Preliminary Cost Investigations and the Importance of a detailed Budget!

20 February 2017 / By John Manning

The most critical segment of the pre-design phase is the development of a sound budget through good preliminary cost investigations. A project can be made or lost in those crucial first few days or weeks if careful thought is not put into the budget. Once the budget is set and the Owner gets its funding it becomes an uphill battle to get more funding so all budgets need to be reviewed by everyone who has a stake in the project from the Owner’s side. The budget should be broken out in adequate detail to allow everyone to understand what is included in the budget and what is not included in the budget.

Most of the time budgets are developed with little, if any, design documentation. This initial budget estimate may be required prior to any plans or sketches and be based solely on a “concept” or “program,” hence the need for a well thought out and written Scope or Project Requirements, which should be developed in parallel with the budget and will provide the detail of what is included in the budget.

Actual estimating will typically be limited at this stage to broad budget type numbers based upon areas. Those areas should be included in a written Scope or Project Requirements (Program). In any budget breakdown, notes should be added to line items to ensure that others understand what was considered and be able to follow the budget logic.

The key steps in developing a Program Budget are as follows:

1. Development of Project Criteria: The key element in developing a budget is sorting out the criteria that the finished facility needs to provide, in other words what type of Project is it; Hotel, Office Building, Hospital, Warehouse, etc. and what quality standards are required. The individual elements need to be quantified into some form that can be priced. Typically, the Budget Estimate will be formatted to align with the written program so two documents tie clearly together. The Program must contain enough information to be quantified into some form that can be priced based on previous projects or an outside source like Means or ENR Square Foot Cost book. Known quantities could include Building and Site SF, number of Hotel Rooms, etc.

2. Development of Project Constraints: Many factors can affect the costs and need to be considered as well as the actual Project size and use. Preliminary cost investigations should be undertaken to assess these items properly in the Budget. Some of the key constraints to consider are:

a. Project Location
b. Union or Non-Union Labor
c. Single or Multiple Phases
d. Labor or Material Shortages
e. Current Economic Conditions (i.e. post hurricane, high inflation, etc.)

3. Development of Project Budget Direct Costs: At this stage, the Estimate will be broken down into the main elements of work like the Site, Structure/Envelope, Finishes, HVAC, Plumbing, & Electrical. In addition, at this stage, the budget should follow the Program format. The steps recommended to develop the initial estimate budget are as follows:

a. Quantify the Site Development Items: If no information is available, we will need to utilize allowances to cover the main cost items.
b. Site Clear & Grub: Define the area to be disturbed. The detail of the site portion will depend on the amount of information available. You may know only the site area, or you may have parking requirements, landscape requirements, utility requirements, etc. More than likely, we will only have the Site and Building areas available.
c. Site Grading and Excavation: This cost can vary greatly and only an allowance can be utilized at this point.
d. Utilities: Provide allowances for the separate cost items included in the site utilities. Knowledge of location will help determine the whereabouts (if any) of existing utilities and their impact on costs. Items to include are storm water, potable & fire water, RO plant, sanitary sewer, septic system, electrical and communications, back-up power, gas.
e. Plant Construction: Reverse Osmosis (RO), Waste Water Treatment Plant (WWTP), Emergency Power Generation, Alternative Energy Sources, etc.
f. Paving: Provide allowances for the separate cost items including, but not limited to, curbs, pavement, stops and striping, and signage.
g. Landscape & Irrigation: Provide allowance based on site area if known.
h. Hardscape: Provide allowance based on site area if known.
i. Site Amenities: Provide allowances, if any, for known amenities including pool and deck, fountain features, spa, sports equipment, etc.
j. Demolition: Need to include both building and site.

4. Quantify the Building Items:

a. Structure/Building Envelope: This should include the foundations, slab-on-grade, elevated slabs, exterior walls, roof structure and dry-in, exterior windows & doors. Include SF costs for overall Building SF.
b. Finishes: Includes interior and exterior paint, flooring, interior doors & hardware, running & standing trim, cabinetry. Include SF costs for overall Building SF.
c. Conveying Systems: Include elevators per stop, escalators per LF.
d. Fire Protection: Include SF costs for overall Building SF.
e. Plumbing: Include SF costs for overall Building SF.
f. HVAC: Include SF costs for overall Building SF.
g. Electrical: Include SF costs for overall Building SF.
h. Low Voltage: Include SF costs for overall Building SF.

5. Soft Costs: On top of any direct construction costs there are a variety of soft costs that need to be considered. We recommend the following for budgeting purposes:

a. General Conditions: These are the costs of the CM, Design-Builder or GC managing the project. They can range significantly but we recommend typically 8% to 10% of the Direct Construction Costs be used for budget purposes.
b. Overhead & Profit: These are the costs of the CM, Design-Builder or GC making a profit on the project. They range significantly but we recommend typically 3% to 8% of the Direct Construction Costs be used for budget purposes based on the overall size of the Project. In general, a value of 15% to 20% on top of the Direct Construction Costs covers both General Conditions (GC) and Profit.
c. Bonds and Insurance: At this stage, the budget should be 2% to 4% of the Direction Construction Costs.
d. Design Fees: At this stage, the budget should consider the entire costs, which include design on a project. A/E fees range from 5% to 10% on a project. For budget purposes, we recommend 7% of the Direct Construction Costs.
e. Permit/Impact Fees: These vary greatly and we recommend that the Project Manager find out what the range would be in the area the project is being built. For rough budgeting a value of 2% to 3% of the Direct Construction Costs should be adequate.
f. Testing and Inspection: Most projects will require some type of testing and inspection. This varies widely but it would typically run on a time basis so we recommend budgeting about 2% of the Direct Construction Costs.
g. FF&E and OSE: Calculate the estimated costs of FF&E (Fixtures, Furnishings and Equipment) and OSE (Owner Supplied Equipment) for the project. Many times, in the budget phase this is an allowance per segment (i.e. per room, etc.)
h. Project Management Fees: Calculate the estimated costs for the Owner’s team to manage the project. This could be a percentage (i.e. 3%) or the cost of individual team members per a period.

6. Contingency: At this point in the Project, we recommend a high contingency between 20% and 30% based on the factors listed below. Often our Owners hate seeing this high of a contingency so we split the contingency between inflated unit pricing and a percentage contingency factor:

a. Inflationary pressures in the market place are critical. If the Project is to be phased over a long period of time a larger contingency to cover the cost escalation will need to be used.
b. Clear definition of criteria is also critical. If the Project Team believes that the standards for the criteria are vague then the contingency needs to be increased.
c. Competition and a shortage of materials and labor in the market place are other items that need to be considered.

In summary, the Project Budget should include as much detail as possible to ensure that the Owner or anyone else who is working on the project will understand the thought process the team went through to develop the budget.

About The Author

John Manning

John Manning is the Principal and CEO of KMI International with more than 30 years of global experience in project management of the design and construction processes on resort hotels, parking structures, infrastructure, area development and mixed use. He is a CCM (Certified Construction Manager), PE (Professional Engineer) and a LEED Accredited Professional while serving on the national board of CMAA. He has worked as a project manager for large Owners and Construction Management Firms on projects ranging up to $3 Billion. Mr. Manning also testifies as a forensic expert in state and federal courts.

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