By 2023, the construction industry across the globe is anticipated to grow at a rate of 4.2%, reaching $10.5 trillion. Anyone who has perused commercial or residential real estate listings will not be surprised by these statistics. Demand is high for construction, and your construction business needs to be ready to scale—and scale fast.
Today we’re breaking down the most useful tips for creating a budget that allows your construction business to work effectively and maximize revenue. Put on your hardhats, because here we go.
Review your business plan
Your business plan is a roadmap. It tells you, business partners, potential customers, and future investors what you plan to achieve with your company. Not only does it help you organize your entrepreneurial goals, it also helps you narrow your focus with market research and targeted strategy.
Without a business plan, budgeting is just numbers randomly assigned. We know the power of strategic budgets, so we urge you to begin with strategy. Write up a business plan that reflects your goals, methods, and timelines. Specificity is your friend. You can’t create a solid budget until you know where you want it to take you. Review your business plan at least every year, but more frequently if you can.
Don’t have a business plan? Check out the Small Business Administration’s guide to writing your own business plan.
Conduct some market research & forecasting
Your business doesn’t exist in a vacuum, so your budget shouldn’t either. There are myriad factors which contribute to your business performance, and you can set yourself up for success by conducting careful market research and forecasting.
These forecasts can inform your budgets to help you leverage everything you have to offer. For example, if you can comfortably predict an increase in the price of lumber, you can factor that price increase into your budget and calculate your job estimates accordingly.
Dive into expense analysis
It is an unfortunate truth that many construction companies will fail, and not because they don’t produce quality work. Financial mismanagement in an industry where job costing and expense management are key will spell disaster. Construction companies need to keep a finger on the pulse of their expenses so they can keep their job costing and estimates on track. An increase in expenses without correlation in project pricing will mean you’re spending more than you’re bringing in.
Instead, let’s get started with your construction budgeting process by breaking down each type of expense for an in-depth expense analysis.
A direct cost is any expense directly related to the project at hand. Direct costs may include:
- Labor cost
- Hourly wages
- Employment & unemployment taxes
- Paid time off
- Health insurance premiums
- Liability insurance
- Overtime pay
- Equipment rental or purchase
Fixed costs are the same month-to-month, making them easier to plan for and analyze. Fixed costs may include:
- Employee salaries
- Rent or mortgage
- Advertising & marketing budgets
- Equipment lease or loan payments
- Memberships or subscriptions
Variable expenses change month-to-month and can be harder to predict. Variable spending tends to grow with your business. For example, increased business will mean more materials and hiring more subcontractors.
- Vehicle maintenance & repair
- Office supplies
- Bonuses and commissions
- Marketing & advertising
While you might not always have control over these expenses, it’s important to keep high levels of visibility surrounding your variable expenses so they don’t creep out of control.
Fixed cost + variable cost = overhead cost
Your “overhead” is everything you need to pay before your construction project can even get started. It’s critical that you have an accurate idea of your overhead expenses before you start making estimates for any potential projects that come your way. Each project you take on will need to help cover these overhead costs, as well as any additional direct costs for the job (materials, labor, etc.) which will need careful projected spending estimates.
The breakeven point is the point at which you’ve generated enough revenue to cover all overhead and direct costs and you begin generating income. It might take a year or two before you reach the breakeven point, but it’s the target you’re shooting for as a construction business. Keep this breakeven point in mind and use it to help inform your budget strategy.
Experiment with rate calculations
Now that you have a better idea of how much it costs to run your construction business before taking on any projects, as well as rough estimates of how much projects of different scale will cost, you can take a deeper dive into your rates.
Calculate how much you’ll need to charge per project to reach your breakeven goals. Your projected spending should cover direct costs and overhead with enough to create profit over time. It can also be helpful to compare other contractors in your area, though many factors may cause variance in construction cost estimates (such as experience, number of contractors, owning vs. renting equipment, etc.).
Try a few methods of calculating your job costs to see how it might affect your bottom line to increase your rates by a certain increment.
Use the right software
Armed with this data you can create your budgets using an accounting software of your choice. Spreadsheets can be a good option for the early stages of a construction business, but eventually you’re going to need the sophisticated analysis and computation features of an accounting software.
We’ve reviewed a handful of the best accounting software programs for small businesses. We’d recommend QuickBooks Online for project profitability and project budgets, as well as a wide range of integrations and features (for a price). For more budget-conscious construction companies we’d recommend Wave Accounting, which has free platforms for receipts, invoicing, and accounting.
Consult with an accounting professional or take advantage of a free trial to see which accounting software fits the needs of your unique construction business.
Track your budgets over time
It’s tempting to finish budgeting and forget all about the numbers so you can get back to the day-to-day tasks of your business, but to truly master your construction business budget you’ll need to track it over time.
Once you’ve set your budgets and completed a construction business forecast, you’ll need to see how the observed numbers match up with your predictions or goals. Use current data and assess it regularly (i.e. do not just plug in numbers at the end of the quarter). As your variable costs change, so should your budgets.
Build a better budget
We know your construction business is busy, perhaps busier than you’ve ever been. Take advantage of the market and increased impact to take your construction company to the next level. Set aside time to build a budget that will work for you now—and into the future. Your bottom line will thank you.
Divvy creates smart cards for every employee and subcontractor, with enforced budgets and seamless expense management for every project you tackle. Sign up for free today.