When you run a small business, you wear more than just one hat, but is budget master one of them? When it comes to protecting your bottom line, your budget plays a critical role. A smart budget accurately sets the tone for the timeline of your project; it also determines the people you hire and the equipment and technology you’ll need. When a budget is perfectly balanced, it allows the contractor to be productive and efficient, with an acute eye always fixed on overhead costs.
Small-to-medium construction firms have small-to-medium project budgets, often with a unique set of constraints. Creativity is key to mimicking the budget flexibility that larger firms enjoy, but it cannot be approached without the influence of best practices. If you are open to adapting and improving your current practices, you can increase your profit margins and resiliency. With a recession looming, these adjustments can mean life or death for your company. Here are 3 budget management tips to help you realize more growth.
1. Bucket Your Expenses
If you want more control over your spending, take a cue from the majority of successful construction firms and divide your project expenses between hard and soft costs. Hard costs, also known as “brick and mortar” expenses, will account for about 70% of your construction budget. These tangible costs are typically fixed in nature and thus, easier to estimate and control. Soft costs, also known as intangible expenses, account for the remaining 30% of your total budget. These expenses cannot be easily categorized, other than the fact that they are neither fixed nor tangible and are almost impossible to estimate. Viewing your costs through this dichotomy will help you apply cost control measures in the places that matter.
2. Include the Right Stuff
Beyond materials and labor, it is important to anticipate as many costs as possible. Failing to account for the full scope of work could result in a substantial amount of debt. Here is a quick refresher of items that should be represented in your project budgets:
- Professional fees and services (permits, planning, drawings, accounting, utilities)
- Waste and disposal fees
- Inspection fees
- Whole labor costs (wages, compensation costs, payroll expenses, vacation and sick time, non-productive time, and rework)
- Equipment costs (rental fees; delivery, operating, and fuel costs)
- Project management costs (project manager salary and office expenses)
- Construction technology
- Liability insurance and professional bonds
- Contingency fund
3. Be Prepared
In a bidding war, a construction company’s snap decision can become a fatal error if they aren’t financially capable of accepting a contract. To make sound project decisions, executives must have a tactical budget in place for their construction companies. If you’re at the beginning of your fiscal year, the good news is that you have a renewed opportunity to apply the lessons learned from the sins of the past. When preparing the structure of your working budget, carefully study the following items.
- Look for patterns in trends from your income statements, focusing on labor burden, direct costs, operations support, sales and marketing expense, administrative overhead, and sales.
- Review average gross margins, being mindful of the factors that contribute to seasons of profit and loss.
- Consider current market evidence and projections – don’t plan for a robust year if all signs point to constriction.
After a business owner submits these areas to careful examination, they can develop a final budget that is both tactical and customized to your firm.
If you would like assistance developing a project budget template or would like to talk to one of our professionals about positioning your construction budget for growth, give us a call today.
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Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing, or recommending any transaction or matter addressed herein.