Building A Preliminary Project Budget
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By: Eric Mahoney
"How much is it going to cost?" This seems to be the inevitable question
asked by all owners of construction projects.
This is often the crucial question – the one that helps a project turn that
corner from concept to reality. No matter what part of the AEC segment to
which you or your firm belongs, it’s a good idea to educate yourself on the
basics of building a project budget.
Project Budget Definitions
When building a project budget, one has to keep the big picture in mind.
Projects are often made up of many small components, and you can easily get
lost in the details of each one. The total cost of the construction will
only be the bottom line. In order to arrive at the correct figure there, you
have to have correct figures on all the many items in your overall budget.
It is important to seek the help of professionals, and also use the many
great resources available to calculate project costs. The following
components are often important pieces that help make up an overall project
Depending on location, land cost can vary from 10% to over 60% of total
project costs. Obviously, land in Beverly Hills, California will generate a
higher percent of the project cost than land in Clayton, Oklahoma. When
budgeting, be sure to include all costs associated with any land purchase -
the sale price, financing costs, taxes and realty expenses. By including the
land cost in the overall budget, you help the owner understand his
investment as a whole, and enable him to more easily keep track of the
project’s overall profitability.
Developing a construction cost estimate is a challenge when first
putting a project together. It’s important not to just multiply some random
per-square-foot cost against the size of the building, but to put some
thought and research into those numbers.
Studying costs of actual projects of similar building shapes and function
may be one of the best ways to start developing your construction cost.
Square-foot costs for medical buildings will differ greatly from square-foot
costs for apartment buildings. A great resource for square-foot data on
actual projects is the ENR Square-Foot Costbook. This book helps you to
develop construction costs by providing cost data based on actual projects
across the country. Each case study is an analysis of a building project
with a detailed narrative of the project’s timeline. With the information
provided in the narrative, you can put the cost data into context, and make
appropriate adjustments to your own project. Using the ENR Square-Foot
Costbook is a great place to start any preliminary budget estimate.
Many times a project’s complexity or scope will require that you look to
professionals for help. An architect can be a valuable resource in figuring
out preliminary costs. Historically, architects have not prepared detailed
cost estimates, but they often can provide costs as an additional service.
As the architect designs and lays out the options for your project, he can
advise you on a rough construction cost. Professional estimators can also
provide that next tier of construction estimating if you’re ready to take it
to the next level. Early contractor involvement is also key, as contractors
will provide cost estimates as a pre-construction service (for a fee). Since
the contractor will often provide this service with a goal of winning the
job, he’ll probably give you a fairly accurate estimate that he’d be willing
to back up with a bid for actual construction.
Another valuable resource for conceptual costs is D4Cost™ (www.d4cost.com).
D4Cost is similar to square-foot costbooks in that it pulls actual data from
real projects to help create a conceptual project estimate. A helpful
feature of the software is that it also allows you to create an archive of
your project costs. Your own historical project costs are always a great
help when estimating the costs of the next project.
The owner relies on a team of professionals to help bring his vision of the
project to reality. That process usually begins with an architect who
establishes the design and specifies the material.
The method of establishing the architect's fees is typically based upon
either a percentage of the construction cost or a lump-sum basis. In the
early stages, there may be no construction cost on which to base the
architect’s fees. It may be a good idea to start with a lump-sum fee for
hiring the architect to help study the project.
But when estimating the fees for the entire project, it makes sense to
establish the architect’s fees as a percentage of the construction cost.
Architectural fees are generally referred to as “soft costs.” This is a
construction accounting term for expense items that are not considered
direct construction costs. Soft costs may include architectural,
engineering, financing, legal fees and any other pre- and post-construction
costs. Soft costs can account for a large portion of your overall costs.
The architect can also help you determine any pertinent engineering fees
that might be required to execute your project. Typically, an architect's
fees can range anywhere from 5% to 10% of project costs, depending on the
size and complexity of the project.
Furniture, Fixtures and Equipment (FFE)
If the owner is building a project for his own use, he’ll want to
consider furnishings. If you contact furniture and equipment vendors early
in the design process, they can actually provide design services as well as
pricing on furniture, kitchen equipment, sound system, security alarm, and
any other items needed for the facility to function properly. The prices
they provide can be quickly added to the preliminary budget.
No matter how carefully you plan your budget, there is a good chance that
you will miss something. An unforeseen condition uncovered in demolition, an
added requirement by an inspector, or even coordination issues that end up
slowing the construction process down are things that can add to costs.
These situations are impossible to foresee in the early phases of estimating
construction – yet they all have a cost. Creating a contingency fund helps
to establish a cushion to your budget as an “insurance policy” for the
unexpected expenses that will inevitably show up like uninvited guests.
The contingency fund is also there to pay for change orders without
affecting your overall project budget. The contingency is not an expense
account and is not for upgrades or changing the scope of work. It is
strictly there to account for anything that comes up on the project that you
didn’t account for. The contingency is usually calculated as a percentage of
the construction cost and can range anywhere from 3 to 10%. A good rule of
thumb is that the less that is known about a project, the higher the
contingency should be. Some owners even create an incentive for their
contractors by sharing the leftover contingency funds after the project is
Plan Ahead to Control Costs
Once the project is clearly identified, establishing costs starts with
an analysis of the owner’s needs, the resources available to answer those
needs, the time constraints and the operating implications of the project.
The cost analysis should be completed well before construction gets
underway, to avoid misunderstanding and conflict later when the action is
going hot and heavy. Doing as much budgetary planning on the front end of
the project will help to mitigate later complications. Establishing a budget
early on helps illuminate a clear path that offers the owner a chance to
make monetary decisions affecting his stake in the construction process.
About the author: Eric Mahoney is a LEED®-certified Architect with
over 15 years experience in the industry who has worked a variety of
projects from multi-story housing to large retail stores. Eric is a
Reprinted with permission from
Construction SAVVY July/August 2013 issue.