How to Keep Your Building Project on BudgetCategory | Construction
Churches commonly exceed their construction budget by overdesigning, overbuilding, or overcommitting themselves. This can pose a risk to the long-term financial health of the church. Although exceeding a budget can’t always be avoided, it can be minimized and controlled. Here’s how.
Identify source and use funds.
There are typically three sources of building funds: money you have, money you raise, and money you borrow. Add these together to obtain your total source funds.
Use funds are made up of three types of costs: hard (construction), soft (professional services, fees, permits), and FFE (furniture, fixtures, and equipment). A common mistake is to plan and design a building or renovation that will require all the source funds simply for the hard costs of construction. To avoid this, account for the soft and FFE costs first. Then what is left of the source funds can be allotted for hard costs. This will typically dictate how large and complex the project can be.
The tricky part is that early in the process, you don’t have a project defined yet and therefore cannot price it. The best you can do at this point is to assume that your use must match your source—you can’t spend what you don’t have. It’s the same principle identified in Luke 14:28 where Jesus speaks about counting the cost of a tower before you build it, to make sure you have enough to complete it. Committing to this concept, as simple as it sounds, will prevent big problems later.
What if you know your ultimate needs will cause the use to exceed the source? Master planning and phasing is the answer. Think of your master plan as the highest and best use of your site and facilities. It reflects the vision God has given your church and is done without financial consideration, as it is a long-term, flexible plan. Phasing is executing this master plan, one step at a time. Each phase is determined by your most important need and available source funds.
Rather than basing your project on assumed costs, which could be detrimental to your ministry, get confirmed bids. All work should be clearly defined, as should the cost and timeframe. Once you have final bids and contracts in place, total them all and add a 10% contingency.
Early in the cost-estimation process, a larger contingency is recommended. In fact, the more vague the numbers, the larger the contingency should be. As you further define the project and associated costs, you can reduce the contingency.
Avoiding cost overruns once you are in the heart of a project is difficult, if not impossible, especially with large, complex projects. This is where your contingency comes in handy. Overruns typically originate from three sources: owner, contractor, and city or local building authority.
Owner-driven overruns are caused when the church requests a change to the plans or agreed-upon work or material, resulting in increased cost. This can be avoided by giving careful thought to the design and planning phase of the project to ensure what the church wants is reflected in the plans and contract(s). Overruns by the church are usually caused when it selects something that costs more than the amount budgeted. The other, often costly, source of budget overruns is simply overlooking costs altogether.
Contractor-driven overruns originate with the contractor and can be avoided by obtaining a fixed-price contract clearly based on the plans and intentions of the church. It is recommended to avoid cost-plus or time and material contracts, as they do not require the contractor to commit to a fixed cost. A guaranteed maximum price always carries the least amount of risk. As much as possible, place the responsibility on others to deliver a certain scope of work for a fixed price.
In addition, the plans from which a contractor bids should be reviewed and approved by the local building authority before the final amount is set. Too often, projects are bid and a contractor secured prior to review. If the reviewing entity has additional requirements, these become a change to the contract, increasing cost. When there is no general contractor and the church is directly hiring subcontractors, the same principle applies—confirm the scope and the contract amount with local authorities first.
City-driven overruns are common, unavoidable, and usually expensive. Your local building authority may require additional work that was not part of the plans or contract, in order to complete the project. The best you can do to prepare for these surprise overruns is careful budget preparation cushioned with a generous contingency.
If you have questions about your building project budget, feel free to contact us or leave a comment below. We are happy to help.