Construction Cost Estimating: Everything you need to know

10 minute read
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As a contractor, before you agree to start a job, you want to have a clear and accurate forecast as to how much a project will cost and how long it will take to complete. 

For this reason, construction cost estimating is an essential function that every construction company needs to carry out. The ability to develop accurate cost estimates is what will lead to the success of your businesses. 

Simply put, a project that starts off with reliable cost estimates will have a much greater chance of being successfully completed.

What's involved in construction cost estimating?

Construction estimating is the process of predicting all costs associated with carrying out a project from start to finish. 

The process boils down to three key objectives: 

  1. Establishing the work required to fulfil a project scope
  2. Estimating the associated costs
  3. Evaluating (and avoiding) risk 

As a construction cost estimator, it's your role to examine a project brief and work out all of the materials and labor needed to build the structure. 

From there, you develop a construction cost estimate to predict how much it will cost to build.

The costs will vary greatly from project to project so there is no set or fixed list. Costs can include everything from:

  • Location
  • Supervision
  • Project duration
  • Labour
  • Tools
  • Raw materials
  • Additional supplies
  • Specialised machinery
  • Transportation

Why is cost estimating carried out?

Cost estimating is a long and complicated process. So why do we do it? Well, it’s necessary for a number of reasons:

1. It provides stakeholders with an indication as to what the project will likely cost. These stakeholders include the construction company, Subcontractors, the client and any additional investors.

2. It gives these stakeholders all the necessary information needed in order to make decisions about a project. For example, they may choose to scale back on certain aspects of the project, choose between alternative materials or adjust timelines.

3. At the end of a project, the cost estimate is used as a means of judging the performance of a project and how well it was carried out.

What makes a good cost-estimator?

Having a reliable cost-estimator is crucial to the success of your business. Cost estimators rely on their expertise and experience in order to accurately estimate costs for construction projects.

Inaccuracy and poor estimating practices will put you at risk of suffering cost overruns. This leads to delays and more importantly damage the reputation of your business in the long run. 

Qualifications and characteristics to look out for when hiring an estimator include:

  • Strong project management and organisational skills
  • Ability to problem solve, assess risk and think outside the box
  • Understanding of architecture and/or engineering
  • Ability to read technical drawings
  • Knowledge of construction materials and methods
  • A holistic approach to evaluating bids 
  • Experience in preparing estimates that are accurate and clear 
  • Aptitude for cost optimization 
  • Good interpersonal and relationship building skills
  • Strong ethics and sound judgement

5 step cost estimating process

Construction cost estimating is more than simply creating a list of costs and deliverables. 

The estimator must also carry out a detailed, in-depth analysis of the project scope which will lead to a list of credible assumptions that are needed to anticipate the total project cost. In essence, a holistic analysis of the entire project scope is required. 

Several rounds of cost estimates will be created with increasing levels of accuracy and detail as things progress

1. Order of Magnitude Estimate

This is where things start off. Think of this as a rough estimate in the pre-design phase. It is used to determine the feasibility of the project scope. 

The typical range in accuracy at his level is from -25% to +50%.

2. Schematic Design Estimate

This is an intermediate level estimate which is so called as it’s created during the schematic design phase. 

This estimate is used to decide whether or not to proceed with a project based on how feasible it is perceived to be. This type of estimate usually has 15–20% margin of error.

3. Design Development Estimate

As known as the preliminary estimate, this estimate is based on the project designs. It contains more detail around the project scope and is used to consolidate unit costs. 

The margin of error for this estimate usually sits around 10% and therefore it is accurate enough to inform financial decision making.

4. Construction Document Estimate

This estimate is informed by the construction specifications and drawings. It is based on estimated unit costs and by analysing finalised project designs, objectives, and key deliverables. 

They will typically run off a margin of error of 5% and used to control project expenditures and avoid cost overruns.

5. Bid Estimate

This estimate should be the most accurate and reliable. It is the one that is given to the client. The client will likely receive multiple bid estimates from  a number of different contractors. 

Each client will have their own criteria for how they will judge or grade each bid estimate and ultimately help make their decision. It is important that bid estimates are clear, easy to read and well presented. We've delved deeper into each of the 5 step construction cost estimating processes if you want to learn more.

Software for Cost Estimating

As you can see, there is a huge amount of work involved in construction estimating. It requires razor sharp attention to detail and also a significant time investment. 

It’s important that you don’t rush the process as this is what often leads to errors and other common pitfalls such as underestimating overheads or making educated guesses.

While traditional methods of cost estimating are still in practice, many companies are now turning towards digital methods to help drive both time and cost efficiencies. Investing in estimating software, like ConX Measure, can help you save time and reduce the chance of errors and miscalculations. 

Cost estimating software is becoming increasingly popular for a number of reasons:

  • Saves time and allows cost estimators to work more efficiently
  • Reduces human error therefore leading to higher accuracy 
  • Allows for consistency across all project scopes and quotes 
  • Work can be reviewed with ease. You can edit jobs in real time, further enabling your team’s capability to stay on track as projects progress.

Investing in cost estimating software will improve your bidding speed, accuracy and overall consistency. 

If you have not yet invested in a cost estimation software application for your company, there has never been a better time. An investment in the right software will set you apart from you competitors and give your business a heightened sense of professionalism. 

Methods to Prepare Construction Cost Estimates

There are a number of ways you can calculate construction costs. The most widely used Two Methods to Prepare Construction Cost Estimates are historical costs and relying on Average Industry Pricing. It is likely that you will use a combination of both when assessing the costs of an upcoming project.

  1. Average Industry Pricing

Cost guides are helpful references for anyone who prepares building and construction project estimates using the average industry pricing method. They provide approximate costing information on individual labour, material and plant hire to make it easier to estimate more accurate. Organisations like RICS provide construction data that you can tap into for a fee.

When you’re developing an estimate based on average industry pricing, you will need to take the following criteria into consideration:

  • Quantity take off
  • Material prices
  • Labour rate
  • Labour hour  
  • Subcontractor rates
  • Equipment costs
  • Contingencies
  • Indirect costs
  • Operational costs

2. Historical cost estimates

Based on historical data, trends and past projects, skilled estimators will be able to leverage their past experience and historical data from previous bids, for example.

Historical data will be used for cost estimate techniques including: 

  • Cost per functional unit
  • Cost per unit of floor area
  • Stick estimating
  • Allocation of joint costs
  • Elemental cost estimating

These techniques are typically used in the early stages of cost analysis and throughout the design process.

When basing estimates on historical trends, it’s also a good idea to evaluate the location and city where the project took place because local real estate markets can have drastic price differences based on local economies as well as different inflation rates. 

Labor costs may vary between different regions which can have a huge impact on estimate accuracy, so it’s always wise to evaluate local labor costs when looking at historical trends. 

Conclusion

As the market becomes increasingly more competitive, contractors are striving to turn around bids faster in order to win business. 

However, It is important to avoid rushing the process and instead place emphasis on getting the basics right. Failure to do so can make or break a construction project. If a cost is off, even by a small margin, it can cause substantial problems for both you and your client.

Accurate estimates are critical for managing budgets and timelines so make sure you are using a good template. ConX Measure has one that you can download for to help you with your future bidding.

Find out how ConX Measure can help digitise your takeoffs , estimating, quoting and ordering process today.

Get started with a free account in minutes.