How To Estimate Construction Costs

How To Estimate Construction Costs

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How To Estimate Construction Costs

Estimating costs is one of the most important steps in the construction process. An accurate estimate allows you to submit competitive bids, negotiate fair pricing, and monitor project profitability. While estimating may seem intimidating, breaking it down into clear steps makes it manageable even for first-timers.

This comprehensive guide will walk you through the key elements of creating a construction cost estimate. We’ll look at the different types of estimates, how to accurately calculate all costs, and techniques for adding markup and margin. With the right approach, you can become a proficient estimator and give your business the advantage of reliably profitable projects.

Types of Construction Cost Estimates

Feasibility Estimate

A feasibility estimate provides a rough idea of costs using limited project details. It may rely heavily on historical data from similar projects. Often based on cost per square foot, this type of estimate has low accuracy, typically within +/- 30%.

It allows you to determine if the project aligns with the client’s budget expectations early on before committing significant time and resources. If it looks feasible, more detailed estimating can proceed.

Schematic Design Estimate

At the schematic design phase, some preliminary drawings and basic information are available. An estimate at this stage will have medium accuracy, usually +/- 20% or better. It utilizes the known building size and style to estimate costs based on historical data.

As design progresses, schematic estimates help clients decide if budgets need adjusting or designs modified to get construction costs in line.

Design Development Estimate

With the design development estimate, most specifications, drawings, and plans are complete. Improved design details increase the accuracy of this estimate to +/- 15% or better. It provides a realistic budget for construction and identifies any significant budget overruns while there is still time for design modifications.

Bid/Tender Estimate

The bid or tender estimate uses complete drawings, plans, and specifications to compile a detailed, accurate estimate. It allows contractors to set competitive bidding and pricing.

Bid estimates achieve the highest accuracy, typically within +/- 5%, giving contractors confidence in project profitability.

Gather Project Details

To produce an accurate estimate at any stage, start by collecting all available project details including drawings, specifications, and other documents like site studies or surveys. Photographs can also supplement your understanding.

Visit the site to observe existing conditions and access challenges. Pay attention to the topography, ground conditions, vegetation, existing structures and utilities. Document anything that may impact construction timelines or costs.

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For bid estimates, read the specifications thoroughly and clarify any vagueness in the documents with the client. It also helps walk through the drawings together to visualize the scope. The more unknowns you can clear upfront, the less chance of costly surprises down the road.

Determine Quantities

A quantity takeoff is the next vital step in estimating costs. Physically measuring all required materials from the drawings will take time but leads to the most accurate materials estimate. For bid estimates, a complete manual takeoff is recommended to reduce errors, but you can use takeoff software for conceptual estimates.

Remember to:

  • Account for material waste which adds extra costs. Review past projects to determine typical waste percentages.
  • Adjust quantities based on site conditions like difficult access or water runoff considerations.
  • Factor in design issues like complex geometries or building features that affect material needs.

A comprehensive list of quantities provides the foundation for an accurate estimate. While tedious, an investment in a detailed takeoff saves headaches when acquiring materials and during construction.

Get Accurate Pricing

Use the measured quantities to get written quotes from material suppliers and vendors. Seek quantity discounts where possible but also confirm lead times and quote validity—material costs can change rapidly. Avoid getting locked into expired quotes.

Labor costs account for a significant portion of any construction project. Identify the types of tradespeople needed and typical crew size. Break down the project into tasks and estimate the manhours required for each based on the scope and quantities. Have experienced colleagues review labor hour projections, as inaccuracies here have a big impact.

Finally, apply realistic loaded labor rates inclusive of wages, taxes, insurance and benefits. The total hourly rate is often 20-50% higher than wage alone.

Don’t underestimate equipment costs either whether purchased, leased or rented. You’ll also incur costs to transport, operate, maintain, insure and tax equipment over the course of a project.

Account For Project Costs

Direct Costs

Direct costs include all expenses specifically tied to the project itself:

  • Labor: Workers’ wages and salaries
  • Materials: Raw materials for the project
  • Equipment: Purchased or rented tools/machinery
  • Subcontracts: Work contracted to third parties

Indirect Costs

Indirect costs are necessary for construction but not part of the permanent work:

  • Mobilization/demobilization: Transporting equipment to/from site
  • Temporary facilities: Site offices, washrooms, utilities
  • Permits and fees: Building permits, municipal fees
  • Site security and cleaning
  • Project supervision: Onsite management staff

Company Overhead

Overhead covers general business operating costs:

  • Office space and associated expenses
  • Administrative salaries
  • Software, technology, and telecom costs
  • Insurance premiums
  • Accounting and legal fees
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Overhead gets spread across all projects annually, so you’ll need to determine the typical overhead as a percentage of direct costs.

Consider Project Risks

Construction projects involve inherent risks that must be addressed through proper insurance and contingency funds.

Typical policies like general liability insurance and workers’ compensation protect the business from common risks. Assess the project’s unique risks to determine if expanded coverage is needed, such as builders risk or professional liability insurance.

Many public projects also require submitting bid, performance and payment bonds along with your proposal—an added project expense passed on to the client.

Identify risks related to the site, complexity, project team, or procurement that could result in delays or cost overruns. Brainstorm creative solutions to mitigate identified risks.

Add Markups

Contingency

No matter how thoroughly you estimate, expect the unexpected. Industry best practice is to add a 5-10% contingency reserve to the estimate total to cover changes in scope, unforeseen site conditions, corrections, delays or deficiencies. Contingency gives a buffer for managing most unknowns without turning small issues into major cost overruns.

Profit

The markup above costs provides the profit margin that keeps your business running and funds future growth. Typical construction industry profit margins fall between 10-20%, but this varies based on market conditions, project risk, and a company’s minimum profit goals.

Review historical profitability on similar past projects when deciding on your target profit for a new estimate.

Sales Tax

If the project is taxable, remember to add applicable sales tax to the total costs. Sales tax rates vary significantly by jurisdiction.

Compare to Budget

Take a step back and compare your estimate total to the client’s budget expectation before finalizing it. If it exceeds the budget substantially, consider areas where the design or finishes can be value engineered to get costs in line before bidding.

Finalize the Estimate

Before submission, diligently review every aspect of the estimate again or have a colleague provide peer review. Validate cost projections against historical data from past projects. For major bids, it can be worth getting a third-party review from an estimator with no stake in the bid value.

Present the final estimate to stakeholders and clients and be ready to provide explanations for each element. Make all estimate assumptions clear, and document any exclusions or qualifiers.

With approval, you can now confidently proceed with bidding and procurement knowing your profit margin is realistic.

Conclusion

Preparing accurate construction estimates takes time and diligence. But a detailed estimate based on complete information is proven to maximize bid success and project profitability.

Leverage technology, tap collective knowledge through peer reviews, and always keep improving your estimating process through lessons learned. With each completed project, you’ll refine your ability to produce winning estimates.

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