The “art” of budget forecasting

January 15, 2020
Council Column

There’s no science to budgeting; either at the household or City level. The “hard data” we use for budgeting is always merely an estimate of what we might spend our money on and an estimate of how much each item we put in our budget will cost. And, there’s always the exigent circumstance that wasn’t fully accounted for and sometimes not even budgeted for (like a water heater failing at home, or a U.S. President who starts a global trade war).

Then there’s the issue of cost factors beyond our control; like the cost of fuel or steel, or contractor pricing increases due to labour shortages or limited expertise in a particular area.

The regularity of general budgeting for a household or a City buffers some of these unknowns simply through experience; the practice of annual budgeting builds a knowledge base that reduces the uncertainty associated with estimating costs. But, budgeting for one-time projects is an entirely different matter; one that is compounded at the City level by the long timeframes involved in going to referendum for borrowing authority.

Council is experiencing this issue with the new Public Works Facility. The first concept drawings and rough cost estimate for this project were done in 2016 in advance of the alternate approval process. The failure of this approval process triggered a full referendum in association with the 2018 municipal election, but the cost estimate presented to the public during the referendum was completed in early 2018 and was again based only on concept drawings.

Rough cost estimates are used during referendums because Council’s don’t invest in full scale design and construction drawings prior to getting voter assent to advance any major project. This saves taxpayer money should the referendum fail but adds a high degree of uncertainty to project pricing should the referendum pass – a no-win situation for Councils everywhere.

In the case of the Public Works Facility, the rough estimate presented to the public in October 2018 was just under $11 million. With voter approval to proceed with this absolutely necessary project, City staff proceeded immediately to complete the actual design and get a proposal package out for pricing in early 2019. When the proposals came in, the actual market price for the proposed Public Works Facility ranged from a low price of $15 million to a high of almost $18 million.

Only when you actually put a project out for proposals do you get firm pricing that allows you to establish a firm budget.

Council knew that the 2019/2020 market price for the project was unaffordable and directed staff to get the costs down by re-engineering the project. Staff worked with the lowest priced general contractor to refine the project and all cost saving measures were explored. Our local contracting community were of great assistance in finding cost savings.

In conjunction with the contractor process, Council’s Finance Committee dug into the City’s five-year capital plan to find areas where existing cash reserves could be used to finance the Public Works Facility. As a result of significant infrastructure investments over the past five years, the Finance Committee was able to free up $2 million from cash reserves to cover any overage in the Public Works Facility, enabling Council to establish a new budget of up to $13 million for the project.

The new cost estimate for the project based on actual market pricing and re-engineering the facility is $12.7 million and Council has established an all-in budget of $13 million to get the project finished by November 2020 (close to the original projected date).

Borrowing for the project will still be $8.5 million, as per the 2018 referendum, and the overall tax increase for the project will be as promised during that referendum and no more.

More information:

Mayor Bob Simpson

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