What is Construction Estimating?
Construction estimating is the process of anticipating the expense of building a physical structure. This step is essential, and one of the most crucial in the construction process. Estimators need to be as accurate as possible because profit margins (the livelihood of contractors) are impacted if any estimated direct and indirect costs for the project are off by even the slight amount. Every successful project starts with a precise and accurate cost estimate. By the end of this article, you will know the basics of estimating and learn the importance of its role in delivering successful commercial construction projects.
Why is the Estimate Important?
Accurate estimates win new projects and business for companies. In the bid estimation phase, construction documents, take-offs, and other direct costs are used to allow the estimator to determine an approximation on job costs. Customers and builders are concerned about the price of a project because of the financial impact of expenditure overrun and the failure of project completion. It is in the interest of BOTH parties to spend time researching and estimating the expenses. No one wants to lose money, and construction estimating provides a useful tool in project management.
Cost Estimating Key Components
Cost estimating on a project is typically responsible for the project estimator, manager, or other staff depending on the type, size, and scope of the project. Each project is different so that an estimator will look at the take-off to measure materials, time, and labor. Cost estimations are the total costs and expenses of a project from start to finish. There many ways to classify expenditures, but great estimators will categorize them into direct and indirect costs.
Direct costs are costs and expenses that are accountable directly for a specific activity in construction work. Some examples of direct costs are:
– field workers (aka labor)
Indirect costs are expenses of items that are not allocated directly for specific construction activities. These are called overhead costs. Examples of project overhead expenditures are:
- quality control
- security costs
- administrative costs
- temporary structures
- legal fees & permits
Levels of Accuracy in Construction Estimating
The estimated costs during the earlier stages of a project have less accuracy, and those expected later have higher certainty. The ranges will be higher at the beginning of the project and will narrow down as the project advances. Project cost estimates are characterized by how precisely defined the scope is at the time of estimation. The ASPE, American Society of Professional Estimators classifies cost estimates in order of Levels – Level 1 through Level 5:
Level 1: Order of Magnitude
The Order of Magnitude estimation is an extremely rough estimate created before the project is well defined. It is based solely on expert judgment and previous costs of similar projects. The typical range in this level is from -25% – 75%.
Level 2: Intermediate Estimate
The primary purpose of the intermediate estimate is to determine project feasibility from the concept of the general project. Large-scale commercial projects develop this type of estimate because they use the information to decide whether to carry 0ut or abandon the project.
Level 3: Preliminary Estimate
This estimate uses a somewhat detailed scope to consolidate unit costs. It is accurate enough to be used as a basis for project financing, and sometimes, project budgets are authorized solely on the preliminary estimate. Therefore, it is essential to be as accurate as possible to differentiate between alternatives.
Level 4: Substantive Estimate
The substantive estimate is based on estimated unit costs. The estimate is created by analyzing reasonably finalized project designs, objectives, and deliverables that are established by the company. Additionally, it used to control project expenditures to stay within the budget.
Level 5: Definitive Estimate
This estimate is the most accurate and reliable because it occurs when costs are known. It is used to create bids, tenders, and cost baselines. All estimates are calculated by assumptions and can be susceptible to change when costs are updated.
Bid estimates meet the criteria defined in the Level 5 Definitive Estimate in terms of accuracy. The bid combines construction documents, take-offs, and direct costs. In the bid estimation process, the estimator approximates the project cost and submits paperwork to ensure the project’s potential.
Determining Budget from Estimates
Establishing a budget is crucial in construction management. The estimator or project manager calculates the total costs of the project and level of funding and budget allocations necessary for completion. This calculation leads to creating the budget. The project manager estimates the total cost by using the estimate and includes risk management activities along with reserves (contingency and management).
Construction estimating is vital in the project management role, and companies must invest resources and technology to make this role effective. It is important to know the basics of estimating because it can make or break a construction project. They also can make or break a company’s business. Estimates are the stepping stone to getting a bid, which ultimately wins projects. Without accurate construction project estimates, there is the likelihood of catastrophic financial consequences.