Budgeting for Construction Projects

We are busy with architectural projects, which is fantastic after the long slow period during the recession.  We are, however, aware that budgets are still tight and lending standards are very stringent.  This blog post will help you figure out how much money you will need to get started on a construction project.

 No matter the size of your wallet, you want to know how much your project is likely to cost.  Architectural projects are unique, and it is difficult to generalize or make cost assumptions. 

Architectural projects are unique, and it is difficult to generalize or make cost assumptions.  It is not like a car repair, that you can look up the make and model in a book and determine the average price for parts and labor.  Even so, we understand that you must have a way to calculate and budget for this major undertaking.  This article will take you through some steps to get a ballpark estimate for your construction project.

 

From a financial perspective, a lender would consider a commercial construction loan to include four types of costs—the land cost, the hard costs, the soft costs, governmental permit fees, and a contingency reserve.  These categories can help to organize the budget for your project.  For simplicity, we will define soft construction costs as anything related to the project that you cannot visibly see and these costs are usually incurred prior to construction.  Soft costs include design, engineering, and consultants.  Hard costs include the labor and materials for the actual construction, (the contractor’s bid price).  A contingency reserve should be included (usually around 10% of the hard costs) to cover unforeseen site conditions and change orders. 

 

For a typical commercial or public project, the soft costs will usually range from 6 to 10% of the hard costs. For a typical residential project, the soft costs will usually range from 10 to 16% of the hard costs.  Commercial projects are usually bigger than residential, so the soft costs make up a smaller percentage of the overall project.  Soft costs will include your Architect and a Structural Engineer on most projects.  In California, there will also be a few hundred dollars for a Title 24 energy analysis.  Many jurisdictions are also now requiring a Green Point Rating to be performed.  Other types of engineering may be required as well, especially on commercial projects, such as Mechanical/Electrical/Plumbing (MEP), geotechnical, civil, and so on.   

 

 Differences in costs are affected by many factors, including:

  • new construction vs. remodel
  • the age of the building to be remodeled
  • the location (especially the governmental jurisdiction)
  • site issues, (slope, soil conditions, landscaping needs, parking requirements, etc.)
  • use of the building (variances, code requirements, accessibility issues)
  • unique features (historic, LEED-certified, etc.)
  • public input requirements (hearings, Environmental Impact Reports, etc.)

 

(An example of how location can affect project costs is addressed in a previous blog article called “Planning and Building Department: Ally or Adversary”.)

 

If you do not already own the property, you will start your budget with the asking price for the parcel or existing building.  Secondly, call a local licensed general contractor (builder) who handles your type of project and ask what current construction prices are per square foot, generally speaking.  Let the contractor know what type of construction you are considering.  For homes, kitchens and baths are more expensive than living rooms or bedrooms.  For commercial buildings, restaurants are more expensive to build out than office space or “vanilla shell” tenant improvements.  So, the contractor will need to know what kind of project you have in mind.  The contractor should be able to give you a very rough number that is not a “bid” or a quotation, just a dollar figure per square foot that reflects what a similar project cost to build in his/her recent experience.

 

Next, make an approximation of how many square feet you intend to impact for your project.  (Impacts include adding or changing the building in any way.)  If you remodel a bathroom, for example, count the entire square footage of the bathroom as impacted square footage even if you aren’t adding on to it. Calculate how much square footage you plan to add on, if any.  (Square footage is calculated as length multiplied by

width.)

 

Then call your City Planning Department for a list of governmental fees in your building’s jurisdiction.  The phone number is usually listed on your City’s website.  Typical fees include plan check, building permit, school impact, and Fire Department review.  Note that if you are in an unincorporated area (not within city limits), then you should call the County Planning Department for this information.

 

Now you are ready to do the math:

 

Cost per square foot X number of square feet under construction = hard cost estimate.

Hard cost estimate X soft cost percentage = soft cost estimate (this will be a range).

Hard cost estimate X 10% = contingency reserve.

 

 

Property sales price (if not already owned)

+ hard cost estimate

+ soft cost estimate

+ contingency reserve

+ government fees

= Overall project budget

 

Now that you have done the math for your overall project budget, ask yourself whether you have the resources to accomplish the project.  Will you be taking out a loan or using savings/capital reserves?  For residential remodeling projects, you can decide whether you have enough equity in your home to refinance your mortgage to pay for the remodel.  For commercial projects, lenders will want to review a cost-benefit analysis to see how the improvements will pay for themselves over time; for example, by increased lease income, customer attraction, or improved employee working conditions.  Create a compelling case to show the loan officer at your financial institution.

 

With your project budget established, you can call your accountant and lending institutions to find out whether this amount is within your means.  If not, you may wish to do a master plan on the project, with the actual construction occurring a step at a time as funds become available (multiple phases).  Your architect can help you with this master planning procedure.

 

Budgeting and financing is an important early step in a construction project and we encourage you to take the time to do it so that you can avoid downsizing and disappointment later in the process.   Do you have questions about this process?  Feel free to post them in the “comment” section below and we will respond.  We have kept this article very generalized, so that it fits a wide variety of projects.  If anyone wishes to share actual costs from their own project in the comments section, it would be very helpful to other readers.

 

Lorianna Kastrop

The Kastrop Group, Inc. Architects

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