How do you determine the standard deviation number you use for modelling out your Construction budget?
I’m aware of the formula. This is it from a previous post, but I just want to know what standard deviation is used to model or the strategy/judgement used for that number.
Just slap a contingency on the cost based on your drawing set and call it a day
Lol. I kind of need a bit more than that.
No one used an s-curve before and had to put in standard deviation
It really doesn't matter. I just go with whatever number gets to high 90%s before it's adjusted to 100%.
What are you referring to when you say “standard deviation number”? Have never heard that before for construction loan modeling.
Not the loan, but modelling out the construction budget. Your hard costs are distributed in an a-curve/bell curve. The reason is most of your cost are incurred in the middle of construction.
https://www.adventuresincre.com/development-budget-distributing-cash-fl…
It all depends on your expectation of cost outlays for the expense you are referencing. Use 1 as your standard deviation if you think costs will be normally distributed. The higher the SD, the more distributed your curve is. After that it's all subjective.
The model you are referencing uses the number of months divided by an arbitrary number from 1-9. Because of the division sign you have to reverse the logic from above, but it's the same idea. In this case the higher the steepness factor 1-9, the less distributed your curve becomes.
The last SD I had was 5.5 but it's entirely dependent on the timeframe inputs / mean of the inputs.
mean = 33 month program / 2 = 16.5
Max z = 3 (my input on steepness of the curve)
SD = 16.5 / 3 = 5.5
Its not rocket science. Pick up the phone and give the construction guy a call. You can even just hard code the spending by percentages per month on another tab. Aint that complicated my man.
I’m aware it’s not it’s more judgement rather than analysis, but this is the approach I kind have to take.
That Norm(Dist stuff is cute and all, but do some real ground work: call GC's and manufactuers and hard code it in your development budget.
I know working off your gc is kind of better, but I’m working in advisory capacity and it’s just easier to work with a more quantitive approach and adjust based on the gc or cost consultant from a risk perspective.
I see you linked to A.CRE above - just use one of their models, he has hidden tabs that shows his bell curve.
It’s not about the formula for the bell curve I’m asking about it’s the standard deviation.
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