Laying the foundations for solid spend management on a building site

If you work in construction, you deal with professional expenses every day on a building site. You’re probably familiar with how tricky managing these costs can be, especially when juggling multiple construction projects, including very costly ones. Particularly so when it’s tough to estimate the budget of some projects accurately.

What with paying for materials, supplies, tools, heavy equipment and labor costs, there are all sorts of expenses to consider. Also, it's not uncommon for unexpected events to disrupt a construction project, causing unplanned delays and expenses. Luckily, there are tools and best practices to help you build a solid financial foundation for your next construction budget. So put your hard hat on, we’re getting down to the nitty-gritty in this article.

One of the first things to do before you kickstart a new building project is to calculate construction costs and put together a preliminary budget.

This is easier said than done, as construction projects often get spanners thrown in the works. Luckily, with the right toolkit of best practices, you can plan as best as possible for any unexpected events.

The goal here is to calculate the cost of production for the company, or, in other words, the volume of expenses your company will need to incur to carry out the construction project successfully. Knowing this production cost helps you determine your selling price and give your client an accurate and detailed quote.

To calculate this amount, you’ll want to add: Production cost = direct costs + construction costs + overhead costs.

Direct costs (DC) cover all the expenses and costs necessary to complete a project. They are also referred to as hard costs.

They include:

• cost of labor;
• purchase of supplies and materials;
• and, if needed, rental of equipment.

Let’s look at a practical example to understand better how to calculate direct costs (DC).

Imagine you’re a roofing specialist tasked with renovating a house’s roof.

• Your rate is €40/hour, and your work will take two days or 16 hours.
• The entire roof needs renovation, and it’s 100 square meters large. Successfully renovating the roof means replacing all its broken tiles. You can purchase 1 square meter of tiles for €50.
• In addition to having to purchase tiles, you’ll need to procure other equipment for a total cost of €1,000.

How much are your direct costs here? Let’s break it down. (16 x 40) + (100 x 50) + 1,000.Or, 640 + 5,000 + 1,000 = €6,640.

In this hypothetical situation, your direct costs for this job are €6,640.

With small-sized building projects, calculating direct costs is relatively simple. However, the bigger the construction project, the more challenging it is to accurately assess all the direct charges involved.

To help you forecast costs, price libraries such as Batichiffrage or Batiprix can be a great help. These construction cost-estimating tools analyze the prices of supplies from different suppliers in your area and help you estimate direct costs.

Construction costs (CC) include all indirect costs accrued on a construction site. These indirect costs are usually shared between different construction projects and are also referred to as common interest expenses.

This is because, on a worksite, several companies often work together on a project. They share several expenses, in areas needed by all to perform their job well. Such expenses can be, for instance:

• security fees;
• construction site setup;
• energy costs (water, electricity…);
• crane costs…

These costs are allocated to a specific account (prorata allocations, called in French the compte prorata - prorata account). Each work party on site then pays for a percentage of the expenses, calculated in proportion to their time spent on the building site.

In overhead costs go any expenses linked to the company but that are not directly associated with a particular project.

In the construction industry, you’ll usually include these expenses:

• rent and utilities;
• salaries of administrative employees;
• travel expenses;
• social and tax contributions;
• professional insurance costs;
• software;
• phone and internet subscriptions;
• workwear, etc.

These numerous expenses must also be incorporated in calculating production costs. They take on the form of a coefficient.

Note: it's usually recommended to work with a certified public accountant to calculate your overhead expense coefficient.

Budgeting the cost of a building project is a complex endeavor. Many unforeseen events can occur, and budget overruns are frequent, which can cause significant difficulties in the project's smooth operation.

It's therefore crucial to be as prepared as possible. One way of doing this is to analyze past project spending over six months or a year to foresee and streamline future costs.

• What was the initial budgeted amount? Did it hold up?
• Were there unexpected expenses? If so, what were the reasons for them?
• Would it have been possible to avoid these expenses?
• What was the impact of these additional expenses on the initial budget?

By asking yourself these questions, you’ll likely notice patterns and recurring issues resulting in unforeseen expenses. You’ll also have better visibility over the different expense categories and will be able to identify areas where costs could have been avoided.

On a construction site, many stakeholders are involved in purchasing: the site manager, project managers, supervisors, workers etc. However, the more people involved in managing these expenses, the more considerable the risk of exceeding the budget.

To avoid abuse and keep the team’s construction costs in check, you must set up a clear, comprehensive, and easily understandable expense policy.

In the construction industry, this typically means:

• clearly defining each purchase (by making a list of the necessary expenses and designating the individuals responsible for each purchase);
• establishing a list of recommended stores or suppliers;
• setting a payment limit per type of expense;
• listing all the purchases and expense reports that aren't accepted;
• imposing a timeframe to provide receipts and reminding everyone of the information that must be provided for each type of expense.

For such an expense policy to be effective, it must be communicated to all employees in the company. Everyone should have access to the same level of information.

Overseeing construction projects can often require managing multiple work sites simultaneously. In that case, having an estimated budget per work site is a good call as it gives you greater control over spending (and possible over-runs).

With Qonto, you can create multiple sub-accounts to allocate budgets to your teams based on your different projects. Each sub-account has its own dedicated IBAN. That way, you can easily track expense items and control your spending.

The heads of some construction companies prefer handling all the expenses themselves. However, working in this manner isn’t always ideal and can even generate friction. The business owner in charge of making the purchases (and there can be many to make on a construction site) must go on-site whenever there’s a new need. As a result, they spend a lot of energy on low-value management tasks when they could be focusing on other tasks.

The alternative is to give a payment card to the site manager. How do you know at what point to put a site manager in charge of a payment card? It all boils down to trust and delegating responsibilities. Luckily, there are now ways to delegate spend management while keeping your peace of mind.

At Qonto, you can benefit from fully customizable Mastercards. These allow you to:

• set a spending limit, which can be per day, per month, or even per transaction;
• restrict card usage to specific times or days of the week;
• limit online and foreign payments;
• block or unblock a card at any time.

That’s not all: you can also directly track the expenses made with these cards in real time on the Qonto app. So with Qonto’s cards, you can give your teams autonomy on-site while staying in control of their spend.

Digital solutions can come in very handy to help you keep your construction costs in check.

Let’s use a practical example and compare two companies’ approaches, to show you the extent of the advantages of going digital.

Company A manages its spending without the aid of digital tools:

• Bills and invoices are checked and sent as sheets of paper.
• The accounting team inputs these invoices manually.
• Monitoring finances (outgoing expenses and customer payments) is carried out by a financial controller and management, usually through Excel.

Inputting and approving these documents, either manually or verbally, leaves room for error. In addition, the tools used are basic, which means inputting is repetitive and time-consuming. What’s more, none of the tools used allow company A’s teams to collaborate on them.

Company B wants to save time, as it’s had enough of seeing its margins evaporate due to lost documents or human error. So, it has embraced a modern, digital solution like Qonto.

As a result, it enjoys the following advantages:

• Bills and invoices are saved online and automated (considerably reducing the risk of damage, loss, or fraud and making the verification process faster and more secure).
• Digital tools can be integrated with solutions used by other departments. The accounting team, for instance, will instantly and automatically receive documents generated on the building site.
• Finances are tracked in real time by the financial controller and/or upper management, while expenses are categorized by purchaser, supplier, etc, in an easy-to-understand dashboard.

Time management, team management and spend management. These are the 3 pillars of a successful construction project.

Adopting new methods and ‘going digital’ takes time, but one thing is for sure: once you do, you never want to go back. And for a good reason: you can measure and track your efficiency and profitably as granularly as you want and as often as you want. So why would you go back?

Are you a construction professional looking to open a business account that matches your company’s needs? Then, discover Qonto, the all-in-one financial management solution that helps you streamline your construction costs.