Most construction projects go over budget. Possible reasons include unexpected challenges, poor planning, and ignoring construction technology. For that reason, it is essential for construction managers to understand budgeting principles to operate within the established budget.
For the perfect creation of a construction project budget, better cost estimates and budget management is necessary. It is the responsibility of a project manager to execute a project within budget by maintaining timelines successfully. That is because poor budgeting can result in low-quality building output inviting client escalations.
In this article, we will explore basic construction budgeting principles including its importance and how to follow it for a project’s successful implementation.
Importance of Setting a Construction Budget
Proper budgeting is an essential phase for any project. Without a well-established budget, construction projects can fall apart.
1. Cost Estimation
With well-structured budgets, cost estimators and construction managers can accurately determine the amount of money they will spend on each project task. A budget allows contractors to allocate funds to all project components evenly.
2. Creation of Guidelines
Budgeting can help project owners and contractors to establish rules and guidelines of a project, including the goals of the project. Restrictive budgets limit alternatives available to a construction firm or project owner, ensuring that the project ends at the right time.
3. Prioritization of Project Components
Another benefit of budgeting is that it helps construction managers to prioritize vital project parts. For instance, if the funds available are not enough to complete the entire project, contractors can optimize priority tasks to reduce resulting overhead costs and direct costs of excludable tasks.
4. Future Project Planning
If the money available is not enough to cater for all expenses in a construction project, budgets can help project owners to plan for future costs. A project manager can use the budget to determine the additional amount of money required to complete the project.
5. Timely Completion of Projects
If a construction project takes longer than expected, contractors will have to pay workers more money than the budgeted one. Setting a budget, therefore, ensures that the project runs within the set timeline and estimated budget.
Principles of Budgeting in Construction
It is vital for project managers involved in budgeting to have good knowledge and understanding of the principles of budgeting. Here are some of the tips that can help construction managers to follow budgets.
1. Support by Management
For the management to successfully implement a construction budget, it must provide enough support to workers and cooperate with all stakeholders. It should set not only targets but also monitor the performance of each employee and reward top performers.
2. Flexibility of Budgets
Should the proposed budget change before the project ends, the budget should be flexible enough to accommodate change orders. That will help project managers to analyze and establish the deviation from the expected output.
3. Effective Communication System
Effective communication is an essential element in budget processing and revision. That is because any change in the budget can affect many people involved in a project. When adjusting the budget, project managers must communicate it to all stakeholders, allowing them to gain fresh insights that they can use to address the needs of the budget.
4. Teamwork within an Organization
Another vital principle of budgeting in construction is teamwork between stakeholders. Despite one person compiling the overall budget, a project manager should delegate the task of budgeting among different people or departments, resulting in more accurate and reliable results. However, this process of budgeting can be slow.
5. Expense Tracking
Continuously evaluating the expenses in a construction project is a vital requirement of effective budget management. Project managers can identify the core areas that need adjustments in funds allocation. Tracking expenses effectively can also prevent or reduce conflicts that might arise during invoicing.
6. Involvement of Employees
Establishing a budget on a high level of worker motivation can encourage employees to work within the set budget. For that reason, project managers should involve workers in decision making during budget preparation. Allowing workers to participate in budgeting will not only help them think critically about the project but also motivate them to work harder.
7. Proper Documentation
While it is vital to track expenses in a construction project, it is also essential for project managers to ensure that they maintain appropriate documentation of the budget throughout the project. That will help the project managers anticipate future costs for similar projects. When documenting a budget, accountants should assume that it will be circulated to different people who don’t understand financial jargon.
8. Financial Feasibility
Before setting budgets, project owners must conduct feasibility studies to determine if a construction project is financially feasible. Some of the financial aspects that the research focuses on include construction estimates, quotes, and bids.
Construction managers use estimates to establish the amount of money they will spend on a project. An estimate specifies the deliverables of a project, including labour and raw materials, allowing project managers to establish accurate and reliable budgets.
Project quotes also play a significant role in establishing the budget of a project. A quote is simply the price of materials a supplier gives to the construction manager. As prices of materials are subject to change, quotes are usually valid for a particular duration.
A bid (sometimes referred to as a proposal) is a document that contractors submit to project owners to specify the services they will offer at a particular price and duration. The project owner can use the information from the best bidder to create a budget.
Read this article to find more information about estimates, quotes, and bids in construction.
As mentioned, budgeting is one of the most critical aspects of a construction project as it forecasts the amount of money a project owner is likely to spend. Construction managers should train project teams in setting and following budgets. That will not only help workers understand the principles of budgeting but also motivate them to work towards achieving project goals.