Preliminary cost estimation occurs before the construction phase of a project. The cost estimates provide a projection of how much the project will cost and determine the success of a project. In construction, project owners use different methods of estimation for other purposes. For example, one builder might use cost estimates to assess the cost of setting up a building, whereas another owner might use cost estimation for assessing operation costs after completion.
Construction estimation requires a lot of knowledge and skill, and firms dedicate many resources to proper construction estimation.
Throughout the rest of this article, we’ll be running through the methods cost estimators use to create their estimates alongside some common problems.
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Cost estimate classifications
According to the American Society of Professional Estimators, estimates are classified according to a five-level system.
The least accurate estimate is the level 5 estimate, while the most accurate is the level 1 estimate.
Due to a precise and well-defined plan, standard practice enables us to get multiple estimates with increasing project definition (scope of the project). An estimator is always working on cost options with progressing design.
When considering the five-level system, each level serves different purposes. Below are the classifications of the five-level cost estimation system.
Order of magnitude estimate
This estimate is performed just before kicking off the project’s design phase. Here the project definition stands between 0 to 2%, and the accuracy of the cost estimate lies within a 20-30% accuracy margin.
This estimate has a fundamental work breakdown structure for quantities and materials. The owner uses this estimate to estimate a project’s suitability, whether it merits close evaluation, and whether there are better alternatives available.
Its preparation is in the preconstruction stage because there is little to no information available for the project.
The techniques employed for these estimates are experience, judgment, charts, and historical values. This estimate is also known as a ballpark, rough cost estimate, guesstimate, or concession license estimate.
It is mainly used for initial evaluation.
Intermediate/ Construction feasibility estimate
The intermediate estimate determines a project’s feasibility, evaluation, and preliminary budget approvals. In addition, it helps the project owner determine whether to proceed with the project or not.
This estimate aids the owner in detailed strategic planning, budget approval, and technical feasibility.
The project definition in this stage lies between 5 to 20%, and the accuracy margin of this estimate varies from 10 to 25%.
People within the construction industry may also refer to this as a conceptual, screening, or schematic design estimate.
Preliminary construction estimate
This estimate is computed from an adequately defined project scope.
It gives the owner a basis for choosing design features and configurations, and it’s the estimate presented to lenders for budget authorization and appropriation. They typically form the control estimate where monitoring of resources and costs is against the budget.
The project definition ranges between 10 and 40% when computing this estimate, with an accuracy margin ranging between 10 and 15%.
This estimate uses a coded work breakdown structure with quantity takeoffs.
Substantive construction estimation
This estimate is prepared from a detailed work baseline where the project is monitored against progress control and cost. There is a complete work breakdown and quantity takeoff at this stage.
The estimated costs are then computed together with the profit margin and contingencies.
The project definition is over 90%, and the accuracy also ranges between 5 and 10%.
The labor and materials are well defined. Contractors use this estimate to establish contract value, bid projects, solicit and assess bids. This estimate is also known as a change order estimate or precise control.
Definitive construction estimate
This estimate is prepared using the agreed costs on the construction contract.
It is no longer an estimate as the project team already knows the final costs. These estimates are the most accurate, with only up to 2% variance. The project definition is at 100%.
This estimate is used as the control baseline for the project and evaluates bids, checks vendor negotiations, and claims evaluations.
Cost estimating methods
Project managers use different methods of cost estimating depending on a variety of factors. For example, some organizations may need the cost estimates to follow the company policies, while others may work with rough estimates and refine them as the project progresses.
Below are the best cost estimating methods you can use.
In analogous estimating, the project manager calculates the costs based on the known costs of a similar project done in the past. This method depends on expert judgment and historical data. The limitation in analogous estimation is that no two projects are the same. Therefore, it is usually used in the early stages of project planning during pre-construction when there is very little information about the project.
Parametric estimating method
This method uses algorithms or statistical relationships of historical data to calculate the resources needed. The advantage of this method is that it is more accurate than analogous estimating and needs more data to assess costs.
Here, we know the average costs, error margins, and square footage of a project and can easily estimate costs within the budget.
This is also referred to as detailed estimating.
In this estimating method, the team and resources are estimated from the activity level. The estimates are then aggregated and develop estimates for work packages, control accounts, and project levels. This estimating method estimates a work component, and the detailed estimate is rolled out to higher levels for reporting and tracking.
The accuracy of this estimating method depends on the size and complexity of activities.
Here the project manager identifies three cost estimates. An optimistic estimate where funds are spent efficiently, a pessimistic estimate is where funds are spent least efficiently. The third point is a balance between the two, which is the more likely scenario.
Three-point estimating depends on weighted formulas and originates from program analysis. The costs calculated with an assumed distribution provide the expected costs and clarify the range of uncertainty.
Data analysis method
This technique is also known as alternative analysis. It identifies the options available in order and outlines them to execute the work. The data analysis method provides the best solutions to performing project activities within defined project constraints.
The advantage of this method is that instead of overbudgeting, money is budgeted for dealing with unplanned costs. Therefore, statistically, planned costs increase.
Cost of quality estimating method
This estimating method is a methodology that determines the extent to which poor-quality resources affect the quality of work. Such information allows an organization to choose the potential savings on the project by implementing improvements.
This is a slightly detailed estimation method based on the use of the equipment at the site. It is a factor that considers the total cost of a project to the cost of all the technical equipment.
This method is an extension of the Lang method, but it uses different factors depending on the equipment type. The factors also exclude indirect costs, and these costs are calculated separately.
Equipment factored estimating
This estimate is calculated by considering the cost of the individual equipment and multiplying it by an “installation factor” to compute the total costs. This is a valuable method as a sizeable amount of project costs consists of equipment costs. In addition, the installation factor includes subcontracted costs, materials, and labor costs.
Common cost estimation problems
Generating quality estimates is not as easy as it appears. Analysts and estimators face many challenges when estimating costs, and you should keep the challenges mentioned below in mind when coming up with your next estimate.
Quantifying cost impacts
Design modifications may warrant reductions of a component in a project, but there is no way to quantify the cost implications to the overall project. Estimators also need to assess impacts from new and intangible products. Quantifying such costs can be subjective yet necessary before making decisions. One of the best ways to combat this problem is using cost estimation software.
Cost estimates should be timely, but time constrains several aspects of estimation, such as data collection, validation, and consistency.
Good data needs a lot of time to develop.
Many organizations involved
Cost estimation involves many organizations that estimators need to communicate to and coordinate resources with. This process is time-bound, and where there are time constraints, the quality of estimation suffers. In addition, after data collection, different organizations need to verify the data. This inherently creates a challenge in consistency as other organizations have different methods of data verification.
Frequently asked questions
Cost estimation is one of the most critical steps in construction, and if done improperly, the repercussions are dire. There are several validation models when using cost estimation, and we will answer some of the frequently asked questions on cost estimating methods below.
How many types of estimation methods are there?
There are eight main cost estimation methods, but you will find at least 45 different cost estimation methods in all.
What is a Class 5 estimate?
This is the estimate prepared for planning purposes, such as determining the initial viability of a project. It is also used for evaluating alternative schemes and project location studies.
What is a Class D estimate?
This is the cost estimate that is prepared during the conceptual design stage of a project.
Which method is the best method to predict mixed cost?
The best method for estimating mixed costs is the bottom-up estimating method, as it evaluates individual project components before rolling them out into detailed analysis.
With the best cost estimation method, you can keep all the stakeholders within the loop from project inception to closeout. Reasonable cost estimates help you make informed decisions and land the best projects within budget. They also make it easy to capture, plan, manage and report the work more effectively. When there is clarity in estimation, the team can accomplish a lot more within a short time. Choose the best estimation method that suits your workflow.