Friday, April 16, 2010

Budgeting A Project – "I Don't Know Does Not Equal Zero"

Architects are notoriously poor cost estimators. We fall in love with our own work (understandably) and know in our hearts that the upgrade to a granite counter top will only cost $11.00. Inevitably, this is not the case and we lose credibility with our clients. Having a contractor on board early as part of the design team (a negotiated bid process) helps to alleviate this problem.

It is also tempting to say that you don’t have sufficient information to identify a particular cost for some component of your budget. Leaving a line item blank in a budgeting spreadsheet, because you don’t know the answer, is honest and wrong at the same time. The Hixson Doctrine applies in cases such as this: Any line item left blank is guaranteed to be wrong by 100%. My suggestion is to put something in as a placeholder and update the budget as better information becomes available.

When establishing a conceptual budget for a project it is always tempting to assume that that various components of the budget will go down once the drawings are completed, when a report comes in or even when the bids come in.

This rarely, if ever, is the case. I think it happened once on the East coast.

In fact, one should always establish a contingency for unknowns and changes on a project. They always occur and are rarely anticipated. Put yourself in the position of your client. If the contractor finds some dry rot hidden in a wall and asks the client for funds to repair it – where does this money come from? This is not an unlikely scenario and it will be much more palatable if money is available to cover the costs of the necessary repairs.

Hidden conditions are often the cause of budget increases, but they are not the only ones. In many cases the client will add something (or upgrade a component) to the budget during the course of construction. There is always the chance that the architect will make a mistake and forget to specify a component. Having the contingency cover these possibilities keeps everyone’s blood pressure down. Remember it’s all a team effort.

What if we don’t use this contingency? Good question. In my experience most issues come up during the foundation and framing stages of the project. I usually counsel my clients that if they still have contingency money available when the drywall crew gets started they can start thinking about spending some of these funds on upgrades.

Project Schedules

All projects are done on a hurry up basis. I have come to believe that this is hard wired into our busy lives. It is tempting to devise a tight schedule where each task on the critical path starts immediately after its predecessor. Although I can’t prove it – I am sure that the universe will not allow this to be true. It is much better, and professional, to allow some float or contingency time in the project schedule. When the unanticipated comes up the team has some time to solve the problem.