Tips for Effective Construction Budget Management; Guide to 2024

Monitoring and Control Construction Budget

Planning Your Construction Budget Management

The process of preparing a project budget can vary, with experience often guiding the chosen method. A commonly employed and well-established approach for constructing a construction budget management in the realm of construction is to categorize expenses into two distinct groups: hard costs and soft costs. In accounting terminology, the soft costs for a construction project encompass any expenditures not directly tied to the physical construction process itself. These expenses represent services needed before and after construction, often referred to as intangible costs, and typically make up around 30 percent of the overall construction budget management.

The remaining 70 percent of the construction budget management is attributed to hard costs, also known as “brick and mortar” expenses. These are the expenditures directly associated with the physical construction work, whether it’s a building, road, bridge, or any other construction undertaking. Hard costs, being tangible expenses with fixed values, are generally easier to estimate and control. Soft costs, on the other hand, encompass all other expenses not falling within this category. They tend to be more challenging to estimate due to the fluctuating nature of service fees.

Segmenting your construction budget management into these two primary categories from the outset offers several advantages. It provides a clearer picture of expenses within each category, facilitating the identification of any potentially overlooked costs. This approach also helps project management teams apply cost-control measures more effectively to certain expenses while highlighting those expenses that are less within their control.

1. PROPERTY

Property costs can vary significantly based on location and project scope. In highly sought-after areas, land costs may represent as much as 60 percent of the construction budget management, whereas, in less desirable locations, land expenses might account for less than 10 percent. Regardless of the land’s value, it’s crucial to establish a realistic budget range for property investment. It’s important to note that land costs extend beyond the purchase price of the lot itself, encompassing real estate fees, financing, and taxes, contributing to the overall investment.

From an accounting perspective, the land is classified as a capital cost, representing a one-time expenditure that continues to provide value for more than a single fiscal year. Land acquisition expenses are vital in determining the eventual profitability of the construction project. Over time, the land’s value is expected to appreciate, and establishing an accurate initial value serves as a basis for gauging the increase in value resulting from the investment in the constructed asset.

2. Professional Fees and Services

Construction projects entail a wide range of professional consulting and services, categorized as soft costs. Depending on the project’s scope, various professional services and approvals may be necessary to proceed with construction. These pre-construction fees can accumulate, and some initial fees associated with pre-construction include:

• Obtaining building and occupancy permits from local governments, along with related permit filing and transaction costs.
• Fees for surveying, studies, and testing, such as geotechnical or environmental assessments.
• Architectural and design services, including master planning.
• Professional engineering stamps from structural, electrical, mechanical, or civil engineers.
• Accounting, banking, and real estate-related fees.

Accurate and detailed design plans are essential for understanding the total project costs. Comprehensive project drawings define the scope of work and help prevent budget overruns, particularly during the early stages of the project. As the project progresses, additional fees may arise during the construction phase, depending on local regulations and requirements. Post-construction, inspection fees, and final accounting services may also be necessary.

3. Materials

Many construction costs are fixed and non-negotiable. Negotiating the costs of permits and design services, for instance, is often challenging. However, the category where budget adjustments can yield the most value is materials. Contractors have the opportunity to establish relationships with suppliers, enabling cost negotiation based on volume, especially when sourcing multiple materials from a single supplier.

Material costs typically represent the largest portion of a construction budget management, making it essential to review them carefully. Quality materials within the budget constraints are key, as materials have fixed costs that can be quoted by suppliers. Depending on the project’s nature, material costs can fall into categories such as:

• Site preparation, including materials for lot construction, paving, pipes, and drainage. Landscaping materials, such as plants, trees, and fertilizer, may also be considered part of site development’s hard material costs.
• Building structure, encompasses framing materials, roofing, insulation, mechanical systems, doors, windows, flooring, drywall, paint, and more.

4. Labor

Accurate estimation of labor costs is fundamental in realistic construction budgeting. Labor costs encompass wages for tradespeople, subcontractors, equipment operators, and other professionals working on-site.

Predicting labor costs in construction is often challenging as the exact number of hours workers will require for the job becomes clearer only as the project unfolds. Nevertheless, labor cost estimates are critical for planning and communicating with employees to keep production on schedule and within budget. Enhancing labor productivity is a crucial factor in maintaining a construction project’s profitability.

When calculating the labor budget, consider the comprehensive cost of human resources, including:

• Hourly wages for both employees and subcontractors.
• Costs related to workers’ compensation and payroll for employees.
• Provision for vacation time and sick leave for employees.
• Factors accounting for non-productive time and potential re-work, with potential inclusion in a contingency budget.

5. Equipment and Tools

Every construction project requires effective construction budget management along with various equipment and tools, varying in size and function. The classification of equipment and tools as hard or soft costs depends on their usage. Equipment necessary for activities like demolition, clearing, grading, and paving directly contributes to the construction process and is considered a hard cost. Owned equipment and tools are generally classified as capital expenses for accounting purposes.

Contractors assess their material and labor lists to determine the types and quantities of equipment and tools required for the project. Based on this assessment, contractors may need to rent equipment from reliable local suppliers. Renting heavy equipment for construction projects involves considering several expenses, such as:

• Equipment rental fees.
• Delivery costs.
• Operational expenses, including labor and operator costs, fuel costs, and potential maintenance and repair responsibilities.

When renting equipment and tools for construction projects, it’s important to choose reputable suppliers who can help select the right equipment and clearly define associated costs.

6. Project Management

Effective construction project management is vital for construction projects and involves highly skilled and organized personnel. Construction project management staff require equipment and supplies to fulfill their roles. Construction project management costs encompass salaries for team members, office-related expenses, security staff, safety supplies, and other support roles and materials.

Consider expenses like office rent, utilities, internet connectivity, phone services, and office supplies, including paper, ink, and computer equipment. While some construction project management costs are considered capital expenses due to their long-term use, it remains crucial to account for their usage within the construction budget management to ensure the long-term profitability of the business.

Also, include costs associated with construction technology tools used to enhance construction project productivity, such as project management, accounting, and scheduling software. These soft costs may not be directly related to physical construction but are essential expenses to facilitate project completion.

7. Liability Insurance and Professional Bonds

Construction project management, regardless of its scale, is subject to legal requirements for insurance coverage and the associated expenses for safeguarding against liabilities. Professional liability insurance is an obligatory soft cost that needs to be included in the overall budget calculation. Depending on the nature of the construction project, you may also be obligated to provide a deposit or bid bond to guarantee your company’s commitment to completing the project.

Certain projects, particularly government contracts, mandate the provision of payment and performance bonds. These bonds serve the purpose of ensuring that all subcontractors, tradespeople, and materials suppliers receive their due payments, thus averting any potential liens on the project. It’s advisable to account for membership costs in builders’ or contractors’ associations if your company is affiliated with such organizations.

8. Utilities and Taxes

Depending on the nature of the construction project management, you may find it necessary to install utilities like gas, water, sewer, and electricity. These utility installations come with their associated expenses for permits and connection fees, which should be included in the comprehensive construction budget management.

Moreover, your construction project management may also be subject to taxation at the local and state levels, administered by various governmental agencies. The tax rates are contingent upon the project’s scale and type, with larger construction endeavors incurring higher tax liabilities. It’s advisable to collaborate with a certified professional accountant with expertise in construction finance to ensure accurate and thorough tax accounting.

9. Contingency

While construction budget management may appear to be a rigid financial plan, estimators intentionally set aside a margin to account for unforeseen circumstances. Unexpected costs invariably arise during any construction project, making it imperative to incorporate a contingency budget within the cost schedule.

A contingency construction budget management involves earmarking funds to address unforeseen expenses that may surface once the project is underway. This contingency fund is not specifically allocated to any particular cost category; rather, it serves as a financial safety net to address any type of unforeseen expense. A prudent contingency fund typically falls within the range of 3 to 10 percent of the total budget. Depending on the project’s scale, the contingency fund may need to be as high as 20 percent of the budget.

Some of the types of expenses that a contingency fund can cover include:

• Modifications to the original project scope
• Upgrades in design or materials
• Repairs for equipment and tools that experience malfunctions or breakdowns
• Costs arising from accidents, unforeseen risks, or acts of nature
• Any other unanticipated expenses

Incorporating contingency plans into construction budget management serves as a safeguard against costly disruptions in production by providing the necessary capital to address unexpected challenges.