Understanding a client’s project budget is crucial for the design and planning process. Some clients are often unwilling to divulge specific budgets, for a variety of reasons. This can lead to an inefficient or ineffective design process. The core of this post is to enlighten homeowner and private developers (who may not be as sophisticated as corporations or governments) to the critical nature of budget disclosure with design professionals. Our recommendations ultimately are that private, residential and smaller commercial developers be more forthcoming with project budgets and learn about more advanced design practices.
This is one of the more important blog topics – this simple element is responsible for more disagreement than any other single aspect I can put my finger on. This can feel like a very awkward question akin to “how much money do you have?” It’s not something that feels right to discuss with someone you may have just recently met, right?
This may be professional bias (and I’m sure others feels the same way) but for the most part, we just don’t care. Sure, a high number can be impressive but most of us are just after clients we can work with, to continue to practice our specific craft. Our ideal client isn’t a rich one or a poor one, but someone with a realistic expectation of what they can achieve so that whatever project we’re working on can ultimately be completed. We want to see things built, we want to see it work, make things better, learn, create, take an Instagram photo and go on to the next one.
Clients (especially those doing their first project) often want to play budget numbers close to the vest. While I’m sure it’s different in many cases, I imagine much of the time the client is reluctant to divulge their true number out of fear that we’re going to increase our design estimate if we find out the number is relatively large (or perhaps walk away from the job if it’s not large enough). That’s not the story here, our design charges are based only on time and skill requirements. While it’s true that more expensive projects typically are more complex (and thus cost more), our billing practices are not based explicitly on project value.
Furthermore, we provide our clients with a detailed cost spreadsheet containing each facet of the design and the estimated hours it will take to complete. When bills are submitted we provide hours spent (categorized by the design task) so they are aware of how the charges occur. This maximizes transparency, which in my opinion is the key metric to hold someone to an accurate assessment. We are “open book” when it comes to billing. That is the only way to create a long-term relationship based on trust and transparency.
Aside: General Contractors
This is a very different animal when looking for general contractors, in which case the project cost often is a reflection of the complexity. To that end, we would promote utilizing builders who use an open book “cost plus” model, that is, someone who maintains a detailed log of money spent on the job (that’s transparent to the client) and bills the client a fixed markup based on the cost of the requisite subcontract or good.
This message is just as valid for other professionals as it is for homeowners and business owners. We’ve been involved in so many projects over the years where a designer does not know the client’s budget and proceeds to design a building or site (often at the client’s direction) that is well beyond what the client had in mind. Once that painful realizations occurs, the client is upset and does not want to pay for a design they cannot use. Going further, they are unwilling to pay for the necessary design changes required to scale the project back to the point of feasibility. Even when they do understand the mistake they’ve made, it’s not a fun process for anyone! We all want to get it right the first time.
On the other hand, if the budget is not realistic, we want to help you figure it out now, so you can either adjust and rescale or pull the plug quickly to minimize any potential wasted cost and effort. The difference in approach is apparent when working on governmental or corporate projects, or when working on private jobs with veteran builders or developers. In those instances, budgets are generally one of the first things discussed; both for design and construction. Budgeting is a key part of the design process – conceptual and schematic designs are done and interim cost estimates are prepared (often by a paid 3rd party estimator) to check the legitimacy of the project at various stages of completion and to ensure that the designs stay on track.
The process can be different for homeowners who are often making an emotional decision, vs. developers or commercial builders who need to make money to survive.
Again, large budget, small budget, etc. – it really makes no difference. We all have our niches and we want to make sure you are in the right place with us, or vice versa. While budget is often an indication of scale, it’s not necessarily an indication of complexity. Most professionals can recognize when a project is too big, too small, to complex, etc. and in many cases will be able to refer you to someone else that may be a better fit.
The first bit of advice we provide to someone looking to building a home or commercial building is: start a spreadsheet. It’s not always fun, but it’s a necessary first step….
Often building a home is not a financially responsible activity and that’s fine. Homes can provide more value than simply stated on a spreadsheet and often the utility provided by a thing may actually outweigh the value of said thing, and again, that’s okay as long as you’re making the decision consciously.
Regardless, no one’s resources are infinite and we want to help ensure that you have enough information to complete a budget so you can finish your project successfully. You can’t live in a house that’s 90% complete!
Our recommendation is that you (the homeowner) become responsible for project budgeting by setting up a spreadsheet based on typical construction and design requirements. A sample spreadsheet can be found here:
Alternatively, if you’re not willing or able to do this, it may be advisable to retain your design professional(s) to assist or shop for a builder who is willing to assist with pre-construction planning. This will ensure that the design and development project occur by rigorously following the project budget. Using a builder or professional is always advisable. We understand the tricks of the trade, including project contingencies, taking advantage of (or accounting for) seasonal differences, as well as just having good resources for subcontractors and other professionals to ask budget questions to.
Designing and Engineering for a business or commercial development is often a different calculation. Development is based on profit / loss – it’s a technical effort, being total project expenses (design, construction, interest, fees, etc.) vs. total project sales (e.g. sale of home, condominiums, etc.). While it’s simple to write, it’s not simple in practice as there are many variables to consider. Learning to deal with these and applying property contingencies can be as much of an art as a science, and like most things, it does take practice to become proficient.
Aside: Site Work and renovations
For building design, especially for new construction, it’s often prescriptive. When everything is “new” it is much easier to perform design estimates, as there are few if any variables outside of the designer’s control. If something needs to be changed, it can be done easily as the changes are just “paper” changes at that point. Where things can become difficult, is when there are unknowns. Two similar cases, where there are often many unknowns, are site work and renovations. In both cases, existing elements are hidden either behind walls or underground. In both cases, estimates (and often design) are subject to what’s uncovered during the construction process. This can make budgeting very difficult as both these applications require a substantial contingency, often on the order of 20% or more.
Our approach to both these items is proper site investigation. With respect to site work, this can often mean subsurface investigations like soils evaluations, boring or exploratory excavation and ground penetrating radar. For renovations, this often means investigation, which comes in two flavors: destructive and non-destructive. Destructive (as the name implies) means demolishing or opening walls or sheathing to view the interior elements. In some cases, this is impossible (if someone is living in the home, for instance). In that case, non-destructive testing is necessary. This may include simple visual inspections, borescope cameras or even x-rays in the case of commercial structural investigations. Non-destructive testing typically limits what the inspector can find, which means that things could be overlooked or missed – which could mean change orders and increased costs. In some cases, like projects with insufficient contingencies, this could mean disaster.
Benefits of Budget Disclosure
• Allows us to understand your limits and design appropriately.
• Lets us notify you if the potential project is infeasible (given X budget) and to provide faster identification of unsuitable projects – which ultimately saves money and time.
• Helps to identify if there is room in the budget during the design phase when it’s useful to have that information. That way if you wanted to add in an addition, expansion, jacuzzi, etc. then you can factor it into the plan. Of course, you can always add these things in later but often they will incur frictional or mobilization charges and you’ll lose budget efficiency.
Our ideal billing structure is to charge hourly rates. That’s far and away the most equitable way to bill clients. Easy jobs are done quickly and subsequently charged less. Hard / complex jobs (that carry complicated issues or risks) take longer and are billed more. It’s elegant in its simplicity. No one gets a free ride and no one is overcharged. Folks who change their minds (or plan poorly and necessitate changes) are charged accordingly. Those who have the process down to a science and use their consultants effectively are charged less.
That said, it’s necessary to know how much things are going to cost, otherwise it’s impossible to put a budget together. We always provide cost estimates but the earlier on in the project phase (or the more complex or risky the task is), the more contingency we require. To this point, it’s incredibly important to be able to properly perform investigational surveys, and be able to keep an open mind and open budget while these services are being performed. For projects that require profitability to work, one has to be able to “walk away” from a project if the investigations uncover a substantial issue. This does mean absorbing those investigational fees, but for better or worse, that is part of the risk of land development.
This is also why larger developers are able to take some risk on fringe projects that would be inadvisable for a small entity to tackle.
If you take anything away from this article, let it be that budget disclosure is a key part of any client–professional relationship. Having good information is critical for any design professional to be able to practice their skill. This includes information from our clients. Here at NEI, one of our main goals is to be able to foster long-term relationships with homeowners, builders and developers – we’re not in it just for “this” project, we’re in it for the next one or the next 15 of them. When both parties are able to disclose budgets and fees accurately, we’re able to achieve solid project planning and budgeting. That is one of the most important keys to both project performance and relationship building.
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