The Importance Of Project Budgets

The Importance of Having a Project Budget at the Onset of Design

A potential source of frustration and disappointment for an owner at the outset of a project is discovering that the design they have fallen in love with and put so much effort and thought into is too costly. This happens more often than you might think on commercial and residential construction projects, and when it does, the ramifications are many. Frustration and disappointment on the part of the owner can be easily understood. The design team can feel as if they have let the owner down. The bidders that priced the project are concerned they have wasted their time bidding something that will not be built or are concerned they will have to start the whole process over again with a scaled down design.

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Aside from these emotional issues, the economic impact of having no clear understanding of the project budget at the outset is significant for all parties involved. For example, the owner has paid for a complete design they may not be able to use and will likely spend more design dollars to modify the plans. The bidders have spent numerous hours of fruitless estimating time, and the design team may feel compelled to cut their margin so as reduce the frustration on the owner’s part. Finally, the enthusiasm and excitement that should accompany the start of a project has been dampened even if the project goes forward in a reduced fashion. It is the antithesis of a win-win situation.

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With all of the potential negatives of embarking on a design without a firm grasp of the owner’s budget, why would anyone ever do it? It is possible that occasionally the budget question is never asked. Since that is or should be one of the first questions asked by the designer during the initial designer / owner meeting, a more likely reason this occurs is that the owner says they have no budget; they have no idea what their project might cost. They might ask the designer to incorporate all their needs and desires into an attractive design in order to learn the cost. As detailed above, this approach usually doesn’t end well. At this juncture the designer should probe deeper to see if there truly is a price range the owner has in mind. If the owner has no budget, the designer should, and probably often does, attempt to give the owner an idea of what the project might cost on a square foot basis or perhaps in terms of a price range. This ‘first blush’ estimate can be very helpful for the process provided the designer has a firm grasp on costs for the owner’s type of project. However, if the designer does not have a good feel for the costs of the project type at hand, there are several steps that might be taken.

A simple solution to the above problem would be for the designer to contact a contractor with experience building the type of project in question. Once the designer has imparted the project particulars, including any unique features, to the contractor, the contractor should be able, with minimal effort, to provide the designer a reasonable estimate of square foot cost for the project. If, however, the project at hand is uncommon, a different and more involved process for ascertaining a preliminary budget estimate is required.

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The process for unique/uncommon projects requires that the owner incur costs from the designer to prepare preliminary sketches and information that can be passed on to a selected contractor for their use in preparing an estimate. The owner should anticipate compensating the contractor as well for his efforts in calculating a budget range for the project. The less information provided to the contractor, the more effort the contractor must expend filling in informational blanks and investigating existing conditions. In turn, the owner should anticipate compensating the contractor for his increased effort.

When preparing preliminary budgets for unique or uncommon projects, a good designer and contractor team will be able to communicate to the owner the level of precision they feel they have ascertained with their efforts. They will also often outline conditions or potential issues which may have a large impact on costs. The owner, likewise, should communicate the level of precision that he/she is comfortable with. As one might expect, more precise budgets require more effort and are therefore more expensive to produce. The owner, designer, and contractor should ensure a balanced approach to preparing preliminary budgets which satisfies the owner’s need for precision vs. the cost of preparing the budget.

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The process to generate a preliminary budget for a non-standard type project should follow these steps:

* Designer advises the client that to establish a budget will require compensated work on the part of the designer and a contractor / estimator. A fee range for this work can be established and the contractor may offer to deduct part of his fee from the cost of the actual project should he ultimately be selected to perform the work.

* Once the client has authorized the preliminary estimate work, the designer can prepare the sketches and narrative the contractor will use to prepare a preliminary budget estimate. Bear in mind, the less time spent by the designer at this stage, the less information provided to the contractor and the higher the contractor’s cost to prepare the estimate

* The contractor will likely need to solicit budget pricing from subcontractors for portions of the work. The more complex and unique the project, the more subcontractors the contractor may need to involve. If there is not adequate information provided to the contractor that he can pass on to the subcontractors, the contractor himself must clarify scope and provide enough information to the subcontractor to enable them to prepare pricing.

* The contractor will require a few days to a few weeks to develop a meaningful estimate depending on the complexity of the project

* When the budget is complete a meeting should be held to review the initial estimate, determine if the owner has sufficient funds for the project as conceived, and or discuss possible modifications to reduce the project cost.

It is always ideal for the owner to have a budget in mind when thinking of taking on a construction project. It is better still if the designer can easily confirm the budget is adequate for the owner’s needs and wishes.
Should that not be the case, the processes outlined above should get the team to a reasonable preliminary budget which will allow all those involved to avoid the negative consequences of pursuing a design that exceeds the owner’s financial capacity.

For questions about this article feel free to contact Jim Perry at Perry Contracting Inc. at pci@perrycontractinginc.com

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