A project can only come to fruition when the necessary materials and labor are assembled. These things, however, cost money. This is where cost estimation comes in. Cost estimation helps you determine your project’s budget, schedule the necessary work, and manage new resources. Cost estimates are also crucial when it comes to winning new business.
Property owners also use cost estimates to assess the feasibility of their projects before embarking on actual construction. This article will give an in-depth overview of the purpose of cost estimation in construction.
TABLE OF CONTENTS
1. Increased understanding of costs
2. For funding requirements
3. To understand material requirements
4. To aid preconstruction
5. To know equipment and tooling requirements
6. To pre-plan labor requirements
7. To understand the cost-to-benefit ratio
8. To understand rebuild costs for a valuation
9. To compare rates during a tender
10. To control costs
The margins for projects are small, and competition has risen. The accuracy of an estimate has never been more important to identify the exact cost and time to complete a project so you can make an educated decision if a project is right for your business or not. There is tremendous risk if you are awarded a project without knowing an accurate cost.
Cost estimation aims to give project stakeholders accurate information concerning the related project costs. It is easier to make lasting decisions if there is information to back them up. Cost estimation also gives clients value-aided options and helps clients minimize expenses.
People often confuse the term ‘estimate’ and ‘quote.’ A quote denotes the exact price the client will pay for a product or service. On acceptance, the service provider is contractually bound to complete the work at that price. On the other hand, an estimate is not contractually binding as the prices change with the project’s progress. A cost estimate is divided into direct costs and indirect costs.
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Direct costs refer to specific product, department, or project costs. They are the costs immediately linked with a project's construction. Such prices include labor and materials. These costs are also variable and fluctuate depending on market conditions. Below are some of the direct costs in cost estimation.
These are the materials and equipment costs necessary for a project’s success. The costs vary depending on market conditions. Cost estimators also look at historical data and use it to predict expected buying prices.
This refers to the cost of team members working on the project regarding time and wages. It also includes overtime, labor burden, worker compensation, and employee insurance.
Unlike direct costs, indirect costs are not directly linked to the construction work. They can be either variable or fixed costs. They include transport, administrative, and building temporary structures, permits, design, and legal fees. Overhead costs that cannot be directly charged in a specific project but are necessary to support overall project activities are also grouped as direct costs.
Other costs are capital costs and operation and maintenance costs. Capital costs are the overall construction costs necessary to establish a facility. Operation and maintenance costs are a more significant concern to the owner than the contractor. These are the costs needed for the proper functioning of a building during its lifetime.
Other essential terms in estimation are:
It is common in the construction industry for contractors not to receive payment up to three months after construction kicks off. Even with these delayed payments, contractors need to ensure the timely progress of projects by having adequate funding to run them. Most clients also operate their projects on loans. The client and contractor are, therefore, sometimes forced to look for funding elsewhere. Loan financers ask for construction cost estimates and use them as a criterion for whether they should issue loans or not.
Cost estimates are essential in evaluating a project’s feasibility. Loan financers also check whether the borrower can achieve what they want to accomplish within the financial constraints.
Residential, industrial, and commercial projects have unique material requirements. Therefore, the cost estimator must select the proper materials that fulfill the industry requirements. The estimation process needs a lot of accuracy. The estimator uses the project’s drawings and specifications to determine the necessary material quantities to get the project running. Insight into the material requirements also helps properly manage the materials. The procurement processes run smoothly, and resource gaps can be filled on time.
Preconstruction is the stage in a project before actual construction takes place. This process involves budgeting, planning, and scheduling activities. The projects struggle to get back on track when projected timelines and costs fall outside the estimated parameters. Cost estimations help the plans in preconstruction. They help project stakeholders make prudent decisions on material availability, material costs, scheduling project feasibility, and constructability. As the project evolves from concept drawings to actual construction goals, cost estimates simplify identifying cost and schedule goals. The team then checks the project’s progress against the milestones during preconstruction to ensure everything is on track.
The construction process requires a lot of equipment, such as cranes, forklifts, generators, and excavators. Some equipment is consumable in a project. These are electrical tapes, threading oils, bandsaw blades, and drilling bits. Sometimes, if a contractor does not own this equipment, they might need to rent them out.
An estimate jumpstarts a contractor’s efficiency in a project. Most of the construction work takes place simultaneously, and with a listing of all the items necessary for a project, the owner will have all the required equipment listings. This also improves the profit margins as the contractor’s procurement process will be more straightforward, and accurate estimates will be available.
A contractor must understand all the labor units required for a project. A project has several units that run concurrently, with each item in cost estimation having an associated labor unit. The labor requirements are pre-planned depending on the project’s specifications. When you accurately estimate tasks and resources, you can develop a work breakdown structure covering your staff. It is easier to monitor the team and ensure that they adhere to the expected project timelines.
A cost-benefit ratio is an indicator that shows the relationship between the foreseeable relative costs and expected benefits. If a cost-benefit ratio is more than one, a project is expected to deliver a high net value to its firm and investors. However, if the cost-benefit ratio is less than one, the costs are more than the benefits, and thus the project should be reconsidered. A proper cost-benefit ratio evaluates direct costs, indirect costs, construction risks, and opportunity costs; these costs are compared with the direct, indirect, total, and net benefits. Cost estimators calculate the cost-benefit ratio from initial cost estimates developed during the preconstruction stage. The cost-benefit ratio analyzes the overall value for money when undertaking a new project.
When you plan to take out insurance for your home, the insurer will likely ask you for rebuilding costs. With the correct expenses, you can get the best insurance coverage. An insurance cover is essential because you will have to cover the costs yourself in an unfortunate event. To arrive at the rebuilding costs, you need to perform cost estimates on service installations, demolitions, plumbing and electrics, and other associated costs. Rebuilding costs are usually evaluated as lower than your asset’s market price as it accounts for factors such as land and location.
Before awarding a contract, a cost consultant must evaluate the fair contract price. In most cases, the influencing factor is the lowest tendered sum. However, the cost consultant must examine the individual estimates in the tender and ensure that the quantities do not differ from the values in the Bill of Quantities. When a tender is impractically low, the cost consultant can also evaluate if the results are from inexperience or misunderstanding of contract requirements. If the quantities are not as billed, it can lead to many problems for the contractor and client. Using the cost estimates, the client can then award a contract.
Cost estimation helps control a project’s cost. Cost estimation provides a project baseline for measuring variances from the initial costs. After measuring variances, stakeholders can decide on corrective action to attain minimal costs. Cost control also helps in scope change management. Any changes to the initial costs are recorded to make it easy to forecast the expected final costs continually. This assessment of cost controls helps the project to stay on course and avoid budget overruns.
As you can see, greater insight into cost control improves the tasks and timelines in your project. Clients will likely trust your judgment and expertise when they understand the reasons behind certain project costs. They will expect changes as the project progresses, which results in better working relations. As projects are completed on time and within budget, it is easier to win repeat business, create happy customers, and get more referrals.
Leveraging previous jobs is the best way to create accurate estimates. Throughout the project, you should diligently track employee time and costs to measure performance against productivity accurately.
Want more accurate estimates and to win more business? Learn more about Autodesk’s powerful cloud-based construction estimation software.
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