How to Make the Right Cost Estimate for Your Construction Project

How to Make a Construction Cost Estimate

Whether you are a property owner, investor, or contractor, having a clear and accurate cost estimate for your construction project and the duration it will take is significant before commencing operations.

This article will give you an in-depth review of the basics of cost estimates in a construction project, including factors that can cause the costs to inflate unexpectedly and how cost estimates fit into the construction process.

We will also delve into the types of construction contracts, construction estimating software, best practices, the role of historical data, and pitfalls for estimators.

Let’s go ahead and jump right in and provide detailed information to help your cost estimate for your construction projects.

The Background and Purpose of Construction Cost Estimation How to Create An Accurate Construction Cost Estimate

Construction cost estimation is the action of estimating the cost of erecting a physical structure. Usually, property owners and builders worry about failing to complete a project on time and the financial implication of cost overruns.

That is why they allocate time and energy to estimate the cost of a project and the duration it will take before commencing with it. It is advisable always to consult multiple cost estimates if you are planning to undertake a large project. You might want to consider cost estimates prepared by the contractors and those compiled by independent estimators.

Most property owners use cost estimates to calculate a project’s feasibility, scope, and the amount of money required. On the other hand, contractors use cost estimates to decide whether to bid on a project or withhold. Most cost estimates are usually prepared with engineers’ and architects’ input to ensure the project meets scope requirements and financial feasibility.

One characteristic of a reasonable cost estimator is its ability to assist the property owner from overpaying and preventing losing money by the builder. The cost estimator is a principal component of earned value management. This project management methodology monitors a project’s performance against the total cost and time estimate.

Generating a construction cost estimate is ideal for anyone looking to plan and budget their project beforehand. Cost estimates are a perfect practice for all construction projects, such as remodeling an office and constructing a new building.

Accurate cost estimates are particularly essential for construction projects with a timeline and a budget closely linked to generating revenue and paying back lenders in the shortest time possible.

They are also critical for large and mega civil projects due to public money’s potential participation and sizable nature. On mega-projects, minor miscalculations become magnified and might lead to corruption allegations primarily if the project is being constructed with public funds.

Cost estimates are particularly necessary for government projects as they tend to promote accountability, transparency, and trust in a contractor’s ability to manage a project prudently.

Failing to generate a definitive cost estimate can have devastating results. One prominent example is Indiana’s Marble Hill nuclear power plant. The people behind the project abandoned it in 1984, a few years after it began. The project contractors spent over 2 billion USD and completed it only partially due to cost overruns.

We are conscious that it is impossible to predict any project’s cost with absolute accuracy, as projects tend to have unforeseen situations. However, a skilled cost estimator will consider as many factors as possible, including market trends, to develop a useful report.

How accurate a cost estimate becomes is dependent on a few things: the experience and skill of the one estimating, the quality of the project plan, cost information accuracy, and the merit of the procedures and tools the estimator uses.

A cost estimator can be prepared by either an individual or a team, depending on the project’s size, type, and industry. For some development projects, contractors and subcontractors come together to prepare a cost estimate, although it is not considered best practice.

In some other instances, the role of preparing a cost estimate is delegated to the construction salesperson. At present, most architectural firms have an in-house cost estimator, a department that prepares the assessment in addition to their primary function.

The development market is increasingly witnessing the emergence of independent estimators who handle tabulation and verification of contractors’ estimates. For builders and contractors, an accurate cost estimate report wins projects and jobs. Clients usually tend to opt for lower-priced bids that meet the threshold and specifications of the project.

The development market is a competitive market that needs time and effort in preparing a reliable cost estimate that positions you to win a project. If urgency is a determinant for a development project, you might want to schedule your estimate and bid quickly to secure the contract.

The Construction Cost Estimation Process How to Accurately Estimate Construction Costs

It is essential to understand that cost estimation requires basic knowledge of the construction process. For you to compile a practical cost estimation report, you need to have a basic grasp of the following 9 phases of a building project:

Project Commissioning: This phase is fundamentally a verification process where the builder’s designs, costs, and deliverables are measured according to the owner’s specifications. It usually commences early in the construction process and can run-up to a project’s occupancy stage. It is the work of the commissioning provider to commission the project.

Outlining the Project’s Requirements: Also regarded as the planning phase, this stage is the first real phase in constructing a project. It involves defining the project’s requirements, such as the cost specifications, the project’s functions, location of the project, and any legal specifications it has to meet.

Setting Up a Design Team: After the project owner has settled on a contractor, the contractor will then go ahead and set up a designing team that incorporates specialized consultants and other relevant persons. Complex projects such as acoustics tend to demand more specialized consultants to ensure the project meets the specific design requirements. In most projects, the architect is responsible for overseeing the design process’s realization, although some tasks, such as industrial construction, are best managed by an engineer.

Designing the Structure: This phase entails the contractor creating a series of designs. The contractor first works with the owner to better understand their vision and then increasingly works closely with the design team members to realize the structural designs according to the requirements. This phase is considered the last stage of construction documentation and theory. At this stage, cost estimators compile and revise cost estimates as other team members bring forth estimates of their respective departments.

Project Bidding: Once all the cost estimates are concluded, they are forwarded to the contractor who places a bid on the project. During this phase, the contractor complies with the set bidding instructions such as the contractual agreement, proof of financial and technical capability. Usually, all contractors receive the same bidding information to ensure a fair bidding process. Most project owners settle for the lowest qualified bidder.

Signing the Contract: After the bidding process, the contractor signs the contract document after being selected. The contract document acts as a legally binding document between the owner and the contractor. Different contact documents follow different models depending on the task at hand.

Construction: During this phase, the contractor manages the construction of the project following the construction requirements. Most contractors hire specialized subcontractors to work on different sets of tasks, such as foundation work, wiring, and plumbing. Throughout the construction process, the contractor keeps a keen eye on the project’s progress while ensuring everything does not overrun the original costs. Their cost control efforts usually ensure they turn their efforts into a profit.

Completion: The architect or the engineer performs a final inspection of the project before handing it over to the owner. A certificate of completion should be issued for the owner to be able to claim full payment.

Factors that Influence a Construction Cost Estimate

What are some of the information that estimators use when preparing a cost estimate? Here are the key terms and concepts that influence the final cost estimate for your construction project:

Man Hour: Also known as labor hour, the working hour determines how much an individual will be paid for work per hour.

Quantity Take-Off: This concept estimates the materials and labor required to complete a project. Contractors compile it during the pre-construction phase.

Labor Rate: This is the hourly pay of a skilled craftsman. It includes the introductory hourly rate and benefits, payroll burdens, insurance, and added costs of overtime.

Equipment Costs: This is the direct cost of buying or renting heavy machinery such as cranes and cement mixers. It is prudent to note that the type of machines you use in a project determines how quickly you will finish the project. Therefore, invest in reliable machines as they directly impact the cost and time of the entire project.

Prices of Materials: Since the cost of materials is susceptible to fluctuations based on market trends and seasonal changes, cost estimators might want to study historical cost data when compiling the expected material prices.

Subcontractor Costs: It is usual for contractors to hire multiple specialized subcontractors to work in different departments. Each subcontractor works with a budget that needs to be considered in the contractor’s final estimate.

Indirect Costs: These are expenses that are not directly associated with the building process, such as transport costs, design fees, legal fees, administrative costs, permit fees, and any other cost.

Why You Need A Construction Cost Estimate

Contingencies: Since every project is liable to be affected by unforeseeable elements, the final estimates should allocate a predetermined amount to take care of such situations.

Profits: To make a profit, it is advisable to add a reasonable margin on the prices and cost of delivering the task.

Economic Factors: Since we live in a volatile society, natural inflation of costs usually happens. It is prudent to take this into account, especially when dealing with long-running projects.

Common Cost Estimation Techniques

Different construction cost estimation techniques vary in potential accuracy and speed. Some of the primary methods used by cost estimators include:

Allocation of Joint Costs: This is where the contractor allocates money to different subcontractors using different mathematical formulas. For instance, the contractor can assign field supervision to separate entities based on their participation.

Production Function: This relates to the output, the amount built, to input factors such as labor and material. What this means is the relationship between the input factors and the final product. For instance, if you are looking to achieve a certain number of square feet built, you need to know the labor hours per square foot to make a proper estimate.

Stick Estimating: Although it is considered one of the best methods of compiling a cost estimate, it is incredibly time-consuming. It entails determining the total cost of a project by listing.

Empirical Cost Inference: The empirical cost inference is a statistical technique that uses regression analysis to connect construction cost to a model of forecasts. The accuracy of the empirical cost inference method depends on the forecast model’s accuracy, so it requires the input of an experienced individual.

Unit Cost Estimating: This technique connects unit costs with each construction unit involved in the building process. It is reasonably fast and accurate, especially if the contractor is familiar with the scope of work.

Final Construction Project Cost Estimate Thoughts

At present, there are software applications that make the cost estimating process easy. However, incorporating some best practices can allow you to get a more accurate estimate and a more bankable bid.

For instance, the cost estimate should abide by industry norms, standards, and measurement units’ regulations. The cost estimator should consistently satisfy cost-related contracts, such as quantity surveys, and comply with cost-recording procedures to ensure their work is easy to hand off and verifiable.

The success of a construction cost estimate solely depends on the cost estimator. Therefore, they should be armed to the tooth with evaluation skills, cost-related processes and inputs, documentations, among other skills.

You can make the process of cost estimating faster and easier by adopting estimation applications. These applications tend to be more accurate than human beings as long as you regularly update their cost data. For anyone venturing into cost estimation, especially for complex projects and long-running construction, estimation software has emerged as a vital component that is a must-have.

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About Anita Clark Realtor

Anita Clark has written 610 posts on this blog.

Anita is a residential Real Estate Agent in Warner Robins Georgia, with Coldwell Banker Access Realty (478) 953-8595, aiding buyers and sellers with all their real estate questions on her Warner Robins blog.