What is a project budget?
Businesses use budgets to first predict what a particular project, good, or service might cost, then to conduct job costing and understand how actual costs compared to their initial prediction. Project budgets play a critical role for businesses to understand the health of the bottom line.
In residential construction, a budget summarizes all originally estimated costs as compared to actual expenses for a particular client’s project. A building project handles several material, labor, equipment, subcontract, and other types of costs that must be tracked in order to balance cash flow plus understand the profitability of the project.
Why is a project budget important in residential construction?
No matter the size or scope of a construction project, they all consist of income and expenses. Without any mechanism to track these monetary buckets, builders and remodelers face uncertainty and risk their business’s overall financial health. As soon as the project starts, bills and expenses flow in. Experience and historical record might provide some insights into the schedule required to balance these actuals with income from clients. If these expenses aren’t tracked, however, building firms are left simply guessing when to invoice clients. Client’s also wonder where the project budget is heading so they can make informed decisions regarding selections and allowances. A building firm without an understanding of the project budget threatens client confidence.
In every stage of a building project, the client’s budget is a primary factor in the decision-making process. From initial drawings, to painting the walls, the builder has to balance quality and cost to ensure that the client gets the best return on investment possible. Simply listing out the originally estimated cost for materials, labor, subcontract work, and equipment then comparing that against the bills and expenses coming in answers many questions. For example, seeing bills pile up for excavation equipment and foundation work triggers builders and remodelers to request a payment from the client to restore order. Informative budgets also factor in the expected profit margin for the project and include insights into where a project is headed towards that original estimation, empowering building firms to take cost saving measures or increase margins on change orders in order to preserve that bottom line.
How do builders + remodelers track project costs?
In residential construction, a project budget includes several elements:
- Accounting Codes: The job cost buckets used to organize income and expenses.
- Original Budget: The originally estimated costs at the start of the project.
- Revised Budget: Indications of changes to the original costs due to client selections, allowances, and change orders.
- Committed Costs: Negotiated and contracted scope and price for trade partner work as documented on purchase orders. These costs against original and revised amounts expose potential differences and assist accurate project projections.
- Actuals: The bills, expenses, labor costs, and fees incurred as the project progresses. Ever moving throughout the project, these amounts illuminate the balance of cash flow.
Calculations built into the rest of the budget to factor in expected profit and differences between original, revised, committed, and actual costs allow the budget to effectively tell the story of the project and assist with cash flow planning. Online cloud-based budget tools, like CoConstruct, tie together the original estimate with change orders, purchase orders, and actuals, making job costing quick and painless, while also ensuring accuracy and mobile access.
At its simplest a project budget built in a spreadsheet or managed through an accounting system provides the basic information required to make informed decisions. Given the time and thought, such tools effectively capture manual entries of these data points, plus building in formulas to calculate differences and projections can take this a step further. Since these tools require manual updates and human-entry, they increase the risk of error and outdated information. An integrated construction management tool that updates instantaneously with the approval of change orders and the entry of other budget details erases many of these risks. Plus located online and in the cloud ensures any building team member access the data from anywhere has the most up-to-date information to make decisions off of.
A builder may additionally encounter unforeseen costs throughout the building process. Sometimes, building companies and their clients will agree to set aside some breathing room in the budget in case unexpected costs arise. A contingency markup calculated on costs helps absorb these surprises. Adding on a markup of between 4-10% (dependent on project size and location) provides the buffer needed to to cover any extra costs that might come up. With all this data located in one project budget, builders, remodelers, and their clients have fruitful conversations, build trust and confidence, and leave the project happy!