While budgets are developed with cushions for unexpected pitfalls, there are areas where budgets routinely are overrun. Knowing about these areas ahead of time will help to make better budgetary decisions in the future.
Whether the weather is snowy or rainy, too damp or too dry, or, as we discussed in an article last month, simply too hot, there are days when the worksite has to shut down. Every good subcontractor and general contractor builds a cushion of work days into their estimates for project completion, but what about the extra costs?
“If we get a rain day, it's not like we can send the superintendent home and not pay him,” said Chuck Taylor, director of operations for Englewood Construction in Illinois. “If we have a construction trailer, it's not like we can tell the rental company, 'Hey, it rained today, so we're not going to pay for the rental on the trailer.’ It doesn’t work that way.”
There are also costs such as wrapping structures in protective material to keep them from the elements, or water remediation, or bringing in expensive heaters. It could also mean bringing in extra workers to make up for lost time.
Indirect costs are costs that are not directly attributable to a project, like materials and labor, but make demands of the contractor nevertheless. Such costs include things like insurance and maintenance. When preparing a bid, it is wise to include these costs as a percentage of your total estimate.
“A portion of the total dollar amount of a general liability policy, for example, must be assigned to each job. If the estimating team doesn’t have updated estimates for these things, the job will likely go over budget in these areas,” said James Miller, partner and member of Marcum LLP’s national construction industry group.
Often these costs are included in bids automatically, referred to as “burden” or “markup” but they tend to be forgotten, and many times are not adjusted for inflation, so they are not properly reflected. “They didn't adjust it during the takeoff and estimation phases of the contract, so they are already going in with a profit fade built into the contract,” Miller said.
Extra Labor Charges
Extra labor is another area where there are often overruns, because contractors often underestimate the time it will take them to complete a project. This often leads contractors to push extra hard on subcontractors, who cannot deliver under the tight deadlines.
For subcontractors, labor is an extra important component of their costs, so they should be even more mindful of these costs in their bids to general contractors.
Conversely, in these days of labor shortages, contractors must make sure there is enough work for their laborers to do so that the workers do not leave the company looking for paying work elsewhere. Often, this means putting the laborers to work at tasks that might be below their pay grade, such as maintenance or even volunteer work, because it is cheaper to pay to keep a good worker than pay to find new ones.
Unexpected Direct Project Costs
Many overruns in direct project costs are the result of errors or simple lack of communication.
“One way to head off unexpected direct project costs,” said Joe McLaughlin CFO at Austin Industries, “is with a robust preconstruction process that gives ‘a line of sight’ as to exactly what the owner wants and has envisioned for the project.”
“Understanding the contract, determining where there’s flexibility and how approvals and other processes will be handled while working toward a budget with the owner increases the odds that the budget is correct before work starts.”
To read more about ways costs can overrun their budgets, check out this article in Construction Dive.