The accuracy of a construction estimate can mean the difference between profit and loss. Estimators leverage historical data, industry databases, and advanced software tools to produce reliable cost estimates for project stakeholders.
However, even the most careful and diligent estimation process can have unintended consequences. Consequently, a comprehensive understanding of indirect and overhead costs is essential to a financially sound construction business.
1. Time
Construction estimation is a crucial step in creating projects that are cost-effective and profitable. However, achieving accurate estimates isn’t always straightforward. Whether due to calculation errors, insufficient time spent on the estimate, or lack of reliable data, estimating accuracy can be a significant challenge for any company in the construction industry.
Depending on the stage of the project, a cost estimate requires different levels of accuracy. For example, early estimates at the beginning of a project life cycle serve to provide a rough idea of potential costs and are more tentative than estimates created during the design phase.
The more time that is spent on a project estimate, the more precise it will be. Nonetheless, it is still important to identify potential risks and build in contingencies to mitigate them. Otherwise, unforeseen issues that arise during the construction phase can drastically affect project completion timelines and costs.
In addition to considering the impact of unforeseen costs, estimators must also make sure that they take into account any time constraints that could influence project success. For example, construction that is taking place during a winter or rainy season may have an increased risk of delays and should therefore be allocated a larger contingency amount than if it were taking place during a summer. Also, a lengthy design review process can add to overall project costs as well.
2. Money
The money required to fund a construction project is another factor that can influence the accuracy of a cost estimate. Inaccurate estimates can result in a company missing out on profitable projects, losing the ability to bid on future work or even having to close up shop altogether.
Building materials and supplies are one of the biggest costs for construction projects. These costs are often subject to market conditions and supplier pricing. Locking in prices while estimating can help prevent these variables from negatively impacting your project’s bottom line. In addition, forming relationships with suppliers can provide you with a competitive advantage when it comes to negotiating discounts.
Insurance requirements are also a common part of the overall cost of a construction project. This can include performance and payment bonds as well as general liability. For projects that require specialized workforces, the transportation costs for workers and equipment can add up as well.
Many large construction projects are complex and involve multi-discipline engineering. Adding in the time and expense needed for the technical review of the project can also drive up the overall cost. It is also important to consider the impacts of inflation when preparing a cost estimate and to express it in year-of-expenditure dollars. A projected rate of inflation should be chosen that reflects the estimated construction and development durations as well as the potential for schedule slippages.
3. Experience
The ability to accurately and consistently produce repeatable construction cost estimates requires the right mix of skills, experience and tools. A construction estimator’s specialized knowledge and commercial acumen are the keys to delivering quality estimates on time and within budget.
Performing an estimate requires attention to detail, the use of the best software available and a clear understanding of the specifics of the building project. Even a single mistake can dramatically throw off an entire estimate. For example, if an estimator misses the number of windows in a skyscraper, the estimate will be off by millions of dollars.
Other factors that affect accuracy include the availability of labor, materials and equipment. Having strong relationships with suppliers and manufacturers can be helpful, as they may be able to provide price information early in the estimating process and lock prices into a contract. These types of discounts can have a significant impact on overall project costs, especially on large projects.
The most important factor of all, though, is the experience of the estimator. Without a good amount of experience, errors in the estimating process are likely to occur and will be amplified on larger projects. Those errors may result in a bid that loses because it is too high or wins because it is too low, which can be financially devastating to both the contractor and the client.
4. Knowledge
Construction estimators require an in-depth knowledge of blueprints, as well as the costs of building supplies and labor. Moreover, their efforts are augmented by the ability to identify patterns and lessons learned from previous projects. These insights can help constructors optimize their estimating processes and improve the accuracy of future estimates.
Cost estimating is a critical step in the planning process for capital projects. Moreover, inaccurate estimates can jeopardize project profitability and even the financial solvency of construction companies. Hence, accurate cost estimating is essential to ensure effective project execution and sound decision-making.
Establishing relationships with building product manufacturers and suppliers can help you secure the necessary materials at competitive prices. Especially during this time of uncertainty over tariffs, the ability to lock in costs can save you money on your upcoming projects.
Understanding the scope of the project is also an important element in preparing a cost estimate. This includes identifying the overall objectives and size of the project, as well as the functionality and design specifications that will guide resource allocation and contingency planning.
Determining the correct labor productivity rates for each construction task is also a key factor in constructing an accurate cost estimate. To do this, estimators must consult with experienced workers or reference historical data to establish realistic and industry-standard productivity rates. Additionally, they must consider whether the equipment needed can be rented or purchased. If purchasing the required equipment, they must account for rental costs, maintenance, insurance, and depreciation.