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 estimation.
Inaccurate estimates might not be the root of all evil, but they can derail a project. When projects go over budget, they result in frustration, delays, missed timelines, terminated relationships, and loss of reputation for companies. According to Runn, 'budget and time limitations are the biggest cause of stress for project leaders, towering above the challenges of change management, meeting high expectations, and responsibility for helping other team members develop their skills.' Therefore, accurate preliminary cost estimation is crucial to avoid these issues and ensure project success.
Throughout the rest of this article, we’ll be running through the methods cost estimators use to create their estimates alongside some common problems.
What we cover:
There are several key types of construction estimates to know:
A conceptual estimate is an estimate prepared using engineering concepts and avoiding the counting of individual pieces. As the name implies, conceptual estimates are generally made in the early phases of a project, predesign, before construction drawings are completed.
A design estimate is created during the design phase of the project lifecycle. They first start with the order of magnitude to determine a project's feasibility and are based on the schematic design. After the preliminary estimate, a more detailed estimate is followed by the design team.
A budget bid is a rough estimate of the costs of construction, which is prepared without a lot of detailed information on the quality or type of materials. This enables clients to make early, broad-sweeping decisions about target outcomes.
A control estimate is created once the contract is fully signed between the owner/client and the contractor. This type of estimate plans for any upcoming costs.
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 preconstruction when there is very little information about the project.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
So which technology and tools can you use to make estimating construction costs easier and more reliable? Take a look at the following estimating software options and features.
Cloud-based cost-estimating software let you create more competitive bids in about half the time. For instance, solutions like Autodesk's ProEst offer a comprehensive cost database and automated workflows to streamline estimating and preconstruction tasks, all with the kind of accuracy and detail that results in more profitable jobs.
Software like Autodesk Takeoff is another excellent cloud-based tool to help teams optimize their takeoff workflows. It can be used across 2D and 3D takeoffs, so teams can generate the quantities they need easily. Now you can generate figures faster from 3D models to save time and capture project scope with linear, count, and area takeoff in 2D, all in a single solution. Always stay on top of document version control to ensure all your estimators are working off the most up-to-date information.
Cost management tools are particularly useful for costs once construction begins. However, they can help you improve cost control, gain real-time visibility of cost-related risks, and forecast accurately. They do this by centralizing all construction cost management activities in the cloud and within the context of the construction project.
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.
There are eight main cost estimation methods, but you will find at least 45 different cost estimation methods in all.
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.
This is the cost estimate that is prepared during the conceptual design stage of a project.
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.
The accuracy of a construction cost estimate depends on the quality of information available and the estimator's experience and expertise. For that reason, it’s critical to get everyone on the same page upfront and get all the details you can before attempting the estimate.
In a nutshell, an estimate is a prediction of the expected costs for a construction project, while a bid is a formal offer to complete the project for a specific price.
Neither size nor complexity is a complete answer in and of itself. Large buildings can prove simple if they’re low-complexity (hangars), while small buildings can be exceedingly finicky (medical clinics). That’s why understanding the project scope and design is critical. It’s important to approach size and complexity together to ensure good estimates.
Yes, location matters greatly. Accessibility to the project site, local rules and regulations, and the cost of living in the area can all influence a construction budget significantly. Don’t forget to take them into account.
Not all cities and regions are alike. If a local regulation means you’ll need to change the way you normally approach a process, that can change costs by a healthy margin. Look into permitting rules, building codes, and so on before moving forward.
With the best cost estimation method, you can keep all the stakeholders within the loop from project inception to construction project 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.
Ready to start estimating better? Learn more about how to create accurate construction estimates with Autodesk Construction Cloud.
