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Money lessons learned the hard way take center stage when contractors start telling stories about how they wrangle troublesome construction budgets. Tales of material cost estimates falling far short. Site visits failing to flag major expenses. Change orders snarling the schedule. Labor costs spiraling out of control...
The list goes on.
A recent QuickBooks survey found estimating line-item construction costs and then operating within a construction project budget are among the greatest challenges in the industry. Almost a third of survey respondents said profits routinely run lower than expected. And slightly more than one-third said two to three wrong estimates for construction projects could tank their business.
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“Holy cow, there are so many things to remember, in terms of setting project budgets and keeping them under control,” says Silvio Dobrovat, a second-generation contractor and president of Hometelligent in the San Francisco Bay Area. “You know, construction budgeting—the contract-writing process, the expectation-defining process—these things evolve year over year over year. We just have to adapt to market shifts, and we’re constantly learning. I’m constantly learning.”
Consider the following 6 Tips for Creating the Perfect Construction Budget Template, and become a master wrangler who avoids common construction budget pitfalls.
Tip 1: Build project budgets and contracts to absorb surprises.
The year 2020 included enough surprises to give even an agile number-cruncher whiplash, nailing an exclamation point to the inescapable need for contingency planning—a pre-construction priority.
For example, in the spring, the lumber industry braced for a COVID-induced slump in demand—only to find itself instead unable to keep up supply as consumers decided in droves to spend extra time at home on repairs and renovations, or to move. Hurricanes in the South and forest fires in the West didn’t help.
As a result, lumber prices nearly doubled from March to mid-September.
“It was just a perfect storm that drove lumber prices through the roof,” says Kim Hibbs, president of Hibbs Homes and a delegate to the Leadership Council of the National Association of Home Builders. The company specializes in luxury custom homes in St. Louis, Mo., and Utah.
Hibbs recommends including a clause in contracts for commodity-based materials, such as lumber and concrete, to avoid taking the full force of pricing fluctuations. Without contractual safeguards for cost control, commodities fluctuations can be especially hard on production builders, who tend to set prices more firmly at the beginning of a project than custom builders.
“Some custom builders,” Hibbs noted, “make sure to categorize commodities in the budget as more of an allowance—if the price goes up, the client pays for that. If the price goes down, the client benefits.”
Tip 2: Sweat the small stuff now to save money later.
As an employer of two in-house employees and a regular client of 40-plus independent subcontractors, Dobrovat considers his full-service general contracting firm small. But it’s big enough to have taught him the importance of managing labor costs and overall project costs.
Include clear project plans in a construction budget template with detailed task lists for every aspect of the job to prevent omissions, Dobrovat emphasized. Make sure to carefully prepare schedules for the arrivals and exits of the various trades on a job site—from electricians to plumbers to tilers to HVAC workers.
He also advises always naming a point person or on-site project manager to supervise the construction process. This helps to keep the big picture in view and prevent scope creep.
“A lot can be lost on inefficiencies, and the bigger the job, the more important that becomes,” Dobrovat says. “Most of our jobs range in time from six months to a year. On a project like that, if delays start adding up and accruing, the bottom line is going to suffer. And that big job that looked great on paper is all of a sudden a nightmare.”
Tip 3: Gather constant data on project costs, and use it.
Whenever Chicago-area contractor Bill Samuel uses a subcontractor for the first time or hires out a particular kind of work for the first time, he takes notes.
“You have them explain in a detailed way what exactly they’re going to do and how they’re going to do it,” says Samuel, owner of Blue Ladder Development, which specializes in rehabbing homes for first-time buyers. “You learn how they handle the work and how they do their pricing. Once you have that, you know what to expect with similar projects. I know basically what all of my subcontractors’ prices are before they even give it to me.”
Using that knowledge as basically an estimator tool, Samuel is able to make quick decisions as he buys real estate at auction. Such purchases generally allow little time to gather input from team members in advance.
That kind of on-the-fly construction budgeting entails more risk than other kinds of building, particularly new construction. As Samuel puts it, "You never know what is hiding behind a wall." But he says his data-gathering habit helps to keep risks more manageable.
He also encourages working with highly specialized contractors as much as possible, as opposed to generalists, because specialists tend to offer more advanced skills and more streamlined processes.
“There are so many nuances with different things in construction,” Samuel says. “But hang doors all day, and, I mean, you'll get to the point where you can hang a ton of doors in one day. You figure it out. And watching that, I think, is a good way to kind of price hack.”
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Tip 4: Budget early and often.
Alan Lefkowitz, founder of New Jersey-based CFO Strategies, finds his company in the throes of helping many clients in the construction industry figure out their budgets for 2021. While the annual ritual remains a standard budgeting practice, Lefkowitz would like to see more construction management companies move toward a routine of monthly forecasting, year-round.
“Because, you know, financial periods are really arbitrary,” Lefkowitz says. “We do annual reporting, and we do quarterly reporting, but business is continuous. Budgeting should be a continuous evaluation, constantly being updated.”
The benefits to constant budgeting, he says, go beyond the ability to keep actual costs on a particular project under control. They include real-time awareness of the company’s current position, including the hard and soft costs required to complete jobs currently underway, as well as insights into the company’s overall strengths and weaknesses.
Insights can be based on such factors as past cost overruns, lags in productivity, cost-benefit analyses of higher-priced subcontractors, and upcoming gaps in work schedules.
Tip 5: Update budgeting tools and processes for more accurate projections.
Using the right tools to accurately track and report budget construction projections results in numbers that help with business planning as much as they do cost tracking, Lefkowitz emphasized.
“You can see what your costs are for your overhead, whether it's payroll, rent, utilities and so forth. Then you can see the bottom line, and you can tell month by month where you need to put work in place to either break even or to make a certain level of profit.”
Lefkowitz advises monthly forecasting, but acknowledges it hasn't caught on as quickly as he would like. Some construction management teams report difficulty finding tools with the right functionality to make it manageable for them, while others perhaps feel tied to older, more intuitive ways of doing business.
“There’s an old adage in construction: ‘If you want to know how I’m doing in construction, I’ll tell you when I’m done.’ But what we're talking about is the ability to look forward, anticipate, and project,” he says. “And that allows management to adjust for changing circumstances, which happen in construction every day.”
Tip 6: Consider the benefits of construction budget software.
Craft the perfect construction budget template by first understanding your company’s key performance indicators (KPIs). For Ismael Valdez, owner of a blended HVAC-plumbing company in Southern California, the top financial KPIs for contractors to track—especially on commercial projects—include knowing your gross profit margin, set overhead, and break-even point.
With help from ServiceTitan and its job-costing software, Valdez knows exactly how much to target in revenue by closely tracking monthly expenses and gross profit. For instance, if your monthly overhead is $1 million and your goal is a 50-percent gross profit margin, then you need to target $2 million in revenue to break even.
It’s like following a detailed roadmap to get to your desired destination.
“Your budget tells you exactly how you’re doing, what you should be doing, and where you should be going,” Valdez says.
Construction budget software helps contractors set prices, estimate material and labor costs, and gain financial insight on overall company performance. From providing accurate job-costing reports and tracking inventory needs to improving cash flow management and growing gross profit margins, budgeting software does the heavy calculating.
ServiceTitan is a comprehensive software solution built specifically to help service companies streamline their operations, boost revenue, and substantially elevate the trajectory of their business. Our comprehensive, cloud-based platform is used by thousands of electrical, HVAC, plumbing, garage door, and chimney sweep shops across the country—and has increased their revenue by an average of 25% in just their first year with us.