So far, we have discussed how having an experienced Development Team and having a clear scope of work are foundational items that are needed for a successful project. In addition to these two fundamental items, the next important item is the construction project budget. Some might say this is the only critical element, or by far the most important, but delivering a quality project that meets the needs of the end user is just as important!
A Sound Construction Project Budget Begins in the Details
A construction project budget should be a detailed account of the costs for the project. A good starting point for a budget format is the CSI MasterFormat. If you are not familiar with it, see https://www.csiresources.org/standards/masterformat (or just “Search It Up” as the kids say!)
The CSI MasterFormat is a very commonly used format by General Contractors to provide standard budget categories. This also helps contractors (and cost consultants like us) compare similar projects, as costs get aggregated into standardized categories. In our opinion, there is no such thing as a budget that is “too detailed”, but there are often budgets that are not detailed enough.
“Building 1 – $500,000” is not a detailed budget!
Once a detailed schedule is created by the Contractor, there is often a value engineering process, by which the Owner, Contractor, and Architect are involved in reviewing ways in which the project can be delivered for less. Value Engineering (often called VE for short) involves reviewing the potential for substitute materials or methodologies in construction that can deliver similar value and usability but at a cost and/or time savings.
The VE process often results in alternate options that the Owner can choose if desired, called “Alternates”.
The Architect should always be involved in the VE process, as they are ultimately the designer of record and should confirm that any alternatives do not create other adverse issues for the construction project. (i.e. utilizing a particular window or door that does not meet a code requirement).
Additionally, a final budget for construction also requires that plans have been through the permitting process. Permitting and project approvals often require changes to the construction project scope. Some can be minor, yet others can be major (i.e. we saw a project that was not sprinkled be required to have sprinkler added during plan review. It was a major scope and price increase).
Another great tool for budget development before construction is the Contractor issuing a Clarifications and Exclusions document as an exhibit to the Construction Agreement. This document lists (often by CSI MasterFormat category) certain items that are excluded from the contract pricing, or provides additional clarifications around budget pricing that may not be clear in the construction documents (plans and specifications) provided.
Construction Project Budgets – Always in Flux
While you may have a Stipulated Sum (Fixed Price) contract or a Guaranteed Maximum Price (GMP), that doesn’t mean that your project costs will never change. Why not?
Because the Fixed Price or GMP is only “fixed” or “guaranteed” if the scope of work does not change. Also, the General Contractor may keep the same budget, yet lower-tier subcontractors and vendors are always negotiating with the GC for field changes, unknown conditions, material price increases, and other general changes that occur during construction.
Knowing that construction costs are in flux during the construction process, it is good to keep track of potential changes via a Potential Change Order Log (PCO Log).
Contractors should keep and update monthly a PCO Log for the project. This helps the Owner (and Lender) know what potential change orders are looming for changes in the scope of work.
Additionally, a buyout log is a rarely provided document that can provide great insight into the Contractor’s negotiations with subcontractors.
The Buyout Log shows the Schedule of Values amount for a particular trade and the subcontractor’s contract amount for the proposed work.
If a $1,000,000 project is 50% “Bought Out”, this means that $500,000 worth of subcontracts and vendor P/O’s are signed. As such, 50% of the contract is “locked in”. The higher the Buy Out percentage, the higher the certainty of the contract price.
Finally, the Change Order process should be followed in detail for any changes to the construction contract.
Not only do budget changes need to be documented within the Change Order process, but also changes to project scope, changes to construction schedules/delivery timelines, or other contract adjustments for items such as retainage withholdings. All such items should be documented and agreed upon formally via change order.
In summary, having good documentation defining the construction project budget and changes that occur during the construction process is critical for having a successful project.
Items such as a VE Log, Clarifications, and Exclusions Document, PCO Log, Buyout Log, and formally documented change orders will help all members of the project team be armed with critical information to keep the project on time and within budget!
Download our Total Project Budget Template to help you stay on top of project sources and uses of funds.
