11 August 2022 9 min read

Construction Budget: a quick and comprehensive guide

 

A construction budget is the core of any project. Check out our financial guide to learn how to build a competitive budget and feel confident at every project delivery stage.

A construction budget works for project managers like a GPS for drivers. Without good navigation, it’s extremely hard to reach your destination. Instead, you’re more likely to run out of petrol, stuck helpless on the side of the road.

Do you feel that your construction budgets navigate you toward fast and efficient project delivery?

Discover construction budget management strategies and never get lost again.


TL;DR

  • A construction budget is a plan of expenses estimated for a specific project.

  • It helps you better plan project expenses and keeps the profit rate on the desired level.

  • Construction costs fall into three basic categories: hard costs, soft costs, and profits.

  • To create a competitive budget, ensure you understand clients' expectations and estimate costs accordingly.

  • Inadequate estimation, inappropriate project planning, and poor communication are the most common mistakes in budgeting.

  • One in every five construction companies exceeds the project budget.

  • Construction Budget Software can be a great solution for your budgeting challenges.

  • A proper construction budget software should provide solutions for reporting, document management, and estimation & quotation processes.

  • Archdesk, Procore, Playard, and Excel Spreadsheets are the most popular budgeting solutions on the market.


What is a construction budget?

Archdesk Construction Budgeting Dashboards for the Project and Company Level

A construction budget helps you plan and execute your projects while keeping the profit-cost ratio safe for your company’s financial health.

An accurate budget presents different cost categories and shows how they change during construction project execution: from the first inquiry to the final delivery.

Once the project starts, a construction budget works like a compass. It aims to show the work progress, help you plan your next actions, and keep the project profitable.


Why is construction budgeting important?

Saved Time, Higher Productivity

Creating a project budget takes time—no doubt about that. But, once a project starts, streamlined ROI will make the time up.

No more dealing with unexpected expenses or recalculating labour costs. All data is already in your budget. Instead, you can take this time to focus on another task and deliver your project’s scope faster.

No Stress about your Project’s Future

Do you remember the stress of not knowing until the very end of your project if you reached the expected level of profits?

If yes, you must consider creating construction budgets for your projects. Analyse the scope of your project, set realistic expectations, estimate all the costs and never worry again about going over budget.

Clear Relevancy of Tasks

If you don't prioritise your tasks, everything is urgent. The same is with your budget. Unforeseen costs happen. The trick is to know how to include them and not ruin your financial stability.

Which materials are indispensable to finish the project? Is there a possibility of saving on soft costs if the risk occurs? You don't have to do fortune-telling; you'll know the answers thanks to a construction project budget.

What is included in a construction project budget?

Before we move to strategies and tips, let’s recall the basics of creating a construction budget.

The best practice is to divide your project’s construction costs into three basic categories: hard costs, soft costs, and profits.

Hard Costs (direct costs)

As their second name implies, hard costs are all the expenses directly connected to the construction project. They represent the cost of the tangible aspects of a building, site, or landscape.

In the direct costs category, you find:

  • labour costs,

  • equipment costs,

  • material costs.

Soft Costs (indirect costs)

Soft Costs are all the expenses necessary for a company to work. Estimating them is much harder as they're intangible and often not strictly related to one specific project.

For example, insurance or legal fees may apply to the whole company, so in a construction budget, you should include only part of these soft costs.

In soft costs, you find:

  • project design/architecture,

  • insurance,

  • legal Fees,

  • temporary facilities,

  • accounting fees & taxes.

Profits

A construction budget's profit is the difference between the money you received for the project and the actual costs.

The amount of money can vary depending on the scope of your work, potential costs, or budget management techniques.


How to create a basic construction budget?

It's time to create the construction budget template for your business.

Note that every project is different. Your construction plan might require further customisation to meet your company's goals and customers' needs.

Also, there are many different construction budgeting strategies. You can create them using various tools (from spreadsheets to professional budgeting software).

Check out a free construction budget template and adapt it to your needs:

Contingency budget

A contingency budget is a safety buffer for all unforeseen costs. Its goal is to help you mitigate project risk to assure final profitability. The contingency fund can be 5-10% of your total budget, depending on the project type.

Equipment and tools

This category covers all the expenses connected to project equipment. It doesn’t just mean machines but also all the costs associated with delivery, usage, or maintenance.

Labour

Labour includes all human resources costs: hourly wages, vacation, and sick leave. It's an often underestimated category, so make sure you include all your workers' costs when forming your project budget.

Materials

Next to equipment and labour, it's another hard cost. You can use supplier relationships to negotiate favourable prices. At the same time, materials prices are much more sensitive to change in time like we're seeing now with rising inflation.

National insurance, VAT and taxes

Insurance and taxes are a vast category. Depending on your project's size and complexity, levels of insurance and taxes might differ. Don't hesitate to seek advice about up to date terms and conditions from a professional financial office.

Overheads & profits

Overheads are the costs of running your business like office rent or transportation costs. Depending on their nature, they can be included in both hard and soft costs. Profit is the money left over after paying all the expenses.

Professional Fees & Services

In this category, you can add all costs related to services not performed by your employees. If you're a general contractor, devote more time to estimating these costs, as they might be the most developed part of your budget.

Project Management

Here you can include all costs associated with project management activities. It might be project management software, digital tools, office supplies, or even an internet contract.

Property

This cost refers to the land or property acquisition to start your construction project there. For the lot/land price, you also need to include the purchase fees and taxes.

Utilities

Utilities mean electricity, gas, and water consumption that you made during the project execution. If it's difficult to estimate these costs, try looking at previous similar projects and gauging costs based on numbers there.


If you’re interested in building a proper construction budget template, check out the Construction Wiki.

View on the construction project budget in Archdesk construction management software.

Successful construction financial management on a project level in Archdesk software


How to make sure you build a competitive budget?

Creating a construction project budget is difficult. Luckily there are some tactics that you can use to make your plan competitive:

Get on the same page with your customer

Don’t assume your client’s expectations. Even if you think you understand their tastes and needs perfectly.

Clarify expectations before the project starts. How? After your team creates the budget estimation, show it to your customer and explain the origins of specific costs.

Do they have any objections? Are there any aspects they would like to change? What are priorities vs. what part can be abandoned in case of increased costs? Clear out these issues in pre construction phase and feel safe about your project budget.

Seek expert advice

No one can be an expert in everything. Don't hesitate to seek expert advice when dealing with a challenging construction project case.

It doesn't always have to be costly. You can search for construction forums or blogs focusing on construction management challenges.

If you feel it's not enough, consider getting professional help. Investing in knowledge on how to do your job better is much more profitable than doing it on your own and losing time, money, or a prominent client.

Make sure you estimate labour correctly

Many project managers make the mistake of underestimating labour costs. They usually calculate it hourly or in m2 rates.

But, the cost is not the only aspect that matters for your customers. They want to have projects delivered with outstanding quality. And for that, you need to work with professionals and pay for their competencies and experience.

Consider including your team's skills in future estimations. Once your customers understand the project's budget, they might be willing to pay more.

Consult with your suppliers

You might have spent years building relationships with suppliers, so make sure you use them. After all, if you win, they win as well.

If you’re having trouble pricing an intricate detail, fire it over to their engineers. Maybe they will be able to offer you a more competitive rate to beat a competitor?

Or it won’t be possible this time. But there won’t be any gain without daring to ask about prices.

Want to see how simple managing construction budgets can be?
Book your quick demo to discover Archdesk solutions.


3 big mistakes to avoid when construction budgeting

Inaccurate estimation of project costs

Have you ever underestimated project costs? We all do, as it's one of the most common mistakes while building a construction budget.

Many companies withdraw from building detailed budgets when unsure they have a job. It's a risky tactic that often results in many unexpected costs, which contingency budget funds can't always save.

Inadequate project planning and controlling

Budget management doesn't end in the pre construction phase. If you're a project manager, your work is just starting. You must ensure the estimated costs match your project plan.

It might seem obvious, but many construction project managers tend to focus more on project management. They don't understand the numbers in their budgets, and in the end, they're often surprised that the expected profit is not there.

Bad communication

Does your company struggle with laboured communication? Almost two thirds of construction projects fail to meet deadlines due to poor information exchange.

Don't let unexpected costs slow down your project’s progress. Already in the pre construction stage, set the channels of communication. Ensure your team and subcontractors are familiar with them and track information flow during the works.

"

Understanding numbers and being comfortable with them is a fundamental reality of running a professional building business.
- APB’s Head Coach, Andy Skarda, in Professional Builders Secrets

"

How often do construction budgets go over budget?

Too often! According to Mckinsey Global Research one in every five projects exceeds the budget.

The current situation in the construction industry is not helping stay, as 37% of project managers admit they went over budget due to problems after the coronavirus pandemic.

"

The construction industry must embrace these new ideas. When we resist change, we overlook solutions and set our companies—our industry—up for failure.
- CEO of Kiewit Corporation, Bruce Grewcock in McKinsey Analysis

"

Why do construction projects go over budget?

Many factors can make your construction projects go over budget. They can be divided into two categories:

Internal Factors

These factors come from mistakes or lack of proper process. Usually, overspendings result from inaccurate estimation, human errors, or lack of budget tracking techniques.

Cost overruns might seem to appear from nowhere. But, with proper strategies and tools, you can save your project from being a financial fiasco.

External Risk Factors

There are many things you have no control over. Inflation, unexpected weather conditions, or disturbances in a supply chain are only a few examples.

However, there's a chance to prepare for them. Try to analyse risk factors in the pre construction stage. Also, look at existing documentation on risk management in your company. If you don't have it, it's high time to create one.


What is construction budget software and how does it help you?

Construction budget software is a system that helps you estimate, manage and control your construction budgets. It provides a real-time view of budget execution and tools to manage construction costs.

It’s an excellent choice for your company if you struggle with budget overruns, inaccurate estimates, or lack of spendings control. But it’s not only for budget management.

Good construction budget software gives you tools to streamline your project management and communication as well:

Plan and track construction costs on a Gantt Chart

Matching estimated costs with a project plan seems a challenge? Use a Gantt chart to see the construction process with all blockers and dependencies.

Track costs and progress in real-time on a dashboard

Monitor your project development without stress of your budget as all costs are visible in real-time within just a few clicks.

Gets rid of damaging spreadsheet errors

If you manually enter data into complex spreadsheets, your project will likely fail. Take care of your financial data and save your projects from avoidable but hazardous mistakes.

Automates lots of the boring, mundane stuff

Use a construction budget template and free yourself from manual, time-consuming tasks. Use the template and customise it to current needs.

Gives you the up-to-date cost databases

No more unexpected building costs showing up from nowhere in your construction budget. Construction budget software shows you all details of your expenses.

A person is sitting in a modern office working in front of a computer.

How to choose construction budget software?

When reviewing construction budget software options, it’s about more than just building your budget. It’s about what you can do once you’ve built that budget.

Construction Estimating & Quotation

As we stated before, inadequate project cost estimation is the main reason construction budgets fail. But you can fix it with the use of construction budget software.

A proper digital solution can tailor to your budget building structure. You don't have to sacrifice quality for a time as it speeds up the whole process and helps you maximise your revenue from upcoming contracts.

Read more about Construction Estimation & Quotation

List of purchase orders visible on Archdesk software dashboard

In Archdesk, within a few clicks, you can access a project estimation and check the stage of the approval process.

Construction Reporting

If you’re a project manager, there’s a big chance that you’re managing more than one construction project at a time. In such circumstances, it’s easy to get lost in the amount of data, financial reporting, and budget specifications.

Luckily construction budget software can support you. Use it to see all data in a reporting dashboard customised to your needs. The software will give all the insights to boost your project development right away.

See how Archdesk helps you with construction reporting

Financial reports visible in Archdesk software

See all financial reports in the software and not lose track of project finance progress you make.

Construction Document Management

10 minutes into an important meeting, tons of folders with financial data, and you realise you’re missing this one crucial document?

Managing your existing documentation doesn't have to be a nightmare. Choose a construction budget software that will keep all your documents in one place, organised, and accessible anytime you need them.

Read more about Construction Document Management

List of purchase orders visible on Archdesk software dashboard

All purchase orders are visible in a separate dashboard, so you can easily find the document you're looking for.


The best construction budget software in 2022

Archdesk to understand the real-time financial health of your business

Some systems can help you with basic budget considerations. But, Archdesk is the construction management software that supports your processes from A to Z, not only financial ones.

Features:

  • Budgeting- Create, manage and control your construction budgets from a single platform

  • Quotation & Estimation- Use a custom structure to build solid estimations

  • Project Finance- Track the financial health of your construction projects in real-time

  • Reporting- Use up-to-date dashboards to see what’s happening in your projects anytime

Pros:

  • Archdesk integrates with the most popular accounting systems like Xero or Sage50

  • Customer Support- individual approach with customised implementation process

  • All your financial documentation is safe and accessible anytime and anywhere you need it

Procore

Procore is an Archdesk alternative that also supports construction management processes.

Features:

  • Financial Reporting

  • Budget Tracking/Job Costing

  • Document Management

Pros:

  • Variety of tools and modules to use

  • Precise Construction Estimating

  • Easier Management of Construction Data

Cons:

  • It takes time to implement and onboard a team

  • The complexity and amount of tools can be overwhelming for smaller companies

Planyard

Planyard is a project cost management software specialising in solving construction financial challenges.

Features:

  • Construction invoices management

  • Construction Budgeting

  • Construction Estimating

Pros:

  • Free 14-day trial

  • Good customer support

  • Easy to navigate

Cons:

  • Relatively a new product on the market

  • Supports only financial aspects of the construction management processes

Spreadsheets

Excel Spreadsheets aren’t the worst tool for creating a construction budget. They’re free, accessible, and there is a big chance that your employees are familiar with the most common formulas.

Yet, they have many flaws. You cannot track project progress, and with more complex projects, it’s tough to understand and manage data there. Not to mention the high risk of mistakes.

Once you invest in a construction budget software like Archdesk, you can use Spreadsheets to export financial data and send it to an external client for approval.

See the 9 best construction RFI software and tools in 2022


Conclusion

A construction budget should be the heart of your work: from the site preparation to the project closeout. You can only feel safe about your profits with proper planning and cost estimation.

On the construction market, you can find many tools to support your budget management. If you're a project manager, you shouldn't close only on project management software options.

The solution you need should provide solutions from A to Z, just like Archdesk software does. Book a quick demo if you want to discover how we can help your company.

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2022-09-29 23:42:29