Tips for Estimating Construction Costs and Projects

Cost estimating is a vital function of construction project planning. An accurate estimate is important to contractors as it enables them to make informed decisions, determine the return on investment and whether the project is worth doing, submit a project bid to include the project cost and timeline, develop cash flow needs for the project and create a baseline and monitor the progress of the project.

How to Build an Accurate Estimate – and why each step is important

There are four basic steps in the construction cost estimating process. These steps are utilized to take a project from conception to a full cost estimate and they are carried out while using any cost estimating software.

Four basic steps in the construction cost estimating

Step 1: Understand the Project Scope
Step 2. Understand the Direct Project Costs
Step 3. Determine the Project Timeline and Indirect Costs
Step 4. Review the Cost Estimate and Submit the Bid

Step 1. Understand the Project Scope

This step involves the initial actions of any new project and typically starts with a project charter or request for proposal (RFP). The project charter is the formal document that jumpstarts the project and will include key inputs and considerations to the estimating process such as:

  • The project scope statement

  • Resource availability to include capital and time

  • Key stakeholders that will affect the project

  • Project Deliverables

  • Project Plans, Limits, and Exclusions

Once this information is gathered or provided in the initiating documents of the project, the project scope is developed by breaking the project down into smaller pieces for both work planning and cost estimating. A work breakdown structure (WBS) and cost breakdown structure (CBS) are created to develop the complete scope picture of what the project will entail.

The WBS is a hierarchical outline that identifies the products and work elements required in a project. It shows the relationship throughout the project between all deliverables, sub-deliverables, and work packages. The WBS creates the very first structure of the project, and around it, other key elements of the project estimate are developed to include:

 

  • Resource requirements and breakdowns

  • Cost and budgeting requirements and breakdowns

  • Plan Details and Building Components

  • Material Requirements per WBS Item

Step 2. Understand the Direct Project Costs

With the full project scope in-hand, the time-intensive process of takeoff estimation can take place. During this process, the contractor or estimator extracts the quantity and material requirements from numerous sources such as:

  • Project Blueprints
  • Historical Project Documents
  • Project Templates

The takeoff process quantifies the by-item material quantity required for the entire construction project by counting and measuring items from the above documents. The use of historical project documents from previous projects and a cost estimating software can significantly speed-up and improve the accuracy of the takeoff process.

“The use of historical project documents from previous projects and a cost estimating software can significantly speed-up and improve the accuracy of the takeoff process.”

Once complete with the takeoff process, the contractor has a comprehensive understanding and value for the direct costs of the project. Direct costs are the direct labor costs, material costs, commissions, and cost of manufacturing supplies that are rolled up to represent the direct cost of executing the project.

Step 3. Determine the Project Timeline and Indirect Costs

The third step in project estimating is to determine the project timeline and estimate the indirect costs of the project. The timeline is a high-level view of the stages of the project and it helps determine the indirect costs of completing the construction project. Project overhead is another term for the indirect costs of a project and can include:

  • Supervisor salaries covering the time period of the project

  • Quality control costs associated with executing the project

  • Insurance costs for the project and business as a whole

  • Depreciation costs of equipment utilized during the project

  • Any other general costs of maintaining a business throughout the project to include rent, taxes, fees, and business dues

A key input to the creation of the project timeline and indirect cost basis of the project is the work breakdown structure (WBS). Each work package in the WBS details a specific activity that must be completed during the construction project and is accompanied by information such as the standard amount of time to complete the activity, equipment involved, and division of the business that is assigned the task.

Determining the project timeline involves rolling up all the work package time values into a rough project timeline. The timeline at this point predicts the longest estimate of the completion time for the project and this enables the calculation of the overhead costs listed above.

Step 4. Review the Cost Estimate and Submit the Bid

The complete cost estimate will comprise of all the estimates in the previous steps. Multiple factors can influence the quality of the estimate at this point to include:

  • The planning horizon for the project

  • The skill and experience of the people making the estimate

  • The organizational culture and level of crosstalk between estimators, engineers, architects, and contractors

  • The prevalence of estimate padding

Once the estimate is completed, it is presented to the team and key stakeholders inside the organization. It is important for an organization to get as much input as timely possible into estimates.  Generally, the more levels of review throughout an organization the more accurate the estimate. With an approved estimate of the project, the contractor can create and submit the bid for the project.

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Why Should you Use an Estimating Software?

Building an accurate estimate can be a laborious and risky process for contractors following the four basic steps described above. There is a small margin for error in estimating and time is also always the most critical resource for contractors. Construction estimating software programs provide multiple benefits to streamline the estimating, planning, and scheduling process.

Accuracy

The excel spreadsheet currently dominates the cost estimating process for general contractors, but when compared to a competent estimating software program, the spreadsheet has numerous accuracy pitfalls. The spreadsheet is used so prevalently because of its analytical nature, simple grid style interface, and accessibility as a Microsoft Office platform.

Excel spreadsheets lose accuracy over time as multiple users tweak them, input data, and change formulas.

It is human nature to be resistant to change, but contractors who switched from manual estimates to using an excel estimating software have experienced the common pitfalls of spreadsheets disappear (see some case studies here). Some of these pitfalls include:

  • Inefficiencies for data input to include low speed and the prevalence of typing errors
  • Lack of flexibility for cell formatting related to the construction industry
  • Not easily collaborative and non-intuitive
  • Absence of an audit trail for work inputs

General contractors care about repeatedly creating accurate estimates as one of their core business functions. This is because contractors win business on the strength of the bids they submit, and they lose money when they underbudget a project. The project bid and project budget rely on the estimate as their backbone. Excel spreadsheets lose accuracy over time as multiple users tweak them, input data, and change formulas. Unlike the traditional excel spreadsheet, an estimating software provides all the familiarity of a spreadsheet with advanced features that nullify the shortcomings.

Construction estimating oriented parameters and rules settings are a key capability of a construction cost estimating software. Just like spellcheck parameters, the most effective estimating tools have built-in systems that automatically audit the inputs and computations that you create. Some of the key features of the validation technology inside of a construction estimating software are automatic search capabilities that discover errors like:

  • Logic errors
  • Missing information and missing inputs
  • Incomplete equations
  • Improbable price estimates

Many contractors and estimators have already made the switch to construction estimating software programs over the use of traditional excel spreadsheets. The significantly more accurate estimates are well worth the adaption time and cost of the software.

Time Saver

Second to accuracy, the amount of time that it takes to create an estimate is one of the most important advantages provided by construction estimating software. The speed advantage of construction estimating software comes from:

  • Flexible workflows for data integration
  • A database storage model of elements such as the price book and historic projects
  • Template creation and implementation
  • Drag and drop functionality

How data is organized can have a large impact on the flexibility of the workflow applications that run a software program. Traditional excel spreadsheets are built with data dependencies that produce inflexible workflows throughout the estimating process.

Construction cost estimating software has flexible workflows that integrate with a database structure to add significant flexibility to the takeoff process. This allows the creation and use of templates to integrate pre-built building sections and takeoff data into a construction estimate. There is significant repeatability for contractors in many of their construction projects, and the ability to easily integrate previous estimating work with a drag and drop functionality drastically speeds up the takeoff process. Construction cost estimating software has flexible workflows that integrate with a database structure to add significant flexibility to the takeoff process.

Increase Profit Margins

Profit margins increase from either increasing revenues or decreasing costs. Construction estimating software drastically increases profit margins by doing both. Revenues are increased through the drastic increase in the accuracy of the estimating process. The more accurate the estimate, the less risk a company needs to take in its bid process. This allows companies to input more competitive bids which both help win contracts as well as ensure projects don’t go under.

Many contractors consider time to be one of their most crucial costs whether it is in the form of the opportunity cost for time lost or the cost of paying employees for their time.

It also increase when businesses decrease metrics such as indirect costs from overhead. Many contractors consider time to be one of their most crucial costs whether it is in the form of the opportunity cost for time lost or the cost of paying employees for their time. Estimating software decreases the time to complete the estimating, project planning, and bid submittal process by fifty to eighty-five percent.

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The Nuances of Residential and Commercial Estimating

The process for completing a construction cost estimate is different for every type of project, trade or role that the estimator is representing. The cost estimating process can differ by elements such as:

  • Role in the project such as the general contractor or subcontractor role
  • Trade such as masonry, plumbing, or electrical

The construction industry itself can be categorized into residential or commercial construction projects. These two categories differ in numerous characteristics.

Residential Construction Estimating

Residential construction builds the homes that people live in. When compared to commercial construction, residential construction is often high volume, low budget, and can even be highly repeatable. The work can be completed by a single contractor or by a general contractor employing numerous subcontractors underneath. Residential construction builds the homes that people live in. Residential construction is often high volume, low budget, and can even be highly repeatable. The estimating process will differ by role within a residential project. A general contractor managing multiple subcontractors on a project will need to integrate the estimates of each subcontractor together to calculate a total project estimate.

Given the pertinent documents from the project plans, subcontractors can supply an accurate estimate to the general contractor on their trade.

Subcontractors generally perform work pertaining to a single trade such as concrete, roofing, HVAC, electrical, or plumbing. These subcontractors often have the greatest expertise in their specific trade. Given the pertinent documents from the project plans, subcontractors can supply an accurate estimate to the general contractor on their trade.

Whether the general contractor on a residential project is completing the entire estimate for a project themselves or by incorporating the estimates of subcontractors, they need to ensure their estimate is accurate. Considerations for general contractor estimating software and sub-contractor estimating software when creating a residential estimate include:

  • Uniformity in price index between the general contractor and subcontractors
  • Common access to building documents and plans for the contractor and subcontractor
  • An estimating tool with a common format and structure

Historically, different trades utilized different estimating spreadsheets to calculate their estimates. Within the category of residential estimating software could be masonry estimating software, concrete estimating software, roofing estimating software, or HVAC estimating software.

The decentralized nature of estimating by trade on residential construction can produce more detailed and accurate estimates. The strength of individual estimates for a residential project is reliant however on the ability to pull together all the estimates from different trades into a total project estimate. Integration focused construction estimating software programs outperform traditional spreadsheets at this feat consistently and are the best tool for contractors in the residential construction role.

Commercial Construction Estimating

Commercial construction builds businesses and buildings where large populations of people reside. These projects can be massive in scales such as high-rise buildings or smaller in scales such as single-story brick and mortar stores.

Unlike residential construction, commercial construction is rarely completed by a lone contractor, rather the construction team is a framework of multiple subcontractors managed under a general contractor. There are numerous versions of owner, architect, general contractor, and sub-contractor relationships that dictate the hierarchy and relationships throughout a project.

The estimating process during a commercial construction project is a cohesive process between the general contractor and sub-contractors. The general contractor is ultimately responsible for the estimate that they create and must pull together data from different trades in order to create the project estimate. Commercial construction estimates can be created from the individual trade estimates of multiple different contractors. Some of the considerations that a general contractor must make when requesting and receiving estimates from subcontractors are:

  • The time it will take the subcontractors to complete their estimate

  • Estimating methods to include top-down, bottom-up, and estimate padding

  • The format and spreadsheet type that the subcontractor will use for their estimate

  • The time it will take the general contractor to analyze and compile all subcontractor estimates

  • The level of risk and risk mitigation measures that the general contractor needs to place into their final estimate

Utilizing a construction estimating software is the best method to mitigating issues that can arise from these considerations. 

Key Calculations for Construction Estimating

The following are key terms and metrics used in construction estimating by trade:

All Construction Trades

Length

Length is the linear distance that an object projects, extends, or inhabits. It is typically denoted on construction plans. Key to calculating and using length equations is understanding the unit of length that is referenced. Units are either in English (inches, feet, yards) or metric (meter, centimeter, kilometer) systems.

Count

Count is simply the enumeration of the number of a certain object in a group. An example of a count in a construction estimate is the number of brass doorknobs in a residential building.

Earthwork and Horizontal Construction Trades

Earthwork

Earthwork construction in the United States describes volume typically by the cubic yard. Soil volume is either loose, compacted, or banked (in place) and different soils have different conversion rates for calculating each type of volume. Earthwork estimates may calculate project costs based on the volume of earth hauled.

Carpentry and Masonry

Area

Area is the space occupied by a flat shape or the surface of an object.

  • Area of a triangle = (½ × base) × height
  • Area of a rectangle = length × width
  • Area of a trapezoid = ½ × (top length × bottom length) × height
  • Area of a circle = π × (radius)²

Linear Footage

Linear footage is the length along a line and is used to describe how long an object stretches or extends in one direction. The implied unit of measurement for linear footage is the English system foot.

Width

Width describes how wide an object is in one direction.

Depth

Depth describes how far an object extends in one direction, perpendicular to both the length and width planes.

Nominal measurement

Nominal measurements are approximate or rough-cut dimensions that many lengths are labelled or sold for ease of trade.

Pythagorean Theorem

The theorem states that the square of the hypotenuse of a right triangle is equal to the sum of the square of the other two sides. a² + b² = c² . This equation is often used to find the length of legs or the hypotenuse when using right triangles.

Electrical

Voltage

Voltage is the difference in electric potential between two points along a wire. Measured in volts.  The electric potential between two points can be calculated by multiplying the current flowing through the wire and the resistance along the wire: V = I × R.

Current

Current is the measure of the flow of electricity along a wire. Measured in Amps.

 

Resistance

Resistance is the impedance to flow along a wire or material for an electrical current. Measured in Ohms.

Plumbing and HVAC

Volumetric Flow Rate

Flow rate is the volume of liquid that passes a point per unit of time. Typical units for volumetric flow rate are or are ft/second or m³/second

Diameter

Diameter is the length between two ends of straight line passing through the center of a circle.

Temperature

Temperature is the measure of warmth or coldness of an object or substance with reference to some standard.

Pressure

Pressure is the force per unit area that one fluid exerts on another fluid or object. Units are the Pascal, atm, and torr. 1 atm = 101325 Pa = 760 torr

Volume

Volume is the amount of space that an object occupies.

Volume calculations differ by object

  • Cylinder = π × (radius)² × height
  • Cube = length × width × height
  • Cone = ⅓ x π × (radius)² × height
  • Sphere = 4/3 × π × (radius)³

Key Takeaways

The estimating process is an integral step in construction planning. Correct estimates secure project success and lock-in profits for contractors and subcontractors, while incorrect and incomplete estimates can quickly put businesses in the red.

Construction cost estimating software, excel estimating software, and takeoff estimating software are all aliases for computer programs that drastically improve speed, accuracy, and profit margins in the construction estimating and project planning process. Infusing business practices with this technology will drastically improve the proficiency and performance of the practice and lead to success.

“The very best contractors and subcontractors win the bidding stage repeatedly through their proficiency at estimating.”

Succeeding in the construction world today as a general contractor or subcontractor requires systematic proficiency throughout the stages of a construction project. The very best contractors and subcontractors win the bidding stage repeatedly through their proficiency at estimating. Competent use of construction estimating software can be the difference for contractors that leads to repeated success in the industry.

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