Having your project meet your expectations requires more than just good design and finishes. Construction planning and budgeting are both necessary tools in getting the outcome you envision. Without careful attention to both, project cost may spiral out of control. The first monitoring tool is the budget. The importance of a clear and complete budget cannot be overstated. If the construction planning is done meticulously then the budget should be easier to quantify. This however, does not usually happen. Often budgets are divided into categories and the amount in each category is based on the sub-contractors bid for that area of the work. Other parts of the budget are based on time, such as how long a dumpster will be needed at the site. This type of budget may be fine for a small project but the larger the project the more important it is to know where the contractor expects to spend your cash.
The budget should be segregated by Area (i.e. Equipment Room), Phase (i.e. Finishes), and Task (i.e. install particular brand of Heating and Air conditioning unit). Each budget category should be broken down further by wages and supply costs. The finished budget should show what it will take to complete the entire construction project. Once the budget is complete, verify that nothing is missing or needs to be changed. Remember, as stated in the Change Order blog, the main failure of a construction project is poor planning from the start. It is therefore, extremely important to make sure that the construction plan includes everything that you want and that you are comfortable with the base cost.
Typically, above the base cost of the construction project, a fixed percentage fee is added to all costs for the Builder’s administrative costs and associated profit. The base cost plus the administrative cost will equal the total cost of the construction project. Once the total cost is finalized an escrow amount will be calculated. Often, a pre-determined escrow amount is set aside in a separate bank account. Make sure you have 100% control of the escrow account. Funds will be released from the escrow account when phases have been completed. The American Institute of Architects have created many different contracts and forms that anyone can purchase and use for their building project. The forms that are used to monitor the progress of construction project spending are as follows:
- G702 – AIA Application for Payment
- G703 – AIA Continuation Sheet – Schedule of Values
Instructions to complete the G702 and G703 forms can be found using the below link: http://www.contractorform.net/PDF/G702-Application-for-Payment-and-G703-Continuation-Sheet-Instructions.pdf
Included with the submission of the forms listed above will be the actual costs you are incurring. This information shall be included in the Detail Expense Report based on area, phase and task including all supporting documentation (i.e. invoices, time sheets, etc.). If there is no supporting documentation (i.e. invoice, credit card receipt or timesheet) than payment should not be remitted to the builder. Under no circumstances should the builder or employees have access to your debit/credit cards. All expenses should be paid by the builder and submitted per the agreement. The Builder will either charge the owner monthly based on the tasks completed or based on phases completed, not items or phases started; verify this wording in your contract. It is critical that actual charges are correctly coded to the proper area, phase and task. Failure to do so could incorrectly show tasks that are over or under-budget. In addition, charges could be erroneously posted to a change order causing the owner to pay more, when in-fact the costs should have been posted to an original budgeted task.
Another area that you need to fully understand is what other projects the builder and sub-contractors are currently working. Which employees time will be 100% allocated to your project and which will be utilized part-time. All too often we have come across expenses and time being charged erroneously to our clients that should have been charged to another client. We cannot stress enough that all expenses should be supported by invoices. All time sheets should be signed by the employee and signed / approved by Project Manager (PM)). If the PM has been hired by the Builder, than the owner should either hire a part-time PM or have your Architect audit the construction site periodically to make sure that the Builder’s employees are working the required hours and the work is being performed in a satisfactory manner per the construction plans.
The final and perhaps most important person you need to hire is an accountant who knows construction. This person can monitor the financial control and review the billings. The accountant should work with the part-time PM and/or architect to make sure the builder’s billing information is correctly calculated and presented accurately. The accountant, the part-time PM and/or architect should all approve the billing prior to the owner releasing payment to the builder.
Your project will be with you for a long time. It is important that you create a team that will keep your interest first. With careful monitoring of the finances and good documentation of what you expect to your finished project to be, your project can come in on budget and if the weather co-operates on time.