Construction budget

Introduction

Construction in India involves a multitude of different factors. These factors involve the purchase of land, design procedures, permissions, construction, and post-construction operations and maintenance. For any construction project to be successful, the most important aspect is it’s finance. Project/ Construction budgeting is an essential element of a construction project and it’s management. 

What is the construction budget?

A construction budget is an estimate of overall costs incurred during the construction of a building. A construction budget involves every cost essential for the completion of a project. The construction budget is the allocation of resources majorly money with other resources such as Man, materials, machinery, and time required for the completion of a project in a specified time. 

Why is construction budgeting important?

A budget provides a glimpse of a project’s viability, sustenance and it’s success. Analyzing finances before the start of a project gives an upper hand in terms of overall financial planning, and decision-making regarding the quality and quantity of the project. Here are a few reasons why construction budgeting is important: 

• Financial budgeting: Budget creation allows an individual to plan expenses across the timeline of a project and allocate funds accordingly. It helps in setting realistic goals and keeping track of expenses. 
• Control over cost: As the budget is decided minutely, one can have control over expenses. One can prevent unnecessary expenses, make informed decisions, and hold onto cost-saving opportunities. 
• Prioritising needs and wants: Budgeting will help allocate funds according to priority to the most essential. It helps in understanding the need for certain expenses and getting rid of unnecessary wants according to the budget. 
• Avoiding pitfalls: A project spans for longer than a year and there can be certain surprises and expenditures during the construction. A well-planned budget helps to avoid such unexpected costs. It helps to plan the cost of contingencies that may arise during construction.

Steps to create a construction budget

• Project Research: The first step is to analyse the project goals and requirements. Evaluate the project feasibility by checking site conditions, zoning, permit requirements, location, and availability of construction materials. 

• Project Scope: Meet with engineers and architects to determine the scope and design options for the project. Create a detailed list of materials that will be needed. Reach out to contractors and suppliers to check with material costs and supply timeline. 

• Pre-construction and documentation: Before initiation of construction, 
• Meet all the stakeholders to discuss the project, material list, and cost overheads.
• Document these and create an intensive list of items, their costs, supply timelines construction timelines to avoid overruns, and reduce risks during construction. 
• Make use of technology by having templates made by project management professionals for the creation of a construction budget. 

• Construction and close-out: Keep track of the budget during the construction phase. Monitor actual costs against projected costs. Identify any issues and change any deviation according to budget or schedule. Keep track of deliverables from contractors and suppliers to make timely payments and have a closure to the project.

How to do construction budgeting?

There are different approaches to the process of budget making. 

• Bottom-up/ Unit cost estimation:  In this method of estimation, the work is divided into small work heads. A unit price is established for each piece. The unit price is then multiplied by the required quantity to find the cost of that head. This method provides the most accurate results of projected construction costs. 
  For example, the cost to build a brick wall can be accurately determined by finding the number of bricks required and estimating all costs related to delivering, storing, staging, cutting, installing, and cleaning the brick along with related units of accessories such as reinforcing ties, weep-holes, flashings. 

• Top-down/ Assembly estimation: In this method of estimation, the cost is calculated based on the previous project cost which is similar in nature of construction. 
  For example, if there is a residential project with piles footing to be done, the cost is estimated by referring to the construction cost of earlier completed similar projects for that head. Usually, this is not much reliable due to different factors like a timeline of both projects, fluctuating material costs, labour cost. 

• Parametric estimation: This method of estimation uses historical data to calculate the resources needed. This method uses more project data of similar building types to estimate the construction cost along with specifications of materials with their costs. This estimating method requires the assumption of an approximate gross area for the proposed work and a sufficient historical record of similar building types.

• Square foot estimation: In this method of estimation, the cost of the overall project is calculated based on the square feet area of the project built-up. The estimation requires data from previous similar construction types with proper and sufficient knowledge as well as experience of the construction field. 

Factors to consider for construction budgeting

• Property: One of the most important factors is the property. The rate of property varies based on it’s location, project scope, and vicinity. The land value is not just the value of property but also includes the cost of acquisition if there’s any. The property cost is a capital cost that is one-time investment. To calculate the overall budget of the project, the projection of this capital cost plays a very important role.

• Fees and services: A construction project requires a wide range of professional consultations and services. Depending on the scope, size, and requirement, one may be required to hire professionals including architects, engineer, landscape architect, Mechanical Electrical Plumbing consultant, surveyor, project manager, interior designer and many other consultants. Hiring professionals will incur service costs that are to be taken into account while working on the budget.
  With service costs, there are also fees that includes registration fees, building permission fees, occupancy certificate fees, No objection certificates, and other government service fees. 
  It is important to get highly detailed construction drawings for accurate estimation. Depending on the scale of project, the service fees to service provider may increase, and also other government costs may increase as well.

• Design: The cost of project depend on it’s design, soil conditions and use. Based on the design of project, the cost can vary. Like larger span between columns may give you bigger spaces but the steel design becomes heavy. So, finding balance between design and technicality is important. 
  For example, with extended cantilevers, the steel and concrete design will increase leading to increase in construction cost. 
  Also, based on soil conditions, type of foundation will be decided which will further affect the cost of construction. 

• Material: Material accounts for one of the most significant parts of the construction budget. The material required for the construction varies as per the stage of construction. The list of materials is extensive some heads common for most construction projects and with some heads that are project-specific based on design requirements. 
  The cost of a few materials is fixed while some materials have fluctuating costs based on market value, it is important to study the trends of that specific material and calculate the average cost for such materials. 
  Sourcing materials from reputable suppliers ensures quality construction and longevity of the project. Also, the procurement cost of materials depends on the accessibility of location. 
  Make a intensive list of all the materials from site preparation to beautification of the project including foundation, structural costs, interior finishes and fixtures, external works, and landscaping. 

• Labour: Any construction project to be completed, labour is a fundamental aspect. Hire contractors, sub-contractors, labour according to the requirement on site. One of the most challenging aspect of cost estimation is calculating construction labour costs. When calculating labour budget, keep in mind the true cost of human resources, including:
• Hourly wages both for employees and subcontractors
• Workers’ compensation costs and payroll expenses for employees
• Non-productive time and re-work, though these costs can also fall under a contingency budget

RCC contractors charge 10% of the project cost, electrical contractors charge based on square feet area of project, plumbing contractors charge based on number of toilets, Landscape contractors charge based on cost of plants/trees, structural consultant charge between INR 3 to INR 10 per square feet of slab area.

• Equipment and Tools: There are two ways this cost can be calculated. One if the contractor provides equipment and tools, the cost will be considered accordingly whereas if you plan to purchase equipment then the cost of equipment and tools have to be calculated separately. For large-scale projects, heavy equipment can be rented, and rental costs based on location and time should be calculated. 
  There could be operating costs, and fuel costs for certain equipment which should be taken into account. 

• Management & Technology: Construction projects require people who can manage the project technically. These members require their own equipment and supplies to perform their jobs. Salaries, office rent, and utilities have to be included in the construction budget. Security staff, safety supplies, and all other support roles and materials are also part of project management costs.
  There are new technologies for project management and construction. Many companies today use project management, accounting and scheduling software. These soft costs aren’t directly related to physical construction, but they are critical expenses you incur to get the job done.

• Utilities & Taxes: As per the scale of the project, utilities have been installed on the project site like water, electricity, sewage, and gas. These utilities have their permit and service fees that must be factored into the overall construction budget.
  The construction project will be subjected to local and state level taxes. Tax rates depend on the scope and type of construction, with larger construction investments subject to more tax. Be sure to work with a certified professional accountant who is experienced in construction finance to ensure you’re properly accounting for all taxes.

• Contingency: Even after accurate and technical planning of the budget, there will be surprises and unexpected scenarios during construction. It’s crucial to include a contingency budget in the overall construction budget. A contingency budget is funding set aside to pay for unexpected expenses that arise once the project gets started. A contingency fund isn’t allocated to any particular category of costs. 
  A contingency budget is usually between 5% and 10% of the project’s total budget.

• Insurance and bonds: Construction projects legally required to carry insurance. There might also be a deposit or bond required as a show of faith that your company is going to follow through and ensure all subcontractors, tradespeople, and suppliers are paid. This is especially true if working on a governmental project.

Things to avoid when planning the construction budget

• Inaccurate estimates: While planning the construction budget, estimates are to be planned according to current market prices. It is important to study the market cost and have accurate costings. 
• Poor quality: While estimating, usually one tends to look for the cheapest option.  But one needs to be careful of the quality of the material. 
• Miscommunication: During the process of making the budget and after, communication plays an important role. The contractors, labour, managers, and suppliers must be in the communication loop for the timely and successful completion of the project. 
• Delays: Even after making an accurate construction budget, the cost of a project can go haywire if there are project delays. Natural delays are beyond our control but one must avoid delays due to decision-making, procurement delays. 

The construction cost per square foot in India in 2024 is influenced by a multitude of expenses ranging from land acquisition and design fees to material costs, labor expenses, structural elements, interior finishes, and external works. It is important to understand the detailed list of expenses that are involved in construction. Careful planning, budgeting, and managing expenses can ensure the successful completion of their project with their decided budget constraints.

It’s not just about creating a budget; it’s about following it, reviewing it regularly, and amending it when necessary. After all, a comprehensive construction budget is dynamic and must serve as an active financial management tool throughout the span of your project!