Construction budgets can be as simple as a few lines on a napkin or a detailed examination down to the screw. They typically start at the napkin level and get more refined as the stakes increase. At the investment level, I like to start with a brief outline and build it out as project feasibility improves.
Start with the Layout
Construction costs fall into three major categories – hard costs, soft costs, and FF&E.
Hard costs are related to the labor, materials, and overhead to build the structure. These often come entirely from your general contractor. Hard costs are fairly standard across asset classes. The composition may change based on what you’re building, but drywall costs just as much for an office building as for a senior living facility.
Soft costs are related to planning, monitoring, and adjusting the project. Most costs in this category come from service providers and vary widely by the type of project. Here, you can expect to see architects, engineers, and attorneys. However, you’ll also find the carrying costs, like taxes and insurance, and pre-opening or sales costs.
FF&E comprises the items that fill the building, which may or may not be attached. The abbreviation stands for furniture, fixtures, and equipment. As you can expect, this category is entirely tailored to your project.
Build the Drivers
It’s time to fill in the details once you have a good general framework. This is where you want to start thinking in terms of flexibility. You want a budget that will adjust as new information becomes available.
Budget drivers have to components – quantity and cost. I allow cost to be a dollar amount per unit or a percentage of the base. Regardless of your approach, think about the next step – you will multiply these two for the dollar amount.
Quantity and cost will vary for each line. Most lines will take hard figures as the quantity, like square footage, months, or the number of parking spaces. Some will reference other lines in the budget, like a contingency referencing the sum of total hard costs.
You can enter the formulas as you go, but I like to set it up in the beginning with one big copy-and-paste job. This way, you’re sure that you don’t miss anything along the way and formatting is consistent throughout.
Finish with Descriptive Statistics
A good budget always includes a set of descriptive statistics that further support your assumptions. These sit just to the right of your drivers and dollar amounts.
The most basic descriptive statistics are:
- Percent of total (% Total)
- $ per net square footage ($/NSF)
- $ per gross square footage ($/GSF)
- $ per unit ($/unit)
When building these, I include the denominator (total, NSF, GSF, units) just above the column header and tie all formulas to that cell. This way, you can easily make changes to the columns without adjusting too much in the table.
Of course, this is an oversimplification of the work that goes into reliable budgeting. Two universal considerations stand out.
First, be sure to think about the presentation as you go. No matter how good the analysis, it’s worthless if you can’t share it easily with stakeholders.
Second, always be looking for opportunities to enhance your work. Lean on industry sources and news that give you reliable data points. The technical work may take ten minutes or less, but the work behind that work never ends.