When preparing an estimate for a budget there are three components that are critical. They are scope, scope and scope. The budget estimate has to present the right scope for the direct cost of construction, indirect costs of construction and the right markups to apply to them. Even though there may be minimal information and minimal details, the right scope needs to be included in the estimate.
- The direct cost of construction is just that – moving dirt, placing concrete, installing pipe and running conduit. The line items can be as simple as task items such strip site with the area of the site or cubic yards. It can be the break out on mechanical for items such as such as insulation, fire protection, plumbing systems, mechanical piping, HVAC, and temperature controls.
What differentiates the right budget estimate from the wrong budget estimate is the scope determination that goes into the line items. By using a solid basis such as the area of the site or building, anticipated volume of concrete or systems anticipated for the mechanical work in conjunction with historical cost information, the estimator can develop a budget that can be considered the right budget. This budget scope will hold up under the scrutiny of the stakeholders prior to it being approved. But first, a word or two of caution needs to be injected for the reviewers. If the answers you are getting to your questions include “(Name your item) is included with this line item over here”, too many times, it is highly likely you do not have the right budget for the project.
- The indirect cost of construction scope is as important as the direct scope. This includes items such as design fees, legal fees, permits, artwork, furnishings, finance expenses and a host of other line items that are just as critical in having the right budget. Again, each expense anticipated on the project needs to have a line item associated with it for the right budget. What would happen to the budget if the design fees or finance expenses were left out? What areas would be cut to make up for the shortfall? Would the project still be viable?
- The scope of the markups is very important to the overall budget. The estimated costs for the direct and indirect costs of construction need to be estimated with today’s costs. It is then appropriate to add line items for escalation, or cost growth, and contingency for the budget. The direct cost may not occur for two years. Escalation, or cost growth, needs to be applied to the costs due to the overall tendency for costs to increase over time. As another word of caution, the magnitude of cost reductions experienced in the past year is an infrequent occurrence but they do happen.
Contingency needs to be added as a line item in the budget. This contingency is used to cover the scope items that are not identified specifically in the estimate and for scope that develops from the budget to bid time. This is a very important line item and should not be reduced to help keep the budget numbers low.
The above considerations are important. What is equally important is to follow up the initial budget estimate with further estimating during the design period. Unless this is done, the efforts to develop the right budget will be wasted.
