Planning and Budgets

7/8/2018

It Is All About Money

One of the ways in which we attempted to distinguish ourselves from other firms was by taking care of our client’s money questions. In my opinion, and in my experience, too, money is usually the main thing that will undermine a project.

I don’t want to have the money conversations after it has become an explosive topic. So right from the beginning we attempted to help our clients set up a sound budget.

But before you can have a sound budget, you need a sound plan for the project. The only clients that I had who had a plan for their projects were public school clients. That was because once you determined the projected school enrollment, everything was pre-determined by the state.

According to the standard AIA owner/architect agreements, the owner is responsible for providing a program and a budget. Except for the public school folks, not one client in my career lived up to this responsibility. So we ended up doing it for them.

Eventually, we realized that this was why Schematic Design was always so over-budget. From that realization we began working on how to get paid for taking care of their responsibility.
The following two articles were used to help our clients understand the issue.

'Need For Planning' Article

When you are embarking on a new project, it is crucial to have a plan for the project. You need to know the goals that you need to meet in order to achieve success. This building planning process has six parts that build upon each other:

Space needs
Building characteristics
Project constraints
Land use
Scheduling and implementation issues
Cost and budget

All of this information is designed to answer just one question (although there are many ways to state it) - “How much will the building cost?"

From that point of view the whole planning process is about money. Each of the six areas of the planning process, while necessary in its own right, are also needed to answer that bottom-line question about cost. Space needs translate directly into construction costs; and so do the building characteristics and land use. These might also affect design costs. Project constraints and implementation issues can affect design costs as well as other “soft” (non-construction) costs. Finally, budgeting is about bringing all this cost information into alignment with the money that is available to fund the project.

It really is all about money.

To keep nasty surprises at bay, we’ve found that, if your budget is comprehensive, then surprises are much less likely to occur. “Comprehensive” means lots of detail; and lots of detail also makes your budget more accurate. Besides the main costs of construction there are many issues that are easy to underestimate or overlook altogether. Construction costs are the “hard” costs. But there are also “soft” costs. Soft costs fall into two categories: Design, and Development. All these costs are listed in our template for a comprehensive Project Budget.

We can help you incorporate all of these budget concepts into an integrated process for answering “How much will the building cost?”

‘Budgeting Considerations’ Article

The key way to avoid going over budget is to have a realistic budget in the first place. There are 10 issues that your budget must address in order to be realistic. Those ten key issues are:

1. PROJECT COSTS VS. CONSTRUCTION COST
There is a tendency for everyone to focus on the constructions costs, but they aren’t the whole story, sometimes they are only 70% of the story. Include all the non-construction cost.

2. CONTINGENCY
A contingency is intended to make up for omissions or just plain mistakes in the budget. It is common to reduce the contingency as the project progresses, but it is wise to have at least 5%.

3. LABOR RATES
Some projects require union workers, compliance with the Davis-Bacon Act or “prevailing” wages. This can add 8% to 15% to the cost of construction. If this applies, add a factor.

4. SMALL PROJECT MULTIPLIER
In construction, smallness is uneconomical; and, at the extreme, can make a difference of over 100% in the cost of your project. Add a line item to compensate for the smallness of the project.

5. FINANCING IMPACT
Nearly all projects have interim financing costs. Determine the amount and how long it will be needed to estimate how much to budget. Show a line item for financing.

6. INFLATION
Although inflation has been low, you should anticipate the lag between your budget and when the costs are actually incurred. Add a line item for inflation.

7. BONDS AND INSURANCE
Some projects require performance and payment bonds, which add up to 2.5% to the cost of construction. Builder’s Risk insurance is needed on all projects, but it is one-tenth the cost. Include these line items.

8. TAX-FREE ASSUMPTIONS
Even if you aren’t tax exempt, historic districts or enterprise zones could provide a savings. If you are exempt, see if it is practical to take advantage of the exemption. Rules vary by state. Add a line item for tax breaks.

9. IN-KIND WORK
It is very difficult to budget accurately for donations or work by your own forces. It is often best to ignore the impact on your budget. If in-kind work becomes a reality, it will have a positive impact on the project.

10. PERMITS
Obtaining permits is not usually expensive, but the unanticipated work that may have to be done can be substantial. Include permit costs.

“Getting money is like digging with a needle; spending it is like water soaking into sand.”
- Japanese Proverb

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