Overview of Project Costs

So, how much will my project cost? I get asked this a lot when I talk with people about new projects they are interested in starting. This is usually after they have briefly described their idea to me, so their question lacks some vital information. The major indicator of cost is the scope of the project, meaning, what a team of architects, designers, engineers, builders, and/or tradespeople would actually be doing to a new building or renovation project. I’ll do my best to explain how project costs are established and what you can expect during the budget creation process.

This discussion will be very high level, since I want the following concepts to apply to most building projects. Please understand that there are differences and nuances to different project types including commercial, industrial, multi-family residential, single-family residential, education, hospitality, and healthcare. These projects range widely on complexity, budget, code requirements, and about a million other things.

Like I mentioned earlier, the main approach to establishing how much a project is going to cost is understanding the scope of what you are wanting to renovate or build. You’ll also need to understand the level of finishes (on a scale of high quality and custom to standard quality and utilitarian). If your project requires more complexity involving utilities, custom work, historic preservation, security needs, renovation while the building is occupied, etc., more planning and often more money is needed to cover the added complexity. If a project is fast-tracked, meaning it has a completion deadline that requires the construction schedule to move faster than a typical project, your budget may increase. The size of a project often includes the square footage of the building or part of the building being worked on and can include site work such as parking lots, sidewalks, landscaped and green spaces, and the like.

With all of this considered, I hope you can see how it is not easy to accurately answer the question, “how much will my project cost?” without an idea of what the project entails. For standard construction of commercial and residential projects, a trusted, seasoned professional can often give a ballpark estimate for a project or even a cost per square foot. Many projects with similar characteristics will be in the same cost range. With that, you have a starting point on what to expect in terms of costs. The established budget will be based on your specific project needs though.

What Is Included in the Cost?

I hope I haven’t lost you, since the section above is a lot of information. Arriving at an actual budget number for a project is not necessarily difficult, it just requires input of a lot of project information. So, what line items do design and building professionals add up to arrive at a project budget number? To answer this question, it may be helpful to think of construction just like any other business that has staff, inventory, facilities, etc. to pay for. Any business also has to make a profit to survive and charge that profit to their clients.

Professionals in the building industry have offices, payroll for staff, and other overhead costs they must pay for to be able to work on your project. This overhead also includes insurance, vehicles, and equipment. So far, we have added up overhead and profit. These are generally already established prior to the creation of your project’s budget. Overhead costs are set costs the business incurs to operate, and profit is usually a percentage of the overall project cost.

To work on your project, the first thing people usually think of is materials. The physical materials needed for your project are a major contributor to the overall cost. Many people think of what they see like flooring, wall paint, doors and windows. The budget, of course, also includes the elements that aren’t readily visible like framing, foundation, insulation, and building systems materials like piping, ductwork, electrical conduit, fire protection, etc. The cost for standard materials can be estimated pretty accurately, especially if the project has detailed construction drawings from which estimators can decipher the quantity of materials needed. Custom furniture, cabinetry, and finishes will almost always be higher than standard, ready-made materials, which isn’t surprising. If the project requires a high level of finishes, some custom options will probably be added to the budget.

Next, how are the materials designed, specified, acquired and installed in your project? This is where labor costs come into the budget. Generally, there is a hierarchy of labor costs that I’ll explain together here for the sake of explanation. Architects, designers, and engineers charge fees that allow them to design and specify (or choose) the materials and designs needed for the contractor to build or renovate the project. That is, these firms charge fees that maintain their operations and business costs as well as payroll for qualified, often, licensed individuals in their respective fields. Architecture, design, and engineering firms charge fees that are generally based on the amount and type of building project and the hours of labor it will require to accomplish their specific scopes of work. For an architecture firm, their fee will include time for an appropriate amount of their employees (often calculated based on title and expected time commitment) to attend project meetings, draft architectural plans in tandem with engineers, and oversee appropriate portions of the building project as it progresses.

Define Scope

We now understand what scope is, so for every project, the project owner must define the scope for their project. Defining the scope is mostly done by the project owner or client, and the architect, designer, or builder may make deductions or additions before the scope is finalized. The scope for your project will include detailed information on what exactly is being built or renovated. Detailed scopes are highly important for several reasons. The more detailed a scope is, the more accurate the architects, designers, and builders can be when creating project designs, specifications, and budgets.

If your scope is vague like this example, “renovate restroom to meet ADA requirements”. That leaves a lot to question and may force someone creating a budget to make assumptions that may not fit your intentions. You’ll need to provide details on the quality of finish levels you would like, what components of the existing restroom you intend to keep, etc. A better scope could be something like this: “Complete renovation of restroom in commercial office building. All current finishes, fixtures, and equipment to be demolished and replaced with durable, standard industry level FF&E. Water-saving and automatic plumbing fixtures are preferred. The building will be in use during renovation. Restroom shall meet all applicable building and ADA codes.”

Establish the Budget

As you process and define the scope, you as the project owner will also need to establish a budget. You may have a certain amount of money set aside for your project, perhaps in the form of a loan or grant or private funding. A large majority of projects have some sort of budget. The budget and scope may have to shift to meet each other. To expand on that, some project scopes end up with a much higher budget estimate than the project owner expected. In that case, the scope may shift or shrink to fit the proposed budget. In a few cases, project owners can find ways to increase their budget to fit the entire scope.

Is There Any Wiggle Room?

It is important to communicate any flexibility in your budget to your project team. Most building teams are adept at finding creative solutions for budgets. More often than not, clients have bigger project goals than their budgets reach. This is often due to clients not considering costs like overhead and profit that building teams will charge. Additionally, most people who work outside of the building industry do not have a solid grasp on general building costs, because they haven’t ever had a need to. As the client, voicing your project goals and priorities at the beginning of a project is helpful for everyone involved. Knowing your budget or budget range allows all parties involved to stay on the same page regarding what is feasible and expected.

Understand Market Conditions

Here in the building industry, we are all pretty aware of the higher than normal costs and lower availability of certain raw materials needed for building projects. As we near the end of 2021, we are continuing to see higher than average costs due to supply chain issues related to the pandemic. This current scenario is something to be aware of, but not something that should scare off clients interested in a new project. Since lumber prices are currently high, new building and renovation project teams can consider substituting metal for traditionally lumber applications, like wall studs.

In addition to raw material availability fluctuations, labor in the construction industry is experiencing shortages as well. Specialty tradesmen and contractors may be hard pressed to find skilled and unskilled laborers as well as experienced project managers, estimators, and superintendents. You as a client cannot change the job market, but you can be aware that labor shortages may increase your project’s timeline and potentially raise the budget.

Characteristics that are specific to your project can affect your budget as well. You can understand that a building project in a decent sized town with easy access to highways, utilities, and building supplies will be a logistically easier place to build. A rural project site far from building supply stores and utilities is both logistically more difficult to build on and usually requires more time, budget, and pre-planning. If there are no access roads to a site, or no paved access roads, getting to the site is often more difficult, especially for large work trucks and equipment. Weather conditions can definitely change your project’s budget and schedule especially if unexpected weather (like the 2020-2021 winter) causes delays or damage.

Also, as far as timing, most building teams are searching for new projects constantly in an effort to create a backlog of projects that will keep their flow of work consistent. So, to start a project, there may be a necessary time period to mobilize a project team, hold initial project planning meetings and other initial work required for a successful project. So, most building teams want to work on your project, but it’s important to understand that they generally cannot put their other work aside and immediately begin work on your project.

The Best Mindset for a Successful Project

I generally tell people who are thinking of starting a new project to increase their idea of how long the project will take. Almost all building projects take a little longer than planned. They almost always have some unforeseen snafu or delay that may require the budget or schedule to shift, a little or a lot. These are sometimes out of anyone’s control, but they can definitely be caused by a building team member’s oversight. For all new clients on building projects, my advice is to keep a flexible mindset, learn as much as you can, and keep your finished project visualized. The day your project is complete, it will be worth the investment of time, costs, and sometimes headache to get it done.

P.S. Check out the links in the Resources section below for pricing guides on both commercial and residential projects.