Creating and Managing a Construction Budget
Eric Fleps
“How much will it cost?” – That without fail, is the most commonly asked question when a client is considering whether or not to build a new self storage facility. It’s seemingly a simple question, so of course it should have a simple answer, right? Unfortunately, that is almost never the case. The process of getting an accurate budget pulled together for a new project should begin with far more questions than answers.
So, what questions should I be asking you might be thinking? The first place to start would be to examine the high level items that can dramatically influence the cost of any given project. These can be boiled down into a few primary buckets: 1. The market or region the project will be built it, 2. Site specific premiums, 3. Building size and shape, 4. Municipality or owner driven specifications.
1.) The first is the market or region in which you are building. Regional cost escalations are due to a variety of factors such as volume of labor force, union presence, availability of raw materials, etc. and will play a tremendous role in the cost of your future facility whether you like it or not. Regional cost escalations vary widely depending on the market. Something that costs (x) in Dallas may fetch a 25% premium in Seattle. It is important to identify the cost premium associated with your market as one of the first steps in narrowing down costs.
2.) Once you have gotten past your market selection and you are examining individual parcels of land, you need to start thinking about any site-specific challenges or premiums that must be evaluated. What kind of soils exist on the site? Is there rock? Is there groundwater present? Do we have to import or export dirt? Will there be retaining walls? How will we deal with storm water? What is the size of the site? Are there any environmental challenges? All of these questions should be answered, and their answers will impact your cost.
In addition to site specific challenges, you must consider the location specific design requirements. Some big ones to consider: Are there seismic requirements? Are there high wind or hurricane requirements? What is the snow load? What climate zone am I in and how will that impact the building envelop? The answers to these questions will also play a role in creating your budget.
3.) Once you start to test fit and site plan on an actual parcel, it’s important to know that the size and shape of your desired building will make a difference in your budget. The larger the building, the greater your economies of scale. The number of stories will impact structure type, fire requirements and more. The piece of land may dictate that your building is an inefficient shape (think about a ratio of façade wall to floor area). Additionally, the proximity of the building to the lot lines will have building code implications that impact the cost of the project.
4.) One last thing to consider are any specifications that may be driven by the local municipality, or by you – the owner. Will the façade be stone? Or metal panel? How much glass will be on the exterior of the building? Are landscaping requirements above and beyond the norm? What kind of office specs? Hallway systems? Average unit size? Number of elevators. All these items should be evaluated and discussed as you are working to define a budget.
Once all the major cost influencers have been evaluated and understood, an actual budget can be developed. To avoid some of the commonly made budgeting mistakes in this process, for all the reasons listed above, avoid using per-square-foot costs universally. The reality is that no two projects on different sites are exactly alike. Make sure you don’t forget to account for unforeseen contingency or tax issues and have remembered to consider all of the possible scope gaps such as signage, impact fees, and low voltage.
It is highly recommended that you work with a general contractor to develop a budget for your project. A budgetary price can be based on whatever information you are able to provide. That can be as little as the region, total square-footage, and stories you want to build. Or as much as a site plan, elevations, floor plans, a Geotech report and a survey. The key here is that the more information you have gathered, analyzed and shared, the more accurate your budget will be.
Once you have a good budget developed and have decided the project still makes sense, it’s time to move toward getting a firm price for construction. In order to get to a firm price, you will need to decide that manner in which you plan to ultimately procure design and construction. There are two widely used procurement methods to consider: the traditional “plan and spec method,” or the “design-build” method.
Plan and spec, the traditional process, requires the developer to hold separate contracts for each design consultant and contractor, which can exacerbate the opposing goals of these development team members. The result is an amplified risk of delay and increased cost, with the owner commonly caught in the cross fire between designer and contractor for drawing errors and coordination issues.
Design-build is an alternative project delivery method, in which an integrated design-build team, bound by a single contract, works with the project owner to provide turnkey design and construction services. Because the design-build team acts as one entity from project concept to completion, this methodology provides faster delivery timelines, reduced risk, lower overall cost, decreased burden to ownership, and eliminates any opposing goals between design team and construction team.
So, what does my contractor need to provide a hard price? The chart below breaks it down for both traditional contractors and design-builders.
Under a design-build contract, the owner can solicit a turnkey price before spending significant dollars on design. Usually the items needed for an entitlement package are all a design builder needs to produce a firm price. The design-builder will take that information and connect the dots by completing the conceptual design in-house, enabling them to accurately price the project and provide a firm, turnkey price. This allows the owner to mitigate hard cost risk prior to spending money on construction documents. Savvy developers will work due diligence, site planning and soliciting design-build pricing into their land option period for a clear picture of total project cost before committing major dollars on land.
In a design-build project, cost risk is limited to true unforeseen conditions and municipality or client-originated scope changes. The single contracting entity alleviates finger-pointing between contractor and design team and holds itself to a performance specification in the contract. The result is elimination of change orders from design and/or code issues.
Best practice is to involve the design-build firm early in the process, allowing it to drive design decisions that can reduce the overall project budget prior to over committing to cities or 3rd parties. The design-builder will manage the necessary objectives needed to reach the firm project price and maintain a thorough understanding of every project variable.
If you have solicited multiple numbers from contractors, the last thing to consider is getting everything apples to apples. Has everything been accounted for and are all contractors including the same scope? This is the final step to insure you are ready to choose a contractor and break ground on your project!
“How much will it cost?” – the answer is never as simple as the question. Take time to consider each step and you will find yourself breaking ground with a much clearer picture of total project costs!