Construction Estimating 101: Everything You Need to Know
Estimating project costs requires detailed knowledge of several construction aspects such as materials, equipment, labor, specifications, techniques, vendors, pricing, and trends. This is an industry of its own in the modern-day construction market with construction estimators generating over $2 billion in revenue in the United States alone. Over 60 percent of construction companies have reduced their project overruns thanks to accurate cost estimates, which further signifies the importance of construction estimates in turning over profits from completed projects. The following in-depth article looks to guide you through all the steps in determining the costs of a project: from its key components to levels of accuracy to whether you need to hire a professional construction estimator or not.
Table of Contents
What is Construction Estimating?
The term “construction estimating” refers to a process that anticipates the expense of building a physical structure. It is one of the most crucial steps in the construction process because profit margins (the livelihood of contractors) are greatly impacted if any estimated direct and indirect costs for the project are off by even a slight amount.
Every successful project starts with a precise and accurate construction cost estimate. By the end of this article, you will know the basics of estimating and learn the importance of its role in delivering successful commercial construction projects.
Why is Construction Cost Estimation Important?
Cost influences every major decision taken for a construction project. During the bidding phase, for example, contractors must provide competitive cost estimates that include their profit margins to win projects. Stakeholders, on the other hand, must perform their own research to estimate a reasonable budget. Remember that both parties are concerned about the project price because an inaccurate estimation can lead to negative impacts such as the project exceeding the budget or forced cost-cutting.
Furthermore, cost estimating can also be used to reduce operational or maintenance expenses. While they might increase the project budget, yielding great benefits over time can often be a critical market requirement. For example, installing LED lighting instead of conventional lighting in commercial buildings can result in annual savings on electricity bills.
Cost Estimating Key Components
Knowing how to cost-estimate is important for project managers because they are responsible for detailing project budgets for each construction phase. Understand that cost estimation is the total expenses incurred during the lifetime of a project. This can be broken down into several categories, but are generally classified as direct and indirect costs.
Direct Costs
Direct costs, also known as project costs, are expenses related to specific construction activities that form the basis of a project. These are critical tasks leading from laying the foundation to erecting the structure.
- Labor: Paying wages and salaries of the workforce.
- Materials: Buying supplies and components for the project.
- Permits and Fees: Obtaining licenses from regulatory authorities.
- Safety: Investment in reducing site incidences and keeping the workforce safe.
- Site Preparation: Excavating, grading, and clearing the construction site for the workforce.
Indirect Costs
Indirect costs, also known as operating or overhead costs, are expenses incurred over time. They are not attributed to a single construction activity but instead oversee the whole project from start to end.
- Administrative: Costs associated with purchasing or renting office space, equipment, and furniture. Also, includes administrative salaries.
- Insurance: Paying premiums for liability, property, and other insurance coverages.
- Legal: Cost of consulting fees, or retaining legal services.
- Software Licenses: Subscription cost for construction management software.
- Training and Development: Conducting training workshops and programs.
How the Construction Estimating Process Works
The process of estimating construction cost involves the same basic steps regardless of whether the construction estimator is a contractor or owner. It starts with reviewing bid documents and accounting for every known cost to prepare a detailed construction estimate that covers expenses, profits, and contingencies.
Step 1: Define the Project Scope and Requirements
The bid package contains everything needed to establish the scope of the project. This includes all the contractual documents and the construction documents which include drawings, blueprints, and other specifications.
The structural drawings, especially are important for the construction estimator to understand the material and equipment needed for the project. The estimator must also take into account the other requirements such as electrical, plumbing, heating, etc., for which a specialist contractor can be referred.
Once the bid package has been completely reviewed, the construction estimator gets a rough idea of what the project needs in terms of materials, quality, equipment, etc.
Step 2: Quantity Takeoff (QTO)
The next step is performing a quantity takeoff, also called a material takeoff. The construction estimator lists every material required to complete the project alongside how much and what types. This step is especially important for general contractors because the material takeoff helps create work packages to confirm what specialist contractors to bring in, what equipment to rent, etc.
Contractors can then begin working with suppliers to get pricing information and delivery details. Labor can also be hired by general and specialty contractors. In either case, the labor rate is established by the construction estimator to add to the final project cost.
Step 3: Estimate the Costs
With all this information, construction estimators can complete takeoffs for materials, equipment, labor, and other related tasks. While estimators may prefer manual takeoffs by using pen and paper to draw and calculate the required materials according to the project’s specifications, it is recommended to rely on digital takeoffs by using construction estimating software like eSUB. It speeds up the process and saves time which can be spent elsewhere. It is also far more accurate in comparison, ensuring that your project is set up to create detailed estimates using one solution.
Step 4: Overheads and Profit
This is where construction estimators calculate all the expenses incurred through direct and indirect means to find out their profit margins. While we have already mentioned above that direct and indirect costs can be classified into several categories, the bid package will (should) clearly lay out these costs for the general contractor to review. Hence, estimators can easily consider rates for each cost alongside duration.
Also, do not forget about overhead costs which can creep up for a project. These are the costs of doing business. Hence, even if a contractor has no projects, overheads are still going to pile up. For example, running an office and maintaining administrative expenses.
Step 5: Review and Finalize
In the final step, construction estimators have determined what a project will cost in totality, covering everything from materials, labor, and equipment, to office expenditures, traveling, etc, while returning a health profit. Go over the calculations again to ensure nothing has been left out even if they were done using a digital takeoff. Review the final numbers and prepare to submit the bid to the owner or begin negotiations.
Levels of Accuracy in Construction Estimating
The estimated costs during the earlier stages of a project have less accuracy, and those expected later have higher certainty. The ranges will be higher at the beginning of the project and will narrow down as the project advances.
Project cost estimates are characterized by how accurately the scope is defined at the time of estimation. The ASPE, American Society of Professional Estimators classifies cost estimates in order of Levels – Level 1 through Level 5 as mentioned below.
Level 1: Order of Magnitude
The Order of Magnitude estimation is an extremely rough estimate created before the project is well-defined. It is based solely on expert judgment and previous costs of similar projects. The typical range in this level is from 25 – 75 percent.
Level 2: Intermediate Estimate
The primary purpose of the intermediate estimate is to determine project feasibility from the concept of the general project. Large-scale commercial projects develop this type of estimate because they use the information to decide whether to carry out or abandon the project.
Level 3: Preliminary Estimate
This estimate uses a somewhat detailed scope to consolidate unit costs. It is accurate enough to be used as a basis for project financing, and sometimes, project budgets are authorized solely on the preliminary estimate. Therefore, it is essential to be as accurate as possible to differentiate between alternatives.
Level 4: Substantive Estimate
The substantive estimate is based on estimated unit costs, determined by analyzing reasonably finalized project designs, objectives, and deliverables established by the company. Additionally, it is used to control project expenditures to stay within the budget.
Level 5: Definitive Estimate
This estimate is the most accurate and reliable because it occurs when costs are known. It is used to create bids, tenders, and cost baselines. However, always keep in mind that all estimates are susceptible to change when costs are updated.
How to Use Construction Estimation for Bids
Bid estimates meet the criteria defined in the Level 5 Definitive Estimate in terms of accuracy. The bid combines construction documents, take-offs, and direct costs. In the bid estimation process, the estimator approximates the project cost and submits paperwork to ensure the project’s potential.
How to Determine the Budget From Estimates
The first step in establishing a budget for a project is to have a cost estimate as accurate as possible. The estimator (project manager) should remember to include risk management activities alongside contingency plans while estimating the total cost. This final figure can then be used to outline a level of funding and budget allocations necessary for completing the project.
Role of a Construction Estimator: Do You Need One?
Every construction company wants their bids to be as accurate as possible. This helps them win businesses, establish long-term clients, and turn a healthy profit in return. That level of accuracy, however, requires the involvement of a construction estimator.
Despite popular belief, construction estimators do not just crunch numbers. They have insights into all types of direct and indirect costs, knowledge about the current market trends, relations with vendors and suppliers for pricing information, expertise in contingency planning, etc. They play a significant role in creating competitive bids for a construction company, which is why they are needed. You should refrain from crunching numbers yourself and hire a seasoned estimator or else risk the reputation of your business.
Final Thoughts
Construction estimating is vital in project management, and companies must invest resources and technology to make this role effective. It is important to know the basics of estimating because it can make or break a construction project. They also can make or break a company’s business.
Estimates are the stepping stone to getting a bid, which ultimately wins projects. Without accurate construction project estimates, there is the likelihood of catastrophic financial consequences.
