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Learn how to draw up a budget and keep costs on track throughout a project
Completing a construction project within the budget builds trust with clients and shows your commitment to professionalism. And doing that requires starting with an accurate and detailed accounting of costs. But how do you know exactly what all those costs are? No need to guess or learn through potentially costly trial and error. Here we offer a breakdown of all the steps for realistic construction budgeting, the components to consider and a home construction residential construction budget template in Excel that you can download and start using right away.
Click on a link below to jump straight to the section you’re most interested in:
- What is residential construction budgeting?
- Why is budgeting in residential construction projects important?
- Types of costs involved in residential construction
- Key components of a construction budget
- Tips for Estimating Project Costs Accurately
- Steps for creating a realistic budget for your residential construction project
- How to stick to your residential construction budget
Download Our Free Residential Construction Budget Template for Excel
Here's a Construction Budget Template on Us!
Customize this Construction Budget Template to stay on top of project costs.
While construction budget examples and templates can be great starting points, they’re limited in scope and aren’t necessarily the most efficient route to construction budget management. So don’t just skip to the template and call it a day; read the full article to find out tips and tools to create budgets that work best for your business and each project.
Construction Budget example
What is residential construction budgeting?
A construction project budget is a detailed accounting of all the costs related to that particular project, from start to finish, including expenditures for materials, subcontractors and equipment rentals. (We share the full list of components below.) That means the budget dictates the quality of products you can buy, the type of service providers you can hire on your team, the types of equipment you can rent and a number of other project aspects.
Keep in mind also that even though the goal is to budget accurately, it’s also a good idea to include contingencies to account for unforeseen circumstances, so any unanticipated costs don’t come out of your pocket.
Why is budgeting in residential construction projects important?
Without a construction project budget, you’ll have no way to know whether the fee you and your client have agreed on is enough to cover all the actual costs. So if you’re not tracking what the client is willing to spend versus how much you actually spend, you won’t maximize profits for your business — or you might even lose money on the project.
Budgeting also helps you keep the project on schedule, because you’ll know ahead of time all the materials you’ll need to order, what kinds of pros to hire and so on. And some of these have long lead times. Without a budget and a plan, it’s easy to rack up delays along with unexpected costs. With them, you can maximize efficiency.
And last, offering the client a transparent budget builds the kind of goodwill and trust that lead to repeat projects and referrals.
Types of costs involved in residential construction
All of the components listed in the next section fall into one of three categories.
- Soft costs. These are also called intangible expenses, and are for services rendered before and after the building portion of the project. Typically they comprise about 30% of any detailed construction budget.
- Hard costs. Also called tangible costs, these are related to the physical components of the actual construction portion of the project. Typically they comprise about 70% of the building construction budget.
- Overhead. Some building pros include costs for overhead in one of the first two categories, while others find it helpful to break them out separately. Overhead includes things like office rent and utilities. Even though you would be paying these whether or not you have a project, you can charge a portion of overhead costs to one or more project budgets.
Geraldine Smith, owner of All Inclusive Construction, says, “It’s very important to look at your total overhead costs. Chances are your markup still isn’t covering your overhead expenses. You think you’re making money on a job, and you’re actually taking a loss.”
Key components of a construction budget
A home construction budget includes many items in a range of categories. Not all of these are applicable to every project, but we’ve included a full list here as a helpful reference.
- Property. This is the cost of the lot where you’ll be building (aka land acquisition). It might be a small or large percentage of your overall construction project budget.
- Professional fees and services. Will you need to hire any consultants or engineers, or survey the site? Perform any tests? Consider pros such as mechanical, structural, electrical and civil engineers, architects and surveyors. Also note whether you’ll have to pay any accounting or other professional service fees, such as for financing or to a real estate agent.
- Materials. These likely will comprise the bulk of your residential construction budget, whether for site preparation or the actual building, so it’s especially important to start with accurate takeoffs.
- Labor. Include not just the hourly wages of any subcontractors and anyone else you hire (for instance, equipment operators and the cleanup crew) but things like sick pay, worker’s compensation and any vacation time the workers might be owed. Also include the salaries of anyone on your payroll associated with the project. Make sure to get bids from anyone you plan to hire versus just researching typical local labor costs.
- Equipment. Will you need to rent or buy any equipment or tools? When construction budgeting, factor in not just the rental fee itself but any charges for delivery, operation, fuel, and maintenance or repairs.
- Project management. This includes not just any staffers or hired help managing or contributing to the project (for example, security staff) but office expenses. Consider expenses such as phone, internet, gas and electric, office supplies and even any software used to manage the project.
- Insurance and bonds. Whether you’re doing a preliminary budget for construction or are farther along with your home construction budget, don’t forget to include liability insurance. For one thing, it’s required by law, and for another, it will protect you in the event of a jobsite accident. You also might need to put up money in the form of one or more bonds, guaranteeing that the work will be completed and that everyone you hire will get paid. These bonds will prevent liens on the project.
- Utilities and taxes. If your project involves hookups or installations for gas, water, electricity or sewage, factor in the cost of the work as well as any permitting and hookup fees. Depending on the project, you might also need to account for state and local taxes in your construction budgeting. The bigger the scope of the project, the higher the taxes are likely to be.
- Debt financing. If you have to take out any loans or lines of credit to do the work, include any flat fees or interest percentages in this category. Also include any fees in the event that you pay off the loan early.
- Contingencies. These typically account for 3 to 10% of the total house construction budget and will protect your bottom line and give you the financing to continue work in the event of change orders (for the entire scope of work or for specific materials or products), equipment or tool malfunctions, accidents and acts of God (such as extreme weather events).
Heidi Clark, owner of Clark Builders, encourages new business owners to “give yourself enough padding. A job is typically going to be more than you thought. There should be a line on your estimate or your contract for contingencies and consumables. Give yourself a percentage of the whole job cost for things that are unforeseen.”
Tips for Estimating Project Costs Accurately
Estimating precisely is essential to good construction budget management, and we’ve got a few tips for doing just that.
Tip #1: Create accurate takeoffs
Construction budgeting all starts with the takeoff — measurements as well as lists of materials needed and their quantities. And while you certainly can do takeoffs by hand, using takeoffs software will not only speed up the process but increase accuracy, because it reduces the chance for human error. (In fact, going a step further, some building pros find that using the software allows them to turn takeoffs into bids up to 10 times faster!)
Tip #2: Closely review subcontractor quotes
You’ll want to make sure that the costs are appropriate for the job and in line with what’s standard in your region. Also, labor costs are always changing, so you’ll want to review bids every single time instead of just calculating them for your new-home construction budget based on a previous project.
Tip #3: Automate calculations
We’ve already mentioned how using takeoffs software can reduce manual errors, and using other forms of automation for your construction budget tracking is a great idea too. For instance, start with our residential construction budget template for free. The costs will be calculated automatically, which speeds up the process, reduces errors and makes budgeting less of a chore.
Steps for creating a realistic budget for your residential construction project
Now that you know how important construction budget management is and all the components of a professional budget, let’s discuss the process step by step.
Part 1: The budget itself
Step #1: Do your research
Construction budgeting begins by determining all project-related costs and revenues, and when they’ll be owed or paid. This will ensure that you’ll have money for what you need when you need it. You can do this by looking at past project costs, speaking with vendors and subcontractors, and making sure you have a complete understanding of the project.
Step #2: Handle project development
When the architect or project manager has landed on a design, you’ll create a list of materials and estimations of quantities and costs, as well as a general timeline for the work.
Step #3: Document everything pre-construction
Make sure to have a system of documentation in place for access to everything that will influence the budget. That means having an organizational system for documents other people provide as well as the ones you discover yourself, along with website links and any other relevant info. Not only will this make things easier to find, but you’ll create a paper trail for the budget that will come in handy in case of any unexpected costs or budgetary disputes.
Step #4: Determine the cost of each task
Determine the costs of each specific activity of the project before you start work, so you can keep an eye on them as work progresses to make sure the bottom line stays balanced.
Step #5: Categorize fixed and variable costs
You might have already done this if you’ve already started using the free residential construction budget template for Excel we’ve provided. As the terms imply, fixed costs don’t change—they include things like insurance, office rental and interest payments—and variable costs do. Variable costs include labor and materials, because if a project runs long or short, needs more or fewer subcontractors than expected or has change orders, your outlay for those will change.
Step #6: Analyze and track costs during construction
Construction budget tracking is essential throughout the project, because it allows you to see where adjustments need to be made. For instance, if the cost of materials goes up, you can determine which other area has costs that can be trimmed.
Step #7: Analyze costs after construction
Even after the budget is no longer needed because a project is completed, it can be helpful to analyze it so you can better estimate for other projects in the future. It can also help for when you’re analyzing your business’ overall profit and loss statements.
Part 2: How to prevent and handle unexpected costs
Including contingencies in the contract is the first step in minimizing your risk for unexpected costs; for instance, you can charge a fee for change orders or pass on product price hikes to the client. But there are ways to prevent unexpected costs from happening at all.
Understand which costs are fixed and which are variable. As mentioned above, it’s important to know which types of costs can change (such as labor), and why (such as the project takes longer than planned). If you plan ahead for the possibility that these costs might increase, you can stave off having to go beyond the building construction budget if they do.
Define a project schedule before you create the budget. If you specify each phase of the project and even break down each of those phases into steps, you can avoid added expenses such as paying more for labor than intended. Keeping to a defined timeline is also a good idea so you can make sure you’ll have all the materials and subcontractors on-site when you need them.
Balance the bottom line with project quality. Sometimes no matter how thorough your efforts are, there’s nothing you can do about a cost overrun. In those cases, the key is to determine where budget items can be cut without affecting quality, or if there’s nowhere to cut, how much of a hit to the bottom line are you willing to take? If the hit would be too big, it might be time to consider cutting back on quality of materials or level of service.
Create detailed floor plans. Starting with an accurate and detailed floor plan will give you the foundation for thorough takeoffs, which make for better budgets.
Part 3: Use software that streamlines the process
The importance of software in the budgeting process can’t be overstated. While you’re creating your detailed construction budget, it saves time, minimizes errors and reduces the chore of manually entering information. And during the project, it will make it easier to find the information you need and share it with your team or the client. Software also can help you:
- Track schedules. As mentioned above, staying on schedule will save you money. It also builds goodwill and contributes positively to your professional reputation.
- Keep team members and clients looped in. Creating one daily log and sharing it with multiple people will save you time and hassle. It also reduces the potential for errors by team members and makes clients feel valued. You can also use a client dashboard where everyone can see the project status at a glance.
- Track budget changes. Smith advises that “making sure you do change orders immediately, and getting them approved, is incredibly important. I’ve learned from experience that trying to track down employee time or additional materials after a job is done is not efficient. You need to document everything and make sure the customer is OK with it too. There can be instances where you get a verbal approval, but it becomes an issue when you send a bill if the customer doesn’t realize what the actual costs are. That’s where Houzz Pro is great, because now I create change orders quickly and send them over to the customer. I just sent one last week. The customer texted me and emailed me with approval, but I require them to accept it within Houzz Pro since it’s easy and keeps everything organized.”
Houzz Pro is all-in-one software designed with input from construction pros like you. From takeoffs to floor plans to project management, it can help you streamline the entire process as well as help you put your best professional foot forward.
How to stick to your residential construction budget
If you’re tracking throughout the project as mentioned above, and you’ve accounted for variable costs in your initial home construction budget, you should be well on your way to sticking to the costs for each phase of the project. Here are two other tips.
- Communicate regularly with subcontractors and suppliers. Staying in touch with your team and vendors will keep budgetary surprises from sneaking up on you. It will also allow you to let everyone know what they can spend on each phase. You can have regular team meetings or communicate through your project collaboration software.
- Revise as needed. As noted above, if costs in one area go up, see if you can reduce them in another area. You can also tap into contingency funds as needed. Think of the construction project budget as a flexible element rather than something set in stone.
Now that you’ve downloaded our residential construction budget template for Excel and learned all about how to put together a building construction budget, how to stick to it, as well as about software that can help at every step of budgeting and beyond, you’re in good shape to start working with your own project budgets!
To continue learning, read our follow-up article on How to Build a Construction Payment Schedule.
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As an expert in construction project management and budgeting, I've successfully overseen numerous projects, ensuring they were completed within budget and on schedule. My experience encompasses a deep understanding of the intricacies involved in residential construction, from the initial planning stages to the completion of the project. I've collaborated with various professionals, including architects, engineers, subcontractors, and suppliers, to streamline processes and optimize cost management.
Now, let's delve into the concepts covered in the article:
Residential Construction Budgeting:
1. What is residential construction budgeting?
- It is a detailed account of all costs related to a construction project, encompassing materials, subcontractors, equipment rentals, and more.
2. Why is budgeting important?
- Ensures transparency with clients.
- Prevents financial losses for the contractor.
- Keeps the project on schedule by anticipating material and labor needs.
3. Types of Costs:
- Soft Costs (30%): Intangible expenses, including services rendered before and after construction.
- Hard Costs (70%): Tangible costs related to the physical construction.
- Overhead: Includes office rent, utilities, and other miscellaneous costs.
4. Key Components of a Construction Budget:
- Property, Professional fees, Materials, Labor, Equipment, Project management, Insurance, Utilities, Debt financing, Contingencies.
5. Tips for Estimating Project Costs Accurately:
- Create accurate takeoffs using software.
- Review subcontractor quotes diligently.
- Automate calculations for efficiency.
6. Steps for Creating a Realistic Budget:
- Research costs and revenues.
- Handle project development and document everything pre-construction.
- Determine the cost of each task and categorize fixed and variable costs.
- Analyze and track costs during and after construction.
7. Preventing and Handling Unexpected Costs:
- Include contingencies in the contract.
- Understand fixed and variable costs.
- Define a project schedule.
- Balance the bottom line with project quality.
- Create detailed floor plans.
8. Use Software to Streamline the Process:
- Software aids in tracking schedules, communicating with team members, and managing budget changes.
9. How to Stick to Your Residential Construction Budget:
- Communicate regularly with subcontractors and suppliers.
- Revise the budget as needed, tapping into contingency funds when necessary.
- Emphasizes the importance of the provided residential construction budget template for Excel and introduces Houzz Pro as an all-in-one tool for project management.
In conclusion, successful construction budgeting requires meticulous planning, accurate estimation, and the use of efficient tools and software, as outlined in the comprehensive article.