5 Budgeting Best Practices for Consulting & Engineering Firms

Profitability and efficiency are core to successful environmental consulting and engineering firms. It’s talked about a lot within the industry, but where do you start for your business? A clear place to make a direct impact lies in your firm's budgeting and cost estimating process.

This article delves into the fundamental components of a budget, explores six common budgeting mistakes, and outlines five best practices to ensure that your firm's budgets are optimized for success.

Project Based Consulting & Engineering Firms Have Unique Budgeting Needs

Consulting and engineering firms need to create regular budgets for each new project that the business takes on. Project managers and estimators must refine their budgeting skills to create the most accurate and effective budget possible so that projects are completed on time, within budget, and the business remains profitable.

Oftentimes, budgets need to evolve as the project increases in scope. It’s important to ensure that your budgeting and estimating process breaks down project-based work into tasks or phases. This allows you to add additional phases of work and change-orders into the same budget you initially built. Creating multi-phase budgets is also helpful when it comes to tracking billable activity between different phases of a project so that the invoices you send clients match up to the estimates they agreed to in your proposal. 

Core Components of an Effective Budget

Building an accurate budget is the key to maintaining healthy client relationships. Typically, there are three different types of costs that go into a budget: labor, subcontractors, and direct expenses. Each of these three costs might have different pricing structures, such as lump sum or time and materials. It’s important to separate each of the three costs from one another in your budgeting and cost estimating process, so that when the project is live, managers can easily understand what cost bucket caused your team to exceed their original cost estimates. 

• Labor: Employees’ hourly rates and the estimated time they will spend working on each task or phase. You can either budget labor using a top-down or bottoms-up approach. 
• Subcontractors & Third Parties: Subcontractors and vendors who you rely on for specialized services. Clients often pay a markup above the cost of these third-party services. 
• Direct Expenses: Fixed priced expenses that you charge your clients, such as company-owned equipment, software, and materials. Reimbursable expenses such as mileage should also go into this category.

8 Common Budgeting Pitfalls to Avoid

We understand your pain; it’s challenging to create an accurate budget for projects. There are many moving parts that go into the process and getting it right can often feel like a daunting task. These are the most common pitfalls for consulting and engineering firms that come up time and time again. 

1. Relying on Lumpsum: It’s tempting to create a single number that takes into account multiple different costs in your budget. However, this often leads to problems once the project is in progress, including the inability to track what caused the team to go over budget. Creating T&M budgets may take longer up-front, but it will save your team a headache down the road.
2. Subcontractor and Direct Expense Markups: As a business, you want to add a markup to subcontractors and direct expenses so that you can earn revenue from these services. It’s important to find a budgeting and estimating tool that allows the markup to be added to your budget separate from the actual cost incurred. 
3. Material Price Fluctuations: Prices of construction materials, like steel, concrete, and lumber, can fluctuate significantly. Firms need to account for these potential budget changes as they make accurate budget forecasting challenging, potentially leading to cost overruns.
4. Labor Shortages: Depending on the region and project type, skilled labor shortages can impact project timelines and costs. Budget for competitive wages and potential overtime.
5. Regulatory Changes: Changes in building codes, environmental regulations, or permitting requirements can force project modifications and impact budgets. Make sure to get change-orders approved by your client as soon as you think you may need one. 
6. Inaccurate Time Tracking: Accurate time tracking is crucial for managing labor costs and billing clients accurately. Without consistent timekeeping, the time and resources necessary to complete a phase of work can easily be underestimated.  
7. Inadequate Contingency Planning: Insufficient funds for unexpected challenges or scope creep can leave firms unprepared in the case of unforeseen circumstances that might occur. It’s helpful to budget on the conservative side, giving yourself wiggle room to adjust.

Five Budgeting Best Practices for Environmental Consulting & Engineering Firms

1 - Be Detailed in Scoping and Planning:

By starting with a detailed scope and clear planning, you simplify the entire project.  It is important to establish the objectives, deliverables, and potential risks. The project should be divided into phases with clear milestones. Each phase should have a designated budget, encompassing all expenses such as salaries, subcontractors, materials, and overhead costs.

2 - Adopt a Robust Contingency Approach:

The budget needs to be prepared for the unexpected. A contingency plan, such as 10-20% of the budget, should be included to ensure that the project is prepared for scope changes or unexpected events. The contingency funds should be regularly reviewed and adjusted as the project progresses and issues are resolved.

3 - Prioritize Effective Communication and Transparency:

Open communication with clients throughout the project lifecycle is essential. The project's budget should be discussed proactively, and potential issues should be addressed to ensure that expectations are aligned. The team should also be informed of potential increases or decreases in scope so that they can adjust their hours accordingly and have a clear understanding of their allocated time.

4 - Leverage Technology and Data Analytics:

Utilizing project management and financial software to access real-time data from project budgets, expenses, and resource allocation can enhance budgeting processes. Historical project data can also be analyzed to identify areas for improvement and refine budget estimation models. 

Aldoa provides comprehensive access to all time spent on tasks, salary costs, and material expenses in a centralized platform, facilitating improved budgeting and a deeper understanding of spending.

5 - Conduct Regular Financial Reviews:

Establishing a standardized routine for financial reviews will enhance project managers' and company stakeholders' ability to monitor project budgets, identify potential problems, and implement corrective actions promptly. Upon project completion, it is essential to analyze its profitability and incorporate the findings into future budgeting practices.

See How Aldoa is Transforming Financial Management for Consulting & Engineering Firms

Aldoa offers a streamlined all-in-one project management solution. It includes features to make project budgeting and management efficient. With real-time data, accurate expense tracking, and resource optimization, Aldoa empowers you to make informed decisions and ensure your projects stay within budget. 

Sign up for a free demo and discover how Aldoa can revolutionize your budgeting process.