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How to Plan a Budget for Construction Projects
Insufficient time devoted to budgeting can negatively impact your construction project. In this article, we delve into the theoretical aspects of budgeting in construction and provide a guide with stages that can help you clarify your budgeting strategy.
What is Construction Budgeting?
For example, imagine you are planning to build a new house. The construction budget for this project would start with the cost of purchasing the land. Next, you would need to account for design fees paid to architects and engineers, as well as the cost of obtaining necessary permits from local authorities.
The budget would also include the cost of materials like bricks, cement, wood, and roofing. Additionally, you need to factor in labor costs for hiring builders, electricians, plumbers, and other workers. You might also need to rent or buy construction equipment such as scaffolding, drills, and concrete mixers.
Beyond these basic costs, the budget should also set aside a contingency fund to cover any unexpected expenses that might arise during construction, such as price increases for materials or additional work required by unforeseen problems. By carefully planning and documenting all these expenses, you can better manage the project's finances and avoid running out of money before the house is completed.
There are several software and construction budget templates that accountants use to create a construction budget. FirstBit’s Project Costing Software helps plan, estimate and manage the project finances. It is tailor-made to help construction companies realize their budget planning goals.
Why is Construction Budgeting Important?
Relationships Between Contractors and Owners
By doing so, they ensure that the owners are content about not having to exceed their expected expenses to finish the job. This strengthens customer relationships, enhancing the likelihood of receiving a referral or collaborating with an owner again.
Strategic Decision Making
For example, by knowing the specific costs of each component, you can avoid overspending on non-essential items and ensure that critical areas are adequately funded. It also provides data needed for strategic decision-making, allowing you to evaluate the financial implications of various options and choose the best one for the project's needs.
Potential Risks
A detailed budget helps identify potential financial risks early, helping managers develop mitigation strategies to address them before they escalate into major issues. For example, if your budget analysis reveals that material costs are volatile, you can decide to purchase materials in bulk when prices are low or set aside a contingency fund to cover potential cost increases.
Clear Documentation
With clear documentation through a budget, you can accurately track actual costs against budgeted amounts. This helps identify discrepancies and make necessary adjustments promptly. It also serves as a valuable reference for resolving disputes, ensuring compliance with regulations, and simplifying audits.
Moreover, well-documented budgets from past projects inform future planning, improving the accuracy of estimates and financial strategies.
Types of Costs in Construction
Direct and Indirect Costs
On the other hand, indirect costs encompass all expenses incurred by a construction company that cannot be directly attributed to a particular project. These general shared expenses support multiple projects simultaneously.
Administrative salaries, safety gear, and overhead costs like rent or utilities fall into this category. These costs will be incurred regardless of whether a project is active or not and, thus, have a more substantial impact on the company's overall profit margins.
Fixed and Variable Costs
Variable costs fluctuate based on the scope of the construction project. Expenses such as construction materials increase in proportion to the quantities ordered. Similarly, overtime labor expenses vary depending on project demand and scheduling requirements.
Contingency Funds
Deciding how much money to set aside for contingencies is essential. It would be best to have enough to deal with uncertainties and keep the construction on track. Most projects set aside around 3-10% of the total budget for contingencies.
Steps to Create a Construction Budget
1. Research and Analysis
By analyzing the data you find, you will easily begin to conquer the planning budget for your construction project. Then, move on to the next step.
2. Development
These efforts should yield a polished construction estimate ready for client approval.
3. Pre-Construction Documentation
It is essential to document every step you take during the life of your construction project. These steps include storing documentation, permits, all contracts, and deliverables. This phase is critical to reducing risks, such as cost overruns, from the start of the project and ensuring the budget and timeline remain on track.
Construction
Checking the budget carefully helps build trust with clients and keeps things clear by often sharing updates on the building work and money matters. This constant checking also helps in managing the money well, allowing for the support of more than one project at the same time.
Best Practices for Creating Accurate Construction Budgets
How FirstBit Helps with Construction Budgets
First Bit ERP features will increase efficiency in project management and budget planning. Our solution offers smooth reporting and analysis tools that allow construction teams to generate comprehensive budget reports, track key performance indicators, and gain insights for continuous improvement at once.
In our ERP software, you will be able to optimize your planning by using the price comparison option.
of your processes and scale your business with FirstBit ERP now!