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Detailed Guide on Construction Cost Estimating: What Is It & How It Works

Cost Estimating

Managing construction projects with unique features can be challenging in the industry. However, all projects have fundamental components such as scope, schedule, and budget. The precision of the cost estimation process plays a crucial role in determining the success and smooth operation of a project.

What Is Construction Cost Estimating?

Forecasting the cost of a construction project is a crucial aspect of any construction project. Project owners use cost estimation to determine the feasibility, scope, and budget allocation of the project. Adhering to accurate cost estimation techniques can prevent contractors from incurring losses and clients from overspending.

Why Is Estimating Important?

It Is Unlikely For The Initial Cost Estimate To Exactly Match The Final Cost Of The Project. However, The Value Of A Thorough Construction Estimate Should Not Be Overlooked.

Estimating Assists:

  • Construction Cost Estimating Is An Essential Aspect Of Determining The Feasibility And Suitability Of A Project For Project Owners.
  • A Comprehensive Cost Estimate Is Essential For A Builder To Evaluate The Profitability Of A Project.
  • A construction cost estimate is necessary for the procurement team to secure financing for the project.
  • The Project Team’s Decisions Regarding Design Or Materials Selection Can Significantly Affect The Project’s Cost, Both Positively And Negatively. A Cost Estimate Is Crucial For The Team To Make Informed Decisions.

The Factors That A Cost Estimator Takes Into Account Can Have A Significant Impact On The Overall Cost Of The Project.

As A Result, It Is Crucial For Cost Estimators To Consider A Comprehensive Set Of Data Points When Estimating The Cost Of A Project. These Factors Include Materials, Location, Machinery, And Labor. Estimators Should Also Take Into Account Hidden Factors Such As Market Fluctuations That Can Impact The Cost Of Materials. Additionally, They Need To Evaluate The Unique Materials Required For A Specific Project, Such As Eco-Friendly Building Materials.

What Are The Benefits Of Cost Estimating In Construction?

Cost Estimation Is The Basis For Creating A Job Schedule. The Accuracy Of The Estimate Is Crucial For The Success Of The Project. Some Of The Advantages Of Cost Estimation Include:


Accurate Planning: Accurate cost estimation allows for efficient planning of the subtasks required to complete a project. It enables the development of a work breakdown structure and ensures project timelines are met.

Increased Profit Margins: Inadequate planning and unforeseen events can result in project delays and exceeding budget. However, proper cost estimation takes into account both anticipated and unexpected expenses, thereby safeguarding profit margins.

Management of Resources: With a clear understanding of the tasks and schedules, cost estimation allows you to identify any skill or resource shortages, hire additional staff as necessary, and tackle projects with confidence.

Better Reputation: Effective planning using cost estimation enables a builder to complete projects on schedule and within budget, strengthening relationships with clients and increasing the likelihood of repeat business.

Who Creates Cost Estimates?

Construction estimators are responsible for creating and updating cost estimates for a project. They possess knowledge of the project’s design and associated expenses. They also provide multiple evaluations during the pre-design and design phases, with estimates becoming more accurate as the design process progresses.

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When creating cost estimates, the contractor manages the relationship between the budget and schedule.

The Cost Estimating Process

Effective cost estimation for a project is essential for its success and can be achieved through a thorough and well-planned process. Having a basic understanding of the construction process is crucial for accurate cost estimating. The following steps can be used as a guide when creating a construction estimate:

1.   Agree On The Cost Estimating Basis

Before beginning the estimation process, all parties involved must reach agreement on the cost estimates for the project. This involves gathering information such as previous scope and schedule documents, which the estimator can use to calculate cost estimates. The scope of the project is determined by factors such as project type, complexity, design, and criteria. The estimator should clearly document any assumptions made during this stage and keep a record of any additional or updated information to maintain a clear history of the estimates.

2.   Base Estimate Preparation

The base estimate covers all projected costs for a project, excluding any potential future cost increases. These estimates are typically determined using techniques such as evaluating the scope, size, and complexity of the project. In contrast, detailed estimates may change as the design process progresses and more information becomes available.

During this stage, important factors such as scope details, inflation rates, materials and unit costs, and market conditions are taken into account to refine the estimate. Construction take-offs are also conducted to provide an outline of the necessary materials and costs. These take-offs will vary depending on the size and scope of the project.

Collecting and interpreting all necessary scope documentation can be challenging, but it is crucial for the project team to establish this documentation from the start to accurately estimate direct costs.

The cost estimator must also document any cautionary notes, assumptions, and exclusions made during the base estimate preparation. This estimate can also be included as a reference for future project activities.

3.   Reviewing Base Estimate

It is essential to review the base estimate to confirm that the assumptions and foundation of the project are accurate. This ensures that the base cost estimates accurately reflect the scope of work and schedule. Reviewing the base estimate also prevents duplication of items and ensures that all necessary components are included.

During this stage, cost-based estimates and historical data or project-specific conditions are examined and appropriate location and productivity factors are applied. The estimator also compares indirect and overhead costs to the direct costs as the foundation.

4.   Risks And Contingencies

Creating a risk and contingency plan is a crucial aspect of project planning. Managing risks is an ongoing process that involves identifying opportunities and minimizing potential threats. As part of this process, the estimator must also factor in the cost implications of potential hazards and include them in the overall project costs.

5.   Outline A Communication Approach

Effective communication of cost estimate data is crucial for cost estimators. It involves determining the appropriate information to be shared and the parties that need to receive it. Additionally, it involves selecting the most suitable channels through which to transmit the information. Thus, communication is just as important as the numbers themselves and can be used as a powerful tool to ensure the success of the project.

6.   Peer Review

Another cost estimator should always review a cost estimate. They conduct spot checks to verify quantities, costs, and the completeness of the project’s scope. Peer review is a critical stage for identifying any significant gaps in the estimate and for identifying potential cost savings. Assumptions are also clarified during this stage.

After review, the estimator can then present the estimate to management for approval. Finally, the revised estimates are reviewed by project management staff and incorporated into the project cost baselines.

Throughout the project, the estimator continually updates the information and never considers the estimation process to be complete. Estimating is an ongoing process.

How To Improve Estimate Accuracy

1.   Develop A Template For Every Job

Using a template can ensure that nothing is overlooked when creating a construction estimate. Templates include all line items that are included in the scope of work for the project. For example, a template for a subcontractor may include materials and labor, while a template for an electrician or plumber may include additional items such as fixtures, controls, and transmissions. The template may also include insurance limits and administrative costs.

Depending on the specific project, items can be added or removed from the template as necessary.

2.   Reviewing Past Projects

Studying past projects can provide valuable insight when preparing proposals. By examining past mistakes, we can improve the accuracy of our estimates. Projects of similar size and scope often have similar construction estimates. Although every project is unique, analyzing the breakdown of construction job costs can improve the accuracy of the calculations. To improve continually, it is important to reflect on where you began.

3.   Accurate Takeoffs

Accurate take-offs are crucial for obtaining accurate construction estimates. Utilizing take-off software can improve the precision of these measurements without the need for printing, allowing for faster and more precise calculation of areas and lengths. By breaking down the project into a work breakdown structure, you can ensure that all major components are accounted for without getting bogged down in counting every small detail. Focus on the important elements rather than minor details.

4.   Check Your Labor Costs

Labor costs are a significant expense in construction projects. To achieve profitability, it’s essential to understand the productivity and completion time of your crew. Labor costs don’t only include hourly wages but also indirect expenses such as retirement benefits, union contributions, tools, and other benefits. A comprehensive labor rate takes into account all of these costs.

Since no two workers have the same work rate, it’s crucial to consider factors such as weather conditions, skill level, training, and personal issues when calculating the labor rate. This way, you can predict the person-hours required for the project and incorporate them into your cost estimate, ensuring greater accuracy.

5.   Countercheck Subcontractor Proposals

When working with subcontractors on a construction project, it’s essential to review their proposals carefully to understand what is included and what is not. Subcontractors may sometimes overlook or omit parts of their scope, so it’s essential to scrutinize the bids.

By comparing proposals, you can select the best offer for the project and cross-check the subcontractors’ work to ensure that they are not overcharging. This process helps to ensure that the project stays within budget and that all necessary work is included in the subcontractors’ scope of work.

6.   Check Your Formulas

Avoiding mathematical errors in your cost estimates is crucial to maintaining credibility and professionalism. Before submitting bids, double-check formulas on your spreadsheet or software to ensure they are correct. Even small calculation errors can add up and have a significant impact on the overall estimate. Don’t let a simple mistake ruin the hard work and effort put into the estimation process.

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How To Estimate Construction Costs

The process of estimating construction costs is crucial but often overlooked during the construction process. This is due to the time-consuming nature of the task and the many other activities involved in construction that can distract from this important exercise.

Methods Of Estimating Construction Costs

There are different ways of estimating construction costs, as we will discuss below.

  • Unit Cost Estimating

Unit cost estimating is an efficient method for estimating construction costs. This approach involves assigning a unit cost to each element of the construction process, which can be refined and modified over time to improve future estimates. By using unit costs, cost estimators can quickly and easily estimate construction costs, providing a clean and streamlined process.

  • Stick Estimation

The stick estimation method is commonly used in cost estimation, but it can also be quite labor-intensive. This method involves listing every single cost associated with a job, providing a detailed and accurate estimate. While this method can be time-consuming, it is also one of the most accurate ways to estimate costs.

  • Empirical Cost Inferencing Method

The statistical method of cost estimation uses regression models to calculate the cost of a project. However, it is essential to have someone on your team who is proficient in this method as it is not recommended to use it without the proper knowledge. It would be best to have an expert in this method to ensure accurate and reliable cost estimates.

Production Function

The production function approach in cost estimation relates the quantity of construction to factors such as labor and materials. In order to achieve a specific output, it is necessary to find the optimal input. This method can be highly accurate in estimating the relationship between inputs and outputs of a project.

The Five-Level System Of Estimate Accuracy

The accuracy of cost estimates depends on the quality and detail of project plans developed during the design phase. The American Society of Professional Estimators has created a five-level system that improves in accuracy over time, providing a reliable method for cost estimation. The five levels of the system are:

Level 1: Order Of Magnitude Estimate

This type of estimate is created before the project begins and is only used to evaluate the feasibility of the project.

Level 2: Schematic Design Estimate

This is the estimate produced in line with the schematic design.

Level 3: Design Development Estimate

This type of estimate is developed during the design development phase.

Level 4: Construction Document Estimate

This is the estimate that is taken off from construction specifications and drawings.

Level 5: Bid Estimate

This type of estimate is based on the construction documents and prices presented to the client.

A Simplified Approach

A simpler method of categorizing cost estimates groups them into three categories: design estimates, bid estimates, and control estimates. The names reflect the specific usage of each estimate during the construction process.

Design Estimates

During the design phase of a project, estimates are prepared to determine the feasibility of the project. The process starts with an order of magnitude estimate, followed by preliminary and conceptual estimates based on schematic design. As the design develops, a detailed estimate is created, and finally, an engineer’s estimate is taken off from the construction documents.

Bid Estimates

When contractors bid on a project, they prepare estimates by considering various data points such as direct costs, supervision costs, and other hidden costs. This helps them to provide an accurate estimate for the project.

Control Estimates

An estimate is prepared by the contractor after entering into a contract with the client, but before the construction process begins. This allows the contractor to plan for the costs associated with the project.

What Goes Into Your Estimate?

In the construction industry, there are various models used to determine the components of an estimate. However, generally speaking, all estimates can be broadly classified into three categories.

  • Labor
  • Materials
  • Overheads and Profits

In the construction industry, costs are typically grouped into three categories: direct costs, indirect costs, and markups. Direct costs include labor and materials, which can fluctuate based on market demand and supply. Equipment costs are also considered as direct costs, and various factors such as transportation costs, equipment capacity, and renting costs need to be taken into account. Indirect costs include expenses such as temporary utilities, design fees, and costs associated with the mobilization of equipment and office support staff.

Tools To Help You Estimate

Construction estimators use different tools for estimation, including spreadsheet software like Excel. However, newer construction estimating software is now available that offers advanced features and capabilities. These software programs streamline the estimation process, both for simple and complex projects, reducing the potential for human error and providing improved cost analysis and reporting capabilities. They also offer ease of use, allowing for faster and more efficient bid submissions. One example of such software is Proest, which helps to estimate costs, track spending, and manage bids. Additionally, it includes an ROI calculator that can determine the benefits of switching to estimating software for a business.

Cost Estimating Glossary

In cost estimation, there are several important terms and concepts that are used. However, some of them have a significant amount of overlap with one another.

  • Takeoff: This is a process used during the preconstruction stage of a project to determine the materials and labor required for completion.
  • Person-hour: This is a unit of work performed by a person in an hour.
  • Labor rate: This is the amount of money paid to skilled workers per hour.
  • Equipment costs: These are the costs associated with purchasing, renting, or operating equipment necessary for a project.
  • Indirect costs: These are expenses that are not directly related to the construction work, such as transportation, administrative costs, and other minor expenses.
  • Profit: This is the margin added to the project cost by the contractor as profit.
  • Escalation: This refers to the cost increase due to inflation over time.
  • Bonds: This is a guarantee that the contractor will complete the project as per the contract terms. If they fail to do so, the owner is entitled to compensation as stated in the performance bond.
  • Contingencies: This is a predetermined amount of money added to the cost estimate to cover unforeseen circumstances such as bad weather or material wastage.
  • Capital costs: These are the initial expenses incurred for setting up a project, including land acquisition, feasibility studies, design phase, and construction costs for materials, labor, and equipment.
  • Operations and maintenance: These are the costs for ongoing operations such as land rent, salaries, renovation costs, and maintenance costs.

Common Mistakes To Avoid

Inaccurate cost estimates can lead to significant financial and schedule issues, such as cost overruns and delays. Common causes of these errors include underestimating the costs of materials and labor, failing to account for contingencies and changes, and lack of experience or expertise in the project area.

Improper Estimation Of Labor Costs

Accurately estimating labor costs can be challenging as they are often a significant expense and can vary greatly. Using a simple hourly rate may not provide enough detail and can result in significant inaccuracies. To improve the accuracy of labor cost estimates, it’s important to include detailed information such as overtime rates, and to reference data from similar projects.

Failure In Factoring Risks And Contingencies

Cost estimators must consider potential risks when creating their estimates to prevent variations. The likelihood of a risk occurring should be taken into account when analyzing and assessing the potential impact. An experienced cost estimator will perform a thorough risk analysis and use this information to determine if the project is viable for their organization.

Omitting Some Costs In The Estimation


Neglecting certain costs during the estimation process can greatly reduce profit margins. Once a contract is signed without revising these costs, it may be difficult to recoup the losses. To prevent this, it’s essential to have a standardized and detailed estimation template that is used consistently across all projects. This will minimize the margin of error and can be used as a reference for future projects.

Lack Of Thorough Auditing


Even if an initial estimate is accurate, a lack of thorough review can lead to costly mistakes. Time constraints can also contribute to errors in calculations and measurements. To avoid these issues, it is beneficial to use a standardized estimating template that allows for easy comparison and accurate estimation.

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Accurate cost estimation is a crucial aspect of project management, and it takes effort and patience to achieve. Having a basic understanding of estimating and investing in the necessary resources is critical for success in any project. Accurate estimates can help prevent financial disasters and ensure the overall success of the project.

Frequently Asked Questions

Q: Is Construction Estimating Hard?

Ans: Construction estimating is a challenging task in the construction industry, but it is vital for determining profits. Having the right tools for estimation can make the process easier and more efficient, increasing the chances of an accurate estimate.

Q: Is Estimating Stressful?

Ans: Cost estimation can be demanding as it requires technical knowledge and analytical abilities, as well as subjective judgment from the estimator. However, experienced estimators have developed the necessary problem-solving skills to manage the stress of estimation. Using estimation tools can help make the process easier, reducing the burden on the estimator.

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