Before the first shovel hits the dirt, as a construction project manager you must have a full financial understanding of how the final project will come to fruition. After all, buildings don’t just show up overnight: equipment, field workers, permits, and office space are the result of careful planning and coordination.
Creating and managing construction budgeting is no doubt a complex process, but the good news is that good planning makes it all work.
In this comprehensive guide, we’ve compiled essential information you need for efficient construction budget management.
What Is a Construction Budget?
A construction budget is a financial plan that outlines the estimated costs associated with a construction project.
It serves as a roadmap for managing expenses and allocating funds to various aspects of the project to ensure that you can complete it within specified financial limits.
Although including the same elements, construction budgets can vary significantly based on the size and type of companies involved, and their roles in a project.
Small construction companies handle smaller-scale projects, such as residential or small commercial buildings. They would deal with less complex budgets, with fewer line items and lower overall costs.
Enterprises would rather be involved in more extensive and complex projects, such as high-rise buildings, infrastructure, or industrial facilities. Their budgets are typically larger and more detailed, with numerous cost categories. Their budget management may require a separate financial and/or project management team, and dedicated automation software to keep track of all things.
What Is Included in a Construction Budget?
The general thing to understand about construction budgeting is that it’s pretty versatile, and may differ for small and large companies, as well as for project owners and subcontractors, and even different types of projects.
For example, while project owners create budgets for the entire project (planning, design, construction, post-constructions, subcontractors focus on specific aspects of a project, such as electrical work, plumbing, or concrete pouring. The latter would have budgets narrower in scope, covering only the costs associated with their specialized work.
But anyway, there are certain expenses associated with construction budgeting (which you may or may not include in your plan).
Two primary types of costs that make up a construction budget are hard costs, which are directly related to construction, and soft costs, which are indirectly related to construction.
There are also some costs that don’t fall within any category but yet are essential for construction budget management.
Let’s precisely identify where the expenses affecting your project’s financial landscape go.
|Hard Costs (Directly Related to Construction)|
|Materials||Lumber, concrete, steel, plumbing fixtures, electrical components, HVAC systems, etc.|
|Labor||Wages and salaries of workers|
|Equipment rentals||Heavy machinery and equipment rent|
|Subcontractor costs||Plumbing, electrical, roofing, HVAC installations, etc.|
|Site preparation||Site clearing, grading, excavation, demolition, land preparation|
|Contingency||A reserve fund (typically 5% to 20% of hard costs) for unforeseen expenses or changes in project scope|
|Soft Costs (Indirectly Related to Construction)|
|Architectural and engineering fees||Design, architectural plans, structural engineering|
|Legal costs||Permits, licenses, legal counsel|
|Insurance||Various insurance policies|
|Project management fees||Project management services, including administrative costs|
|Taxes||Property taxes, sales taxes, etc.|
|Market research and analysis||Market studies and cost-benefit analyses|
|Financing costs||Financing-related expenses|
|Quality control||Quality control measures, inspections, testing|
|Environmental assessments||Environmental impact studies and compliance with environmental regulations|
|Safety||Safety equipment, training, safety inspections|
|Technology||Construction technology and software for project management|
|Document management||Document management software and reporting tools|
Why Is Construction Budgeting Important?
Money is always important. When done properly, the budget of a construction project gives you a strong foundation for financial control and proper allocation of resources.
With a plan in front of your eyes, you as a project owner and manager have all the data and insight needed to make informed decisions throughout the project’s lifecycle. You’re also able to set realistic expectations and secure the necessary funding and stakeholder confidence.
No secret that investors, clients, and financial institutions are more likely to trust projects that are transparently managed and have clear budgetary guidelines.
On the other hand, inadequate or improper construction project budget breakdown can become a daunting issue, straining project finances and causing other troubles:
- Delayed projects: Delays due to resource shortages impact project timelines greatly.
- Quality compromises: Compromising on the quality of materials and skilled workers won’t do anyone any good.
- Stakeholder discontent: Unforeseen financial issues endanger relationships and future business opportunities.
- Legal issues: Non-compliance leads to legal disputes and costly proceedings.
- Reputation damage: Poorly managed budgets can harm the reputation of any construction company.
How to Create a Construction Budget
Budgeting for each and every possible construction cost requires careful planning and management. Also, because of the number of documents involved when developing project cost estimates, making use of professional construction software can be a good option to collaborate and communicate throughout the course of construction.
Let’s see how to approach this properly, and how a construction app like Fluix can help you with it.
If this is your first time hearing about Fluix, it’s workflow automation software that helps construction companies automate and effectively manage processes, from pre-construction to quality control.
1. Define Your Project Scope
Every successful project starts with a strong foundation. Begin by defining the scope of your project. What are the project’s goals and objectives? What are the deliverables and timelines?
Establish a clear understanding of what needs to be accomplished, what resources and manpower you need, and who is responsible for every stage of the project.
How Fluix can help: Use Fluix to create and manage standardized project scope checklists, ensuring all details are captured consistently. Build automated workflows to streamline the approval process for them and other scope documents, reducing delays and ensuring all stakeholders are on the same page.
2. Carry In-Depth Research
Once you have a clear project scope, dive into data analysis and research. Collect comprehensive data on costs associated with similar construction projects. This includes materials, labor, equipment, and any other expenses specific to your project’s location and requirements.
Analyze historical cost data, market trends, and industry benchmarks in order to have realistic estimates.
How Fluix can help: Integrate the past-project data collected using Fluix forms with analysis tools to analyze historical cost data. Build workflows to facilitate the approval and distribution of these findings between people who make financial decisions.
3. Do Cost Estimations
With a solid foundation and data in hand, you can now break down your project into its individual components and assign cost estimates to each. This detailed construction project budget breakdown helps you identify potential cost-saving opportunities and areas where expenses might exceed expectations.
How Fluix can help: Create detailed cost breakdown templates in Fluix to help project managers and estimators itemize expenses. Build approval workflows for cost estimates, ensuring that all stakeholders sign off on the budget’s accuracy.
4. Establish Documentation and Reporting
Before construction begins, you must complete a pre-construction checklist and gather all necessary documentation. This step ensures that you have accounted for every aspect of the project.
Key items on your checklist should include obtaining all required permits and approvals, finalizing contracts with contractors and suppliers, and securing insurance coverage.
Additionally, document any contingency plans for unexpected events or changes in project scope. By having all these elements in place, you minimize the risk of unforeseen expenses disrupting your budget.
How Fluix can help: Organize and manage all project-related documents within Fluix, making it easy to find and share critical information fast. Automate reporting processes to generate budget vs. actual expense reports with real-time data.
5. Manage the Project Effectively
Engage and coordinate with various stakeholders, such as architects, engineers, contractors, and financial experts, in the budgeting process. Ensure that all team members are aligned with the budgetary goals.
Develop procedures for handling change orders, including approval processes and tracking cost adjustments. Monitor and manage change orders to avoid unexpected budget changes.
How Fluix can help: Implement mobile forms and checklists in Fluix for on-site tracking of expenses and progress. Contractors can submit updates and expenses directly through the app, allowing for real-time monitoring. Automated alerts can flag budget deviations, enabling quick corrective actions. Additionally, Fluix can manage the approval process for change orders and other financial documents, ensuring they are processed efficiently.
6. Regularly Update and Monitor the Budget
Continuously monitor and track actual expenses against the budget, making adjustments as needed. Use regular budget reports to maintain financial control throughout the construction project.
How Fluix can help: Use the data collected with Fluix forms for automated reporting and analytics to highlight areas where adjustments may be needed. Build automated workflows to facilitate communication among stakeholders, ensuring everyone is aligned when budget changes are required.
Three Big Mistakes to Avoid When Construction Budgeting
Making mistakes in construction is barely unavoidable, as there are often unforeseen challenges and changes in the work of outside stakeholders which you can’t control.
But even knowing about possible issues can reduce the degree of their impact, so keep in mind these three significant errors you’d better steer clear of:
1. Underestimating Costs
Failing to accurately estimate costs can lead to a budget that falls short of what’s needed for successful project completion. As a result, you end up with budget overruns, delays, and quality compromises
How to avoid: Invest time and resources into thorough research, ask experts for input, and incorporate contingencies to address unforeseen expenses.
2. Neglecting Soft Costs
If you focus solely on hard costs, neglecting soft costs, you are creating an imbalanced budget and setting yourself to face some financial surprises and difficulties in the future.
How to avoid: Create a comprehensive budget that includes both hard and soft costs, ensuring that all project-related expenses are considered from the start.
3. Doing Inadequate Budget Monitoring
You may think that once a budget is established, the job is done for good. But the absence of regular monitoring can result in overruns, strained timelines, and disputes with stakeholders.
How to avoid: Implement budget tracking mechanisms, use construction management software, and conduct regular budget reviews to identify variances and take corrective actions, if needed.
Construction budgeting, while complex and challenging, is a manageable and essential aspect of successful project management. With the right tools, expertise, and strategy, you can approach budgeting with confidence, and achieve your project’s financial goals.
We at Fluix are here to support you during this journey, offering solutions for digitizing your budget-related documents, automating approval workflows, and facilitating reporting.
If you’re new to the world of workflow automation, our team will assist you in launching your first workflows, ensuring onboarding for your teams, and ultimately making a positive impact on your construction budgeting strategies.