Inaccurate estimating is a very common underlying cause of cost overruns in construction. Keep reading for some tips regarding how to estimate construction costs with more accuracy.
An overview of construction project cost estimation
Construction project cost estimation involves projecting the costs you’ll incur during a particular job. This is a key part of the bidding process as it helps you determine not only an appropriate offer but also how the project in question would affect your cash flow.
It’s not uncommon for a construction company’s future to hinge on the accuracy of its estimates. According to an Intuit survey, 25% of construction firms describe themselves as being just two to three inaccurate estimates away from bankruptcy.
This, understandably, places estimators under a great deal of pressure. Thankfully, there are a few tried-and-true strategies for ensuring accuracy with estimates. We’ll take a look at those shortly.
Types of construction project cost estimations
Before we discuss how to improve the accuracy of your calculations, let’s discuss the various types of estimates and their uses.
Order of magnitude
Professionals use order of magnitude estimates to screen a project and determine whether it’s worth pursuing. These estimates are usually only accurate to the degree deemed necessary for this purpose, often involving a 30% to 50% margin of error.
If the numbers produced during an order of magnitude estimate seem promising, a company will typically proceed to the feasibility evaluation stage. This involves a more detailed cost estimate with a tighter margin of error.
Companies will often use feasibility estimates to pick a particular job from a group of candidates that passed the order of magnitude evaluation.
A preliminary (also known as “budget level”) estimate introduces more detail, breaking costs down by category. Once a preliminary estimate is complete, companies will also typically begin to consider financing for the project.
A substantive estimate takes place after designs have been completed. This allows companies to base their calculations on materials deemed necessary for delivering the finished product.
Once a project has been awarded, the winner will take their substantive estimate and turn it into a definitive one. This ends up being less of an “estimate” and more of a detailed cost calculation.
Barring substantial changes to the project scope, the definitive budget will be what guides the project from this point forward.
How to estimate construction costs: Methodology
There are several methods for construction project cost estimation. Here are a few of the most common.
Unit cost estimating
Unit cost estimating is popular on projects that lend themselves well to being broken into chunks (aka “units”). For example, builders conducting estimates for a subdivision might determine the cost of building a single home and then extrapolate that for the entire project.
One downside to unit cost estimating is the potential for errors to become multiplied across dozens or even hundreds of units.
Production function estimating
Production function estimating involves plugging material and labor costs into a pre-defined formula in order to figure out what the ultimate total cost will be.
Estimators arrive at the formula in question either by creating it themselves or, more likely, using construction estimating software.
The formula can then be reused on similar projects, with occasional adjustments for accuracy based on results.
Stick estimating is a very intuitive method. It involves listing every foreseeable expense associated with a project.
As you might imagine, this can get out of hand on larger projects with numerous variables. However, it’s a convenient and easy-to-use method for smaller projects.
Empirical cost inference estimating
Companies that rely on empirical cost inference estimating typically have a person or team whose job it is to do nothing else. This is because it’s easily one of the most complicated methods of estimating a construction project’s cost.
Rather than looking at costs line by line, professionals using this method will evaluate key characteristics through the lens of regression analysis. In layman’s terms, this relates to determining the relationship between cost and a specific variable (i.e. design feature).
How to estimate building costs more accurately
Now that you know about the types of estimates as well as the methods used to obtain them, here are some tips on how to estimate building costs with greater accuracy.
Track your resources
Determining when you have the resources necessary for a project’s successful completion is a key part of estimating. Construction resource management software makes it much easier to receive an accurate answer in this regard.
Check out this article to learn about workforce forecasting and how it can help you achieve more efficient resource allocations.
Get expert insight
Cost estimating is one area of construction best left to those with plenty of experience. It takes an expert to understand the various things that can go wrong and cause cost overruns on a job site.
This expertise will help you create a more accurate estimate that protects your financial interests.
Be meticulous in calculating labor costs
As we mentioned in this article, labor is often one of the most difficult aspects of any project to price. You need to consider not just your workers’ hourly wages but also any benefits they receive along with things like time theft which, left unchecked, can really eat into your budget.
Know how to estimate construction materials, too
When estimating construction material costs, you need to get the most accurate unit figures possible. Don’t rely on what you think costs might be for quotes requiring more detail. Get your inputs right by receiving quotes for your orders or through whatever other means you have of getting market prices.
One way to ensure more accurate estimates in the future is to carefully track your spending on every project. You can then use this data to inform your estimates on similar projects in the future.
This is imperative when using the more involved methods of estimating, such as production function and empirical cost inference.
Know your hourly rates for specialty work
There’s little sense in being rough with your labor cost estimates since you should have direct knowledge of them. Once again, include not just their hourly wages but also any benefits (including union dues) in your calculations.
Identify key risk factors
Every project has distinct risk factors you can usually see coming from a mile away. When creating your estimate, be sure to include these risk factors along with the costs you’d likely incur if things didn’t go your way.
Construction project cost estimation can make or break a company’s bottom line. We hope this article has been useful in showing you the strategies for achieving more accurate estimates. For more construction management tips, visit our blog.