I’ve written quite a lot about how to prepare and manage your budget. From time to time and certainly at the end of each phase, you will have to prepare a comprehensive budget update. A lot of this work will be done by your team, but, as manager for your organization, there are things that only you can do. This is your story to tell.
Every budget update, whether it is at the granular detail level or a summary, should include a line-by-line comparison to the last budget. You should be able to trace a running thread, throughout the project; a record of what happened. Your team owes you that.
Reviewing a detailed budget, construction cost estimate, soft costs and others costs is a time consuming process. The building design has evolved. Have you updated your assumptions and developed more detailed information about other elements of the project such as furnishings, IT and other owner supplied scope? Have there been adjustments to professional or other fees? Do financing assumptions still hold? Are you still on schedule? It’s helpful to have all the non-construction cost review done by the time the updated construction cost arrives. You’ll have your hands full after that.
In my post, The estimate is too high…now what?, I describe the process of reviewing the construction cost estimate. And I’ll again encourage you to be completely engaged in this review.
After updating all your costs, it’s time to adjust your contingency. See my posts on contingency:Contingency, Your Best Friend, Contingency Breakdown and Tic Tic Tic, Escalation. The work that the team has done since the last budget has reduced risk. If you are half way through the design process, should the preconstruction contingency be halved? Are there still big unknowns our there? Time has passed but has the schedule changed too? Can you reduce escalation? Has the outlook for future costs escalation changed? This is art not science. It is an error to over-do contingency reduction, just to try to minimize increased costs.
At this point you know what’s changed and why. Whether your budget is miraculously below expectations, or is creeping or leaping up, you need a plan now, not just hope that somehow it will be better next time. I recently spotted a T-shirt on a flight back from Maui which read “Hope Isn’t a Strategy.” A thought suitable for return to reality.
In my post, Under Promise/Over Deliver – Expectation Management, I illustrate a strategy of establishing a core project that you know will be in budget and then creating a prioritized list of additional scope that may be added as funds allow. But sometimes you find that even your core project is moving out of reach. You may need to pause the process and reevaluate the project or your financial resources.
Your team is going to spend a lot of time working on a detailed budget, but that kind of report isn’t appropriate for most of your stakeholders. You need to create a summary report, sometimes different summaries for different audiences, that tells the story without getting bogged down in the detail. Your audience, committees and your board need only a budget overview, a clear explanation of the status of the project and the plans for moving forward. A lot of detail makes their job and yours more difficult.