One of the most crucial components of the construction process, construction cost estimating is the process of forecasting the expense of building a physical structure. Understanding what a construction cost estimator is and the phases entailed is therefore essential to anyone who is concerned about how much their project will cost. Cost estimates are executed for many different types of construction projects, from building new structures to remodeling efforts.
Due to the risks involved, a major concern for both builders and clients is the financial impact of cost overruns and failing to complete a project. Therefore, it is in both parties’ best interest to spend time researching and estimating project expenditures before proceeding. Clients who are considering extensive projects often look for multiple cost estimates, including those prepared by contractors, as well as those assessed by independent estimators.
In order to determine a project’s scope and feasibility, project owners typically use cost estimates to allocate their budget. In addition, contractors utilize cost estimates when they are deciding whether or not to bid on a potential project. Estimates are generally prepared with the input of both architects and engineers in order to ensure that a project is in accordance with both scope requirements and budget allotment. Essentially, a good cost estimate will not only prevent the builder from losing money but also help the customer avoid overpaying. A fundamental component of earned value management, cost estimates are a project-management technique that tracks a project’s performance against the total time and cost estimate.
The Importance of Obtaining Accurate Cost Estimates
As we have covered, creating a construction cost estimate is a sound practice when determining the expenditures associated with a building project. However, the accuracy of estimates are particularly critical for development projects, which have timelines and budgets closely linked to reimbursing lenders while generating revenue as quickly as possible. They are also crucial for large civil projects or mega-projects due to their substantial scope and the possible involvement of public monies. In the instance of mega-projects, small miscalculations become magnified. Therefore, it’s wise to obtain extremely accurate cost-estimates in projects fabricated using public funds, as it will not only increase accountability but provide transparency while developing trust in your ability to manage the project adequately.
While it’s nearly impossible to estimate the cost of any given project with absolute precision, failure to prepare a feasible cost estimate can lead to catastrophic consequences in cost overruns. Although projects can fail for a variety of unforeseen reasons, a skilled estimator will account for as many factors as necessary, including items such as market conditions, to create an accurate estimate.
There are several components that a cost estimate will rely upon:
- The quality of the project plan
- The level to which the estimator defines a project
- The experience and skill of the estimator
- The quality of the tools and procedures the estimator utilizes
The cost estimation of a project may fall to one individual or a team depending on the type, scope, and size of a project; additionally, estimators may hold a number of different positions. In the case of certain construction projects, contractors and subcontractors may prepare cost estimates, although this isn’t regarded as best practice. In other instances, the construction salesperson may be responsible for drawing up an estimate. Architectural firms may have in-house estimators, generally individuals who take on the estimator’s function in addition to their primary role. However, it has become more common to see qualified independent estimators handle estimates against which one corroborates the general contractor’s estimates.
For contractors, accurate cost estimates win jobs. Customers generally choose the lowest bid that meets the standards and project parameters they specify. In a competitive bidding scenario, the time and effort you spend preparing the estimate is an invaluable investment, as a good estimate can ultimately lead to winning a bid. If urgency is a project factor, how quickly you prepare a bid can also be a differentiator.
What Does The Construction Cost Estimator’s Job Entail?
As you may have guessed, the cost estimator is pivotal to the cost-estimation process. This individual is generally familiar with design and construction and skilled at navigating the various expenses associated with construction projects and must possess both skill and training.
According to the U.S. Department of Labor’s Bureau of Labor Statistics, there were 213,500 cost estimators in the country in 2014, with employment opportunities anticipated to grow by nine percent over the next decade. Many of these estimators work in the construction industry.
Identifying The Types Of Construction Cost Estimate Systems
In order to ensure a cost estimate’s accuracy, a well-defined project plan must be in place first. Therefore, it’s customary to create multiple estimates during the pre-design/design phases. As the project level of definition increases, the cost estimates subsequently become more accurate. According to The American Society of Professional Estimators, a five-tiered system is used to classify estimates; throughout each level, the estimate grows increasingly more detailed and reliable. Below, a breakdown of the five-level system:
Level 1: Order of Magnitude Estimate
Formulated before the project design has commenced, an order of magnitude estimate is only utilized to determine the overall feasibility of a construction project.
Level 2: Schematic Design Estimate
This phase refers to an estimate produced in line with schematic design.
Level 3: Design Development Estimate
This estimate is made during the design development phase.
Level 4: Construction Document Estimate
This refers to an estimate based on the construction drawings and specifications.
Level 5: Bid Estimate
Based on the information found in construction documents, this is an estimate prepared by the contractor. The bid estimate is the basis of the bid price offered to the customer.
A more simplified system of classifying estimates entails only three main categories: design estimates, bid estimates, and control estimates. These category titles reflect the way in which you utilize each estimate:
- Design Estimates: Prepared during a project’s pre-design/design phases, these estimates begin with an order of magnitude estimate (also known as a screening estimate) to determine which type of construction methods and types are most viable. The next phase is the preliminary estimate (also referred to as the conceptual estimate), which is based upon the schematic design. The detailed estimate (or definitive estimate) follows, which is based on the design development. Finally, the last of the design estimates is the engineer’s estimate, which is based on the construction documents. A basic template can provide an initial assessment of project expenditures.
- Bid Estimates: When bidding to construct a project, contractors conduct an extensive amount of research in order to prepare bid estimates. This data is drawn from various sources to prepare the estimate, including direct costs, supervision costs, subcontractor quotes, and quantity take-offs.
- Control Estimates: This estimate is prepared after a contractor agreement is signed off but before construction commences, and serves as a baseline by which actual construction costs of a project are assessed and controlled. The control estimate also enables contractors to plan ahead in order to satisfy upcoming costs while determining the project’s cost to completion.
Construction Cost Estimate Glossary: Key Terms To Know
As we’ve discovered, many elements make up the construction estimating process. The following are some key terminologies and core concepts applicable to estimators and the industry itself:
Bonds: As a general rule of thumb, an owner typically needs a contractor to arrange for the issuance of a performance bond in favor of the project owner. The bond functions as a form of guarantee of delivery. In the instance that the contractor fails to complete the project according to the terms of the contract, the owner is entitled to compensation for monetary losses up to the amount covered by the performance bond.
Capital Costs: Capital costs are essentially the expenditures affiliated with establishing a facility. Such costs include the following:
- The cost of acquiring land
- The cost of conducting feasibility studies and the pre-design phase
- Compensating the architect, engineer, and specialist members of the design team
- The total cost of construction (which covers not only labor, materials, and equipment, but also administrative, permitting, and supervision costs, as well as any insurance fees or taxes)
- The cost of any temporary equipment or structures that are not part of the final construction
- The cost of hiring a commissioner
- The cost of inspecting the structure when it is close to completion
Contingencies: Since even the most accurate estimate is prone to be affected by unforeseeable factors, such as materials wastage, an estimate will typically have a pre-determined sum of money built in to account for such added expenditures.
Equipment Costs: Equipment costs refer primarily to the cost of running (and possibly renting) heavy machinery, such as cement mixers and cranes; it is therefore important to note that the equipment in use influences how rapidly you can complete a project. In actuality, the use of equipment can potentially impact many costs outside of the project scope directly associated with running the equipment.
Escalation: Escalation refers to the natural inflation of costs over time, and is especially crucial to take into account for long-running projects. Some projects have escalation clauses that address how to handle this type of inflation.
Indirect Costs: Indirect costs are expenses indirectly associated with construction work, such as administrative costs, transport costs, smaller types of equipment, temporary structures, design fees, legal fees, permits, and any other number of expenditures, depending on the particular nature of the project.
Labor Hour: The labor hour, or ‘man-hour,’ is a unit of work that measures the output of one person working for one hour.
Labor Rate: The labor rate is the amount per hour paid to skilled craftsmen. This includes not only the basic hourly rate and benefits but the added costs of overtime and payroll burdens, such as worker compensation and unemployment insurance.
Material Prices: Because the cost of materials is prone to fluctuation (based on market conditions and factors like seasonal variations), cost estimators may look at historical cost data and the various phases of the buying cycle when calculating expected material prices.
Operations and Maintenance Costs: More a concern for the owner than the contractor, operations and maintenance costs are accounted for during the design phase. Making decisions that lower the total lifetime cost of a building may result in higher construction costs. Operating costs include expenses such as land rent, the salaries of permanent operations staff, maintenance costs, renovation expenses (as required), utilities, and insurance.
Profits: To turn a profit, the contractor needs to add a margin on to the actual cost of completing the work. Subcontractors do the same when preparing their own quotes.
Quantity Take-Off: Developed during the pre-construction phase, a quantity take-off measures the labor and materials required to complete a construction project.
Subcontractor Quotes: Most contractors will hire multiple specialist subcontractors to complete parts of the construction; you will then add the subcontractors’ quotes to the contractor’s total estimate. It can be very beneficial to use a tracker in order to collect and record all of the subcontractor documentation in one place.
Variances: Owners frequently allocate construction budgets that are greater than cost estimates, since even in-depth cost estimates tend to underestimate actual construction costs. This may happen for a number of reasons: for example, wage increases, which can be difficult to forecast, will drive up construction costs. Seasonal or natural events, such as heavy rainfall, may call for action to protect construction or restore the construction site. Large projects in urban areas may face regulatory or legal issues, such as a demand for additional permitting. And finally, owners who start construction without first finalizing the project’s design will go in over-budget to account for design changes, as well as the inevitable cost increases that result from throwing a project off-schedule.