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Budgeting and Cost Estimating for Construction Projects

Methods and Techniques

Budgeting and cost estimating are essential tools in the construction industry

Cost estimation and budgeting are essential tools for planning in the construction industry and play a central role in both preconstruction and construction phases of a project. Best practices dictate a total project budget should be developed as early as possible in a project. Stonemark typically aims to prepare the first budget at completion of the architect’s schematic design (SD) phase when the drawings are about 20% complete. Granted, this is a limited set of information, often comprised of simply a site plan, floor plans and key elevations, but if properly managed it is a key technique for cost planning in construction. We generally augment the SD drawing set with a scope narrative that identifies key owner programmatic needs, jurisdictional requirements, utilities and client expectations to convey to the cost estimator the full scope of the project. The owner’s full program should be accurately identified, documented and communicated to the project team. Once the initial budget is established, it becomes an essential tool for managing the balance of the design to meet the owner’s budget requirements.

How is it possible to project the true cost of a project when the drawings are only 20% complete? There are two ways to properly evaluate the construction cost of the project at this early phase. The first is to retain a professional cost estimator to prepare the SD construction estimate. The second that we generally recommend is to engage a suitable general contractor early to perform preconstruction services, for which preparing budgets is a key deliverable. In either method the professional cost estimator or general contractor develops a project cost model by carefully going through the SD drawings, scope narrative and asking detailed construction questions of the project architect and team in order to fully understand the intended scope of the project.

Evaluate potential contractors by their honesty and transparency in their budget projections. 

Remember, what matters most is not what a contractor budgets based on a 20% set of drawings, but the eventual complete construction cost when the contractor turns over the keys. Therefore, we gravitate to general contractors who are honest and transparent in the construction bidding process, preparing budgets and conservative in their projections. This is much better than a contractor who over-promises and under-delivers, providing unachievable budgets early in order to get the job. If you are an owner, beware of people who tell you what they think you want to hear. Projects generally cost more than you think and take longer to accomplish. The construction manager’s job is to ensure the contractor’s pricing is thorough and conservative so that you can make sound economic decisions.

Regardless of whether the project is residential or commercial, Stonemark’s process is to prepare an early total project budget that includes design and construction costs and anticipated or potential costs for the project. These include detailed line item hard construction costs as well as all costs of the project. There are many costs outside of hard construction costs that are generally defined by categories of soft costs (mostly design fees) and FF&E (furniture, fixtures and equipment). To this we add other owner’s costs such as legal and financing, or if a commercial development project, marketing and leasing costs. So, a total budget for a large project will include architecture, engineering (mechanical, electrical, plumbing, structural, civil, geotechnical, acoustic, etc.), landscape architecture, surveying, testing & inspections, permits & fees, consulting, furniture, fixtures & equipment, construction management fees, interest, legal, financing and cost escalation, and other owner’s costs. Include the owner’s full needs such as home automation and security for residences and special equipment or marketing expense for commercial projects. An appropriate contingency must be allocated to capture potential exposure to unforeseen conditions and other hidden costs. As an owner, expect to spend the contingency.

An accurate project budget begins with well established, clear and coordinated drawings.

Many clients complain about contractors’ construction costs, but contractors can only bid on what the design team has drawn. As Owner’s Reps, Stonemark’s ongoing review of the design drawings or management of the contractor to do so, enables us to identify conflicts and potential overruns in advance and mitigate budget problems while they are on the drafting table and not expensive change orders during construction. This allows the project team to target areas of discretionary spending, giving the client and architect better visibility and control over costs. A good construction manager will work with the team to generate a comprehensive construction cost estimate at completion of not only the Schematic Design phase, but also the Design Development and Construction Drawing phases. At any point, if the estimated costs exceed the owner’s expectations, they can either accept the cost increases for value received or consider value engineering recommendations to reduce costs. The best value engineering work is to identify costs that can be removed from the project that do not affect the owner’s program or the architect’s design intent. In any event, the owner should be able to make informed decisions based on the actual cost implications to those changes, so that line item pricing on additional scope can be prepared for the owner’s consideration.

Market trends leading to potential cost escalation should always be given careful consideration, particularly in development projects where construction start is a year or more off in the future. We’ve managed many projects for church parishes where they spend a year or more raising funds for the project, a year for the entitlement approvals and a year for the construction drawings and permitting. It is challenging to explain to the development committee the true impact of time. Most people think they are not spending very much money while they are planning or fundraising. But to provide an example, a $3 million project with 6% annual cost escalation will cost $180,000 more to build every year. This is $15,000 per month or about $500 per day—a lot of money to not build anything. In this example, the dollar that is fundraised today will only buy 80 cents worth of building products in three years. This example illustrates the power of cost escalation to derail a project budget, which is why any general contractor or construction manager worth his salt will include this factor in their budgets.

Construction cost estimating and cost control procedures obviously don’t stop with the preparation of the initial budget. Properly considered, the budget becomes an essential tool to manage the project. Most projects become better projects with a real budget as it forces the design team to create practical solutions and keeps the owner’s expectations reasonable so they know what to expect. Therefore, regular oversight and periodic updating of the drawings, cost estimate and budget are critical to keeping a project budget on track.

Cost management in construction should include the following tasks: 

  • Develop a total project budget as early as possible
  • Analyze project requirements and drawings to verify scope
  • Oversee contractor in performance of detailed line item construction project cost estimate
  • Determine true cost and time parameters for obtaining all jurisdictional approvals
  • Prepare soft cost budget including all consultants
  • Analyze utility, permitting, testing and inspection costs
  • Establish FF&E design and budget
  • Allocate sufficient contingency and cost escalation
  • Determine and analyze cash flow requirements
  • Oversee value-engineering and improvements in cost and schedule
  • Implement ongoing controls for real-time tracking of cost impacts

Construction demands flexibility — this is where an experienced Owner’s Rep is indispensable. Based on our assessment of risk, Stonemark will recommend contingencies to provide for factors that cannot be controlled such as hidden conditions, cost escalation and the inevitable design “scope creep”. Avoid wishful thinking! If you have prepared a through and accurate scope of work and vetted your contractors and material suppliers, your contingency budget will incorporate sufficient funds to allow for surprises.

Duration has a huge impact on budget. When selecting a general contractor, carefully evaluate their capability to provide an accurate and achievable critical path schedule. Stonemark assesses a contractor’s assumptions on whether they can realistically deliver a project on time. Their general conditions and management labor fees are a large part of the overall expense and are based entirely on the duration of the project. Any time increase also extends the fees for all other project participants—architecture, engineering, inspections, construction management, etc. A good Owner’s Rep will manage and reduce costs by accelerating the design and construction schedule as much as possible.

Armed with full information, clients are able to make informed and accurate economic decisions at the earliest possible stage, charting a direct path to the most cost-effective and quality project plan and therefore a more successful project.

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