Construction cost estimating explained

When planning a construction project, one of the core elements is to understand the cost it entails. 

The answer to this question ultimately decides whether the project is even possible.

Que construction estimating. 

Construction cost estimating is the process of forecasting the expense of building a physical structure. 

Anyone involved or concerned with the project’s overall cost must understand what a construction cost estimator is and the phases it entails.

What is the importance of construction cost estimating?

hand writing a construction estimate

Construction cost estimating has a vital role to play in any construction project.

Ultimately, an accurate cost estimate will prevent the builder from losing money and help the customer avoid overpaying.

A knowledge of overall cost allows for plans to be adapted before they’re put into action. It’s every project planner’s worst nightmare to be halfway through a project, only to realize that the budget doesn’t stretch to finish it. 

Any project can benefit from construction cost estimating, from building new structures to remodeling efforts.

No matter the project size, due to the risks involved, a significant concern for both builders and clients is the financial impact of cost overruns and failing to complete a project. 

Therefore, it is in both parties’ best interest to spend time researching and estimating project expenditures before proceeding. Clients who are considering extensive projects often look for multiple cost estimates, including those prepared by contractors and those assessed by independent estimators.

Who benefits from construction cost estimating?

construction project manager

The answer could change from project to project, but typically it’s the project owner and contractors.

Project managers use cost estimates to allocate their budget, while contractors utilize cost estimates to decide whether or not to bid on a potential project.

Estimates are generally prepared with both architects and engineers’ input to ensure that a project follows both scope requirements and budget allotment. 

A fundamental component of earned value management, cost estimates are a project-management technique that tracks a project’s performance against the total time and cost estimate.

Why is it key to obtain accurate cost estimates?

Now we understand the importance of construction cost estimating; it should come as no surprise that the overall figure needs to be as accurate as possible. 

Creating a construction cost estimate is a sound practice when determining the expenditures associated with a building project. However, the accuracy of estimates is particularly critical for development projects.

These projects have timelines and budgets closely linked to reimbursing lenders while generating revenue as quickly as possible.

They are also crucial for large civil projects or mega-projects due to their substantial scope and public monies’ possible involvement.

In the instance of mega-projects, small miscalculations become magnified. Therefore, it’s wise to obtain extremely accurate cost-estimates in projects fabricated using public funds, as it will not only increase accountability but provide transparency while developing trust in your ability to manage the project adequately.

While it’s nearly impossible to estimate the cost of any given project with absolute precision, failure to prepare a feasible cost estimate can lead to catastrophic consequences in cost overruns. Although projects can fail for a variety of unforeseen reasons, a skilled estimator will account for as many factors as necessary, including items such as market conditions, to create an accurate estimate.

Take off In construction estimating.

material take off construction

‘Take off’ or ‘material take off’ is an integral part of the cost estimation process

This process allows the contractors to assess the necessary labor requirements and cost of materials before they bid on the project.

The larger the project, the more critical the take off process. 

Not only beneficial to understand the cost of a project, but it also trickles down to the actual labor itself to ensure it runs smoothly.

The costs of all physical materials required to complete the project should be considered in this stage to ensure an accurate as possible estimation. 

What components help create an accurate cost estimate?

construction pricing

The construction cost estimating process consists of several phases,

However, within these phases, there are several components that a cost estimate will rely upon that include:

  • The quality of the project plan
  • The level to which the estimator defines a project
  • The experience and skill of the estimator
  • The quality of the tools and procedures the estimator utilizes

The cost estimation of a project may fall to one individual or a team depending on the type, scope, and size of a project; additionally, estimators may hold several different positions. 

Contractors and subcontractors may prepare cost estimates in some construction projects, although this isn’t the best practice. 

In other instances, the construction salesperson may be responsible for drawing up an estimate.

Architectural firms may have in-house estimators. These are generally individuals who take on the estimator’s function in addition to their primary role. However, it has become more common to see qualified independent estimators handle estimates against which one corroborates the general contractor’s estimates.

For contractors, accurate cost estimates win jobs.

Most customers want to spend the minimum amount of money they can for a project that still meets the specified standards and parameters. 

In a competitive bidding scenario, the time and effort you spend preparing the estimate is an invaluable investment, as a reasonable estimate can ultimately lead to winning a bid. If urgency is a project factor, how quickly you prepare a bid can also be a differentiator.

What Does The Construction Cost Estimator’s Job Entail?

As you may have guessed, the cost estimator is pivotal to the cost-estimation process. This individual is generally familiar with design and construction and skilled at navigating the various expenses associated with construction projects and must possess both skill and training. 

Similar to construction estimators are commercial construction estimators. While they share apparent similarities, commercial construction estimators are specifically skilled in, as the name suggests, commercial construction. 

According to the U.S. Department of Labor’s Bureau of Labor Statistics, there were 213,500 cost estimators in the country in 2014, with employment opportunities anticipated to grow by nine percent over the next decade. Many of these estimators work in the construction industry. 

Identifying The Types Of Construction Cost Estimate Systems

construction estimate clipboard

To ensure a cost estimate’s accuracy, a well-defined project plan must be in place first.

Therefore, it’s customary to create multiple estimates during the pre-design/design phases. As the project level of definition increases, the cost estimates subsequently become more accurate.

According to The American Society of Professional Estimators, a five-tiered system is used to classify estimates; throughout each level, the estimate grows increasingly detailed and reliable. Below, a breakdown of the five-level system:

Level 1: Order of Magnitude Estimate

Formulated before the project design has commenced, an order of magnitude estimate is only utilized to determine a construction project’s overall feasibility.

Level 2: Schematic Design Estimate

This phase refers to an estimate produced in line with schematic design.

Level 3: Design Development Estimate

This estimate is made during the design development phase.

Level 4: Construction Document Estimate

This refers to an estimate based on the construction drawings and specifications.

Level 5: Bid Estimate

Based on the information found in construction documents, this is an estimate prepared by the contractor. The bid estimate is the basis of the bid price offered to the customer.

Is there a more straightforward way to estimate costs?

A simplified system of classifying estimates entails only three main categories: 

  • Design estimates
  • Bid estimates
  • Control estimates

These category titles reflect how you utilize each of the following estimates:

Design Estimates

Prepared during a project’s pre-design/design phases, design estimates begin with an order of magnitude estimate (also known as a screening estimate) to determine which type of construction methods and types are most viable.

The next phase is the preliminary estimate (also referred to as the conceptual estimate) based upon the schematic design. 

The detailed estimate (or definitive estimate) follows, based on the design development. 

Finally, the last of the design estimates is the engineer’s estimate, based on the construction documents. A basic template can provide an initial assessment of project expenditures.

Bid Estimates

When bidding to construct a project, contractors conduct an extensive amount of research to prepare bid estimates. This data is drawn from various sources to prepare the estimate, including direct costs, supervision costs, subcontractor quotes, and quantity takeoffs.

Control Estimates

This estimate is prepared after a contractor agreement is signed off, but before construction commences and serves as a baseline by which the project’s actual construction costs are assessed and controlled. The control estimate also enables contractors to plan to satisfy upcoming expenses while determining the project’s cost to completion.

Construction Cost Estimate Glossary: Key Terms To Know

Many elements make up the construction estimating process, and to go with it is a whole range of terminology you may or may not be familiar with. 

The following are some key terminologies and core concepts applicable to estimators and the industry itself:

Bonds

As a general rule of thumb, an owner needs a contractor to arrange an issuance of a project owner’s performance bond — the bond functions as a form of guarantee of delivery. 

Suppose the contractor fails to complete the project according to the terms of the contract. In that case, the owner is entitled to compensation losses up to the performance bond’s amount.

Capital Costs

Capital costs are essentially the expenditures affiliated with establishing a facility. Such costs include the following:

  • The cost of acquiring land
  • The cost of conducting feasibility studies and the pre-design phase
  • Compensating the architect, engineer, and specialist members of the design team
  • The total cost of construction (which covers not only labor, materials, and equipment, but also administrative, permitting, and supervision costs, as well as any insurance fees or taxes)
  • The cost of any temporary equipment or structures that are not part of the final construction
  • The cost of hiring a commissioner
  • The cost of inspecting the structure when it is close to completion

Contingencies

Since even the most accurate estimate is prone to be affected by unforeseeable factors, such as materials wastage, an estimate will typically have a pre-determined sum of money built to account for such added expenditures.

Equipment Costs

Equipment costs refer primarily to the cost of running (and possibly renting) heavy machinery, such as cement mixers and cranes; therefore, it is essential to note that the equipment in use influences how rapidly you can complete a project. 

In actuality, the use of equipment can potentially impact many costs outside of the project scope directly associated with running the equipment. 

Escalation

Escalation refers to the natural inflation of costs over time and is especially crucial to take into account for long-running projects. Some projects have escalation clauses that address how to handle this type of inflation.

Indirect Costs

Indirect costs are indirectly associated with construction work, such as administrative costs, transport costs, smaller types of equipment, temporary structures, design fees, legal fees, permits, and any other number of expenditures, depending on the project’s particular nature.

Labor Hour

The labor hour, or ‘man-hour,’ is a work unit that measures the output of one person working for one hour. 

Labor Rate

The labor rate is the amount per hour paid to skilled craftsmen, which includes hourly rate and benefits and the costs of overtime and payroll burdens, such as worker compensation and unemployment insurance.

Material Prices

Because the cost of materials is prone to fluctuation (based on market conditions and factors like seasonal variations), cost estimators may look at historical cost data and the various phases of the buying cycle when calculating expected material prices. 

Operations and Maintenance Costs

These costs are more for the owner than the contractor. This is because operations and maintenance costs are accounted for during the design phase.

Making decisions that lower the total lifetime cost of a building may result in higher construction costs. Operating costs include land rent, the salaries of permanent operations staff, maintenance costs, renovation expenses (as required), utilities, and insurance.

Profits

To turn a profit, the contractor needs to add a margin to the actual cost of completing the work. Subcontractors do the same when preparing their quotes.

Quantity Take-Off

A quantity takeoff measures the labor and materials required to complete a construction project, developed during the pre-construction phase.

Subcontractor Quotes

Most contractors will hire multiple specialist subcontractors to complete parts of the construction; you will then add the subcontractors’ quotes to the contractor’s total estimate. It can be very beneficial to use a tracker to collect and record all subcontractor documentation in one place.

Variances

Owners frequently allocate construction budgets that are greater than cost estimates since even in-depth cost estimates tend to underestimate actual construction costs.

Several reasons may contribute to this, including:

  • Wage increases - these are difficult to forecast and will drive up construction costs.
  • Seasonal or natural events - such as heavy rainfall, may call for action to protect construction or restore the construction site.
  • Large projects - in urban areas may face regulatory or legal issues, such as a demand for additional permitting.

Owners who start construction without first finalizing the project’s design - they will typically go in over-budget to account for design changes, as well as the inevitable cost increases that result from throwing a project off-schedule.

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