Comprehensive Guide to Construction Budgeting | Must-Have Tools
Construction project management requires careful planning and execution to achieve the desired results. While most short-term projects may not require a detailed construction budget, for anything more complex, precise budget planning is a crucial step that can make or break the project. What’s all the fuss about? Construction budgeting is not as simple as allocating a certain percentage of effort and resources for each construction activity.
Recent research published by Statista Research claims a consistent growth rate of 3% in the construction industry per annum. This refers to all projects from residential and commercial to industrial structures. Still, construction budgeting remains an essential part of any project regardless of the sphere. Creating an accurate budget plan is a necessary evil that all contractors must deal with if they want to stay in business and avoid costly project failures. Even expert project managers must consider several factors before preparing a financial plan. An effective construction budget must be based on well-defined project scope and schedule. That’s even truer for first-time construction project managers who may find the task of construction budgeting daunting.
So, what is the purpose of systematic construction budgeting? Let’s dig in and explore the subject at hand in more depth!
What Is a Construction Budget?
In short, a construction budget is a comprehensive list of all costs associated with a construction project. It includes both direct and indirect costs like construction materials, equipment, permits, and contractor fees.
The construction budget is sometimes referred to as the project budget or construction cost estimate.
Main Types of Construction Budgets
As a rule, construction cost estimates are divided into several categories. Such categories are tied to how construction companies prefer to group their services. It’s either about diving into details, highlighting every single activity, or keeping it more general by summing up the total spending for each construction phase. The main types of construction budgeting include the following:
Preliminary Cost Budgeting
Otherwise referred to as an abstract or approximate cost estimate, preliminary cost budgeting helps builders get a general idea of overall construction costs. It is based on a project’s square footage, and is helpful for large construction projects.
Preliminary budgets can be prepared using construction cost databases, which show the average costs for a specific project. Such calculations give construction companies a ballpark estimate, further refined in the following construction budgeting stages.
Plinth Area Cost Budgeting
Plinth area is a technique that divides the construction site into small imaginary squares called “plinths.” The total construction costs are then calculated based on the number of plinths on the construction site.
For instance, if the construction site is 1000 square feet in area, and the average cost of construction per plinth is $500, the total construction costs would be $500,000.
This construction budgeting technique is useful for small projects, as it provides a more accurate estimate than the preliminary cost budgeting method. As a rule, open spaces like courtyards and gardens are not included in a construction site’s plinth area.
Cube Rate Cost Budgeting
This type of budget planning is closely related to the previous one. The estimations are obtained by analyzing the construction site’s dimensions, i.e., considering the building height and length of the area. This method is suitable for medium-sized projects with multi-storey buildings in construction.
Approximate Quantity Cost Budgeting
The approximate quantity method is based on construction drawings and specifications. The construction company performing the estimate analyzes all materials, sizes, and construction methods required to complete the project.
As a result of this process, the company comes up with an approximate construction quantities list for every unit of construction activity. These activities are then multiplied by the unit cost to get the total construction costs.
Detailed Construction Budgeting
This construction budgeting technique is the most accurate as it entails a line-by-line analysis of all steps and materials required to complete the project.
Detailed construction budgeting is usually used for complex construction projects with many stakeholders, since it provides a professional level of detail.
The construction company performing the estimate creates a construction budget spreadsheet that includes all construction activities, materials required, and their related costs. It’s a rather time-consuming approach, and even a single error can lead to significant miscalculations.
Such reports are created to supplement the construction budget and help construction managers track the project’s costs. The most popular types of supplementary budgets used in construction include:
- Construction insurance
- Change orders
Construction companies often use construction budgeting software to make the process more efficient. Additional calculations help maintain precise workflow management and track down every single expense.
Construction Budget Main Components
Let’s explore the topic in more depth: construction budgeting involves creating a detailed estimate of all costs associated with the project.
We’ve already outlined the most common types and budgeting examples. Depending on the type, the reporting should also have a set of specific components. This will include direct and indirect costs, profit and overhead, the cost of labor, materials, equipment and tools, permits, construction insurance, utilities and taxes, contingency plans, and more.
Notably, construction budgeting is not a one-time event but an ongoing process that should be revised and updated constantly. Let’s briefly go through each component to understand how construction budgeting works.
Direct and Indirect Costs
Direct construction costs are the ones that can be quickly and accurately traced back to the construction project. This would include the cost of materials, equipment, and other construction-related services.
On the other hand, indirect construction costs are all the other expenditures that can’t be directly attributed to the construction project but are necessary for its completion. These would include the cost of office space, construction insurance, marketing, and other administrative costs. Indirect costs are not always easy to track and often result in construction budget overruns.
Profit and Overhead
Miscalculations in profit and overhead can lead to devastating consequences, including putting an entire project at risk.
It is therefore crucial to have a clear understanding of all the costs associated with the construction project and allocate the necessary resources to cover them.
The following formulae can calculate the two fundamental figures:
The Cost of Labor
Construction managers, engineers, architects, and workers must be paid for their time and expertise. Labor cost is, therefore, one of the most significant construction budgeting components.
Construction Labor Market Analyzer (CLMA) defines the industry standards, according to which labor costs lie between 20% and 40% of the total construction budget.
The cost of labor is an umbrella term for components like:
- Construction workers’ wages
- Payroll taxes
- Employee benefits
- Paid days off
- Recruiting and training expenses
- Workers’ compensation insurance
The Cost of Materials
While materials are a significant construction budget item, their costs can be difficult to predict. The type of materials used in a project can vary greatly, as their cost. For instance, inflation, tariffs, and other global market conditions can also significantly impact the cost of materials. In fact, the best way to budget for materials is to get a firm estimate from suppliers before the project begins.
The cost of construction materials includes:
- Pipe fittings
- Doors and windows
And so on!
Construction managers often use construction material price indices to track changes in construction material prices. This helps them make more accurate predictions and avoid possible budget overruns.
Remembering the rule of two may become a time-saving life hack for construction managers and help them stay on top of construction budgeting.
What is the rule of two?
In brief, the rule of two states that for $50,000 worth of labor costs, there is an additional $50,000 for materials. Of course, this is a rough estimate, as the prices may vary depending on your client’s preferences, the construction site’s location, and other circumstances. Nevertheless, construction managers keep this rule in mind to make quick predictions.
The Cost of Equipment and Tools
Just like materials, equipment and tools are irreplaceable in construction. Managers need to factor in the cost of renting or purchasing equipment and tools when budgeting for a construction project. This cost includes:
- Dump trucks
- And other construction vehicles
Power tools like drills, saws, and hammers are also viewed as construction budgeting components. Keeping every detail under control is the only way to avoid construction budget overruns.
There are many construction budgeting software solutions available on the market, but not all are created equal. To save you the trouble of sifting through construction budgeting templates and tools, we have an all-in-one solution to help you keep track of all the construction budgeting components discussed in this article.
Buildern’s integrated solutions keep all project-related data in a centralized system. The software helps custom home builders automate construction tasks, manage construction contracts, and track progress on construction sites in real time. Its construction budgeting module is designed to help builders track actual costs against the budget, identify cost overruns early, and make necessary adjustments to stay on track. Starting a free trial will help you see Buildern in action and explore its professional features.
Permits and Construction Insurance
Budgeting calculations cannot be complete without the cost of permits and construction insurance. Depending on the project location, these costs can range from a few hundred to several thousand dollars.
Although insurance is sometimes forgotten or neglected by the builders, sparing time and resources to normalize documentation will save construction companies a lot of money and hassle in the long run. It protects builders from costs related to third-party liabilities, property damage, and injuries that might occur during construction.
Utilities and Taxes
Utilities include electricity, water, gas, and other construction-related services. Construction managers often overlook the cost of utilities when budgeting for construction projects. Yet, depending on the time of year, the site, and the construction project, utilities are significant budgeting components.
The same applies to taxes. When budgeting for construction projects, construction managers must factor in local, state, and federal taxes whenever relevant.
Taxes also vary depending on where your company operates, and your industry. For instance, an Australia-based building company will have to pay a different tax than a construction company based in the USA. The Australian Taxation Office defines fundamental prerequisites for construction companies, and construction managers should check with their local tax authority to learn about specific tax requirements.
Understanding construction tax rules across the U.S. will help builders comply with the law and avoid costly penalties. Learning about each state’s tax laws is the best way for companies to stay on top of their tax obligations.
The construction budget will also need to factor in unexpected costs that may arise at a construction site.
A construction contingency typically takes up between 5% and 10% of the project’s total budget. This allows construction managers to cover any construction cost overruns that may occur.
Why Is Construction Budgeting Important?
The reasons why builders want to use construction budgeting include:
- Saving time and money
- Avoiding construction cost overruns
- Keeping track of construction progress
- Providing clients with detailed and transparent financial reports
- Monitoring overall workflow and ensuring there are no disruptions
When construction managers factor in all of the necessary construction budget components, they can be confident that they are making sound financial decisions for their current and future projects.
Construction Budgeting – Main Challenges
Planning and monitoring every single aspect of the process is a challenge that every construction manager should be ready to address. One of the most frustrating moments builders face is the frequent changes in construction costs.
The construction industry is volatile, and construction costs often fluctuate. This makes it challenging to predict the prices of raw materials and can lead to unforeseen cost overruns.
Trade policy and labor shortages are also among the most common reasons for cost inflation. Last year the Wall Street Journal reported skyrocketing prices for construction materials, and the trend is expected to continue in the years to follow. Industry professionals recorded over 250% price increases for import fees on certain construction materials, like granite, ceramic fixtures, and carpets.
The construction industry is cyclical. To stay ahead of the game, construction managers need to be proactive and use advanced solutions to track construction costs and predict future trends.
Construction Budgeting Phases
Discovery and Initial Analysis
Construction budgeting starts long before the first brick is laid. Success depends on teamwork as much as on the quality of raw materials. When every team member knows their exact duties and scope of responsibility, the process will run as smoothly as possible.
Use this phase to evaluate the construction site conditions and make forecasts regarding every scenario.
Once you have everyone’s role defined, move on to the next step – designing and developing the project overview.
Design and Development
The second phase involves planning, drawing, calculating and outlining the future project. Meet with designers, subs, vendors and local authorities to clarify misunderstandings. That’s when designers and architects come up with the final versions of the future project. Clarifying each detail with the client will save you time and effort in the long run and free you from workovers.
In the pre-construction phase, builders secure approval of the final budgeting and architectural drawings. Ensure that the project has secured all the necessary work permits, licenses, and insurance. No one wants to build a two-storey house to find they broke the law while doing it.
Keeping all your paperwork and budgeting neatly organized will position your company as a trustworthy and top-notch industry representative. So, before introducing the final project overview to your client, ensure it’s well-created. Buildern’s user-friendly and highly versatile interface allows builders to make professional services budget overviews.
Construction and Closeout
Building and closing a project is the longest and probably the most complex phase. Managers need to track the whole process to ensure everything is delivered according to schedule. While construction is ongoing, building managers also need to focus on the quality of construction.
It’s important to have regular meetings with all construction managers to review construction budgeting and make necessary changes. To avoid any unpleasant surprises at the end of the project, have a final inspection with the construction crew. Doing so will help identify and solve any potential issues.
Buildern: The Most Easy-to-Use Construction Budgeting Software
Construction can be tricky. Even well-planned projects may diverge from the original plan. Before you get frustrated, however, let us introduce you to the most ingenious solution available on the market!
Buildern is construction budgeting software that will help you plan, track and optimize your construction project. Buildern is an all-in-one solution created by a team of industry experts with builders’ specific needs in mind. Use its estimating tool to create construction budgets, track real-time progress and expenses, and avoid construction cost overruns. The software has a detailed representation of construction finances encompassing estimation procedures, construction billing, purchase order management, client invoicing, etc.
The software is construction industry-specific, and covers all project stages from design and pre-construction to closeout and final invoicing. Choose one of Buildern’s all-providing subscription plans to get access to advanced construction budgeting software, personalized training, and 24/7 customer support.
How to Organize Construction Budgeting in Buildern?
First and foremost, construction budgeting requires construction-specific software. And secondly – it’s all about transparency and collaboration. Choosing a budgeting tool to take all the organizational responsibility and construction budgeting process off your shoulders is the first step to success.
Builders should opt for solutions offering a centralized system, i.e., a platform where you can manage construction finances, open bid requests for your subs and construction crew, sign contracts, and generate construction reports for clients.
Luckily, Buildern meets all these requirements with ease! The software is construction-specific and offers a wide range of features for mutual collaboration.
Let’s see how you can effectively organize construction budgeting with Buildern:
Set up your construction company profile and invite team members, subs, and vendors to join the platform. Start adding overheads, local taxes, insurance rates and other budget-specific data.
Once everything is ready, start by creating an estimation with your client’s needs and requests in mind. That’s when a builder’s construction knowledge and expertise come into play. You can use Buildern’s professional dashboard to list every activity and equipment needed for the job. Accurately estimate costs by adding prices for every construction item on your list. It’s important to present an estimation meeting your client’s expectations without compromising the quality of construction.
Add estimation lines to your construction budgeting software and include all the necessary information, such as materials, man-hours and any additional services required for the project. This will help the client understand what’s included in the price and make an informed decision.
Finding a sub with the best suitable price/quality offer can be challenging. That’s when construction bid management comes in handy! In Buildern, you can open construction bid requests and invite your network to participate. Managers can then compare construction bids and prices and choose the most beneficial offer.
Creating bills for the corresponding purchase order will provide additional control over construction finances. Buildern is a versatile solution designed to help you receive and track invoicing progress, get reports and keep every flow under complete control.
Once everything is set and construction budgeting is well-organized, leave your project management duties to Buildern! The platform has advanced integrations with the leading accounting software solutions. Quickbooks and Xero are available by default meaning any additional change orders or construction budgeting adjustments will be automatically updated and reflected across all channels.
Believe it or not, construction budgeting can be fun! With the right construction budgeting software by your side, the process becomes much easier and less stressful.
Give Buildern a try today and see how construction project management should be done!
Construction budgeting implies allocating funds to different aspects of a construction project. It’s a fundamental and inevitable construction step, as poorly managed expenses can lead to construction cost overruns.
Today is your lucky day to use advanced technologies instead of old-fashioned Excel files, and never lose track of your construction finances and progress again!