An essential part of owning a construction business is staying on budget. While there are challenges for a business owner in this industry, creating and maintaining a better budget is possible. These tips can help you do so.
Why Construction Budgeting Is Difficult
Before getting to the suggestions, let’s start by pointing out the potential problems when it comes to keeping a budget on construction projects. Firstly, the costs of a build can quickly increase from what was initially thought, making it hard to stay within the costs originally calculated.
Secondly, construction projects can go longer than anticipated, which delays the return on investment from the finished project, along with extending certain costs. There are several reasons why the project might take longer than planned, such as unforeseen labor shortages and holdups with approvals from gas companies or other organizations.
Thirdly, clients may request changes to a building project part-way through it, requiring your team to redo steps or pivot in ways that were not expected. In addition to requiring extra effort by your team to meet the client’s new demands, additional funds are likely required that were not factored into the budget.
With all of this in mind, here are tips to help you stay within budget even when the challenges mentioned above (or other ones) occur.
10 Tips to Improve Your Construction Business Budget
Whether you are finding it hard to keep track of the numbers when the construction project changes in any way halfway through or find another part of budgeting difficult, these tips are here to help you.
1. Create a Baseline Budget at the Start
While the budget for the build can certainly change along the way, having a baseline at the start is important or the risk is that you could overspend without realizing it’s happening until it’s too late. The financial risk that comes with that is huge so it’s best to avoid it. Creating a baseline budget before construction even begins involves determining what the project entails, from deliverables to what each step involves, and collecting estimates from architects and others you hire to estimate labor and material costs, as well as energy costs, more accurately. You’ll want to organize the budget properly from the start, which takes us to the next point.
2. Categorize the Budget
Divide the budget into cost categories to help you stay on top of it easier. If it is unorganized, it’s harder to figure out where you’re at financially during the build. Among the top expenses will likely be labor and building materials, with site costs, such as excavation, equipment rental, and legal costs, such as contracts, being some of the other expenses, along with several others. Be sure to set aside a certain amount of money for unanticipated expenses, given the common challenges discussed earlier. That is often called a contingency fund.
3. Have a Monetary Safety Net
A contingency fund is typically a good idea as unexpected costs can absolutely come up. Having this financial protection as a business owner helps you continue moving forward on the project without lowering quality or having to extend the deadline for the build. How much money you put into this safety net depends on many factors, including the project size, risks involved, and whether there are several unknown costs. To be clear, this fund is not something to dip into unless you have to. Set rules around when you will use it so there is no temptation to take money out when it’s not essential. Having this type of fund can give you peace of mind.
4. Stay on Top of Cash Flow
Regularly reviewing the money coming in and going out is easier when it’s all in one place. That’s where tech comes in handy to save you the guesswork. With reliable job costing software, you can see at a glance the up-to-date costs and profitability of your trades project as a contractor. See your current profit or loss percentage, sort revenue by invoices and WIP, and know the exact amounts you’re spending on materials and labor. That gives you a clear picture of where you might need to make cuts to stay within budget, helps you keep an eye on spending and other benefits. Monitoring cash flow is a lot easier now with this useful tool.
5. Research Financing Options
While there are many ways to potentially get funding for the build, you want to get the best one for your situation. Researching the options can help you avoid large-interest sums that come with some loans, as that extra expense could jeopardize your budget. Whether to choose loans or equity depends on your situation, and larger projects may require a specialized loan rather than a line of credit. If you intend to get a traditional construction loan, shop around for lower-interest options and read the repayment terms carefully. Other common types are loans through the US Small Business Association and, for commercial property, commercial real estate loans.
6. Regular Budget Review
Do not assume that everything is going according to budget, given the fluctuations that are inherent to the trades industry. Regularly reviewing your budget and adjusting it according to where costs and revenue are at can help you stay within budget, avoiding making decisions that put you in debt. You might notice overspending in a certain area, for example, and catch it early to have time to make adjustments before it gets out of hand. As for what adjustments to make, that depends on the issue. For example, if workers are not meeting expected timelines, then you might implement training to improve efficiency.
7. Manage Payments Effectively
Cash flow problems are not something you want to contend with. So, make sure you handle payments better than ever by setting clear terms in your contracts with clients and any subcontractors. That includes clearly laying out payment amounts with the client for each milestone reached. Attaching payments to milestones rather than based on a bi-weekly or monthly basis might make more sense for your project, so it’s something to consider. It also can be a good idea to tell subcontractors about any budget limitations at the start of the project so they know what to expect.
8. Negotiate Pricing for Subcontractors and Suppliers
Just as you shopped around for the best financial rates, you can do the same with subcontractors and companies supplying you with building materials. Rather than going with the first person or company you come across, do your homework to get the one that offers the most value for the price point. That may involve negotiating terms to get ones that better suit your budget. This effort is not a waste of time as you can get lower prices. Unfortunately, negotiating can be even more challenging for women business owners who feel they are not being taken seriously. Stand firm in your worth, know what you want, and brainstorm potential scenarios before heading to the negotiation table to help achieve better results.
9. Stay Compliant Throughout the Project
Compliance can make or break your build. That makes it something to pay attention to at every step of the construction project. If you don’t adhere to regulations, that jeopardizes your business as it can damage your reputation, halt the project temporarily or permanently, and cost you money in fines. That can take you over budget. To avoid this misstep, do regular inspections and follow the local safety guidelines. Compliance also applies to following labor laws, including providing workers on the job site with breaks and using legally binding contracts with those you employ and the client. Also, adhere to the application processes for permits so that nothing gets stalled, as that could lead to unexpected costs.
10. Keep Track of Material Prices and the Market
If building material supplies increase along the way, your project will become costlier and, in turn, potentially exceed the estimated budget. The prices of lumber and other build materials can increase or decrease as the market fluctuates, so regularly monitoring the market is generally a good idea. It may be ideal to lock in prices with suppliers to prevent higher costs down the line if you foresee increases in the market. As for how to tell if price hikes are coming, many suppliers have newsletters to update you on market trends, so it may be worth signing up for those alerts.
Concluding Words on Better Construction Budgeting
As a business owner in the construction industry, you are working in a fast-paced environment that is highly susceptible to change. That makes budgeting more difficult than in some other sectors. However, it definitely is possible to stay on top of finances and within the price range you want. It requires regularly reviewing the baseline budget that you spend considerable time putting together, negotiating lower prices with those you work with, and managing cash flow better with software. Categorizing the budget, monitoring the market, and having a contingency fund can all help you be more effective financially.