10 min read
8 Steps to Mastering Construction Cost Estimating
Published 29 Apr 2024
Understanding cost estimation is essential for contractors looking to effectively manage their budgets, prepare competitive bids, and anticipate potential project uncertainties. Cost estimates not only aid in project planning, scheduling, and decision-making but also provide valuable insights for clients.
Ultimately, accurate cost estimates are crucial for ensuring project profitability and successful execution. In this guide, we'll explore the key principles and strategies of cost estimation in construction projects.
Ultimately, accurate cost estimates are crucial for ensuring project profitability and successful execution. In this guide, we'll explore the key principles and strategies of cost estimation in construction projects.
Contents
Construction Estimation Process
Construction cost estimating is a complex process that determines the budget required for a project's completion. Accurate estimates are crucial to a project's success.
When undertaking a project, it is vital to ensure that you take every aspect of its scope into careful consideration during the estimation phase. Mistakes made during this stage can have significant financial implications, even after the construction is complete. You will inevitably need to make numerous decisions during this phase, and as such, it is crucial to have an accurate estimate to serve as the foundation for delivering a project within the allotted timeframe and budget.
To achieve this, conduct a thorough analysis of all factors that may impact the project, including material costs, labor, equipment, and potential risks. A precise estimation is not only an essential tool for effective project management but also a means of ensuring that client expectations are met and that the project is completed to the highest standard.
Therefore, it is imperative that you take a meticulous approach when developing an estimate and consider all variables that could impact the project's outcome. By doing so, you ensure that the project is delivered within the specified timeframe and budget while still meeting the client's expectations and requirements.
To achieve this, conduct a thorough analysis of all factors that may impact the project, including material costs, labor, equipment, and potential risks. A precise estimation is not only an essential tool for effective project management but also a means of ensuring that client expectations are met and that the project is completed to the highest standard.
Therefore, it is imperative that you take a meticulous approach when developing an estimate and consider all variables that could impact the project's outcome. By doing so, you ensure that the project is delivered within the specified timeframe and budget while still meeting the client's expectations and requirements.
UAE Practice
The UAE construction market can be very volatile, with rapid changes in material prices and labor costs. You need to keep abreast of these changes, maintain strong relationships within the construction industry and adapt your strategies accordingly. The integration of building information modeling (BIM) and advanced cost estimating software provides more accurate cost forecasts and real-time cost monitoring.
In the UAE construction industry, where grand designs are realized on a monumental scale, the cost estimating process is crucial for the success of construction projects.
The common cost estimation techniques used in UAE construction projects include:
In the UAE construction industry, where grand designs are realized on a monumental scale, the cost estimating process is crucial for the success of construction projects.
The common cost estimation techniques used in UAE construction projects include:
Standard single unit estimate method. This traditional method involves establishing the costs of construction elements (labor, material, plant, subcontractors), and then adding overheads and profit.
Percentage of the estimated cost. One common methodology is adding a percentage of the estimated cost (risk-free) to cover the uncertainty in the project. [?]
Comparison of similar projects. Some practices involve comparing the costs of similar completed projects and using personal experience on similar projects to estimate costs.
Use of software. Many companies use different software for the estimation process. In the UAE, you can use the FirstBit ERP solution to keep a careful count and operate with all the information in front of you.
The Main Types of Construction Cost Estimates
There are several types of construction cost estimates:
Preliminary. An initial cost approximation based on limited information.
Plinth area. Based on the external dimensions of the structure, incorporating foundation type, roof construction, materials, and finishes.
Cube rate. Calculated based on the total building volume.
Elemental. Provides a breakdown of costs, including structural frames and floor finishes.
Detailed estimate. Offers the most comprehensive breakdown, itemizing costs by trade, including labor, materials, and equipment.
Steps in Construction Estimating
Follow these steps to improve the efficiency of project cost estimating.
1. Bidding
The bid package is a crucial compilation of documents necessary for bidding on construction projects. It encompasses various essential items, including:
Owner-contractor agreements
Bond forms
General conditions
Supplementary general conditions
Construction specifications
These documents offer detailed insights into the project's requirements, timelines, and budgetary constraints, enabling you to make informed decisions during the bidding process.
Throughout the bidding process, you review the bid documents. If you have a specialty contractor you can assign responsibilities. You also need to concentrate solely on the documents pertinent to their specific scope of work. This focused approach allows you to assess crucial details relevant to their expertise and deliver precise bids for their services.
Follow a standard process when reviewing bid packages:
Throughout the bidding process, you review the bid documents. If you have a specialty contractor you can assign responsibilities. You also need to concentrate solely on the documents pertinent to their specific scope of work. This focused approach allows you to assess crucial details relevant to their expertise and deliver precise bids for their services.
Follow a standard process when reviewing bid packages:
Verify the presence of all drawings and specifications, ensuring completeness for an accurate estimate.
Gain a project overview by quickly reviewing specifications, assessing scope, material requirements, and finish quality.
Assess material and equipment needs by evaluating structural drawings and requirements.
Consider the impact of mechanical, electrical, and plumbing (MEP) requirements on the construction process, including potential underground work.
Carefully identify nonstandard items such as unique floor plans, features, or fit-out.
When a construction project is being planned, you need to examine all the documents related to the project to make sure they have a good understanding of what needs to be done and how much it will cost.
Divide the project into smaller parts and figure out how much each part will cost. This will help you assign tasks to different groups of workers and make sure that everything is covered without wasting time or money.
Overall, the cost of the project is based on how much each part will cost. This information is used to create a proposal that is presented to the customer.
Divide the project into smaller parts and figure out how much each part will cost. This will help you assign tasks to different groups of workers and make sure that everything is covered without wasting time or money.
Overall, the cost of the project is based on how much each part will cost. This information is used to create a proposal that is presented to the customer.
2. Site Visit
A site visit is essential before bidding, and it is recommended for most projects. While specialty contractors may be less inclined to conduct site visits, opting for documentation, the primary goal remains gaining a thorough understanding of site conditions and their impact on project costs.
Difficulties you may encounter during a site visit that can cause delays and cost overruns:
Difficulties you may encounter during a site visit that can cause delays and cost overruns:
Sites with inadequate drainage or challenging subsurface soil conditions
Sites with limited access pose logistical challenges for transporting equipment and materials
Difficulty in maneuvering heavy machinery and delivering materials efficiently
Sites with poorly located utilities such as water and electricity necessitate extensive underground work for relocation or rerouting
During a site visit, an estimator engages in various activities aimed at assessing the project's viability and potential challenges. These include:
Making detailed notes and taking photographs to document site conditions and potential obstacles.
Collaborating with contractors to evaluate how site factors may impact project delivery.
Understanding local requirements and regulations, such as building codes, permits, noise restrictions, and working hours.
Checking if there are specialty contractors nearby who can handle specific tasks or if construction equipment can be easily rented in the area.
Analyzing the condition of nearby roads to determine if heavy equipment can be efficiently transported to the site and if material deliveries will encounter any logistical obstacles.
3. Material Calculation
Estimators conduct a material takeoff, also known as a quantity takeoff, by carefully reviewing the construction documents and tallying every item required for the project. Materials are typically categorized based on how they are measured. For instance:
Quantity (windows, doors)
Area (tiles)
Volume (concrete)
Length (cables)
The successful completion of large construction projects requires careful planning and meticulous attention to detail. One such critical element of the planning process involves the creation of a bill of quantities (BOQ) by the owner or engineer, which itemizes all the materials needed and the scope of work. However, to ensure accuracy and detect any discrepancies, contractors typically perform independent takeoffs, even when a BOQ is in place.
In particular, general contractors conduct takeoffs to create precise work packages that can either be completed by the contractors themselves or delegated to specialty contractors. The latter then perform their own material takeoffs based on specifications to guarantee accuracy before engaging suppliers and vendors.
Estimators rely on takeoff information to obtain a detailed list of all materials required for the project and assess the equipment needed for each work package. This information helps them accurately estimate the project's cost and ensure that the project runs smoothly and efficiently.
In particular, general contractors conduct takeoffs to create precise work packages that can either be completed by the contractors themselves or delegated to specialty contractors. The latter then perform their own material takeoffs based on specifications to guarantee accuracy before engaging suppliers and vendors.
Estimators rely on takeoff information to obtain a detailed list of all materials required for the project and assess the equipment needed for each work package. This information helps them accurately estimate the project's cost and ensure that the project runs smoothly and efficiently.
Estimators traditionally perform manual takeoffs using paper copies of drawings, rulers, and digital measuring tools to count and measure materials based on specifications. Nowadays, digital takeoff software is commonly used to expedite this process, although many still verify its accuracy. Contractors then use this information to obtain pricing from suppliers when preparing bids.
4. Solicit Pricing from Suppliers
Specialty contractors collaborate with suppliers and vendors to obtain pricing details for required materials and equipment.
Specialty contractors must consider the following when pricing materials:
Specialty contractors must consider the following when pricing materials:
Material waste. While efforts should be made to minimize waste, some is unavoidable due to material sizing. Contractors can refer to past projects to estimate expected waste.
Bulk pricing. Ordering larger quantities may be more cost-effective due to supplier pricing structures. For example, purchasing 40,000 cubic yards instead of 37,000 may result in better pricing.
Quote validity. Contractors should ensure that received quotes remain valid long enough to have their bid accepted and order materials for the project.
Bulk pricing can influence the quantity of materials ordered. For example, a contractor may need 500 square meters of tiles for a project, but it could be more cost-effective to purchase 600 square meters due to supplier pricing structures.
Additionally, quotes for materials have expiration dates. Therefore, specialty contractors must ensure that received quotes remain valid for a sufficient duration to secure their bid acceptance and order materials for the project.
Contractors lacking necessary equipment for the project must contact equipment vendors to ascertain leasing or rental pricing for the project's duration. They need to factor in various considerations, such as equipment ownership, purchase, lease, or rental, and assess how these choices impact associated costs like depreciation and maintenance.
At this stage, contractors obtain initial cost figures crucial for the project. Moving forward, estimators will incorporate additional direct, indirect, and overhead costs to determine the project's overall financial implications for the contractor.
Contractors lacking necessary equipment for the project must contact equipment vendors to ascertain leasing or rental pricing for the project's duration. They need to factor in various considerations, such as equipment ownership, purchase, lease, or rental, and assess how these choices impact associated costs like depreciation and maintenance.
At this stage, contractors obtain initial cost figures crucial for the project. Moving forward, estimators will incorporate additional direct, indirect, and overhead costs to determine the project's overall financial implications for the contractor.
5. Labor Requirements
Using data from the takeoff, estimators can ascertain the labor requirements for a project. Specifically, the estimator must outline:
The necessary roles for the project
The estimated labor hours needed to complete the project
The expected productivity of the crew based on data from past projects and project-specific information
Specialty contractors typically employ a crew mix comprising tradespeople, laborers, and assistants. General contractors may also have project-specific managers or other professionals whose roles are considered direct costs, as they are directly tied to a specific project.
Estimators utilize data from the takeoff to determine the labor needs for a project. This involves:
Estimators utilize data from the takeoff to determine the labor needs for a project. This involves:
Identifying the required roles for the project
Estimating the labor hours required for project completion
Assessing the expected productivity of the crew based on past project data and project-specific details
Specialty contractors typically employ a crew mix consisting of tradespeople, laborers, and assistants. General contractors may also have project-specific managers or other professionals whose roles are considered direct costs, as they are directly linked to a particular project.
6. Insurance
Insurance and bonding serve as risk management tools for both owners and contractors, though they add to the overall project expenses.
Most construction firms necessitate general liability insurance, while larger companies with varied roles and scopes may require additional policies such as:
Most construction firms necessitate general liability insurance, while larger companies with varied roles and scopes may require additional policies such as:
Builder’s risk insurance
Errors and omissions or professional liability insurance
Inland marine insurance
Commercial auto insurance
Contractors on public and some commercial projects may require various construction bonds, like payment, performance, and bid bonds, along with insurance. These add costs to projects, which contractors spread across their work. They might need extra bonding or insurance for specific jobs.
Construction estimators need to include the cost of bonding and insurance requirements in the project estimate.
Construction estimators need to include the cost of bonding and insurance requirements in the project estimate.
7. Overhead and Indirect Costs
Apart from the direct project expenses, estimators must account for the indirect field costs and overhead expenses essential for running a construction business.
Indirect Field Costs
Permits
Trailers or temporary offices
Site cleaning
Professional services
Equipment costs (depreciation, insurance, maintenance, taxes, and fuel)
Software
These expenses, though not explicitly outlined in the bid package, are indispensable for project construction. Hence, estimators assess the rate and duration for each item, considering factors like the need for temporary site offices.
Apart from these indirect project costs, there are general overhead expenses, also termed general and administrative (G&A) costs. These represent the basic operational expenses of the business, which contractors must bear regardless of project activity.
To sustain business operations, contractors include overhead costs in their estimates by distributing them across all their projects annually.
Apart from these indirect project costs, there are general overhead expenses, also termed general and administrative (G&A) costs. These represent the basic operational expenses of the business, which contractors must bear regardless of project activity.
To sustain business operations, contractors include overhead costs in their estimates by distributing them across all their projects annually.
Typical Overhead Expenses
Rent for office space
Administrative salaries
Software subscriptions
Utilities
Taxes
Depreciation
Insurance
Estimators evaluate the company's projected annual revenue alongside its total annual overhead costs. Using these figures, they can reasonably allocate a specific percentage of the overhead cost to each project.
8. Profit and Contingency
Once all construction project costs are calculated, the estimator will make adjustments to accommodate both profit margin and contingency. Profit represents the contractor's earnings from the contract, which can be reinvested for business growth. Contingency, meanwhile, serves as a buffer for unexpected overruns and waste typically encountered in construction projects.
Every construction company sets its own minimum desirable profit margin based on factors like growth objectives and prevailing market conditions.
Likewise, contingency figures differ widely across the industry, influenced by factors such as construction type, company scale, and project risk.
Every construction company sets its own minimum desirable profit margin based on factors like growth objectives and prevailing market conditions.
Likewise, contingency figures differ widely across the industry, influenced by factors such as construction type, company scale, and project risk.
Typically, construction firms allocate between 5-10% of the contract price for contingency purposes.
After completing this process, the estimator has established the sales price necessary to cover all project expenses, including:
Materials
Labor
Equipment
Indirect field costs
Overhead costs
Armed with this figure, contractors are ready to submit a competitive bid or initiate negotiations with a project owner or general contractor.
How to Manage Cost Estimates in Construction Projects with FirstBit ERP
Estimating costs can be stressful, but adopting a smarter approach is the key. Manual takeoffs are time-consuming and prone to errors. Construction cost estimating software offers accuracy, organization, and time-saving benefits, putting you ahead in the game.
Using the FirstBit ERP software will import your data into a spreadsheet that is easy to read and distribute.
The software gives you a workspace to customize and save your work, providing access to a network where you can submit more bids and win more profitable projects.
With FirstBit ERP software, you can create detailed project estimates for your construction project.
Using the FirstBit ERP software will import your data into a spreadsheet that is easy to read and distribute.
The software gives you a workspace to customize and save your work, providing access to a network where you can submit more bids and win more profitable projects.
With FirstBit ERP software, you can create detailed project estimates for your construction project.
Project Estimates (create) form in FirstBit ERP
Also you can keep profit and cost records in the system and control your budgets efficiently.
Project estimates tab in FirstBit ERP
An ERP system enables you to utilize precise and up-to-date data and metrics to calculate the actual costs of a project, including real-time job costing. This allows you to make improvements on the go and accurately predict your profits, ensuring that you always have a clear understanding of your financial standing.
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