It all starts the same. A dream for a new project emerges. The vision is catchy, but the dollars need to follow. It’s time to create a budget. These early budgets are not easy. They include a series of numbers calculated based on a full host of assumptions. There’s a lot the organization still does not know. Yet, this preliminary budget can determine if the project moves forward and becomes essential to gaining buy-in.
These budgets might be better described as cost estimates. They provide the framework for organizations to run the needed financial proformas for operations and even in some cases, to call for a community vote. Yet they are often completed one to two years or more before construction begins.
Quality and quantity determine the initial cost estimate. These three components create each side of a triangle. One element cannot change without affecting another part of the triangle.
Take quantity. An organization may decide to increase the footprint of the facility. That means that either the budget needs to increase or the quality of the facility needs to be reduced. Or let’s say the size of the space decreases. That provides an opportunity to either increase the quality or lower the budget.
Behind the Numbers
Determining a needed budget for a project is not as straightforward as it may initially appear.
A school district, for example, may want to build a new high school to serve 1,200 students with a baseline of about 190-200 square feet per student. Then, we add in other key spaces they desire such as an auditorium or pool.
Design teams often use a combination of state or national databases and their own experience to provide a projected estimate of the construction cost.
Using historic and current averages, design teams calculate a projection for what the cost will be when construction begins. Those cost escalation forecasts can come from a variety of publications and entities, such as the Minnesota Department of Administration. Right now, for example, we’re using a construction cost escalation of 3.5 percent annually.
In the past 10 years, we have seen significant swings in the cost escalation projections. Leading up to 2007, a hot building market led to a construction cost escalation of 8-9 percent annually. Then in 2008, the market dropped and the cost escalation projection fell with it. Cost estimates developed in 2008 for projects factored in a no price change to a 5 percent annual decrease in construction costs.
The calculations can give a false sense of security. It is important for leaders to understand the assumptions and predictions upon which the estimates are based.
So, what does a complete early budget look like? Here are three key elements most often overlooked in these early cost estimates:
- Design/Estimate Contingency
A design/estimate contingency may sound fluffy and even feel like it’s just a cushion for the design team. But it’s really for the client. The most honest – and important – step an organization can take is to include a reasonable design contingency as a line item in the budget. This allows leaders to make design and facility decisions throughout the process, when it makes sense and more information is available. Organizations that fail to include a reasonable design contingency can find that they are more limited in what they can and can’t do – even in the simplest of terms. It’s recommended to include a design contingency for about 5-15 percent of the estimated project cost, depending on the degree of information known and the type of building.
- Construction Contingency
Every plan is perfect until implementation. Every construction project will have hiccups and unexpected items surface. It may be a large rock uncovered while digging, poor soil that affects excavating or higher demand for a particular building material that delays shipment or increases its cost. It’s common to include a construction contingency for about 5 percent of the estimated project cost for new construction.
- Soft Costs
These costs often are overlooked altogether and at the least not fully accounted for. It’s one area organizations are typically expected to build themselves. Soft costs include items like furniture – both fixtures and equipment – fees for architecture, legal and accounting and other expenses for travel, communications and financing. In the case of furniture, technology and other equipment, the cost estimate can be less straightforward and often provide the most wiggle room based on what you eventually choose. Don’t cut yourself too short. Soft costs typically total about 20 percent of the project budget, with around 7 percent of that dedicated to furniture, fixtures and equipment.
These three areas can be the first to be targeted for cuts or eliminated altogether when the budget cost is higher than anticipated. They may seem like easy targets early in the process, but later organizations can feel strapped when they cannot add the necessary dollars in. That can lead to shrinking hallways, eliminating storage or making less desirable material choices.
While these early budgets are better defined as cost estimates, they quickly become final and serve as figures by which everything is filtered. Take the time to give yourself the financial cushion and flexibility to deliver on the project vision.
The longer leaders can retain the contingency percentages, the more satisfied they typically are with the final product.
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