Construction Estimate: Everything You Need to Know

construction estimating 101
Developing a construction estimate is one of the most difficult aspects of construction to get right. In this post, we answer the most frequently asked questions about estimates.

Your Construction Estimate Questions, Answered

Take a moment to look at one of the tallest buildings in your city. Think about what’s going on inside it. You may imagine employees meeting customers or maintenance staff up on ladders fixing light bulbs. For a cost estimator, you’re seeing so much more. You’re seeing the nuts and bolts of the building–from the HVAC system to the flooring and even the wall studs holding the building upright. You’re factoring in the materials and labor used to make such a monumental structure, then developing a construction estimate to predict just how much it would cost to construct it.

Developing a construction estimate is one of the most difficult aspects of construction to get right and because it impacts so many different aspects of a construction project, it’s imperative that the estimate be accurate. In this post, we answer the most frequently asked questions about estimates, providing everything you need to know to get up to speed on one of the industry’s most important but least understood functions.

What is a Construction Estimate?

Although there are many types of construction estimates depending upon the stage of a project, a construction estimate at its most basic level is forecasting the expense of building a physical structure.

How Are Construction Estimates Used?

Construction estimates are used differently depending on the client who hires a contractor to manage a project. Beyond the costs of the actual building project, a property owner will review the construction estimate to determine the costs of long-term maintenance and upkeep of the building after it’s constructed. They will also use several construction estimates from different contractors to decide on the right bid and develop the overall budget. In addition, the owner often requires the estimate to take into account unforeseen expenses to prevent scope creep during construction.

Architects and engineers also review cost estimates to understand the feasibility of the building project. They’ll check to see if specific client requests will fit into budgetary restraints. Likewise, because the safety of workers and building functionality play important roles when creating the estimate, A/Es will review the estimate to determine construction limitations for building aspects.

Building contractors also use construction estimates to determine the ongoing costs of the project. While they want to see what their labor, material and construction equipment costs will be, they also use construction estimates to understand the costs of short-term or long-term storage of equipment and supplies. Builders want to know, for example, the costs of the logistics to bring specialized equipment to the construction site or to provide specialized workers for key aspects of the build. They’ll also use the estimate to win construction jobs as well as determine how much profit they’ll make.

For these reasons, a good building estimate should take all parties into consideration, since they’ll work as a team for the duration of the project. 

Who Handles Construction Estimate Work?

The person who handles cost estimation work varies. Owners will typically hire independent construction estimators, but architects and engineers may already have in-house estimators they work with for every project. Building contractors may hire independent estimators, have in-house salespeople handle the estimate, or do the estimation work themselves via cost estimation software.

Since there are usually different estimators involved in any given project, the depth of the cost estimate can also vary. Keep in mind that at the start of the project, cost estimates may not be fully completed because the required documentation is not yet available. So the estimate may only cover 25% or 75% of the project costs. The accuracy of the cost estimation will, therefore, depend on a variety of factors, including taking into account previous building projects that are similar to the current project.

The contractor’s role in the project will also factor into an estimate’s accuracy. You may only receive a partial estimate for the foundation work if that’s the only aspect the foundation contractor will manage before the project is passed on to the framing contractor. The estimator will take this into consideration when compiling the numbers for the entire project.

How Many Estimates Are Used in a Project?

Several cost estimates will be created during the pre-design phase and the design phase of a project. These levels are broken down into five basic categories.

Project Estimation Cost Levels:

  1. Order of Magnitude Estimate: This estimate is often considered to be the pre-design or project initiation estimate to determine the project’s feasibility.
  2. Schematic Design Estimate: This is an intermediate estimate created during the schematic design phase and has 15–20% margin of error.
  3. Design Development Estimate: This estimate is made when the designs are created and is often considered the preliminary estimate as project budgets may be created at this time based on the designs. The margin of error for this estimate is 10%.
  4. Construction Document Estimate: The construction document estimate is determined based on the construction specifications and drawings and includes a margin of error of 5%. This estimate can also be the substantive estimate to determine unit costs because the contractor has more finalized project documentation regarding deliverables and objectives.
  5. Bid Estimate: This contractor-generated estimate is provided as a bid to the client as the estimate is based on construction documentation. At this level, the tenders may also be created.

Estimates can become even more detailed and broken down into small sub-categories based on the complexity of the building project. As the project moves through each of the phases, the accuracy of the estimates will also increase.

While these estimates are commonly used in standard construction projects, smaller projects don’t always require all five estimates. Instead, smaller projects will primarily focus on creating both design and bid estimates and include a control estimates category. The cost estimates category focuses on costs after the contractor agreement is signed by the client but before the work begins and establishes a baseline estimate that the client uses to monitor actual construction costs to prevent overages.

What Types of Estimates Are Created Throughout a Project?

Developing Estimates for Building Aspects

A cost estimator will create an estimate for every aspect of the project, from the nails and screws needed to the labor used to complete the project. Due to the sheer magnitude of compiling potential and actual expenses during estimation, the estimator will break down construction information by certain elements. These elements are based on the specific functions of the building, such as the interior, while not entirely focusing on the materials, design specifications, or how the building will be constructed.

A method, called UniFormat II, is a valid ASTM format that cost estimators turn to when performing their work. Contractors who are providing cost estimates may also rely on CSI MasterFormat to create element divisions. Major element categories for UniFormat II include:

  • Substructure
  • Shell
  • Interiors
  • Services
  • Equipment & Furnishings
  • Special Construction
  • Site Work

The estimator then breaks down each of these elements further with detailed explanations. For example, in terms of the substructure category, the estimate will be broken down based on the floor construction system, roof construction system, exterior enclosures, exterior walls, exterior windows, and exterior doors. An explanation of what type of system will be required, such as steel doors with steel casings for the exterior door’s category. Each element for the doors will be listed, including the hardware and weather stripping.

Once the estimator decides on the type of element, the cost estimate summary is developed either based on the quantity, such as doors and windows, or the square footage ratio unit for flooring, roofing and exterior walls. Estimates will also be based on the rate, total costs, cost per square foot, and the percentage of the trade cost.

Using this element design estimate system allows for easier costing for materials and labor based on quantity and unit costs. In addition, each element can be broken down based on the quality of materials that will be used. So a project may start off by using materials that consist of corporate building quality. If the owner is looking to reduce costs due to a smaller budget, regular commercial building quality materials may be substituted. In addition, cost overruns can be monitored quickly with these estimates, as any corrections can be made before the project moves into the next design phases.

Calculating Element Cost Estimates

To create a calculation based on elements of the building project, an estimator can use several methods depending on whether they are calculating material costs, labor costs, overhead or profits. These methods include:

  • Multiplying the unit costs/unit rates by the quantity of the specific element
  • Adding the costs of labor and materials for the system components for the element
  • Adding up the element’s assembly costs

Because there is no set method for calculating these construction costs based on the building elements, an estimator may use one or all methods when developing their design estimate summaries.

Developing Estimates Based on Construction

Beyond the estimation of building aspects, estimators also need to calculate costs related to the physical construction of the building itself. These expenses include labor, equipment costs, subcontractor costs, and other factors:

  • Labor rate: The amount per hour paid to skilled workers
  • Labor hour: The unit of measurement that determines the amount of work that a person can do within that hour
  • Equipment costs: The cost of renting or operating equipment that will be used for the project. Project deadlines will play an important factor in equipment costs
  • Material prices: Historical data is often used to determine material prices as market trends can cause the final estimate to fluctuate based on when the materials are purchased during buying cycles
  • Quantity takeoff: A list compiling the amount and cost of materials and labor needed for a specific project
  • Contingencies: Unforeseen circumstances can occur anytime during the project that can throw off budgets. Contingencies take into account this situation
  • Variances: Variances are developed to cover any fluctuating expenses. Typically, estimates are usually lower than actual construction costs. The property owners will set aside a large budget to cover the discrepancies if construction costs increase due to weather, higher worker wages, or seasonal events
  • Indirect costs: Indirect costs cover everything from administrative costs, transportation costs, permits, legal fees, and other factors

In addition to these elements, the operational and maintenance estimates may be calculated along with capital costs in acquiring the land, bonds to guarantee the delivery of the project, contractor profits, and supervision costs.

Skilled estimators will also leverage historical data to validate estimates. Although no building project is exactly the same, historical data can show actual construction costs for buildings that have many basic similarities. The historical data may be gained from previous successful contractor bids, databases, vendor data sheets, and commercial references.

When basing estimates on historical trends, it’s also a good idea to evaluate the location and city where the project took place because local real estate markets can have drastic price differences based on local economies as well as different inflation rates. Labor costs in different geographical regions can also have a huge impact on estimate accuracy, so it’s always wise to evaluate local labor costs when looking at historical trends.

What Techniques Are Still Commonly Used for Construction Estimating?

We briefly touched on several construction estimate techniques, such as developing unit cost estimating based on building element assembly because this technique is fast and accurate. Yet this is only one of many techniques that an estimator can use based on certain aspects of the project. Here are a few more common techniques:

Joint Allocation Estimation: This technique is used when trying to calculate difficult costs for individual project aspects. For example, trying to calculate field supervision expenses isn’t simple because the construction project hasn’t officially begun. Instead, several other calculations may have to be performed, such as prorating field supervisor tasks that will impact the total project costs.

Production Function Estimate: The production function estimate is used when determining input and output costs. The amount of work that a person puts in within a certain time frame along with the materials that are used (input) will be compared to the work that is completed (output).

Stick Estimation: More companies are moving away from stick estimation, but we will still mention it here. This process involves taking every piece of material and component of the job and creating a list of costs. It is very time-consuming although it can create a highly accurate estimation. Another issue with stick estimation is that you may not have all the documents necessary to list all the components if you’re working with incomplete information.

How Can you Simplify the Construction Estimate Process?

Construction estimation is a detail-oriented process. Having an estimator that is knowledgeable about their field, current construction standards, and market trends is essential to produce an accurate estimation. Companies that don’t have an estimator on staff and can’t justify the costs of implementing estimation software, can find help through construction estimating services. These services reduce the estimation work and time while providing accurate bids that will allow construction projects to successfully move forward. For more information about construction cost estimating services, turn to 1build.

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