Understanding a Construction Budget: Funding the Project
No matter how much money you’ve raised, it’s not enough.
BELIEVING IN THE PROJECT
When working with a construction budget, there are many points that one should understand. In this chapter we explain both the “how” and “why” of construction budgeting for PraiseBuilding renovation, as well as a few “don’t ever do this” pointers and discussion of the mistakes made in years of working with congregations.
Remember that when we speak of construction budgets for PraiseBuilding acquisition and renovation, we are probably going to be speaking in terms of hundreds of thousands of dollars to many millions of dollars. Dealing with these huge amounts of money to many people is unnerving. Remember that one is not raising all of this money from a single paycheck. Hopefully, the growing congregation is large enough and full of working families who, although living paycheck to paycheck, are able to have every family contribute a little from their paycheck each week.
If a congregation of 250 families each contributed $50 each week to the building drive over the normal tithing and offering, the congregation would raise $12,500 a week, or $650,000 per year, or $3,250,000 for five years. And these calculations are shown without any interest income!
Remember, be realistic about the amount the congregation is expected to contribute each week. Keep in mind that in times of recession, giving will drop as people tighten their budgets, and in times of plenty, giving should rise if the congregation believes in the project placed before them.
One of the most amazing fundraisers ever was a young 24 year-old African-American preacher who had a congregation of 100 adults and was going to purchase a closed college to be their new church home. Although they had raised the necessary deposit money and secured a mortgage on the property, they found themselves $10,000 short for the money required to cover the closing costs.
After the normal tithing and offering portion of the Sunday service, the young pastor again took his place behind the pulpit, and with the skill and articulation of a great southern preacher, explained to his congregation the problem that faced them. Then he asked the ladies of the congregation to sacrifice the coming week’s hair and nail money. He asked them to stand and be recognized for their sacrifice as they handed a quickly written check to one of the ushers in the church. Then he asked the ushers to bring the checks to him. One by one, he would read the woman’s name from the check and the amount she was giving. The first few women had given checks in the amount of thirty or forty dollars. However, as he read each name, the ladies who were still writing their checks, quickly increased the amount of money they were giving to fifty, seventy-five and one hundred dollars.
This was not a large wealthy suburban congregation. This was a small inner-city congregation filled with many ladies living on fixed incomes or single-mothers supporting families. But they believed in the project put before them and gave more than they normally would because they were asked to, and they were recognized for their sacrifice. The sixty ladies alone raised $4,500 in that one service.
The most important aspect of fundraising for construction projects of any type is to have the support of the congregation before starting. The congregation needs to understand what they are building, why they are building, where the building will be, and what it is going to cost. More important than this is that the congregation must want the same goals and objectives as the leadership. Too many times one finds beautiful artistic renderings hung on the wall covered in dust. These are the projects that never began because the congregation just didn’t believe in it.
Don’t think one is lucky if the congregation has a few wealthy folks to fund the building project. Wealthy folks, like everyone else, must believe in the cause for their giving as well.
Here is a story that illustrates this point.
A young Catholic priest needs to raise money in a hurry to repair the church roof. Each time it rains, water pours from the roof directly onto the altar. In fact, the roof is in so much need of repair, one can look upward and see daylight streaming down into the church. After services one Sunday, the young priest asks the five wealthiest men of his congregation to remain after mass.
He brings them all up to the sanctuary and standing around the altar, makes his pitch. Since they are all wealthy, he informs them that it is their moral obligation to repair the church roof. However no one breaks out a checkbook. In fact, they are not moved at all.
In a moment of brilliance he turns to the wealthiest man of them all, James Sullivan. “Mr. Sullivan, God has given you much in this world.”, he begins. “ It is your moral obligation to rebuild the roof of this church. After all, your parents were married in this church. Your father was buried from this church. You were baptized, received Holy Communion, confirmed, graduated high school, and were yourself married in this church. Your children all did the same. It is your moral obligation as the wealthiest member of this congregation to repair the roof of this church.”
The old man looks at the priest and sternly replies, “My moral obligation is to support my family. My son is a scientist who is attempting to find a cure for cancer. He has hundreds of thousands of dollars in medical school bills and needs additional funding for his scientific research. It is my moral obligation to support him. My beloved daughter is a widow with five young children. When her husband died he left her only bills. It is my moral obligation to support her. My mother is ninety-five years old and is confined to a bed in a nursing home. It costs $165 a day to keep her there. It is my moral obligation to support my aged mother.
Now, if I can tell them no…I can surely tell you no.”
How does one raise the funds required to undertake such an expensive project as conversion of an existing structure into a PraiseBuilding?
Identify the scope of work to be undertaken. Spell out in detail the scope of work to be completed.
Meet with either an architect or design/build construction firm to have the scope of work fully outlined. Have the architect or construction firm submit a construction estimate for the work to be completed, as well as an estimate of the time required.
If the architect or contractor finds signs of hazardous materials in the structure, have an environmental engineering firm complete a Phase 1 environmental assessment outlining the extent of the problem. Have a firm properly licensed for hazardous waste removal submit an estimate for removal of the problem materials.
Now that a scope of work has been prepared and priced, meet with the finance and building committees to discuss the project in detail. Discuss how the congregation expects to pay for the renovation project. The more typical options for funding a renovation project are: paying for the projects out of either general funds or special project funds; undertake a renovation fund-raising campaign; borrow the money from a wealthy member; borrow money from the religion’s regional headquarters, conference, judicatory, or other similar organization; issue building fund bonds to pay for the project; or borrow the money from a local bank.
Secure funding. If the committee decides to borrow the funds from a bank, the bank officer will want to see the construction estimate from a reputable licensed construction firm, the financial records for the PraiseBuilding showing income from weekly collections, tithing, membership dues, etc., plus other income from all sources. Next, the bank officer will want to see a listing of all debts currently outstanding: salaries, rental payments, insurance premiums, financing agreements, employment tax payments, utility payments, automobile payments paid by the PraiseBuilding, etc. Additionally, the bank officer will want to see an annual budget showing what the current year’s projected expenses and income.
A word about income. Most bank officers look at the health of a PraiseBuilding’s congregation based on the annual income, not the membership. Most building committees think that if they inflate the number of members they have, it will give the appearance that they are a healthy, vibrant, growing congregation. Not true. If the income is low in comparison to the number of members, it shows the banker just the opposite. The congregation, although growing, is not supporting the expenses of the PraiseBuilding. When discussing membership, be conservative and speak in terms of regular attendance or active members. If your congregation is normally one hundred members for most services, but swells to five hundred people for Christmas, Easter, or High Holy Days, explain just that.
Congregation A reports that they have 125 members. They also report that their annual income is $175,000 from tithing and offerings. They also receive $15,000 a year from various fundraising activities. Their total income is $190,000 per year. When all of the debt including salaries, rental for a school gymnasium where they currently worship, and insurance payments are totaled they have a surplus of $55,000 per year. They appear to be a growing healthy congregation or are they? On a per-member basis, each member is contributing an average of $1,400 a year or $26.92 per Sabbath service. This is what the
banker wants to see and all else being equal, there is a good chance that the
bank will make the loan.
Congregation B reports that they have 225 members. They, too, report that their annual income is $175,000 from tithing and offerings. They also receive $15,000 a year from various fundraising activities. Their total income is $190,000 per year. Once all debt payments have been made each year, they have a surplus of $55,000 per year.
Does Congregation B appear to be as healthy as Congregation A to the
banker? On a per member basis, each member is contributing an average of
$777 a year or $14.95 per Sabbath service. This is not what the banker wants to
see. The banker sees a lot of members who are not contributing their fair share
to support the PraiseBuilding. Worse yet, if the membership drops, the financial condition of the congregation will get only more precarious.
Many times, a financial institution will approve a loan for a growing congregation, even when the numbers don’t justify the loan amount. In order to achieve this, the loan officer may ask for members of the congregation to collaterize the loan or co-sign documents personally guaranteeing the repair of the loan if the PraiseBuilding is not able to repay its obligation. Although many members of PraiseBuildings will agree to these terms in order to see the realization of their PraiseBuilding come true, one should read and thoroughly understand what their personal obligation would be if the bank exercised this option.
Establish a separate PraiseBuilding Construction Project checking account for the paying of deposits and progress payments to contractors. It is very important that in order to establish fiduciary controls, the checking account require two signatures for all checks. Additionally, no checks should be issued without written documentation in the form of a contract, approved progress payment application, or invoice. The signatories should be the treasurer and either the Pastor or chairperson of the building committee.
It is a sad fact that during fundraising and construction activities, many times the person charged with the fiduciary responsibility to the PraiseBuilding, may abuse this trust when their own financial problems and personal debt becomes too great to bare. It is thus a prudent safeguard to institute such practices as requiring two signatures for all checks, having regular audit of all accounts, recording written invoices before cutting checks, etc.
DEVELOPING A CONSTRUCTION BUDGET
What comes first, the budget or the scope of work? Develop a good scope of work in order to have the project sent out for bid. However, the congregation should know how much they have to spend first. Congregations have attempted to renovate structures into the most magnificent PraiseBuilding ever on a budget that could not even cover the basics.
Whether working as a committee of one or fifty, the board is going to be the designer of the new house of worship. The first step in designing the new PraiseBuilding is to create a wish list. The wish list is nothing more than listing every room one would like to have in the PraiseBuilding if money and space were no object. The purpose of this exercise is to put a value next to each of these items, as well as assign a priority to that item. This priority listing will determine whether that line item makes it into the plans for the renovation after the construction budget has been prepared.
The next step is to retain the services of an architect or design-build construction firm. If your project is located near a major city, there may be both architectural firms and construction companies that have as a specialty, the design and renovation of houses of worship.
RUNNING THE NUMBERS
It is important to have a finance committee that understands budgets and can help motivate the congregation in its fundraising efforts. From the time one begins raising funds for the purchase of the structure to be transformed into the PraiseBuilding, through design, construction and furnishing of the PraiseBuilding, this committee will be responsible for many hundreds of thousands or millions of dollars.
The first step in raising funds starts by finding the answers to many important questions.
On the next two pages are some basic questions that the finance and building committees should address and share with each other, and perhaps the congregation, before beginning any work. By completing this exercise, the congregation will know how much it can spend, and most importantly, how much it needs to raise for construction of the PraiseBuilding.
¨ How much needs to be raised to purchase the building?
¨ How much needs to be raised on a weekly basis to cover the mortgage payment?
¨ How much needs to be raised on a weekly basis to cover the other building expenses, insurance, utilities, basic maintenance, etc.?
¨ How much needs to be raised to cover normal church expenses, salaries, administrative expenses, normal purchases, etc.
¨ How much more can be raised to cover the renovation costs?
¨ How long will it take to raise the budgeted renovation costs?
¨ How much can be borrowed?
¨ Can we get a bank commitment for this amount?
¨ What will the bank fees, interests, rates and terms be?
¨ Does the bank require any of the members to personally guarantee this loan?
¨ What is the structural condition of the building?
¨ What is the condition of the roof, windows, doors and walls?
¨ What is the condition of the major systems of the structure? Are the following systems up to current repair: HVAC, electrical, sprinkler, alarm, and plumbing?
¨ What repairs need to be made to each of these items?
¨ How many people will the building be able to hold according to fire code?
¨ How many people will the sanctuary hold?
¨ What will it cost to renovate the building?
¨ Can the building be designed to contain the various classrooms, offices, worship spaces, and meeting spaces included on the building committee’s wish list?
¨ Will the PraiseBuilding complex be able to park all of the members’ cars on site?
Once an assessment can be made on the existing building, the leaders are ready to work on creating a scope of work for the new Praise Building. Remember, it makes no sense to spend money renovating the interior of the structure if the existing major systems that are not in good repair are not upgraded at the same time. It is just as important that the roof be in good condition and that all of the walls and windows and doors are watertight if they are not part of the renovation.
Once everyone knows what they want in the PraiseBuilding, the next step is hiring either an architect or design-build construction firm. In this guide are listed guidelines on hiring an architect. Hiring a construction firm is also addressed in this guide. Once having met either with the architect or contractor, many congregations will complete this exercise with three firms, presenting each with their wish list. Have them walk through the new structure to help determine if the building can be renovated into a PraiseBuilding using the basic principles of adaptive re-use. The idea behind adaptive re-use is saving money by re-using those major architectural components of the subject building. At this stage of the planning process, ask the construction professional to help determine if the subject building can be remodeled into a PraiseBuilding. Next, ask what will be required in order to transform the building into a house of worship. How much will it cost? How long should it take? Are there any major systems that need to be replaced? What will that cost?
After the construction professional has had a chance to review the wish list, ask him to submit a schedule of values for each item. This will help the committee determine what can be afforded and what might need to be eliminated or postponed until a later phase of the project.
Once all of the construction prices are submitted, review each price quotation with the respective contractor or architectural firm to determine if anything can be done to reduce the cost further. If price is a major issue on a “must have item”, many times a contractor is able to address this problem differently by using the principles of value engineering. Remember, however, that the contractor is not a miracle worker and that budget items are what they are.
So now there are three bids sitting before the committee. What should the committee do? Well, the first thing is not to jump for the lowest bid. Contractors don’t see the same construction issues the same way. Consequently, construction prices may vary quite a bit. Here is an example to illustrate the point.
On a major construction project, two firms are given the same scope of work. Firm A budgeted $2,000 for leasing scaffolding while Firm B owned their own scaffolding and had budgeted $30,000 for the same project. When the other firm A was questioned about why their bid for scaffolding was so low, they explained that they planned on addressing the issue by mainly using ladders, rather than scaffolding. They were awarded the job as low bidder. After their ladder idea didn’t work, they issued a change order for $45,000 for scaffolding. In fact, although they were lowest bidder out of five, after the seven-month project had been completed, they had issued change orders that were worth more than their original bid.
Interview your bidders. Make sure that the architect and/or contractor are on the same page as you are. Do they understand fully what the congregation is attempting to achieve with your PraiseBuilding? Do they understand the budget? Can they work within it? Are they able to complete the project? How do they address change orders? Inquire with past customers of the firm to gain an understanding about the firm’s reputation. Remember, in a tight labor market, the quality of construction labor tends to go down, so it is more important than ever that the management team be knowledgeable and able to get the job done.
Once having agreed on what it should cost to complete the scope of work identified in schedule of values, add a contingency factor. Remember, whenever you renovate or remodel, there are always unknowns, no matter how diligent the committee or construction professional has been in pricing the work. As a rule of thumb, put an additional ten percent of the construction cost away in reserve. If there are a lot of unknown factors or the building requires substantially structural improvements, twenty percent of the budget in reserves may be in order.
Why is a construction estimate just a construction estimate?
When the construction firm is preparing a bid, the estimator uses a CSI take-off sheet to add all of the line items identified on the wish list or blueprint with the current cost of that item, if known. Many times it is not possible to submit a hard cost on an item until the final blueprints have been created showing exactly what a line item will look like, from what materials it will be made, and how it is to be fabricated and installed. Since the estimator needs to submit a price for the line item, an estimate or best guess is used. Many times this estimate is based on a linear foot, square foot, or recent price for a similar line item. Nonetheless, this price is still a guess.
A second reason that an estimate may increase is the prices of both labor and material tend to be volatile. Since PraiseBuilding design and funding tends to be a process of committees, there is often a lag time between the time of the estimate and the time the contract is awarded. If that lag is only a few weeks, it should not affect the bid since both labor and materials should have remained at the same cost originally estimated. However, if that lag time is months or in some cases years, then the bid will no longer be valid if the conditions upon which that bid is based – labor costs and material costs – have changed.
Finally, construction is a dynamic process, meaning that no two structures are exactly the same with exactly the same conditions and outside forces in place during the construction phase of the project. The dynamic aspect means that variables may present themselves that in turn may increase the construction cost to overcome.
Here is a story to illustrate this point.
One day in 1994, the owner of construction firm received a call from the committee chair of a church on which he did not remember bidding. Proudly, the committee chair proclaimed that after seeing the firm’s work at neighboring churches and working hard to
raise the needed funds, the firm had been awarded the job to re-paint their church sanctuary.
“Excuse me sir,” the firm’s owner asked, “Do you have our bid in front of you?”
“Yes”, he replied, “I certainly do.”
“May I ask the date that the bid was submitted,” he inquired
“Your salesman submitted this to our church on October 11, 1989.”
A lot had changed in the four years since that bid was first submitted.
¨ The cost of materials certainly had increased.
¨ The firm had increased the wages they paid their painters three times in those four years.
¨ The costs paid for worker’s compensation insurance, scaffolding insurance and general liability insurance had nearly doubled in those four years.
¨ As the construction company continued to grow, they had raised the amount they charged each project for profit and overhead to cover their increased expenses.
¨ The amount of preparation required to bring the sanctuary to the proper condition before the painting could begin had increased, as four years of neglect took its toll.
Even when the price submitted is current, the scope of work can change unexpectedly.
Again, another story to hammer home this point.
Some years ago, I was asked to submit a bid on the renovation of a sanctuary that was located on the second floor of an older church building. This old church was located in Washington, D.C., a few blocks from the Supreme Court and once had Frederick Douglass as one of its members. Upon entering the church and walking the wooden staircase to the second floor sanctuary, I noticed signs of old termite damage. Although the church committee assured me that the problem had been solved years ago, I was still skeptical. When I submitted my estimate on renovating the sanctuary, I put into my bid some carefully worded language that would protect me if I discovered that the damage was more severe that either the congregation or I expected.
After all of the pews had been removed and we had begun the demolition phase of the project, I received a phone call from a puzzled project superintendent. “Stephen, you need to come over here now. The problem is…. well…dirt….lots of it.” I told him that I would be over to the job site which was located an hour from the office as quickly as I could. When I got there, I found my employees sitting on the front steps eating lunch. “You’re not going to believe it when you see it,” a young laborer laughed. As I entered the sanctuary, the superintendent grabbed me and attempted to explain the extent of the problem as we walked up the wooden stairs.
When I got to the second floor sanctuary, I saw that the rear third of the hardwood flooring had been removed. “Look,” he exclaimed, “termite damage everywhere. All of the flooring had severe damage, the sub-flooring was completely eaten away, the joists
are nothing but paper. In fact, the only thing holding this place together are the termites holding hands.”
Indeed, the entire second floor had been eaten away by termites. What made things
go from very bad to very expensive quickly was that when the building had been constructed nearly one hundred and fifty years ago, the builders had filled the cavities between each row of joists with dirt. What I saw before me was a floor that had been removed, insulation eight inches deep that was nothing more than earth, a steam pipe that had been leaking for decades buried within the dirt. This pipe had supplied moisture to these happy little guys for generations. If you were a termite living under these circumstances, you’d never have to leave. And from the extent of the damage, these guys had been eating away at this church for decades.
As an estimator, I saw before me a good $50,000 dollars worth of damage. As a construction firm owner, I saw before me one big change order. No one could have predicted the extent of the problem. Although, the church had placed $20,000 dollars in reserve as a contingency, the balance had to come from their general operations budget. Sometimes it’s what you can’t see that costs the most.