For construction contractors, estimating is a vital skill. If you don’t master it, your business won’t succeed. Construction estimating involves determining the total expenses for a project, including materials, labor, equipment, and other costs. It’s important to note that some of these costs can be connected directly to a specific aspect of the construction project. Others, such as utilities, administrative fees, and temporary structures, are generally referred to as “indirect expenses.”
It is essential to create precise estimates regardless of the size of the project. For a contractor, inaccurate calculations can eat into profits and harm your business. The costs become part of the construction contract, so you will suffer financially if your estimate does not cover your expenses. When you properly estimate the costs of a project, it’s easier to bid lower than other contractors. Developing this skill can become a competitive advantage.
Types of Construction Estimates
Construction estimates differ in their accuracy and degree of confidence. The type a contractor uses depends on the nature of the project and the stage of the bidding.
Naturally, estimates made at the beginning of a project will be less accurate, and they will become more refined as the process moves forward.
The American Society of Professional Estimators categorizes cost estimates into five levels:
- Level 1: Order of Magnitude. This is the least accurate estimation of the cost of a project. It is a rough estimate developed before the project is well-defined. The forecast is mostly based on the experience of the contractor on similar projects.
- Level 2: Intermediate Estimate. Once the project is well-defined, an intermediate estimate determines its overall feasibility. This type of estimate is significant for commercial projects as it helps project owners choose between carrying on with the project and abandoning it.
- Level 3: Preliminary Estimate. Preliminary estimates are much more accurate than intermediate estimates. They are detailed when it comes to things like unit costs. Developers typically use these estimates to obtain enough financing for their projects. If you need a construction loan, the lender may want to see a preliminary estimate.
- Level 4: Substantive Estimate. Substantive estimates provide more details and take into account project objectives, designs, and deliverables. These calculations are often used as control estimates, which means they show whether the project stays within the budget.
- Level 5: Definite Estimate. Definitive estimates are the most accurate possible estimates for construction projects. These are the calculations used to create tenders, bids, and cost baselines for most projects.
Contactors should understand, however, that no cost estimate can ever be 100% accurate. Thus the term “estimate.” Definitive estimates are still based on a few assumptions and may be updated as the situation changes and the project progresses.
Key Components in an Estimate
Each construction project is unique, and different variables will come into the equation. This means there isn’t necessarily a one-size-fits-all solution for making construction estimates.
There are, however, some elements that tend to remain the same from one construction to another. These typical costs can provide a framework for the overall estimate.
- Quantity takeoff. Quantity takeoff refers to the materials and labor required for the project to begin. This is a crucial component of any construction estimate because it deals with the initial costs to get the project up and running.
- Labor hours. Apart from the labor required to get the project started, the estimator should also consider the total labor hours required to finish the project. This calculation is based on the estimator’s prior experience and the need for skilled specialists, who are more expensive to employ.
- Labor rates. Labor rates include basic wages plus any benefits, contractors’ insurance, and taxes. This figure is more accurately known as the “burdened labor rate,” and it offers a more detailed picture of the total labor costs during the entire project.
- Material prices. The estimator should also take into consideration the full cost of materials required to finish the construction project. This calculation can be more complicated than you might think. Material prices fluctuate based on demand and commodity prices, and these changes may significantly impact the project as it continues.
- Equipment costs. Cost estimators also consider different factors associated with the equipment for the project, including the choice between purchasing and leasing equipment and hiring specialists to operate complex instruments.
- Overheads. Costs necessary for project completion that are not associated with any particular construction activity are known as overheads. These include land acquisition, utilities, design fees, construction insurance, and administrative costs.
- Contingencies. The estimator should also consider possible cost overruns. These can happen due to unforeseen changes in the project. Contingencies are typically added as a percentage of the total after all the other costs are estimated.
Common Estimating Mistakes
Novice contractors may not have the knowledge or experience necessary to make accurate construction estimates. As a result, they make common mistakes, which adversely affect their profit margins in the long run. It’s essential to understand these common mistakes and avoid them when calculating costs and planning your projects.
- Not visiting the site. Site visits help you to form a clearer picture of the place and the project. The more information you get, the easier it is to make more accurate estimates.
- Inaccurately estimating labor costs. Novice estimators may overlook insurance or taxes related to hiring contractors or laborers.
- Inaccurately estimating material costs. Materials costs can change from project to project based on the season, commodity market fluctuations, and demand. Never assume that you know the price of materials from previous projects. You need to check the most updated pricing.
- Failing to assess risks and create contingencies. Unforeseen events or changes can affect the cost of a project. Be sure to include contingency costs, which usually appear as a percentage, to ensure that you account for the unexpected.
- Not reviewing estimates from your subcontractors. Subcontractors may have different prices than the market average, or their rates may change. Even if you have worked with them before, check their estimates to ensure the figures match the ones you include in your calculations.
Tips for Accurate Estimating
Construction estimates can be challenging, especially for novices. Luckily, some tools can help with the process, and there are specific strategies that can make estimates more accessible and straightforward.
Use Construction Estimating Software
Construction estimating software has become significantly cheaper while also becoming more powerful and detailed. These tools make it easy for contractors to streamline and automate the estimating process, leaving less room for error and making it easy to update estimates using new data (rather than restarting the calculations from scratch).
Bid on Projects You Have Experience With
One of the common mistakes that contractors make is to guess on costs with which they are not familiar. As a result, they underestimate project costs, which can eat into profits and cause significant financial losses. If you work in a familiar area, you can make more accurate estimates, or at least you can make educated guesses. A good rule to follow is to only bid on projects with which you have prior experience. Working in areas that you already know will minimize the chances of making inaccurate estimates.
If you want to tackle projects in unfamiliar specialties, consider hiring an expert to help you with the estimate process.
Plan and Price for Overhead Costs
Another mistake contractors make is to fail to consider overhead and contingencies. These costs can easily add up and cause budget overruns. If you are operating on a tight budget, a seemingly simple unexpected change can wreak havoc on your profit margins.
To avoid finding yourself in this situation, calculate potential overhead expenses and price them into the project’s cost. You should also add a percentage of the total estimate to act as coverage for contingencies.