How to Develop a Construction Budget

You have an idea for a dream project. One of the first things you’ll want to know is how much it’s going to cost. After all, you won’t know if you can even do the project until you have a ballpark cost.

Depending on the scope of the project, a construction budget can have a lot of moving pieces. Some you get to decide on, and some are dictated by others. Gathering the information, putting it together, and working the numbers to get the right price is all part of the process.

Components of a construction budget

There are five main components of a construction project budget for a new building or major remodel.

Hard costs – Construction hard costs are the costs for the actual construction of the building. They include materials, labor, and equipment costs. Pricing is determined by the going labor and material rates for the project location. A general contractor will determine these costs based on bids from subcontractors and suppliers, and the costs to employ their own workers.

General conditions – This term refers to the general contractor’s non-trade costs that are required in order for a construction project to take place. They include temporary utilities, project supervision, dumping services, printing, trailer rental, project management and administrative costs. The price of these services is determined by the scale but even more so by the duration of the project. General conditions costs are part of the general contractor’s budget and responsibility.

Soft costs – Construction soft costs cover design and other services that are needed for a project but aren’t directly tied to the actual physical building. Architectural and engineering costs, insurance and bonds, and legal and accounting fees are included. These costs are determined by the companies providing the services and are usually based on the size of the project and the length of the schedule.

Permits and fees – Every project is subject to review and permitting by local jurisdictions. These fees are usually calculated based on the scope of work and size of the project. Some are determined based on the cost of the project, while others are dependent on the number of fixtures or items being installed.

Contingency – Every project should have some money set aside for unexpected circumstances. Expect the unexpected! These can include changes to the project scope, unforeseen conditions, and project delays. Most owners will have a contingency in their budget, but it is also appropriate for the contractor to include one as well.

What influences a project budget

There are many factors that influence how much a project is going to cost. Two projects that differ in one or more of the following can end up with two different construction budgets.

Project scope – Does the project entail constructing a new building or adding on to an existing one? The scope of work is going to be important in determining how much it costs. Generally, the more work that is required, the more expensive it is going to be.

Project size – The square footage of the project is going to influence the overall budget, although it isn’t always as important as you would think. Small areas with intense equipment needs or high-end finishes can be more expensive than larger areas that aren’t as cost intensive per square foot.

Materials and equipment – If the project requires a lot of expensive materials and equipment, the cost is going to be higher. Knowing the value of the finishes and equipment on a project can be key when it comes time to value engineer a project to meet a set budget.

Quality of design – This refers to the quality of the plans and specifications provided by the design team. If they provide high quality drawings that don’t require a lot of interpretation and don’t create a lot of questions for the contractor, then construction costs will be lower. It’s when the design is sketchy or not enough detail is provided that many contractors will pad their pricing to make sure they can afford to deal with the delays and additional time it will take to complete the work. Contractors, like everyone else, don’t like to take risks and undefined scope will translate in the contractor’s mind to more risk, and therefore more money. The same can be said if there is a special construction technique that the design team requires for the project. If the contractor is unfamiliar with it, they will raise their price to account for any additional costs they may incur.

Project schedule – Generally, a shorter duration project will cost less than one that runs over a longer period. Costs like general conditions and supervision are directly dependent on the amount of time on the project, so a shorter project is less expensive. However, there are times when shorter projects can cost more. If a project is being fast-tracked to meet a specified opening date, tactics such as rush deliveries and working overtime can increase the overall cost.

Owner requirements – If the owner requires special insurance, performance and payment bonds, or prevailing wage rates, the cost will be higher. Due to the nature of the owning entity, they may not have any choice in these matters, but they do increase costs.

How to develop a budget

So, now that we’ve discussed what goes into a project budget, how do you actually put one together?

1. Start by measuring the total square footage of the project. Using a construction cost reference tool, you can determine an approximate cost for the project. These tools generally include a cost per square foot for different types of buildings, such as restaurants, offices, hospitals, or warehouses. This will give you a ballpark figure to let you know if you are in the right area when you finish your budget, but don’t rely on square footage costs alone!
2. Look at the plans and list out all the trades and scopes that will be needed for the project. You’ll then want to use that list to set up your budget spreadsheet or enter it into your estimating software.
3. Once you have all of the scopes listed, put together a rough schedule with anticipated durations for each of them. This will give you an idea of how long the total project will take and will determine the amount of supervision and general conditions costs that need to be included.
4. At this point, there will be some known quantities that you can start pricing. For example, if you know the project will last six months, you can budget for supervision for that time period. If you know that the project will need temporary power, you can add an allowance for that into the budget. Do this for all of the items you can quantify based on your list of scopes.
5. If you want to double check quantities, you can do material take-offs for each scope of work. For example, you can measure the size of the concrete slab and the number of footings needed and determine a material and labor cost for that work. You can also use that quantity to check the estimate of concrete subcontractors who bid the project.
6. Review subcontractor estimates carefully, making sure the scopes are comparable. Note specifically the inclusions and exclusions on each one, and request clarification or ask the subcontractor to revise their pricing, if needed, in order to make it comparable to other quotes.
7. Select the best subcontractor at the best price for each scope of work and enter their price into your estimate spreadsheet or software. If there are scopes you don’t have pricing for, you’ll have to contact suppliers or subs directly to get them. You may have to do this for certain soft costs, such as permits and insurance, and any unique materials that have been specified.
8. Once all the pricing has been filled in, you’ll need to calculate overhead and profit for the project. Different contractors have different overhead needs and profit targets.
9. Now that you have a final price, compare it to the budget you got in step one from the cost tools. If your price is within a short range of that estimate, you can rest assured that you’re at least in the ballpark and probably haven’t missed anything. If your price is significantly over or under what the cost estimator came up with, you may want to dig a bit to see why. Possible reasons include expensive equipment or material was specified, or there’s a lot of it; there are site issues, such as bad soil, on this particular project; or materials cost more due to price escalations. It’s always a good idea to review the budget one more time, to be sure you didn’t miss anything and that your formulas are calculating correctly.
10. Have one or two people who are familiar with the project review your budget. Tell them you need them to ask you questions about anything that looks out of place. Take any feedback you get and revise the budget accordingly.

Construction budgets can be complicated, depending on the scope of the project. By providing an estimate for each scope involved in the project, you can be sure that you didn’t miss any significant costs.