Effectively managing and budgeting a construction project requires extensive planning for project success. Adequate funding is a prerequisite for initiating any construction endeavor. Estimating construction costs can be a challenging task, even for experienced project managers.
Creating a budget that perfectly aligns with the realities of a construction project is an elusive goal. This is primarily due to the ever-changing nature of construction projects and how unforeseen circumstances can lead to modifications in the project’s plans. The construction industry is highly time-sensitive, necessitating careful scheduling of milestones and associated costs. To ensure the success of a project, it is crucial for all stakeholders to adhere to a well-structured construction budget.
The Three Components of a Construction Budget Regardless of the specific type of construction project, construction costs can generally be categorized into three fundamental parts: hard costs, soft costs, and profit.
Hard Costs (Direct Costs) These are the costs directly tied to the actual construction work, often referred to as direct costs. Contractors determine direct costs based on the pricing they receive from suppliers and subcontractors. Examples of direct costs include expenses related to equipment, labor, and materials.
Soft Costs (Indirect Costs) Soft costs, also known as overhead expenses, encompass expenses associated with design, project management, and other essential project-related costs. These expenses are critical for the project’s success but do not directly relate to the physical building or its materials. Examples of soft costs include insurance, bonds, engineering, and legal fees.
Profit Construction is ultimately a business, and ensuring a reasonable profit is essential for the sustainability of any construction enterprise. Profit is calculated as the difference between earnings and expenditures, with the specific amount varying based on the project type, scope, and contractual agreements.
Incorporating Costs into Your Budget Estimating construction costs typically occurs during the project’s bidding phase, a process that can be quite meticulous. It involves a thorough review of bid documents and project plans to determine the overall costs. The types of expenses to include in your construction budget may vary depending on your role within the project:
- Materials:
A substantial portion of a construction project’s cost is allocated to materials. These costs are typically divided into site preparation expenses and building structure costs. Material costs may be subject to negotiation depending on the relationship between the contractor and suppliers, as well as the project’s geographical location. - Land:
Land-related costs are influenced by the project’s location and scope. They encompass expenses like real estate fees, taxes, and financing. Other land costs may involve licensing fees, which the client or general contractor must cover. In most cases, plumbing, electrical, and HVAC subcontractors are responsible for their own permits. However, in some instances, the primary construction permit may encompass all other secondary costs. Hence, it’s imperative to determine responsibility for permits and their associated fees when constructing a budget. - Labor
Labor costs include expenses related to the human resources required for the project, such as tradespeople, subcontractors, and equipment operators. These expenses encompass direct wages and also account for worker compensation, sick leave, and vacation pay. - Equipment
Equipment selection for a project is contingent on the project type, labor, and materials. You should also consider costs like equipment rental, delivery, equipment operation, and maintenance. - Project Management
Project management techniques play a crucial role in keeping projects within budget through efficient organization and tracking. Allocating funds for project management software is essential to ensure project efficiency. Additionally, budget considerations should account for utility bills, internet connectivity, and telephone expenses. - Insurance/Bonds
Most contractors, irrespective of their level, will need to demonstrate a certain level of insurance coverage to obtain a license. Bonds, on the other hand, are project-specific and vary depending on the type of work to be performed. Government projects, in particular, commonly require bonds. These costs should be factored into the construction budget for any project. - Taxes
The payment of local and state taxes depends on the project’s location, scope, and type. Additional utility-related costs may include expenses associated with gas, electricity, and sewer lines connected to the construction project. - Contingency Costs
These costs, also referred to as unforeseen expenses, constitute a reserve fund used to address unexpected circumstances during the project. Depending on the type of contract, the responsibility for these unforeseen costs may fall on the client or the contractor. Contingency charges are especially useful when the project scope changes or unforeseen issues arise during construction. Typically, contingency amounts for most projects range from 5% to 7% of the total project cost.
