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A Guide to Residential Construction Contingencies for Builders: Managing the Unexpected

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Accounting / Financial Communication

In the world of residential construction, it’s often said that the only predictable thing is unpredictability. Whether it’s unforeseen soil conditions or sudden spikes in material prices, every construction project has its share of surprises.

These unplanned incidents or costs are precisely why builders should understand and factor in construction contingencies.

This article explains the essentials of residential construction contingencies and offers insights for builders to navigate them effectively.

What Are Construction Contingencies?

At its core, a construction contingency is a reserve amount of money set aside to cover unforeseen expenses that arise during a building project. Typically expressed as a percentage of the overall construction budget, this reserve ensures that the project doesn’t stall when unexpected costs surface.

But to truly understand its significance, it’s vital to break down its multifaceted nature:

  1. Risk management: At its essence, a construction contingency is a risk management tool. It acknowledges the inherent uncertainties in any construction project, from geological surprises beneath the ground to sudden weather events that can delay work.
  2. Types of contingencies:
    • Design contingency: This is often used in the early stages of a project when the design is not yet finalized. As the design evolves and becomes more detailed, some elements might cost more than initially anticipated.
    • Construction contingency: This is for unforeseen events related directly to the building process, such as labor issues, equipment failures, or unexpected material cost hikes.
    • Owner’s contingency: Separate from the amounts that contractors set aside, this is a reserve that the project owner maintains to address changes they might want or unanticipated challenges that don’t fall under the purview of the contractor’s responsibilities.
  3. Calculation factors: While the contingency is often expressed as a percentage, the specific percentage isn’t arbitrary. It’s determined by evaluating various factors, including the project’s complexity, past experience, site conditions, project duration, and even the local regulatory environment.
  4. Evolution over time: As the project progresses and unknowns become knowns, the amount of contingency needed may decrease. Regularly revisiting and adjusting the contingency amount can free up resources or provide a clearer picture of the project’s financial health.
  5. Legal and contractual considerations: In many contracts, especially for large projects, the use of contingency funds and the conditions under which they can be tapped might be strictly defined. This ensures transparency between contractors and clients and sets clear guidelines for unforeseen expenses.

Why Are They Crucial for Residential Construction?

Unpredictable Conditions

Residential construction often involves working on sites that might have been untouched for years.

There could be unforeseen soil conditions, hidden water tables, or even buried remnants from past structures that can derail your initial plans.

Construction management software helps document and archive site assessments, ensuring that any unusual conditions are flagged and accounted for in both planning and budgeting.

Material Price Fluctuations

Economic factors can lead to sudden changes in the prices of essential construction materials. Having a contingency allows builders to proceed without compromising on quality.

With its inventory tracking and vendor communication features, BuilderPad enables builders to get real-time price updates, helping anticipate spikes and making the necessary budgetary adjustments.

Design Alterations

Sometimes, what looked good on paper may not materialize as expected, necessitating design alterations. These changes can increase costs.

By integrating design tools and allowing for change logs, BuilderPad ensures that any design modifications are instantly recorded and announced, keeping stakeholders informed.

Updates
Get notified of every progress update, delays and milestones

Regulatory Hurdles

Zoning laws and building codes can sometimes throw a wrench into the works. Staying compliant might mean additional work and expenses.

By providing a repository for latest regulatory guidelines and integrating them with project planning, BuilderPad ensures builders stay on top of compliance requirements.

How Much Should Be Set Aside?

While general guidelines suggest:

  • New Builds: 5-10% of the total budget.
  • Renovations: 10-20% of the total budget.

It’s essential to assess each project individually.

How much to set aside

There are several nuanced factors and considerations that builders should take into account to determine the appropriate contingency amount:

  1. Project Complexity: More complex projects with intricate designs, specialized materials, or cutting-edge technologies will inherently carry more uncertainties. Such projects might require a higher contingency allocation to cater to unexpected challenges or specialized solutions.
  2. Project Size and Duration: Longer projects tend to have more uncertainties, simply because they span across extended periods. Market conditions, labor rates, or even regulatory frameworks can change over time, necessitating a larger contingency reserve.
  3. Past Experience: Historical data and past project experiences are invaluable. If previous projects of similar nature frequently encountered unforeseen costs, it would be prudent to set aside a more generous contingency for upcoming endeavors.
  4. Site Conditions: Sites with unknown conditions, or those in challenging terrains (like waterfronts, hillsides, or dense urban environments) may necessitate a heftier contingency. If comprehensive site surveys haven’t been conducted, or if a site has a history of surprises, a higher contingency percentage might be in order.
  5. Economic Climate: In periods of economic volatility, material prices and labor costs can fluctuate more unpredictably. During such times, it might be wise to have a more substantial contingency to buffer against these fluctuations.
  6. Contractor’s Track Record: If working with a new contractor or one with a varied track record, it might be prudent to allocate a higher contingency. Conversely, a seasoned contractor with a stellar track record might justify a slightly lower contingency.
  7. Flexibility of Scope: If there’s a likelihood that the project scope might expand or change based on client feedback or evolving requirements, a more considerable contingency can help accommodate these changes without disrupting the project’s financial health.

Tips for Managing Construction Contingencies

Thorough Site Analysis

Before starting a project, conduct a detailed site analysis. This includes soil tests, site accessibility assessments, and reviews of any existing structures.

BuilderPad allows for easy upload, storage, and sharing of site reports, ensuring all involved parties are on the same page.

File storage BuilderPad
BuilderPad ensures all involved parties are on the same page.

Regular Budget Reviews

Ensure you’re reviewing the budget regularly, tracking contingency usage.

Open Communication

Keep clients and stakeholders informed about contingency usage and potential budget changes.

Through integrated communication channels, BuilderPad ensures everyone is updated in real-time, fostering trust and transparency.

communication
BuilderPad fosters effective communication between all parties involves in a construction or remodeling project

Flexible Planning

Be ready to adjust your construction approach based on emerging challenges.

With BuilderPad’s agile management, you can use tools that allow task adjustments, resource reallocation, and timeline shifts, the software ensures adaptability throughout the project lifecycle.

Conclusion

Construction contingencies are more than just a financial buffer; they’re a testament to a builder’s foresight and commitment to a project’s success.

By integrating knowledge about contingencies with powerful tools like BuilderPad, builders can ensure a streamlined, informed, and proactive approach to residential construction, consolidating their reputation as industry leaders.

Mastering Construction Budgeting: Your Path to Profitable Projects in 2023

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Accounting / Financial Industry Tips & Tricks

Construction budgeting is a critical aspect of any construction project, ensuring that the project is executed efficiently, within financial constraints, and meets the desired quality standards.

As technology evolves and economic factors fluctuate, construction budgeting practices have also adapted to the changing landscape. In 2023, construction budgeting

has taken on new dimensions, integrating advanced tools and methodologies to enhance accuracy and streamline the process.

This comprehensive guide explores the key components of construction budgeting in 2023 and provides insights into best practices for successful project delivery.

1. Initial Project Assessment

The construction budgeting process begins with a thorough assessment of the project’s scope, objectives, and constraints.

This stage involves collaborating with architects, engineers, and stakeholders to gather detailed information about the project’s requirements, design complexity, and any unique challenges that may impact the budget.

2. Cost Estimation Techniques

In 2023, cost estimation has evolved with the incorporation of advanced technologies such as Building Information Modeling (BIM), 3D scanning, and artificial intelligence.

BIM allows for precise virtual representations of the project, aiding in accurate material quantity take-offs and cost calculations. 3D scanning helps capture existing site conditions accurately, minimizing surprises during construction.

3. Building Contingencies

Unforeseen events can significantly impact a construction project’s budget.

In 2023, construction budgeting includes comprehensive contingencies to account for potential risks, such as weather-related delays, supply chain disruptions, or regulatory changes.

These contingencies, often based on historical data and industry benchmarks, provide a safety net against cost overruns.

4. Sustainable Construction Practices

With increasing awareness of environmental issues, sustainable construction practices have become an integral part of many projects.

While sustainable initiatives might have upfront costs, they often lead to long-term savings through energy efficiency and reduced maintenance.

Budgeting for sustainable features, such as solar panels or rainwater harvesting systems, is a key consideration in modern construction budgeting.

5. Technology Integration

Construction budgeting has embraced various software tools designed to enhance accuracy and collaboration.

Project management software, cost estimation tools, and financial tracking platforms enable real-time monitoring of expenses, helping project managers make informed decisions to keep the project on budget.

BuilderPad itself is a technology-driven platform that centralizes project management, cost tracking, and communication. It offers tools for project managers to monitor expenses, track budgets, and communicate with team members in real time, streamlining the entire budgeting process.

6. Procurement Strategies

In 2023, procurement strategies have diversified to accommodate changing market dynamics. Some projects leverage global sourcing for materials, while others prioritize local suppliers to support the community.

The choice of procurement strategy can significantly impact costs, making it an essential aspect of construction budgeting.

7. Skilled Labor Considerations

The availability and cost of skilled labor are crucial factors in construction budgeting. In recent years, the industry has witnessed labor shortages in various regions.

This has led to a focus on optimizing labor productivity through training programs, efficient scheduling, and the use of labor management software.

8. Regular Budget Monitoring

Gone are the days of creating a budget and sticking to it without deviation. Modern construction budgeting involves continuous monitoring of expenses against the budget.

This proactive approach allows project managers to identify potential deviations early and take corrective measures to prevent cost overruns.

BuilderPad’s tracking capabilities allow project managers to monitor expenses against the budget on an ongoing basis.

Set a total budget and allowances for cost transparency, while keeping clients in budget or aware of overages.

9. Communication and Transparency

Open communication among all stakeholders is fundamental to successful construction budgeting. Regular updates on budget status, potential changes, and challenges foster transparency and collaboration.

Technology-driven communication tools facilitate instant sharing of information, reducing misunderstandings and conflicts.

BuilderPad offers communication tools that enable seamless collaboration among all stakeholders.

Team members can share budget-related updates, track expenses, and discuss potential changes within the platform, promoting transparency and minimizing miscommunication.

Remove unproductive meetings and phone calls, with an activity feed that encourages discussions to be documented.

10. Adapting to Change

Flexibility is key in construction budgeting. The year 2023 emphasizes the need to adapt to unexpected changes, whether they are technological advancements, regulatory shifts, or unforeseen economic events.

Projects that can adjust their budgets and plans swiftly are better positioned for success.

Conclusion

Construction budgeting in 2023 is a dynamic and technology-driven process that incorporates advanced tools, sustainable practices, and a proactive approach to risk management.

By integrating these components and fostering clear communication, construction projects can navigate the complexities of modern budgeting to deliver results that align with financial expectations and quality standards.

As the construction industry continues to evolve, mastering the art of construction budgeting remains a cornerstone of successful project management.

By leveraging BuilderPad, construction professionals can enhance their budgeting processes, ensure accurate cost estimations, and successfully navigate the complexities of contemporary construction projects.

Construction Budgeting: FAQ

What is construction budgeting?

Construction budgeting is the process of estimating, planning, and managing the financial aspects of a construction project, including expenses related to materials, labor, equipment, and other project-related costs.

How has technology impacted construction budgeting?

Technology has revolutionized construction budgeting by introducing tools like Building Information Modeling (BIM), project management software, and real-time communication platforms. These technologies enhance accuracy, collaboration, and transparency in budgeting.

What role does BuilderPad play in construction budgeting?

BuilderPad is an advanced project management platform that offers features such as real-time expense tracking, cost estimation, supplier management, and communication tools. It integrates technology to streamline budgeting processes and facilitate informed decision-making.

What is the difference between construction budget and project budget?

The construction budget specifically refers to the allocation of funds for the construction phase of a project, while the project budget encompasses all costs associated with the entire project lifecycle, including planning, design, construction, and post-construction activities.

What are construction cost examples?

Construction costs examples include expenses for materials such as concrete and steel, labor wages, equipment rental, permits, and site preparation.

Navigating Cost-Plus Contracts: A Comprehensive Guide to Calculating Your Construction Markup

Categories
Accounting / Financial

The ever-changing economic climate has compelled construction firms to reevaluate their pricing strategies.

To mitigate risk, many are considering adopting a cost-plus pricing model. This pricing approach can help secure profits, but to optimize its benefits, it is crucial to understand and apply appropriate markup calculations.

In this blog post, we will explore how to:

  1. Understand the cost-plus pricing model
  2. Calculate the minimum markup to prevent losses
  3. Determine the ideal markup for generating profits
  4. Monitor the competition and industry trends
  5. Regularly review and update your markup

Understanding the cost-plus pricing model The cost-plus pricing model, also known as “transparent pricing” or a “time and materials contract,” involves charging clients for the cost of materials and labor plus a predetermined markup. This pricing method helps protect your bottom line against economic uncertainties by passing increased costs to the client. To maximize profitability, it is essential to calculate and apply the right markup.

Calculating the minimum markup to avoid losses As a business owner, generating revenue is necessary to maintain operations and employ staff. With a transparent pricing model, the goal is not only to break even but also to become more profitable. To ensure you avoid losses, start by calculating the minimum markup necessary.

To calculate your breakeven markup:

Breakeven Markup % = Total Annual Operating Expense / Total Annual Expected Job Costs

Determining the ideal markup for generating profits Once you have calculated the minimum markup needed to avoid losses, the next step is to identify the optimal markup for maximizing profits. The amount you can charge is primarily limited by your competition, so it is crucial to find a balance between competitive pricing and profitability.

Two approaches can help determine a markup target:

  1. Start high and reduce: Suitable for established builders with ample work, this strategy involves beginning with a markup 20% above the breakeven point and decreasing it until clients start signing proposals.
  2. Start low and increase: Ideal for new builders looking to establish themselves, this method involves starting with a markup at least 5% above the breakeven point and gradually increasing it until clients stop signing contracts.

Monitoring competition and industry trends, and staying informed about your competitors’ pricing strategies is crucial for maintaining a competitive edge. You can gather this information by talking to clients and joining local builders’ associations or networking groups.

Additionally, keeping an eye on industry trends will help you anticipate changes in the market and adjust your pricing strategy accordingly.

Regularly reviewing and updating your markup as your business grows and the market evolves, it is vital to review and update your markup regularly.

At a minimum, this should be done once per year.

Continuously analyze your profit margins and recalculate your breakeven markup to ensure you are charging the right amount to maximize profitability.

In conclusion, adopting a cost-plus pricing model can be an effective strategy for construction firms in an unpredictable economic environment.

However, to optimize its benefits, it is essential to understand the model, calculate appropriate markups, monitor the competition, and regularly review and update your pricing strategy. By doing so, you can secure your bottom line and ensure the long-term success of your construction business.

From Blueprint to Bottom Line: How Accurate Construction Takeoffs Can Save You Money

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Accounting / Financial

A building proposal’s takeoff is an essential phase in the cost estimation process. The items and supplies required for the project, and their quantities, are calculated by vendors, sub-contractors and project managers using the building plans, selections, and specifications. The budget, schedule, and supplier purchase orders are also created using that data.

Nevertheless, creating a takeoff – extracting this detailed data from project plans – can take up a large chunk of a builder’s time. Historically, builders used a set of blueprints, along with some pens and markers, to create a takeoff manually. For the benefit of modern builders, software has been developed to streamline and create efficiencies for this procedure.

Why Are Construction Takeoffs Vital To A Project?

  • Establish project viability: Since estimators often have a budget to stick to, construction takeoffs specify how financially viable a project is based on the cost of the materials and labor.
  • Provide a profit estimate: By creating an accurate construction takeoff, estimators can calculate how much a construction company will profit from the project.
  • Bids: Estimating a construction project is challenging enough. If you underestimate, you risk losing profits. If you overestimate, you risk losing the job.  This is why an accurate construction takeoff is so important.  It provides a financial figure you’ll need before submitting a bid.

How Many Different Kinds Of Construction Takeoffs Are There?

The two varieties of building takeoffs are as follows:

  • Manual – With a printed set of plans in hand, and following a long list of material, home builders calculate the cost of each component individually to arrive at the total cost of the project. This method can be tedious and time-consuming, and utilizing the following process is better. 
  • Digital – The days of a builder painstakingly going through physical printouts to create a list of items one by one are long gone. Takeoff software was designed specifically to aid in this complex task. Simply upload a plan and the necessary components into a takeoff software program. After the program has analyzed the data, each item is given a figure, and estimates are made to arrive at a total inventory cost.

A Closer Look At Construction Takeoff Software 

The computer software that helps users with estimating their material costs according to digital plans is called Construction Takeoff Software. Software for takeoff frequently includes tools for assessing costs and workforce. 

Takeoff software frequently uses digital model forms. The program often supports the most popular file formats for designs, including SVG, DXF, and even PDF or picture files.

Instead of physically estimating material quantities (a procedure prone to error) estimators may point, click, and drag information off the project designs using the digital representations of the blueprints.

Advantages Of Using Construction Takeoff Software

Although different providers’ software uses its own processes, they are very comparable.  Below, we discuss some essential tasks that takeoff tools may provide to builders and clients to expedite and enhance the takeoff experience.

  • Collaborative Takeoff Process – This functionality will be most prevalent in cloud-based takeoff tools intended for big teams. Collaborators can view someone else’s comments and notifications and prevent future mistakes. The takeoff procedure for a specific configuration frequently involves the utilization of materials from a number of suppliers.
  • Measurement Tools – Every takeoff tool available today enables users to locate and evaluate linear components on the drawings to extract the required dimensions of different materials. This might be any assortment of components assessed in length units, such as concrete, lumber, windows, doors, etc.
  • A Record Of Material Costs – A record of prices for materials organized by manufacturers and suppliers is frequently included in and updated by the more comprehensive takeoff software. As a result, estimators won’t have to personally search for item or material costs.  Even if users can obtain better prices through supplier relationships and/or social connections, it can often add value to work with the pre-built system.
  • Accessibility – Your work will be accessible to you anytime you have internet access if you use cloud-based takeoff software.  This means that you may use the software virtually whenever and wherever you want.  For example, if you are on the job site and need to evaluate an order or confirm material amounts, having the software at your fingertips is a huge convenience.

Closing Thoughts

Creating an accurate construction takeoff is a crucial step in estimating the building costs, regardless of how big or small the project is. Home builders must have the ability to thoroughly explain the project’s required materials, and their pricing, to provide a competitive proposal. 

Accuracy with old-school, manual takeoffs is challenging regardless of the home builder’s expertise level. Construction Takeoff Software provides the ability to create precise estimates in a quick time frame. We suggest using software such as BuilderPad, which can help you achieve your construction goals, keep you in touch with your clients, and help you provide accurate construction takeoffs. 

You can start a free 14-day trial to view what BuilderPad offers, so sign-up now! 

Building Smart: How to Save Thousands with Rebates and Tax Credits for Your Next Home

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Accounting / Financial

When building a home, every dollar counts. But, did you know there’s a trove of untapped savings in the form of rebates and tax credits? As a savvy homeowner or builder, you can unlock significant financial benefits while contributing to a greener future. Let’s explore the types of rebates available to turn your house into an energy-efficient masterpiece without breaking the bank!

Energy-Efficiency Rebates: The Green Bonanza

Transforming your home into an eco-friendly fortress doesn’t just save the planet, it saves your wallet too!

Many utility companies provide attractive rebates for installing energy-efficient appliances, windows, doors, and insulation. By optimizing your energy use, you’re not just earning back on your investment but also significantly reducing your annual energy bills.

For more substantial energy projects, consider these eco-friendly powerhouses that could land you juicy tax credits:

  • Solar panels: Harness the power of the sun and let it pay off in substantial rebates.
  • Small wind turbines: Get a breath of fresh financial relief.
  • Geothermal heat pumps: Leverage the earth’s temperature for heating and cooling and reap financial benefits.
  • Air purifiers: Breathe easier knowing you’re contributing to both your health and wealth.
  • Biomass fuel stoves: Enjoy cozy winter evenings, fueled by renewable sources and attractive rebates.

Energy Star Rebate Finder: This website allows you to search for energy-efficient rebates available in your area. You can insert this link in the paragraph discussing energy-efficiency rebates.

Searching for eco-friendly products to add to your new home? Check out these resources:

  1. Energy Star Certified Products: Energy Star provides information on various energy-efficient products and possible tax credits. This link can be used when discussing solar panels, air purifiers, and more.
  2. Federal Tax Credits for Consumer Energy Efficiency: This page provides a summary of available federal tax credits for energy-efficient purchases. Insert this link in the same paragraph for more depth.

Appliance Rebates: Upgrade Your Lifestyle, Upgrade Your Savings

When revamping your kitchen or laundry room, opting for energy-efficient appliances can lead to exciting rebates. Major appliance manufacturers often provide attractive incentives when you choose specific energy-saving models.

A simple appliance upgrade could turn into a few thousand dollars of savings, making that shiny new refrigerator even more appealing!

Energy Star Appliance Rebates: Again, the Energy Star Rebate Finder is a fantastic resource that also covers appliance rebates. Add this link to the paragraph on appliance rebates.

General Home Rebates: A Spectrum of Savings

Did you know that there’s a wide array of home improvements that could qualify for rebates?

Upgrading your windows and doors, improving insulation, or even installing solar panels could bring you unexpected returns. Besides enhancing your home’s comfort and resale value, you’re also investing in future savings.

Database of State Incentives for Renewables & Efficiency (DSIRE): DSIRE is a comprehensive source of information on state, local, utility, and federal incentives and policies that promote renewable energy and energy efficiency. Insert this link in the section about general home rebates.

Finding the Right Rebates for You

The road to substantial savings is paved with potential rebates tailored to your unique home improvement project. Whether it’s energy-efficient upgrades, appliance replacements, or general home improvements, a world of financial benefits awaits.

All it takes is a bit of research to discover the rebates perfectly suited for you and your home. Start building smarter today and see how your investment can pay for itself!