An accurate, detailed cost estimate can take a long time and is labor-intensive. But its significance cannot be overstated. In order to plan projects and allocate budgets, project owners use cost estimates to determine scope and feasibility. For contractors, these estimates help decide whether to bid on a project.
Estimating is among the toughest tasks in construction. But it is also the most crucial. It is commonly determined whether a bid will be successful or not by how accurate the estimates are and how closely they correspond to the actual project costs. Continue reading to learn more about construction estimating and the different types and methods used by general contractors.
An introduction to construction estimating
Estimating is all about accuracy. In order to be successful at estimating, General Contractors need to have a deep understanding of the requirements in each project to ensure that everything is accounted for. Estimates are necessary in translating project scope, construction methodology, quantity take-off, equipment and labor into a cost needed to deliver the project.
The job of the General Contractor is to put together a package of what's needed and who's needed to make the project a success. It also involves outsourcing works to subcontractors and including their fees onto the estimate.
The importance of choosing the right cost estimating method
At the early stage of a project, planning involves ensuring its financial viability, an estimate of the probable expenditure can help owners decide whether a project is feasible. Estimates therefore serve as the framework upon which the project budget is determined.
Estimates that are too low can result in negative profits that the General Contractor has to shoulder. On the contrary, estimates that are too high run the risk of losing out to a bid that has a lower estimate.
Choosing the right cost estimating method is crucial from a design perspective because it influences the design tradeoffs or alterations during the concept phase phase.
Factors That Affect a Construction Estimate
To begin with, it is important to recognize that every construction project is unique. Each project has individual characteristics that set them apart from each other and there are many factors that define the total cost of a construction project. A good estimate will take all of these factors into consideration.
Quantity takeoffs ensure that every single piece of construction material is included in the estimate. Logistics, taxes, inventory, and lead times are also taken into consideration.
Wages are one of the biggest expenses in any construction project and failure to accurately estimate labor could have negative financial consequences for a General Contractor. Local wage rates, manpower availability and productivity rates are all part of the labor computation. Subcontractor quotation and vendor outsourcing is also part of this factor.
3. Previous Construction Projects
Estimators also look at similar construction projects and factor these in the estimate because previous projects provide historical data that can be very useful when forecasting the possible price of a project. The cost of similar projects provide insight and are frequently referenced by estimators.
4. Equipment - fixed costs such as price and depreciation are also factored in when equipment costs are calculated. Variable costs like gasoline and maintenance are likewise included in the final cost. Oftentimes equipment rental is also required and so general contractors place a margin on top of rental fees to offset costs.
5. Site Conditions - topographic, environmental and geological factors like soil condition, weather, environmental restrictions all affect the cost of a construction project.
6. Inflation - it is likely that the cost of materials, tools, labor, equipment, etc. will fluctuate throughout the construction period and thus variances need to be accounted for in the estimate
7. Design Specification & Scope - the quality and clarity of a design also affects estimates. Unclear and ambiguous scope that are poorly defined by the design team creates a subjective cost interpretation on the General Contractor’s part.
8. Contingency - Most construction projects use a rate of 5%-10% from the total budget to determine contingency. Typically that will cover any extra costs that might come up.
9. Logistics - site location, transportation and proximity to construction resources are also important expenses that need to be considered, for example, a remote island construction site will be costlier to build than a site that is situated in the mainland.
10. Miscellaneous Costs - these are expenses not directly related to the scope of a construction project but are necessary for construction operations. Examples of these are overhead costs, site maintenance, security, statutory fees, insurances, regulatory requirements, and local permits.
Cost Estimating Methods Used By General Contractors
These are the most popular cost estimating methods utilized by general contractors when estimating a project. 1. Analogous Estimation - this method of cost estimating relies on analogies made between similar projects. Previous construction projects and historical data provide one of the best reference points for a general contractor when providing an analogous estimate.
For example a new project being planned is a 300 bed hotel. If a general contractor has delivered the same capacity hotel in the past, they can reference this in an analogous estimate.
This kind of estimate is used during the early phases of the concept or design phase when the drawings have not been finalized yet.Project owners reference these estimates during feasibility studies to forecast expenses.
2. Parametric Estimation - parametric estimating utilizes unit costs and different variables aggregated from the averages of many different projects. The required resources of a construction project are calculated using algorithms or statistical connections based on the historical data.
3. Three Point Estimation - in this method, an estimator comes up with 3 scenarios: Optimistic, Most Likely and Pessimistic. “Optimistic” represents the best case scenario. “Pessimistic” is the worst case scenario and “Most Likely” would be the most probable outcome. It is calculated through statistics and weighted formulas.
4. Bottom-up Estimation - This method is achieved by analyzing the project scope and translating it into a series of very detailed work packages; it is one of the most precise albeit most-time consuming estimating methods especially for large and complex construction projects. It is a very granular approach that aggregates and accounts for every bit of work at the lowest level of detail.
5. Expert Judgment Method - this method leverages the expertise and opinion of technical experts in estimating the cost of a construction project. Their wealth of experience and knowledge are invaluable information that can help provide more accurate estimates to General Contractors.
The 5 Levels of Accuracy in Construction Estimating
The American Society of Professional Estimators classes estimates by five levels, each of which becomes more detailed and reliable as it advances. In the construction industry, it is standard practice to generate multiple estimates throughout the construction phases. The estimates increase in accuracy as the project’s level of definition also increases. Level 1 - Rough Order of Magnitude Estimate
This is a rough estimate created at the beginning of the concept phase prior to the drawings being made, the purpose of this estimate is to help the project owner gauge the possible expenses and to assist with strategic planning. Preliminary estimates are part of the feasibility study conducted during the concept phase, this helps project owners decide whether a project is financially viable.
Level 2 - Schematic Design Estimate
Once the design of the project has been drafted and the general scope of work has been outlined, a schematic design estimate is performed. It is also considered as the feasibility study estimate. Level 2 estimates are often used for budget approval and strategic planning.
Level 3 - Preliminary Construction Estimate
Also known as the budgetary estimate, project owners rely on this estimate in order to raise capital for the construction project. Level 3 estimates provide greater accuracy because an overview of the project scope has been made available together with detailed design documents and specifications.
Information that is now available at this stage to the estimator include the following: floor plans, elevations, sections, preliminary schedules, equipment and outline specifications. The preliminary references for bidding are also established in this stage.
Level 4 - Substantive Construction Estimate
At this point, 90% of the construction documents have been completed. Also known as the bid estimate, Level 4 estimates are comprehensive and the most time-consuming phase because quantity takeoffs are also computed in this estimate. Drawings and construction documents are available for the estimator to utilize at this stage.
Level 5 - Definitive Estimate - is based upon the budget stated in the contract; it is no longer an estimate and the final costs have been determined. Project definition at this point is at 100%. During this phase, sub-contractors' bids and change orders are also reviewed in detail.
How Construction Technology Helps Create Faster and More Accurate Estimates
The quantity takeoff is a critical part of the estimate, it involves creating a comprehensive list of materials and quantities to be used in a construction project. Traditionally, these takeoffs were done manually and the process was laborious and took up to weeks or even months to complete. This meant that estimators faced the risk of missing out on bid deadlines. AI estimating software like Togal AI helps automate the takeoff process by completing the analysis of drawings and quantity reports in a matter of seconds resulting in more bids to send and more work to win. Request a demo to learn how Togal.AI can integrate with your workflow.
Different phases of a construction project rely on different kinds of estimating methods. Some methods are best suited for preconstruction and others like Bottom-up Estimating can only be done towards the latter part of the construction project. General contractors need to be cognizant of the different case usages of each estimating method in order to create accurate estimates. Knowledge of these various estimating methods helps general contractors deliver more value to their clients by choosing the method best suited for the project.