Developing Budgets in construction Industry

Budgeting in the Construction Industry enables the creation of financial and non-financial plans for various functions for a specified future period and is usually compiled and reviewed periodically.

This requires performing at least nine activities that must be completed to initiate and implement a robust construction industry budgeting process.

Eight activities out of nine identified below are identical in each of the functions except unique activity at Sr no 4, which is unique for each function like Design, Construction, Quality control, Contracts, Purchase, sales and marketing, and so on for 13 functions identified in the book.  

Professionals can undoubtedly add more activities per their needs/nature of business.

The focus of this blog is three Design functions, i.e., Design of Architecture, Interior, and Design of MEP.

Budgeting is to be done separately vis a vis each Project, such as:

·      Residential

·      Commercial

·      Hospitality

·      Other significant categories relevant to the organisation

Nine Activities

1. CEO to constitute CFT (cross-functional team) deliberating and deciding the following

·      The format & contents of the Budget at the “Design function” level

·      The frequency (like annual) at which Design Function’s Budget must be prepared and reviewed, and released to identified designers

·      Timelines by which the Design team’s Budget must be released

·      Design team’s coordinators for making and releasing the Functional Budget

·      Recipients of the Design team’s Budget

·      Periodicity for reviewing the Functional of the Budget

2. Capture key assumptions, w. r. t. following before identifying budget parameters

·      Competition

·      Economy

·      Political

·      Social

·       Government policies (Including GST, Taxes, and Statutory regulations)

·       Customer demands

3. Capture corporate-level key budget parameters /Targets such as below vis-à-vis Company Vision for at current year under review and the next five years, year by year.

Sales Revenue related Targets:

a) Saleable area in square feet in each construction project segment

b) Amount in local and foreign currency w. r. t.  each type of saleable area in construction projects

Project costs related Targets:

a) Project costs in Rs (local currency) and foreign currency w. r. t.  each type of saleable area in construction projects

b) Project costs in Rs /Square feet (local currency) and foreign currency w. r. t.  each type of saleable area in construction projects

Profitability in local currency and foreign currency terms related to Targets

a) Existing construction projects /segments w. r. t.  each type of saleable area in construction projects

 b) New construction projects /segments w. r. t.  each type of saleable area in construction projects

4. Make  Budgets for Each Function Design of Architecture, Interior, and MEP)

·      New Construction projects

a.    Plan and timelines for accomplishing key activities

b.    Performance targets for developing new designs and commercial-design roll-out plans. (vis a vis different stages of design)

c.    Estimated consultancy fees and expense estimates

d.    Project costs

e.    Implications of Union Budget of Central Government and State legislations

B) Existing - Ongoing Construction projects -each Design function

·      Changes in earlier budgeted timelines for accomplishing key activities

·      Changes in earlier budgets of performance targets

·      transitions in earlier estimated consultancy fees and expense estimates

·      changes in earlier Project costs

·      Implications of Union Budget of Central Government and State legislations

   C) Costs to be included in the budget of Corporate finance and accounts 

·      Statutory fees for licenses

·      Charges payable to local government bodies

·      Fixed costs like permanent employee costs

·      Overheads etc

5. Budget for the following  (These are common to each of 3 Design functions) vis-à-vis both New and existing projects.

·      HR organization structure/manpower numbers and value — subfunction wise

·      Skill acquisition and up-gradation — subfunction wise

·      Technology investments (Rupees /Local currency and Foreign currency) to be made/assets to be acquired -names, quantity, values, and timelines

·      Expenses - local currency and foreign currency

·      Reimbursements in local currency and foreign currency towards identified cost elements  

 6. Review functional budgets in the Budget review meeting along with the HOD of Each Function.

·      Assumptions,

·      Resources required from top management to accomplish budget

§  Financial

§  Organization structure,

§  Manpower-Numbers at different levels  

§  Equipment/machines,

§  IT Hardware and software

§  New skills to be acquired

§  Technology up-gradation, etc.

·      Strategies for accomplishing functional performance targets to corporate budgets along with responsibility and timelines 

7. Post review, suggest amendments to be carried out in functional budgets and timelines by the HOD of Each Function.

8. Submit the revised budget to the corporate Budget team

9. Approval of functional budgets along with Corporate budget Coordinator and HOD of Each Function

·      Agreeing on amendments through catch ball process/suggestions and counter suggestions and acceptance process

·      Carrying out incremental changes in functional budget /corporate budget parameters

·      Final circulation of corporate-level budgets and functional budgets in a controlled manner for implementation

Activities that can adversely affect Organisations              

1.    Deliberately keeping loose targets, such as projecting timelines/schedules for completion of plans and design briefs for each package, such as below but not limited to:

·      Design of Architecture: 

§  Structure,

§  Buildings,

§  Façade,

§  Hardscape

§  Softscape, and so on

·      Interior Designing:

§  Furniture,

§  fixtures, and equipment (FFE),

§  Finishing works,

§  Artwork and so on

·      Design of MEP:

§  Electrical - external and Internal works,

§  Airconditioning -Works

§  Basement Ventilation

§  Plumbing

§  Firefighting

§  Lifts and elevators

§  and so on

2 Teams of three design functions, deliberately incorporating incorrect assumptions of BOQ rate (of high-value items)vis-à-vis construction such as below  but not limited to (whether owner supplied or in contractor scope):

§  Design of Architecture:

·      Cement -Rate/bag, RMC rate /cubic feet,

·      Reinforcements-Rate/PMT, Bricks-Rate/unit,

·      Modular Kitchen-Rate/kitchen, Kitchen Appliances-Rate/kitchen,

·       Internal Doors-Rate/door, External Doors-Rate/door, Door Hardware-Rate/set

·      And so on

§  Interior design –

·      FFE, Finishing works, Artwork

§  Creation of MEP works-

·      Cables, Conduits, Pipes,

·      Transformers, Air Circuit Breaker,

·      vacuum Circuit Breaker, Outdoor units, Indoor units

·      and so on etc.

·      And so on  

3. Incorporate and share  false assumptions by the Budget coordinator of “three functions vis-à-vis aspects like :

·      Competition projects,

·      Economy,

·      Political,

·      Social,

·      Government policies/Statutory regulations,

·      Customer demands,

·      implications of the Union Budget of Central Government and State legislation

4. Deliberately Incorrect Estimation of % wastage allowed as usual on critical BOQ materials.

5. Deliberately Incorrect Estimation of SITC (supply, installation, testing & commissioning) costs payable to outsourced contractors in Rs lumpsum and as aggregated Rs/square feet of saleable areas or super area as per policy guidelines for constructing the following areas:

§  Design of Architecture:  Structure, Superstructure, External works, Façade system, Landscape works (Hardscape), Landscape works (Softscape), Renovation/repair to existing architecture:

§  Interior Designing: FFE works, Finishing assignments, Artworks

§  Design of MEP: Electrical - external and Internal works, Airconditioning -Works, plumbing works, Firefighting works, and so on

6. Deliberately Incorrect Estimation of Design fees and associated expenses for travel, conveyance, and out-of-pocket expenses in a lump sum and as aggregated Rs/square feet of saleable areas or super area as per policy guidelines for various packages such as below

§  Design of Architecture:

§  Structural consultant

§  Architect consultant, proof-checking consultant, Code consultant,

§  landscape consultant,

§  Golf consultant, and so on

§  Interior Designing:

§  Interior designers,

§  FFE  consultants,

§  Arts consultant

§  Design of MEP:

§  Electrical designer,

§  Lighting designer,

§  HVAC consultant,

§  Fuel supply system consultant

§  Firefighting consultant

§  And so on

7. Deliberate Incorrect Estimation of Contingency costs by three design functions

8. Deliberate Incorrect Estimation of % Escalation on outsourced contractor’s scope of work costs and estimated design fees as captured above

 9. Deliberate Incorrect Estimation of Taxes payable. 

10. Manipulate or provide incorrect information to CEO/MD, such as below, vis-à-vis last year/past period actual accomplishment.

§  Developed design plans and drawing releases timelines w.r.t ongoing projects.

§  Project design specifications

§  Consultancy fees

§  Expense estimates

§  Team size/organization structure

§  Project costs and BOQ costs vis-à-vis each Architect package

§  Hardware and software acquired

11. Do Overprovision of the following aspects (common to all Design functions) vis-à-vis both New and existing projects.

§  HR organization structure/manpower numbers and value -subfunction wise

§  Skill acquisition and up-gradation, subfunction wise

§  Technology investments (Rupees and Foreign currency) to be made/Assets to be acquired -names, quantity, value, and timelines

§  Expenses: local currency and foreign currency other than direct SITC costs /direct package consultancy fees

§  Reimbursements in local currency and foreign currency towards identified cost elements   

Handbook of the author 

A template illustrating the list of activities to be performed for developing budgets is included in chapter 13 (annex 35B) in the author's handbook and titled” ETHICS in the real estate and hospitality industry, Volume 1- Architectural, Interior design, and MEP services.