How to develop a budget for your construction project (Part 2)
by Luis Gile
Building on the basic information we discussed in Part 1, we can now move forward with developing our project budget.
Building on the basic information we discussed in Part 1, we can now move forward with developing our project budget.
First lets talk about the various estimating methods that we can use.
Estimating methods
There are several methods for estimating projects. The estimating method you choose will be determined by how well your scope is defined. It is perfectly acceptable to change your estimating method as your project advances. In fact I highly recommend that you revise your estimate each time your scope changes or becomes better defined.
At the earliest phases of work, your scope definition is very limited so your estimate will be less detailed and you should have a greater margin of error and contingency. As the scope gets further defined, estimates become more detailed and should have lower margin of error and lower contingency.
The types of estimating methods I will cover are:
1. Area Pricing
2. Unit Pricing
3. Budgetary Quotations
4. Percent Cost of Work
Regardless of the type of estimating method you choose, all estimating methods require two pieces of information. The first piece of information is the scope. The second piece of information is the market rate.
Area pricing
Area pricing uses the area of the space you want to build multiplied by a cost per area. This pricing method can be used for either hard costs or soft costs, but it's most commonly used for hard costs. We use area pricing when our scope of work is very limited.
The only scope information needed to use area pricing is the approximate area of the space you want to build. In the United States the unit of measure we use for area measurements is square feet. We can use the project program we discussed in Part 1 to estimate our area.
The market rate needed for area pricing is a cost per square foot. The cost per square foot is affected by a number of factors including, the type of project, your geographic area, and the scale of the project.
Unit Pricing
Unit pricing can be used in a variety of ways. Most often unit pricing is used when the scope of work is more detailed and well defined.
Scope definition for unit pricing typically requires a detailed set of design drawings. If you have detailed design drawings you can use the drawings to perform material take-offs. The term "material take-off" is a method of estimating material quantities by taking scaled dimensions off of design drawings.
Market rates used in unit pricing are typically specific rates for materials, equipment , and labor. Unit pricing can be collected from a variety of sources including directly from suppliers and also from historical pricing.
Budgetary Quotations
Soliciting budgetary quotations directly from trade contractors and material suppliers is another common method of cost estimating. Soliciting budgetary quotations can be even more accurate than unit pricing but can take longer than other methods.
The scope of work for this estimating method can vary greatly from very little scope definition to a very detailed set of design drawings. The value and accuracy of budgetary quotations varies equally with the amount of scope definition. It's also common to rely on the trade contractor to perform the take-offs for his specific trade.
You wont need any market rates for this estimating method because the budgetary quotes will come from each trade contractor. All you need to do is add each contractor's price together. When you use budgetary quotations it is important to ensure that there are no gaps in scope between trades contractors and that each contractor is clear about what scope they need to quote.
Percent Cost of Work
Percent Cost of Work rates use rule-of-thumb percentage rates to estimate soft costs.
This estimating method is dependent on having an estimate of your hard costs. You can use any combination of the previously discussed estimating methods to estimate your hard costs.
Once you have your hard costs estimated, you can apply the percentage rates to estimate your soft costs and then add the hard costs and soft costs together.
Hybrid pricing
It is common to use a hybrid or blend of these options. How you combine these methods is entirely up to you.
In this article we will focus on a hybrid approach that uses area pricing for hard costs and percent cost of work for soft costs. This blend of pricing methods is the simplest and most effective way to budget a project at an early phase of development.
How to budget
If you have been following my blog you may recall the May 2015 entry entitled "What are the phases of work of any construction project". In that article we took a step by step approach that began with high level scope definition and methodically made our way through design. When planning and executing a project we always begin with design and we add layers of detail until we know what we want to build. The construction work is always the last step. For budgeting we actually start backwards.
We will be using percentage of cost of work rates to estimate our soft costs, so we will need the Cost of Work as our multiplier for these rates. Establishing the Cost of Work up front will also help us understand the scale of the work we are taking on.
First we'll estimate the hard costs using your program's estimated square footage (established when you developed your program) and a cost per square foot market rate. The math on this is pretty simple, simply take your estimated square footage multiplied by the area market rate
EXAMPLE:
From Part 1 we estimated the program to be 421 SF
Estimating your hard costs
To estimate your hard costs, we will need a cost per square foot market rate.All area pricing rates will be based on historical rates. These rates are highly influenced by the location, date, and scope of the project that the rate is based on. in other words, if you use a rate from a garage addition in New York from 5 years ago and your project is a kitchen addition in Kentucky that you expect to start one year from now, you wont have an accurate budget. Try to find rates that are as closely matched to your specific circumstances as possible.I recommend getting at least three area market rates and averaging the three together. This eliminates any guess work and gives you the best chance at using an accurate figure.Here are a few sources that I recommend. You can type in "cost per square foot" into your web browser and I'm certain you will find others.For this example, we will use an area market rate of $200 per square foot. Now we multiply the square footage by the area market rate as follows:421X 200 = $84,200Therefore our hard costs for this project are $84,200 eighty-four thousand two hundred dollars. This is the cost of the labor, materials, and equipment needed for the project.
For the soft costs of this example we will focus on estimating Architectural fees, contractor fees, and general conditions costs. These costs are the most common soft costs applicable to most projects.We will use percent cost of work rates to estimate these costs. These rates are typically within the following ranges. The specific rate you use is dependent on the location and scale of your project.
Sum up your costs then add contingency and margin of error1. Architectural fees, (6% to 15%)2. Contractor fees, (5% to 15%)3. General conditions costs, (10% to 20%)If we use the $84,200 estimate for our hard costs we can estimate the following:Architectural Fees (15%) = $12,630Contractor Fees (15%) = $12,630General Conditions Costs (10%) = $8420
We now add up all your costs and add our contingency and margin of error
Hard Costs...................................$84,200
Architectural Fees........................$12,630
Construction Management Fees....$12,630
General Conditions Costs...............$8,420
Subtotal....................................$112,000
Owner's Contingency (@15%) .....$16,800
Margin or error (@20%) .............$22,400
Total Budget.............................$151,200
Keep in mind that the "Owner's Contingency" and the "Margin of Error" are essentially funds that you need as safety nets. These costs are not to be shared. You and maybe your Project Manager (if you have one) should be the only people who know you have this money set aside.
Never reveal your budget to your Contractor and when you speak with an Architect about your project, reveal only your estimate for the hard costs. When an Architect asks for your budget, what they want to know is whether you are looking for higher end finishes or a basic design, so giving them your estimated cost for hard costs should suffice.
Now you should have enough information to develop your budget. Let me know how well the process works for you and when your project is completed, email me back to tell me how close your numbers were.
