Construction Estimation 101 – Construction Project Management

Construction Cost Estimate

What is Construction Cost Estimating?

Construction cost estimating is the process of anticipating the cost of a structure that is going to be built. Accurate cost estimation of a project is necessary as it has a financial impact on all the stakeholders whether it’s a contractor or the client himself. A good construction cost estimate prevents contractors or builders from losing money and client from overpaying. To reduce errors, cost overruns, and failing to complete a project, clients often want multiple cost estimates for larger projects prepared by independent estimating firms or contractors. Estimates are usually prepared with the help of architects and engineers to make sure that the project meets the financial feasibility and the scope requirements.

 

 

Why is the Construction Estimate Important?

For project owners, construction cost estimating helps to check a project’s scope, feasibility and to allocate budgets. For contractors, construction estimating helps to win bids and generate new business. As customers usually select the lowest bid without compromising the quality and standards of a project. In that competitive situation, estimators invest a lot of time and effort to prepare the estimate which results in winning the job and all of this can be done by estimating a project accurately.

 

 

How to Prepare Accurate Construction Estimates?

Estimating any project with absolute accuracy is impossible but a skilled estimator will make sure to account for as many factors as necessary to ensure that cost doesn’t overrun or project completes within due date.

However, the accuracy of a construction cost estimate depends upon several factors:

  • The quality of the project plan.
  • The detail up to which the estimator defines a project.
  • The experience, skills and the quality of tools (software) & techniques the estimator uses to estimate the cost of a structure.
  • The accuracy of the information of material, labor, equipment, and overhead cost. Overheads are the expenses that are not directly allocated for specific construction activities.
  • The accuracy of a project also depends on which stage the project is. Here we have provided some different stages at which the accuracy level of a project depends.

 

Levels of Accuracy in Construction Estimating – Type of Construction Cost Estimate

 The accuracy of estimate at the early stages of the project will be less and at later stages, it will be more as at that level there is more certainty and information available. ASPE has classified 5 stages of cost estimating of construction projects.

 

 1. Order of Magnitude

 The order of magnitude estimation is considered to be the project initiation estimate or the pre-design estimate that’s why they are extremely rough. These types of estimates are usually prepared based on previous similar projects and experts’ opinions. The error margin of these types of estimates is usually from 25-75%. These types of estimates are prepared to check the feasibility of a project.

 

2. Intermediate Estimate (Schematic Design Estimate): 

The intermediate estimates are prepared during the schematic design phase of a project. These types of estimates are prepared in large-scale commercial projects to check the feasibility of a project to decide whether to carry on or abandon the project. The margin of error at this level is 15-20%.

 

3. Preliminary Estimate (Design Development Estimate):

This preliminary estimate is prepared when designs are prepared and have detailed scope to get the unit costs of items as this is a stage when the project budget is sometimes decided based on the designs and estimate. That’s why this type of estimate is needed to be as accurate as possible. The error margin for this estimate is 10%.

 

4. Substantive Estimate / Construction Document Estimate:

The substantive estimate is calculated based on estimated unit costs from construction drawings and specifications. These types of estimates are prepared when project designs, deliverables, and objectives are finalized and to make sure the project expenditures are within budget. The error margin for this estimate is 5%.

 

5. Definitive Estimate / Bid Estimate:

Definitive estimates are prepared by the contractors for the purpose of bidding. The bid combines construction documents, takeoffs, direct and indirect costs. These types of estimates are the most accurate and reliable because it occurs when costs are known. It is used to create bids, tenders, and cost baselines.

 

 

What happens when the cost estimate is incorrect?

Investing your time and effort in preparing good estimates helps in winning new jobs and generating more business. But failing to prepare a good construction cost estimate can have disastrous results for both the project owner and the contractor. One notorious example was the Marble Hill nuclear power plant in Indiana. The owner of the project had to abandon the project in 1984, 7 years after it began due to incorrect cost estimation. The Public Service Company of Indiana had completed the project only halfway and spent $2.5 billion due to cost overruns.