Construction Budget 101: Everything You Need to Know

As a residential home builder or remodeler, understanding the financials on each project is vital to your profitability and overall success of your business. 

This doesn’t mean you need a masters degree in accounting, you just need to master your construction budget — which is the single most important tool for keeping your jobs profitable and on track. 

Not only that, but good construction budget management during projects will eliminate surprise cost increases which leads to reduced stress and happier clients.  

This article is the first step on your journey to learning how to master the construction budget for your residential home building and remodeling projects.

What Is a Construction Budget?

A construction budget is a financial planning tool used to determine the cost of a building or remodeling project. It’s also known as a cash flow budget and includes all items related to the design, build, or renovation of a residential or commercial construction project. 

There are many expenses that home builders and remodelers may not realize should be covered in each job and should not come out of the profits. That’s where a reasonable budget comes in. Here are a few things to consider:

• How much staffing do you need for the job? (Include things like a project manager, secretary, and office staff.)

• Estimate your operational costs (Such as rent, insurance premiums, loans, electricity, gas, water, maintenance of your office, etc.)

• What are the costs directly related to the project? Remember to categorize it correctly if your estimate includes allowances for the client’s selections that are not fixed costs. (Materials, sub-contractors, laborers, equipment rentals, and expenses that you’ll have in your bids/estimates. Always add in a cushion for those unexpected Home Depot runs.) 

• Include contingencies to cover the unexpected. (To help to cover any unforeseen problems.)

• Don’t forget to calculate your profits in the budget as well. (You need to know if you’re covering your expenses and ensuring that the project is profitable.)

Why Use a Construction Budget vs. Construction Estimate – Don’t Rely On Your Bid Alone

Your estimate or bid contains vital financial information and might give you a ballpark of the job costs. It’s a great start, but no matter how accurate it is, it’s not an actual cost until you’ve paid for the materials or the work completed. So a budget spreadsheet (like the free residential construction budget template created by BuildBook) allows you to follow your expenses closely throughout the job. You gain essential information during the process so you don’t have any surprises at the end of the project. It’s also an excellent tool for learning where your estimating skills are strong and where they need to be refined, helping you make more money in the long run.

Breaking Down Construction Cost Types

Construction costs fall into two major categories. fixed costs and variable costs. Understanding the difference between them is important for an accurate and realistic budget.

Fixed Costs

Fixed costs don’t change once work has begun and remain the same no matter what happens. So if you know that the cleanup crew will cost $8,000 for the entire job, no matter how long it takes, then that’s a fixed cost. All expenses where the price will remain the same throughout the project are considered fixed costs.  

Variable Costs

Variable costs fluctuate throughout a project, and they often go up when a project takes longer than expected. Most variable costs for a builder or remodeler are labor and material but can include taxes and interest. For example, in recent years, we’ve seen lumber prices fluctuate dramatically over a short time. These changes are not in the contractor’s control and make them a variable expense. Fully understanding your variable costs can help you see where overages might occur and can help you avoid them.

Overall construction costs are often difficult to categorize, but all expenses will fall into one of these two categories. 

Understanding Construction Contract Types

Knowing which contract you’re using can help you be more accurate with your bid and budget. There are a couple of popular types of contracts used in construction: fixed-fee and cost-plus. There are some pitfalls to watch out for when using each type. But, some things remain the same: be thorough, define your scope of work clearly, keep on top of change orders, and include a detailed payment schedule. This can help you manage client expectations and keep your budget on track.

If you haven’t read our article on which type of construction construction contract is right for you, it’s a great start to understanding contracts and which one would work best for your specific project. 

Common Mistakes Creating Construction Project Budgets

A construction budget is simply the breakdown of how much money it will take to start and finish a construction project. The budget can be simple or more in-depth. That’s up to the builder or remodeler. But, the potential mistakes in both are often similar. Here are a few to avoid:

- Don’t underestimate labor costs. Unless all of your subcontractors are on your payroll, you should get bids from each of them. Otherwise, you put yourself at risk of miscalculating. Also, as labor costs fluctuate, so does your budget, unless all of your workers are on your payroll.

- Don’t forget that material costs are variables; you may need to break down construction materials into different types such as concrete flooring, electrical wiring, aluminum roofing siding/sheet metal work, etc. So, again, don’t underestimate. It can be challenging to be super accurate because of the variables involved, so do your research and order your supplies as early as possible to avoid price hikes.

- Don’t forget contingency costs: aka how you account for unknowns during construction. And if you don’t include some cushion for them, you could end up with frustrated clients in the end.

- If it’s a high-dollar project, don’t forget any financing costs. These costs are the interest or fees paid on loans before the project is complete. It’s wise to divide financing costs into three sections:

• Loan financing costs  
• Loan interest rates  
• Prepayment penalty 

You don’t want these things to come out of your pocket.

How to Prepare a Construction Budget for Your Residential Projects

A thorough budget is essential. It allows you to better predict how much money you will need and where the costs may increase. The first task of a project budget is defining the scope of work and completing the bid or estimate. And remember, you’re not reinventing the wheel - there’s construction management software, budgeting software, and templates out there to help you. You can customize the many options you find online, create your own budget template, or use a residential construction budget template like the one BuildBook has created. And don’t forget to:

• Create a cost for each task (including getting subcontractor’s bids)
• Categorize all costs (fixed or variable) 
• Create the budget (refer to your bid/estimate)
• Don’t overlook the small stuff
• Update your expense log daily (enter ALL receipts and mileage, or you might forget!)
• Enter ALL change orders (always get them approved and signed by your client)
• Enter all payments and credits (this will let you know when you need to collect progress payments)

So there you have it…

The amount of effort it takes to create and maintain a construction budget for each project is peanuts compared to the money, headaches, and time it will save you in the long run.