In order to manage any construction project, you must be able to budget effectively. I’m sure you know that budgeting is a necessary step in the project process, but it can be a maddeingly frustrating excercise. You will have to look into your crystal ball, put your finger into the wind and give it your best guess. Of course we can take out some uncertainty by understanding the process and eliminating as many variables as possible. And when all else fails, the WAG (Wild A** Guess) method never fails. How to Take the Mystery out of Tenant Improvement Budgets.

Budgeting Basics

The first thing you need to know about budgeting is that is is imperfect. Drill it into your head now. You will never prefectly budget a project no matter how hard you try. It can’t happen. Construction budgets are designed to reveal the expected costs for a project. You will find the actual costs after the last bill has been paid and no sooner. Coincidences do happen but you’d be well served to understand now that your goal with any budgeting exercise is not to nail it perfectly. That’s a fool’s errand. Instead your goal is to provide a comprehensive and reasonable estimate based on the information available to you.

Next you need to know for what you are budgeting. The scope of the project is where it all starts and it should reflect the goals of the project. You may know all the details of a particular project down to the number of electrical outlets. Or you may only know the square footage and the general use of the space. Where The more detail you know the fewer assumptions you need to make.

Finally you need to be able to tie a cost to something. As we mention above you are very likely making at least some assumptions. That’s ok. Just be sure you describe what your assumpations are. If you are budgeting for 4 electrical outlets per office, be sure to say so.

Soft Costs

Soft costs are the design and consultation costs. You’ll be working with Architects, MEP engineers, Structural engineers, material testing labs an other specialists. The array of companies and people that provide design and consultation services for your project fall into the soft cost category.

Hard Costs

The costs of the actual construction are known as hard costs. These costs represent the actual work that gets put in place. This cost is primarily the General Contractor’s cost. However you might see other hard costs if you need to contract for some work directly, like for custom cabinets for example.

Tenant Improvement Allowance

Most tenant improvement projects will include a tenant improvement allowance. A tenant improvement allowance is money afforded by the Landord in the lease that you can apply to the construction of your project. The allowance is awesome because it’s a direct offset to the costs of design and constuction. It doesn’t count for furniture, artwork and other non-permanent items.

The tenant improvement allowance may be large enough to cover all your costs and many tenants will budget their space to equal the exact amount of the allowance. If you’re successful in doing that, you don’t come out of pocket for any project costs.

Tenant Overages

On the flip side, if your project ends up costing more than the tenant improvement allowance you will need to pay for the difference. The difference is referred to as an “overage”. The overage is not anything you should worry about as many projects cost more than the allowance. The key is to know how much over the allowance the project will be so you can be sure you have a way to fund the overage.

Your overage is of course subject to change as your project progresses. Changes will potentially increase the overage over the course of a project. It’s important to know how these changes will affect the final overage costs.