Construction Estimating: What Is It & Why Is It Important?
March 10, 2020
What is Construction Estimating?
Given how rapidly estimating is evolving, it might be prudent to ask: what exactly is construction estimating? At its most basic level, construction estimating is the process of predicting the cost of building a physical structure. But predicting the cost of a structure is just the start of a complex process. Construction estimates need to be accurate because profit margins are typically razor-thin in the industry, so even a slight miscalculation on costs can determine whether a contractor makes or loses money on a project. For these reasons, successful construction projects include multiple cost estimation phases with varying degrees of scope and accuracy.
Accuracy in Construction Estimating Is Essential to a Project’s Success
Over time, construction estimators have traded in their pencils and calculators for software, making a paperless process an achievable objective. While construction estimating has definitely come a long way in the past few decades, there’s still considerable room for improvement since only 31% of today’s construction projects come within 10% of their original budget.
The construction estimating process is highly detailed and requires a specialist with the extensive training and experience needed to develop reliable cost estimates. In this post, we take a closer look at construction estimating by examining who performs cost estimates during a construction project, why it’s so important to achieve an accurate assessment, and what are the key components and levels of construction estimating.
Although cost estimators in the construction industry must be generally familiar with design and construction, they don’t need to be an architect or engineer. They do, however, need to be skilled in dealing with the expenses and data associated with any construction project, which includes quantity take-off, material prices, costs (equipment, capital, and operational), contingencies, variances and more. As construction has become increasingly more competitive, the role of cost estimators has been growing steadily in recent years. In fact, the U.S. Department of Labor’s Bureau of Labor Statistics (BLS) estimates the U.S. had 217,400 cost estimators in 2018, with an increase in employment opportunities of 9% expected over the next decade.
Why the demand? As costs continue to be a major concern for clients and builders due to the extreme financial risks involved in any given construction project, having a skilled estimator who can provide accurate cost estimates can help offset those risks. Therefore, it’s in the best interest of both parties to spend the time needed to properly research a project’s expected costs before proceeding. For these reasons, estimates are “touched” by almost every major role in a construction project.
Construction roles that are affected by cost estimates:
Project owners: Typically allocate their budgets based on cost estimates when they define a project’s scope and assess its feasibility
Contractors: Also use cost estimates to determine whether they should bid on a project
Architects and engineers: Usually provide input for these estimates to ensure the project remains within scope and budget
Project managers: Use cost estimates to track a project's performance
It’s now even becoming common for contractors to review multiple cost estimates from independent estimators, allowing each estimate to serve as a check on the others. Employing this strategy allows contractors to more accurately predict costs, especially on large projects. Ultimately, by keeping all parties focused on delivering a project on time and under budget, accurate cost estimates help to prevent builders from losing money and customers from overpaying.
Why Is Accuracy So Important in Construction Estimating?
Of course, cost estimates should be accurate regardless of industry, but accuracy is particularly important in construction. Accurate estimates are critical in construction because unlike other sectors where businesses set the price for their products and services, contractors must routinely bid on projects and the accuracy of the estimate can be the decisive factor in determining whether a project is won or lost. Furthermore, the unpredictable nature of construction makes cost overruns and project failures more common than in many other industries--which means a contractor assumes less risk the more accurate a project’s estimate is.
Let’s take a look at how accuracy impacts a project’s bottom line. Consider a project’s budget. The budgets and timelines of each project is closely linked to the schedule for repaying lenders, which also require the project to generate revenue as quickly as possible. What’s more, large projects that affect the entire community have a particularly strong need for cost estimates due to the scope and likely use of public funds, which usually requires greater accountability and transparency than private projects. In terms of large projects, accuracy is critical for these projects because even a small error in the unit price of a material is typically multiplied many times, resulting in a large difference in the project's final cost.
While absolute precision is obviously impossible in cost estimation due to factors outside an estimator’s control, skilled estimators do strive to account for as many cost factors as possible. Factors outside of human control include fluctuating market conditions according to the time of the year as well as highly variable timelines due to specific weather conditions. Indeed, cost estimates are even affected by human factors such as the quality of the project plan, the estimator's skill and experience, and the procedures and tools that the estimator uses.
Cost estimation is always complicated, but becomes especially challenging with large projects, which typically require a team of estimators, rather than an individual. In these cases, the members of different roles may provide cost estimates for the same task. For example, contractors and subcontractors may prepare cost estimates for their particular projects. Sometimes, estimates are drawn from someone whose primary role isn’t cost estimation, as when a salesperson in the construction business creates an estimate or architectural firms perform cost estimation in-house. The differences in these roles often result in a large difference in estimates, which is why many construction firms now use qualified independent estimators.
Last but not least, the competitive bid environment in construction usually favors the contractor with the lowest bid that meets standards specified for that project. The time and effort spent preparing these estimates are, therefore, a business investment that can result in a winning bid that will still yield a profit. The more accurate an estimate is the more likely it is the bid will be the lowest--thus delivering a return on the business’s investment in the estimate.
Key Components of Construction Estimating
Although there are many components of construction estimating, cost estimators typically rely heavily on the project's take-off, the document that describes the quantities and types of materials the project will require. This list of materials also drives the estimates for the time and labor needed to complete the project. Cost estimators typically classify these expenditures into direct and indirect costs.
Direct costs can be associated with a specific activity. Materials and labor are the most obvious direct costs in construction, but the depreciation, maintenance, and repair of equipment is also a direct cost that estimators must take into account. Indirect costs, also known as overhead, can't be associated with a specific activity. The costs found in construction estimating would be:
Legal fees and building permits
Accuracy Levels of Construction Estimating
Cost estimates generally become more accurate as the project progresses and estimators gather more information. Each estimate, therefore, begins with a wide range that becomes more narrow with a more precise definition of the project's scope. For example, the American Society of Professional Estimators (ASPE) defines five levels of cost estimates.
The ASPE’s Level 1, or order of magnitude, estimate is the roughest cost estimate since it’s created before the project has been completely defined. This estimate is based entirely on the estimator’s judgment and experience with similar projects. A Level 1 estimate typically has a range of 25 to 75 percent.
The Level 2 estimate is commonly known as the intermediate estimate. Its primary purpose is to determine the project’s general feasibility. It’s typically used to determine if a large project should proceed as planned.
The Level 3, or preliminary estimate, is typically used to consolidate unit costs. It requires a more detailed scope because it typically provides the basis for project financing. Managers occasionally authorize project budgets solely on preliminary estimates, making their accuracy significantly more important than for lower levels.
Level 4 estimates are also called substantive estimates. Unit costs form the basis of these estimates by analyzing a project’s design, deliverables, and objectives after they’ve been reasonably finalized. Project managers typically use substantive estimates to keep expenditures within budget.
Contractors prepare level 5 estimates based on all the information in the project documents, which will determine the bid that a contract makes on the project. Level 5 estimates may be classified into design estimates, bid estimates and control estimates, based on their specific uses.
Design estimates are prepared during the project’s pre-design or design phase to provide an initial assessment of the project’s expenditures.
They include an order of magnitude estimate, which is also known as a screening estimate within the context of a design estimate. The purpose of the screening estimate is to determine the most viable construction method and type. A design estimate also includes a preliminary estimate, or conceptual estimate, based on the project’s schematic design. The detailed estimate, or definitive estimate, is based on the design development. The engineer’s estimate is the final part of the design estimate, which is based on various construction documents.
Bid estimates require an unusually large amount of research that's typically drawn from a variety of sources. They include direct costs, take-offs, subcontractor quotes and the cost of supervising the project.
Control estimates are prepared after the project contract is signed but before construction begins. These estimates serve as a baseline for accessing and controlling the actual construction costs. Control estimates also allow contractors to plan for their upcoming costs in advance and determine the total cost of completing the project.
Estimating construction costs is an increasingly vital part of project management, but construction companies must invest in the technology needed to make it effective. An estimate's accuracy can make or break a project, which can also put a company's survival at risk since many construction businesses live from project to project. Cost estimates are part of the bidding process, which is essential in construction. Estimators routinely develop many other types of estimates during the course of a project, which are typically classified according to their required accuracy.