How to Manage Your Construction Budget and Keep Your Project’s Financials in Check

construction plans with pen

As a builder or contractor, properly planning your construction budget is critical to setting your home building project up for success. Excellent construction project management skills require a great deal of oversight, organization and preparation, so creating a project budget—ideally with the use of automated tools and software—is an integral part of the construction management process.

What is a Construction Budget?

Generally speaking, a construction project budget is a cost estimate of all the money you’ll need to cover all stages of the project — from analysis and discovery to the closeout, along with any possible associated costs you’ll build up throughout the process. While it’s difficult to precisely determine your total construction costs, an in-depth construction estimate should set aside some extra money in the budget for contingencies such as unforeseen building costs, which may include supply chain hiccups and inflationary pressures

The Importance of Construction Budgeting

Generally, stakeholders invest in a construction project with the intention of earning a profit. Thorough builders and contractors draft budgets and project plans in order to better keep track of the project and determine the best way to not spend too much money.

Additionally, with many parties and stakeholders involved, having a construction budget will help keep everyone accountable and ensure that team members are able to track and stay within the allotted resources.

Of course, it’s impossible to be 100% prepared for every possible outcome when it comes to your construction project. Pricing may change suddenly for certain materials, or there may be an unexpected shortage, causing material costs to shoot up. That said, by using construction budgeting software to track your real-time status and projections, you’ll be well on your way to ensuring you’ve prepared thoroughly for your project.

How Do You Create a Construction Budget?

It’s important to factor all-important costs into your budget during the pre-construction phase. While it’s common to think about materials as the primary cost, there are many other expenses such as the property, fees and services (e.g., real estate or consulting fees), labor, equipment and much more. This is the most critical step in the process and involves spending the time to research all requirements, reviewing documentation and blueprints and being aware of all safety codes and permits.

By seeing to it that your team fully grasps the scope of your project, along with any possible limitations, you and your team members will be able to avoid breaking the bank. Keep reading for our tips to make sure your total costs stay within your budget target.

1. Ensure Your Estimates are Accurate

During the pre-construction phase, you want to make sure that your construction team is working with the latest data available. You’ll be dealing with costs such as site preparation costs, which tend to involve demolition, permit and inspection costs and much more. Many projects tend to have additional hard and soft costs involved, so be sure to factor these into consideration.

Use the latest project plans and blueprints, as these will have the most up-to-date information and will allow you to draft a well-informed construction budget. Leveraging technology can greatly assist here. Construction cloud software can automatically sync project data and ensure that you’re not working with outdated information.

What are Hard vs. Soft Costs?

To have an accurate construction estimate, it can be useful to divide your costs into hard costs and soft costs. Hard costs are “brick and mortar” costs and are the ones related to the actual physical construction involved in your project. These tend to make up around 70% of your expenses and are easy to quantify and estimate.

Meanwhile, soft costs consist of everything that’s not directly related to the direct construction of your project. Costs entailed in the planning, discovery, design and post-construction stages fall under soft costs and can reach up to 30% of your costs (although these percentages can vary significantly).

Here’s a quick example to outline the difference between the kinds of costs: Let’s say you’re starting a remodel of a client’s home. Hard costs involve the actual construction, such as insulation, drywall, HVAC materials, landscaping and labor costs. These costs make up a huge chunk of your budget, but that’s not all.

You’ve also factored in other costs such as the architectural fees, inspections that need to be done and post-construction fees since you offer insurance and maintenance for your clients, as well as any fees associated with your construction software. While these are equally important expenses, they aren’t directly related to the remodel project’s construction phase and get qualified as soft costs. These fees can also be harder to estimate upfront.

By grouping your costs in terms of hard vs. soft costs, it becomes easier for your construction management team to get an accurate overview of your expenses upfront, helping you to see if costs have been potentially forgotten, but also to control costs more quickly should they start to balloon.

2. Factor in Historical Data Into Your Construction Budget

Just like most companies take historical data into consideration when creating their financial goals, you should analyze any previous data available and use that as the foundation of your team’s construction budget to best allocate your resources. But what kind of data should you be looking at and for how long back?

A general rule of thumb would be to look at the numbers over the past 2-3 years, although this may not always be possible. When making a construction estimate, some data you could look at includes price quotations from suppliers, the costs of equipment and materials, labor costs, the quantity of material purchased for prior projects and much more.

If there are previous projects that were undertaken for the client, analyzing the past projects can help turn a rough, initial estimate into a more granular, detailed construction budget that you can check against your real-time costs periodically to ensure you’re staying within budget.

3. Plan Your Budget

While you may be well-versed on the majority of the requirements for your project, getting the most accurate costs well in advance will help give you a clear overview of expenses, as well as not have to deal with any priority or rush fees due to a lack of oversight.

Whether your project involves working with surveyors, engineers, city government officials, real estate agents, or all the above, make sure to keep all stakeholders aligned as early as possible to minimize the chance of cost overruns.

4. Don’t Forget to Account for Unexpected Issues or Delays

Delays in the construction industry can happen for various reasons, and while some of them are out of your control, it’s important to be as prepared as possible to avoid time-consuming disputes. In fact, a 2021 Arcadis report showed that the average construction disputes can go up to millions of dollars and take an average of 13.4 months to reconcile. While proper preparation can prevent most non-excusable delays (such as late performance or execution), excusable impediments such as natural disasters, governmental red tape and equipment rental issues will still delay your construction project.

According to KPMG, only 31% of all construction projects come within 10% of the budget. This shows the importance of having both a time and money buffer in order to avoid serious cost overruns.