Creating budgets is an essential step in setting up performance tracking for design projects.

The Importance of Budgets

One thing firms can do to help understand their operational performance is to create budgets for each project, and measure the project's progress against the budget that you created.

Creating a budget is usually simply taking a project’s Net Fee and expenses and distributing it over time. Once created, the project’s weekly timesheet charges are tracked against the project labor budget.

While creating a budget is not complicated, there are a couple of things to consider before starting. One of the first decisions to make is what level of detail you want to create the budget in. When I discuss budgets, I frequently identify three different levels that budgets can take: Level 0, Level 1, and level 2.

In this article I'll talk about the three different levels of budget that can be created for a project where each digs deeper into the project structure than the prior. It is possible to create even more levels, but three levels usually suffice.

Defining Simple Project Budgets

A budget at its core is simply an allocation of money over time. With that in mind, we need three very basic data inputs to create budgets for the typical design project:

a start date,
an end date, and
a fee.

The simplest method to create a budget is to take the fee and divide it by the number of days between the start and end dates to produce a baseline daily budget. This creates a budget with daily amounts allotted to each date in the project. Daily budgets can easily be aggregated to weekly or monthly budgets, so there’s a lot of flexibility in starting with daily amounts. This is what I call the Level Zero budget -’L0’.

Splitting between Design and Construction

Design projects of course do not follow a simple linear distribution, or ‘burn rate’. Firstly, there is a typically skewed distribution of work between the design phase and the construction phase of a project. We can ponder the best numbers for that split, but I frequently use a 70%/30% split of fee for simple budgeting - 70% design: 30% construction.

There is also an inverse split in the respective durations of design and construction. For instance, the design phase of a typical large project might take 9-12 months, while the construction phase might take anything from 18 months to several years.

The result is a situation where a lot of fee is burned in a brief period, and the remaining fee is burned over a long period of time. For this I usually use a 35%/65% split of time.

We can actually model these skewed distributions by writing a very simple formula that takes 70% of the fee and divide it by 35% of the duration to get a design-phase burn rate, and then take the remaining 30% of the fee and divide it by the remaining 65% of the time to get a daily burn rate for the construction phase. Thus we get two separate burn rates, one for design and one for construction. This is the Level One budget - ‘L1’.

Adding Phase Level Detail

At the next level of detail, we sometimes take a project and divide it into phases and allocate the fee for each phase as per the standard AIA guidelines. The following distribution describes the typical AIA breakdown.

Schematic Phase (SD) - 15%
Design development Phase (DD) - 20%
Construction documents (CD) - 40%
Bidding phase (BN) - 5% and,
Construction Admin phase (CA) - 20%.

Phase percentages may vary with firm and client type, but the AIA’s allocation is a useful starting point for budgeting purposes. To create budgets for each phase however, we need a start and end date for each phase, so we're at a different level of detail when we start to create budgets for each phase of a project. We then take the percentage of fee for each phase and divide it by the duration of that phase. The result is a burn rate for each phase. This is the Level Two budget - ‘L2’.

The Advantages of Phase Budgeting: There are some significant advantages to creating phase-level budgets. The first is that on many projects there can be significant gaps between the completion of one phase and the start of the next phase. This is true in projects where fundraising needs to occur or planning approvals are required: often the client can authorize a schematic design phase, but then needs to wait for trustee or planning committee approval before moving ahead with the rest of the project. It can be hard to predict the correct distribution of that project with algorithms alone, because it will vary widely by project.

When to Use each of the Levels

The three budget levels are what I call the L0, L1 and L2 models, for “Level Zero”, “Level One” and “Level Two” respectively. The ‘L0’ budget simply takes the fee and divides it by the total time creating a uniform daily burn rate. This can be useful for small projects or those that are heavy in Construction phase activity.

For most design projects however, you probably will move to the next level, the 70/30 model. Again the 70/30 model has the advantage that it at least shuttles most of the fee into the early parts of the project, and creates a slightly better distribution of the budget that reflects the different level of activity between design and construction. I typically use L1 for projects that are not yet contracted, so we can begin to graph the future revenue. If possible though, the L2 budget is more useful for contracted projects because it allows phase-by-phase tracking.

“There is a cardinal rule in operations - avoid creating too much detail in financial projections because it is often cumbersome to manage and move around.”

Avoid too much detail: It is also possible to contemplate Level 3 and 4 budgets which drill down to discipline and labor category respectively. In practice, this level of detail is far too granular for most projects, particularly in large firms with hundreds of active projects. While I have created some budgets beyond Level 2 detail, there is a cardinal rule in operations - avoid creating too much detail in financial projections because it is often cumbersome to manage and move around, which is inevitable in practice.

Using the Budget in Practice

Once the budget is created, the final step is to start tracking charges against the budget. Typically, this is in the form of timesheet charges which record employee time which results in labor charges.

There are various data techniques that make creating distributions for budgets possible and most budgeting software incorporates proprietary algorithms that help with the distribution. In either case it's worth understanding that there are different levels of budgets that an operations team can utilize, and each of the methods all of the methods can be used in conjunction with each other.

Overall a project budget is an essential tool in enabling a firm to understand the financial progress of a project, and as mentioned, it really only requires three simple inputs: start date, end date and net fee.

3 Ways to Create Project Budgets