A construction budget details all of the direct costs involved in delivering a construction project, as well as any indirect costs the contractor can attribute to it.
A complete and accurate construction budget informs decision-making throughout the construction project, helps contractors control costs, protects cash flow and develops trust with owners and lenders.
Budgeting for a construction project requires thorough research and comparisons to previous projects to understand all the costs involved clearly. Sticking to a budget involves consistent monitoring and continual data to help project leads recognize how spending lines up with the budget over time.
Although adhering to construction project budgets takes considerable time and effort, there are some things contractors can do to make sure they’re working as efficiently and cost-effectively as possible to meet their budget guidelines.
Understanding the construction budget
Contractors create budgets as part of the bidding process, working with cost estimators, materials suppliers, and subcontractors to develop an accurate idea of the costs of completing the project.
The more detailed and granular a budget can get, the more clarity it will provide in guiding buying decisions and monitoring progress during the project build.
What to include in a construction project budget
Experience goes a long way to teaching a contractor what should go into a project budget. Reviews of previous work can jog the memory about any forgotten expenses. Teaming up with professional estimators or estimating software can help, too. Contractors can mine their networks of colleagues for information about current labor and material costs and other considerations.
Here are some of the common costs to consider in a good construction budget:
Materials and Equipment
Close relationships with materials suppliers can help contractors calculate accurate materials costs. Contractors will also have to consider material storage, insurance, and transportation expenses.
With experience, labor estimates can become a matter of quick calculation. A contractor generally knows the labor hours required for each square foot of drywall and simply multiplies that number by the area of drywall needed on a project.
General contractors will also need to consider all the subtrades the work will require and the cost of each.
When calculating labor costs, contractors should consider the labor market in the project area. Wages can vary a lot from place to place, as can tax expenses, benefits, and other incidentals.
Permit costs may fall to the owner, the subcontractor, or the general contractor, depending on contract stipulations. Before preparing any budget, project owners should understand exactly which permits they’re responsible for and how much they’ll cost in the project’s jurisdiction.
Bond and loan fees
Financing costs are easy to forget in cost calculations, but interest, bond, and service fees can add up considerably over a long and expensive project. Construction businesses should count those into project costs because they will certainly impact the bottom line.
Overhead or indirect construction costs
Besides the project-specific costs named above, construction companies also have to include a portion of company-wide overhead charges as part of the project estimates. Anything from office supplies and personnel to accounting fees and advertising costs a construction business money. Include a portion of those fixed costs in each project estimate.
Common challenges to construction budgeting
Contractors may have difficulty creating an accurate project budget if they don’t have the time or information to thoroughly understand the project scope and specific challenges the project will present. Often, general contractors are invited to bid after a project design is complete and have to turn out a budget fast. Inaccurate estimation and budget overruns can mean running out of money mid-build, presenting a serious risk to successful project delivery.
Even if bids are accurate, cost variability is a huge challenge in construction projects, especially on larger projects that could last months or years. It is becoming more common to write provisions in the contract that allow a construction business to offload any expenses that increase during a project.
How to create a successful project budget
Given the complexities and challenges, how can a construction project manager create a good construction budget that will lead to accurate bids, steer informed decisions throughout the construction project, and create reasonable expectations for the contractor, owner, and subcontractors?
1. Setting realistic budget goals
Accurate budget goals come from a thorough understanding of the project at hand. Past experience or examination of similar historical projects can guide the budgeting process, while materials suppliers and estimators can provide information about current prices. Analysis of past and present costs can guide budget creation and an accurate construction plan.
Cost savings measures like bulk materials purchases, renting equipment instead of buying, and regularly servicing equipment can be considered during this analysis to create an efficient budget and a more attractive bid.
Finally, project managers should ensure they completely understand the project's scope and requirements before submitting bids. Good communication between the owner and the design team can further educate the process.
2. Conducting pre-project analysis
Before committing to any budget, construction firms must thoroughly vet the project to ensure its viability. This means researching any required regulatory approvals, checking contractor budget numbers against the owner’s stated budget, assessing whether the project is truly “buildable” as designed, and if the timeline is realistic.
The legwork to get a construction project from conception to shovels in the ground can seem monumental. However, the stakes are high – this groundwork can make the difference between successful completion and project failure.
3. Effective cost control measures
Once a proper budget is set and the contract signed, the challenge and the opportunity become sticking to it. Construction managers must report costs consistently and monitor the construction budget carefully. When project teams take care of the construction financials, the budget plan can predict problems before they occur and catch overspending in time to fix the problem.
Digital banking systems like Truss can help with expense management by allowing contractors to tag and view expenses by project so they can easily see where the spending has been tracked against the budget.
Tracking finances becomes easier when contractors can send and receive money quickly. Truss can save time and money by allowing construction teams to track payables, receivables, and card expenses all in one place. Contractors can monitor card spending in real-time, set spending limits individually for each employee, and freeze cards immediately if overspending occurs.
4. Risk management and contingency planning
Creating a budget with ideal time-and-cost measures is an excellent academic exercise, but it’s unlikely to help a project team that finds itself faced with unexpected costs or delays. Part of creating a full picture of construction expenses involves a thorough workup of the possible risks on any project – a list of “what-ifs” and some answers to the challenges they present.
Consider historical weather patterns in the project location, construction site conditions, surrounding neighborhood, suggested project start date and as many other details as possible. If, for example, a project is slated to begin in Florida in September, there is a possibility that hurricane activity could impact timelines.
Plan for as much as possible, then leave room in the budget for contingencies to cover unforeseen costs and avoid cost overruns.
5. Embrace Technology and Innovation
Luckily, no project team is on its own in creating and following construction budgets. Construction budgeting software can help build and track budgets throughout a project. Construction project management solutions can help keep on top of the schedule and timeline to alert contracting firms to conflicts before they arise, saving last-minute scrambling and lost time and money.
Further, cloud-based platforms improve the opportunity for communication and data sharing to help avoid costly errors. Digital banking systems like Truss can streamline payment processes to save time and shave down the costs associated with large and frequent payments.
Truss integrates with accounting software, tagging expenses with their associated projects to better view and track how costs align with the budget. Truss cards allow for individual spending limits by employees and the ability to freeze cards in real time.
Contractors who embrace technology turn off the guesswork when it comes to spending, scheduling, and payments to get control of their projects like never before.
Mastering budget efficiency in construction project management
Construction project managers who grasp the fundamentals of effective project budgeting can become more efficient throughout the construction process while minimizing costs. No contractor is born with the ability to create and manage a project budget – financial success happens through continual experience, learning, and using tools that can help the whole process go smoother.
Budget success comes from doing the legwork at the outset of a project to get a thorough understanding of the expenses to follow and setting realistic goals with built-in contingency plans for the unexpected. Finally, successful contractors can now use cutting-edge digital tools to complete proven processes for optimal construction budget management efficiency.
Get started with your free Truss account today and take control of your construction finances.