Many construction businesses and builders find themselves in the position to ask for a construction loan. In order to accurately decide how much to ask for when applying for a loan, a new construction loan assessment needs to be made prior to ensure all of your bases are covered.
Many situations need to be factored in including the possibility that the financing for a construction project runs out of funding before you're finished with the job. What are some considerations that you can make to hopefully avoid this conundrum?
While most companies that provide loans for construction jobs are aware of this variance and are familiar with the construction loan process, it's not looked upon favorably if the funding runs out prior to the project completion. It can be perceived as poor planning and may affect future loans if an assessment is not accurately made prior. Here are some often overlooked items that many newer construction companies and new construction builders miss.
Construction Labor Burden Costs While this seems obvious, it's easy to go over budget quickly if you don't correctly estimate what your overall labor costs will be. Understanding your employees’ hourly rate and adding together the hourly rate of each crew member is just the beginning. Additionally, there are also labor burden costs.
Labor burden costs can include benefits, meals, insurance, payroll taxes, supplies, and other items like training costs. Review your previous year's tax returns to determine what those total costs were for the year and then divide them by 52 to understand what those expenses are on a weekly basis. Depending on how long your building project is going to take to complete, this could add up to a considerable expense that will eat into your construction loan and leave you falling short.
Vacation/Time Off Sometimes a construction project could take many months to complete and you will possibly have employees on your crew that are entitled to vacation time. Unforeseen circumstances like illnesses during the project timeline can also occur. If employees receive the benefit of paid time off or vacation, you not only incur the cost of that employee not being productive but additionally must pay for their replacement and expense of potential training.
Pay close attention to your calendars for previously requested time off and see if it falls within the site project timeline. While it may seem like a small concern, one full-time employee vacationing for a 40 hour work week at $30/hour equates to a $1,200 loss just for that one employee. Not to mention the cost to replace that worker or other workers who may need to be out for illnesses.
Specialty Material Costs Estimating building material costs is almost never an exacting science, but it is certainly one with that’s often the culprit for sending construction budgets into a spiral. It can even come up on a smaller scale for residential construction projects. Invest in a good solid construction budgeting software program that will help you correctly make closer estimates. Understand the pricing variants among your building material suppliers and pad accordingly. When acquiring new construction funding from Snap.Build®, included is access to our proprietary software application for builders to help with budgeting and construction project management.
Many itemizations on the new construction site may also increase due to intricacies such as detailed woodwork or site conditions that may not only cause an increase in labor hours, but an increase in material costs due to the need of purchasing specialty or premium building materials. Pay attention to details like this in your construction project to identify those potential areas.
While there are other unexpected elements that may appear such as overtime due to weather-related delays in your construction schedule or unforeseen building permits, it's always best to be over prepared. You’ll want a financial safety net that you can utilize if it's needed. If it's not, you can simply roll the leftover funding back into the loan repayment, which is far better than needing to apply for additional construction funding.
Rely on historical data to get you closer to an accurate estimate, put together a construction loan checklist, and find a software package specializing in construction projects that can guide you to avoiding embarrassing oversights. Learn how Snap.Build® can help you with assessing your construction loan amount and gain access to streamlined new construction funding quickly.