Creating an Effective Budget in Construction

Not only does creating and using a budget on a construction project help contractors control costs, it helps increase their profits. Tracking costs against a budget also allows contractors to learn as they go, so their budgets can be more accurate. We’re going to look at the process of how to create a construction budget, what to include in the budget, and how MX Build can help you track your costs.

1. Break the project down into component activities or materials

Start by breaking the project down into its component activities or major materials that must be purchased. You want components to be small enough to quantify. If you’re using subcontractors on the project, each sub will have its own line item in the budget. One sub may have two or more lines if they are performing multiple scopes of work.

Let’s look at the breakdown of activities for a small bathroom remodel project:

• Demolition
• Carpentry
• Lumber
• Plumbing (subcontractor)
• Electrical (subcontractor)
• Drywall
• Painting
• Flooring (subcontractor)
• Bathroom accessories

Each activity is small enough to quantify the amount of materials or hours of labor needed, and subcontractors are broken out as their own line items in the budget.

2. Add soft costs

Soft costs are usually incurred before or after a project,and include costs not directly related to the construction being performed. They include costs like design fees, insurance, and permits and inspections. These costs are generally included in a project budget if the general contractor is responsible for paying for them or is providing an overall project budget to the owner so the owner can decide if the project is feasible.

3. Add general conditions

General conditions costs are required to provide the infrastructure for the project. They help the general contractor and subcontractors by providing the tools and utilities they need to perform their work. The most common general conditions costs are project management, supervision, dumpsters,and temporary utilities. Some GCs include equipment rental and final cleaning in this category as well.

4. Perform material takeoff

For each type of material on the project you will be providing, use estimating software or a scale ruler to perform a takeoff to determine how much material you need. Create a list of materials and the quantity required to complete the project. For example, a lumber takeoff will include how many 2x4s, 2x6s, and sheets of plywood are needed. Once you know how much material you’ll need, you can price each of them and determine the total cost.

Instead of taking off one material at a time, you can perform what is called an assembly takeoff. An assembly captures all the material needed for a component of the project. For example, a wall assembly would include lumber, insulation, drywall, and paint. By taking off the amount of wall assembly, you can quickly calculate how much of each material is needed. Doing an assembly takeoff is more efficient and takes less time.

5. Calculate labor

Now that you know how much material you’ll need for the project, you can calculate how long it will take to install it. Based on previous projects or standard labor calculations you can determine the labor hours needed for each scope of work. For example, if a crew of two men can install framing at the rate of 20 feet an hour, and we need 100 feet framed,then the labor required will be ten man hours.

Once you’ve determined the number of man hours needed to complete an activity, multiply it by the labor costs for that skill to determine the labor cost for that part of the project. You’ll then add the material costs and labor costs for each activity to determine the total cost for each line item.

6. Add subcontractor costs

If you are using subcontractors on the project, add the low bid for each scope to the budget. Before selecting a subcontractor, actively review each proposal to ensure it includes all the necessary work. You may also want to contact references to make sure that they do a good job before hiring them.

7. Add overhead and profit

Determine the total cost for the project by adding up all the costs for each activity or work component. Next, you’ll add markup to capture overhead costs, like administration, vehicles, cell phones, etc. Then add markup to the project for profit. Profits should be based on your company goals and current market.

8. Allocate costs to each budget item

Once the project begins construction and costs start to come in, they should be allocated to the appropriate budget line item. MX Build allows you to assign a virtual card to each line item in your budget. You can set the budget limit foreach card and track the spending against the limit as the project progresses. You’ll quickly know if you’re over budget by viewing the MX Build card dashboard.

Compare your actual costs incurred on each line item to your budget as the project progresses. If you’ve spent less than the budget for a particular line item, then you are under budget for that item. If you spend more than the budget amount, then you are over budget for that item. Putting controls, like card limits, in effect will prevent your staff from going over the budget for any particular item.

MX Build helps control costs

With cost controls in place, like budgeting and using MX Build virtual cards, contractors can increase their profits and improve the accuracy of their future budgets. MX allows contractors to set limits on virtual cards that can be tracked as budget line items. When the limit is reached, the card no longer works, stopping overspending.