Creating a Construction Budget? Here’s What You Need to Know

Creating a construction budget is integral to the preconstruction process, but the construction budgeting process begins long before that.

A comprehensive construction budget includes all the costs associated with the constructed asset from concept through decommissioning. 

This is important because accurate construction budgeting is essential for meeting the project’s goals while staying on schedule and preventing cost overruns.

Here’s a high-level breakdown of what you need to know to create an accurate, reliable construction budget.

What is a construction budget?

A construction budget is a financial accounting of all the known and anticipated costs of a construction project over the asset’s lifespan, from initial concept to final decommissioning. 

A comprehensive budget will account for such expenses as acquiring the land, designing the structure, securing permits, building the asset, and maintaining it throughout its lifecycle.

There are three primary cost categories in a construction budget. The table below gives a brief overview of each.

Site Costs:	Hard Costs:	Soft Costs:
-Land and property acquisition -Commissions & fees -Title insurance -Site surveys & plotting -Land clearing & demolition -Land balance & utilities	-Foundations -Exterior structure -Environmental systems -Interior finishes -Telecommunications & IT systems -Furniture, fixtures & equipment	-Design & engineering fees -Management fees -Legal expenses -Insurance -Asset Management -Grounds maintenance

What are site costs?

Site costs, also known as development costs, cover all the expenses of preparing a parcel for development.

The site costs include all the expenses incurred while preparing the construction zone for development.

Depending on the project scope, this could consist of developing a vacant tract of land, demolishing an existing structure to build something new, or creating space for an addition or new wing of an existing structure.

Owners incur site costs well before the preconstruction phase. And it’s not uncommon for developers to prepare large tracts of real estate at a time, years in advance, to spread site development costs across multiple projects.  

What are the hard costs of a construction budget?

A construction project’s hard costs are the quantifiable, “brick and mortar” costs incurred during the construction phase. And depending on the contract, hard costs can sometimes be divided into two categories.

1. Contractor cost, or “by Contractor”
   1. Preconstruction costs
   2. Permits and approvals
   3. Labor, tools, equipment, and materials
   4. Building systems (MEP), 
   5. Interior and exterior finishes
   6. Project management and commissioning cost
2. Owner costs, or “by Owner.”
   1. Furniture, fixtures, and equipment (FF&E)
   2. Artwork, decorative floor coverings, and special finishes

“By Owner” costs generally occur after the contractor secures a certificate of occupancy, construction is fully completed, and the contractor has delivered the asset to the owner. 

What are soft costs in construction?

Soft costs are the intangible expenses incurred before, during, and after construction.  But aside from design and engineering fees, soft costs generally occur after commissioning and continue through final decommissioning.

Soft costs include management fees, property taxes and insurance, lease commissions, and ongoing facility maintenance. 

Constructed assets are investments, so ongoing expenses reduce the asset’s revenue and its appreciation in value. 

However, predicting the asset’s lifespan while considering potential economic fluctuations, equipment failures, and technology upgrades make soft costs more difficult to budget.   

Overview of construction budgeting

As you can see, the total construction budget is within the developer’s or project owner’s domain.

Project owners and developers need to budget for the total cost of their constructed assets from concept through completion to make informed investment decisions.

General contractors and construction managers use construction budgets differently.

General contractors and construction managers have no control over project soft costs and only a limited impact on site costs. 

Line items for land clearing, site balance, and utilities often fall within the general contractor’s scope of work. But otherwise, the project’s hard costs are the only expenses general contractors can impact, budget for, and control.

Budgeting construction costs: Where to begin?

For accurate cost analysis, it is crucial to use a standard framework for classifying and managing information.

The most common framework for organizing information in the construction industry is either the 16-division or more recent 50-division MasterFormat developed and managed by the Construction Specifications Institute (CSI). 

MasterFormat is extensively used in the construction industry as the standard for project manuals, specifications, and other project-related information. 

And the MasterFormat structure follows the basic process for procurement (subtrades and contract packages) and construction, so it’s widely used for estimating, scheduling, and cost control.

So for those reasons, it makes sense to use the CSI MasterFormat to create and manage your project budget.

Critical components of a construction project budget

No matter which information management system you choose, all project expenses are broadly grouped into the following categories.

General Conditions:

General conditions fall into three types: 

1. Preconstruction costs
   1. Cost estimating and budgeting
   2. Permits and approvals
   3. Subcontractor qualification and selection
   4. Safety planning and risk management,
   5. Resource management and procurement
   6. Project scheduling, phasing, and logistics 
2. Construction organization costs
   1. Temporary site facilities (job trailers, etc.)
   2. Site preparation and setup costs
   3. Project management and organization
3. Project operating costs
   1. Temporary power and utilities
   2. Site sanitation and waste management
   3. Project site maintenance and security
   4. Parking, staging, and delivery access

Insurance and Bonds:

All construction projects are legally required to carry insurance. 

Surety bonding is also necessary to ensure your company completes the project promptly and pays all subcontractors, tradespeople, and suppliers. Surety bonding is especially true if working on governmental projects, but most other projects require bonding. 

Including allowances for insurance and bonding fees in your budget is always wise.

Professional Fees and Services:

Professional and service fees during the construction phase include geotechnical consulting and testing, permitting, surveying, banking, and legal fees.

Some of these expenses are known and can be planned for, while others may occur unexpectedly. It’s always wise to set aside a contingency fund in the budget to account for such expenses.

Utilities and Taxes:

This includes gas, water, sewer, and electric costs associated with the building site and local or state taxes related to the scope of work.

The owner’s site development costs cover many of these expenses, but others are the general contractor’s responsibility. A well-scoped project prevents these expenses from sleeping through the cracks.

Tangible costs in the project budget

Labor, materials, tools, and equipment are the more familiar items in the project budget. 

These expenses are generally easier to quantify and control, but not always. Rising material costs, an unstable supply chain, and limited workforce availability make budgeting for these expenses difficult and time-consuming.

Materials:

Unlike other expenses, material costs can often be negotiable depending on your supplier relationship. 

Large general contracting firms with many projects and those able to make substantial capital investments can buy in bulk and secure volume discounts on many commonly used materials.

Budget line items for building materials should always include the necessary fasteners and accessories and an allowance for waste.

Labor:

The labor line item accounts for the cost of your tradespeople, subcontractors, equipment operators, and other human resources. 

Your budget should include all salaries, hourly wages, fringe benefits, workers’ compensation, health insurance, vacation and sick time, taxes, and unemployment insurance for everyone involved with the project.

Tools and equipment:

The tools and equipment line items should include all the heavy and light equipment, tools either rented or bought, as well as delivery fees, operating fees, fuel, and maintenance costs associated with the project.

Don’t forget to include scaffolding, work platforms, material handlers, and company vehicles. Every piece of equipment necessary to construct the project needs to be budgeted.

Project Management:

Project management efforts organize and monitor the project to keep stakeholders on schedule and avoid overspending. 

Consider the costs of construction project management software or any office space or utilities needed for management tasks such as internet connection, local area network (LAN) requirements, telecommunications, and mobile phone expenses.

Include contingency funds in your construction project budget: 

Even the best-laid plans go awry. 

That’s why every budget needs funds set aside in contingency in case of unforeseen costs or expenses. Changes in scope, design upgrades, material substitutions, machinery malfunctions, accidents, and severe weather events can wreak havoc on your project. 

Your contingency fund should be between at least three to 10 percent of your total budget, depending on the work scope to provide coverage in case disaster strikes.

Profit and Overhead: 

Profit is the difference between what you earn and spend, while overhead is operating expenses associated with running a business.

Include both of these line items in your budget.

Tips for creating an accurate construction budget

Accurate construction budgets are essential to successfully completing any construction project. 

As a construction project manager, it is crucial to consider long-term economic and market trends when creating a construction budget to ensure accurate estimates and avoid making costly mistakes.

Budget for pre-construction costs because the preconstruction phase is where you’ll establish the project scope, create the project plan, and collect cost estimates from subcontractors.

Study the project’s scope of work and break it down into its individual components based on the CSI MasterFormat.

Estimate costs for each component and line item and assigns that budget amount to the respective work package within your work breakdown structures (WBS).

Then, as your crews complete their tasks, your project management software will automatically deduct the expenditures from your budget while updating your schedule.

And don’t forget to account for potential change orders, RFIs, delays, and contingencies. Unforeseen and unexpected costs can come out of nowhere, and you can’t afford to be caught unprepared.

Construction Project Management Software for the Construction Industry

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