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Total project budgeting
Potential expenses from 4 major categories should be considered to determine overall cost
When deciding whether you’re going to be building a new veterinary hospital, it is important to develop a preliminary budget as early in the process as possible. Not only a construction budget but also a total project budget. By the time all is said and done, there will be many people that need to dip into your project funding to make it happen.
The purpose of establishing a budget early on is to make solid decisions, balancing what you prefer to spend against what the potential costs are going to be to achieve what you want. Let’s start with breaking down the different categories that relate to a total construction budget. When we establish a total budget for a project, the 4 major categories include soft costs, builder’s budget, owner’s managed budget, and contingencies.
Soft costs are typically expenses for design and engineering, which should include architect, plumbing, electrical, mechanical, structural, and civil engineering. Depending on the type of project you have, you may also need other consultants such as surveyors, geotechnical engineering, hazardous materials or environmental studies, fire protection or sprinklers systems, traffic studies, and other potential municipal studies and submittals.
You should be able to determine an approximate cost by either contacting each individual entity or contacting an established architect or design/builder that has experience in these types of projects to help you allocate funds for this first part of your budget.
Typically, builders’ budgets are the most expensive portion of the overall budget. This is the cost of constructing your new facility, not only the building but also site costs associated with your project. There are many factors that make these budgets fluctuate. Some of these factors are the type of construction. Is it going to wood, steel-framed, or concrete block? How elaborate is the design? If money were no object, then champagne taste carries a champagne price. Try to balance your style of architecture and amenities with your budget. Another factor is the geographic location of your project. Middle America is still comparatively economical to build. As you get closer to the East Coast or West Coast, costs go up.
The COVID-19 pandemic has had a major impact on costs. Interest rates are still low, which is good for your loans; a lot of people are taking advantage of this, and contractors, in general, have not slowed down. If anything, they have become busier, which typically drives up the cost. Material costs have also escalated for wood, steel, and petroleum-based products, as well as copper and other base materials. Shortages and long lead times for some material also have an effect on costs. A lot of suppliers are unwilling to hold pricing for more than 10 days. This makes it more difficult to establish a budget 9 to 12 months before construction is ready to start. You should make an accommodation in your budget for escalation of cost somewhere between 5% and 15%.
There are several areas where you can obtain information regarding basic costs for construction. We have developed a database of average costs of previous projects throughout the United States that can be used as a base point. You will just need to factor in inflation from when that project was built to today’s market. Another would be to invest in a construction cost data book that breaks down individual components and square-foot averages. These books will give standard construction cost but may not indicate the specialty components in veterinary hospitals such as oxygen and anesthesia evacuation systems. Three other sources of information would be from veterinary-experienced architects and contractors, as well as veterinary-specific lending companies.
Owner’s managed budget
Owners’ managed budgets are items that are solely the responsibility of the owner. These can be broken down into 6 categories: business systems (ie, furniture, fixtures, and equipment [FF&E]) and financing (ie, legal and practice management, project development, and occupancy costs).
Business systems include phone systems, computer systems and cabling, as well as safety systems such as fire and intrusion alarms, monument and building signs—all of which could impact the total cost.
FF&E are all items that are necessary to open your doors when your construction is complete. Are you going to reuse existing items? Or are you going to purchase all new? The costs can be large, especially when you’re purchasing big-ticket items such as CTs and MRI units. FF&E could be a separate line-item budget in itself to be added to the overall total budget.
Financing costs can include closing costs on your loan, loan interest, appraisals, banking fees, and inspection costs. The best source for information on these items can be obtained from an experienced veterinary-specific lending company.
Legal and practice management
Yes, you will probably need an attorney and their fees to guide you in contracts, closing documents, and advise you on other legal issues. Do you have a practice management consultant or software? If not, you may need 1 or the other, if not both.
Land acquisition cost could be a substantial expense to your total budget and should be accounted for. Other project development costs can include impact fees, utilities, and meter fees established by your local jurisdiction. Additionally, there may be project management fees. If you hire a third party to act as your liaison between you and the architect and contractor for the duration of the project, this could add an additional cost.
Items in this category should include installation of equipment and furniture you purchased such as cages, run desks, etc. One thing many people forget until the end is the cost associated with moving into your new facility: labor, rentals, and the expenses associated with printing and revising existing websites or developing new ones.
The last of the major considerations are contingencies. You and your lending company should always establish a contingency for your project. In the past, we have used somewhere between 5% and 10% of the total construction cost. These contingencies will help with things you may add during the project process or to help offset some of the potential escalation in material costs. Unused contingencies can go toward purchasing that new piece of equipment you have been wanting. Your lending company will help you establish a percentage of a dollar amount for this.
As you can see, there are a lot of items that should be taken into consideration when developing a total project budget. The more information you can obtain early in the process, the less likely there will be costly surprises toward the end. This should reduce or eliminate going back to your lending company and asking for more money or coming out of pocket.
CMP, Inc, has developed a standard spread sheet that can be utilized in producing a budget that can be added to or modified, which can help establish a total project budget. For a copy or more information, please email the author at Sean@cmp-inc.net.
Sean Campbell is a shareholder, president, and a founder of CMP, Inc.