The process to determine the cost for a construction project is just that…a process. This process must start with the answers to three simple questions:
What do I want to build?
When do I want to build it?
Who do I want to build it?
Without the answers to these questions, the costs and projections will vary and may cause the project to fail to meet the desired outcomes.
After these questions are answered, the technical portion of the process can begin.
Preliminary or conceptual budgets are typically prepared with very few drawings. At this stage, the owner has answered at least two of the three questions – what do I want to build, and when do I want to build it. With this information, a construction professional and/or design team can prepare a preliminary budget. When preparing a budget at this stage, the team will use industry experience, knowledge of the specific project types, historical data, and current market conditions to prepare an estimate or opinion of cost. These budgets typically provide the owner with a range of potential costs and are useful when determining if the project fits their cost parameters. Conceptual budgets are sometimes referred to as “square foot” budgets, as most of the pricing is based upon square foot pricing – square feet of flooring, ceilings, and floor area – because there is very little detail available for exact finishes and wall layouts. Because of this intentionally missing detail, these budgets normally include significant design contingencies. These contingencies allow the owner and designer to fill in the gaps during the design process. This level of budget is typically the quickest to produce but provides the widest range of costs.
After the owner has reviewed and approved the conceptual budget, the budget process enters the next stage. This budget is normally prepared following the completion of the Design Development drawings. The owner and design team will work together to fill in much of the design intent such as wall placement, furniture systems, and many of the finishes. With this level of detail, the owner may elect to engage a construction team (general contractor or construction manager) to assist in pricing the construction at this phase. Engaging the construction team at this stage allows the owner to receive a real-time assessment of the costs associated with the design decisions that are made every day. If a construction team is selected, this team may solicit pricing information from subcontractors or suppliers to provide more accurate pricing. Design contingencies are likely to be included at this phase of pricing at a value less than that of conceptual design, as the drawings are not yet complete. This phase of budgeting is more detailed than the conceptual phase and takes longer to prepare. Depending on the complexity of the project, this phase may take three to six weeks to complete. At this phase of budgeting, the schedule starts to become important, as suppliers and contractors need to understand the project timeline in addition to the project scope.
The final budget for a project is often prepared when the construction (or contract) drawings are nearly complete. This budget is sometimes called the 50% CD estimate. During this phase, a construction manager would solicit as much information (and pricing) as possible from suppliers and subcontractors. As the drawings are nearly complete during this phase, the design contingencies are further reduced, providing the most detailed budget of the design process.
After review and approval of the budgets, and completion of the final documents, the project is ready for the Bidding phase. During the bidding process, the owner may elect to solicit bids from multiple general contractors (assuming one was not engaged earlier in the process). This process provides the owner with several opinions and prices, potentially highlighting the lowest cost producer for the project. Using this approach typically removes all design contingencies from the project. It is likely that the general contractor will maintain some level of contractor-controlled contingency in the contract amount.
The owner has the right to utilize one of several alternate project delivery models. These options include construction manager as agent, construction manager at risk, design-build, and various hybrid models. The design professional or an owner’s representative is a useful resource in selecting the proper project delivery model.
Regardless of the project delivery model, the owner, design team, and construction team must have clear and open communication. Throughout the process, the team must be working from the same expectations and assumptions. These expectations and assumptions are best established early in the process, and reviewed frequently, especially when new team members are added.
Budget vs estimate: While these terms are frequently used interchangeably, there are some differences. A budget is simply a statement of how much can be spent. An estimate is a detailed accounting of how much something may cost. Conceptual budgets are great tools to get an “order of magnitude” cost for the project. However, even minor changes to the project scope or timeline may increase the project costs.
Project scope and schedule are defining parameters of the budget. Changes to either of these critical items will affect the budget.
The budget process allows for several touchpoints for the project team. These should be used to verify project assumptions, scope, schedule, and desired outcomes.
The budget process, and the subsequent estimating phases, require a little bit of art, a little bit of science, and a lot of gut feeling. There is no crystal ball or magic formula that will tell an owner exactly what their project will cost. A strong team, good communication, and a lot of hard work can help mitigate the impacts of the unknown before they derail an otherwise great project.