One of the significant challenges in the construction industry is managing projects with unique requirements and features. However, all projects have the same primary elements such as scope, schedule, and budget. The accuracy of the cost estimation process determines how smoothly a project will run.
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Construction cost estimating is a foundational principle in forecasting the cost of construction of a structure. Project owners also use construction cost estimation to determine a project’s feasibility, scope, and the necessary budget allocations. Proper construction estimation practices prevent the contractor from losing money and the client from overpaying.
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It is practically impossible for the initial construction estimate to match the final project cost. However, this does not negate the usefulness of a comprehensive construction estimate.
Estimating assists:
The concepts that a cost estimator considers affect the total cost of the project.
Therefore, it is imperative to have a set of data points that a cost estimator should investigate. These factors include construction materials, location, machinery, and labor. These are the apparent factors, but the estimator should also consider hidden factors such as the possible market fluctuations that affect the costs of materials. Estimators also need to assess the project-specific materials as an eco-friendly building would need different materials than an ordinary building.
Getting a handle on the estimate cost of construction is crucial for ensuring project success. To that end, understanding the different kinds of cost estimates can help you plan more effectively.
Here are the various types of construction cost estimates.
Cost estimation provides the foundation for the planning of a job schedule. The accuracy of an estimate determines whether a job meets its objectives or not. Some of the benefits in cost estimation include:
Construction estimators produce and revise estimates for a project. They are familiar with the design and expenses incurred in the project. They’ll also create multiple assessments on the pre-design and design phase. With each design phase, the estimates become more accurate.
During the creation of estimates, the contractor oversees the link between the budget and schedule.
All projects benefit significantly from following a deliberate and thoughtful process in cost estimation. The cost estimating process requires good judgment and planning to achieve the best results from a project. One needs to have a basic understanding of the construction process to understand the cost estimation process properly. The following steps provide a guideline when making a construction estimate.
The parties involved must agree based on cost estimation of the project before starting the estimation process. This activity entails obtaining project information such as previously developed scopes and schedules from which the estimator can come up with cost estimates.
The level of the scope is always dependent on the project type, complexity, design matrix, and criteria. The cost estimator should clearly outline and document all assumptions in this stage. The cost estimator should also record additional and subsequent information to give a traceable history for each of the estimates made.
When estimating building costs, teams should align with stakeholders on any potential exclusions or modifications to avoid future misunderstandings.
When it comes to producing cost estimates for construction, conducting a site visit early on can be extremely beneficial. Heading to the jobsite enables teams to get more information on local conditions that could affect project costs. These include factors like terrain, access limitations, etc.
A site visit enables the estimator to observe logistical constraints, potential hazards, and other on-the-ground realities that might impact labor productivity, equipment needs, and material delivery.
When conducting site visits, estimators must document all their observations, as they provide critical information that may not be evident from project drawings alone. This practical assessment also helps teams anticipate site-specific challenges and refine their cost projections accordingly.
A base estimate covers all the estimated costs of a project apart from the foreseen future escalations. These estimates are usually calculated depending on different techniques such as scope definition, size, and complexity of a project. In contrast, detailed estimates vary depending on the development phase of the project.
More details come to light giving a more detailed cost estimate as the design progresses. The critical inputs required in this stage are scope details, inflation rates, material take-offs, unit cost databases, and market conditions. The construction takeoffs give the client an outline of the necessary material costs. Construction takeoffs vary depending on the project’s size and scope.
Collecting and interpreting all scope documents can be challenging, but the project team must fix the scope documentation from the start to estimate the direct costs.
The cost estimator also takes down all the cautionary notes, assumptions, and exclusions while preparing the base estimate. The estimate can be included as an attachment for reference for the remaining project activities.
Reviewing the base estimate is necessary to ensure all the assumptions and basis of a project are correct. It also means that all the base cost estimates are an actual reflection of the scope of work and schedule.
It prevents the double counting of items and ensures components are not missing. This stage reviews cost-based estimates and historical data or project-specific conditions by applying the necessary location and productivity factors. The estimator also checks indirect and overhead costs with the direct costs as the basis.
Next up is getting pricing from suppliers and vendors. At this stage, estimators reach out to reliable suppliers to secure quotes. The goal is to get costing information that reflects current market prices for materials, equipment, and subcontracted work.
This step requires diligent vendor communication and market research, since prices fluctuate based on demand and availability.
During this stage, estimators should also verify that quotes include all relevant details, such as delivery fees, lead times, and any potential discounts for bulk orders. And as always, clear documentation of each quote is a must, as it allows the estimator to compare options and make decisions that support the project's requirements.
Determining labor costs is another key element in the estimating process. This involves calculating the labor hours required for each task and applying wage rates, which may vary by region, labor classification, and union agreements.
Accurate labor costing also considers productivity rates and potential overtime. With that in mind, estimators must account for site-specific factors such as weather conditions, access challenges, or local regulations that could impact labor efficiency.
Remember that projects also include indirect costs—such as overhead, administrative expenses, and insurance premiums.
Overhead and indirect costs are those non-direct costs that support the project, such as office expenses and general equipment. Meanwhile, insurance costs—including liability, property, and worker's compensation—should also be calculated based on the project scope and local regulatory requirements.
Factoring in all these expenses will enable estimators to have a comprehensive budget, and teams will be able to allocate funds for all operational needs.
An integral part of project planning is developing a risk and contingency plan. Risk management is always an ongoing process for maximizing the possibilities of opportunities and minimizing the probabilities of threats. In addition, the estimator needs to include the cost impacts of hazards in the total project costs.
Be sure to account for risks and uncertainties that could impact the project budget. This includes evaluating potential project risks, such as schedule delays, material price fluctuations, and unforeseen site conditions.
Based on this analysis, estimators include contingency allowances to address unexpected expenses.
Cost estimators should communicate the cost estimate data to all the necessary parties. A good communication approach determines the information that should be shared and who should receive the information.
It also determines the information channels that information should pass through. Remember, communication is just as important as numbers, and the information can be used as an effective critical tool to ensure the project’s success.
Another construction estimator should always review a cost estimate. They perform spot checks to verify quantities and costs and check the scope completeness of a project. Peer review is a crucial phase for addressing significant gaps in the estimate and an opportunity to reduce costs. Assumptions are also removed and clarified at this stage.
After this review, the estimator can now present the estimate to the management for approval. Finally, the revised estimates are reviewed by the project management staff and incorporated into the project cost baselines.
It’s important to recognize that estimating is a continuous process. Throughout the project, the estimator continuously updates the information; they are never done with estimating the project outcome.
Inaccurate construction estimates are detrimental to the job in that you can quickly lose a bid, or you can win one but lose money throughout the construction process. However, there are some tips you can employ to have accurate and growing construction estimates. Below are some of the information you can use to improve your accuracy in cost estimation.
Having a template ensures that you do not leave out anything when developing a construction estimate. Templates include all line items that are within the scope of work of the project. For example, for some subcontractors, a template can consist of materials and labor. On the other hand, the electrician’s or plumber’s template includes more items such as fixtures, controls, and transmissions. The template can also include insurance limits and administrative costs.
Depending on the project, items can then be added or removed from the template.
A review of past projects is very educational when it comes to putting up proposals. You can learn from past mistakes that help make your estimates accurate. A project of a similar size and scope is likely to have a similar construction estimate. Of course, no two projects are the same but breaking down the construction job costs enables you to evaluate the calculations more accurately. Continual improvement is impossible if you do not look where you started from.
The more accurate your takeoffs are, the better your construction estimates. You can use takeoff software to improve the accuracy of your takeoff without having to print anything.
This, in turn, helps you determine areas and lengths more accurately within much less time. You can also break down your project into a work breakdown structure, ensuring that your project is not missing any major components. Do not, however, count every screw in the project. Instead, stick to the big stuff that matters.
Labor costs are one of the most expensive costs in a project. To make money, you need to know how productive your crew is and their completion time. Labor costs are not just the hourly wages, but they also entail the labor burden to the company. They can be summed up in indirect costs such as retirement, union contributions, tools, benefits, and more. A comprehensive labor rate sums up all these expenses.
Even in the best of conditions, no two people work at the same rate. Therefore, when calculating the labor rate, you should also factor in the weather conditions, skill rate, training, and personal issues. This way, you will accurately predict the person-hours required for the project and factor it into your cost estimate.
Subcontractors in a project bid for different jobs, and you, therefore, need to dig through the proposals and see what is included and what is not. Sometimes subcontractors may miss part of their scope or omit it altogether.
After skimming through the bids, you can then choose the best offer for the project. Checking other proposals is an excellent way to counter-check subcontractors’ work and ensure they do not overquote the price.
Nothing is more embarrassing than preparing a reasonable cost estimate, only to find that it’s riddled with mathematical errors. Check formulas on the spreadsheet or estimating software before submitting your bids. The minor errors in calculation can accumulate into huge sums and ruin the entire estimation process.
One key industry innovation is the cloud-based estimation tool. This allows an estimator to utilize a 2D or even 3D model to predict the needs of a construction project. The cloud-based approach provides more accuracy by uncovering the true engineering needs of a project. This accuracy, in turn, offers the client a fuller picture of the estimation, and gives the estimation team a helpful tool to better present the construction job.
Another approach involves executing a takeoff within the cloud for an estimation. Integrating the takeoff into the cloud allows for more security and collaboration among team members. It also eliminates the headaches of using license-based tools.
Implement an automated approach to your takeoff. When takeoffs are automated, estimators are freed up from the tedious task of manually counting supplies. They can easily visualize quantities in 3D to understand scope, complexity, and design intent.
For example, one company was able to leverage a 3D model to get the correct number of doors needed for a project in a matter of minutes—a process that would have taken them over a day using a 2D drawing.
Automation as a tool is key in the preconstruction phase, as it allows a contractor to jumpstart the launch of a new job seamlessly, without getting bogged down by the nuances of an ordinary takeoff.
More and more, automation is offering firms a competitive advantage. They’re able to work faster and take on jobs that may have BIM requirements they weren’t able to meet in the past. In other words, automation allows contractors to access a whole new set of customers. And with the time-savings you get from automation, you can bid on more jobs and win more work.
Teamwork is an essential first step in construction estimating, and this process fails if there’s not a culture of transparency and collaboration between the contractor, client, and estimator.
Justin Davis, Executive Vice President of Preconstruction, Estimating, and Business Development at Walker Engineering explains the importance of collaboration during the estimation process this way: “Customers expect and trust [contractors] to fill in all the gaps, make sure that they’ve got their costs covered, and make sure that when we sit in a room, there’s transparency.”
Allowing teams to manipulate data and have visibility into scope removes oversight or double-ups on takeoffs. This is best accomplished in cloud-based takeoffs where data is centralized. With streamlined teamwork as a top priority, the goal should be to make estimating a collaborative process.
Estimating construction costs is one of the most important yet most neglected stages in construction. It is time-consuming, and the myriad of activities involved in construction leads many to neglect the exercise.
There are different ways of estimating construction costs, as we will discuss below.
Unit cost estimating is a quick, easy and clean way of estimating construction costs. Cost estimators assign a unit cost to each component of the construction process. Setting the unit prices refines the process over time, as you can alter and modify subsequent projects for better estimates.
Stick estimation is a prevalent method in cost estimation but also relatively cumbersome because it involves listing every single possible cost on the job. It is an accurate estimation method but very time-consuming.
This method uses statistics and regression models to determine a project’s cost. It is, however, not recommended if you do not know how to use this method. It would help if you had someone on your team that explicitly does this.
Production function relates the amount built to factors such as labor and materials. To achieve a given output, you must look for the optimal input. It can be pretty accurate in estimating the input and output relations of projects.
The accuracy of cost estimates is pegged upon the well-defined project plans in the design phases. The American Society of Professional Estimators subdivided the system into a five-level system that improves over time and is very reliable. The five-level system is subdivided as follows:-
There is a more straightforward method of classifying the costs that groups the estimates into just three categories. These are design estimates, bid estimates, and control estimates. The names reflect the usage of the estimates.
These are the estimates prepared during the design phase of a project. They start with the order of magnitude to determine a project’s feasibility. There are then the preliminary and conceptual estimates that are purely based on the schematic design. Then follows the detailed estimate from design development and lastly, the engineer’s estimate taken off from construction documents.
These are the estimates prepared by contractors during bidding as they look for data points such as direct costs, supervision costs, and other hidden costs to prepare their estimates.
This estimate is prepared after the contractor gets into a construction contract with a client and before construction starts. This way, contractors can plan for the upcoming costs.
There are many models in the industry that determine what goes into a construction estimate. These are:
Other professionals group the construction costs into direct costs, indirect costs, and markups. For example, labor and materials are direct costs, while overheads and profits are markups.
The cost of materials is a direct cost, and it fluctuates depending on the demand and supply in the market. Equipment costs are also a direct cost, and a lot needs to be considered while computing these costs. For example, you need to consider transportation costs, equipment capacity, and renting costs of the contractor.
Indirect costs include temporary utilities, design fees, and mobilization of equipment and office support staff.
Estimating construction costs isn't always simple. But with the right approach, you can avoid the most common pitfalls. Here are some issues to watch out for.
spreadsheet software like Excel. However, new construction estimating software is now available in the market that leaps into the future.
Construction estimating software streamlines the estimation process in both simple and complex projects. There is a narrow margin of human error, and good usability gives an analysis on cost and reporting.
Take a look at some of the ways construction estimation software can help your estimating workflows.
There are essential terms and concepts in cost estimation. However, there is a large degree of overlap between some of them.
Inaccuracy in cost estimation is often a very costly mistake that results in cost overruns and blowouts in the schedule. Some of the common errors are as follows.
Labor costs are some of the most expensive yet the most difficult to estimate. Using a simple hourly rate in the labor rate can lead to huge variations. Therefore, you need to be as detailed as possible when calculating labor rates, factor in the overtime, and source data from similar projects for better accuracy.
Cost variations are common when an estimator fails to factor in the risks. The higher the probability of a threat is, the more detailed the risk analysis should be. The experienced cost estimators assess the risks and determine whether a project is feasible for their firm or not.
Overlooking some costs in estimation means that the profit margin will eventually take a big hit. Once one gets into a contract without revising these costs, the chances are that it will be impossible to recover the losses. As such, you need a detailed estimation template that is standardized and cuts across all jobs. This way, the margin of error is minimized, and you can apply the template for future jobs.
Sometimes the estimation may be okay, but a poor review of the numbers can lead to costly mistakes. In addition, time pressures can lead to errors in math and measurements, which is why you need a standardized estimating template to help you compare and estimate correctly.
Construction estimating is one of the complex tasks you can embark on in construction. It is also crucial you base profits on how accurate estimates are. However, with the proper tools in estimation, the process is easier and more efficient.
Construction estimators produce and revise estimates for a project. They are familiar with the design and expenses incurred in the project. They’ll also create multiple assessments on the pre-design and design phase. With each design phase, the estimates become more accurate. During the creation of estimates, the contractor oversees the link between the budget and schedule.
Cost estimation can be stressful as it requires technical and analytical inputs and seeks a form of subjective judgment from the estimators. On the other hand, experienced estimators have developed problem-solving skills that help them adjust to the stresses associated with estimation. Estimating tools make work easier and lower the burdens on the estimators.
The rule of thumb in construction estimating is to be as detailed as possible. This means accurately breaking down the costs that go into labor, materials, and overhead. Many estimators use rough guidelines, such as cost per square foot, for initial budgeting, but these should be refined with precise data as more information becomes available.
A construction estimate should be clear, detailed, and organized. It typically includes sections for labor, materials, equipment, indirect costs, and contingency. It should also outline assumptions, exclusions, and any relevant calculations so stakeholders understand each cost and can easily review and track budget items as the project progresses.
Contractors often estimate costs by performing a detailed quantity takeoff, assigning unit prices for labor and materials, and calculating overhead and profit margins. Many use specialized estimating software to streamline this process, while some rely on spreadsheets for smaller projects.
The road to accurate estimation takes time and patience and is vital in any project management role. First, one needs to know the basics of estimating and investing in the proper resources as it determines a business’s success or failure. Accurate estimation inhibits the likelihood of catastrophic financial outcomes in a project.
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