Project Budget & Construction Cost Explained

If you are not an experienced real-estate developer or a repeat client of an architect, you probably don’t know the difference between the project budget and the construction cost. That’s OK, we did not know either until we got to manage these budgets and costs.

As a matter of fact, it is very simple, let’s dive in!

What is a project budget?

The project budget consists of soft costs, construction costs, FF&E costs and contingency. Construction cost is not the project budget and your project budget should always be greater than the estimated construction cost.

Project Budget = Soft Cost + Construction Cost + FF&E Cost + Contingency

Soft Cost = Design, Managing and Permitting Fees

Construction Cost = Labor, Materials and Contractor Overhead Fees

FF&E Cost = Furniture, Fixtures and Equipment Purchasing Costs (Installation is either by the contractor, vendor or the client.)

Contingency = Budget buffer for unforeseen situations.

(If you will need to hire employees for the opening date, you should include the cost of hiring people into your project budget as well.)

What is a construction cost?

Construction cost is essentially the bill that the contractor will present to you. It will include their labor costs, material costs, overhead costs and profit. The contractor will most likely charge you on percentages of completion, so you can expect to pay throughout the construction and the last payment usually is made after the construction is finished.

What percentages is a typical budget composed of?

The percentage allocation for each budget items is different from project to project. Here is an office tenant improvement example:

Project Budget for An Office Tenant Improvement = $750,000.00 (100%)

Soft Cost = $112,500 (15%)

Construction Cost = $412,500 (55%)

FF&E Cost = $150,000 (20%)

Contingency = $75,000 (10%)

Bottom Line

From example above, you can see that construction cost is the most significant number of the project budget but is not the total budget. When you start a project, you have to account for all the work that goes into it and make sure you have a realistic budget.

Want to do the back of the napkin calculation for your project?