Accurately forecasting a project’s construction cost isn’t just another task on your to-do list. It's a make-or-break factor for any construction company’s success. Poor estimating can be a double-edged sword: you can not only slash your profits by taking on jobs with little or no profit, but you can also lose jobs you should’ve won to a lower-priced competitor. The impact on profitability is so significant that successful construction companies invest plenty of time and money to avoid this by developing and improving their construction estimating process.
In this guide, we’ll teach you how to prepare detailed estimates and improve your estimating process so you can win better, more profitable work.
Key Takeaways
- Good construction estimating is vital to a construction company’s success. Estimates are used to determine a project's feasibility, ensure that the design stays within the budget, and establish the construction contract price.
- Project comparison, square foot, assembly, and detailed estimating methods are commonly used to prepare construction estimates.
- Any time and energy spent on improving your estimating procedures is a good investment.
The Role of Good Estimating in Construction
Preparing accurate project estimates is a cornerstone of a construction company's success. Construction cost estimating is a strategic process used to forecast both the direct construction costs (material, labor, equipment, and subcontractor) and indirect costs (project overhead costs) for a project based on the construction documents.
Cost estimates affect your company’s profitability in several ways. For example:
- If a cost estimate is missing costs, you’ll need to dip into your profit to cover them.
- If your bids are too high, you could lose business to a cheaper competitor.
- On the other hand, if your bids are too low, you’ll have to accept lower profit margins.
The ideal winning bid doesn’t leave a lot of money on the table, and is based on a cost estimate that accurately captures every construction cost. Few things can impact your profitability as much as hiring a skilled estimator. The right estimator can not only prepare accurate estimates, but price projects in a way that allows your business to win enough work to keep your crew busy and maximize profits.
Common Types of Construction Estimates
Construction estimates are usually organized by the method used to prepare them. Project comparison, square foot, assembly, and detailed estimates are some of the most commonly used methods. Project comparison estimates are the quickest and easiest to prepare and require the least amount of information, while detailed estimates are the slowest and require a lot of information.
Project comparison estimates are prepared using the total cost from a similar project, while square foot estimates use the cost per square foot, allowing for differences in the square footage.
Assembly estimates are made by dividing the building into assemblies and pricing each assembly separately. Unit price, detailed, or bottom-up estimates are prepared by listing all the items needed to complete the project and pricing each item.
Construction estimates can also be organized by the completeness of the project’s design. Order of magnitude, conceptual, and preliminary estimates are used to determine a project’s feasibility and establish the budget before design begins. Additional estimates are prepared at the schematic design, design development, and construction document design stages to ensure the design stays within the budget. Finally, an estimate is used to set the contract price.
How to Prepare Detailed Estimates
The best construction managers establish a comprehensive construction estimating process that helps the general contractor prepare accurate estimates for construction projects. Detailed estimates (also known as unit price, bottom-up, and definitive estimates) are the most accurate estimates. They are used to establish the bid, set the contract price, and price change orders.
The estimating process for preparing detailed estimates follows these eight steps:
Note: Steps 2 through 6 can be performed in any order (and are often performed at the same time).
Step 1: Plan the Bid
The first step is planning how to prepare the bid. This is done by carefully reviewing the bid package and identifying all the tasks needed to prepare a complete and accurate bid. This could include:
- Attending required preconstruction meetings
- Visiting the job site
- Getting construction bonds
- Taking off material quantities
- Getting subcontractor quotes.
During this planning, estimators should identify all the work included in the project by mapping the project’s scope of work to the company’s job cost codes. Scopes of work are then written out for each required job cost code by dividing the scope of the project into the job cost codes, making sure all the work is covered (and there’s no double coverage). Estimators should also identify what work will be done by in-house crews and what will be subcontracted.
The last step in planning the estimate is to schedule the tasks needed to complete the bid and assign the tasks to a specific person. The schedule should clearly communicate who is responsible for what and when it needs to be completed. Setting and following a schedule helps prevent putting the estimate off until the last minute.
Step 2: Get Subcontractor Bids
Because subcontractors need time to prepare accurate estimates for themselves, the process of getting their bids should start early in the estimating process.
This process starts with preparing requests for proposals (RFP) for the subcontracted work. The RFP should clearly identify the project, the scope of work the subcontractor will bid on, and when the bid is needed.
The next step is identifying subcontractors to bid on the project and sending them the RFP. We recommend establishing a prequalification process to ensure that high-quality subcontractors are used on the project.
Once several bids for an RFP have been received, it’s time to compare them. If the bids differ from the scope of work in the RFP, adjustments need to be made to make them equivalent. This is known as bid leveling. After the bids have been leveled, the best subcontractor bid is included in the estimated project costs.
Step 3: Price Materials
When in-house crews are used on a project, the materials they need have to be estimated and included in the bid. Materials are priced by preparing a materials takeoff (often referred to as a quantity takeoff or QTO) from the project plans, and grouping the materials by the type of supplier. For example, the drywall takeoff is separate from the wood framing takeoff.
The QTO is prepared by identifying and quantifying all the materials needed to complete the project. This could be done by the contractor’s estimator, a material supplier, or a construction estimating service.
Once the QTO is complete, material lists are sent to suppliers for material pricing. The material cost is determined by multiplying the material quantities by the unit price from the selected supplier. The costs for the individual materials are added by the cost code, and a waste factor is added to cover the extra materials needed for construction errors and damaged and lost materials. The material costs, including waste, are then added to the bid estimate for the project.
Step 4: Price In-House Labor
When in-house crews are used on a project, that labor cost must be included in the bid. The first step here is determining the amount of work that will be performed by this workforce. The amount of work is typically measured in labor hours (one person working for one hour). The amount of work is based on the QTO. It’s determined by dividing the number of materials to be installed by the crew’s estimated productivity, which is the quantity of materials they can install in one labor hour.
Estimating labor productivity is one of the most challenging parts of preparing an estimate. A crew's productivity changes daily, making it hard to predict how long it will take to complete work. Historical data is the best source of information for estimating productivity because it reflects a crew’s past performance. Alternatively, published cost data, such as databases from Gordian RSMeans, may be used.
The quantity of labor is multiplied by the average hourly burdened labor rate for the crew to determine the labor costs. This average hourly burdened labor rate should include:
- Wages paid to the labor
- Labor burden (Social Security, Medicare, unemployment taxes, workers’ comp, and liability insurance)
- Fringe benefits (insurance, retirement, PTO)
The wages, labor burden, and fringe benefits must comply with federal and state laws, such as the Davis-Bacon Act and the Fair Labor Standards Act. We recommend working with your payroll accountant to identify all the labor costs.
Finally, the labor costs are incorporated into the total costs for the project.
Step 5: Price Equipment
In-house equipment costs should always be included in an estimate. To do this, begin by determining what equipment is required and how long it will be needed on the job.
Some equipment, like small tools (shovels, hammers), will be purchased or rented for the job, which makes including their cost in the estimate easy. The purchase price and rental costs are added to the estimate.
Other equipment, such as excavators, will be purchased and used on several jobs. The cost to own (including depreciation, interest, insurance, and storage) and the cost to operate (including fuel, oil, filters, tires, maintenance, wear items, and repair reserves) this equipment must be allocated to the jobs. Equipment costs for company-owned equipment are determined by establishing an hourly unit cost and multiplying it by the number of hours the equipment is required. The unit cost should equal the annual cost of the equipment divided by the estimated annual usage. Working with your accountant will make this process much easier.
Finally, the equipment costs are incorporated into the total costs for the project.
Step 6: Estimate Project Overhead Costs
Project overhead costs include all construction costs that aren’t associated with completing a physical component of a project. All the direct construction costs, the costs of physically building the project, should be included in either the subcontractor bids or the pricing of the materials, labor, and equipment. Project overhead can include:
- Your project management team
- General labor (site cleanup, etc.)
- Temporary facilities (fencing, office trailers)
- Temporary utilities
- General equipment (tower cranes)
- Bonds
- Insurance
- Permits
Project overhead costs should always be estimated with the same accuracy as the in-house work. Each item should be quantified and priced separately. Many of these costs, such as supervision, are a function of the project’s duration. To estimate these costs, a high-level schedule must be prepared to determine the project’s duration.
Once all the project overhead costs have been accounted for, they are added to the estimate.
Step 7: Add Markups
Markups are commonly used to add general overhead, contractor contingency, and profit to the bid. Typically, they’re a percentage of the construction costs, the sum of the subcontractor, material, labor, equipment, and project overhead costs.
The general overhead markup covers the project’s contribution to the cost of operating your construction company. General overhead costs include all expenses that cannot be billed to a job, such as the owner’s salary, accounting, and marketing. This markup can be calculated by estimating the annual cost of operating the company and dividing it by the expected revenues for the year. We recommend working with your accountant to determine this markup.
The contractor contingency is used to cover unexpected costs and risks. These include increases in material prices caused by unexpected changes in market conditions (such as shortages), increases in labor costs due to renegotiation of union contracts, and bad weather. Estimates must be carefully prepared to make sure the contingency isn’t used to cover poor estimating.
The profit markup gives the company’s owners a return on their investment. Estimators should consider the project’s risk, who is bidding on the project, and market conditions when establishing the profit margin.
Step 8: Submit the Bid
The final step is to submit the bid. Before submitting a bid, estimators should carefully check the estimate for errors and verify that all the blanks on the bid documents have been filled in. When submitting the bid, they should carefully follow all the bid instructions and procedures, as most government projects and some private projects require incomplete bids and bids with procedural errors to be disqualified. Check out the book Estimating in Building Construction for more in-depth information.
Tips on Improving Your Estimates
Because preparing accurate cost estimates is critical to a construction company’s success, it’s always a good investment to spend time and money improving your process. Here are a few ways you can improve your company’s estimating:
Develop and implement a standard estimating process - This reduces the chances of missing an essential estimating step. By following the same process repeatedly, you’ll get better (and faster) at it over time.
Implement an accounting system that provides accurate historical cost data - This historical data should include the costs, the number of labor hours, and the quantity of work performed so that productivity can be determined. Your historical data should be validated to ensure that it accurately reflects the project’s costs. Once validated, it should be used to update the company’s cost-estimating database.
Leverage technology - Spreadsheets, BIM, and estimating software can automate the process of preparing estimates and improve their accuracy. This includes developing estimating templates and checklists that help reduce estimating errors.
Provide ongoing training to employees - One way to provide your team with additional educational opportunities is to get involved with the American Society of Professional Estimators, a construction industry trade organization focusing on construction estimating.
Perform close-out audits on each project - After a project, the project management team should review how cost estimates can more accurately reflect the actual project costs. This review should not only look at how the estimating can improve but also at what worked so that it can be incorporated into future estimating.
Leveraging Estimating Software
If you’re looking to make the estimating process faster and more accurate, you can try estimating and takeoff software like On-Screen Takeoff®. This platform allows contractors to determine material quantities from construction drawings. Some project management software like Procore, also includes takeoff software.
Construction estimating software can be as simple as setting up estimating templates in an Excel spreadsheet, such as Excel, or as complex as purchasing construction estimating software with a cost database. Either way, your company’s unique needs will help you decide whether or not it’s worth it to purchase this kind of software. Just keep in mind that any software you purchase should not only improve the cost-effectiveness of preparing estimates, but improve their accuracy as well.
Final Thoughts
A large part of a construction company’s success lies in its ability to prepare accurate construction cost estimates. If you can make your estimating process more efficient, you’ll be able to free up more time that can be spent managing projects, getting better pricing from suppliers, and growing your business. And while it may take time and energy to improve your estimating process, it’s an investment you’ll quickly see a return on.