how to create construction budget

What to include in a construction project budget?

Before the first shovel hits the dirt, construction project managers 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. Establishing a proper construction project budget ensures work can be carried out from conception to completion.

Setting a Strong Foundation

Taking time to account for every imaginable (or unimaginable) expenditure is essential to executing a construction project. Whether the job is commercial or residential, construction budgets should anticipate each and every cost of the building process. 

Construction project and cost management begins with site preparation costs, which includes expenditures such as demolition or equipment rental, and should account for everything else required to execute the project, such as insurance.

Construction hard and soft costs

Two primary types of costs make up a construction budget: hard costs, which are directly related to the construction of a building, and soft costs, which are indirectly related to construction. Typically, hard costs make up 70% of a project and soft costs are responsible for the remaining 30%, though these numbers may vary depending on the project. 

From raw materials to direct labor, products or services pertaining to the building’s physical construction make up the bulk of a project’s hard costs. Some of the most typical hard costs for construction projects concern the labor and materials required to make the building structure, equipment purchases and rentals, overhead costs related to general business needs, and landscaping. Contingency cost, which is typically 5% to 20% of the project’s overall cost, should also be set aside for unforeseen expenditures. 

While not directly related to the physical act of building construction, soft costs are nevertheless required to carry out the execution of a project. Some of the most typical soft costs for construction projects include architecture and planning work, real estate assessments and legal tasks, government permits and inspections, project management tasks, insurance, and taxes.

Building and Executing a Project Budget

Budgeting for each and every possible construction cost requires careful planning and management. Proper research to determine a budget is essential to ensure the construction project is affordable, accounting for each cost that will ultimately lead to successful completion. When budgeting, it’s essential to keep track of each and every document or spreadsheet so no unaccounted budget surprises emerge. A study on Cost Overruns on Infrastructure Projects found that inadequate project monitoring was a cause of budget overruns.

Because of the sheer number of documents involved when developing project cost estimates, embracing digital documents instead of manual paperwork makes it simple to collaborate and communicate throughout the course of construction. Careful monitoring of change orders and reports can help avoid budget overruns. Systematic tracking of all costs related to a project in one software could guarantee to prevent a project from slipping far off-budget.

Document management software also makes it easier for construction companies to manage cost overruns with automated multi-step approval workflows and conditional routing. In a 2015 study, James Odeck and his colleagues found that costs were reduced on large transportation projects that instituted a quality assurance program where initial cost estimates were reviewed by external advisors before final approval was granted.

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