BUDGETING
 Very few school districts in California ever experience the situation of having more money than they need for their facilities projects. More typically, districts are required to stretch inadequate financial resources to cover an abundance of need. This process is called budgeting.
I. Fundamental principles and concerns of capital outlay budgeting
- The actual cost of construction contracts (often referred to as "hard cost") comprises no more than 75%, and often as little as 60%, of the total project budget. Inadequate budgets for those "other costs" can have a direct impact on the construction.
- Construction cost escalation is not only alive but thriving at present, and must be accounted for in budget planning.
- Project priorities may be driven by either scope or cost, but project budgets cannot reasonably be driven by both.
- Within the framework of Proposition 39 reporting requirements and OPSC audits, accurate tracking and reporting of expenditures is of paramount importance.
- School district fund accounting systems with their fiscal year orientation are anathema to project accounting, which must span the multiple years of a project's life.
II. Budget components
Construction cost: The largest single component of a facilities project budget is almost always the contract for the actual construction of the project. Regardless of how the construction is procured, this cost will typically comprise 60 to 75% of total project costs exclusive of land acquisition. The initial cost of the construction contract will virtually never be the final cost due to change orders executed during the course of construction. It is therefore very important that dollars be set aside for addressing these changes.
The initial construction cost is usually set either by estimate or rule-of-thumb square foot cost calculations. This number may then be refined by phase estimates during design. When construction contracts are actually awarded, it can be adjusted to the contract amount.
Contingencies: Projects will typically encounter changes in cost both prior to construction and after award of construction contracts. During the design phase, a contingency of up to 10% or more is often set aside to address increasing cost estimates as the plans are developed, finalized, and approved by the state agencies. This contingency may also be used to cover bid costs that exceed final estimates.
A second important cost change encountered prior to construction is construction cost escalation in the marketplace. This varies both from season to season and from year to year. Seasonal variations typically are characterized by a cycle of rising bid costs throughout the late spring and summer months, followed by falling costs throughout the fall and winter. The worst (most expensive) time to bid a project is typically June or July, with the best being December or January. Absent considerations of year-to-year escalation, the bid cost spread between these two periods is typically 10 to 20% within a single year.
Annual escalation is trickier. Industry standard indices that track construction cost escalation generally report an annualized average increase of 3.5 to 4% over a twenty-year period. However, individual years can vary wildly, including occasional years of decreasing construction costs. The middle years of the present decade (2004, 2005, and 2006) have experienced unprecedented double-digit escalation with no relief in sight. The resulting impact on projects is profound. In one school district modernization program, costs budgeted in 2001 for future projects were found to have escalated 62% by the end of 2005, when the projects were actually moved into design.
A contingency to address escalation can be carried within the individual project budgets or as a separate item for the capital outlay program as a whole. If carried within the projects, it is subject to being "raided" early in design for additional scope or enhancements. If carried within the program it is safer from being used too soon, but requires judgment about when and to what degree it is appropriately used.
After construction commences, changes will take place for a variety of reasons. These typically include owner-initiated changes, unforeseen conditions, regulatory requirements, and design errors or omissions. Only the first of these is under the district's control. For each change that takes place during construction and requires a change order to the construction contract, there will be associated costs in other areas, e.g. design fees, agency fees, inspection, and so forth. Contingencies to cover these changes may be kept separate in the budget or lumped together.
- Owner initiated changes can vary, and are often unacknowledged, but a typical number is 3 to 5% of construction costs.
- Unforeseen conditions include such items as underground rock or other soil conditions not revealed by a soils report in new construction, and hidden dryrot or termite damage in modernization. The former can be mitigated by obtaining a thorough and up-to-date soils report. The latter is more difficult as it may require destructive testing to uncover. It is typical to encounter dryrot/termite damage costing two or three percent of construction cost, and not unheard of to encounter ten times that amount.
- Regulatory changes are typically a minor item. The DSA field representative may require additional structural connections beyond those on the approved plans. More significantly, a local fire marshal may require additional hydrants on site, or emergency vehicle access, or alarm system changes. Generally these costs are less than 1% of construction.
- Design errors or omissions may be the most difficult for district administration and school boards to understand, but they are a fact of life that must be dealt with. Typical exposure is 2 to 3% of construction costs for new projects, and 4 to 8% for renovations or modernizations (although many of the latter could reasonably be attributed to unforeseen conditions).
Agency costs: The most obvious costs are formula-driven. Both DSA and CDE assess straightforward sliding scale fees based on construction costs. These fees are adjusted at project closeout to the actual final cost of construction. Not so obvious but potentially challenging are other agencies costs, especially in light of recent court decisions. Districts building new projects may find themselves paying significant connection and plant upgrade fees to local sewer and water agencies. Both new and modernization projects may encounter electrical upgrade fees for engineering, offsite construction, and providing new or upgraded service to the site.
One of the largest unknowns among the state agencies is the Division of Toxic Substance Control (DTSC) requirements for new sites. Both the fees for DTSC monitoring of mitigation projects and the projects themselves can be very costly, and need to be adequately accounted for in the project budget.
Consultant fees: Best known are the design fees, which continue to be heavily influenced by the old state Lease-Purchase Program sliding scale, even though it has not been in effect for nearly a decade. Initial development of the budget might include a fee based on this scale (still available on the OPSC website), which would then be updated when the design agreement is actually negotiated.
Other consultants might include project or construction management, technology, design specialties (e.g. acoustics, theater lighting, kitchen), hazardous material abatement design and monitoring, and others.
Construction support: Public school construction in California requires full-time inspection by a Project Inspector tested and licensed by DSA. Inspector fees vary significantly by region, and may be demand-driven during periods of active school construction (e.g. the present decade). Other items in this category include the materials testing and inspections agency (concrete, rebar, welding, glue-laminated beams), printing of plans and required advertising, and any other items dealing with the actual support of onsite construction. Some districts put construction management fees into this budget category.
Interim housing, moving, storage: Renovation and modernization projects typically involve interim housing for students, along with moving of classroom furniture and other items and storage of items during construction. Placement of portable classrooms to provide interim housing on-site includes the rental of the buildings themselves as well as preparing the site, providing handicapped access, bringing utilities to the buildings, removing them at the end of the project and restoring the site. The cost of preparation, placement and removal very often exceeds the actual rental cost of the buildings.
Furniture and Equipment: In the old State Lease-Purchase Program, this item was a separate budget line item driven by a complicated formula. The present SFP grant program acknowledges that F&E is part of the cost of the project, but leaves it up to the district's judgment how much (if any) to spend. Typical approaches include a per-student formula (often in the range of $200 to $500 for modernization, depending on grade level) or a carefully developed purchasing list for equipping a new facility, developed by the users and the district purchasing department.
III. Establishing Budget Parameters
For most projects, the budget is generally driven by an interaction of need and available dollars. For new construction the need may be more clearly defined, e.g. a new elementary school for 650 students or a new middle school gymnasium large enough to house a basketball court. CDE publishes planning standards to help guide required square footages for various educational functions, and then the budgeting challenge is primarily one of getting the space needed in the most efficient package. This is primarily a design issue, and it is one that the school design community addresses daily.
For modernization/renovation projects, budgeting issues are much more complicated. Most districts undertake a program of modernization involving multiple campuses. Key issues include the age and present condition of each campus, district-wide equity among facilities, special needs or desires at each campus, and availability of state modernization funding at each campus.
District facilities departments should consider preparing and having their boards adopt a board priorities document that formalizes how the district in general will allocate its modernization funding. This will help guide staff and consultants in preparing scope for individual projects as well as removing some of the perception that each site needs to compete vigorously for limited funds. The guiding principal is that equity of outcome is the desired goal. This may mean that some (older, more run-down) sites get relatively more funds than newer sites in order to elevate their post-modernization condition to a level more equal to the newer sites. A board-approved document that establishes this principal of equity is generally understood and accepted by the faculties and staffs of the various sites.
Typical organization of a board priority document is in several major categories along with more specific examples of each category. Major categories might include Health and Safety Items, Handicapped Access, Building Shell Integrity, Site Infrastructure, Classroom Interior Improvements, Technology, Instructional Support Spaces, and Athletic Facilities, among others. The first three noted are likely to be the top three priorities for any prudent board to adopt; after that the field is wide open. The first two are self-explanatory; Building Shell Integrity refers to projects that keep the buildings themselves intact, such as roof replacement or painting or dryrot repair, in order to protect the district's capital investment.
If a district decides to adopt district-wide priorities for scope, the budgets for individual projects will be controlled by how far down the list of priorities the overall amount of dollars available will go. Often it is a stretch just to cover the top three priorities, especially if the only funding available is state modernization grants plus required local match.
If, on the other hand, a district decides to allocate funding to individual sites and projects on some other basis, e.g. state eligibility, the individual budgets will be controlled by funding allocated, and scope of work will need to be tailored to available construction dollars.
IV. Budget Tracking and Reporting
Proposition 39 brought school districts the 55% vote for local general obligation bonds accompanied by Citizens' Oversight Committees with mandated reporting requirements. Most districts embrace the elevated level of accountability to their communities, but many are not prepared to do the actual accounting.
Project budget systems typically span the multiple years that a project is active, from the start of predesign work right on through to DSA and OPSC closeout. This usually involves no fewer than three fiscal years, and often encompasses two to three times that amount of time. District fund accounting systems are notoriously bound to single-year intervals, and tracking budgets and reporting expenditures across fiscal years can be very challenging. Additonally, a district may change accounting software vendors over such a period of time, further complicating any consistent method of keeping track of costs. For this reason most districts set up either formal or informal project budgeting systems outside their fund accounting systems.
Basic components of a project accounting system include funding (by source), original budgets, budget changes, current budgets, contractual commitments, and expenditures to date. Each of these is compiled over the life of the project, providing a simple, single source for auditing purposes. Project audits may come from the state (OPSC), the oversight committee, the public, and the district's own auditors. Filing of accounting records by project rather than fiscal year will help support this effort.
Funding: Sources may include the state funding programs, developer mitigation fees, local bonds, other local agencies, developer CFD's, redevelopment funds, federal dollars, or the district's general fund (including deferred maintenance dollars). Each may have individual reporting requirements, along with constraints on how the funds can be used. Project budgets should indicate funding source and amount, and if necessary track how individual expenditures were attributed to the funding source.
Original budgets: At some point early in the project's life a budget should be established and the original budget numbers frozen so that an audit trail can be created for subsequent changes. This may be as early as the local bond planning stage, or the establishment of state eligibility. Establishing budgets early forces the participants to identify all possible categories of cost exposure and brings discipline to the budgeting process from the beginning.
Budget changes: Changes should be tracked and documented from the time the original budget is established. This may be a requirement of the citizens' oversight committee, and in any case provides a way for later investigators to understand what decisions were made during the course of the project and why.
Current budget: Current budget should reflect the amounts allocated to each budget category, derived simply from original budget plus or minus changes. These numbers also provide the basis for loading fiscal year budgets into the district's accounting system.
Contractual commitments: This item reflects all of the contracts entered into (the actual encumbrance of the budget in accounting terms) along with any past or pending changes to those contracts. This also provides a check against cash flow requirements for district fund accounting purposes.
Expenditures to date: This number should tie back to the district's fund accounting system, and be reconciled at the close of each fiscal year. Failure to perform this exercise may result in undocumented and possibly unauthorized costs being charged to facilities projects.
V. Program Budgets
For a capital outlay program comprising multiple projects, some types of expenses are better tracked at the program level rather than the individual project level. These might include the following:
- Escalation contingency—as discussed above
- Program-wide consultants such as planners, eligibility consultants, financial consultants, attorneys, public relations consultants, and program managers.
- District staff costs charged to capital outlay program
- Citizens' Oversight Committee support.
- Bond issuance costs and costs of short-term borrowing.
- Other contingencies—for items that do not happen in each individual project but likely will happen in the course of the capital outlay program. Examples include construction claims and litigation, and major unforeseen site conditions such as extensive dryrot or termite damage.
VI. Conclusion
The careful planning of project budgets in the beginning, along with accurate tracking and reporting during the course of the project will involve a fair amount of effort by district staff and consultants. The rewards for such effort may include greater credibility with the community, an easier time with state agency and other audits, and greater control of the use of limited project funding.
- Jay Davison
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