There are many events during a construction project that can derail plans and wreak havoc on cash flow. One of the most critical ways to control cost overruns is by improving construction estimating — essentially, the art of educated guessing — before the project ever begins. A construction estimate provides the foundation on which the rest of the project will be built. The accuracy of your estimate will determine whether you finish the project on time and under budget, or is plagued by cost overruns and delays.
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What is Construction Estimating?
Construction estimating is the process of forecasting the total costs to complete a job. A good estimate accounts for every single expenditure associated with a project. This means it should include every single item on the plans and in the specs.
An estimate will contain many factors not shown on the plans and specs, but still required to realize the building. Temporary shoring, project accounting, equipment rental, insurance…the list goes on and on. Every bit of it must be accounted for, because if the owner doesn’t pay for it, you will.
Free estimate templates
Download a free construction estimate template in Excel, Google Sheets, or PDF, customizable for just about any construction project.
Why Accurate Construction Estimating Matters
Owners typically work from a budget, which is the amount they expect (and hope) the building will cost. But the contractor has to determine how much the building will really cost. And that calculation is the construction estimate.
Read more: What to include in a construction budget
“Estimating” really sums up both the difficulty and opportunity of being a contractor. You have to estimate the cost of building something that has never been built before. Then you make a bet that you’re right. If you guess too high, you don’t get the work. If you guess too low, you don’t get the profit. As a result, it’s critical that your educated guess is as well-informed as possible.
The most important role of a construction estimator is to win work for the company. This is particularly true in bid work, where the owner will consider more than one company’s proposal.
Accurate construction estimating will be the difference between winning the bid or not. And the bid reflects more than just the price you’ve set. As your first communication with a potential client, a bid will provide a sense of your thoroughness, your attention to detail, your organization, and your transparency.
A slightly higher estimate presented in detail and in a professional format will always be considered over a lower number scrawled in pencil on a piece of paper.
Improving Cash Flow
You can’t bill for work that’s not on the schedule. Knowing your costs up front at every stage of construction means you can bill for those costs as soon as they’re incurred. If your estimate didn’t include renting a crane and now you realize you need one, it’s going to be hard to put the crane rental on the Application for Payment in a timely fashion.
In fact, you may not be able to bill for it at all if it wasn’t in your estimate. Or say you missed the labor burden on your employees. You still have to pay it and you may have to carry that cost until the end of the job.
One of the greatest advantages to proper construction estimating is the deep familiarity with the project you get as a result. If you’ve really taken the time to count every lag bolt and account for every bit of formwork, you know every component of your work. This means you can bill for and you can prove that it’s required and that it’s done.
Most project and payment disputes are the result, not of greed, but of misunderstanding. A deeply researched and reasoned estimate will make sure you understand.
It’s important to understand the difference between an estimate and a contract, and clearly communicate your intention with the client.
The Five Tiers of Construction Estimates
Most project managers and estimators recognize five tiers of estimate that coincide with the standard five phases of the design process. They’re called tiers because they build on one another, growing in complexity as the design is finalized. Often two or more of them — sometimes all of them — will be used throughout the course of a project.
For instance, in a design-build process, the estimators are on board from the conceptual phase of design and will employ each tier of estimating along the way. At other times, an Architect might pull an estimator into a project at some point along the design process to check that they’re within budget. And in traditional bidding, the contractor only gets one shot, based on the final construction documents.
According to the American Society of Professional Estimators (ASPE), the tiers lay out as follows:
Level 1: Order of Magnitude Estimate
This kind of estimate is usually done well before the design has started, just to give the owner a very rough idea of what a particular type of project might cost.
This is the least thorough and, therefore, least accurate. These are often generated, like real estate prices, from comps in the area.
Level 2: Schematic Design Estimate
Once the general scope of work has been determined and there is some vague notion of the quality of the expected materials, a Schematic Design Estimate can be performed. These are often based on the square-foot costs of similar properties in the area.
Level 3: Design Development Estimate
In a Design Development Estimate, an Architect often brings in a friendly contractor or professional estimator. All the materials and systems and quantities are essentially set, but the drawings and specs are yet to be prepared. Changes in quality and scope often occur after this estimate is presented.
Level 4: Construction Document Estimate
In a Construction Document Estimate, there should be few if any unknowns, as the project design is complete and documented. This is the final check on the budget before real bidding happens.
Level 5: Bid Estimate
The Bid Estimate is the final estimate, providing the cost the contractor promises to meet. It’s based on the completed, published drawing set, including specifications.
The Bid Estimate is used to compete with other contractors for the job. It’s also the bid on which the costs will be based if the work is awarded to you.
Avoiding Common Construction Estimating Mistakes
Estimating is exacting work and success or failure there will follow you through the entire life of the project, right down to your pay requests and close out.
Here are some of the common areas where pitfalls occur. If you can avoid these mistakes, will make your estimate better and your life easier.
Know the Work
Generally speaking, the drawings give you quantities and the specifications give you qualities. Most people understand the drawings well, but the specs can be trouble. Contractors should be familiar with all of the MasterFormat divisions that impact their work.
But first, know Division 1 so you can plan for all the requirements there about submittals and practices and staging. These are all things that can cost money.
If you’re working on a commercial project, it helps to be familiar with the average cost-per-square-foot of common building types in the project’s location.
Lastly, make sure you understand the details. For instance, the difference between 1.2 mill thickness of paint and a 2.0 mill could be the difference between one coat and two. That could be a job killer if you miss it.
Contractors with deep knowledge of the required materials and experience problem-solving on similar projects will be well-suited to suggest better alternatives to the existing specifications, providing that the project owner is open to the benefits of value engineering.
Know your overhead costs and build them into your estimates. This includes job specific costs like project bonds and permitting, as well as general office costs, like office rent and clerical staff that are paid for by the profits of the combined work for the year. Coffee and copy paper aren’t free.
Contractors often have to pay for things up front (materials, subs, labor) and carry those cost for some time before they’re paid for their work. Make sure the job supports them.
It’s particularly costly if you have trouble getting paid by the general contractor or the owner and need to take action to get paid. Though there are now people in the industry who can help speed payment along, these things always take time.
Often overlooked, it costs money just to get the job. There’s even the time required to prepare the estimate! It’s important to factor in administrative and business development costs when calculating an estimate. Otherwise, where will the money come to cover these expenses?
Though there’s some flexibility here that can help you beat out the competition, many construction firms are too quick to lower this number. There’s not much point in doing all the other stuff if you don’t include enough profit to make the job worthwhile.
Read more: The contractor’s profit roadmap
Time truly is money. Make sure your labor costs take into account the little things that can eat away at profits. Time that the crew spends driving, waiting for deliveries, or working around other trades can add up.
And time clerical staff spends creating or reviewing submittals is often overlooked in the estimating, even when figuring overhead.
Construction Estimating Software
Technology has vastly improved the accuracy of estimates. This is largely because of the complexity of estimating, which, on a large job, can be enormous.
Every individual item required in the building must be identified and counted to access quantity, then linked to a product from the specifications to determine quality. The direct labor to install it must be estimated and valued, then the burden on that labor and the taxes on those materials must be calculated.
And then there are the invisible costs like equipment rental and temporary construction, construction engineering, office overhead, depreciations, permitting, licenses, etc.
This work was made much more efficient when we moved from pencils to spreadsheets, but modern estimating software improves it exponentially. Beyond simply counting things and adding pricing factors, these programs can actually perform more accurate takeoffs, link data bases of cost indexes, cross-check pricing, and output complete estimates.
Tailor-made libraries are available for specific kinds of construction, from bridges to hotels, to make sure all possibilities and project-specific requirements are considered.
Top 3 Estimating Software Programs
There are now hundreds of construction estimating programs available in many formats, some cloud-based, some native, some geared toward small builders and some built for giant contracting companies.
Three of the most popular are:
- PlanSwift: A Windows based program that integrates with Excel.
- Knowify: A GPS enabled cloud-based program optimized for tablets to allow job-site integration.
- Clear Estimates: A cloud-based program aimed at small to mid-sized builders and home remodelers.
The Future of Good Estimating
Of course, many estimators, particularly old timers, insist that their customized Excel sheets are the way to go. But that’s all changing with emerging construction industry trends.
As estimating programs are integrated with Building Information Modeling and Virtual Design and Construction, the entire process of delivering buildings — from design to settling payment disputes — will be radically changed.
In the future, the building will not be drawn, but instead constructed as a 3-D model that will contain all the information from both a qualitative and quantitative standpoint, including material waste and geographical cost modifiers.
That information will go straight into the estimating software and a cost and schedule will be developed based on customized parameters. Every man-hour will be accounted for and every contingency considered and every pay application on time and verified.
Soon, the art of the educated guess will be so educated, it will scarcely be a guess at all.