Construction Terms: Budget and Bid
07/31/2023
The words ‘budget’ and bid’ are often used interchangeably, but when it comes to commercial construction, these terms are distinctly different, with important consequences if one is mistaken for the other. Both are integral to project management, but they serve different purposes.
Budget
Definition
A budget is a preliminary financial plan for a specific construction project. It encompasses all the expected costs that will be incurred throughout the project, such as labor, materials, equipment, permits, and overhead costs. It may even include some soft costs, such as architectural and engineering fees.
Purpose
The purpose of creating a budget is to have a financial blueprint that guides the construction process. It ensures that the project stays within the allocated financial resources and helps in making informed decisions regarding resource allocation.
Flexibility
A budget is a living document, meaning that it can change as the project progresses. Unforeseen events or adjustments in the scope of work can impact the budget, necessitating revisions.
Components
It usually includes line items with unit costs for all of the sub categories such as site work, foundations, framing, electrical, plumbing, interior finishes, and more.
Timeline
Budgets are typically utilized during the preconstruction process, before final design drawings are complete.
Bid
Definition
A bid is a proposal submitted by a general contractor (or subcontractor) to the project owner, which outlines the cost for which they are willing to complete a specific part or the entirety of a construction project.
Purpose
The bid is intended to compete with other contractors’ bids for the award of a contract. It provides the project owner with a fixed price or a clear basis for the costs involved, which is used to make a decision on which contractor to hire.
Flexibility
Unlike budgets, bids are generally fixed. The contractor is committed to completing the project for the price they bid, barring any changes in the scope of work or unforeseen conditions.
Components
A bid will usually break down the total price into different categories. However, it may also include a profit margin and contingencies. This depends on the procurement method the owner chooses to use to find their general contractor.
Timeline
Bids are typically created once the project scope is defined, often when design drawings have been fully completed.
The Bottom Line
The budget is an overarching financial plan created to guide the construction process, whereas a bid is a competitive proposal submitted by contractors indicating the price for which they will complete the project or a part of it.
Budgets are usually more flexible and can change as the project evolves, whereas bids are generally fixed and serve as a binding agreement on the price of the project once a contract is signed.
Why the Distinction Between Budget and Bid is Important
There are a few reasons that the distinction between a budget and a bid should be understood:
- A budget is rarely used to form a contractual price. There are some scenarios where a budget may be used as a contract price depending on the procurement method, but this is not typical.
- A budget can be produced based on very preliminary information if a contractor with experience in the particular project type is utilized. A building doesn’t have to be formally designed to create an outline of the potential costs. These early budgets can contribute to:
- Tenant negotiations
- Feasibility studies
- Procuring early financing commitments
- Preliminary discussions with local jurisdictions for permitting purposes
- Fundraising efforts
Importantly, the ability of a contractor to create a budget based on preliminary information can save an Owner significant design dollars that don’t need to be spent if the budget determines that a building isn’t the right design/space for the desired purpose.
- Budgets can be modified as designs progress, helping to keep the total project dollars in line with the cost of construction.
- Budgets can be used to explore options and quickly understand price effects prior to sending changes to the architect/engineer to fully design. For instance, a good general contractor can help provide pricing to raise the building height by 4’. This study will likely provide enough information to an owner to determine whether they want to move forward with that option or not, without the investment and time required for design.
In contrast to a budget, a bid is generally presented when all of the data related to a project is known, with the intention of determining the contractual price for the work. An Owner may choose to have a single contractor bid the work, or elect to solicit pricing from multiple contractors. There are benefits to each method of procurement.
Once bids are received, they can be compared to the latest budget to ensure that the price is as expected. And if the pricing does not align, the discrepancies can be investigated and resolved.
Final Thoughts
Both budgets and bids are critical pieces of construction projects, and they both have their place. When discussing potential projects with a contractor, it’s important to identify whether the ‘price’ should be a preliminary budget, or a firm bid. The process for creating each differs, so clarifying this expectation can prevent misunderstandings.
If you’re considering a project and need a rough idea of the price, contact us now.