Nothing’s ever guaranteed in construction. From materials shortages to nasty weather, there’s a lot that can go wrong in the construction process on even the simplest builds. And while something’s bound to hit the fan at some point in almost every project, that doesn’t mean it’s a good idea to make things up as you go along. In fact, having an airtight project plan is one of your best defenses against snags on the job – and building a solid construction project budget plays a big part in that.
The good news is, it’s not too difficult to build an effective construction budget. Plus, once you’ve mastered the budgeting process, you can cash in on a steady flow of valuable business data.
Key Takeaways
- A construction project budget allows you to anticipate a project’s total cost. Ideally, your budget should only cover costs – not your expected revenue.
- Generally speaking, the main goal of a project budget is to manage direct costs like general conditions, labor, and materials.
- Once your construction budget is set, it should stay set. If possible, only increase your budget through change orders.
- Always perform a post-mortem and compare your estimated costs vs. actual costs. We call this the builder’s feedback loop and it’s how you improve future projects.
What is a Construction Project Budget?
From bridges and roads to mini home renovations, every job needs two things to go from pre-construction to execution: enough funding, and a budget that will keep everything in line. Because you’re in business to make a profit, we like to think of a construction project budget as a tool that ensures you’re holding to your expected margins from the construction estimate. Creating your budget continues much of the work you’ve already done in drafting your initial cost estimates and bid proposals. If you’ve already been meticulous here, that means less work for you now.
One important call out: While we just mentioned protecting your profit, ideally, you shouldn’t be mixing your budget with your revenue. Instead, a general contractor’s construction project budget should only reflect project costs.
What Should Go into Your Construction Budget?
The primary benefit of a construction project budget is to manage direct costs. These “hard costs” cover things like:
- General conditions – these include any associated costs needed to support the general contractor’s team members, like office trailers, temporary electricity, and any project overhead costs.
- General requirements – any associated types of costs with the specific site you’re working on. This can include security, worker amenities, and clean-up costs.
- Labor costs – should be used for self performed work by the GC and general labor costs to run the project. Labor for subcontracts should be categorized under the subcontractor category.
- Material costs – similar to labor costs, these are for self-performed work and any material costs purchased for the project aren’t covered under a subcontract.
- Subcontractors – as a general contractor, this will likely be your largest expense and will need to be broken up by the divisions of work using a cost coding structure. Additionally, you’ll need to track your subcontracts as committed costs on your budget in order to forecast these costs.
- Equipment – covers any equipment you’re providing. For example, maybe you’re setting up scaffolding for multiple trades to use or providing man lifts in place of ladders, or maybe you’re renting heavy equipment for site preparation that’s included in the scope of work.
Sometimes, you may need to work in indirect costs like permits and pre-construction services, but in our experience, it’s more beneficial to split those soft costs off from your project budget.
Change orders should also be split out on your budget. You’ll still break them out according to the cost types listed above, but you want to show change orders as a separate column on your budget to visualize how they impact the overall budget.
In the above example, we’re only showing approved change orders on the budget, but many general contractors like to enter potential costs as unapproved change order on the budget and make project stakeholders aware that they’re potentially coming. One last note, if you’re not balancing the equation and showing total budget vs. actual costs, you’re ultimately putting your budget at risk and missing an opportunity to improve on future project cost estimates.
Best Practices & Key Cost Controls for Your Project Budget
At the end of the day, what construction project budget methodology works best for you and your business will come down to your own experience. But in the meantime, we’ve got a few best practices to make the process easier.
1. Set your budget, and stick to it. If possible, only increase the construction budget through the use of change orders. There can be transfers from one line item to another, but the value of your total budget shouldn’t change unless you have a change order. The reasoning behind this is to be able to gauge your performance at project closeout and learn lessons from any overruns and unforeseen costs.
2. If your contract type allows for a contingency budget, you have two options on how to manage it. You can either move in money from contingency to show funding from the project owner, or you can just spend out of your contingency fund and not necessarily allocate it to the scope of the project before you spend it. Either way, once you find a method that works for you, it’s important to stick to it.
3. Always look at your budget as it relates to the schedule. Ideally, your expenditures should align with how the project progresses. If your costs as a percentage of the total budget are higher than where the project is at, you’ll want to investigate.
4. Make sure you’re digging into the data after a job using the builder’s feedback loop. For every unexpected cost that creates a cost overrun, you need to have an answer as to why it happened. Compare your actual costs vs estimated costs and determine where you’re coming in under budget and where there are cost overruns. This will help you identify potential issues in future jobs. We call this the builder’s feedback loop and you should have a documented workflow for analyzing every job post-mortem and updating your historical cost database based on your actual performance.
5. Be proactive when anticipating construction costs. Thankfully, construction financial management software like CrewCost is making it much easier to do this by integrating real-time cost data into your construction budget. And while it’s important to look at lessons learned after the fact – why wait to learn? Nowadays, software can help you forecast and anticipate costs in real time, so you can make adjustments as you go and protect your profitability.
🔎 Dig Deeper – Cost Control in Construction: Strategies for Maximizing Efficiency
Final Thoughts
When it comes to protecting your profitability in the construction industry, a well-thought-out and accurate budget is a safeguard you can’t afford to take any chances with. With good budget management, you’ll set yourself up for better margins and lower risk across all your construction projects.
Further Reading – Foundations of Construction Project Management for SMBs
Software can make it easier to manage all your construction company’s budgets and cash flow without the hassle of workarounds. Learn more about CrewCost’s purpose-built construction accounting software, and sign up to join Early Access here.