The construction budget is one of the topics that instantly come to your mind if you plan to develop or take part in a construction project. However, many investors struggle with defining a realistic project budget and sticking with it, due to the unpredictable nature of the construction industry. In this blog post, we give some useful tips on anticipating the project cost and managing the project budgets.
What is a construction budget?
A construction budget is an estimation of all money needed for a construction project to be completed, from the initiation phase, up to the final completion. To make it as realistic as possible, it needs to include all necessary costs that occurred during the project cycle, and are directly related to the project, or affect its completion. In an ideal case, a good construction budget should anticipate and include all costs associated with the project.
However, due to the dynamic nature of the building industry, some costs that were not forecasted in the budget can occur. Therefore, good project managers are usually aware of that, and they usually include some unexpected project costs in their construction budgets (they are known as contingency costs).
Why is managing construction budgets important?
Construction budgets are so important, that can affect the success of the whole building project. Here are some benefits of having your construction budget well planned:
- Construction budgets help you get an overview of your project costs – Whether you’re a residential or commercial property developer, you will come across a wide range of construction costs. These cover everything from the price of materials to paying contractors. Having a clear understanding of your construction budget is important, as it will help you manage cash flow and thus lead to successful project completion.
- Help in managing the unpredictable nature of construction projects – Being on top of your budget means that you will account for unexpected items such as increases in interest rates, holding costs and even contractor availability. A Section 94 Report maintains an accurate record for every stage of your residential or commercial construction project.
- Help plan your project cost more realistically – Some building costs can vary every year, such as the cost of building a house. Construction budgets help in assessing the cost more realistically and keeping track of the changes in real-time.
- Help in reducing the project risks – if a construction budget is not well-planned, the risk of project failure significantly increases. If you don’t measure cost, you can’t track it, and in the end, it would be difficult to assess the overall cost and determine whether a project was successful or not.
- Good construction budgets take inflation into account – right now, as the construction costs are soaring, it’s essential to calculate inflation as well, as it can greatly impact the total project costs.
What costs are usually included in the construction budget?
The construction budget consists of the necessary costs needed for a project’s completion. Since building projects are very complex in nature, construction budgets reflect that complexity as well. Therefore, construction budgets usually include the following types of costs:
- The property costs – costs such as buying the land lot, real estate fees and state taxes,
- Material and equipment cost – the largest and most visible cost for construction projects, and it includes all necessary construction material and all equipment needed to make a building complete,
- Labour cost – the cost of all the workforce, subcontractors and all human capital that are a part of the project,
- Consulting / professional fees – costs of hiring architects, quantity surveyors, professional project managers, attorneys, civil engineers, bankers, designers, and similar,
- Professional software cost – internet cost, professional project management tools, and other supplies and communication costs needed to complete the project,
- Utility fees – water, sewer, and electricity costs on the building site needed to perform the construction work,
- Insurance cost – is usually required for large construction projects, as a sign of proof that the company will be able to cover the cost of the subcontractors and other stakeholders,
- State and local taxes – the cost will vary depending on the type and scale of the project,
- Contingency costs – unpredictable costs such as machine malfunction, upgrades, unpredicted delays, and accidents.
Tips on creating a reliable construction budget
A good project and budget planning is a work in progress. The biggest advantage of budgeting is accuracy, adaptability, and proactivity. Therefore, here are some tips you can incorporate today:
- Strive for accuracy – put some effort into planning, researching, and estimating the future cost of the project. Be up-to-date with the latest trends when it comes to cost and be informed about the current inflation rate in the construction industry, the latest average hourly rates of subcontractors, etc.
- Be flexible – costs constantly change, and our construction budgets need to follow that. Some construction projects will require constant budget redoing.
- Do a lot of research – be informed and collect information about budgets of the recent similar projects in the construction industry.
- Provide necessary documentation – to help you determine the accurate project costs.
Avoid these errors with construction budgets
Planning a realistic construction budget can be a very valuable skill. Therefore, there are some errors to avoid when planning budgets for building projects, since they can negatively affect the whole project’s success:
- Avoid being overly optimistic – underestimating costs will affect your overall budget plan. Instead, try to be as realistic as you can, given that you don’t have all the necessary info at the beginning.
- Avoid rushing – creating realistic construction budgets takes time, as there are many dependencies and activity flows that need to be predicted. That can also affect the budget costs. Neglecting this can make our construction budget incomplete.
- Avoid choosing the first bid and low-cost contractors – Quality is as important as quantity, so low bids can affect the quality of the construction work in the long term, even though they can help save some money.
- Avoid a rigid mindset – the construction industry is dynamic and changes are constant (industry, designs, legal requirements). Therefore, the cost defined at the beginning may not reflect the project accurately in the later phases of the project. That’s why mindset flexibility is crucial.
Contact us today to keep your construction budget in check
We’re here to help get your project off to the best start. Our QS report will help you keep on budget and minimise outgoing costs. Our goal is to help your development project run smoothly.
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