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The Importance of Budgeting in Construction

Yancy Lassiter
Published Dec 14, 2022

Every business, especially in the construction industry, needs a budget. It helps you maintain profitability and manage overhead costs both per job and over time. Budgets allow you to view your revenue as dollar amounts and percentages of your expenses, so you know for certain if you’re earning the profits you want.

A construction budget should be your go-to tool to manage your time and money. Effective budgeting will help you develop your long-term business goals and stick to a plan to achieve them. It also gives you more flexibility to adjust your operations and expenditures so you stay on track. If you can develop and follow an effective budget, you’ll see improved projections on profit, revenue and expenses.

How to Budget for Your Business Type

New and existing businesses will need to set up their budgets differently. New businesses are starting from scratch and don’t have any previous construction project data to inform their decisions, so their budget needs to be more flexible. Existing businesses likely have at least two years of financial data that they can base their budget on and thus make it more rigid in an effort to protect profits.

New Businesses

If you’re just starting your business or have never created a budget, then you’ll need to go through the entire budget setup process. It’s best accomplished with all business leadership working together because the more thought leaders that are involved, the better chance you have of creating a realistic budget that suits all departments.

Ask everyone involved in the budgeting process to do some research on common financial factors and construction costs your business is likely to face. This might include:

With the pertinent factors considered, you can lead more efficient budget sessions and ensure you address every aspect of your business. Plus, you’ll end up with more accurate cost estimates when you take the time to research them instead of guessing.

Another important role in the budgeting process is holding everyone accountable. One person will need to be in charge of monitoring the budget and ensuring departments aren’t going over their allotted amounts. This is important because overages in one area could affect things like salaries and operating expenses at the end of the month.

Finally, you need to keep immediate and long-term goals in mind. Remember, you’re not just building a project budget, you’re setting milestones for your business. Your budget team might be tempted to set goals that are easy to achieve, but that doesn’t mean you should settle for that low standard. Set and work toward ambitious benchmarks by deciding what you need to accomplish year over year to reach your goals.

Existing Businesses

If you’ve been in business for a few years, then you should use your existing financial data — specifically your income statements — to create your budget. You’ll already have a good idea of the total costs for different types of projects, and what unforeseen costs might pop up, which gives you a head start in the process.

Having this data gives you an edge when it comes to cost control. Evaluate all of the major costs and revenue you’ve incurred over the years and find trends for the increases and decreases in each area. This will show you actual dollar amounts that you can turn into percentages. With this information, you can streamline your budget and start boosting profitability.

It’s critical to think constructively about what a reasonable amount of increase or decrease is for your business. As you forecast revenue and costs for the next year, you want to ensure that you’re likely to fall within an acceptable range and not below your targets. This process is usually iterative until you have enough data and knowledge to make educated projections.

Calculating Your Profits

To accurately calculate your profits, you need to have proper estimations of both your job costs and the effect of the economy on your business. For example, if you want your profits to keep up with the 3% long-term inflation rate, you need to look at all your business’s revenue and expenses to determine the best course of action.

Ask yourself questions like:

  • Will my revenue increase 3% this year if my expenses also increase 3%? (Unfortunately, this rarely happens.)
  • Can I increase my revenue by 10% while maintaining an overall expense increase of 7%? (This would create a 3% net profit increase.)

In fact, increasing revenue by 10% as in the second question would increase your net income by more than 3%. If you earned $2 million in revenue this year and your total expenses were only 90% of that figure — $1.8 million — then you’d earn $200,000 in profit. However, if you increase your revenue by 10% to $2.2 million and expenses by 7% to $1.926 million, you’d see a 37% increase in profits. That’s $274,000 in profits for the year.

  Current Year Budgeted Year Net Profit Increase % Profit Increase
Revenue $2,000,000 $2,200,000    
All Expenses $1,800,000 $1,926,000    
Profit $200,000 $274,000 $74,000 37%

This example shows how an increase in revenue can greatly increase profitability if there isn’t an equal increase in expenses. Although revenue is not easily controllable, remember that your expenses are. Consider what project costs you can control in your budget and pay close attention to them to ensure you’re not outspending your profit margin.

How to Implement Your Budget

Once everyone on the budget committee is on board with the proposed budget, it’s time to implement it across your business. You’ll need specific employees to control and be accountable for specific items in the budget.

If you’re a business owner and control the spend on all items associated with overhead, then you need to take responsibility for those expenses when building the budget to ensure they come in where they’re supposed to.

If you have a large business with regional teams and managers, then you’ll need to break your budget up so each region knows how they contribute to the overall company budget. In this case, the regional leaders will be accountable for their section of the company budget. There are many different ways to set this up; the option you choose is based on what’s best for your business operations.

Each month, schedule a budget review with every employee who is responsible for a section of the company budget. This gives you a pulse on how your revenue and expenses are stacking up against your budget. As each month passes, you’ll have more information about what actual costs your business is facing and how much revenue you’re reliably bringing in.

Take those insights and use them to adjust your budget moving forward. Maybe you’ve discovered some hard costs you hadn’t planned for or that soft costs are consistently higher than anticipated. With a rolling 12-month budget, you have room to make adjustments during the year and avoid potential downfalls.

Get Software That Can Help

Budgeting is one of the most important parts of your business, so you don’t want to phone it in. Get help from professional-level software that’s designed to support construction businesses.

Crewcost is a purpose-built accounting software made specifically for the construction industry. It can help you  easily create, track and manage your budget. Try it FREE to see how Crewcost can help you protect your profits.


Author
Yancy Lassiter

Yancy Lassiter, a CPA with a degree from the University of Texas, has 12 years under his belt as a Controller and CFO in the construction industry; he’s your go-to guy for finance in the building industry.

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