A construction budget is a statement of the amount of money that is available to spend over a period of time, or on a specific item, such as a building. Generally they are derived from a Quantity Surveyors Bill of Quantities as a starting point. It may include an outline plan for how that money will be spent, and a breakdown of the items it will be spent on.
The modern construction industry typically deals with large numbers in terms of the estimated amounts but relatively small numbers with available margins. These tighter margins demand a far greater focus on operating within budget to avoid completed projects delivering little profit or, in the worst cases, considerable losses. So where should a company focus its efforts to stay on budget?
Let’s take a look at the key areas in a successful budget
Creating a Realistic Budget
One of the primary reasons contractors fail to hit their profit goals is because they are overly optimistic about their margins. When creating / reviewing a construction project budget or estimate, you need to challenge all assumptions that have been made. Can your company perform better than they have in the past ? Unless there is established proof that you are more efficient than before, have introduced more efficient equipment, cheaper materials are available or that operations on site will be able reduce downtime, do not assume your costs will outperform the costs from the past.
Your project, however unique it might be will have other similar projects to compare to. Checking out costs of past projects with the same goals and objectives can give you great insights for your new project budget.
Know your Overheads
Overheads are a deep topic here at Livecosts. It is a extremely complex equation when you try to apply expected overheads to a project as they all vary so much in value, length and strain on resources. The most effective method we have seen is to at least establish what your overhead allowance should be on a project budget, this is done by calculating your overhead percentage and ensuring this is covered in your project budget. The math here is relatively straightforward.
Total overhead costs last year / Total sales last year = Overhead Rate
To get a percentage instead of a decimal after you first divide, multiply the result by 100. This will give you a percentage number that you can easily work with for a greater understanding of your overheads.
For example, if you have a 10% overhead rate, this means that your company invests 10 cents in overhead for every dollar that you make. The appropriate overhead rate is industry-specific, so you should take some time to research what the standard is for businesses in your region and that your rate is in the same ballpark.
Use Project Accounting Practices
Unlike traditional accounting, project accounting measures the financial performance of specific projects and phases. It requires collecting key data throughout a project, such as time and expense information. Project accounting provides real-time data, giving firms the financial insights they need to thrive. In many cases, small decisions at key times can have a big impact on staying within a project budget.
Using an effective project management software will allow you to set up construction project budgets and allocate the various incoming costs against those initial budgets.
Avoid Scope Creep
In construction, it’s imperative for the scope to be comprehensive, agreed upon, and understood by all parties involved. The client, the contractors, and even the sub-contractors all need to be in agreement regarding who is doing what, who is responsible for what, when it needs to be done, and for how much. This agreement is generally formalised in a contract.
By and large, your clients don’t care about the nuts and bolts of how your company produces the final result. They may ask you, entirely out of ignorance or innocence to change direction mid-construction, erasing all chances for staying within scope. This is where having a clearly outlined, written estimate is so important. It’s less important that your client signs the document, the signature is mostly used for legal purposes, than it is for them to understand what’s in the contract and how changes to the contract will be addressed.
Variations to the initial scope of a project (also commonly known as change-orders) are not unusual for those who undertake job-based work. Managing those changes efficiently and effectively can be tricky – but it is essential that they are managed correctly if you are to recover, and profit from, the extra work you will do outside the original scope.
Ensure that any variations are notified, costed and passed onto the client as soon as possible, in full and with a margin on top. This may sound like common sense, but many companies manage variations badly, failing to pass on updated expenses to the client and effectively losing money on each variation.