Conceptual budgeting and risk assessment

Predicting Soft and Hard Costs: Conceptual Budgeting and Risk Assessment

Any construction project comes with its own unique set of risks — but the better and more thorough the estimate, the more likely the project is to succeed.

Conceptual estimating and budgeting help to assess the costs and risks of a project. This is important as it allows your team to understand how expensive a project may be. While this type of budget doesn’t always lead to the actual construction of a project, it’s a critical practice for anyone considering a new build or tenant improvement project to understand.  

Estimating costs for each stage of a project — planning, design, and construction — is absolutely necessary for any new project. While these estimates can be affected by a number of unforeseen factors, understanding the construction budgeting process provides clients with insight into a project’s lifecycle as a whole before they decide to build.

In order to accurately estimate costs, it’s important to understand the differences between strategies used when estimating a budget.

Construction Cost Engineering

Conceptual budgeting and risk assessment

Using the practice of construction cost engineering delivers a workable plan for construction projects that clients and investors can use to determine its feasibility. The costs for a construction project can be divided into two broad categories: soft costs and hard costs:

  • Hard costs: costs that are physically visible, such as the excavation that is necessary before construction can begin on the site and its grading. The materials used in construction, along with landscaping and labor, are all hard costs.
  • Soft costs: costs that are not obvious to a client at first. Things such as the fees charged by an engineering firm as well as those billed by the architect are considered soft costs. The costs of obtaining the necessary permits and any taxes also fall into the soft costs category. In order to obtain an accurate conceptual estimate of a project, ongoing soft costs — such as those for insurance, maintenance, security, and other fees — must be included.

Conceptual Estimating Process

Conceptual budgeting and risk assessment

Using a conceptual estimating process provides project managers and clients with a general framework to approach a potential project with. These types of estimates usually come into play when you’re looking to evaluate how feasible a project will be, or you need to raise capital for a new project. These types of estimates often lead to more specific design-build estimates to shape the detailed plan for the project once the general approach is approved. This method helps the project stay on a prescribed budget by managing costs across the different phases of a project once the big picture is established.

Accurate Cost Estimating is Vital

There is a false notion within some construction circles that a cost estimate doesn’t need to be that accurate. Many people point to the word “estimate” when verbalizing this fallacy. While it is true that a cost estimate is only a rough figure based on assumptions and limitations that no one can predict, there are ways to ensure that the figures delivered are more accurate than not.

Experience Lends Structure and Validity to Estimates

Using numbers that have stood the test of time and the whims of the market ensures that clients have accurate deliverables from which to plan their next move. Without this type of accuracy, a project manager could have difficulty getting the project off the ground. When looking at the conceptual estimating process, it is important to know the approximate accuracy of the estimate. Usually, the lower the tolerance level, the more informed the estimate is. It’s important to know the type of estimate you are reviewing — project bids from various construction companies should be judged based on accuracy rather than who has the lowest budget estimate.

  • Detailed estimates: usually has a tolerance under 20 percent.
  • High-level estimates: usually has a tolerance between 30 and 50 percent.
  • Ballpark estimates: usually has a tolerance of around 50 percent.

Other Factors that Contribute to an Accurate Estimate

Conceptual budgeting and risk assessment

When evaluating conceptual estimates from different general contractors (GCs), it is also vital for a project manager to keep these important considerations in mind:

  • Industry expertise and knowledge are crucial in delivering an accurate estimate. Not only must the contractor have a broad and overarching understanding of the construction process itself, they must also know current and past industry benchmarks in order to develop future predictions.

Learn about how our decades of industry expertise helps us budget for your projects’ scope and schedule.

  • Estimating techniques can differ widely between companies. A GC who has been in the business through its many ups and downs has demonstrated a formula that works, as evidenced by its continued longevity in an increasingly competitive industry.

Sticking to your budget is important: get our three tips for a well-crafted cost estimate.

  • A GC who can demonstrate their use of leading tools shows they have learned from and contributed to, the evolution of the construction industry over the years. A forward-thinking GC is always looking for ways to refine their process to deliver the most accurate figures to their clients.

Unforeseeable costs can pop up during a construction project, do your best to forecast them with an experienced GC.

  • It’s vital to adhere to governmental regulations when completing a project. Without compliance at every governmental level, project risks cost overruns or even the possibility of being tabled. Every element involved in a conceptual estimate must be checked and double-checked — both for accuracy and adherence to the necessary government regulations.

Determining hard and soft costs are challenging, and the accuracy of this estimate can make a difference in whether or not a project is feasible. Proven experience, references from past clients, and documented knowledge of the industry demonstrate the experience and reliability of a GC. Finding the right partner gives you the confidence you need to know so your next construction project can stay on budget and schedule.

Our team at South Bay Construction has the experience, knowledge, skills, and connections within the industry to provide clients with accurate conceptual estimating for effective construction budgeting. Our comprehensive recently updated Cost Reference Guide app offers current market data and conditions in the Bay Area. It’s a necessary and helpful resource for anyone looking to get a conceptual estimate on a construction project. To begin the cost estimating process or learn more about us and our comprehensive construction services, contact us at (408) 379-5500 or download our iOS app or Android app today! 

Photos: Shutterstock / Piyapong Wongkam, Shutterstock / Piyapong Wongkam, Shutterstock / yuttana Contributor Studio, Shutterstock / ALPA PROD

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Cost reference guide

Cost Reference Guide

Our Bay Area Cost Reference Guide provides up-to-date construction pricing and market data; it's a critical budgeting tool that can deliver conceptual estimates and that can save you both time and money.