Starting a construction business requires more than just the hands-on experience you've developed working for others. It is exciting being out on your own, but now your time is filled with running a business, often more so than putting the bags on. Many construction startups struggle with budgeting and costs, which can jeopardize their future. Drawing from my journey, I have learned that mastering budgeting and cost management is key to a sustainable and growing construction business. In this post, I will highlight the importance of budgeting, share effective cost management strategies, and provide tips for staying on budget.
The Importance of Budgeting in Construction Startups
Budgeting is the foundation of any successful construction venture. It serves as a financial roadmap, showing where money will be allocated and how to make smart decisions. Without a solid budget, there is a high risk of misallocating resources, leading to project delays or, worse, business failure.
Due to the unpredictable nature of construction work, budgeting becomes even more vital. Costs can unexpectedly rise from various factors such as:
Material Price Fluctuations: According to the National Association of Home Builders, the price of construction materials can change by as much as 10% in a single quarter.
Labor Costs: Labor prices might surge during peak seasons, impacting your bottom line.
A well-prepared budget helps you anticipate these fluctuations, allowing for better financial management. Additionally, a solid budget promotes accountability. By outlining expected costs and revenues, I can track my expenses against the budget, spotting discrepancies early. This approach allows me to properly allocate funds during a project rather than waiting until the final check comes in to balance the books & see how we did.
Strategies for Cost Management
Effective cost management goes beyond just adhering to a budget. It includes disciplined financial decisions & thoughtful investment in tools for your construction startup.
1. Detailed Project Estimation
Before embarking on any project, I conduct a detailed project estimate. This includes a breakdown of costs related to labor, materials, and overhead. In my business, this is completed as I create Fixed Price Contracts for our remodels.
We start with the cost of each subcontractor involved in the remodel, then create a "shopping list" with every item we will purchase for the tasks being self-performed. By creating such a thorough estimate, we are able to predict our profit accurately prior to stepping foot on site.
2. Utilize Technology
In my experience, investing in construction management software has become as essential to some as the tools they use on site. However, while your business may improve by implementing a construction management software, you should select a tool that fits your current needs & more importantly, your current budget.
For instance, software like Procore or Buildertrend are at the top of the charts for performance in the construction industry, but your startup may not need to spend $400 / month for a tool like this when Jobber can perform just as well for your business. In the beginning, you need to be able to send quotes (preferably more professional looking than a Word Doc) & collect payment. Invest wisely in what you need, then upgrade as your business evolves.
3. Implement Change Order Management
Changes are inherent in construction projects, but managing them carefully is key. I have developed a structured change order management process to evaluate cost impacts before changes are approved.
For instance, during a recent remodel, we effectively communicated the potential cost of a requested change to the client, who then decided to forego these changes, aware of the true cost associated with such a modification late in the project.
4. Give Every Dollar A Job
One of my most critical practices is allocating the money that comes into the business. I've outlined the importance of having a budget along with sound decision making, but let's not forget that you are in business to make money. Now give that money a job & enjoy the rewards of your effort.
In my business, budgeting goes beyond knowing how much profit I can expect from each project, extending to how every dollar of profit gets allocated inside the business. At this stage, I implement a modified 'Profit First' strategy, wherein I setup separate bank accounts for Owner's Comp, Taxes, Marketing, Profit, & Overhead. Here is how I breakdown profit that comes into my business...
Building a Solid Financial Future
Financial management in a construction startup is an ongoing challenge but crucial for long-term prosperity. By appreciating the importance of budgeting and implementing effective cost management techniques, I’ve positioned my business for continued growth and success.
With the right strategies in place, any aspiring construction entrepreneur can tackle the financial challenges that come with building a startup. By applying these insights, you will be better prepared to succeed in whatever trade you decide to tackle.
Remember, we're here to build the dream. One where we earn our financial freedom through work that we love.
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