Estimating is one of the most challenging jobs in the construction industry. Accurate estimations can lead to more profitable projects. On the other hand, inaccurate estimations can result in a substantial amount of money lost.
Part of estimating comes down to the nature of construction projects: every construction project is unique. Estimators simply can’t employ a one-size-fits-all methodology. Plus, several variables are taken into account during the estimating process, meaning there are many ways for the estimate to get off-track. Even for the best estimators, there’s always going to be a certain amount of uncertainty.
According to a study from KPMG, a global accounting organization, only 31% of all construction projects came within 10% of their budget in the last three years.
Another recent survey showed that nearly a third of construction companies make less profit than their estimates would lead them to expect. Almost 40% of respondents said they aren’t confident with their estimates.
Estimates can impact profitability in two ways. One, if the estimate is too high, the construction company may not get the bid. Two, if the estimate is too low, job overruns can eat into the project’s profitability. This can make a difference in whether a construction company stays afloat or not. It is crucial to have proper construction project management software and the correct historical cost data to deliver an accurate cost estimate.
Here are five of the more common pitfalls that can create construction estimating mistakes.
#1. Inaccurate or confusing design, plans, and specifications
If your design, plans, or specifications are inaccurate or incomplete, the stage is set for cost overruns. Often this happens when the design phase of the project is rushed to start the project sooner. It could indicate that the design team or construction professionals aren’t experienced, and there could be additional issues down the road.
If you don’t know for sure what the plans and specifications call for, there’s no way to calculate an accurate estimate.
#2. Inaccurate material takeoffs (MTOs)
A comprehensive, detailed list of all the raw materials, prefabrication tools, and the quantities necessary to complete the construction project is essential for a construction estimator. An incomplete or inaccurate material construction takeoff list can throw off a construction estimate by a considerable amount.
The material type needs specification; it’s not enough to have a list of general materials and quantities. For example, the cost can fluctuate significantly between grades of steel, specific brands of material, or electrical cable type. If this information is missing or inaccurate, the cost estimate can be way off.
Typically, the material takeoff list is created from the information on the blueprint and other design documents. If these documents are incomplete or inaccurate, it impacts the material takeoff list’s accuracy, further compounding the issue and making it less likely the material takeoff list will be accurate.
The material takeoff list helps determine the quantities of materials and supplies needed for the construction project. It also helps construction estimators assess the amount of labor and type of equipment necessary to complete the job. If the material takeoff list isn’t accurate, the labor and equipment estimates may also be off.
A less substantial impact, but one that impacts the bottom line, is that an inaccurate takeoff list can result in workers on the construction project not having what they need to do their jobs. That can lead to costly delays and misappropriation of labor.
#3. The difficulty of estimating labor costs
The most expensive construction cost is often the cost of labor. It’s also the most difficult to estimate accurately. Why? Because there are so many variables involved in the estimating process. To estimate labor costs, the construction estimator has to consider each worker’s experience level and the rate of pay and productivity of each available worker.
A common estimating guideline is to determine how many man-hours it takes to perform each task. Using historical data from similar jobs can help, but every job is different, as is every work team.
#4. Not staying up-to-date with market conditions that impact the cost of materials and regulations
The cost of building materials is another huge piece of the construction estimate. While historical data can be helpful in some instances, a savvy construction estimator will stay on top of market conditions that can impact the cost and delivery of materials.
Perhaps workers at a facility go on strike, or oil, gas, or coal price goes up. These factors would increase the manufacturing and transportation costs of raw materials, effectively raising the cost of raw materials.
This is especially true of imports as imported building materials often cost less than domestic building materials. Sometimes, shipments get delayed, are unavailable, or subject to price increases due to embargos, internal politics, material scarcity, fluctuating tariffs or other reasons.
It can take a long time from the initial estimate to the start of a construction project, especially when it’s large. During that time, the cost of materials could increase considerably. It is almost impossible to get an accurate cost estimate for an overall bid estimate if you do not factor in an indirect cost. Staying up to date on what’s going on in specific industries, such as the timber industry or steel industry, can improve the accuracy of a construction estimator’s calculations.
#5. Not creating a risk assessment
Risk is an integral part of the construction process. Construction estimating should always include an assessment of the level of risk associated with a project. This helps management determine whether to bid or pass on a job. Winning a job with a high-risk factor could be more detrimental than losing out on the opportunity.
Having a good grasp of the amount of risk also helps determine how much to build into the contingencies’ bid. Factors to consider in a risk assessment may include the project owner’s age and reputation, if the project pricing is fixed or flexible, if materials are custom or standard or if the materials are prone to pricing fluctuations.
Making the estimating process easier
Now, for a construction firm more than ever, direct cost estimating matters. There’s so much riding on the accuracy of construction estimates. To achieve the most competitive estimates and maintain profitability, only utilizing estimating software is not enough. Cost estimators should also use project management software, such as eSUB, for the most accurate information. Both tools, used together, will bring your construction business more peace of mind.