The ultimate guide to construction budgeting in 2023

Construction budgeting is important to the building process, no matter the size of the construction company or the scope of the project involved.

Not only does budgeting help builders stay on track financially, it also helps save administrative and construction time in the long run, which leads to savings in project costs. An accurate and detailed construction budget not only helps ensure current jobs are profitable, it helps ensure builders can take on more jobs in the future.

The process doesn’t have to be difficult, but it’s important to make sure builders have a clear understanding of what it is, why it’s important and what’s included to be successful in construction budget management.

What is a construction budget?

A construction budget is a cost estimate or a financial plan that outlines the expected construction costs and expenses associated with a project. It serves as a guideline for allocating funds and resources throughout the entire construction process, from inception to completion.

The construction budget typically includes various components such as:

• Labor costs
• Operational costs
• Material costs
• Equipment and machinery costs
• Permits and fees
• Design and architectural fees
• Site preparation expenses
• Subcontractor fees
• Contingency budgets
• Overhead costs.

To develop a construction project budget, a detailed analysis of the project is performed. It takes into account factors such as the scope of work, project specifications, building codes and regulations and any unique requirements or challenges. 

Why is construction budgeting important?

Construction budgeting is important because it helps control costs, supports strong client relationships, guides decision making, highlights risk and provides clear documentation for all involved to work from.

1. Controls costs and ensures profitability

Just like a personal budget, budgeting in construction is meant to help ensure the project owner understands each expense that goes into a build. Using this knowledge, the project manager can ensure that every single project expense is attributed to the correct job and invoiced accordingly.

This saves hidden costs for builders, who might otherwise end up paying for expenses that slipped through the cracks out of their own operating expenses. In fact, it’s proven that construction companies that use a sophisticated construction budgeting tool can actually save thousands per construction project.

“It all adds up with the receipts, small expenses that we paid for with a credit card or the things we didn’t add into the spreadsheet,” Amanda Worlow of Casey Construction Company in Lago Vista, Texas said. “Those items were forgotten about and wouldn’t be invoiced to the client. That’s real money!”

2. Establishes good relationships between builders and buyers

When builds are completed at or under budget, everyone can end the contract happy.

Home builders are able to show that they’ve completed a project under budget, which shows as a profit on their bottom line.

When a build stays within the estimated expenses, homebuyers are happy they don’t have to pay more than what they were expecting to get the job done.

With strong client relationships, builders can increase the odds of gaining a referral or working with the homebuyer again the future.

3. Guides strategic decision making

Construction budgets are an invaluable tool to use when making decisions for a project. Working from an overall budget total, construction contractors can limit expenses, ensuring each cost doesn’t exceed the number allowed in the budget.

For example, a budget can guide decisions on what appliances are selected for a home, the grade of materials the builder procures and even the level of skilled general contractors hired for a job.

4. Highlights potential areas of risk

By monitoring construction budgets periodically throughout a build, project managers can highlight potential areas of risk before they become a big issue – or expense – for the homebuyer.

Unexpected roadblocks are not uncommon in the construction industry. Ground and weather conditions, unexpected delays with permitting and zoning and even floorplan requests can lead to change order after change order. Using a construction budget as a guide, project managers can keep an eye on when sections of the budget are getting close to running out. From there, adjustments can be made to minimize cost overruns and budget increases.

5. Provides clear documentation for all involved

A detailed, double-checked and approved budget is also great for one more thing: establishing a paper trail.

Even in the best home builder and homebuyer relationships, tensions can build. This is especially true considering the dollar amount tied to the construction budget. It’s estimated that buying a home is the most expensive purchase 99% of the population will make in their lifetime.

On top of that, there are a lot of moving parts to a construction timeline. It’s easy for details to get lost in the shuffle.

A construction budget can reduce confusion and establish clarity when building a home. When change orders do come up, both parties can examine the budget in detail to understand why the change is needed, what else might be impacted and how overages can be minimized going forward.

Types of costs in construction budgeting

There are two main types of costs used to create a baseline budget in construction: direct and indirect. Direct costs and indirect costs can each be broken down even further into fixed or variable costs.

Direct costs

Direct costs include every cost that can be individually tied to a specific building project. An example of a direct cost in construction budgeting could include construction worker wages, subcontractor fees and the lumber required to frame the build.

Direct costs impact the profit margin of each individual construction project.

Indirect costs

Indirect costs include every cost a construction company experiences that can’t be directly tied back to a specific construction project. Examples of indirect costs in construction budgeting could include administrative wages, safety equipment, rent or utility costs.

Indirect costs have more of an impact on your company’s profit margins.

Fixed costs

Fixed costs stay the same no matter the scope of your build. For example, if you rent an excavator, it doesn’t matter if you use that excavator on one job site or five – the cost of the equipment rental stays the same.

Variable costs

Variable costs change depending on construction scope. Construction supplies, for example, increase in cost as you increase quantities ordered. Overtime labor costs also typically fall into this category, as it increases or decreases based on project demand.

What costs do you need to track to make an effective construction budget?

Builders should track every single cost within their construction budget to get an accurate picture of profitability.

Direct or indirect, every single expense impacts either the profitability of a project or the profitability of your company as a whole. You need insight into both to effectively manage your business’ financial health.

A project-specific construction budget should include all direct costs of that build, plus the amount of indirect costs you can allocate to the job. This is where a job costing tool becomes invaluable for a company, as it can help allocate things like overhead, insurance and utilities down to each specific job.

A construction budget example might look like this:

• Site Preparation
  • Permitting
  • Excavation
  • Utilities
  • Foundational pouring
• Framing
  • Structure
  • Structure fill
  • Window installation
  • Door installation
• Mechanicals
  • HVAC
  • Plumbing
  • Electrical
• Roofing
  • Venting
  • Installation
• Exterior
  • Masonry
  • Insulation
  • Siding
• Interior
  • Drywall
  • Carpentry/Masonry
  • Flooring
• Appliances
• Finish
  • Trim
  • Paint
• Closeout
  • Inspections
  • Occupancy permitting
  • Subcontractor closeout
  • Equipment closeout
  • Punch list
• Indirect expenses
  • Overhead
  • Rentals
  • Utilities

The way you organize your budget can differ based on your specific budgeting approach. Plus, each category can be broken down even further to itemize things like materials and labor.

What’s really important in the budgeting process is to break your total budget down into cost codes. This creates an easy-to-read document that can highlight if you are over or under budget in each area of expense.

5 steps to creating a construction budget

There are five key steps to take when creating a construction budget.

Step 1: Setting up the foundation of your budget

Before you ever start the budgeting process for a construction project, you first need to make sure you have the foundation in place to support the process. That starts with cost codes. Setting up a clear cost code system ensures that every single expense you take on has a place to “live” within your budget. That means nothing gets lost in the shuffle when invoicing customers.

From there, it’s equally important to make sure you have a way to create construction estimates, track and compare actual expenses and manage bills and purchase orders. Having these financial foundations in place ensures your budget is set up for success from the start.

Step 2: Data analysis and project research

As you begin work on a new contract, approach the work backed with real-time data.

Use a historical comparable project budget as your guide. If certain cost codes went over budget – or items were missed during billing – make sure to make adjustments to them on your new build. Examine zoning or permitting requirements that are specific to the build’s location. Meet with the homebuyers to map out budget-impacting details like timeline and customization requests.

With this information and forecasts, you should be about to rough out a draft budget for expenditures.

Step 3: Fine tune the numbers

Working from your draft budget, begin making the more minute changes.

Contact your suppliers and subcontractors to determine timeline feasibility. Check on pricing of any custom requests and pull secondary quotes. Finalize floorplan and design choices and start hiring and scheduling construction workers.

This work should be able to get your construction estimate in good shape for client sign-off.

Step 4: Pre-construction checklist and documentation

This step is really all about checking and double checking your work. Flag any potential issues with the project plan, like if there are issues securing permits or you anticipate cash flow shortages. This may impact the cost of certain items or the pattern of invoicing and billing. 

The more thorough a construction contractor can be in this step, the less chance there is for roadblocks to stall the budget later on.

Step 5: Contracts and construction

It’s important to revisit your construction budget often throughout a construction process. At the very least, a budget should be reviewed in detail before any invoice is sent to a homebuyer for payment installments.

A constant review of a budget also helps maintain client trust. As project managers regularly communicate with homebuyers, they can give accurate summaries of the physical progress of construction alongside the financial status of the project.

Budgetary review also helps ensure the company as a whole can accurately manage cash reserves to fund other projects that may be in progress at the same time.

How Buildertrend construction budgeting software saves you time and money when budgeting

An accurate construction budget can make all the difference between a project that’s completed on time and within a set cost cap, and one that is a financial drain on a construction company’s bottom line.

That’s why Buildertrend has built integrated financial tools within our construction project management software.

It connects cost code systems with estimates to establish clear construction budget breakdowns. It helps categorize your expenses using expert job costing features. Combined with extensive reporting tools, integrations with accounting software and easier ways to collect on payments, it gives you the full picture of your financials down to every last penny.

When it comes to profitability, that’s security construction businesses can’t afford to miss out on.

Are you ready to get your construction budgets organized? Let’s talk about your numbers.

Want to learn more about Buildertrend? Visit our frequently asked questions.

Construction budgeting FAQs

Get answers to the most common construction budgeting questions.