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The Comprehensive Guide to

Construction Cost Estimating

In the dynamic world of construction, never underestimate the importance of efficient preconstruction activities. A crucial component of that process is cost estimating, which shapes the trajectory of any construction project. From small-scale renovations to grand infrastructure projects, a construction cost estimate forms the backbone of the entire project, influencing every phase from planning to execution.

Prior to a new construction build or renovation, cost estimates are used to evaluate information for facility or business owners, contractors, architects, engineers and project managers. These stakeholders rely on the cost estimate to determine project feasibility, budget compliance, funding forecasting, logistics and other required resources. 

For contractors, accurate cost estimates are crucial for making competitive bids. Overestimating can result in lost work, while underestimating can lead to financial losses on a project. 

For owners, an accurate cost estimate provides the necessary information needed to make decisions about the project. The cost estimate can help determine project feasibility. If the estimate is over the forecasted budget, it may require adjustments to the design or scope of the project. 

But what exactly is construction cost estimating? Why is construction cost estimating so important? Who is responsible for developing construction estimates, and what are the critical steps to construction cost estimating? This guide walks through all those questions and more to provide a comprehensive understanding of this vital aspect of construction.

What is Construction Cost Estimating?

Construction cost estimating is the process of anticipating the cost of a construction project. This involves calculating the total cost required to complete a construction project within a defined project scope. A project’s success is in direct correlation to the thoroughness of its estimate. 

It isn’t just about adding up the costs of materials, labor and equipment. It's a complex procedure requiring great attention to detail and a deep understanding of construction materials methods, specifications, local codes, regulations and pricing trends. 

Construction projects can be intricate and multifaceted, involving a multitude of tasks, resources and stakeholders. Maintaining a high degree of organization in the estimating process is crucial to achieving a comprehensive and precise cost estimate. A well-structured approach can help you avoid overlooking important cost factors, prevent budget overruns and other financial discrepancies down the line.

The process of construction estimating essentially revolves around three fundamental components:

  1. Quantifying Materials, Labor and Equipment: This involves determining the exact quantities of various resources that will be required for the project. For materials, this means calculating how much of each type of material (e.g., concrete, steel, wood, etc.) will be needed. For labor, it involves estimating how many workers will be needed and how many hours they will have to work. For equipment, it means identifying what types of machinery or tools will be required and for how long. This requires a thorough understanding of the project scope and a meticulous attention to detail in order to ensure that all necessary resources are accounted for.
  2. Selecting the Appropriate Materials that Meet Contract Plans and Specifications: This component involves choosing the right types of materials that align with the plans and specifications outlined in the contract. This not only refers to the physical characteristics of the materials (e.g., strength, durability, appearance, etc.), but also their compliance with any relevant building codes or standards. This step 
    requires a deep understanding of both the project requirements and the properties of various construction materials.
  3. Pricing the Work to be Done: After the quantities have been determined and the appropriate materials have been selected, it all has to be priced to get a final total cost of the project. This involves assigning monetary values to each type of resource (material, labor, equipment) based on current market rates. It also involves factoring in indirect costs such as overheads, contingencies, and profit margins. This step requires a good understanding of the construction market and the ability to forecast future price trends.

The process of estimating construction costs is a complex task that requires a systematic approach and a deep understanding of various aspects of construction. By focusing on these three key components, you can ensure a more complete and accurate cost estimate, setting the foundation for a successful project. 

Who is Responsible for Construction Cost Estimating?

The responsibility of estimating construction costs often falls on a Construction Estimator or Cost Engineer. They work closely with architects, engineers and project managers to define the project's scope and use technical drawings, project plans and the latest cost data to assemble an accurate and detailed cost estimate. 

In some cases, particularly in smaller projects, the project manager or contractor might take on the role of cost estimator. Regardless of who carries out the task, it's critical that the person has a strong understanding of construction methodologies, material costs, labor costs and project management principles.

4 Steps to Developing a Construction Cost Estimate

A best practice approach to staying organized through the cost estimating process is to follow the steps of building the project just as a contractor would: from the ground up. Using a standardized method like the Construction Specifier Institute’s (CSI) MasterFormat® divisions helps to ensure that all parts of a project are accounted for and that nothing is overlooked. It provides a structured, standardized approach to the construction estimating process, which can make it easier to review, compare, and use the data in cost estimating and project management. 

The MasterFormat includes divisions for all aspects of a construction project, from concrete and masonry to electrical and mechanical systems. By aligning estimates with these divisions, you can ensure that your estimates are comprehensive, organized, and easy to understand.

1. Capture Scope of Work

To truly understand what is being built, and to estimate the cost of the project, requires knowing exactly what is to be built. When it comes to developing construction estimates, it is imperative that the estimator thoroughly reviews all the construction documents to understand the scope of work. If possible, the estimator should:

  • Plans and Specifications: Existing plans and specifications for identical or similar buildings should be a go-to resource for creating and reviewing a scope of work. These documents are a treasure trove of information including drawings, the materials and products used, installation methods and quality of work. Plans and specs are instrumental to the scope of work and the construction estimate.
  • Conduct a site visit: Walking the job-site will help inform challenges to equipment and material delivery, the conditions and operations of the existing facility and even a look at potential security concerns. Walking the project area reveals ground-level knowledge that can be used to ensure everything is accounted for when preparing a cost estimate.
80% of the estimating process is spent reviewing the scope of work, understanding the project requirements and clarifying uncertainties by asking questions. 

90% off errors in the estimating process can be traced back to the scope of work. Three common areas to be mindful of: 

  1. Omissions
  2. Mismatched unit of measurements
  3. Mistakes in calculations

2. Material Quantity Takeoff

Quantity takeoff, also known as Material takeoff, is the process in which the estimator compiles a comprehensive list of every material, piece of equipment and labor task that is needed to complete the project. For some projects, like repairs and replacements-in-kind, the takeoff list might be relatively short. But for larger projects and new construction, the list can be tough to tackle.

There are standard practices to help speed up the takeoff process and ensure accuracy, like breaking the project down into smaller chunks. But it can still be easy to miss items or tasks for complex projects. When creating a takeoff, it is recommended to follow the actual order of construction. 

Any mistakes in the takeoff can lead to cost overruns or delays in the project. It's always a good idea to double-check your measurements and calculations, and to get a second opinion if possible.

Tips when compiling your quantity takeoff:

  • Group Similar Materials: This involves categorizing materials based on their type. For instance, you might have a category for concrete, where you list out all the different kinds of concrete required in the project, such as poured concrete for foundations or precast concrete for certain structures. This not only helps in maintaining organization, but it also aids in ensuring that nothing is overlooked. It can also be beneficial when ordering materials, discounts may be available for bulk orders of similar items.
  • Use the Right Tools: Accurate measurements are crucial for a successful takeoff. Physical tools like rulers and tape measures can be used for smaller, more tangible items. However, for larger or more complex projects, digital tools are more efficient. Computer-Aided Design (CAD) or Building Information Modeling (BIM) software can help you measure dimensions directly from digital plans, reducing the chance of human error and increasing efficiency. These tools can also automate some parts of the takeoff process, saving you time.
  • Accurate Scaling: Construction blueprints are drawn to scale, meaning they represent the project at a smaller size. It's crucial to understand the scale of the blueprint (for example, 1 inch might represent 10 feet) when taking measurements. Using the wrong scale can lead to significant inaccuracies in your takeoff, which can result in cost overruns or material shortages.
  • Round Up: Construction projects rarely go exactly as planned. There can be waste, breakages, or changes in the plan that require more material than initially estimated. To account for these uncertainties, it's a good practice to round up your measurements. This means if you calculate that you need 9.5 cubic yards of concrete, consider ordering 10 cubic yards instead. This provides a buffer and reduces the risk of running out of materials mid-project.
  • Use a Systematic Approach: When counting materials, start from one end of the blueprint and methodically work your way to the other end. This helps ensure you don't miss anything or double-count items. For instance, you might start counting windows in the top left corner of the blueprint and move systematically to the bottom right. This approach increases accuracy and efficiency.

The MasterFormat includes divisions for all aspects of a construction project, from concrete and masonry to electrical and mechanical systems. By aligning estimates with these divisions, you can ensure that your estimates are comprehensive, organized, and easy to understand.

3. Pricing the work to be done

Once the quantities are known, the next step is to assign prices to each item. Obtaining pricing can be tedious, and many channels can be leveraged to come up with numbers that make sense to the project and ensure profitability. Pricing can be obtained by researching suppliers, getting quotes from vendors and subcontractors, historical estimates, experience and published cost data. 

Using up-to-date and comprehensive cost data will help ensure price accuracy. Be sure you have a clear understanding of all costs involved, including labor, materials, equipment and productivity rates and location factors.

All costs included in a construction estimate fall into one of two categories: direct costs and indirect costs. 

Direct costs are those directly linked to the physical construction of a project. Material, labor and equipment prices are all direct costs, as are subcontractor costs. They are also sometimes called “bare” or “unburdened” costs.

Examples of direct costs include all on-site personnel, even those without direct responsibility for structure being built, like security guards. If you plan to have telephone service or use a copy machine on-site, you can file those under direct costs. 

A good rule of thumb is if a line item is used for a specific task at the job site, it’s a direct cost.

Indirect costs are incurred while completing the project but are not applicable to any specific task. There are two types of indirect costs: 

  • Main office overhead - These costs are typically calculated as a percentage of the total project cost and added at the end of an estimate. Estimator and engineer salaries are considered main office overhead as are any costs associated with the office like rent, furniture and power. Legal services, insurance, mileage expenses and owned equipment depreciation expenses fall under this category, too.
  • Job site overhead – These costs are calculated as specific line items on the estimate and not as a percentage of the total project cost, even though by definition, they are indirect costs. Think of these as job-site necessities. They are not used to complete a specific construction task. Things like trailers, fencing, barricades and project signage. Temporary facilities and utilities such as light, power, water and toilet facilities are included in this category. By definition, trailers and other temporary job site facilities are indirect costs. However, these facilities support all tasks on the job site, and nothing could get done without them.

Including insurance and bonds in the construction cost estimate is crucial to ensure all potential risks are adequately covered, providing financial protection to all parties involved in the project. Some of the typical insurance costs to include in an estimate are:

  • General Liability Insurance: This covers legal expenses, medical costs, and any damages if a third party is injured on the construction site or if property damage occurs.
  • Builder's Risk Insurance: This insurance covers damage to the building during construction, such as fire, wind, theft, and vandalism. It generally covers the building itself and materials, fixtures, and equipment being used in construction.
  • Professional Liability Insurance: Also known as Errors and Omissions (E&O) insurance, this covers legal fees and damages if a construction professional is sued for negligence or failing to perform professional duties.

Bonds on the other hand, are a type of financial guarantee between the contractor, the client, and a bonding company (surety). They ensure that the contractor fulfills their obligations as per the contract. Permit costs and surety bonds also fall into the direct cost category of a project but are typically specifically listed out in the estimate. Some of the common types of bonds in construction projects include:

  • Bid Bonds: These ensure that if a contractor wins a bid, they will enter into a contract and provide the required performance and payment bonds.
  • Performance Bonds: These bonds guarantee that the contractor will perform the work as per the contract's terms and conditions. If the contractor fails to complete the project or fails to meet the contract's standards, the client can claim against the bond to recover costs.
  • Payment Bonds: These bonds guarantee that the contractor will pay subcontractors, laborers, and material suppliers involved in the project.
  • Maintenance Bonds: These bonds protect the client from defective workmanship or materials for a specified period after the project is completed.

4. Validating the Estimate

Every estimate should be powered by scores of cost information. Estimators and contractors should use every data source available to them—their own old estimates, subcontractor quotes, vendor quotes and, of course, published construction cost data.

However, all cost information must be validated with common sense. Every estimate must be scrutinized before it is submitted – do the numbers in the estimate make sense based on professional experience and understanding of the project? We have access to more data now than ever before, but there is still no substitute for old-fashioned common sense.

Common Types of Construction Estimates

Construction cost estimating methods can be broadly categorized into four types:

  1. Preliminary or Rough Order of Magnitude (RoM) Estimates: This early-stage estimating occurs when the project is still in the idea or conceptual phase. At this point, estimators use historical data and analogous estimating techniques to provide a rough cost projection, aiding in the decision-making process. This is a high-level estimate used in the early stages of a project when detailed information is unknown or not available. RoM estimates provide a rough cost forecast and is typically accurate to within +/-25%.
  2. Square Footage Estimating: This method uses the cost per square foot of similar completed projects to estimate the cost of a proposed project. It's the quickest estimating method yet more in-depth than what is required during the conceptual stages of a project. Square foot estimates provide more detailed information about the cost of labor, materials, professional services and more. Although they provide more detail than RoM estimates, they are based on the typical cost to create a building with a set square footage, of the same type and use. Because a square foot estimate is still intended to be created with relative efficiency, it does not include finer details like specific materials used. A square foot estimate is intended to predict total cost of construction, typically accurate to within +/-20%.
  3. Assemblies Estimating: The advantages of creating a systems and assemblies estimate at this stage is that this estimate provides a detailed breakdown of the costs of specific systems and assemblies that will exist in the final facility. This will include items as simple as lavatories, to more complex ones like mechanical systems. Because this type breaks down cost data into more minute details than a square foot estimate would, it gives a more accurate total cost System and assemblies estimate typically are within +/-15%.
  4. Unit Cost Estimating: This method involves breaking down a project into its smallest units and estimating the cost of each, down to the specific materials that will be used along with the labor and equipment costs of installation. It's the most time-consuming method but also the most accurate, especially when detailed design information is available. It's typically accurate to within -5% to +10%.

The Role of Construction Estimating Software

Construction estimating software has revolutionized the estimating process, offering a host of benefits. The baseline for any construction estimation software should be accurate and current construction costs. Without them, the software fails to be a minimally viable tool. 

Construction estimating software streamlines a complex process with order and convenience to help minimize human error. The functionality and accessibility provided by software solutions accelerates a large part of a cost estimator’s work. However, the expertise of a proficient estimator remains crucial. The software aids in calculations and tabulations, but it's the seasoned estimator's understanding of construction overall that determine the inputs into the software.