BUDGETING FOR CONSTRUCTION 101
Construction projects present a significant challenge both financially and logistically. Whether for a remodel or new build, several points should be addressed before embarking on this endeavor. As with any project, you should start by putting a budget together.
The first major step in creating a budget is to discuss project specifics with the client/owner of the project. They should have a realistic vision for the property, including its primary use, general design ideas, desired completion date, a rough idea of cost, and also where to set limits.
You should gather as many specifics from the owner as possible to ensure that the estimated construction costs are relatively close to the finalized budget. As construction drawings are completed, budgets can be finalized. Even if the budget is only an estimate, it is a good tool to affect expectations.
When estimating construction costs, it’s helpful to think of the two different types of costs involved:
Hard costs represent the actual physical construction of a project. The costs for land clearing, excavation, demolition of existing structures, underground utilities, foundation, vertical construction (including block, framing, mechanical, plumbing, and electrical), drywall, trim and finishing work (including stucco and painting), final grading, paving and landscaping, are examples of some “hard costs.” It’s important to include not only materials cost in your hard cost estimates, but also that of tools, equipment rental and the labor required to utilize those materials.
Soft costs initially may be less obvious, but are equally important in factoring building costs. Soft costs to think about include legal, design, inspection, testing and management fees, as well as insurance, financing and interest costs, taxes, and even applicable permit fees, zoning costs, LEED Certifications. Some soft costs are directly impacted by the schedule. For instance, site trailer, portable toilet and dumpster rental, disposal fees, temporary utilities, and other general conditions costs.
It’s a good idea to budget some money for allowances and extras. Allowances are estimated costs of particular items or scopes of work which are quoted at standard or customary rates. Allowances usually apply to architectural features (such as cabinetry, countertops, flooring, tile, and electrical and plumbing final trim packages), but could include larger scopes which fluctuate because of the demand (such as pilings, pavers and concrete). Final costs of allowance items can be drastically different then the quoted price based upon the feature selected. Extras are costs for items not specified or included in the plans or unknown/unforeseen at the commencement of the project. Commonly known in the industry as “change orders,” they are usually priced at the actual cost plus a fee. They include extra costs because of (1) a scope change requested by the owner, (2) a building department directive, or (3) the discovery of a condition after the work starts (for example, peat or muck in the subsoil). At some point during the building process, you’ll typically encounter these. Making selections and minimizing “change orders” up front can lead to increased efficiency and a greater likelihood of meeting the budget and completion deadline.
Because Florida is prone to severe weather, including flooding and hurricanes, it is also good to consider how to handle these events and who bears those costs.
Aside from the budgeting aspects above, here is a handy itemized list of budget points to consider:
- Blueprint drafting and review – These issues include payment to engineers and architects the development, engineering, and design of a bid set, client review and review times at any given municipalities.
- Contingency allowances – Use these to account for unforeseen costs, using the basic rule to reserve at least an extra 5% of the budget for such costs.
- Exterior (window, door, roofing and exterior finish) – Familiarize yourself with building envelope (waterproofing) and wind zone (impact resistant materials) requirements for your municipality. Permitting here in Florida especially can get tricky with hurricane codes. If unforeseen, these costs can pile up.
- Energy Efficiency (HVAC and insulation) – Include accounting for building type and house size, height, occupancy, and other special system requirements, and heat load requirements.
- Insurance – Take into consideration whether general liability insurance is sufficient or if job-specific or business-specific policies are necessary. Other important policies are builder’s risk, wind, flood, and inland marine for materials purchased but not installed.
- Interest and fees – Managers should account for legal and management fees.
- Interior – Consider including floor-to-ceiling heights, spatial area, and special finishing requirements.
- Permitting – Concerns might include adequately addressing permitting for zoning, survey, land disturbance, electrical, mechanical, plumbing, environmental, and department of transportation.
- Site preparation – Find out the cost of excavation as well as labor and machinery costs, erosion control and monitoring.
- Delay damages – Consider what costs the owner or contractor might incur if the project is delayed beyond the completion date. For instance, lost rent or finance changes to the owner or additional management costs to the contractor. These damages are often difficult to ascertain before the contract is signed, can be liquidated or waived in advance.
KNOW THE LAW
Finally, it’s essential that you know the rules and the laws pertaining to entering into a construction contract, and therefore a good idea to have a line item in your budget for an attorney to represent your interests and review your contract. Southwest Florida-based board certified construction lawyer David Zulian of Cheffy Passidomo Attorneys at Law states that it is important to know your rights before you sign a construction contract, “There are many types of construction contracts which are used, including design-build, fixed price, cost-plus and cost-plus with a GMAX price,” he says, “ Each type of construction contract has its own specialized terms and presents different pricing formats. To assist in the orderly administration of payments during the construction process, Florida has adopted the ‘Construction Lien Law,’ which provides specific ‘proper payment’ procedures and lien rights to ensure everyone is paid in full what is owed and to protect the owner from paying twice. Recognizing the complexity of this law, Florida Statutes §713.015(1) mandates that every direct contract over $2,500 include language (of a specific type) that strongly recommends consulting an attorney.”
Our experienced crew at J. Sweet Construction has close to 20 years’ experience budgeting and completing construction projects big and small. Rely on us to keep you in the know with all the costs and legalities involved.