How to Keep a Project on Budget

Feb 02, 2023

Main topic: “How do you keep a project on budget?”

I often get this question casually or during a project interview. As with all the topics I cover in the newsletter, the answer is simple yet multifaceted. Unfortunately, there isn’t a single thing that will magically keep a project on budget (sorry, kids!).

As with all worthy pursuits, relentless and consistent action is the name of the game when it comes to staying within budget on a development project. Based on my experience, I’ve put together some thoughts regarding what every developer should do throughout a project to ensure they don’t bust the budget.

1- Get the concept right.

Whom do you want to be?When starting new projects, this is the most challenging question for many new developers. Although this question sounds ‘squishy,’ having a solid answer is the foundation for all the work that follows.

The most common way I’ve seen developers blow their budgets is by not knowing what conceptual goal a project is supposed to meet.

Is the building supposed to be the ‘fanciest’ building in the neighborhood? If so, what does that mean? Who is the target audience? What is their price point? Will it offer extensive amenities? Will it be mixed-use?

The process of determining conceptual goals is often overlooked. The impulse to design the biggest, shiniest, most amenitized building is real. If the market and deal economics don’t support it, it can be the sole thing that kills a project before the design is even finalized.

The second aspect of this point is that once the ownership team determines the concept, they need to provide strong and consistent direction to the design team to execute it.

Not insisting on staying within the concept will have the same outcome as not having a concept at all. This is the second hurdle that many rookie developers stumble on.

The beauty of having a solid concept from the beginning of a project is that it will provide coherent guidance whenever choices need to be made through the entire design and construction process.

2. Create a Budget.

The beginning of a project can be exhilarating. Often, that excitement elicits a rush to action, which can be a wonderful thing—but you know what they say about a dream without a plan. Therefore, it would seem obvious that one of the essential parts of any business endeavor is ensuring it is profitable.

Thankfully, financial modeling in real estate is a much-heralded activity, so most projects will have some type of financial model from the beginning. However, that doesn’t mean the model inputs are always grounded in reality.

The bottom line is that every project needs a business plan based on realistic assumptions, which must be carried through to set project budgets.

Despite how obvious this sounds, I often come across projects that are started without a budget. It is impossible to track against and ensure a non-existent budget. Budgets should contain sufficient detail to help determine whether retaining a certain consultant or purchasing a particular material is prudent. Without enough detail, budgets are only partially helpful.

Typically, budgets start schematic and become more detailed as the project approaches design and construction. Since these processes take months, there is plenty of time to polish a budget to an acceptable level of detail before a construction contract is executed.

Aside from having a construction budget, development projects also need design and FF&E budgets. These are often forgotten but can add up quickly—especially on fully-furnished projects like hotels.

Having a design budget appropriate to the concept is one of the easiest ways to narrow down the best design team for a project. Markets are smart in that way.

For example, suppose the concept is strong, and the budget aligns with the market costs of designing and building to that goal. In that case, the budget alone will help determine whether hiring a particular architect is appropriate.

3- Complete drawings.

‘Drawings are never 100%.’ This is a common adage in design and construction. While this is true, there is important nuance around what “100%” means. For instance, some would say that complete drawings would require every single condition on the project to be detailed—which is why many architects would say an absolute 100% is unattainable.

This should not be used as an excuse not to ‘complete’ drawings to a reasonable professional standard. And while there may be some debate among professional organizations regarding what that entails, from a developer’s practical perspective, ‘complete’ drawings must reasonably define the entire project scope.

Drawings don’t have to be absolutely perfect to execute a construction contract, but they must delineate the full scope either schematically or in detail.

Ensuring the design team meets that standard of completion is every developer’s responsibility, from holding everyone to the established design schedule to the review of the completeness of the drawings.

The developer must also account for enough time for the design team to issue reasonably complete drawings. It takes a design team about a year to issue a set of construction documents on most new construction projects. When assembling project milestones, I recommend using that timeframe as a rule of thumb.

Planning the overall project timing is crucial. Rushing through the design and construction document process will increase the likeliness of human error. This always results in added cost through the miscoordination of the drawings or insufficient information, which are the basis for most change orders.

Bonus idea: Every project should carry contingencies within and outside the construction agreement to account for human error. The two moments when human error affects drawings happen when the architect puts the set together and when the contractor reads the drawings—pretty much every time a human interacts with the drawings. When the architect makes the error, that is a change order under most construction contracts. When the contractor makes the error, that is what contingency is used for.

4- Validate the Scope.

Most people celebrate the moment when both parties execute a construction contract. While it is great to celebrate a successful agreement after weeks of negotiation, this is often just the beginning of the contractual work required to complete the work.

This is typically when the project’s CM or GC starts to buy out the trades. In other words, this is when most of the capital invested in the project will be committed to other parties. My hope in reframing the buy-out process in this way is to highlight its importance.

Many project owners are not involved when trade contracts are negotiated and executed.

Usually, scope meetings consist of a review of the scope as the CM understands it and confirmation that that is the same as how the subcontractor understands it. These meetings are also an opportunity for the subcontractor to ask questions or present ideas for cost savings and discuss challenges they found with the drawings and specifications (if any).

Often, the CM/GC will lead the process after receiving bids from multiple bidders, qualifying them, and narrowing down the pool to those with the technical capability, availability, and who are within a reasonable cost range for their scope. Despite all of the work leading up to a ‘descope’ meeting, there is no substitute for having someone from the ownership team present. Absent ownership in scope meetings often results in missed scope, misunderstanding of the drawings’ intent, or missed opportunities to save on costs.

There have been a couple of instances when I have seen this firsthand.

In one case, a project had three elevator bids somewhat close to each other. What seemed unusual to me was that the highest one was by a company that had notoriously come in as the low bidder in two recent projects. Looking at their bid more closely, I realized the CM had not noticed they had gotten the number of stops wrong.

Given that there were multiple elevators in the project, they had 30% more stops in their proposal than was necessary. This mistake did not only nearly disqualify what ended up being the lowest bidder, but it also made the process a lot less competitive. If the owner had not requested to be included in the process, nobody would have known this was missed; after all, their bid was close enough to the second-highest that it did not raise a concern.

The second instance occurred during a descope meeting where the low bidder had proposed an alternate HVAC system instead of what was specified in the drawings. The CM was presenting the bidder as their recommended subcontractor for the scope. Unfortunately, both the CM and the subcontractor had failed to account for the additional work other trades would have to include in their scopes to make their proposed system change.

After running a quick exercise with the affected trades on our request, it was determined that the HVAC alternative presented would not result in savings and would instead require the design team to re-coordinate the entire building, resulting in an increased overall cost.

The bottom line is: don’t take anyone’s word for it. Developers should attend scope meetings for all major trades to ensure (as much as possible) that they have the entire scope accounted for in detail or as an allowance. Chances are, you will learn a lot about how buildings are put together, and being present will also help strengthen relationships with the CM and the trades.

5- Keep an Anticipated Cost Report.

This one is part II of “don’t take anyone’s word for it.”

Using the CM/GC’s accounting as your own is not the way to go on commercial construction projects. Never mind all the other expenses outside of construction that need to be tracked. Keeping and organizing all project contract values and cash flow data is a significant part of a developer’s job. Keeping all of the different categories of costs in the same place to quickly see a project’s financial status and progress is a pro move.

In this (Management Tactics Every Developer Should Know (mailchi.mp) newsletter, I covered the basics of setting up an anticipated cost report. Essentially, an ACR tracks budget and contract values and changes and compares them against billings and payments. The data required to build and keep an ACR to date provides clear insight into a project’s cash flow and progress.

I stress using the ACR as a project management tool for all projects (not just new construction!) because it provides unambiguous project data that can be used to make unemotional decisions.

Following the adage that “what gets measured gets improved,” keeping a constant eye on the project’s progress against the budget is a much more effective way to stay on budget than attempting heroic value engineering toward the end of a project when an ‘unwatched’ spend finally catches up to everyone.

This is also why keeping the ACR up to date is crucial. It is the only way to ensure that all decisions are made with the most recent data.

6- Only pay for work that has been completed.

Getting this one ‘right’ requires a lot of emotional discipline, and it is essential to the accuracy of the ACR.

On the standard AIA G-703 (the continuation sheet to the Application and Certificate for Payment) document, the column that tracks payments is labeled “Total Completed & Stored to Date,” not “Total Paid.” This is because, traditionally, work is not paid for unless it is completed.

Outside of material deposits, assessing what percentage of the work is complete is the fairest way to approve and administer payments on a project.

Many people are tempted to approve payment applications as soon as they receive them to keep the project moving. While I understand where that impulse comes from, not reviewing payment applications regularly against the work completed can actually delay a project over the long term.

For example, after six months, the bank flags an error that happened in the second month of work. They will only fund work once the error is corrected. This requires the CM/GC to conduct an internal audit to identify the source of the error and rectify the problem. Given the tens (sometimes hundreds) of values typically included in a subcontractor’s scope, this is not a quick task. Payment delays ensue, and soon enough, subcontractors are threatening to demobilize, beginning with reducing their workforce.

This is why every project owner should carefully and consistently review pay applications and enter all validated data into the project ACR to track progress against the budget and contract values.

This practice is the best way to track project progress and ensure budget milestones are met as the project progresses. It is also a way to ensure the project is not overbilled and to know whether a budget concern is on the horizon before it becomes a problem.

I wrote a quick primer on reviewing pay applications in this newsletter.

7- Prompt payment and prompt decisions.

Time is the most significant decision-maker on development projects.

Once a payment application is processed and approved, payment should follow promptly. Not funding invoices for work that has been completed is terrible business. Not to mention, it will likely put a developer in breach of contract.

The implications of not paying on time have a cascading effect. It begins with trades diminishing their workforce on site, escalating to complete demobilization, and can ultimately lead to liens being filed against the project.

That sequence of events adds time to the schedule, inevitably adding cost via increased general conditions and reduced revenue from a late building opening. Additionally, late payments will damage the relationships with the GC/CM and the trades, which can add less measurable costs to the job.

Similarly, slow decision-making can deeply damage a project.

Choices decline with time, so when decisions aren’t made quickly, there are often only few options left. Unfortunately, those options are not always the most appropriate for a project or the most cost-effective.

So, when a challenge arises during construction, it is best to default to quick decision-making. Agonizing over a decision to the point that construction progress is halted is likely to cost the project more than a decision that is made quickly. This is especially true when the choice is difficult, and neither decision is clearly ‘wrong.’ In those instances, it is unlikely there is indeed a ‘wrong’ decision.

In instances with an abundantly clear ‘wrong decision,’ the right choices are much easier, and there is no excuse for taking unreasonably long to decide.

As a project owner, the main goal is to keep the project moving forward, and extending timelines for payment or project decisions is a surefire way to jeopardize the budget.

While these tactics require consistent work and discipline throughout the life of a project, they are relatively easy to learn and practice. Following these methods is the best way to ensure that a project stays on budget and on schedule—there is no ‘easy’ fix.

The mastery of any pursuit worth doing requires being relentless about following through the ‘boring’ day-to-day. It is the repetitive daily tasks that have the most compounding effects on the outcome of any project.

Not sure where to start and think we can help?

Main topic ideas for future newsletters.

Between conversations with clients, industry professionals (and RE Twitter) these are some subjects we will be diving deeper into in future newsletters.

Main challenges of office conversion projects.
What does a typical development schedule look like?
How I like to structure a GMP.

Have a specific subject you want to see us tackle? Drop us a note!

A cool thing we did...

This was a podcast I did in January of 2023 with Eric Anderton from Construction Genius.

We chatted about excellence in project management and about how to pivot in changing markets.