Many construction businesses don’t start a project with a financial plan. That means they’re often surprised when delays or payment disputes happen. This article will help you avoid those problems by learning how to properly manage a construction budget. It’s part of the PM Crash Course(r) series, which has taught thousands of people how to manage projects successfully.
1. Identify Your Hard and Soft Costs
Creating a budget for a construction project is vital, and understanding the difference between hard costs and soft costs is critical. This distinction allows responsible project managers and proposal teams to include all upfront and hidden costs while drawing up a master plan for the project.
Hard costs are the physical expenses associated with the construction of a building, site or landscape, things like materials, labor and equipment. They are easy to estimate because they are tangible and predictable.
However, there are also soft costs that are not incurred during the construction phase of a project, but are still important to consider when creating a budget. They can be anything from permits, taxes and legal fees to maintenance and insurance costs, architectural, engineering and inspection expenses and even garbage collection.
These are often called “hidden costs” and can be more difficult to identify than hard costs, but they are still important to account for in a budget. Using construction management software, like Buildxact, will help you easily estimate what is considered soft costs and provide an accurate cost estimate.
Unlike hard costs, which can only be quantified once the construction process begins, soft costs are usually quantified in advance of a project’s completion to ensure that they are within a reasonable range. This helps prevent unexpected costs that could derail the project.
Soft costs can make up a significant portion of your overall budget, so it’s important to factor them in early on. This will allow you to determine your contingency, which is the amount of money needed to cover unexpected costs.
2. Determine Your Contingency
One of the most important things to keep in mind while creating a construction budget is to ensure that every cost is included. This includes costs like equipment insurance and inspections. If you don’t account for these costs in your budget, you’ll end up going over your projected cost and may have to cut expenses or find more money.
Having a comprehensive spreadsheet of your expenses will help you keep track of all the details of your project. It will allow you to easily identify any gaps in your budget so you can quickly address them and prevent overspending.
It will also give you a sense of how much money you have in each of your expense categories. This will allow you to determine whether you’re running a surplus or a deficit.
If you’re running a surplus, this will allow you to put more money into your business or put it away for future projects. It will also allow you to get started on your next project sooner.
A contingency is an additional expense that you put into your budget as a way of preparing for unexpected events. These can include natural disasters, fraudulent activity, terrorist attacks, or any other event that might be unforeseeable and could disrupt your business.
Many businesses set aside a percentage of their overall budget to deal with contingencies, but this percentage should be based on the estimated risk that your company has. Having a contingency plan in place can reduce the stress on your team and make it easier to recover from an unexpected disaster.
As your company grows, it will be necessary to update your contingency plans to accommodate new staff, processes, software, or ways of doing business. Keeping up with these changes will make it possible for your team to adapt to the ever-changing world of technology and the construction industry.
3. Create a Schedule of Expenses
When creating a budget, you must be careful to make sure that every expense is fully accounted for. This can be challenging, but if you are aware of what expenses are included, it will help you avoid overruns.
Once you have identified your hard and soft costs, you need to create a schedule of your expenses. This can be done using Excel or another program that allows you to track costs.
Construction is a highly regulated industry, so it is essential that you stay on top of all costs associated with the project. It is also important to ensure that all costs are covered by insurance and any required permits.
The schedule of expenses will help you keep track of everything that is being spent on the project. This will allow you to identify any unexpected costs that may arise and to be able to adjust your budget accordingly.
In addition, it will help you to plan your project better and avoid delays caused by shortages or price variations. You can also use this information to better manage your supply chain and avoid having to rush purchases that will cause unnecessary overspends.
Aside from the obvious expenses, it is important to include costs related to your project management staff as well. This can include their salaries, office expenses and any supplies that are required for them to perform their duties.
These are all essential parts of any successful construction project, so it is crucial that you include them in your budget. They can help you avert unnecessary delays and save your company money in the long run.
Aside from a thorough budget, it is also important to include a contingency fund for any unforeseen costs that may arise during the construction process. This can be 5-10% of your total budget, depending on the type of project you are working on.
4. Track Your Expenses
Construction projects involve countless expenses, so it’s important to keep track of those costs. Not doing so can lead to unplanned spending that can hurt your budget and your profit, or worse, damage your reputation.
Luckily, you can take the time to set up an efficient cost-tracking system so that you can easily analyze the data and determine where your costs are out of control. Using insights from this data, you can also detect underlying issues and make the necessary adjustments to keep the project on schedule and within budget.
One of the most common problems that contractors face is that they don’t track their costs properly, leading to costly cost overruns. It’s important to include each and every expense, be it nails or YRCO pumps. Fortunately, there are a variety of cost tracking software solutions that can help contractors and project managers keep their projects on budget.
First, estimate your expenses accurately. You need to consider both direct and indirect costs, such as labor and material costs, as well as specialized software, travel expenses, contractor hours, etc. This can be a complex and time-consuming task, but it’s crucial for building a solid foundation for your budget.
Second, create a budget based on your estimates and the budget you received from the client or project owner. You should also include the budgets of your subcontractors and suppliers, as well as the cost of materials, transportation, and any other expenses that aren’t covered in the original budget.
Finally, set goals for your budget and your project. The goal-setting process helps you identify specific, measurable, attainable, realistic and timely objectives that can guide your decisions.
By following these tips, you can easily manage your construction budget and stay on budget from start to finish.
5. Set Goals
Having a budget for your construction business is essential, and it’s often the difference between being profitable and struggling. It’s also a great way to ensure that every project is completed on time and within budget.
One of the most common mistakes construction companies make is underestimating their costs. This can be a costly mistake, as it can cause delays and cost more money in the long run.
It’s important to divide your budget into hard and soft expenses. Identifying these categories helps you better manage your budget and determine which expenses can be controlled and which ones aren’t.
If you can’t control certain items, it’s a good idea to include contingency costs in your budget. This allows you to account for things that are out of your control and will not come out of your pocket, like weather, disturbances in the supply chain or unexpected material price changes.
These costs can be difficult to estimate, but they are an essential part of your budget and help ensure that everything runs smoothly. For example, if you know that the concrete you’re using is going to rise in price by 20%, you might be able to include an extra $20,000 into your budget so you can cover it.
Another way to save on soft costs is by using more durable materials. Including more durable materials is likely to reduce the amount of downtime and allow for more efficient work, which can lead to savings in the end.
Once you’ve created a construction budget, set goals for yourself and your team. Achieving these goals will make your job easier and will help you keep track of your budget in the future.
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