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Construction can easily comprise approximately 50 to 75% of a development budget, depending on factors such as land acquisition costs, local wages, etc. Ongoing monitoring of the construction process and budget will help reduce cost overruns. Of course, as noted earlier, selecting the best payment approach for your consultants and negotiating clean, clear contracts will go a long way toward achieving these goals. Along with a reasonable contingency, this will give the flexibility you need to counter unforeseen events during the construction process.
It is important to recognize that changes or eliminations of specific project components are an inevitable part of the construction process. Why? First, a specific product may not be available, and substitutions may have to be researched and secured. Second, there may be a price increase in materials, forcing you to consider a less expensive alternative. Or, there may be delays in shipping that will create a “logjam” with other project components, so you will want to select a more readily available option. Minimize change orders, especially those driven by contractors, as they can be costly and ruin your budget. You and your architect should approve all changes and substitutions to ensure they do not compromise construction quality or the overall project. If your project budget includes sufficient contingency funds, you should have enough cushion to handle most substitutions.
Your team will maintain the project budget as an ongoing process, not only during the construction process. Managing the budget starts in the predevelopment stage when designers and other consultants constitute the bulk of the expenditures. We advise keeping detailed financial records of these early expenditures, as they can most likely be reimbursed at closing of the construction loan, if proof of expenditure is available.
Related link in Essential Resources: Managing Construction Risks
Nothing in this material should be construed as investment, financial, brokerage, or legal advice. Moreover, the facts and circumstances relating to your particular project may result in material changes in the processes, outcomes, and expenses described herein. Consult with your own professional advisors, including your financial advisors, accountants, and attorneys, before attempting to consummate any transaction described in this material.