Setting a Realistic Design & Construction Budget

by | Sep 15, 2022 | Design-Build, Facilities

Setting and adhering to a realistic target project budget is one of the most critical yet most difficult tasks for any project owner.  It is often made more difficult in challenging economic times of labor and material availability uncertainty and rising inflation, making the inclusion of realistic contingencies essential.

So what comprises a project budget?   The first thing to understand is that the “Building Cost” or what the contractor is paid is only part of the story.  There are dozens of additional line items of cost that comprise an overall project budget.  Generally, these costs fall into one of two categories.  Hard costs or soft costs.    

Think of hard costs as the “bricks and sticks” that comprise the finished product – all that is left behind by the contractor when they are complete with their contract.   Think of soft costs as all that an owner must provide to get project started and then what it takes to operate and maintain the completed project upon the contractor’s completion.  Soft costs are essentially supporting services and material “not nailed down” in the finished project. 

Because hard costs are more intuitive and generally understood to be what the contractor builds for an owner based on a set of design documents, we will focus more on the soft costs since they have the greatest potential to negatively impact the overall project cost if not well planned.  A simple equation to keep in mind is:

Project Cost = Hard Cost + Soft Cost

Too often though, a design and construction team is turned loose to design and build a shiny new project before the owner has really counted the full cost of all that is required to make the total Project (not just Building) a reality.  What does that mean?  The following is a list (though not comprehensive) of some major aspects of soft costs that must be taken into account before commitments are made about the size and level of quality of a project (the Project Scope).

Design Fees:  The architect and all civil, structural, mechanical, plumbing, fire protection, AV, technology, interior design, and acoustical consultants.    

Site Due Diligence:  Project entitlements define what an owner will be allowed to do within existing planning and zoning ordinances in a particular municipality.  If the planned project requires any zoning variances or rezoning, then the time and fees for professionals to manage that process must be taken into account.

Legal: Contract reviews with design and construction firms.  Support for any due diligence requirements.  Support for any purchase or sale of land that may be necessary.

Insurance:  Construction projects require additional levels of insurance to protect builders and owners from loss during the construction of the project, commonly known as Builders Risk Insurance.

Permits and Fees:  Municipal permit and impact fees for building, sewer, traffic etc. can be substantial and must be investigated early on.  Nonprofits do not usually qualify for any relief from these fees either. 

Municipal Performance Bonds:  Many municipalities require owners to post performance bonds for things like landscaping and storm water management as an enforcement mechanism for adherence to local regulations.  Funds posted for these bonds are typically held and not released until after building occupancy and sometimes not until a year later to ensure that all landscaping has survived.  These costs must be factored into cash flow.

Temporary Space: Will any temporary space be needed to maintain organizational operations during the construction phase of the project?

Inspectors:  Will any third-party inspectors or Owner’s representatives be hired to oversee the project on behalf of the Owner?  

Interest:  Will paying interest on a bridge or construction loan prior to permanent financing be necessary?

Moving:  Will there be a cost to move out of existing facilities and/or move into new facilities at the conclusion of the project?

Additional Facility Staff:  It is not uncommon for additional staff to be required to maintain new or expanded facilities.  Check existing service contracts to determine what the marginal cost for servicing an additional or larger facility may be.  Consider potential additional cleaning of existing spaces that may be required during the construction period beyond the contractor’s responsibility.  

Owner Furnishings and Equipment: A critical category to be assessed early in the design phase especially if existing relocated equipment is to be accounted for in the design and if replacement furnishings and equipment are contemplated.  Often original intentions to reuse existing equipment are rethought once the implications of placing old furnishings and equipment into a brand-new building are fully realized.  Be realistic from the beginning on wants vs. needs for new furnishings and equipment.   

Marketing & Public Relations: Factor in the cost of promoting the project and new facility including website updates as may be required.

Grand opening ceremonies: It would be a shame to not be able to properly celebrate the opening of a new facility for lack of funds to throw the party.  Plan ahead.

Additional Utility Costs:  Larger facilities will typically cost more to operate.  Separate water, gas or electric services that may be required can trigger additional connection, meter, and hookup fees or large monetary deposits.  

Those planning new projects are well advised to account for all soft costs in the total project budget very early in the project planning process.   Unmet expectations regarding the size or quality of the building can be avoided with timely and thorough accounting for all soft costs as well as building costs. 

Steve Kuhn is the founder of ShareBuilt, a nonprofit organization, that directly connects those in need of new/renovated facilities to AEC organizations with resources to meet those needs and professionals called to serve their communities.

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