Project Budget Basics
If you're preparing for your first foray into a construction project, the idea of a "budget" has probably been one of the main items you’ve been concerned about. But if you’ve never completed a construction project you might be wondering what exactly it encompasses and how it progresses from an initial estimate, to a final bid, and finally to what you actually pay. I’d love to dive into some of the common concepts you may not be familiar with and what actually makes up a project budget.
Project Budget = Soft Costs + Hard Costs
Soft Costs: The Essentials
Often overshadowed by Hard costs, Soft costs play a monumental role in ensuring the execution of your project and you must account for them. They encompass all aspects of the project that lead to the physical construction including:
Design Fees: The cost for the architect or interior designers to actually work with you and come up with a design to build.
Engineering Fees: These cover the expertise required for the “guts” of your project. This may include, but aren’t limited to, structural, civil, or HVAC (heating & cooling).
Permit Fees: Necessary expenditures for legal authorization to commence construction. HOAs, zoning reviews, plan checks, and pulling your final permits will all have associated costs you’ll need to pay before you can break ground.
Consultant Fees: Costs associated with specialized expertise such as surveyors and environmental experts.
Soft costs lay the groundwork for a smooth and successful project experience. Without these, you simply won’t have a project to build. Unfortunately, it’s difficult to put an exact number on what you should plan for soft costs as they vary greatly due to location, size, complexity, and project type. It wouldn’t be unreasonable to spend 15-30% of your project budget on Soft costs.
Hard Costs: Creating an Actual Building
In contrast, hard costs are the tangible expenses directly linked to the physical construction of your project. These encompass:
Materials: The physical elements such as bricks, mortar, and steel essential for construction.
Labor: The skilled workforce that actually performs the construction.
Equipment: Tools and machinery indispensable for the construction process.
Site Costs: Expenditures related to the preparation and maintenance of the construction site. Think temporary power poles or renting porta-potties for the workers.
It’s not uncommon for Soft costs to take a backseat to the hard costs because they seem less tangible. This mindset is often to the detriment of the project. Trying to get the lowest cost engineer or designer often leads to a lower quality design along with less comprehensive construction documents that the contractor needs to execute the design. Skimping on Soft costs often manifests as time delays or change orders during construction. Common issues that arise might be that the contractor had to interpret something that wasn’t clear and you didn’t like his solution or that he simply didn’t include a line item in the budget for a product you wanted because it wasn’t in the plans. A project is always smoother when you invest in a quality team of designers and engineers.
Unit Costs: Your Budget Starting Point
In the project's early phases, we rely on preliminary “unit costs” which serve as a guide through the initial budgeting process. These estimates are assigned to each square foot or unit based on industry standards and experience. In practice, you’ll hear people say “this similar project cost $500 per square foot”. Simply multiplying your desired home size (in square feet) with the Square footage costs will give you rough construction cost.
EG a 3,500sf home at $500/sf would cost $1,750,000 to construct. You’d then account an additional 10-30% for the project Soft Costs. A Project Budget of $2,200,000 wouldn’t be unreasonable.
When starting a project with an architect, they may attempt to get a bit more granular in the very initial Pre-design phases by assigning a weighted average to different room types. For example, a bedroom will cost less than a bathroom simply because a bedroom is virtually just flooring and wall materials, whereas a bathroom needs sinks, showers, and toilet fixtures along with the associated plumbing and electrical. The architect might give you a very rough estimate just to confirm the scope of your project is in-line with your available budget. Keep in mind though that an architect will never give a guaranteed construction cost, they can only provide estimates based on previous experience.
The Budget’s Maturing Precision
Which begs the question, how do we transition to a more detailed construction budget? As you work with your architect, you’ll hit certain milestones during the design process:
Initial floor plans
3D renderings
Basic design documents,
Fully engineered construction documents
Each one of those milestones layers in additional information that can be shared with prospective contractors. The contractors can start to provide up-to-date unit costs that can be used to get more accurate estimates of what the current iteration of your design might cost. If you get preliminary numbers from a contractor that exceed your budget estimates, you can work with your architect to revise the scope of the design before you spend further time and money on developing a project that might be too expensive to build.
Bidding & Awarding the Contract to Build
Once you have gotten to a point where you have fully engineered construction documents, you can have 2 or 3 contractors provide a formal bid for the project. They will take the full plan package out to their subcontractors and furnish the actual cost required to complete the work. This will be the point where you will get a true cost for the work, with little ambiguity.
Included in the hard costs associated with construction is the contractor's fee structure. While there are a handful of ways a contractor can structure his work, a common one for residential construction is a "cost plus" model. Under this approach, the contractor bills for the actual costs of construction along with a pre-agreed fee, typically as a percentage (10-15% of the materials + labor). This ensures transparency and aligns the contractor's interests with yours—both parties share the common goal of completing the project efficiently and within the budget.
In Conclusion: From Concept to Refined Numbers
Venturing into a construction project may seem like navigating uncharted waters, but comprehending the dynamics of soft costs, hard costs, and the evolution of budgeting along with having a reputable architect as a guide provides you with a reliable framework to work within. From preliminary unit costs to the creation of fully engineered documents, each phase refines the numbers, ensuring your project's budget aligns with its maturing design. As you step into the realm of construction budgets, remember—it's not just about the bottom line, it's about making sure the money you spend actually results in your vision. Good luck!
