Building a construction budget – Improve cost control in your construction projects

Cover photo for Knowify blog: Building a construction budget – Improve cost control in your construction projects

Across the board, construction and contracting businesses are feeling the impacts of global supply chain disruptions and labor shortages firsthand. According to an early 2022 news release published by Associated Builders and Contractors, “overall construction input prices are up 22.3% from a year ago, while nonresidential construction input prices have increased 23.2% over that span.” And with business owners trying to navigate these volatile economic waters, staying on track with your construction budget can feel overwhelming, if not impossible. Here are five strategies to improve cost control in your construction projects, and regain power over your construction budget.

What is cost control in construction?

Traditionally, cost control in construction refers to the ongoing process of managing costs – such as materials, labor, overhead, and change orders – associated with a project in order to improve profitability. The process of controlling costs helps project owners and managers deliver projects on time and on budget while increasing the revenue generated from that project.

Why cost control is important

Aside from increasing overall profitability, cost control in construction is critical for a successful business. By creating a strong reputation for hitting projects within the scope, budget, and timelines initially outlined, your company is more likely to:

  • Win future contracts
  • Improve your bid-hit ratio 
  • Discover current processes that can improve
  • Remain agile through unexpected challenges

How to budget with cost control in mind

1) Keep material prices up to date

Construction material prices are in flux now more than ever, so keeping an eye on the market is crucial to staying within your budget. Outside of noticing changes in your current prices, keep an eye on your supplier’s competitor rates. Don’t be afraid to negotiate and renegotiate, leveraging your relationships to improve your rates by requesting free shipping, seasonal pricing, and other discounts. Another way to keep construction material prices low is to form a buying group and opt for wholesale purchases wherever possible. These strategies will give you greater control over pricing based on purchase quantity and frequency.

2) Get your construction budget down to the line item

The more you break down a budget, the better you’ll become at controlling expenses. Take into consideration the exact prices of materials, labor, overhead, markup percentages, and more when creating each phase of your project. This also provides intimate knowledge of each phase of the project and greatly reduces your chances of missing an important step or cost that could eat at your overall profitability. Additionally, by creating pre-budgeted line items, you’ll have greater control and confidence throughout the quoting process should clients have questions about their initial quote. While it’s optional for you to choose sending a line item or lump sum quote, knowing how the quote breaks down is always an advantage for your team.

3) Build in contingency and allowances

With any project, there’s a degree of uncertainty as to how smoothly things will go. Among many other roadblocks to account for, there’s the potential for price increases, errors in scope, incomplete designs, weather, and technology or mechanical complications that can easily drive project costs up. And while advanced planning through allowances can go a long way, it’s best to have a financial cushion built into your construction budget. This is known as contingency, or an amount added into a construction quote that accounts for unpredictable and uncontrollable circumstances throughout the duration of your project.

While allowances are typically used to create flexibility in material selection or project scope at the onset of a project, contingency creates flexibility in time delays, malfunctions, and economic or market shifts. By including both allowances and contingencies in your initial contract and budget, you’ll increase profitability and remain more liquid throughout a project.

4) Increase budget visibility and participation

While sharing budgeting information with lower level employees helps everyone stay within a designated budget, there’s significant benefits to a style known as participative budgeting. Participative budgeting is when lower levels of management, such as foreman or crew leads, have an influence in the creation of a budget – not just staying within an imposed budget. Direct benefits to participative budgeting include:

  • More precision in creating budgets for each phase of a project
  • Greater awareness into frequent challenges crew leads face
  • Extra sets of eyes to catch errors or missing information
  • Increased levels of ownership in foremen and workers
  • Improved trust in business leaders by lower level employees

Participative budgeting can come in many forms and you can implement it to varying degrees. The key is to find the sweet spot for gaining access to more information without slowing down processes too much.

5) Ditch the construction budget template in excel

Aside from being time consuming and challenging, using a construction budget template in excel can be a massive risk. Each time a file is downloaded, there is the potential for outdated numbers and information to be passed on to others. Unless a cloud-based system is employed and you can be certain nobody downloads their own offline version, they create opportunities for delays, overspending, and miscommunication. 

The best way to avoid overspending and the spread of misinformation is to use a cloud-based construction business management software. This allows your information to update in real time, as well as increase your team’s accuracy and accountability.

Gain confidence in your project budgets

Improving cost control in your construction budgets doesn’t have to be an overwhelming task. While there are many ways to control costs and increase profitability, the first step is to understand where you currently stand and identify your greatest financial weaknesses. Utilizing business management software, like Knowify, can help you visualize areas of improvement, and, ultimately, set you on a path towards better cost control in your construction budgeting.

To learn more about how Knowify can help you with cost control and budgeting, schedule a demo with a Knowify expert, or start your free trial today!