Budget Reality: The True Bottom Line
By Janet L. Jordan, CPRP
ost public and nonprofit organizations undertake the exercise of updating their capital improvements projects (CIP) budget on an annual basis, often as part of a five-year plan. Dollar figures for years one and two are understandably more reliable than years four and five. Inevitably, those preparing the budget as well as those whose responsibility it is to tighten the numbers will compare a given project to one in another community, state or region of the country. When this question is asked, it is very important to compare apples to apples or recreation facilities to similar recreation facilities, factoring in the year the construction was completed to estimate a reasonably reliable capital budget request amount.
A "total project" budget is comprised of both "hard costs" and "soft costs" and the variables that comprise these costs can make all the difference in the accuracy of the dollars requested or perceived necessary to design and construct the envisioned recreation facility. Well-meaning but not well-informed elected officials, board members and administrators may identify a budget amount that represents only the dollar value of the lowest and best bid (the hard costs) and not take into consideration the design and engineering fees, land acquisition costs, furniture and equipment, surveys, permits and utility taps or soft costs, just to mention a few.
A basic understanding of the components of a total project budget can help you avoid costly miscalculations and allow you to be responsible stewards of the capital funds required for a successful project.
Hard costs include the construction cost of the "sticks & bricks," or the dollar value of the lowest and best bid on bid opening day, site development, hazardous abatement and contingencies. The furniture, fixtures and equipment, also known as FF&E, can be included in either the hard costs or the soft costs and in some situations may be procured from an entirely separate funding source.
The construction cost is initially an educated estimate, or more an art than a science, of comparable facility square foot costs that is continually refined and tested through the design process phases as increasingly specific information about the project is determined. A design or owner's contingency amount of 10 percent to 20 percent is also factored into the probable cost estimate of construction as a kind of insurance or risk management tool. Typically the design or owner's contingency is used to address unforeseen conditions or issues like discovering an unstable soils problem after the soil borings have been taken, adding more cost to the project. It may be used to help balance the project's descriptive scope as more details emerge with the given budget, and occasionally may be used to enhance the project's scope as agreed upon by the owner and the design team.
Soft costs include professional design fees for the architects, engineers and specialty consultants such as landscape architects, aquatic design engineers or lighting designers. The professional services fees may range from 6.5 percent to 10 percent of the hard cost. Surveying, soils testing, LEED registration, and the printing of specifications and construction documents are considered the owner's responsibility. However, the selection and management of those services are usually coordinated by the architect or engineer, and their fees are reimbursable expenses. The owner is responsible for direct payments for the building permit, inspection fees and water and sewer taps that collectively may cost hundreds of thousands of dollars.
As the design process progresses—from conceptual to schematics, and design development to creation of construction documents—increasingly more qualitative and quantitative information is revealed, resulting in more reliable cost estimates. The design or owner's contingency is gradually reduced to zero by the time the construction documents are complete and ready to be advertised for bidding.
Site development costs often have a critical impact on the hard cost budget and include utilities, grading, parking areas, landscaping, hardscapes, roadways, bridges, traffic control equipment, environmental remediation and occasionally demolition of existing structures. It's logical to include those components that relate directly to the new or renovated facility such as basic utilities, parking and landscaping. The difficulty arises when unanticipated or predetermined requirements are imposed on the project.
The regulatory body that permits or approves the project may require your project to cover the cost to improve an existing infrastructure condition proximate to your project site. The local engineering authority may require that a traffic study be completed and expect your project to construct a turn lane, add a traffic light or enlarge a stormwater detention basin that serves an area much larger than your site. If wetlands are known to be on the site or are discovered through investigation, you may be interacting with the U.S. Army Corps of Engineers for approval permits or remediation.
Hazardous materials abatement cost is frequently overlooked when the project is a renovation or addition to an existing structure. Again, others' expectations may be that your project will bear the cost to investigate and fix old problems such as asbestos. Many public entities require a Phase 1 Environmental Site Assessment (ESA) prior to purchasing land as due diligence. If the site is considered contaminated, or is a known brownfield site, a Phase 2 ESA will be necessary to definitively determine the contaminants. The results of the Phase 2 ESA will define the appropriate cleanup action, some or all of which may affect your hard cost budget.
A second essential contingency—the construction contingency—is also included in the hard cost budget. These funds or allowances are necessary to manage the risk of unknown conditions, errors and omissions, or modifications to the design once the project has begun construction. The construction contingency amount will vary depending on whether or not your project is a new construction or renovation, as well as the construction delivery method: traditional design-bid-build, design-build or construction management.
FF&E is a separate line item within the total project budget and is considered an additional service for design specifications. Perhaps the simplest explanation of FF&E is to visualize taking your facility, turning it upside down, shaking it, and whatever is loose and falls out is considered FF&E. In recreation facilities the determination and procurement of appropriate fitness equipment is a capital investment that can range from hundreds of thousands of dollars to nearly a million dollars, and on average, the FF&E budget allocation is 3 percent to 7 percent of the hard cost budget.
Other elements considered part of FF&E may include information and telecommunication technology equipment, wayfinding graphics and art. Room identification signage in text and Braille is a building code requirement, thus included in the hard cost of construction, but wayfinding graphics and signage are an additional service and frequently included with the FF&E budget. Whether the FF&E design, specifications and procurement are listed under the hard cost budget or the soft cost budget is not as important as remembering to include those costs within the total project budget.
A reasonable rule-of-thumb to project the soft costs for a capital project, including the FF&E, would be 25 percent to 30 percent of the hard cost budget.
The legal cost to finance the project is the owner's responsibility and may or may not be included in the soft cost budget depending on whether or not the bond counsel is on retainer to the institution or organization. Many owners charge back to their own organization the administrative fees to cover an in-house owner's representative or construction manager.
Finally, inflation must be factored into the cost of any project, whether the planning and design begins within a few months or is the result of a feasibility study done last year. The design phase for many contemporary recreation facilities may take up to one full year. Therefore, current construction costs need to be adjusted for inflation or deflation, considering the state of the economy.
The true bottom line of a capital construction project—small, medium or large—is far more than the construction cost of the "sticks & bricks." Whether you are working backwards from a given dollar amount for the capital project or first conducting a feasibility study to determine project scope based on need, don't forget to consider all aspects of the total project costs when preparing the CIP request.
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