The Realistic Budget: Why the First Number Is Always Wrong

There is a predictable sequence that plays out on projects that end up over budget. The operator gets an early estimate — sometimes before any drawings exist, sometimes from a contractor looking at a napkin sketch — and that number becomes the budget. The loan gets sized to that number. The financial model gets built around it. And then somewhere between design development and bid day, the real number appears, and it is 20 to 30 percent higher than what everyone has been planning around.

This is not usually the result of dishonesty or incompetence. It is the result of using an early-stage estimate as a final number, which is like navigating by a map with most of the detail left out.

Construction estimates exist at different levels of precision that correspond to different stages of design. A conceptual estimate — produced before any drawings, based on a verbal description of a project and a rough square footage target — has a margin of error of plus or minus 30 to 50 percent. That is not a firm number. It is an order-of-magnitude check to see if a project is in the right range for a given budget. A schematic design estimate, produced from early drawings without full coordination of the structural and mechanical systems, is more precise — roughly plus or minus 20 to 30 percent. A design development estimate, produced when the drawings are substantially developed but not yet construction-ready, narrows further to plus or minus 15 percent. A final estimate based on completed construction documents, fully coordinated across all disciplines, can be accurate to within 5 to 10 percent.

The problem is that most operators receive a conceptual or schematic estimate, treat it as if it carries the precision of a final estimate, and make all of their financial commitments based on that number. Then the drawings get completed, the scope gets fully defined, and the real number emerges.

The gap between the early estimate and the final number has predictable sources. Design that was not complete enough to price accurately is the most common. A schematic floor plan does not tell you what the MEP systems will cost. It does not tell you the structural implications of the spans you have chosen. It does not tell you what the equipment utility rough-ins require. All of those things have cost implications that only become visible when the drawings are developed enough to show them.

Site conditions that were not fully investigated at the time of early estimating are another common source of gap. The geotechnical investigation had not been done. The utility connections to the site had not been priced. The grading required by the civil engineering had not been worked out. These costs are real and they are specific to the site, which means they cannot be reliably estimated until someone actually investigates the site.

Code requirements that were not fully understood at the early stage also contribute. A project that needs to meet healthcare occupancy requirements, or that triggers a full fire suppression system because of its size, or that requires seismic upgrades in certain jurisdictions — these requirements add cost that a rough early estimate may not have captured. The same is true for specialty systems required for clinical use. The HVAC zoning required for a veterinary clinic, the medical gas systems required for a surgery suite, the equipment ventilation required for a commercial kitchen in a daycare facility — these are not in a generic commercial construction cost estimate.

The downstream effects of an underbaked budget are significant. The operator who sized a loan at the conceptual estimate now needs to either increase the loan amount — which may require resetting the lender relationship, rerunning appraisals, and extending the timeline — or reduce the scope of the project, which means either building something smaller than planned or cutting elements that affect how the facility will perform. Neither option is good when you are three months into design and your contractor is waiting for a decision.

The solution to this problem is not to demand a more precise estimate earlier. You cannot get a precise estimate from an imprecise design. The solution is to work with a team that prices your project continuously as the design develops, so the budget and the design are always calibrated to each other. Every major design decision that has cost implications — the structural system, the MEP approach, the equipment specifications, the finish level — should be priced as it is made, not at the end.

In a well-run design-build process, you should never arrive at bid day and discover the project is $500,000 over budget. That means the design process was broken — the cost was developing one direction while the scope was being developed independently of it. When the design and the pricing happen together, the project that gets built is the project that was budgeted, because the budget shaped the design rather than surprised it.

If you want to understand what your project will actually cost at the earliest stage at which a reliable estimate is possible, and to have a team that keeps budget and design synchronized throughout the process, Primus builds that way. Reach out at primus-companies.com.