The construction industry operates on a unique system. It’s not uncommon for contractors to spend thousands of dollars on a project before they ever receive a payment from their client. So if you don’t meticulously estimate and plan for costs when creating your contract, you could end up compromising your profitability on a job.
Construction businesses work best when they follow budgets and sound accounting processes. You need to track your progress across all projects to ensure you’re protecting your profits and matching your estimates. A well-constructed budget sheet for each project will help your operations and accounting departments work together seamlessly to ensure you don’t overspend on a project.
Budget sheets keep you on track throughout a project and ensure you’re not putting more money into it than you’re going to earn on completion. Your budget sheet is where you can track all of your expected revenue and expenses so you can measure costs and profits periodically during a project. This has three major benefits:
A budget allows you to work with your estimate throughout a project so you can stick to your estimated costs and desired profitability. You’ll need to adjust your budget sheet as you move forward on a project to reflect the actual costs and revenue incurred to ensure it’s accurate throughout the course of the project.
Your budget will also need to be adjusted if change orders are issued. In this situation, you need to create a revised budget that reflects the adjustments in costs, scope and duration of the project. This is a great test to see how well your estimating process is capturing what it takes to complete a project. As you gather information from similar projects, this estimation will become easier and more accurate.
In addition to tracking costs over time, your budget helps you stay on track with your timeline. A budget sheet allows you to evaluate how much of your costs are spent on the project at present versus where you need to be to finish the job on time. Looking at your budget will show you if you need to speed up a portion of work or if you’re on track to finish by the estimated deadline.
For example, imagine you’re working on a three-story building. You had 20% of your labor budget to work on the first floor of the building, but your budget shows you actually used 35% on this portion of the job. With this information, you can evaluate how to better manage the remainder of the work so you don’t go over your labor cost estimates. (Note: This could also indicate a problem on the site you may not have noticed, and could require that you issue a change order.)
Breaking down a budget line by line helps you understand the costs for every input on a job. When you have this picture, you can clearly see where you spend your money and if you’re going over budget in any one area. Finding these discrepancies early gives you space to make adjustments when there’s still time to recoup your costs and earn the anticipated profit.
You might not realize it, but this actually helps you across all your projects. When you notice unexpected expenses or accounting reports, evaluate if the problem is stemming from your team or the project itself. If your team is having trouble working on your estimated timeline, try shifting employees and subcontractors around to have the workload flow better between multiple jobs.
Sometimes you might even opt to work onsite with your crew. This gives you the opportunity to train your employees with less experience or natural skills so they can start performing at a higher level. Or it will show you who just isn’t a good fit for your business and where you need better performers.
When you understand the items on your budget and how those costs affect your business over time, you have better insights into how to correct recurring mistakes moving forward.
If you’ve never used a budget sheet before, it might not be obvious what to include. Should you record every cent you spend on a job or only what’s most relevant to your profits?
There are four core categories to include on a budget sheet that will help you create a reliable budget:
Planning for each of these four cost categories helps you account for everything you’ll need to spend on a project before you get started.
Once you have your budget laid out, it’s important that you know how to manage it throughout the construction process. You need to ensure your estimates are accurate, review quotes and costs, double check the math and use a professional accounting system.
This should start with whomever is in charge of estimating for your construction business. This person or department should be validating estimated costs on a frequent basis based on previous project and financial data. They’ll also need to know your fully burdened labor rates to accurately incorporate that into the final estimate.
Materials pricing should be sourced from suppliers or vendors that you regularly work with so you can create an accurate estimate of vital material costs. The quotes you get during this process should be locked in, should you win the contract.
This can be easier said than done with volatility of the materials market, but if you’re working with trusted suppliers, you should be able to attain accurate quotes.
Don’t forget to use your expertise and knowledge of the market as you gather quotes. When you receive quotes from suppliers or vendors, double check that everything you requested is covered in that estimated price. You don’t want a scope gap in your quote — when a supplier misses an essential part of requirements needed.
Scope gaps can occur for a few reasons. The first is when a supplier notes a qualification in quote or didn’t notice an item on the plans provided. In this case, items can be unintentionally left off of your quote and put you in a bind if you don’t notice right away.
Additionally, you need to consider if your supplier can provide what you need within your desired time frame without needing you to fund them. Capability and financial condition of everyone you work with are equally important. If a supplier has the capability to provide what you need but is missing the financial resources to endure the payment process, then they aren’t a good match for your business.
As you review your budget, go back to the basics and double check that all of your math makes sense. When you work with so many numbers and people at once, it’s easy to make simple mistakes on your budget sheet. This is okay as long as you catch them before finalizing your estimate.
Simple miscalculations can cause serious problems down the line, so don’t skip this step. Don’t be afraid to ask someone to proof your estimate before turning it into an official budget. Having a fresh pair of eyes might save you a lot of time and money in the long run.
👉Read the full guide to mastering job costing.
Consistency is key in construction. Ten years from now, you should know your processes are still being followed and are still valuable to your business. Part of this long-term success comes from using a reliable accounting system.
Crewcost is a purpose-built construction accounting software that can help you create detailed budget templates and more. Try it FREE today to see how Crewcost can help you improve your construction accounting processes.