Article

How to create a construction budget

A step-by-step process

August 22, 2023

Aditya Desai

Executive Director and Head, Investor Solutions

Be it a new construction or retrofitting, construction projects tend to be unique, large and complex. The same can be simplified by breaking down the process into a step-by-step approach. Following a systematic and robust approach in creating budgets increases the likelihood of lesser variations during the execution phase.

One of the most crucial stages of pre-construction is creating a project budget. The project budget is the engine that drives your project’s funding. It’s an instrument to control project costs. A part of your project plan, it acts as a baseline to measure your performance as you collect the actual costs once the project has been started

Why do you need a construction budget?

A construction budget features estimates from suppliers, vendors, and subcontractors, and in turn helps anticipate the total cost of a project. In addition, it looks at past projects, that are similar in nature, to estimate the cost and duration of the new project.

A construction budget, in most cases, determines several things, including the nature and grade of resources to be deployed for the project. Affecting the skill level of resources to the allowed numbers of resources, the make of capital assets such as machinery, and also the make and grade of the material being used. A well-designed budget can help manage costs effectively, ensuring that the project stays on track, and prevents the unplanned from derailing the project.

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What are the steps involved in creating a budget for a construction project?

A smart budget is thoroughly pre-planned to allow you to have maximum productivity and efficiency while keeping overhead costs in check. To create a smart budget, follow the below mentioned steps:

Step 1: Identify Stakeholders

The first and foremost step when initiating a budget exercise is to identify the project stakeholder. This helps the team understand the parties that are likely to contribute to the project/product specification and deliverable acceptance during the project duration. A meeting to understand their involvement, influence and impact will help form the basis for the next step which is key to an accurate cost plan.

Step 2: Determine project requirements

The key step to cost budgeting is to determine all the requirements of the project. This must be obtained from the identified stakeholders (both external and internal). This includes defining the scope of work, identifying the specification of materials, estimating the number and skill of labour required. The kind of methodology expected, the quality tolerances expectations and the possible risks associated. Understanding the methodology being employed to achieve the end product also aids in understanding the operational challenges and requirements along with the allied costs. Looking back at similar projects and their budgets is a great way to get a head start on building your budget. At this stage, it is also important to take permits, approvals, environmental or safety requirements into consideration as they may be needed in future stages and can also have an impact on the cost. One must make it a point to capture the assumptions behind each of these requirements in order to allows baseline updates in case of change in scenarios.

Step 2: Estimate costs

Once the project requirements have been determined, the next step is to estimate the costs. This involves breaking down the project into its various components, such as materials, labour, equipment, inflation and permits. At this stage, it is suggested to be as detailed as possible when estimating costs, and to have some buffer to factor in any contingencies or unexpected expenses like design or material upgrades, malfunctions and breakdowns of equipment and tools & accidents, risks and acts of God. Depending on the scale of the project, the contingency fund may be considered. However, when catering for contingency one must be prudent and avoid an inflated factor of safety.

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Step 3: Prioritise expenses

After estimating your costs, it is important to prioritise expenses based on the project requirements and available resources. This involves determining which expenses are essential and which can be deferred or eliminated. Project costs fall under two common categories: hard and soft costs. Hard costs encompass the actual physical construction of a building, the construction site, and the landscape whereas soft costs are less evident because they are often invisible. Prioritising expenses help ensure that the project stays within the budget and that funds are allocated appropriately.

Step 4: Create a schedule

Creating a schedule involves determining the timeline for the project and identifying key milestones. Once the budget is locked, you also have an idea as to which sections of the project need more attention and are cost intensive. However, through all the processes, it’s important to factor in any dependencies or constraints, such as weather conditions or material delivery times. This exercise also helps in getting clarity of the required cashflow for the project. The schedule needs to be aligned in line with the organisation’s planned funding strategy.

Step 5: Monitor progress

Along with planning, monitoring your progress throughout the project is also necessary. This involves tracking expenses, assessing progress against milestones, and identifying any issues that may impact the project timeline or budget. Regular monitoring will help ensure that the project stays on track and that any necessary adjustments can be made in a timely manner.

While a lot of planning goes into creating a budget for a construction project, one also needs to be prepared for different types of contingencies that may arise. From the fluctuating costs of raw materials and labour, to constantly changing geopolitical and economic conditions, it has become imperative to take several factors into consideration. But, by following the steps mentioned above, one can ensure that the project stays on track and within budget, and that the team is better equipped to manage the challenges.