Cost overruns are among the most common risks for contractors. In addition to harming the bottom line, budget problems can delay projects and compromise the quality of the construction.
Accurate estimates that account for all expenses and provide room for unexpected costs are essential for avoiding cost overruns. Contractors have to balance their estimates, which include all costs from materials and labor to permits and legal fees so that they cover expenses while also allowing a proposal that competes with other bidders on price.
Here is a look at the steps that go into this vital process.
The Importance of Accurate Estimation
An accurate estimate provides the foundation for planning the construction project. Not only can this help contractors understand costs and profits, but it can help them avoid projects that are not financially feasible.
Margins are often tight, especially when bidding for a competitive project. Therefore, seemingly minor errors, such as failing to factor in administrative expenses, may limit (or even eliminate) profits. Accurate estimates can also supply the data necessary to create a timeline of costs and provide a framework for the completion of the project.
Precise construction estimates can impact a construction company indirectly because investors will expect the contractor to deliver on promises for the estimate. Fulfilling obligations in this manner is necessary for any business to build a solid reputation.
Reputation for quality, on-time delivery matters, and other aspects of efficient project management is appealing to investors and clients. Reputation can play a role in a successful bid, especially for privately funded projects. Since budgeting affects both of these factors, calculation mistakes can impact more than just profits on a single project. Mistakes could damage the chance for future work with the same client or harm a firm's reputation industry-wide. Finally, with proper estimates, subcontractors will be able to plan their participation in the project, assess whether they will be able to deliver, and have realistic expectations.
There are four main methods for creating construction project estimates:
Project Comparison Estimate
This method, also known as parametric cost estimation, involves comparing your project to similar projects that have been completed in the past and estimating its cost by taking into account the size, complexity, and budget.
The process requires historical information on the total costs and quantities of similar undertakings. It’s best for early planning stages when there isn't much detailed information about the project. Estimates are expected to be between 15 to 25% accurate, so they are best for initially deciding whether or not to assemble a more detailed proposal.
Area and Volume Estimate
This method also involves the development of construction estimates using historical data. However, the figures are more accurate because they include data on area and volume. The method is effective when the project is large, and its design is developed enough to allow measurement and calculation of floor areas and structure volume.
Assembly and System Estimate
This method involves breaking down the project into individual components and estimating the time and cost for each segment. The estimate groups different trades and disciplines together. For example, excavation and concrete pouring would be in the same category for cost estimation purposes. An estimated price is then attached to each element. This method is best for complex projects that already have blueprints and designs.
Unit Price and Schedule Estimate
This method involves estimating the cost of individual components of the project and then using those estimates to calculate the total budget. It takes variables such as the timeframe and exact requirements for materials into account. Because it requires exact data, this method is effective when the design phase is complete, and all the project drawings are finished.
It’s possible to progress through all four methods when making decisions and preparing a bid for a large project.
Steps of Construction Estimating
Construction estimators use different steps depending on their sector, experience, and preferences. However, most estimators use a similar sequence to calculate the cost of the project.
- Define project scope and requirements: Accurate estimating requires a clear understanding of the project goals, timeline, size, location, and materials requirements. Most estimators start by reviewing available data to ensure nothing gets overlooked and that the project is actually feasible for their company.
- Review specifications and drawings: The next step is to acquire and review all plans, drawings, documents, and specifications available to get as much data as possible to make the initial number more accurate.
- Estimate materials, labor, and equipment: This involves using takeoff sheets to accurately measure areas and volumes to calculate materials needed to complete the project. Because accuracy is essential, you can use takeoff software for estimation and measurement software for calculating distances to get the most precise numbers and avoid human error during the process. Obtain current prices for materials, equipment, and labor, keeping in mind that these may vary depending on location.
- Estimate overhead: Taxes, permits, insurance, legal fees, and other overhead costs get added to the materials and labor totals. These may vary by location, so it is important to understand local ordinances before estimating.
- Identify risks: Determine potential problems and the cost of contingencies to deal with them. Common pitfalls could include weather delays, material shortages, supply chain delays, or cost overruns due to accidents or work stoppages.
- Create a full report: Finally, consolidate all your project costs and estimates into a final report. It should include the known costs, potential risks, and contingencies.
It’s also possible to include the drawings and data as evidence of how you arrived at your figures.
There are additional considerations that can help with the process of developing an accurate bid, improving profitability, and avoiding potential issues.
- Cost reduction: It pays to be aware and take advantage of cost reduction options, such as volume discounts for materials or design changes that can lower the price of the project without reducing quality.
- Type of project: Specific opportunities for using cost-saving methods or techniques may be tied to specific types of projects. For example, some public projects may have incentives for early completion.
- Taxes and incentives: Some jurisdictions may offer incentives or tax cuts, which can help increase profit margins.
- Local sources: Utilizing local resources and vendors can help reduce shipping and delivery costs.
- Recycling: Some jurisdictions require practices that lessen the environmental impact of construction. You will need to comply with these requirements. Also, in some cases, it’s possible to save money by using recycled or salvaged materials, such as crushed concrete or metals from previous projects.
Finally, investing in software, modern equipment, or training in more efficient techniques may require an initial cash outlay, but it can lead to long-term savings.
Who Handles Construction Estimating?
Here is the division of labor for the process.
- Cost estimators often analyze the cost of labor and materials.
- Quantity surveyors are primarily responsible for measuring and pricing the materials more accurately.
- Contractors are accountable for the actual construction of the project, so they calculate costs in all areas or verify and finalize the estimates of other professionals.
These primary estimators often work alongside other construction professionals, such as project managers, interior designers, engineers, and architects. They add their expertise to the process. It is vital to delegate estimation tasks to the professionals with the highest level of experience in each specific area so that the figures are as accurate as possible.
How To Calculate Estimates
The steps for creating an estimate depend on the method and amount of information available. In general, however, the process follows a similar pattern.
- Obtain and analyze plans and specifications;
- Make a list of all materials, labor, and other costs;
- Estimate the cost of materials;
- Figure out the cost of labor;
- Calculate overhead;
- Add fees and permits;
- Compute taxes and insurance;
- Add all costs together for the total cost of the project.
Software, such as a construction take-off app, can streamline these calculations and automate the process to reduce time and the chance of human error.
Construction Estimation Template
Here is a look at the basic elements of an estimate for a construction project:
The actual layout will vary depending on the nature of the project.
Helpful Tools and Resources
Automation can help streamline the estimation process and put all data and information in a central place. There, stakeholders and decision-makers can easily access it at all times.
In addition to a central platform, you can rely on specific tools to increase the accuracy of each estimate. For example, measurement software can help you get pinpoint precision for materials and labor costs. You can also rely on software meant to provide estimates for specific tasks, such as painting, concrete pouring, or electrical work.
Regardless of the job, the goal of these specialized plug-ins is to increase the accuracy of the estimate.