There are lots of reasons why people undertake building projects. It could be that you are able to acquire a cheap property at auction or through inheritance, and want to renovate it to sell at a large profit. It could be that you are building a home to actually live in, or fully renovating a period house for yourself. Or, it could be as a business move, for instance converting a former office building to residential housing.
If you are new to this kind of thing, then the biggest challenge can be setting the budget, and then sticking to it. Almost all construction projects and renovations do end up costing more than the initial estimates, and new costs often arise as the project goes on. Naturally, you need to budget from the start, even if you are certain of a big profit when the job is complete, to enable you to manage cashflow for labour and materials, and to make sure your project remains profitable throughout. You can obtain property development finance to help you with a project, but you’ll need a good budget in place to be able to do this.
So how do you create a budget that is resistant to creeping beyond what you have available, and which will ensure your project is completed, and profitable at the end of it?
Every budget for every project in every sector needs some contingency factored in, as you can’t expect everything to cost exactly what you were quoted in the end and for nothing to go wrong along the way. However, while some people recommend simply adding a contingency of a given amount (20% for instance) to the total for your project, this can be less effective than breaking the budget down and adding different levels of contingency based on risk. As an example, if you are buying materials straight away, the risk of them costing more than budgeted is low, however if it is a long project and you won’t be buying, say, your tiles, for a few months, contingency for the cost of them should be higher. If you are buying materials from another country, even the exchange rate can add risk, so again, contingency based on risk is better.
Once you have worked out a budget with contingency applied based on risk to each thing you need to pay for, you should then add a further contingency figure to the total. At this point, you can use an amount related to the scale and duration of your project – using a larger percentage on something like building a new house from scratch in six months than adding a small extension to an existing property in a week or two.
By this process, your budget has contingency if materials become more expensive or you need extra labour, but also contingency if something happens that wasn’t in your plans that means you need something that wasn’t in the original budget. With any luck, you won’t need to actually spend this money, however having it in your budget covers you against surprises.