Construction projects will never get off the ground without financing. Money sets the gears of construction management in motion. Creating a construction budget, therefore, is one of the most important pieces when developing a construction plan.

How do you create a construction budget, anticipate the costs for a project and track them to make sure you’re not overspending? Let’s take a look at what goes into making a construction budget.

What Is a Construction Budget?

A construction budget is an estimate of the money required to take a construction project from initiation to closure, including all associated costs and expenses that are accrued during the building process. While the budget is an attempt to forecast all costs in a construction project, you should leave some wiggle room to account for any emergencies or unexpected building costs.

Construction project managers start with the project plan, most likely a blueprint, to assess what materials will be required. Factors like job site preparation must be considered, which can include demolition costs, equipment rentals, permitting and inspection costs.

As the project execution begins, other costs begin to appear. There are labor costs and safety requirements for all on-site workers. Transportation can be another cost. Residential and commercial construction projects will also have unique costs. All these variables must be considered and calculated.

Tracking those costs is a way project management software can help. ProjectManager is construction management software that plans, monitors and reports on your construction budget in real time. We have live dashboards, one-click reports and a robust online Gantt chart that can document your work breakdown structure, filter for the critical path and set baselines to compare planned costs against actual costs. Try ProjectManager free today!

What Is Construction Budget Management?

Construction budget management revolves around construction budget tracking. It’s the process of planning, monitoring and controlling a construction project’s financial resources to help it stay within the allocated budget. The budget is established based on project cost estimates such as costs for labor, equipment, materials, permits and overhead. Construction budget control helps improve cost estimation, resource allocation, change management and risk management.

Who Participates in the Construction Budgeting Process?

Various parties are involved in the construction budgeting process, working together to align the project goals and expectations with the ideal financial goals.

• Project Owner or Client: The owner or client helps budget items and set parameters to meet the desired outcomes. In addition to helping with the project scope, they make decisions on change orders and monitor progress to keep risks low.
• Project Manager: The construction project manager oversees the project’s development and helps monitor it. They will collaborate with cost estimators, engineers and architects to get the needed data so the budget reflects the objectives and project scope defined in the construction plan.
• Cost Estimators: A cost estimator provides a detailed analysis of project costs. This role reviews project plans, prepares detailed estimates and looks to historical data to determine the current market prices for materials and labor. As a result, the budgeting process is accurate and competitive.
• Architectural and Engineering Teams: These teams offer technical details and specifications that make up cost estimates to inform the budgeting process. They put together comprehensive documents and drawings that outline the project scope, resulting in clarity for potential bidders.
• Contractors and Subcontractors: Contractors and subcontractors offer detailed cost estimates for their respective scopes of work. They provide potential cost-saving measures and collaborate with project managers to refine the budget and ensure alignment.
• Key Stakeholders: Key stakeholders such as project owners, engineers, contractors, architects and financial analysts are actively involved in the construction budgeting process to ensure collaborative input to contribute to the project’s success.

Why Is Construction Budgeting Important?

Chances are, you don’t have an unlimited fountain of money to work with. Instead, you have stakeholders that have invested in the construction project and want to get a profit—and going into any project without a budget is a sure way to spend too much money. That’s why you need a budget baseline that defines how much you can spend. Having a budget and construction project plan go hand-in-hand with any successful project.

A construction budget is also a great way to keep your project on track during execution. The more unaccounted expenses in a project, the longer it’s going to take to finish. Making a budget lets you take account of as many construction costs as possible and helps you stay on schedule.

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Construction Budget Template

Use this free Construction Budget Template for Excel to manage your projects better.

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What Is Included In a Construction Budget?

In simple terms, a construction budget is just like any other project budget, it adds up all the costs so that the project can be executed. Construction projects, however, have unique costs. So before creating a construction budget, it’s important to understand construction project costs, which fall into three basic categories:

• Direct Costs: This includes heavy equipment, materials and labor
• General Conditions: These are indirect costs, which fall into three types: preconstruction costs, construction organization costs and project operation costs
• Profit and Overhead: Profit is the difference between what you earned and spent, while overhead is operating expenses associated with running a business

In terms of what to include in your construction project budget, that depends on the project you’re working on. But in general, a construction budget should include the following:

• Property: This cost is dependent on where you are building and the scope of your project. This includes the lot price, real estate fees, financing and taxes.
• Professional Fees and Services: These costs relate to professional consulting, including permitting, surveying, testing, architectural and design, master planning, structural, electrical, mechanical and civil engineering, accounting, banking and real estate fees.
• Materials: Unlike other costs, materials expenses can be negotiable, especially if you have a relationship with your suppliers. Material costs tend to be a large portion of your construction budget and are usually broken down into two categories: site preparation and building structure.
• Labor: This is the cost of your tradespeople, subcontractors, equipment operators and other human resources. Keep in mind not only hourly wages but also workers’ compensation, vacation and sick time.
• Equipment and Tools: The material and labor costs will inform the selection of equipment and tools, which helps you determine what you’ll need to rent for the job. Remember to include delivery, operating, fuel and maintenance costs.
• Project Management: Project management methodologies help organize and monitor a budget to avoid overspending. Consider the costs of construction project management software, as well as any office space, utilities, internet connection, phone expenses and office supplies.
• Insurance and Bonds: All construction projects are 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.
• Utilities and Taxes: This includes gas, water, sewer and electric costs associated with the building site. It’s also possible the construction project is subject to local and state taxes. These rates are determined by the scope and type of construction project you’re managing.
• Contingency: Here is where you provide breathing room for your budget to absorb unforeseen costs and unexpected expenses. Some things that fall under this include changes in scope, design or material upgrades, machinery malfunctions, accidents and acts of God. Usually, your contingency fund is between three and 10 percent of your total budget.

Construction Budget Template

This free construction budget template allows you to keep track of all your construction costs, including labor, material, equipment and other types of costs. This template also allows you to compare estimated vs. actual costs so you can determine whether your budget is over or under budget at any time during the execution of your project.

We offer a variety of free construction project management templates for Excel you can use to manage all aspects of your project.

How to Create a Construction Budget

To create a construction budget that’s an accurate forecast of how much the work ahead will cost, construction project managers follow these steps:

1. Define the Project Scope

Start by defining the project scope; the goal here is to define what will be done in terms of project work. There are several tools to help you accomplish this including a work breakdown structure, scope of work and statement of work.

• Work Breakdown Structure (WBS): This is a tool that breaks down projects into smaller, more manageable tasks. A WBS helps organize and prioritize tasks to help the team have more clarity and take accountability.
• Scope of Work: This detailed document highlights the tasks, deliverables and timelines in a project. It helps prevent scope creep and ensures stakeholders are aligned.
• Statement of Work: This formal document details what work will be performed in a more comprehensive manner than the scope of work. The statement of work acts like a contract and has more details than the scope of work.

2. Make a Construction Estimate

To accurately forecast how much a construction project will cost, you must review historical data for similar construction projects, speak to suppliers and understand the project you’re about to start. Set realistic expectations by looking at resources, design options, etc.

Here are some of the steps that project management teams should take when estimating the costs of a construction project.

Review Architectural Drawings, Blueprints and Computer-Assisted Designs

When planning a construction project, the architectural and engineering teams work closely with contractors to produce a series of architectural drawings, blueprints and computer-assisted designs, which are used by the project owner when choosing a final design.

The project manager uses this information to create a requirements list, including materials and cost estimations. This informs the project bidding process, which is when the project owner chooses a general contractor and sets the framework for building the actual construction project budget.

Perform a Material Takeoff (MTO)

The point of a material takeoff is to quantify the materials needed for the project. To do this, review the plans, organize the materials and measure quantities to ensure you have what you need throughout the project. This can be updated throughout the project if needed, and it helps more effectively manage project costs.

Conduct a Quantity Takeoff (QTO)

A quantity takeoff helps improve project planning and cost management. It quantifies the materials, labor and resources needed for a project. The goal is to measure the material quantities, labor requirements, cost estimates and documentation for better resource planning and project budgeting. As the project progresses, revise the takeoff to reflect any price changes.

Create a Bill of Quantities

A bill of quantities is a document that provides a detailed description of the types of materials, quantities, quality standards and other aspects of the materials needed for the construction of a building.

Related: Bill of Quantities Template

It’s based on the architectural drawings, blueprints and computer-assisted designs and it greatly helps in the cost estimation, bidding and budget tracking processes of a construction project.

Create a Bill of Materials

A bill of materials is a comprehensive list of the materials, components and parts needed to manufacture a product or complete a project. While it’s mostly used in manufacturing, in the context of construction, it describes specific assemblies that are needed for a building such as window frames, HVAC components and other similar elements.

Related: Bill of Materials Template

It helps with planning and scheduling by offering a clear overview of what’s needed. It can also improve inventory management and cost estimation. Each BOM should include details such as an item description, quantity, unit of measure, supplier information, etc.

Establish a Project Cost Baseline

To avoid cost overruns, establish a project cost baseline. It will act as the reference point for measuring project performance and controlling costs. As a result, project managers can ensure that project costs stay within budget. You’ll need to define the project scope, develop a work breakdown structure, estimate costs and get approval from stakeholders.

Use Construction Budgeting Software

Construction budgeting software is one of the most integral components of putting together a construction estimate. Here, there are specialized tools that can help construction professionals plan, estimate and manage project budgets for more accuracy and efficiency. Some examples of these tools include Gantt charts, kanban boards, timesheets, workload calendars and more.

Add Contingency Funds, Overhead and Administrative Costs

Contingency funds are funds that are put aside in the case that something unexpected arises during a project. It provides a buffer to reduce risk while still keeping the project on track. Overhead costs aren’t tied to specific projects but benefit the business’ overall operations. Administrative costs can include things like permits, fees and insurance.

3. Establish a Profit Margin Depending on the Type of Construction Contract

Different construction contracts operate based on different types of profit margins.

• Fixed-Price Contract (Lump Sum): In a lump sum contract is when the contractor agrees to complete the project for a fixed price regardless of what the actual costs incurred are. The contractor has predictable revenue, however, he or she faces significant risk if costs far exceed the fixed price as the result of unexpected circumstances. This is why effective project management is so important to avoid these cost overruns.
• Cost-Plus Contract: In this contract, the contractor is reimbursed for any legitimate project costs in addition to a fee or percentage of profit. It’s low risk for the contractor but profit margins are based on cost management efficiency.
• Time and Materials Contract: Here, the contractor is paid for the actual time spent on the project and the materials used in addition to a markup for profit and overhead. A time and materials contract offers flexibility for unexpected changes but profits can be impacted by inefficiencies.
• Unit Price Contract: The contractor is paid a predetermined rate for each unit of work they complete such as per cubic yard or per square foot. This allows for adjustments based on how much work is done but if the quantities are underestimated, profit margins can significantly decrease.
• Guaranteed Maximum Price (GMP): This is a hybrid approach as the contractor is paid for the actual costs incurred with a cap on the total payment amount. It reduces the contractor’s risk but if the costs exceed the GMP, the contractor must absorb them.

4. Get Approval from Stakeholders

Now the project manager should speak to the stakeholders. This highlights potential issues that can be resolved before executing the project. By documenting the pre-construction phase, the project manager has a paper trail to show where unexpected costs can come up. These potential costs can inform the construction budget.

5. Define Construction Budget Management Guidelines

Take the time to define the budget management guidelines using the below information.

• Project Cost Control Metrics: Various earned value management metrics such as cost performance index, budget variance and cost overrun percentage can help monitor the health of a construction budget.
• Change Management Process: Think of this as a change control board, or a group designated to evaluate change order request forms. If approved, it will become a change order that is logged in a change log. A change management process allows for new resources to be reallocated to accommodate needed changes.
• Budget Tracking Tools: These can include timesheets, construction daily reports or project dashboards to help keep construction budgeting on track.

Things to Avoid When Construction Budgeting

One of the biggest mistakes a project manager can make when creating a construction budget is inaccurate estimates. This can be made more problematic by not having a definitive project schedule in place before doing a budgeting forecast.

Also, when estimating, there’s a habit of only looking at the bottom line, which can lead to accepting the lowest bids from general contractors. The low cost might please your stakeholders at first, but if the quality of the work is poor, that pleasure will be short-lived. It can erode your reputation and end up costing more in the long run.

Just as important as the construction schedule is your plan. Not taking the time to make a thorough plan for your construction project will slow you down in the long run. You might miss dependencies, design flaws and more. This will delay the project and potentially bust your budget.

To avoid this, you can use construction scheduling software that’s equipped with robust project planning tools such as ProjectManager so there are no discrepancies between your construction plan, schedule and budget.

ProjectManager Is a Robust Construction Budgeting Software

As good as our free construction budget template is, you’re not going to make it too far on an Excel spreadsheet. ProjectManager is online construction management software that organizes tasks, teams and projects to keep you on track and within budget.

Plan and Track Costs on Gantt Charts

The project plan is the blueprint for your budget. On it, you collect the tasks you need to accomplish, and the resources needed to complete them. ProjectManager’s interactive Gantt chart has all the basics, such as linking dependencies and setting milestones. But unlike competitors, you can set a baseline, which lets you compare actual expenditure against the plan.

Keep the Whole Team in the Loop

Not only do you have real-time data to show progress and performance as it happens, but everyone can comment at the task level. Email alerts and in-app notifications keep everyone updated on changes to task status. That means your on-site crew can communicate seamlessly with your team at HQ.

Track Progress With Dashboards

For more detail, use ProjectManager’s live dashboard. Data is automatically collected and calculated, then displayed in graphs that show metrics such as time and. One-click reports go deeper, with filterable data to show just what you want. They’re also simple to share with stakeholders and manage their expectations.

Related Construction Project Management Content

We have dozens of construction project management blogs and templates that can be useful for anyone who’s managing a construction project. Here are other blogs and templates that might help you during the budgeting process.

• Best Construction Estimating Software for Construction Projects
• Construction Estimate
• Construction Estimate Template
• How to Make a Construction Plan: The Ultimate Guide
• Construction Cost Management: Managing Construction Costs

ProjectManager is award-winning software that helps you manage construction budgets with real-time expense reports. Our features let you plan, schedule and monitor your project with live data. See how ProjectManager can help your next construction project budget by trying it free today.