Holy smokes, this is a huge topic, and there’s a lot to say. I have seen the hurt firsthand in client’s eyes when you sit down in a budget meeting and tell them how far over budget the project has gone. It’s a brutal feeling. There is a feeling in that room that says “I trusted you, I told you how much I had to spend, and you didn’t respect that.” Now that isn’t always true, but that’s how it FEELS, and in that moment, it’s gut wrenching for everyone. This topic is a passion of mine, and has been ever since I started in this business, and it all stems back to a common saying in construction that I absolutely HATE. “Well, it always costs more than you think” or “Budget for 30% more than your budget.” I don’t like these at all, because it doesn’t have to cost more than you think. Yes, I will be the first to acknowledge that construction projects are very complex undertakings, and can be difficult to execute well. However, construction projects are built from construction drawings, and unless those drawings change in a substantial way, blown budgets are mostly a result of one or both of these two things: laziness and ignorance. Hot take there, I know. Let me explain.

How It Works

Construction projects as they relate to budgets can be broken down into two phases: The Budget and The Work. The Budget is essentially the result of The Estimate, which is conducted pre construction, and is a quantifying of all costs associated with the project. This estimate, once approved by the client, becomes the working budget for the project. For the layman, we’ll examine this whole topic through the lens of building a small garden shed in your backyard. The next phase is The Work, where the work is carried out and the actual costs are compared to the budgeted costs.

The Budget and Laziness

Unsurprisingly, the budget is first place we’ll look and truthfully, in blown budgets, the budget itself is usually the main culprit. To explain why, I’ll examine what a budget should be in comparison to what it often is, and where it falls short.

What an estimate should be is essentially a checklist. It’s a chance for the estimator to use their budget template as a checklist to see if individual cost codes (Building materials, site toilet, steel fabrication etc) apply to their project and quantify the costs associated with all aspects of executing the work around that cost code. Using our garden shed analysis, our checklist would ensure we think about all aspects of this project, including any subcontractors we might need (maybe we need a mini excavator and operator), materials (concrete, lumber, fasteners etc), internal labour costs (are you paying a helper?), and equipment needs (do you need to rent any ladders or tools?). The main reason budgets get blown is that the estimates were incomplete in the first place. Incomplete estimates don’t account for all aspects of the costs associated with doing the work, so when The Work is actually being done, there are costs that appear to be unforeseen. Truly unforeseen costs almost never occur, too often the builder has simply not considered the entire scope of the costs surrounding a certain activity. I know, because I’ve been there, done that.

The other main culprit is a lack of cost certainty. The estimate should be as detailed as possible, and in truth, there are very few costs, even in preconstruction, that cannot be quantified.

Finding Cost Certainty

This is one gigantic mistake builders make with respect to budgets, and why my laziness comment from above is well founded. Other than earthworks, there is no reason the estimator can’t achieve high levels of cost certainty prior to the build starting. What builders will often do if, for example, the light fixtures haven’t been chosen yet is carry an allowance in the estimate for a certain quality of fixtures, so clients don’t have to choose everything prior to the build starting. This is a common, but dangerous, game. Clients often say in the estimating phase, they just want “regular, builders grade fixtures,” but 5 months later, when they see what the builders grade budget allows them, they realize they actually want higher end fixtures, and we start the slippery slope. Allowances are fine to do, (though not the best) but the clients must be realistic about their taste and the quality level they actually desire.

Another pitfall of estimates is that the estimator often doesn’t go far enough or consult the people actually doing the work. Estimating labour is tricky, but if the estimator doesn’t talk to the people actually doing the work, it’s merely guesswork. I have made this mistake more than once, and learned tough lessons.

The reason I mentioned earthworks earlier is to illustrate a point. The higher the level of task uncertainty, the more variability there can be for cost. Earthworks can be tricky, and there’s always a caveat in my estimates for earthworks, because sometimes what is beneath the ground can’t be fully known. Different soil types expand at different rates when excavated, and that can cause fluctuation in the amount of material needed to be trucked away etc. Furthermore, there may be unforeseen conditions below grade (like rock) that need to be dealt with in a more costly way (blasting!).

Think About All Scenarios

The estimate document should be designed to make the estimator consider all scenarios of the project that are possible to occur. If you’re in a cold climate, and you’re building through the winter, will the project need snow clearing? There should be a cost carried in the estimate for that. Are we building through the summer in a hot climate? You may need to add 20% more labour during the summer months as workers may require mandatory water breaks above certain working temperatures. Safety meetings onsite? That may be 1/2 hour every Friday/Monday morning that the client is paying wages for, but no value added work is being done. There should be a cost code to carry those labour hours in the estimate. The point is, these seemingly minor costs, if unaccounted for, can add up and blow your budget. Hear me now and clearly: Rarely are budgets blown by an overage in just one cost code, blown budgets (and their inverse) are DEATH BY A THOUSAND CUTS. It’s a little bit here, and a little bit there, and it adds up to $50,000, and you’re underwater on your house before you move in. So often, the estimator just hasn’t considered the likelihood of certain costs occurring. The key takeaway here is: Do absolutely everything you can to get cost certainty in every cost code/line item in your budget. Cost certainty means getting the post construction cleaner to commit to a hard price, not just a time and materials rate. Cost certainty means choosing all your plumbing and electrical fixtures before your estimate is complete as onerous as that sounds. Cost certainty means thinking about and defining your landscaping, or choosing the blinds you want, prior to your estimate being complete. Choices can change, but more than likely they’ll stay in the same price range as the original material selections. It can be difficult and a lot of work preconstruction, but that is so, so much better than eating $30,000 of unplanned expenses because the builder didn’t want to do the work or the client got decision fatigue during preconstruction.

Risk Assessment Matrix

I won’t belabor this point much here as there are people much more qualified than I to speak to this. Estimators should be looking at every uncertain occurrence as I’ve mentioned above through the lens of a Risk Assessment Matrix. Essentially identifying risks (snowstorm), how likely the risk is to occur (somewhat), what the consequences are of the risk occurring (eg. 30 manhours lost to shoveling snow) and what can be done to mitigate the risk (carry an extra 30 man hours in the estimate for snow clearing). If a builder/estimator thinks this isn’t worth their time to do, that should tell the client something about the builder’s organization, and they should be prepared to have an over budget project.

The Work

The estimator or builder has put together the estimate now, the client has approved it, and it rolls over into the official budget. Now the work begins on the project. There are many pitfalls that occur during this phase, but the first and major one is…

Ignorance

Unless the builder and client are tracking budget vs actual with regularity, the project is asking to go over budget. Most of the time, this is just plain ignorance, as neither the builder nor the client are that excited about taking an active role in getting/delivering the medium/bad news. Usually it’s a casual question at the conclusion of the project “so how did we do with the budget?” If that’s when the question is being asked, I think I know the answer.

What To DO

In project management, it’s called Control. As expenses come in, they must be compared with the budget to see where things are at. Budget meetings should be regular (once a month), that will give the builder a chance to gather accounts payable information and give an accurate picture of how the costs are projecting. Of course, if there’ s a major overage in a specific cost code, the client should be made aware immediately. Clients should be aware of projections at regular intervals, as they may need to make choices midstream to adjust their selections and stay on budget. This is important, especially early in the project while there are still choices to be made that can affect the budget. Clients will nearly always assume no news is good news, but for the builder, ignorance is no defense. Clients should be getting constant updates on actual vs budget, it’s so critical. It can be very overwhelming for clients to be sending sums of money they couldn’t imagine spending, out the door every month, and the level of uneasiness will skyrocket if they can’t compare it to their budget. If the first time they are hearing about budget overage is at the end of the project, they will feel duped and that their trust was misplaced. Budgets are blown when no one is looking.

How To Save Money

Scope

If you’re doing a new build or major renovation, your builder is likely charging a management fee (let’s say 15%) for overseeing the project, and their percentage is likely based on a preconstruction estimate. So let’s be clear: the builder has a monetary interest in the project estimate including as much in their scope of work as possible. The purpose of a management fee is to compensate the builder for their coordination//management of the project activities. Sometimes, items slip into the budget that the builder doesn’t have to manage, like engineering, landscaping or permit applications, just as an example. These items could add up to $30k, depending on the project and municipality. The builder will charge 15% of $30k, so $4500 for items they may not have a role in managing at all. As a client, I would ask if I can pull those out of the builder’s scope and manage them myself. They may not like it, but I’ll have saved $4500 in one conversation. Try to examine your estimate for items that don’t require management or coordination, that you can pull out of your builder’s scope, it can save you thousands.

Taxes

It’s a dirty word, but it pays to pay attention. Often times for new home builds, builders will not include taxes in the estimate, because in some cases, the client will need to pay 5% tax on the overall value of the home once it’s complete. Sometimes builders don’t included the tax because some items have a state/provincial tax, and some don’t, but make no mistake, the client always pays the tax. Sometimes the builder will pay the taxes up front and get reimbursed later. This cost can sometimes be hidden, or not clear to clients, until they get a $50k bill at the end of the project. So please make sure you are clear on who is paying which taxes, and at what point. This can save thousands in overages if clients know this expense is coming.

Fixed Price vs Time and Materials

As I mentioned earlier, higher task uncertainty equals higher cost variability. In new builds, once you’re out of the ground, almost everything can be measured and quantified from the construction drawings, so getting fixed price quotes from trades should be no issue. Renovations are another story. I always encourage clients to offer a time and materials based contract structure to trades, especially when there is uncertainty around the task ie. HVAC, plumbing, electrical. Until the walls/ceilings are opened up and all factors can be seen, getting a fixed price from a trade is likely going to result in someone getting unfair value. Either the trade is going to price their quote really high to avoid losing their shirt, or they price it too low, and end up working for a way discounted rate. It’s really hard to get it right. Time and materials contracts mean the trade is paid for their time and the material it takes to do the work. Everyone gets the value they’re looking for. That can save thousands.

Scope Creep

Depending on the temperature of the construction market, not all contractors are busy all of the time. If a contractor is working on an hourly rate and in the back half of your project with no project locked up for after yours finishes, what incentive do they have to finish up your project in a timely and efficient manner? Beyond their personal integrity, not much incentive. They will likely approach you, the client and ask if they can take on additional scope on your project. I have seen framers take on drywalling work, tiling, painting etc. because they don’t have any work lined up and don’t want to be sitting at home. So what’s the problem? The problem is that they’re not always very good at the additional work. Every contractor will tell you they can do everything, but the reality is, that few people are really good at something they do only occasionally. Some are, but most aren’t. You’re far better off to bring in specialists to do what they do all day and everyday. You won’t be paying workers to do something inefficiently, and that alone can save you thousands.

DIY

Lastly, clients are sometimes hesitant to ask what they can do to lower costs, when there are things they absolutely can do that often builders don’t want to do. I’ve had clients come after hours to do site cleanup, dump runs, sweep up etc. so the carpenters don’t spend their time cleaning up, but building instead. Investing a little sweat equity into your project means you lose some time on your evenings and weekends, but save on the labour that you would have paid otherwise. Additionally, it’s a great way to monitor your project’s progress and keep an eye out for mistakes or minor changes you may want/need to make.

It’s my sincere hope that this blog can help people navigate this construction world, and feel a little more confident in this process. Budgets can be the single reason clients have a good experience or a negative one, and my mission is to help make construction a positive and low stress experience. Thanks for reading…

Thanks for reading…

Aaron

Albatross Academy

Albatross Design & Draft

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