Building a Preliminary Project Budget

"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 budget.  

Land Cost  

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.

Construction Cost

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 DCR 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 DCR Square Foot Costbook is a great place to start any preliminary budget estimate. RSMeans also provides great cost data books.

Professional Help

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. 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.

Professional Fees

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.  

Contingency

 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 completed.

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.