How to Identify the Most Accurate Interior Construction Budget

Five Insider Tips to Avoid Surprises and Improve Comparisons

When planning an interior build-out or renovation, landlords, brokers and tenants all want the same thing from their contractors: an accurate construction budget. And they deserve it. Establishing realistic client expectations requires coordination across disciplines, careful calculation and, most of all, attention to detail.

Meeting tenant improvement allowances, accounting for labor price fluctuations, and sourcing more economical material alternatives are among the many variables that comprise the construction budgeting process. But how is a client supposed to know which budgets are accurate, which are too high and which are too low?

“The devil is in the details,” said Rick DuPraw, senior vice president, Leopardo Companies, Inc., a Chicago-based contractor that completes 300 interior projects annually. “That’s really the transparency of the process. Budgets need to account for everything — light fixtures, sinks, square feet of ceilings, linear feet of walls, square yards of carpet. It’s imperative that everything is itemized and quantified.”

The first step in gathering the specifics is a lengthy project team meeting. Sitting down together, the owner, architect, engineer and construction manager lay out each of their programming needs and wants. This early involvement, or Integrated Project Delivery, is a process that leverages the collaboration of all team members with the goal of optimizing the building’s value and maximizing its efficiencies.

“After this initial meeting, I’ll integrate the requirements of each team member into the budget, noting any critical subcontractors, and begin drafting the budget, line item by line item, so the architect and client can see where all costs are coming from,” said Andy Reinhard, estimator, Leopardo Companies. “In the initial budget, I’ll propose material and fixture alternatives if it helps align expectations with the budget.”

For example, light fixtures vary greatly in price, but contractors can present lower-cost options that look the same and deliver similar results. Or, in the case of finishes, carpet can look and perform similar for fewer dollars per yard. Commodity pricing plays a key role here as well, as accurate interior budgets rely heavily on material and labor costs, which can be volatile. Since final prices are impossible to forecast with pinpoint accuracy and budgets are often issued months before a project commences, material unit pricing must be updated multiple times a year with the goal of creating accurate budgets.

Next, sophisticated construction-estimating software is used by Leopardo to quantify everything that is seen and unseen in an interior build out or renovation. Using the information from the initial meeting, a multi-layer plan is created to highlight the individual and comprehensive requirements of owner, architect, builder and consultants. The plan includes item descriptions, quantities, unit pricing and any assumptions to show exactly how the budget was reached and answer virtually every question that arises. Some contractors, like Leopardo, provide clients with live estimating functionality, or the ability to make real-time what-if scenarios to demonstrate cost-saving design and construction approaches on the spot.

“This level of detail and interactivity has sharpened our budgets to consistently fall within 5% of the right number, based on the project program and client requirements,” said Daniel Ulbricht, vice president, Leopardo Companies. “Plus, because the output of our budgets is in real time, we can sit down with the architect and owner to tweak it live, making sure it meets all financial expectations before the meeting adjourns. Everyone leaves the meeting with an increased level of confidence.”

Because no project ends without construction changes or budget alterations, when substitutions are added to the cost modeling software, it automatically re-calculates each layer of the space, moving other interior elements as necessary and relaying quantities needed. Subsequently, the budget can be updated accordingly.
To help corporations and tenant representatives identify the most accurate interior construction budgets, here is a checklist of five helpful considerations:

  • Watch for exclusions. Determining exactly what’s included and what’s not can make the difference between an accurate budget and one that’s missing some important elements. For example, floor preparation is often excluded from budgets. Ask what allowances the contractor is carrying and check the back of the budget for specific exclusions.
  • Use a standard bid form. A standard budget bid form ensures true side-to-side, apples-to-apples comparison. For example, if one general contractor budgets $10,000 for demolition and another only $5,000, go back and ask: why the discrepancy? One contractor may be including a service the other isn’t. This is where questions of scope may arise. How many light fixtures and light fixture types are on the job or is it just an estimate and lump sum for lighting?
  • Check for AV and communication low-voltage. Owners and contractors alike don’t always consider the building’s AV or communication low-voltage needs in the budget, and yet not understanding these requirements from day one can significantly alter the budget at the last minute, as building-wide conduit and cooling requirements are expected to support these needs. While years ago, AV was an afterthought, today’s commercial office spaces need to address both AV and technology up front because they can be big numbers on the budget.
  • Technology Requirements. What are the technology requirements of the space? Will there be a server room and are supplemental cooling units needed? An additional 2-ton air handling unit, for example, with its piping and estimating, can cost up to $30,000 for 15,000-sq.-ft. of tenant space. That’s an extra $2/sq. ft. that hasn’t been budgeted yet. Additionally, make sure the budget specifies the type of wiring and quantifies it, as more and more tenants are specifying Cat6 over the Cat5e cabling, which could carry as much as a 13% increase for the cabling and installation. Having a conversation with your contractor about technology and how it’s going to be supported is crucial, as they should be familiar with base building requirements from previous jobs.
  • Security. Another area that is overlooked in budgets, security includes everything from card readers to video surveillance and keypad locks. Since buildings don’t always include these features in their lease, and it’s often something that companies require for their space, look for it in the contactor’s budget.
    Being a conscientious construction consumer means always reading the budget’s fine print and recognizing what is and isn’t written. Doing so will ensure that realistic expectations are met on every project built.

“The lowest number doesn’t necessarily mean the right number and, in fact, could push the project team into a corner with little room to accommodate any owner-initiated scope changes during construction,” said DuPraw. “The difference between a good budget and a great one is the level of detail.”

A version of this article also appeared in the  Building Operating Management Magazine and the Illinois Real Estate Journal (June 2013) .