Capital Campaign Budgeting: Beyond Construction Costs
If you and your nonprofit are considering a major capital campaign, such as a renovation or construction of new facilities, one of the first things to do is to develop a realistic budget, which you can use as a beginning basis for developing your campaign goal. Nonprofits usually start the process of capital campaign budgeting by taking their “ideas and needs” to an architect who determines how many square feet of space is needed and then applies a formula for determining estimated cost for construction, furnishings and equipment. Too often, that number alone is what is used to estimate the budget for the project. As you can see from the following, there are many other items to consider for inclusion within your campaign budget that will contribute to the ultimate costs for the project.
Capital Campaign Budgeting
While the following list is not all inclusive and will vary based upon the size, scope and nature of a specific capital campaign, it can nevertheless be helpful as part of your considerations as you develop a preliminary budget/goal for your campaign.
Land is a cost item to be part of your budget. Even if the land is donated, it is part of the overall project and needs to be taken into account when budgeting for the campaign. Keep in mind that there may be pre construction costs related to engineering, zoning, streets, infrastructure, soil testing, traffic mitigation, parking, utilities, etc., related to the land. Early in the planning process it is critical to consult with experts in the area of construction, legal and financial planning. The formation of a building and construction committee, which can advise campaign leadership and staff, will be very important and can prevent a lot of potential problems early in the process. Build in these additional costs to your budget in addition to the estimates related to construction, furnishing and equipment which you will obtain from the architect.
It is always helpful to visit other facilities, which operate with a similar mission to learn what works and what doesn’t related to facilities. This may require adding necessary travel expenses to the budget. Keep in mind that construction costs are a one-time expense. However, operational costs are ongoing. Look for architectural input that will save on operating expenses. Landscape design, heating/air, utilities, storage space, etc. all can add or reduce long term operating costs depending on how they are initially planned.
Select a contractor that has experience working on similar projects and understands nonprofits. Take advantage of their expertise. Seek out their input on ways to save money both in construction costs and long-term operations. Make sure that when they give you a quote on costs that they have adequate contingencies built into their budget and that you have incentives for them to complete the project on time and on budget. In addition to the contractor’s contingency, there should be an owner’s contingency within your overall budget. Typically there are costs that are not anticipated which fall outside the bid submitted by the contractor. Early, on one of the projects I was involved, a discovery was made that sewer lines were not as described in original county documents which added close to $150,000 of unexpected costs to compensate for and correct the problem. Your building and construction committee with the assistance of your owner’s representative (see item 4) should review the construction bids in detail and negotiate a fair and sound contract with the contractor.
4. Owner’s Representative
Engage a professional construction manager to oversee construction, review all stages of construction and validate billings. This person works for the nonprofit. The construction company will also have its own construction manager/project supervisor, who will work closely with your committee and owners representative.
5. Other special consultants
If you do not have volunteers in your organization who can provide specialized services, you will likely need to engage specialists to help you with engineering, zoning, fundraising, marketing, etc. While a few large nonprofits have in-house staff with those areas of expertise, most do not. Make sure your budget has a line item for retaining specialists if needed.
Typically, nonprofits solicit capital campaign gifts which can be payable over three to five years. However, construction usually is started when sufficient pledges have been received (usually 80 percent of goal). Since the construction bills are often paid before all of the pledges have been collected, there is a need for financing of the project, using the pledges and/or other assets as collateral. The cost of financing needs to be built into the budget. Some projects obtain bridge loans or construction loans while other bond the project long term.
7. Bad Debt
Traditionally, charitable pledges have a very high incidence of collections. However, every budget should take into account the fact that there are likely to be a few people who are unable or unwilling to pay their pledges on time or at all. Depending on the size of the campaign, most nonprofits budget 2 to 5 percent of the goal as uncollectible.
8. Business Interruption and/or Moving Expenses
During renovation or construction there may be a loss of revenues due to the project, which will have an economic impact on the organization. There are also moving and relocation expenses associated with new facilities. These expenses should also be included in the overall budget.
9. Fundraising and Marketing
Costs associated with mounting of a campaign need to be added to the budget. Depending on the size and maturity of the organization there may be a need to hire campaign management, administrative support, etc. In addition the organization may need additional software to track and acknowledge solicitations, pledges, accounting and tax receipts. Advertising, marketing, donor recognition, events, travel, meals, entertainment, etc. are all expenses, which should be built into the overall campaign budget. Depending on the size of the campaign, the costs for Fundraising and Marketing could be from 3 to 10 percent of the overall goal. The smaller the campaign, the larger the percentage cost of fundraising and marketing.
10. Start up Costs
Often a new facility is built with the future in mind. More rooms, larger space, usually means higher operating expenses. The business plan for the organization in new facilities usually indicate that it will take a few years for increased usage, fees and memberships to cover the additional operating costs. It is appropriate and important to build into the overall campaign budget, some if not all, of the projected shortfall due to increased start up costs to ease the additional burden to the operating budget.
11. Maintenance/Capital Reserve
Annual operating costs for the new facilities beyond what is described in item 10 will need to be covered by ongoing fundraising and operating revenues not part of the capital campaign budget. However, it is always prudent, if at all possible, to include within the capital campaign budget, funds to start a reserve to cover major repairs that are usually not part of the ongoing annual maintenance budget of the nonprofit. A restricted fund can be set up and included in the capital campaign budget, that can be used in the future for items such as roof repair, resurfacing of parking lots, replacement of air handling systems, etc. In addition to whatever can be included in the capital campaign, it is always prudent to budget an amount each year from operating funds to be added to the restricted capital account for future use.
Capital campaigns provide a good opportunity to build into the goal, endowments. Endowments can be set up for annual operations, special projects, fields of interest and/or capital reserves as described in 11. To the extent possible, endowments should be included as part of the overall capital campaign goal.
Typically, ALL of the above budget items are included within a preliminary goal, which is tested as part of the pre-campaign planning and feasibility study. Once a determination is made as to a realistic campaign goal, the budget is scaled back accordingly or put into a multiphased campaign.
A critical committee, in addition to the one responsible for building and construction, is the budget and finance committee, which oversees the full project budget, finances, loans and investing.
Other important committees will be the Fundraising Committee and the PR and Marketing Committee.
Each of the four major committees (Buildings/Construction, Budgeting/Finance, PR/Marketing and Fundraising) should be accountable to the board of the nonprofit and all will have input to the budgeting process.