Managing Your Budget for a Business Contract

Managing Your Budget for a Business Contract

If you work in construction or other contract-based industries, you’re probably familiar with various kinds of pricing. Monitoring your budget while working on contract is essential whether you’re paid on a lump-sum, cost plus fee or unit price basis.

If you overspend on a lump-sum contract, you’ll lose money. If you don’t manage your budget on a cost plus fee contract, the client may become unhappy with the increasing expense of the project. That client may then refuse to contract with your company on future developments.

Fortunately, effective management simply requires attention to your costs and monitoring your cash flow.

Establish a Contingency Fund

With the contract in place, you should have a detailed breakdown of how much to spend on labor and materials. In any project, unexpected challenges may arise. That’s why you should have a contingency fund of five to ten percent of the budget on hand.

Hopefully, you won’t spend the backup funds, and your project will come in under budget and everyone will be happy.

Monitor Daily and Weekly Costs

Spotting cost overruns as quickly as possible is important to modify projects to cut back on spending. Many factors can increase your anticipated expenses. Labor shortages will mean overtime pay to pick up the slack. Material shortages, bad weather delays and changes in project direction cause costs to rise. You will have to cover these costs initially, even if the client has agreed to pay. Run daily and weekly cost reports and match them against budget projections to manage costs.

Don’t forget to also track the progression of the project overall. Your daily costs may be on target, but if the timeline for completion is suddenly extended by two weeks, you may still be out of pocket and over budget.

Hold Back Advance Cash

When you receive an advance payment, spend only what’s necessary at that time. Pay your invoices when they are due, not before. Reserve money for essential costs such as salaries. If you start using capital too quickly, you may have early overruns and have to dip into your emergency fund to complete the project.

Budgeting is essential to completing a contract successfully. If you’ve gotten the job, your project should be planned down to the smallest supplies. Stick to this estimate to ensure you complete the job profitably with a satisfied client.

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