You need a reliable budget to keep your business profitable. For an accurate budget estimate, construction companies need to know the total project expense and where that expense is going. Here, construction estimating steps in. Estimating includes each cost of the project. An estimator needs to have an in-depth understanding of the estimating process and the construction industry. Therefore, we have provided a complete overview of construction estimating and how it works to benefit construction trades.
What Is Construction Estimating?
The term “construction estimating” refers to calculating all the anticipated project costs. This includes direct costs (material, labor, equipment) and indirect costs (fees, permits, licenses, machinery mobilization). Accurate construction estimating is essential, as a minor change in the cost estimate can affect the contractors’ profit percentage.
At the end of this article, you will learn the fundamentals of construction estimating and its significance in construction.
Why Is Construction Estimating Important?
Precise and accurate construction cost estimates drive every successful construction project. Here are some points that further add to its significance:
Enriched Project Planning
Planning a project requires knowing its duration, cost, quantity of materials, and type of machinery needed. Many departments are involved in construction, and an in-depth understanding of the project costs helps to keep them well-aligned.
Higher profit percentage
The more precise cost estimates, the better it is for the project’s success. An accurate cost estimate helps you set a practical profit margin and work more efficiently on your project.
Finer resource management
Most construction firms involve manifold resources, such as various construction departments, trades, suppliers, and distributors. Estimating all the project expenses helps them regulate their financial remittances and ensures that everyone gets paid promptly for his role.
Enhanced reputation
Inaccurate construction estimating may cause you to lose bids and significantly impact your reputation in the construction market. Accurate construction estimating improves your proficiency and generates more customer trust, leading to more positive reviews and referrals.
Critical Components Of Construction Estimating
| Component | Description | Examples |
| Direct Costs | Costs directly tied to the project and its execution. | Materials (e.g., cement, steel), Equipment (e.g., cranes, mixers) |
| Indirect Costs | Costs that support the project but are not directly involved in the physical work. | Administrative fees, Permits, Licenses, Utilities |
| Labor Costs | The wages, taxes, and other expenses associated with labor required for the project. | Construction worker wages, Overtime pay, Taxes |
| Sub-Contractor Costs | Costs of hiring specialized labor or subcontractors. | Electricians, Plumbers, HVAC specialists |
| Overheads | General costs related to running the business that are not tied directly to the project. | Office expenses, Software, Utilities |
| Profit Margin | The margin added to the total project cost to ensure profitability. | Typically a percentage of total costs |
When To Use Construction Estimating
You should go for construction estimating in the initial stages of your construction project. Until bids open, you should have a rough concept of the project cost. As the construction progresses, you can organize it accordingly.
How Does The Construction Estimating Process Work?
The construction estimating process entails the same principles, whether the constructor is a contractor or owner. It starts with the initial review of bid documents and accounting for all the costs that add to the project’s budget cost estimate to streamline your construction trade.
Step 1: Describe the Project Scope and Requirements
The bid package comprises all the details required to gain an insight into the project’s budget. It includes all the construction and contract documents, which are of prime importance in the construction process and in outsourcing skilled employees if needed.
The documents include the structural drawings, marked plans, and construction blueprints. Once the bid package is reviewed, the contractor will have a clear idea of how much material and equipment will be used for the project.
Step 2: Quantity TakeOff (QTO)
The next step is quantity takeoff, also termed material takeoff. In this step, the construction estimator lists all the required materials, their price, number, and quantities. This step is crucial for contractors as it gives them an in-depth understanding of how to help create work packages. Work packages entail necessary information like which material the specialist contractors will bring in, which equipment to rent out, etc. After the work package is created, the contractors can start approaching the vendors for the pricing and delivery of materials.
Step 3: Estimate the Costs
With all this information, construction estimators can initiate takeoffs for materials, quantities, labor, equipment, and other relevant tasks. They can perform this estimate manually using paper, pencil, drawing sheets, and colored pencils. However, using the latest construction cost-estimating software, such as R.S. Means, is advisable. It speeds up the process and saves more time, which can be utilized in other practices.
Step 4: Overheads and Profit
In this step, the construction estimators calculate the overall project cost, including direct, indirect, labor, and sub-contractor marketing costs. A careful review of the bid package will assist the contractor in laying out all the costs, adding to the project cost. While direct and indirect costs are linked to the construction, overheads continue to show even when there’s no project to run—for example, paying for the software, running the office, paying the company’s utilities, etc.
Step 5: Review and Finalize
In this final step of construction estimating, the estimators submit a final number of project costs, including all costs of material, labor, equipment, overhanging, traveling, office management, etc., while returning a healthy profit percentage. If the construction estimating is done using digital construction estimating software, it is advised to check if any item is missing or left out. After all these steps, submit the bid finally.
Levels Of Accuracy In Construction Estimating
The accuracy of the construction cost estimates at the initial stages of the project is less and higher when it is anticipated in the latent stages of the project. Project cost estimates are characterized by the level of accuracy by which they are defined at the start of the project.
The ASPE, American Society of Professional Estimators categorizes construction estimating into five levels of accuracy:
| Level | Description | Accuracy Range |
| Level 1: Order of Magnitude | Very rough estimate based on historical data and expert judgment. | 25% – 75% |
| Level 2: Intermediate Estimate | Used for large-scale projects to assess project viability. | 15% – 30% |
| Level 3: Preliminary Estimate | A more detailed estimate to determine cost units and establish a cash flow. | 10% – 20% |
| Level 4: Substantive Estimate | Based on unit costs and detailed analysis of project drawings. | 5% – 15% |
| Level 5: Definitive Estimate | The most accurate estimate with all known costs accounted for. | 1% – 5% |
Level 1: Order of Magnitude
This level of accuracy in construction estimating is a substantially rough estimation of the project at the start. It is entirely based on expert reviews and a cost comparison with previous, similar projects. The range of this order of magnitude estimation is 25-75 percent.
Level 2: Intermediate Estimate
The core purpose of this level of estimation accuracy is to determine the viability of a project from the perspective of a general construction project. Massive-scale commercial construction trades utilize this estimate to decide whether to take or leave this project.
Level 3: Preliminary Estimate
The preliminary estimate provides a detailed scope of the project costs to determine the cost units. This estimate provides a foundation for creating the cash flow of the construction project. Sometimes, the entire project may be authorized entirely based on this estimate, so it needs to be as accurate as possible.
Level 4: Substantive Estimate
This estimate is based on estimated unit costs. These unit costs are determined after a complete analysis of the project drawing plans, goals, and critical products to be delivered. Furthermore, they are utilized to avoid project costs flowing outside the budget.
Level 5: Definitive Estimate
It is the most accurate and precise cost estimate since it is developed when all the costs are known. It creates bids, work packages, tenders, and cost baselines. However, all estimates are adaptive to change in case of cost updates and fluctuations.
3 Cost Estimation Methods
Historical
Historical cost estimation refers to the costs included in a similar previous project. For example, if you are fitting a new ceiling, you can adjust the final expenses of the ceiling adjustment of the last project due to soaring inflation. This is the quickest method and can save more time, but it lacks accuracy if you don’t have complete information about the project.
Parametric
Parametric estimation refers to calculating the estimated project cost by measuring parameters to create a construction cost estimate. It is done by multiplying the standard rates by the project’s dimensions. All you need is the construction site’s square footage, the cost per unit, labor charges, and required materials.
Bottom-Up
This estimation refers to the cost calculation of each element individually. For example, you can estimate the cost of brickwork, plastering, and plumbing works separately and then add all the components. This is the most accurate estimation method, but evaluating and getting vendor references for each element individually is time-consuming.
Construction Estimating Best Practice
Know Your Client
The initial step in professional construction estimating is comprehending your clients’ expectations and requirements. Ensure that you clearly understand their requirements and specifications, not only in financial terms but also in terms of time, budget, and objectives. This perspective helps lower unrealistic expectations and prevent misconceptions at later stages of the construction project.
Don’t Underestimate The Labor
Labor dues are the most common expense contributing to the inflated construction cost estimate of the project, and they are most often underestimated. Always set some more money aside in case of delays or time overruns.
Talk To Your Suppliers
The relationship you have with your vendors is of prime importance. You can communicate effectively with them if you have good relations with them. You can easily procure materials from them and discuss the pricing with them. If they state high prices, you can negotiate them to adjust them to your budget.
Automate As Much As Possible
If you are implying manual takeoff estimation methods, there is a high chance of errors. Therefore, automate the takeoff as much as possible with cutting-edge construction cost estimating software. This will empower you to calculate the costs with merely a few clicks.
Use The Right Software
Always opt for the software that makes things easier for you. Search for something that costs less, minimizes errors, and aligns your construction trade smoothly.
Common Cost Estimation Problems
Not Conducting A Site Visit
Before bid submission, you are advised to visit the construction site. It gives them a clear idea of site conditions affecting project costs. Not visiting the site prior leaves you at the edge, where you are highly vulnerable to extra expenses that add up to your project cost.
Inaccurate Takeoffs
Takeoff estimation software is a great tool for aligning the construction process. However, these tools are only suitable for their users. Therefore, always recruit experts for the routine use of these tools and software.
Labor Costs
Labor dues, which are most often underestimated, are the most common expenses contributing to the inflated construction cost estimate of the project. Labor costs contribute 60% of the project costs. You need to concentrate on how many hours you will recruit labor. Always set some more money aside in case of delays or time overruns.
Material and Supplies Cost
Costs for building materials fluctuate constantly, and it is hard to stay consistent throughout the construction process. For this purpose, you need to develop strong links with the vendors. In case of material unavailability, they can suggest other alternatives.
Failing To Assess Risks
Every construction project involves risks. Risk management is a vital component of the cost estimate. So always ensure that you set aside a portion of money for risk assessment and management, if necessary. This will help you have a clear estimate of your profit margins.
Why Use Cost Estimating Software?
Manual takeoffs are time-consuming and susceptible to errors. Construction cost estimating software helps you save time and work smart. You can arrange everything with a few clicks, including material, labor, equipment, and quantities. This software makes estimating the cost of a construction project more straightforward to find and read. It gives you access to a network for bid submissions and securing more projects. You can also persolanize and save your work.
How To Use Construction Estimating For Bids
Regarding accuracy, bid estimates fit the Level Five—Definitive estimates criteria in construction estimating. Bids comprise the tender documents, direct and indirect costs, material takeoffs, and construction documents. In the construction estimating process, the construction estimators review the bids, perform the estimates, and submit the bids to contractors to ensure project feasibility.
How To Determine The Budget From Estimates
The initial step in construction estimation is to establish a cost estimate that is as precise as possible. The construction estimator must also include the risk management expenses alongside the contingency plans while estimating the construction. This budget estimate can be used as an outline for the investment and allocation of resources to complete the project.
Role Of A Construction Estimator: Do You Need One?
Every construction firm wants to submit bids that are as accurate as possible. This helps them improve their proficiency, generate more clients, procure material from vendors, and ultimately win more projects. Generating that level of accuracy requires a construction estimator.
Unlike the popular ongoing myths, construction estimators don’t just crunch numbers and values. They hold expertise in contingency and marked-up plans, profound knowledge about the ongoing market trends, firm links, and relations with the vendors and suppliers, and insight into all kinds of direct, indirect, and overhanging prices. They play a crucial role in any construction firm’s success, which is why the role of construction estimators can’t be denied. You should abstain from estimating the values and recruit a seasoned construction estimator.
Conclusion
Construction estimating is essential for all construction trades to distinguish them from others in the market. Companies must invest considerable time and resources into it, a vital investment that pays off in the long run. Furthermore, it’s crucial to grasp the fundamentals of construction estimating, as they can cause any project to grow or break down.
Construction estimates are a stepping stone in bid preparation, ultimately leading to the securement of more projects. Without accurate estimates, the results of construction estimating can be disastrous.
