How to Estimate Construction Costs?

Looking to embark on a construction cost estimate but are worried about the financial impact of cost overruns? It is no doubt that accurate construction costs estimate is crucial for the success of a project, no matter what. Whether you’re an employer who’s looking to undertake new construction or you’re a construction firm looking to multiply profit margins; you need accuracy in estimates.

Technically speaking, contractors use a construction cost estimate during the tendering stage to bid on a project. Clients, on the other hand, takes input from architects and engineers to forecast the cost of a future project. Clients use these estimates to allocate a budget for the project and to see if the project is feasible or not.

Understanding the basics of construction cost estimating is crucial and it will help you in understanding the ways and tricks of gaining favors in your side. An accurate estimate will let you forecast how much a project will cost and how long it will take.

When you’re a project manager, dealing with the cost and budget is the whole ball game. Through earned value management and good cost estimate, you will neither lose money on the project nor do you charge more from the client. This will let you stand out among competitors, earn more clients, and enjoy their admiration.

Hence, a construction cost estimate can make your project an overnight success or it can ruin your entire investment. But the best part is, it’s all in your hands; manage it and enjoy benefits, ignore it, and face consequences.

However, the bad part is that establishing a construction cost estimate seems daunting, especially if you’re a newbie in the field. Anyhow, don’t worry the today’s read describes the methodology for performing a construction cost estimate the right way.

We’ll start from basics definition of terms commonly referred to in construction cost estimate and then we’ll discuss what some methods are for flawless and dead-accurate estimates.

Construction Cost Estimate – What is it?

A contractor uses information from the construction drawings and specifications to determine the resources (labor and equipment) and material required to complete the job. This estimate is referred to as construction cost estimate. Let’s now explore some of the common terms used in this field.

Order of Magnitude (OOM)

During the preliminary and planning phase of a project, you don’t have detailed designs and blueprints to make accurate detailed estimates. At this stage, you can only use rough guesses, historical project data, and your experience to make rough estimates called order of magnitude. This estimate uses historical project data with analogous mathematics. It just shows you the level of effort and cost required to complete a project. It helps decision-makers to decide whether the project is feasible or not.

Schematic design

It is the first phase of the project design that helps to establish project requirements and cost benchmark. The architect and the engineer establish rough drawings, illustrative sketches, computer renderings, and plans for the project as per detailed requirements laid out by the client. These drawings are referred to as schematic design.

Takeoff

Takeoff is to determine each of the required materials off of the blueprint for a project. The simplicity of the complexity of the takeoff depends on the nature of the project. The word “taking off” explains it is the extracting of material and the quantity required.

Bill of Quantities

After detailed construction drawings have been prepared by the architect and the engineer, the estimator formulates a document explicitly defining the materials, labors, and their cost. It defines the scope of the entire project and each of the activities to be undertaken by the contractor hired. It’s a communication document and is always a part of the contract signed by all stakeholders of the project.

Bid

A bid is a proposal or offer made by the contractor to undertake or manage the project. It indicates the price offered to correspond to the entire project scope of work.

Uniformat System

It’s a system that has been developed in consensus between industry and government departments that allows you to classify building specifications, and cost estimating. This system provides a consistent platform for the economic evaluation of building projects.

Quote

When you’re outsourcing a material or hiring someone to offer services, you ask them about the cost. In construction, a quote is just a priced summary of the work or the material to be delivered. The quote from different suppliers or service providers allows you to hire the best offer.

Squaring

As the term suggests, squaring is to determine the areas and volumes of a component or a building. The square area method of estimating is one of the quickest and easiest methods of determining the rough cost estimate of a building.

Abstracting

Abstracting is to summarize the quantities estimated and put all costs in proper heading to get the aggregate cost of everything. Here you just show footage or cubage of the quantity and cost but no detail of quantities item wise is provided.

Stick Estimating

It’s one of the most popular methods of estimating among contractors. It’s a straight forward method for simple projects but can be daunting for complex projects. You just make a list of materials needed, labor, vendor proposals, costs, profits, and everything.

Direct Costs

For construction projects, the costs for raw material, labor, equipment, etc. that are directly incurred or allocable to finish a job is a direct cost.

Indirect Costs

Indirect costs won’t have a direct link with the activity to be undertaken and most importantly; they are unaccountable costs like security costs, facility costs, administration costs, etc.

Elements of Creating a Construction Project Estimate

Now that you’re through to some of the basic terms of the construction cost estimates, let’s discuss what we have to include in the construction cost estimate. Please be noted that the below points are some of the very basics of the costs to include and it varies with the project type and scope.

Equipment 

You need equipment to undertake some specified job that you can either purchase it or hire it over rent. Like if you go with earthwork, you need heavy-duty excavators so all such equipment costs have to be included. If you own the equipment you can add depreciation costs but if you hire you can include cycle times and equipment capacity.

Quantity takeoff

An accurate quantity takeoff is vital for a construction cost estimate. You need to consult the design drawings and specifications to identify and take note of all the materials needed for the project.

Material cost 

After you’ve got the quantities of materials; you have to determine the material cost. You can buy material from the local market and you may also need to import from some other countries. Material cost is highly unpredictable and you also have to include the transportation cost.

Labor 

Depending on the project scope and the deliverables you can estimate the labor hours. You must include the basic wage and benefits of the labor rates. Taxes and overtime must go in there along with the labor work hours.

Subcontractor’s Costs 

If you’ve got some specialized tasks or jobs; you need to hire a subcontractor for it. Take quotes from them and include them in your cost estimate.

Indirect Costs 

Besides undertaking the actual job, you need to establish residential facilities, transport, recreation, and security. All such costs are indirect costs and have to be included in the estimated costs.

Levels of Construction cost estimates

Depending on the accuracy and availability of project information there are 5 levels of construction costs estimates in line with the different stages of project execution. It is right in doing so, as the project progresses in various phases from the preliminary planning phase, design phase, execution phase, and completion phase. In this classification, the first level is the least accurate and the last level is the most accurate.

Level 1: The Order of Magnitude

It is made during the planning phase of the project to determine the feasibility of the project. It is accessed keeping in view the experienced guesses and past projects.

Level 2: Intermediate Estimate

After the finalization of the general concept, an intermediate estimate is developed to determine and allocate budget for the project, only if it’s feasible.

Level 3: Preliminary Estimate

After the scope of work has been decided, a preliminary estimate is made to see if the project budget is enough for basic financing.

Level 4: Substantive Estimate

After the finalization of detailed construction drawings and design, the unit cost estimate is made called a substantive estimate. This estimate is also used to control project costs.

Level 5: Definitive Estimate

This is the most accurate estimate made when all the project documents are well-established and all costs are known. It is the estimate upon which the bid is offered and tendering takes place.

Creating Construction Cost Estimates

Gone are the days when construction cost estimating was done by hand. You can’t afford to make errors and waste valuable time. Construction professionals and estimators are now migrating to construction management software and takeoff applications. They have considerably reduced their mistakes and have improved cost estimates. Moreover for location based specific cost of construction items, the construction cost books are available that gives you the updated cost items ready to use in your estimates.

Recently, BIM has emerged as a useful and versatile approach in estimating the cost of a project and accessing the project behavior way before the construction commences.