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Budgeting for uncertainty in construction

Budgeting for uncertainty in construction

Synopsis
5 Minute Read

Cost volatility is reshaping Canadian construction. From rising material prices to unpredictable supply chains, contractors are under pressure to keep budgets on track in shifting conditions. This article explores practical ways to build resilience into project planning, including smarter sourcing, contingency planning, and contracts that protect margins and cash flow. Learn how a proactive approach can bring clarity to uncertainty and keep projects moving forward with confidence.

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Steve Youn, CPA, CA
Partner, National Tax and Regional Real Estate and Construction Leader
Insight
Performance Insight Real Estate and Construction

The genesis of each construction project begins with a budget. Preliminary estimates all seem good with set numbers and clear expectations. However, as anyone in the industry knows, those numbers rarely stay put. Costs of materials go up, shipments are late, or new trade rules are put in place with little to no warning.

In Canada today, cost volatility is becoming the norm. The Canadian Construction Association reports that tariffs on steel and aluminum can drive overall project costs up by three and five percent. Supply chains for specialized materials such as switchgear and structural steel continue to be strained, leading to longer lead times. Even as interest rates begin to ease after a period of inflation, contractors are still navigating unpredictable pricing across the board.

That raises an important question, how do you plan for a future that refuses to sit still?

See the big picture before you crunch the numbers

Stepping back is the first step. Project teams all too frequently dive straight into spreadsheets without taking the larger context into consideration. But in the end, external factors like supply chain disruptions, inflation, and tariffs determine if a budget is sustainable.

Think about how tariffs affect steel in Canada. The price of beams and panels, as well as the subcontractors who rely on those inputs, might be impacted by a seemingly minor increase in raw material costs. The project timeline can also be pushed off course if you factor in shipping delays or border slowdowns.

Contractors can set more reasonable expectations with owners and developers if they are aware of these demands from the beginning. Additionally, it lays the groundwork for incorporating flexibility into the figures. Without this viewpoint, budgets run the risk of becoming idealistic rather than useful instruments.

Sourcing is now part of risk management

Sourcing used to be a matter of price. Whoever could deliver the best materials at the lowest cost won the contract. That strategy is no longer sufficient. Reliability and punctuality are now as crucial as price.

Diversifying suppliers is one of the clearest ways to reduce exposure. Relying on a single source for critical materials leaves contractors vulnerable if that supplier faces a shortage or regional disruption. Pre-purchasing can also help. Although it may cost money up front, locking in necessities before tariffs or market changes take effect can save far more serious financial headaches down the road.

Local suppliers deserve another look as well. Establishing new relationships outside the traditional supplier may lower transportation risk, minimize border delays, and restrict exposure to international tariffs, even though they aren't always the most affordable choice. Stated differently, sourcing choices are no longer only based on order fulfillment. Their purpose is to mold a project's overall risk profile.

Make predictability a team effort

Predictability doesn’t mean locking in every dollar, but creating clarity around how costs are tracked, communicated, and managed as the project unfolds. And this transparency is the result of process.

Standardized estimating tools help ensure that everyone is working from the same set of assumptions. Aligning design development with budget checkpoints ensure changes on paper is reflected in the numbers before ground is broken. Bringing in stakeholders early helps confirm assumptions and keeps projects from drifting off course.

Owners and developers can also support this effort. Engaging contractors earlier, exploring flexible financing arrangements, and considering phased budgeting models all help reduce the chance of projects running over budget. Predictability, in other words, is a shared responsibility.

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Contingency planning is non-negotiable

Even the best-laid plans are vulnerable to the unexpected. That’s why contingency planning is vital.

  • Set aside five to fifteen percent of the budget, depending on the project’s complexity and risk profile.
  • Include escalation clauses in contracts to protect against sudden spikes in material costs.
  • Use progressive release of holdbacks to ease cash flow pressure while still protecting owner interests.

It’s worth remembering that contingency planning goes beyond money. Building in extra time, maintaining flexibility in execution, and fostering a culture that can pivot quickly are just as important. Projects that plan for disruption, adapt fastest when inevitably arrives.

Break down the silos between budgeting, procurement, and scheduling

It’s quite common that budgeting, procurement, and scheduling are treated as separate functions. Each follows its own process, with limited visibility into the others. This siloed approach magnifies risk, because a change in one area inevitably affects the others.

  • Budgets should reflect real-time procurement costs and lead times, not assumptions made months earlier.
  • Procurement should be timed to avoid known inflationary peaks or supply bottlenecks.
  • Scheduling should allow for phased execution and build in buffer periods for unavoidable delays.

Technology is helping bridge these gaps. Tools such as cost forecasting software, supply chain dashboards, and integrated project management platforms give teams better visibility across all three functions. They also allow for faster decision making when conditions shift. The more these processes are aligned, the smoother projects run.

Contracts as a tool for resilience

Contracts have long been viewed as legal necessities, paperwork to formalize relationships and obligations. Increasingly, they are becoming tools to manage cost volatility and improve project resilience. Recent updates to Canadian Construction Documents Committee contracts highlight this shift:

  • Ready-for-Takeover milestone: Clarifies when a project is not just substantially complete but operationally ready, reducing confusion at closeout.
  • Progressive release of holdbacks: Eases contractor cash flow while still protecting owner interests.
  • Termination for convenience: Gives owners flexibility to end agreements without cause. Contractors need to negotiate fair compensation in these cases, often through a break fee, to avoid undue risk.
  • Price escalation clauses: Recognize the reality of fluctuating material costs and create mechanisms to adjust fairly.

For contractors, understanding these terms and negotiating them effectively is essential. The right contract language can mean the difference between absorbing a painful loss and maintaining project viability.

Design resilience into every project

The ultimate goal is resilience, the ability of a project to pivot when needed without losing momentum. That requires scenario planning that accounts for best case / worst-case scenarios, and most likely outcomes. It means designing schedules that allow for early procurement and phased delivery. It involves maintaining active risk registers that track financial, operational, and supply risks in real time.

The human element is equally significant. Teams that encourage open communication, cross-functional collaboration, and a mindset of adaptability are better equipped to identify risks early and find solutions quickly. Resilience is not just a technical discipline, it is a cultural one.

Built to adjust

As the construction industry will never be free from volatility budgets need to reflect flexibility. The more it accounts for shifting markets, supply delays, and financial pressure, the more confidence teams have in delivering on time and on scope. Resilience is not just a safety measure — it is the foundation for building with certainty in an uncertain world.

Thriving in this environment requires viewing your budget as more than a financial exercise. It’s a discipline that connects strategy, operations, and culture. By treating budgets as living frameworks rather than static documents, project teams give themselves the flexibility to manage change while still keeping projects moving forward.

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