While you may have the ins and outs of the estimation process down pat, the market is changing and it’s now critical to get the costs right and maintain a healthy profit. That could mean getting back to basics. Reevaluate your process to be sure that incorrect cost estimates don’t eat away at your profit margin or damage your reputation.
You can learn to estimate construction costs so you can win more jobs, maintain your profit margin, and improve your business’ reputation.
What is construction cost estimating?
Construction cost estimating is a way of deciding on a job’s feasibility, calculating a bid/quote or creating a project’s budget. It helps with planning, profit margins, resource management, and scheduling. It considers all the building costs necessary to complete a construction project – direct and overhead costs, then calculates the best price you can perform the job.
When is the right time to estimate a job?
The cost estimation process should start well before construction, or in the idea stage. If you have no concept of the project’s costs, then you can’t give an accurate quote, or make a winning bid. A construction cost estimation can be reviewed after the building begins, but a detailed cost estimate must be produced before you start construction to avoid any issues or losses.
Agree on the project scope
The first step is to agree on the project scope, or the order of magnitude. This is where you determine your client’s expectations, the project’s function, complexity, and design. You also need to consider any legal or regulatory issues that can affect the building process, the locality of the project and any other specialty concern the project must include.
Design phase
Once the project’s scope is agreed upon then a design is drawn up. A cost estimation at this stage looks at the materials and the construction process to consider the most cost-effective and practical path to take. The schematic design estimate is part of the construction documents that bids are formed from.
Estimating construction costs for bids
When creating a construction cost estimation for a project bid, data from the project’s construction documents like the design estimate, subcontractor’s quotes, quantity takeoffs – material costs, construction processes, direct and indirect costs and your profit margin are used to make a more detailed cost estimate. The better the total cost of your bid, while maintaining quality, the better your chances are having your bid estimate accepted.
For some projects, this can be the last stage. Even though your bid was rejected you still have the costs associated with preparing the bid. So, don’t forget that these costs have to be recouped too and may need to be covered by other projects that you have been awarded; an indirect cost that must be calculated into future estimates.
Construction costs to include
You need to include everything that comes with a price tag, whether an indirect or direct cost. Indirect costs include the rent and the maintenance costs of your office, taxes, utility bills and the costs of creating bids, including those not accepted. Direct costs include labor, materials and equipment.
Labor costs
Labor costs are one of the biggest expenses in a construction project, and can be around 50% of the overall project costs. To get the labor cost you need to know how much time the project will take to complete and how long before it starts, both critical especially for jobs that don’t start for a long time or those that run for a long time. Bad weather and pay raises need to be factored in or your will have cost overruns and your profit margin will suffer.
Quantity takeoff
A quantity takeoff is a detailed list of all the materials needed for the building project to be completed. Such as doors, timber, carpet, air conditioners, nails, light switches, wiring, tiles, etc. Materials must be counted and measured correctly to ensure actual costs don’t differ from the estimate.
Different types of estimates
There are five types of cost estimates used in the construction industry. Each one is created for a different reason and can be done for the one person or for different people involved in the project. Perhaps the client wants to know what they can afford, a builder needs to ensure they make a profit, a construction company needs to produce a quote or an engineer’s estimate can show whether the building materials or construction methods are going to be too costly. Each estimate is crucial and should be carried out at the correct time to have the best impact on the project.
Feasibility estimate
The first step should be the feasibility estimate. This is where you look at the order of magnitude, or scope, of the project and determine whether it is worth your time or not. Perhaps it uses a construction method your company isn’t set up to perform and would be too costly to implement, then now is a good time to know that, before you sink too much time into it.
This is the least accurate of the estimates performed for a construction project and is mostly based on historical data or previous experience. The main aim is to see whether you should even consider going forward with the project or not.
Intermediate estimate
Once you’ve decided the project is feasible, then you want to have an intermediate estimate, or base estimate created. This estimate looks deeper into the size, scope and complexity of the construction project, and considers any issues or challenges that may occur. It still isn’t a completely accurate estimate, it is based mostly on knowledge, previous experience and historical data, but not targeted, factual information.
Preliminary estimate
Now, blueprint or design data is incorporated into the estimate. The preliminary estimate categorizes the costs and begins to look at the design details. This is where calculation errors need to be picked up and corrected.
Substantive estimate
The substantive estimate is created after the design is agreed upon and adds more accurate material costs to the process. At this stage materials can be exchanged to lessen the costs, or it might show that the budget can allow for gold trims instead of silver. This is the time when the last of the changes should be made.
Definitive estimate
The last step is the definitive estimate. This is created after the contracts are signed and all alterations have been completed. At this step, everything should be agreed upon and details determined. This is the most accurate of the estimates and could also be called an accurate cost calculation. Once this is completed building construction can begin.
Now, you are armed with the right information to do estimations in a cost-effective way. And, you can make them more efficient with an online tool like BuildXact. Book a demo now with BuildXact and or get a 14-day free trial of our estimating and construction management software so you can discover the benefit of fast, accurate estimates.