Understanding Cost Estimation In Construction Projects

Good cost estimation in construction is a vital aspect of any new project. Accurately estimating costs will help prevent potential budget issues and financial losses. This is why it’s important to have a precise breakdown of all expenses right from preconstruction planning onwards.

In this blog post, we explain the basics of construction estimating, including a step-by-step description of the process and a list of common challenges. We also review some of the important benefits of software solutions for timely and accurate estimates.

Key takeaways:

• Cost estimating in construction is the process of calculating the overall required costs for a project, including direct and indirect costs.
• Cost estimation for bidding leverages early design documents, while project management estimates are completed after the contract has been signed.
• Many large companies hire dedicated estimators, but project managers, architects, and outside experts continue to play important roles in the estimation process.
• Direct costs, indirect costs, subcontractor costs, markups, and risk provisions all weigh into accurate construction cost estimating.
• Commissioning, team formation, structure design, contractor bidding, contract signing, and the close-out are among the key activities in estimating.
• Cost estimates in construction are classified into levels such as preliminary, intermediate, and detailed estimates, depending on the state of the project and the precision of available data.
• Site visits, historical data, quantity takeoffs, and a full accounting of all labor, material, equipment, and overhead costs combine to deliver reliable cost estimates.
• Common estimation challenges like unexpected changes, data transfer errors, and subcontractor comparisons can be overcome with the help of effective construction cost management software solutions.
• Advanced construction estimating software provides direct links to material and subcontractor databases while eliminating errors through seamless on-screen quantity takeoffs.
• RIB Candy and RIB CostX streamline the estimation process with convenient forecasting, cash flow, subcontractor management, and electronic quantity takeoff features.

What Is Cost Estimation in Construction?

Cost estimating in construction is the process of calculating the overall required costs for a new building project, including direct and indirect costs. Contractors use cost estimates when they decide whether to bid on a project.

Clients considering large projects often request numerous cost estimates, including those prepared by contractors and those calculated by independent estimators. Being able to accurately forecast costs will help you stand out from the rest. Accurate construction cost estimation also helps define the project’s scope, necessary resources, time frame, and budget.

When Should You Do a Construction Cost Estimation?

The best time to estimate construction costs is when the project is still in the concept phase. Without a clear idea of the project expenses from day one, you may run into potential challenges, such as taking on more than you can handle or suffering financial losses.

Cost Estimation for Bids vs. Cost Estimation for Project Management

Cost estimation for the construction bidding process utilizes data from the design documents and construction processes, and it includes all the direct and indirect costs involved.

Project management estimates for construction cost control are done after the contract has been signed, but before construction commences. This facilitates proactive planning and ensures all parties adhere to the project timeline and budget.

Who Is Responsible for Construction Cost Estimating?

Either an individual or a team may be responsible for construction cost estimation, depending on the type and size of the project. Typically, a large company will have a dedicated construction estimator, who is tasked with preparing and estimating construction costs.

Estimators and project managers require the input of construction architects and engineers throughout the process to ensure that a project is financially feasible and meets the scope requirements. In some cases, outside experts like sustainable construction consultants or specialty contractors also get involved in estimating construction costs.

Estimators review blueprints, specifications, historical data, and other information regularly to ensure their assumptions are correct and the information they rely on is up to date.

How To Estimate Construction Costs?

When calculating construction costs, there are various inputs you need to consider. Calculations are completed based on the following:

• Direct costs, such as materials, labor, and equipment expenses
• Indirect costs, which include overhead, site establishment costs, project team supervision, utilities, legal fees, permits, and more
• Subcontractor costs, which include specialized contracted work expenses such as labor and materials
• Markup and risk provisions, which are added to actual material and labor costs by the contractor to account for overhead, profits, and unforeseen price increases or delays.

Various calculation methods and strategies have evolved over the years to make it easier to create a reliable total based on the sum of disparate costs.

• Unit cost methods rely on accurate takeoffs and labor time estimates to compile the total based on all individual elements.
• Square footage methods assess the total cost by multiplying the cost of labor and materials for a pre-defined space, based on the size of the area to be completed.

Importance of Cost Estimation in Construction Projects

With precise construction cost estimates, project managers can identify potential risks, create realistic timelines, and develop contingency plans to ensure efficient project management in construction. This level of planning helps to ensure that construction projects are completed on time and within budget.

Of course, estimating the cost of any project with absolute precision is impossible, and unforeseen reasons can always cause a project to fail. A skilled estimator accounts for as many factors as necessary to create the best possible estimate. Some of the considerations that go into successful construction cost estimating include:

Financial planning

An estimate of construction costs is much more than an isolated activity, since it sets the stage for important financial decisions and activities that follow. This includes the formation of budgets and client expectations that define financial success or failure throughout the project. When outside funding is secured, an accurate estimate builds investor confidence in the viability of the project and the credibility of the team.

Accurate estimates also prevent cost overruns and budget shortfalls that can derail progress or lead to cost-cutting measures late in the project schedule. All future decisions regarding scope, scheduling, and procurement require an accurate estimate as an input to ensure positive financial outcomes.

Risk management

Construction risk management practices involve an evaluation of all design, site, material, logistical, and financial risks to weigh their importance and develop appropriate mitigation strategies and corrective actions. A clear picture of anticipated costs is required for effective risk management. Accurate cost information allows the cross-functional team to understand the impact of price hikes, natural disasters, labor disputes, and other situations leading to variation or overruns.

Contingency planning

Contingency planning is where risk management and cost estimating in construction overlap. Assessing the likelihood of unforeseen events affecting costs allows the project team to recommend realistic contingency budgets that prevent cost overruns without inflating the schedule unnecessarily.

Competitive bidding

Accurate cost estimation in construction projects allows contractors to submit bids that account for all relevant project costs while still providing a reasonable profit margin. Competitive bids among multiple contractors or subcontractors generally indicate that estimators have taken important cost factors into account, and the contractors submitting bids have recognized and factored in the same cost drivers.

Estimates that are grounded in reality make it easier to recognize underbidding practices that can lead to cut corners, incomplete work, or poor quality, as well as overbidding attempts that rely on a lack of client knowledge to artificially inflate profits.

Profitability

Learning how to estimate construction costs accurately is also a good way to ensure project profitability. An accurate assessment of expected costs enables contractors to set their bid based on profit expectations. If the estimate is later found to be inaccurate, this can eat into contractor profits, especially when they are working under a fixed price (lump-sum) contract that does not allow for cost adjustments.

The Construction Estimation Process Explained

To know how to do a cost estimate, you must understand the construction process and the basic phases of a construction project:

1. Project Commissioning

Commissioning is a verification process that guarantees the builder’s adherence to designing, constructing, and delivering projects in line with the owner’s specifications. Commissioning providers begin this process early during construction, and it may continue through the first year of occupancy or use.

2. Determining Requirements

The most significant early stage of any project is pre-design or planning. This requires identifying a project’s requisites such as its function(s), projected expenditure, geographical location, and associated legal requirements.

3. Forming a Design Team

To form a design team, the project owner hires an architect to identify other experts and consultants, as needed. This might include structural engineers, civil engineers, sustainability experts, acoustic specialists, and other skilled professionals.

4. Structure Design

The structure design phase is when important systems and building elements like foundations, beams, columns, landscaping, and room layouts are developed in detail. The design phase also includes a thorough evaluation of loads, forces, and outside factors that influence building safety and stability. Building Information Modeling (BIM) platforms are often used to design and collaborate on elements efficiently in the virtual realm.

5. Bidding Process

During the bidding phase, the construction documents are made available to contractors who want to bid on the project. These documents include a summary of work to be performed, guidance on how to submit proposals, a draft of the contract agreement, and any financial and technical prerequisites required by contractors. To ensure transparent and fair construction bid management, all contractors receive the same information.

6. Signing the Contract

After the bid tendering and selection process, the chosen contractor will proceed to execute a set of contract documents with the owner. Bidding papers serve as an official agreement between the contractor and owner. The type of contract can follow various models, such as lump-sum or turnkey (where contractors estimate a fixed amount for the total project cost and finalize it once design plans are almost done).

7. Construction Phase

During the construction phase, the contractor is responsible for supervising work in accordance with the documents provided. To handle specialized aspects of this process such as plumbing or foundation work, general contractors often employ subcontractors to complete various tasks. Throughout the project duration, the contractor gauges actual expenses against projected costs to ensure profitability.

8. Close-Out

As the builder approaches the final stages of constructing a building, the contractor will request the architect to verify the near-complete status of the project. During the close-out stage, the contractor provides the architect with a document known as a punch list, which contains details of any incomplete work or corrections that must be done prior to completion.

9. Completion

Upon completion of all tasks in the punch list, the architect conducts a final inspection to confirm the contractor has followed construction plans and specifications accordingly. Once the structure has been verified, the architect will issue an official certificate of completion, signaling that the contractor may be paid in full.

Levels of Cost Estimation in Construction Projects

There are different types of construction estimates that occur throughout the construction process. The level of estimate differs depending on the stage of the project.

1. Order of magnitude estimate: Determines feasibility before the project starts. This rough estimate is based on expert judgement and comparative jobs.
2. Intermediate estimate: Predicts costs once the scope is more fully defined and is often used to determine whether a project is worth pursuing.
3. Preliminary estimate: A slightly more accurate estimate based on early plans and blueprints, which many projects base their budgets on.
4. Substantive estimate: This estimate looks at the project designs, goals, and deliverables. The contractor then creates an estimate based on projected unit costs.
5. Detailed estimate: This estimate is created when the contractor knows most (or all) of the actual costs associated with the project. This is the most accurate form of estimate and is used to create tenders and bids.

How To Estimate Construction Costs

1. Review the bidding package

The bid documents contain construction specifications and contract documents, which serve as the starting point for understanding the scope of the project and requirements.

2. Do a site visit

Construction site visits provide key observations and insights about the environmental and logistical aspects of the project, which can have a considerable impact on its viability, schedule, and expenses.

3. Benefit from historical data

Historical data used for estimating construction costs can come from a variety of sources, including databases, catalogs of vendor data, and successful past bids (assuming these proved accurate). Regardless of the source, it’s important to make sure the data is reliable. Experienced estimators and experts like Matthew Miles of Melrose Construction in Australia often recommend using a trusted industry standard source and “benchmarking against the same cost codes for each project to build a reliable database.”

4. Do a quantity takeoff

When completing a quantity takeoff, estimators ensure precise calculation of every material necessary for the project, including lumber, drywall, concrete, wiring, and much more. Advanced takeoff and estimation software tools allow estimators and quantity surveyors to perform accurate quantity takeoffs quickly based on 2D drawings, 3D CAD files, or building information modeling (BIM) project files.

5. Evaluate costs

Once a complete quantity take-off has been done, contractors will engage with suppliers and vendors to get pricing information, considering several factors:

• Labor costs based on the types of services required, prevailing wages, and expected overtime or bonus pay
• Material costs factor in the physical components required for building, such as wood, steel, concrete, and different fixtures, along with their delivery costs and taxes.
• Equipment costs include expenditures for fuel, leasing, maintenance, and operator compensation. Probable equipment downtime, repairs, and upgrades should also be calculated.
• Insurance premiums can be requested from a broker or estimated based on project duration, scope, location, and claim history.
• Overhead and indirect expenses often include administrative salaries, bookkeeping services, building permits, and other essential costs outside of direct labor, material, and equipment expenses.

6. Finalize with profit and contingency

When calculating the total project cost, estimators will include a profit margin and contingency fund to account for unforeseen expenses and secure a profitable return on investment.

7. Never stop reviewing

Cost estimation in construction is not a “one and done” activity. Unanticipated difficulties, shifts in the market, and scope changes can lead to gaps between preliminary and detailed estimates. It’s critical to continuously review and adjust estimates to make sure they reflect the realities of the project.

Common Construction Cost Estimation Challenges

Construction projects are known for their variation in scope, size, location, duration, and additional factors that can drive expenses and cause overruns. While this variation is part of what makes a career in the industry exciting, it can also lead to challenges when it comes to construction cost estimation.

Reviewing and planning for common estimation obstacles as part of the risk management process is a good way to ensure adequate plans are in place to address challenges, even before they occur.

Unexpected changes

As the Greek philosopher Heraclitus said over 2500 years ago, “there is nothing permanent except change.” This is certainly true in the construction industry, where new client requests, site conditions, design errors, and many other factors can lead to unexpected changes. These changes can present major construction cost estimation challenges, since the original information used to create an accurate estimate also feeds into the project budget, timeline, and expense reporting process.

Along with the construction contingency budgets created to accommodate unforeseen events and expenses, effective cost management practices improve transparency and collaboration while ensuring estimates are reviewed and adjusted as soon as possible.

Market volatility

As anyone who has ever worked in the construction industry knows, market volatility impacting material prices and availability, labor costs, and equipment operating expenses can sometimes occur with little warning. While market volatility is unavoidable, it can lead to serious construction project cost estimation challenges when estimates suddenly become inaccurate.

Data transfer errors

Any task that involves the transfer of data from one platform to another leaves open the possibility of errors. Unfortunately, these understandable errors can cause expensive problems when it comes to construction cost estimation. As Matthew Miles shared in a recent RIB podcast, “hand measuring drawings can take a significant amount of time, and also that transfer of data between a drawing and a bill of quantities on paper to Excel is quite risky.”

Lack of benchmark data

Historical data from online databases, past bids, and other expert sources make it easier to establish benchmarks for comparison to new estimates, but these resources are not always available. Projects utilizing new design concepts or construction methods can be difficult to benchmark since they have no historical precedent for comparison. A lack of benchmark data might force estimators to make incorrect assumptions or fill in gaps with inaccurate information.

Subcontractor comparisons

Estimates for highly specialized work involve bids from multiple subcontractors. Comparing and evaluating these bids becomes difficult when assumptions about the scope of work (SOW), the timing of bids, labor rules, and other important factors are not consistent. Subcontractor comparison tools, like those available with RIB Candy, help estimators and contractors build a useful database of subcontractor information, eliminate biases, and make better-informed decisions.

Estimation experts like Mr. Miles appreciate how this subcontractor comparison feature allows them to “analyze the quotes you receive on a line-by-line basis” and “break down the data to cover all risks and then create a sort of competitive advantage against others.”

What Can Construction Estimating Software Do for You?

For construction firms that want to produce accurate cost estimates, reduce waste, and improve profits, it’s a good idea to use construction estimation software to complete estimates quickly, accurately, and easily.

In most instances, the construction cost estimation software will have a direct link to a procurement package. This link ensures that contractors purchase materials in line with the allowed rate and the allocated quantity. Any deviation from the cost estimate will then be flagged immediately to identify possible losses or buying gains.

Estimating software helps to reduce the risk of human error, allowing for more precise and realistic results. Direct quantity takeoffs from PDF, CAD, or 3D BIM design files allow construction estimators, project managers, and other stakeholders to eliminate manual methods while making the process faster and more accurate.

The ability to leverage historical data from previous estimates and feedback from completed projects is vital to new estimates. Integrated historical data and live links to material and subcontractor databases provide additional benefits from estimation software.

RIB Candy Streamlines the Cost Estimation Process

RIB Candy is our professional construction estimation software that assists contractors in producing efficient, reliable, accurate, and detailed estimates and quotes. With Candy, contractors can confidently and quickly produce reliable and competitive estimates and quotes to submit and win more bids. From on-screen construction takeoffs, estimating, and project planning to the final certificate, Candy targets the unique requirements of construction and engineering contractors in one exceptional project management solution.

The advanced features of RIB Candy include:

• An on-screen Quantity Takeoff (QTO) module capable of extracting precise quantity information from 2D drawings and compiling the bill of quantities (BoQ) electronically.
• A convenient Forecasting module integrated with the BoQ to support improved planning through the combination of the estimate, valuation data, and time schedule information.
• A Candy Cash Flow module to quickly analyze the financial impact of changes and variations in payment times, retentions, or closure dates.
• A Subcontractor Management module to provide rolling subcontract progress updates. This module supplies detailed information on subcontractor billing alongside other relevant cost, claim, contra-charge, material, and variation data.

Final Thoughts

At the beginning of any construction project, accurate cost estimation is essential. Effective estimation processes allow all parties to understand their budget requirements and manage the project scope. Good estimates are the first step to a great project, so getting it done right is very important.

Estimating software helps estimators gain a serious advantage. As the results become more accurate and reliable, the process becomes easier, errors are reduced, and contractors can work within a more realistic budget.

Our professional construction estimating software, RIB Candy, offers innovative functionalities to take your estimating to the next level. If you are ready to benefit from efficient project control, book a demo today!

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