Starting a construction project can be a daunting task, especially when it comes to creating a construction budget.
Whether you’re a landowner with experience or without, creating the right foundation for your project will ensure it’s successful.
Let’s explore the most essential components of building a construction budget.
These practical tips will allow you to navigate the budgeting process most effectively.
1. What is a construction budget?
A construction budget is the estimate of the money required to take a construction project from start to finish.
It includes all associated costs, expenses, and fees related to the building process.
A realistic construction budget should have a buffer built into account for any emergencies or unexpected building costs.
Although the point of a budget is to foresee any costs, it is common for construction projects to exceed the initial financial forecast.
To create a construction budget, we recommend that landowners work with construction project managers.
You should use the project plan (which may also be called a blueprint) to understand what materials are required for the project.
You’ll also need to factor in any costs related to construction such as site preparation, demolition, equipment rentals, permitting, and inspection costs.
Always remember that added expenses will pop up as the project begins such as additional labor costs, safety requirements, transportation, etc.
Depending on whether you’re completing a residential or commercial construction project, you may also need to pay fees specific to the individualized processes that your municipality requires.
As these costs are variable, you’ll need to consider and calculate them separately.
2. Why is construction budgeting important?
Going into any project without a budget is the best way to spend too much money.
Creating a budget allows you to build expectations around how much you intend to spend.
Most people don’t have unlimited funds, so if you want to keep the project financially feasible, then a budget is a key tool in keeping your project on track both before and during execution.
Some people struggle with this concept.
They wonder, “Isn’t the project going to cost whatever it’s going to cost? How is creating a budget going to change that?”
When you have unaccounted expenses in a project it’ll take longer to finish.
Pushing out the completion date is frustrating and can lead to higher costs in other areas.
For instance, you’ll need to pay for additional labor costs.
Or if you’re renovating a home, you may need to pay for accommodations to stay elsewhere for a longer period of time.
Creating a budget (and sticking to it) allows you to take into consideration as many construction costs as possible, plan for them, and then stay on schedule from that point forward.
3. What is included in a construction budget?
Let’s break down all the items that are included in a construction budget.
The primary types of construction costs can be split into three categories.
Direct costs – Heavy equipment, materials, and labor
General conditions – Indirect costs such as preconstruction costs, construction organization costs, and project operation costs
Profit overhead – Profit (difference between what you earned and spent); overhead (operating expenses associated with running a business)
Here are the most important costs that should be considered when building a construction budget for the first time.
Property
Property costs include the lot price, real estate fees, financing, and taxes.
The percentage of your budget you’ll need to dedicate toward this category will depend on where your building project is as well as the scope of your project.
Professional fees and services
You’ll have a lot of partners for any construction project.
These professionals will require a portion of your budget.
You should allot a percentage of your budget for costs related to professional consulting, permitting, surveying, testing, designing, master planning, structural, electrical, mechanical, and civil engineering, accounting, banking, and real estate fees.
Materials
Materials are a significant portion of your construction budget.
Typically, you’ll need materials for both site preparation and building the structure itself.
The good news is that you’ll be able to cut down on your material expenses if you have an ongoing relationship with your supply.
Materials can be negotiated to a lower price, so try your hand at bargaining (especially if you have a bigger project with a greater need for materials).
You may be able to get a better rate!
Labor
Labor can get expensive in the construction world, especially if a project starts to go over the projected timeline.
You’ll be paying for contractors, tradespeople, equipment operators, and other human resources.
Not only do you need to pay their hourly wages, but you’ll also need to factor in compensation, vacation, and sick time to your budget.
Equipment and tools
You can’t budget for your equipment and tools until you’ve done the budget calculations for the material and labor.
Both material and labor will help you determine what type of equipment and tools you need to rent for the job.
Be sure to include delivery, operating, fuel, and maintenance costs in your budget in the equipment and tools section.
Project management
Project management ensures that you stay organized during the project, and it can allow you to properly monitor your budget to avoid overspending.
Depending on your project, you may want to invest in office space utilities, internet connection, phone plans, office supplies, construction project management software, or several other tools.
Insurance and bonds
Construction projects are legally required to carry insurance, so you’ll need to acquire that prior to the start of your project.
Additionally, you may also need to make a deposit or bond to demonstrate you’re able to pay the workers you’ve hired.
Factoring this into your budget early will ensure you have the capital on hand if it’s required.
Utilities and taxes
Utilities like gas, water, sewer, and electric costs are associated with the building site, and they will need to be paid, so you’re able to use the tools onsite.
Furthermore, the construction site may be subject to local and state taxes.
These rates are determined by the scope and type of project at hand, so you’ll need to do more research before estimating your budget.
Buffer
Any budget you create should always have a buffer to absorb unexpected costs and expenses.
Examples of unforeseen expenses in a construction project include changes to the scope of the project, design or material upgrades, machinery malfunctions as well as accidents or acts of God.
You should plan for your contingency fund to be between 10 to 20 percent of your overall budget.
4. How do you create a construction budget?
There are three core steps required to create a construction budget.
Research
Before you create your budget, you must have the knowledge to accurately estimate all the components listed above.
We suggest reviewing the historical data for similar construction projects in your area and speaking to suppliers regarding the project you’re able to start.
This will help you set realistic expectations regarding what the average price will be regarding labor, materials, tools, management, etc.
Selection
After conducting initial research, you (as the landowner and project owner) should choose a final design that you feel comfortable with.
This project design will inform a lot of your costs.
Your project manager will use the design you picked to create a list of materials as well as cost estimations.
From here, you start the project bidding process.
The project owner will use the information the project manager created to choose a general contractor and set the framework for building the actual construction project budget.
Documentation
Once you have a contractor, your project manager should speak to any stakeholders in the project.
Throughout this pre-construction process, your project manager should have been documenting where any unexpected costs may come up moving forward.
You can use this information to inform your construction budget.
5. How do you estimate construction costs accurately?
Do you want to make sure your budget is as accurate as possible?
Here are some steps that can help ensure you’re assessing your project as precisely as possible.
Conduct a detailed needs assessment where you consider the number of rooms, their sizes, finishes, and any special features you’d like in your project.
Engage with architects and design professionals to get their insights on construction costs based on their expertise and experience.
Obtain multiple contractor bids to compare pricing.
Analyze historical cost data for similar projects in your area.
This will give you an idea of what to expect in terms of costs.
We recommend looking at industry associations, construction cost indexes, and professional networks.
Use online cost estimators.
These will give you a rough estimate of project specifications, locations, and other parameters.
You can get a general idea with this tool and cross-reference it with any of the above.
6. What are common pitfalls when building a construction budget?
Underestimating costs
One of the largest mistakes people make when creating a budget is underestimating costs.
They want to think that their project will cost less than it actually will, and as a result, they aren’t realistic when it comes to sending a budget.
While you’re setting a budget, do lots of research to understand what is typical for the market rate and consult experts in your area.
Lacking a buffer
A buffer fund allows you to allocate sufficient money when unexpected expenses arise.
Depending on your project, it can be wise to have 10 to 20 percent of the total project cost set aside in a reserve.
Failing to account for unforeseen delays
Always plan for potential delays in both your budget and schedule.
Even if your crew remains on time, there are issues like weather conditions, permit approvals, and unforeseen construction challenges.
Because delays can cause additional costs like extended labor and rental fees, it’s important to account for these and build in a buffer just in case.
Neglecting regular budget updates
Each time your project evolves, you should review and update your budget as well.
Regular updates to your budget will help you avoid financial discrepancies and mismanagement.
Overlooking the impact of design changes
Throughout the construction process, people change their minds.
This is normal.
However, failing to see how changes to the design of the project impacts the bottom line of your project is dangerous.
If you decide you want to change any portion of your original plan, do it thoughtfully.
The financial implications may not align with your original budget.
7. How should you manage changes and adjustments in the construction budget?
Not accounting for changes is one mistake that landowners often make when building a budget to begin with.
Throughout your construction project, you will need to evaluate your budget and adjust based on how the project progresses.
Here are some ways that you can manage the inevitable changes that come with construction projects and absorb them into your budget.
Document changes in writing
When changes occur, take the time to document them in writing through a formal change order.
Having a clear log of updates to your budget will allow you to understand the reasons for these changes as well as the financial implications behind them.
There are many partners on a construction project and having your budget in writing (rather than an imaginative number in your head) can ensure that your budget is communicated and managed effectively.
Assess the financial impact as you go
As the landowner, you have the final say over the project and the budget.
Take the time to consider what impact changes will have on the project financially.
For instance, if a builder proposed you use a different type of wood due to a shortage, ask for details about the cost and make sure you compare the quote to your original estimates.
Changes have cost implications.
This includes materials, labor, schedule adjustments, etc.
If you believe some changes will impact the budget negatively, work with the builder to find a solution that is more amenable.
Communicate with contractors and suppliers
Contractors and suppliers are partners during this process, but it isn’t their money that is being spent.
They may need periodic reminders about the budget and any financial constraints you may be working under.
If they suggest something that doesn’t work for your wallet, speak up!
Only then can they work with you to find a solution.
Evaluate the need for additional funding
In some cases, you may have significant changes to your project that exceed the allocated budget.
In this case, you may need to explore additional options for funding like seeking investors, applying for additional loans, or adjusting the project itself.
Revise budgets and timelines
If you decide to move forward with changes, update your formal budget with the new cost estimates along with your schedule.
Go back to these documents regularly to ensure you maintain financial control over the project.
Final Thoughts
A construction budget is an essential step for landowners who want to ensure a successful project.
If you have an upcoming build, make sure you consider the financial implications and plan for it with your contractors.
Remember — they say construction projects often take twice the amount of time and money. Plan accordingly!
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.
Prior to starting Gokce Capital, Erika received a Bachelor of Architecture from the University of Southern California and a graduate degree in Urban Policy from Columbia University. She worked as both an architectural designer and engineer in New York before joining the New York City Department of Housing Preservation and Development.
Erika currently lives in the New York Metropolitan area with her spouse, daughter and cat. She is originally from Chicago and still considers herself a midwesterner at heart.
Erika also loves to read, write and travel (fun fact, she has visited all 50 states and more than 30 countries!). Her new book, Land Investing Mistakes: 11 True Stories You Need To Know Before Buying Land, is now available on Amazon.