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Estimating, Finance, Risk Management

A Detailed Guide to Commercial Construction Project Costs

Read time: 4 minutes
Published: September 19, 2023
Last updated: October 03, 2024

Effective budgeting and estimating are vital for the success of any commercial construction project as they lay the foundation for financial stability and project efficiency. From the moment a project begins, managing costs involves more than just setting a budget; it requires a comprehensive understanding of the various expenses that contribute to the project’s overall cost. Commercial construction projects typically involve several variables that can impact costs, including materials, labor, equipment, and unexpected contingencies.

A well-structured budget not only helps you allocate resources appropriately, but it also plays an important role in preventing cost overruns, managing cash flow, and ensuring that the project is completed within the financial constraints set by stakeholders. Proper budgeting empowers project managers and stakeholders to make informed decisions, anticipate potential financial pitfalls, and implement strategies to address those pitfalls proactively. Using tools such as construction budgeting software can streamline this process, making it easier to track and manage expenses efficiently.

In this blog post, we will explore the different types of costs commonly associated with commercial construction projects. Additionally, we’ll offer practical tips and best practices for managing your budget effectively, from initial planning through to project completion. No matter your role in the project, understanding these elements will help you navigate the complexities of construction budgeting and contribute to the successful execution of your projects.

What to Include in a Construction Project Budget

A comprehensive construction project budget can be broken down into three main categories:

Direct Costs

Direct costs are expenses directly linked to the construction process. These include:

  • Material Costs: The cost of all materials required for the construction project
  • Labor Costs: Wages and salaries for workers directly involved in the project
  • Equipment Costs: Expenses for renting or purchasing construction equipment and machinery

Indirect Costs

Indirect costs, also known as soft costs, are not directly tied to the construction activities but are necessary for the project’s completion. These may include:

  • Bonds: Financial guarantees such as bid bonds, performance bonds, and payment bonds.
  • Insurance Coverage: Coverage for risks and liabilities, including builders’ risk insurance, general liability insurance, and workers’ compensation insurance.
  • Preconstruction Costs: Expenses incurred before construction begins, such as permits and architectural fees.
  • Operational Costs: Costs related to project management and administrative functions.

Profit

Profit is the amount earned from a project after subtracting all costs. It reflects the financial gain from completing a project.

Each construction project is unique and will have its own set of costs to include in the budget. Below is a list of potential direct or indirect costs that could be part of your construction project:

Bonds

Bonds play a crucial role in managing financial risks associated with construction projects. They protect project owners, contractors, and other stakeholders by ensuring that certain financial obligations are met. Here are the main types of bonds a sub may need:

  • Bid Bond: Ensures that the contractor will accept the job at their bid price and covers costs if they withdraw.
  • Performance Bond: Guarantees the contractor will complete the project as specified, protecting the owner from financial losses.
  • Payment Bond: Ensures that all subcontractors, suppliers, and workers are paid, protecting against non-payment claims.

Note: The Miller Act requires federal construction projects over $100,000 to have payment and performance bonds.

Insurance

Insurance is essential for managing and mitigating risks in construction projects, providing a safety net for unforeseen events and protecting against potential financial losses. Here are some key types of insurance that are crucial for construction projects:

  • Builders Risk Insurance: Covers losses, theft, or damage to materials and equipment during construction.
  • General Liability Insurance: Protects against bodily harm or property damage claims related to the project
  • Commercial Vehicle Insurance: Covers vehicles used for business purposes, including trucks and construction vehicles
  • Workers Compensation Insurance: Provides benefits for employees injured on the job
  • Umbrella Coverage: Offers additional liability coverage beyond standard policy limits

 

Consulting and Inspection Services

Hiring consultants and inspectors is crucial for project success. Third parties you may work with include:

  • Engineers: For structural, mechanical, and electrical engineering services
  • Surveyors: For land and property surveys
  • Architects: For design and planning services
  • Testing and Inspection Professionals: For quality control and compliance checks

Unforeseen Costs

Unforeseen costs are unexpected expenses that can arise during construction. These might include:

  • Material Shortages: Price increases or delays in obtaining materials
  • Labor Shortages: Increased wages to attract skilled workers
  • Weather Delays: Additional costs due to adverse weather conditions

It is usually recommended to include a contingency fund in your budget to handle these unforeseen expenses.

Debt Financing

Debt financing can help manage cash flow and cover project costs.  The various types include:

  • Material Financing: Loans or credit for purchasing construction materials
  • Labor Financing: Funding for labor costs
  • Equipment Financing: Loans for acquiring construction equipment

Be sure to account for debt payments in your project budget to help offset the cost of using these forms of capital and project your margins.

 

How to Manage a Construction Project Budget

Once you have a clear understanding of the various costs involved in your construction project, you’ll want to focus on how to manage these expenses effectively. Implementing a well-structured budget is a continuous process that requires careful planning and monitoring throughout the project lifecycle. To ensure that your budget remains on track while you try to navigate the complexities of managing your finances, here are the phases you should include in your internal processes:

Research and Analysis

The primary goal of your research and analysis is to identify all costs and revenues associated with your project. Construction budgeting software can assist in this phase by organizing financial data, creating timelines, and predicting potential cost overruns based on historical data and real-time inputs.

Pre-Construction Planning

Create a comprehensive budget and timeline by incorporating insights from your research. Ensure that all potential costs, including bonds, insurance, and profit margins, are included, and plan out your payment schedules. Establish a robust documentation system to keep track of all financial records and changes throughout the project.

Analyzing and Tracking Costs During Construction

Continuously monitor and analyze expenses to keep your project within budget. Track individual costs closely and adjust your estimates based on real-time financial data. This ongoing analysis helps you identify any budget elements that may fluctuate throughout the duration of the projectand allows you to refine future cost predictions more accurately.

Analyzing Budgets After Construction

Once the project is completed, review the budget to extract valuable lessons for future projects. Analyzing completed budgets provides insights that can enhance your estimating accuracy, scheduling efficiency, and overall project management strategies. Construction budgeting software can help analyze past budgets and expenses, offering data-driven insights that can improve your estimating accuracy and overall project management.

Getting On Track—and Staying on Track—with Construction Budgeting 

Navigating the financial landscape of a commercial construction project can be complex, but mastering effective budgeting is key to achieving success. From understanding the diverse cost categories to employing advanced construction budgeting software, a well-managed budget ensures that resources are allocated efficiently and potential pitfalls are addressed proactively.

Effective budgeting involves more than just estimating costs; it requires thorough planning, regular monitoring, and adaptive management. By breaking down costs into direct, indirect, and profit categories, and by considering elements such as bonds, insurance, and unforeseen expenses, you can create a robust financial plan tailored to your project’s needs.

Utilizing construction budgeting software can streamline this process, providing real-time insights and enhancing accuracy. This technology supports detailed tracking and analysis, enabling you to adjust budgets dynamically and stay on top of financial performance throughout the project lifecycle.

Incorporating these best practices and leveraging technology can significantly improve your project’s financial management, leading to smoother operations and successful outcomes.

About Billd: At Billd, we provide a payment solution that enables commercial construction contractors to free up cash for material purchases while enjoying the flexibility of 120-day payment terms. You get financing for commercial materials upfront with the freedom to pay it back at your own pace. Learn more about how we can help eliminate your company’s cash-flow problems so you can win more bids and grow your business.

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FAQs

Why is it a problem if owners are still working long hours at the $25M+ stage in construction subcontracting businesses?

Once companies arrive here, owners should begin to kick their feet up and they aren’t working 60-hour weeks. At most, they’re signing checks and taking cursory looks at the finances since they’ve created a team to manage the day-to-day. The owner putting out fires should be a thing of the past, and if they’re still doing it, it likely signals they’re having problems delegating.

What is the biggest pain point for construction companies making over $40M+ a year?

One of the owner’s biggest pain points at this stage is their ability to keep the business invigorated with the culture and vision they initially outlined. The company can have more subcultures and siloes, and quality control becomes difficult. 

What operational changes should a construction company make at $40M+?

- Technology to Automate Where Possible: With a larger team and established processes in place, evaluate if there are ways the business can automate redundant work or help employees streamline their processes. Using technology instead of performing tasks manually can also help establish consistency. 
- Develop an Exit Strategy: This is another conditional recommendation. If the owner plans to exit, they should develop that strategy as many years in advance as possible to get ahead of any potential hiccups. Exit strategies take many years to accomplish. Don’t underestimate the work that needs to be put into this process
- Continue to develop leadership and employees: As in any stage, training is critical to keep employees sharp. Tap into younger talent who show the capabilities of being a great leader and nurture those skills immediately.
- Full-time cost control department: Projects are larger and more complex, which can result in far more profit loss on projects. Consider having a full-time cost control staff properly trained in both estimating and project management and have them dedicated to continually monitoring costs on projects. 

Hayden AbrevayaProduct Marketer

Hayden has worked in the heavy civil construction industry in estimating, project management, and concrete production. He is an avid learner and lean construction proponent who believes that the construction industry is ready for technological advancements in all aspects of the construction process. At Billd he uses his skills to help contractors grow their companies by providing them the information they need to win more bids, and take on more projects.

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