Construction estimates are the result of a meticulous process that calculates all the expenses involved in a construction project. These costs fall into two categories: direct costs, like materials and worker wages, and indirect costs, which include things like equipment depreciation and office salaries. Professional construction estimators take the lead in this crucial preconstruction phase, ensuring both property owners and contractors can finish the project profitably.
To achieve an accurate construction estimate, in-depth knowledge of construction materials, specifications, techniques, building codes, and current pricing trends is essential. We’ll delve into the entire process used by professional estimators to determine project costs, from meticulously examining bid packages to factoring in contingency plans and profit margins.
The Importance of Accurate Construction Estimates
Accurate construction estimates are fundamental to the success of any construction project. Both project owners and contractors rely on these estimates to navigate a project from the preconstruction phase all the way to completion.
For project owners, a solid understanding of the initial construction estimate is crucial. It allows them to determine the project’s feasibility within their allocated budget. If the estimate reveals a discrepancy, adjustments to the design or project scope may be necessary to bring costs in line with the budget.
Contractors also depend heavily on accurate construction estimates. These estimates are used to prepare bids that are both competitive and profitable. Underestimating project costs can force contractors to absorb the difference by cutting into their own profit margin.
Conversely, overestimating project costs can lead to bids that are too high and ultimately lose out to competitors. Even in situations where bids are negotiated, construction estimates need to be accurate to achieve a successful balance between the owner’s budget and the contractor’s profit expectations.
The 8 Steps of Creating a Construction Estimate
A well-crafted construction estimate is essential for the success of any construction project. Estimators, whether working for a general contractor, specialty contractor, or owner, follow a similar process to arrive at an accurate construction estimate, which is then used to create competitive bids or determine project feasibility.
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Review Bid Package: The initial step involves a thorough examination of the bid package, which includes all documents outlining the project’s requirements. This includes construction specifications, general conditions, drawings, and owner-contractor agreements. Estimators meticulously review these documents to ensure they grasp every aspect of the project and its needs.
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Conduct a Site Visit: While not always mandatory, a site visit is highly recommended. It allows estimators to gain firsthand knowledge of the project location and surrounding areas. This firsthand experience helps identify potential challenges that may affect the construction process and ultimately influence the construction estimate. For instance, poor drainage, limited access for equipment, or nearby utilities could all lead to increased project costs.
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Perform a Material Takeoff: This step involves meticulously reviewing the construction documents to determine the exact amount and type of materials needed for the project. Estimators will typically categorize these materials by measurement (e.g., area, volume, quantity, length) to ensure everything is accounted for. Sometimes, an owner or engineer might provide a bill of quantities (BOQ) to simplify this process. However, even with a BOQ, most contractors perform their own material takeoff to verify accuracy and identify discrepancies.
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Solicit Pricing from Suppliers and Vendors: With a comprehensive list of materials in hand, specialty contractors can now reach out to suppliers and vendors to request pricing information. During this process, they consider factors like material waste, bulk pricing structures, and quote validity periods to ensure they receive the most accurate pricing for the project. Equipment rentals or leasing are also factored into the construction estimate at this point.
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Evaluate Labor Requirements: Using the information from the material takeoff, estimators can determine the labor required to complete the project. This includes identifying the necessary roles (e.g., laborers, tradespeople), the estimated number of labor hours, and crew productivity based on past projects and project specifics. When calculating labor costs, estimators consider loaded labor rates, which encompass not just wages but also taxes, insurance, benefits, and other employment-related expenses.
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Determine Insurance and Bonding Costs: Construction projects involve inherent risks, and both insurance and bonding play a crucial role in mitigating these risks. However, these protections come at a cost, and estimators need to factor these costs into the construction estimate. General liability insurance is a must-have for most construction companies, and depending on the project’s scope and size, additional policies like builder’s risk insurance or errors and omissions insurance may also be necessary. Similarly, bonding requirements can vary depending on the project, and estimators need to account for the cost of any necessary bonds such as payment bonds or performance bonds.
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Calculate Overhead and Indirect Costs: A construction estimate isn’t just about direct costs like materials and labor. It also needs to account for indirect field costs like permits, temporary facilities, site cleaning, professional services, and equipment upkeep. In addition to these project-specific indirect costs, there are also general overhead costs, which encompass the expenses of running a construction business These include office rent, administrative salaries, software subscriptions, utilities, taxes, and insurance. To account for these overhead costs, estimators typically spread them out across all projects for the year as a percentage of the overall estimated annual revenue.
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Account for Profit and Contingency: Once all the aforementioned costs are calculated, the estimator incorporates profit margin and contingency into the construction estimate. The profit margin represents the contractor’s earnings for the project, while contingency serves as a buffer to account for unforeseen circumstances or project overruns. The specific percentages allocated for profit and contingency can vary depending on the contractor’s business goals, project risk, and industry standards.
By following these eight steps and meticulously considering all the cost factors involved, construction estimators can create accurate construction estimates that form the foundation for successful project bids and overall project execution.
From Construction Estimate to Bid Proposal
Once the construction estimate is finalized, with a sales price determined, a bid manager typically creates a construction proposal that details everything included in the bid price. This proposal ensures clarity and conciseness for bid reviewers who meticulously check if everything in the project’s scope aligns with the bid price.
To achieve this alignment, it’s important to use the same language from the construction specifications and drawings within the construction estimate. Utilizing the CSI format throughout the estimating process simplifies the comparison between each section of the bid price and its corresponding section in the specifications. Even for lump sum contracts, a standard format like CSI makes it easier to create a schedule of values and improves integration between estimating software and accounting systems.
Beyond Bidding: Different Types of Construction Estimates
Construction estimates serve various purposes throughout a project’s lifecycle, not just for the bidding process. Here are some examples of how different estimates are used:
- Early estimates: These provide developers with a ballpark figure for a project’s potential cost, aiding them in determining financial feasibility.
- Design-phase estimates: These estimates might be used to assess if project finishes need adjustments to stay within budget.
The American Society of Professional Estimators (ASPE) outlines five levels of detail in construction estimates.
- Level 1: Order of Magnitude – This level provides a very rough cost idea based on past projects with similar characteristics.
- Level 2: Schematic Design – This level typically involves cost per square foot calculations for existing buildings with similar finishes and scope.
- Level 3: Design Development – Using a preliminary design and lists of potential materials and quantities, estimators provide a more refined estimate.
- Level 4: Construction Documents – With a near-complete design, estimators establish a more realistic project budget.
- Level 5: Bid Estimate – This estimate, the one most contractors refer to, is a precise evaluation of the costs associated with completing a project with a finalized design.
The Role of Construction Estimating Software
Construction estimating software streamlines the process by automating certain aspects. However, a skilled estimator remains crucial. While software automates calculations and tabulations, an experienced estimator possesses knowledge of construction projects, pricing, processes, and productivity rates, all of which influence the costs entered into the software.
That being said, construction estimating software has significantly reduced the workload for estimators and simplified making minor adjustments without manually recalculating entire projects. Here are some ways this software aids the construction estimating process:
- Automated takeoffs powered by machine learning can automatically determine the quantity of materials needed by analyzing project drawings and documents.
- Computer calculations minimize human error and allow estimators to make small cost changes that are instantly reflected throughout the entire construction estimate.
- Software boosts estimator productivity by enabling them to focus on the human aspects of estimating, like determining required equipment and finding better pricing information, rather than manual tasks.
In conjunction with other construction management software, estimating software plays a key role in increasing productivity and, consequently, the competitiveness of future bids.
Data-Driven Estimating for Long-Term Growth
Construction estimating is fundamental to any construction business. Financial management principles dictate that understanding costs and achieving profitability are essential for business growth. This is where excellent estimating processes come into play.
Financially sound construction companies leverage data-driven estimating processes. By incorporating job costing data from past projects and maintaining a comprehensive understanding of indirect and overhead costs, companies can create construction estimates and submit bids that are not only competitive but also ensure profitability.
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