My tips on project budgeting
Normally, I hate disclaimers. However, I do need to point out that in the post that follows, I’ve created a number of made up scenarios. They are just that, MADE UP, a complete fabrication, in no way intended to be representative of a real-life situation. Please use your common sense, and don’t rely on my made up numbers. Contact me instead and I’ll happily try and help you out with some realistic numbers.
Budgeting for your project
We’ve all seen the horror stories on the TV. At the beginning of the episode, the client can’t wait to get started on their project. By the end, they’ve blown their budget out of the water and are wondering where it all went wrong. Budgeting in construction is notorious. But with some simple common sense tips, it is possible to budget effectively.
What is a budget?
First thing’s first, you need to actually decide on a budget. I have never met a client who, when push came to shove, didn’t have a budget for their project. Even if you are fortunate enough to have a bottomless pot of money, there will come a point where you’ll start to question if it’s worth the money you’re throwing at a project. Whatever your project entails, it will have a finite value to you, so you need to figure this out early.
It’s important you understand the difference between budgeting and cost estimating. A budget is a measure of how much you are prepared to spend; the value to you. A cost estimate is more objective. It’s the process of taking an idea and putting a number to it, but results can, and often are, quite different.
More often that not, your budget will be a product of the funds that you have available, but it doesn’t necessarily need to be. For example, a boutique restaurant might consider budget in terms of ROI (i.e. if we invest £X, we can expect to increase sales by Y% and we will get a return on our investment within 3 years). Or, it could be a far more personal decision based purely on what you are prepared to spend to get to your end goal.
Ultimately there is no right way to determine a budget. It will be a process that is tailored to you. If you’re not sure where to start, it might be worth talking it through with a professional that is attuned to your requirements.
The next thing to think about is what’s included in your budget. With any project you’ll have a project budget. The project budget encompasses everything; architect’s fees, local authority fees, services, contingencies, VAT, and of course the construction cost. There may well be more items depending on the project.
The construction budget, is just a part of the project budget, so it’s important that you distinguish between the two whenever the question of budget comes up. The other costs could amount to 30% or more of the project budget, particularly on smaller projects.
VAT is charged at different rates, depending on the project and what is being billed. VAT is beyond the scope of this article, but just know that in most cases, the construction industry likes to work with net figures (i.e. excluding VAT).
At this point, I want to touch on lifetime costs. It’s easy to think only in terms of your initial investment. But you should also factor in lifetime costs. As a simple example, let’s consider a project that requires a new heating system, and let’s say we have two options for the fuel; Oil and Biomass.
For the purposes of this example, we’ll make some assumptions about costs (if you didn’t read the disclaimer at the start of the article, please do it now). So, let’s say the oil-fuelled boiler will cost £2000 to install and will cost £1800 to run for the first year with a 5% increase year upon year. The biomass boiler will cost £15,000 and will also cost £1200 to run in the first year, but the cost is expected to stay about the same (representing a year-on-year reduction in real terms). The biomass boiler also benefits from the Government’s Renewable Heat Incentive, meaning the owners will receive £425 per quarter for seven years.
If we do the calculations, we can work out that after six years, the biomass boiler will have cost less overall, despite the initial investment being three times as much as the oil boiler. Now, if you simply didn’t have the money available, there’s unfortunately not a lot you would be able to do. But, it might be that you have £10,000 in an ISA receiving 2% interest (a bit less than £1500 over 7 years). If the interest stayed at 2%, you might actually be considerably better off at the end of 7 years if you take that money out of the ISA and invest in the boiler!
This is a really simple example. It won’t always be as straight-forward, but it shows that you need to consider both the cost, and the value you are receiving over the lifetime of your project.
What is a contingency?
Quite simply, your contingency is a back-up fund to cover any unforeseen circumstances. In my opinion, people almost always underestimate how much contingency they’ll need and that’s where they can start to get into difficulty.
How much contingency do I need?
The amount you should set aside is really dependant on the project in question. If you’re building from scratch on a ‘virgin site’, the chances of any unforeseen things cropping up are much less than say remodelling a house built in the 1950s. However, things do still crop up. There are examples of people finding ancient burial sites and unexploded bombs once they start digging! These are extreme examples, but the point is, even if you are building something relatively straight-forward, you should still have a little spare. As you get closer to the end of a project, the risks start to greatly reduce, so if you still have your contingency, maybe then you can consider treating yourself to a few upgrades or extras!
For every project, the risks need to be weighed up before making an assessment of how much contingency to budget and you should really talk to your architect about it. However, as a general rule-of-thumb, I would suggest you budget at least 10% of the estimated construction cost for any kind of new-build project, up to 20% + for a complex project, such as one involving a listed building or a site of archaeological interest.
Setting your budget
To summarise, you need to set your budget early, and stick to it. Don’t fall into the trap of estimating the cost and then using that as your budget, or worse yet, not setting a budget at all. If you do, you’re missing the point, which is to ascertain the value you place on the project, not the builder or the architect.
Make sure you understand the difference between the project budget and the construction budget, and try to come up with a figure for both.
Lastly, make sure to include enough of a contingency. 10% of the construction cost is the absolute minimum, but for lots of projects, you should allocate more.