A Guide to Accurate Cost Estimation for Construction Projects

The process of determining all necessary expenses for a construction project, including direct costs (like materials and labor costs) and indirect costs (like equipment depreciation and office worker salaries), is known as construction estimating. This crucial preconstruction step is carried out by qualified construction estimators, who help guarantee that owners and contractors can successfully finish a project at a profit.

Accurate cost estimation for projects necessitates in-depth understanding of building materials, specs, methods, codes, and market trends.We’ll go over every step that expert estimators take to estimate a project’s costs, from examining a bid package to factoring in profit and contingencies.

The importance of correct prediction

Any construction project’s success depends on accurate estimating. Cost estimates are essential to a project’s progression from preconstruction to completion for both owners and contractors.

Owners are unable to assess whether a project is feasible within the allocated budget without first having a clear understanding of the project’s costs. Changes to the design or scope may be necessary to adjust project costs after a preliminary estimate.

In order to create profitable and competitive bids, contractors also rely on precise estimates. If a contractor miscalculates the project’s cost, they may have to reduce their own profit margin to pay for the work.

However, if a contractor overestimates the true cost of the project, this could result in a bid that is too high to be accepted. Accurate construction estimates are necessary even in situations involving negotiated bidding in order to balance the owner’s budget and the contractor’s profit.

Construction estimating: eight steps

Whether they work for an owner, a specialty contractor, or a general contractor, construction estimators always follow the same basic procedures. As part of a competitive or negotiated bidding process, estimators usually endeavor to determine an exact cost for a particular project when creating a construction estimate.

Construction estimators typically work with bid documents, which include contract documents and construction specifications. After that, they go through a series of steps to account for all known costs, such as overhead, labor, materials, and insurance. When an estimator is done, they will have created a construction estimate that includes a markup for profit and contingency along with all necessary costs.

1. Examine the bid package.

All of the required bidding documents, including bond forms, owner-contractor agreements, general conditions, supplemental general conditions, and construction specifications, are included in the bid package. Since contractors who submit a bid are obligated to finish the work specified in the bid package, a qualified estimator invests a lot of time in making sure they are knowledgeable about every facet of the project.

The purpose of a drawing is usually used to categorize it, including site, architectural, structural, mechanical, electrical, and more.

Specialty contractors typically only refer to the documents that are pertinent to the work they will be performing on the project, but both general contractors and specialty contractors will review the documents.

A standard procedure is typically followed by construction estimators when examining the bid package:

1. Verify that all specifications and drawings are included.Estimators make sure they have all the information needed for an accurate estimate, regardless of whether the design firm wants the documents divided into sections or numbered sequentially.
2. Obtain a project overview.Estimators can gain a general understanding of the project’s scope, material requirements, and finish quality by quickly skimming the specs.
3. Analyze the needs for structure.Estimators gain an understanding of the building’s material and equipment requirements by looking over structural drawings.
4. Examine the requirements for the mechanical, electrical, and plumbing (MEP).Estimators consider how a building’s MEP requirements will affect the building’s construction process, including any potential subterranean work.
5. List any items that are not typical.Estimators must pay close attention to any unusual floor plans, features, or finishes that could have an impact on the project’s cost because contractors frequently specialize in particular types of work.

The estimator will frequently consult the bid documents during the estimating process to make sure their estimate fully accounts for all of the specified requirements and specifications. The estimator gains a thorough understanding of the project by gaining an overview of the documents, which helps them build a thorough and precise estimate.

An estimator working for a general contractor will also break the project up into work packages after reviewing the documents. Work packages have the important function of guaranteeing that all work is accounted for and no work is assigned twice. Specialty contractors may be assigned work packages later on.

The estimator can easily understand the scope of work in accordance with the different divisions of the Construction Specification Institute (CSI)’s MasterFormat—concrete, masonry, metals, finishes, plumbing, and many more—by looking over the technical specifications, also known as construction specifications or specs.

For instance, the estimator might design two work packages: one for windows and installation, and another for rough-in plumbing supplies and labor. A single construction project will result in the creation of numerous such work packages.

The project must be divided into work packages, which requires meticulous attention to detail:

• There will be work that has not been assigned to a contractor, so the estimator must take care to ensure that every aspect of the project is covered by a work package. The general contractor will be responsible for these unreported project expenses later on in the project.
• Additionally, the estimator needs to ensure that no project detail is included in more than one work package. If this happens, the final bid might not be competitive since costs would have been multiplied needlessly.
• When a project element is split up into several work packages, the estimator needs to specify each work package’s scope precisely to make sure that the parties in charge of each part finish it to a high standard.

The general contractor may request bids from specialty contractors for some or all of the necessary construction work after an estimator has broken up the work into packages.

2. Make a site visit.

In certain instances, a site visit is necessary prior to submitting a bid. But almost always, estimators will find that a site visit is a better way to learn about the conditions of the proposed construction site than merely relying on elevation drawings or photos.

A specialty contractor may rely less on site visits, depending on the nature of the project, and more on the documentation that the general contractor and project owner provide.

An estimator visits the site primarily to gain a better understanding of the site’s conditions and how those could affect project costs.

As an illustration:

• A site that has inadequate drainage, challenging subsurface soil conditions, or nearby buildings may increase the complexity and expense of a project.
• A site with poor access may be more difficult to move materials and equipment, which would raise expenses.
• An inadequately situated utility site (water, electricity, etc.) may necessitate additional underground work, which would increase the cost.

An estimator will visit the site, take notes, take pictures, and work with contractors to ascertain any potential impact the site may have on successfully completing the project.

If they haven’t already, the estimator should become acquainted with the surrounding area in addition to the site itself. This includes:

• Local laws (permits, codes) or ordinances (parking, working hours, noise)
• Specialty contractors and construction equipment rentals are available.
• Roadways nearby that might have to make room for delivery trucks or heavy machinery

For estimators, the site visit is essential in determining the cost and viability of completing the project in a specified location and in accordance with the specifications.

3. Execute a material takeoff.

A material takeoff, also known as a quantity takeoff, is carried out by estimators by going through the construction documents and tallying each item that is needed for the project. Usually, material needs are arranged in order of measurement.

As an illustration:

• Quantity, such as doors
• Area (such as flooring or drywall)
• Volume, such as in concrete
• Length (such as a wire)

To make the bid leveling process easier, the owner or engineer of a large construction project may draft a bill of quantities (BOQ). The scope of work is broken down in this document into a detailed list of tasks and resources. Most contractors still conduct a takeoff to confirm the quantities and spot inconsistencies even in cases where a BOQ is given.

Usually, general contractors will perform a takeoff to generate precise work packages, which they can then either finish themselves or delegate to specialty contractors. Before contacting vendors and suppliers, a specialty contractor usually conducts their own material takeoff by reviewing the specifications to make sure they have an accurate count.

Estimators have a detailed list of all the materials needed to finish the project after finishing a takeoff. In addition, estimators will use takeoff data to ascertain the equipment requirements for every work package.

Estimators may carry out a manual takeoff, in which they count and measure the necessary materials using the specifications using paper copies of the drawings, rulers, highlighters, digital measuring tools, and pencils. These days, the majority of estimators use digital takeoffs made with construction estimating software, which expedites the process significantly. To make sure their estimate is accurate, many estimators still verify the digital takeoff’s accuracy twice.

Contractors can use this information to collaborate with suppliers of equipment and materials to obtain pricing data for their bids.

4. Ask vendors and suppliers for their prices.

After obtaining a definitive inventory of supplies and machinery, specialty contractors start corresponding with vendors and suppliers to obtain quotes.

When determining material prices, specialty contractors need to consider the following factors:

• Ordering extra materials is necessary due to material waste. While waste from unneeded materials should be avoided, some waste is unavoidable (due to material sizing, for example). A contractor should ideally be able to estimate the anticipated waste by reviewing previous projects.
• Order sizes may be dependent on bulk pricing. For example, a contractor might find that, because of supplier pricing structures, buying 40,000 cubic yards is more economical than using 37,000 cubic yards for the project.
• Quotes don’t last forever.When a specialty contractor receives a quote for materials, they must make sure the quote is valid for a sufficient amount of time in order to have their bid accepted and place the project’s material order.

In order to find out the cost of leasing or renting equipment for the duration of the project, contractors who do not currently own the necessary equipment will also need to get in contact with equipment vendors.

Contractors must ascertain how the project affects related equipment costs (for example, depreciation or maintenance) and incorporate this information into their estimate because equipment can be owned, purchased, leased, or rented.

Contractors will have the first firm dollar amounts that must be included in the project costs at this stage of the estimating process. From this point on, estimators will include additional direct, indirect, and overhead expenses in order to determine the project’s actual financial burden from the contractor’s point of view.

5. Assess the amount of labor needed.

Estimators can ascertain the labor required for a project using data from the takeoff. To put it briefly, the estimator must indicate:

• Which roles are necessary to complete the project.
• How many labor hours will it take to finish the project?
• How productive the team will be informed about the current project and data from previous projects

The crew mix for specialty contractors typically consists of laborers, assistants, and tradespeople. Project-specific managers and other experts may work for general contractors; their roles are regarded as direct costs since they are associated with a single project.

Evaluators need to make sure that, instead of just multiplying the total hours by the hourly wage, they compute the loaded labor rate for wages in both scenarios. Included in the loaded labor rate are:

• Salary
• Taxes
• Insurance (such as life, health, dental, or vision insurance in addition to worker’s compensation and unemployment insurance)
• Contributions to retirement
• Union dues
• Vacation or sick leave

If all of the expenses related to hiring someone for the length of a construction project are left out, the estimate will not accurately represent the true cost of labor.

6. Calculate the cost of bonding and insurance.

Both owners and contractors can reduce risk by using insurance and bonds, but this advantage has a price that needs to be factored into project estimates.

Almost all construction companies need general liability insurance. In addition, based on the size, nature, and function of the business, they might also have additional policies, such as:

• Insurance for builders’ risks
• Insurance for mistakes and omissions or professional liability
• Insurance for Inland Marine
• Commercial auto insurance

Contractors working on public projects (and some commercial projects) may need a variety of construction bonds in addition to insurance. These bonds could include:

• Bonds for payments
• Bonds for performance
• Bonds for bids

For contractors, bonds and insurance are financial obligations that must be met by the projects they finish.

Typically, contractors allocate the yearly expenses for bonds and insurance coverage among various projects during the year. For a particular job, contractors might need to obtain additional bonding capacity or insurance coverage.

Evaluators are required to include in the project estimate the cost of bonding and insurance requirements.

7. Determine indirect and overhead expenses.

Estimators have to take into account not only the direct project costs but also the overhead costs necessary to operate a construction company and the indirect field costs related to construction.

Among the indirect field expenses are:

• Licenses
• Temporary offices or trailers
• Site clearing
• Expert services
• Costs associated with equipment (fuel, taxes, insurance, maintenance, and depreciation)
• Applications

Although they are not specified in the bid package, these expenses are required for the project’s construction. As a result, estimators take into account the cost of each of these items as well as how long they will be required (for instance, in the case of a temporary site office).

There are general overhead costs, also referred to as general and administrative (G&A) expenses, in addition to these indirect project costs. These are the overhead costs of running a business; contractors must cover these costs whether or not they have projects to complete.

In order to guarantee the viability of the business, contractors must factor in overhead expenses by allocating them across all of their projects on an annual basis in their estimates.

Typical overhead costs include the following:

• Office space rental
• Pay for administrators
• Subscriptions for software
• Services
• Taxes
• Devaluation
• Protection

In general, estimators take into account both the total anticipated annual overhead costs and the company’s total expected revenue. The estimator can fairly accurately assign a certain percentage of the overhead cost to each project using these two numbers.

8. Take profit and contingency into account.

Following the completion of a construction project’s cost calculation, the estimator will modify the final figure to take contingency and profit margin into consideration. The contractor’s profit is the amount they receive for the contract; they can reinvest this money to expand the business further. Contrarily, a contingency is a portion of the contract allocated for waste and overruns, which are typically expected in construction projects.

Every construction company sets its own minimum desirable profit margin based on a variety of factors, including market conditions and growth objectives.

Comparably, industry-wide contingency numbers differ greatly based on construction type, business size, and project risk. To account for contingencies, many construction companies typically add between 5 and 10% of the contract price.

The estimator has finally arrived at a sales price that generates a healthy profit while paying for all project expenses, including labor, materials, equipment, indirect field costs, overhead, and contingencies. With this amount in hand, contractors are ready to start negotiating with a project owner or general contractor, or they can submit a competitive bid.

converting an estimate into a proposal for a bid

After the sales price is established, a bid manager will usually draft a construction proposal that provides a clear and detailed explanation of every item included in the bid price. Use the same language used in the construction specifications and drawings as bid reviewers will be trying to make sure everything in the scope of work is included in the bid price.

Comparing each section of the bid price to a section of the specifications is made simple when the CSI format is used during the estimating process. Using a standard format facilitates the creation of a schedule of values and enhances the integration between accounting systems and estimating software, even in cases where the bid is for a lump sum contract.

Kinds of approximations

Not all construction estimates are created by estimators specifically for the bidding process. The functions of various estimate types vary based on where they are utilized throughout the project lifecycle. An early estimate might, for example, only give a developer an idea of the approximate cost of a given project, enabling them to determine whether financing will be possible.

Alternatively, an estimate for a project in the design phase can be provided to help assess whether any finishes need to be changed to keep the project within the projected budget.

There are five levels of detail in estimating according to the American Society of Professional Estimators (ASPE).

Level	Name	Description
1	Order of magnitude	This kind of estimate gives a very approximate idea of possible costs based on information from comparable previous projects.
2	Schematic design	Usually entails figuring out the cost per square foot of pre-existing structures with comparable features and scope.
3	Design development	Estimators provide an approximate cost estimate for the project based on a preliminary design and lists of anticipated materials and quantities.
4	Construction documents	Estimators use a nearly completed design to determine a project’s realistic budget.
5	Bid estimate	The cost at which contractors can finish the project is the bid estimate, which they create using the bid documents.

Most contractors, when they talk about estimating, mean a bid estimate, which is an accurate assessment of the expenses related to a specific project with a final design.

Software for construction estimation

By automating some steps in the process, construction estimating software can help speed up the creation of a construction estimate. Despite this, the procedure still typically calls for a trained estimator. Software often aids in computation and tabulation; however, a skilled estimator knows which costs to enter into the program based on their understanding of construction projects, costs, procedures, and rates of productivity.

Either way, the workload that estimators had to bear was significantly lessened by construction estimating software, which also made it simpler to make minor changes without having to manually recalculate entire projects.

The following are some ways that estimator software aids in the process of construction estimating:

• By scanning project drawings and documents, automated takeoffs enabled by machine learning can automatically calculate the amount of materials required.
• Estimators can make small changes to costs that instantly update the entire estimate and reduce human error when computer calculations are used.
• When estimators use software, their productivity goes up because they can concentrate on the human side of estimating instead of the manual side (identifying what equipment is needed, locating better pricing information, etc.).

Estimating software, along with other construction management software, is essential to raising productivity and, consequently, the competitiveness of upcoming bids.

Data-driven projections for sustained expansion

For any construction company, construction estimating is an essential procedure. According to financial management principles, a company needs to comprehend its expenses and generate a profit in order to expand, and good estimating procedures are the first step in that process.

Construction companies with strong financial standing use data-driven estimating techniques. A thorough grasp of indirect and overhead costs, combined with job costing data from previous projects, allows businesses to produce estimates and submit bids that are profitable and competitive.