As a general contractor, estimating construction jobs is a crucial component of your business. But the process isn’t always straightforward. While a smaller construction job might call for an estimate that involves simply creating a list of materials, tallying costs and price checking at hardware stores, larger construction jobs require more comprehensive estimates.
The key to estimating construction jobs with confidence is ensuring that you choose an estimation process that works for you. Doing so enables you to appropriately plan, budget and complete a construction project that sufficiently meets your client’s needs.
Before diving into the process of creating a construction cost estimate, let’s go over cost estimates and why you need them.
A construction estimate is an approximate calculation of the value you place on the construction services you plan to provide your clients. You’re giving your customer an idea of what they can expect to pay whether you’re doing a small basement remodeling project or building an office building for a local business.
Whether you’re bidding for construction jobs or responding to a client’s individual request for your construction services, an estimate makes a huge difference in your ability to secure projects over your competition. Each customer is looking for the best opportunity to complete their construction project at the most reasonable price.
But this doesn’t always happen.
In fact, it’s been estimated that 80% of large-scale construction jobs go over budget. The consequences of underpricing your construction work can be steep: increased costs, additional expenses, reduced productivity, and a hurt business reputation. Extensive research prior to submitting an estimate goes a long way toward avoiding pricing mistakes and building necessary trust among your client base.
Accuracy in cost estimation goes beyond just getting the numbers right. For larger-scale projects, you’re creating estimates in phases based on levels of accuracy, typically from the least accurate in the first phase to the most accurate in the final phase. This is due to larger-scale projects needing budgets or estimates for preliminary, intermediate and final stages. Creating estimates along the way allows project managers and general contractors to plan costs before too much money is spent on land, materials, equipment, labor, etc. Once the final stages of planning are reached, everyone feels confident that the estimate is accurate and the project is ready to move to the construction phase.
Estimating the cost of your construction job offers practical and financial benefits for your business. Accurate cost estimate helps you identify material, equipment and labor needs, plan time requirements and budget essential costs. You’re also able to draft an accurate schedule and set realistic expectations for the construction job from start to finish.
Depending on the scope of a construction project, more than one estimate might be necessary, particularly when estimating for accuracy. Larger projects often require estimates at various pre-design and design stages to confirm their feasibility every step of the way. Multiple estimates also help determine if the construction project requires modifications at any stage.
According to the American Society of Professional Estimators (ASPE), estimating is a five-level system, starting from the least accurate level to the most accurate level:
It’s important to note that other organizations, including the Association for the Advancement of Cost Engineering (ACCE) and ASTM International, also have construction estimate classification systems.
Using the ASPE’s estimate classification system would be an example of creating construction estimates by the level of accuracy. But this is just one of many ways to approach construction cost estimation. Here are a few other methods of estimating construction project costs.
It’s common for contractors to use a simple three-step process to create estimates:
A top-down estimate starts with the total cost of a project and then breaks down that cost into estimates for primary building components and then into materials, etc. Two types of top-down estimates are analogous and parametric.
An analogous estimate is used when you’re only sure of the cost of similar buildings. It’s not as accurate as some other estimating methods since buildings are always so different. However, it is faster and easier to produce. Due to its lower level of accuracy, this estimate is typically used in early stages of planning and design to get a general idea of what you’re up against financially.
A parametric estimate is more involved, requiring you to multiply a unit cost by the number of units in the construction project. Let’s say you know the cost and size of a previously built structure. Instead of creating an analogous estimate, which would state that the building was constructed in 2 months for $500,000 and therefore yours might cost the same, the parametric estimate looks at the cost of the original building per square foot and multiplies that by the number of square feet in your prospective project. Types of parametric estimates include cubic foot estimates, plinth estimates and square foot estimates.
Bottom-up is a far more accurate method of estimating construction costs. Also known as stick, analytical or determining estimating, bottom-up estimating calculates the total cost by adding the cost of each construction project input. This means you wouldn’t calculate by square foot. Instead, you’ll look at specifics like steel, wood, concrete, wiring, labor, etc. For this method, you rely on the material takeoff or bill of quantities, which lists all labor, parts, materials and labor needed for project completion. Due to their accuracy, these estimates require a lot of time to complete.
Here are a few more cost estimation methods you might consider:
Some cost estimate methods rely on the judgment of experts in the field. These include the Delphi method, which involves a group submitting a construction estimate, and the three-point method, which is often used as a starting point for determining a range of likely construction costs.
These estimates are focused on measuring construction inputs in time. You might apply this type of estimate to labor and equipment use to determine how much time a resource will be used.
This is simply a revision to an original estimate that addresses change orders or other project adjustments.
Under the assumption that the same contractor will upkeep a building post-construction, this estimate assesses the costs needed for continued repairs and maintenance.
The process of creating an estimate is often very extensive, but worth the hard work. The goal is to get all of your cost details upfront so you’re dealing with fewer surprises during construction. Here are ways contractors gather cost information for estimates:
A good first step is to go over the client’s construction needs. Getting a comprehensive picture of their goals helps you parse out what you’ll need in terms of labor, equipment, materials and more to get the job done. Be sure to ask about the following:
It’s important to note that going over these details is not always possible in the early stages, particularly if you’re bidding for jobs. But getting as many details as possible sooner rather than later helps create more robust estimates.
If possible, it’s recommended that you visit the construction site to see firsthand a site’s current state. This is a great way to determine how best to approach the job and even gauge the project’s feasibility. Here’s what to look for during a site visit:
During your site visit, note its condition and consider taking photographs to help improve your estimate’s validity. This is also a great time to find out local noise regulations, parking and working hours and any nearby roadways that could make it difficult to accommodate heavy machinery.
Conducting contemporaneous cost checks ensures you’re accessing the latest data. This helps improve your accuracy but is extremely time-consuming. Instead of contacting suppliers for price quotes regularly to ensure they reflect current market prices for materials, labor, equipment, etc., consider an industry database like RSMeans, which provides the latest in industry cost data and can even offer insights on profit margins.
You’ll also want to look at historical data for information on the cost per square foot to build past structures of similar scope. This data helps you determine the average labor costs per hour for subcontractors like plumbers and electricians and units of work.
Your cost estimate for construction work should always include every expense you expect to incur from the start of the project until it’s ready to be occupied. This includes equipment, materials, labor costs, permits, professional fees and more. Here are details to include in your estimate:
Be sure to include the cost of machines you’ll need to manage the construction project. Add these costs whether you’re amortizing, renting or leasing the equipment. Examples of equipment might include dozers, drills, cranes and excavators.
Estimates should include costs for materials and supplies ranging from nails and screws to glass, steel, wood and cement. Be sure to give yourself time to shop around and also maintain flexibility in the event costs go up between the time of your estimate and the time to purchase the materials.
Labor costs and subcontracting expectations
Add wages for your construction team and related costs (benefits included) based on the number of workers needed and expected hours worked with overtime. If the scope of the project means you’ll need subcontractors for additional construction help or other subtasks like plumbing and electrical needs, add these cost expectations, as well.
Adding a rough timeline from start to completion date helps you better estimate your labor costs and gives your client necessary transparency. But give your timeline dates some flexibility. If the unexpected occurs, you won’t find yourself rushing to get the job done.
Include costs and fees associated with overhead, insurance, utilities, permits and inspections, legal expenses, technology and any other costs you’ll generate in relation to the construction project.
Contingencies and variances
Allocate reserves to ensure you’re prepared to cover unexpected costs that arise from delays, weather events and other issues that often slow construction.
Account for profits
Once you’ve calculated all costs associated with the construction project, including materials, labor, overhead, labor, indirect costs, contingencies and variances, you’ll adjust the total cost to account for your profit margin. Of course, your profit is the fee earned for completing the project and is used to grow your business. Profit margins are determined by construction businesses and take into account growth, market conditions and more. Typically, a profit margin ranges from about 8% to 15% (ideal is 10%) and is added to the total cost of the project.
Terms and conditions
Add the terms and conditions of your construction services along with any inclusions and exclusions so you and your client aren’t surprised at any point in the construction process. Be as specific as possible with your terms and ensure they’re clearly written and easy to understand to reduce the time you need to spend explaining construction details to your client.
If you’re like a lot of construction businesses, garnering clients via bidding is a great option. Hard bidding is the most common bidding process for general contractors.
Hard bidding, also known as competitive bidding, has become a common process for securing construction jobs, particularly those that are of a larger scale. Here’s how this process typically works:
A bid proposal gives you the chance to make the case for your contracting business providing construction services. Your proposal offers an overview of the services you’ll offer and also includes an estimate of cost expectations. When creating the proposal, the bid price should always be present in clear and concise terms since bid reviewers want to make sure all aspects of the construction job are included.
A fast way to create a bid proposal is to use the Construction Specifications Institute’s (CSI) format. This allows you to compare every section of the bid price to a section of the specifications.
So, what should be included in your bid proposal?
A good rule of thumb when submitting a bid is to do so close to the bid date. This way, the client isn’t as likely to shop around with the bid price you provide them. If you bid too early, you’re giving your competitors a chance to beat your price.
After completing your estimate and bid proposal, you’re all set to send it to your client. No matter which estimation method you have chosen, it’s important to go over every detail with a fine-tooth comb so you’re sure you’ve accounted for each material, labor, equipment and additional cost that impacts your final number.
If this is your first estimate and proposal, be sure to save your templates to easily compare prices for similar projects and speed up submissions in the future. When ready, ship your documents and cross your fingers.
Well, maybe it’s best not to cross your fingers and leave it to chance. If you don’t hear back about an estimate within a few days, consider following up with the client. This shows them you’re truly interested in securing their business and might just improve your chances of securing the project.
If you’re drawing up an estimate for the first time or would like to improve your estimating process, VIIZR is a fantastic solution. Our estimating software is designed for trade businesses like yours looking for quick and simple solutions in drafting and delivering quick and accurate construction estimates.
A few clicks of the mouse are all it takes to produce detailed estimates that outline every aspect of your construction job, including materials, labor, equipment, contingencies and indirect costs. Our estimating software also makes it easy to include your terms of condition, projected timeframe and other important details.
When ready, turn your estimates into professional PDFs and email them to your clients in a matter of seconds for fast construction project job approvals you’ll receive via our platform.
Before and after securing a construction job, communicating with your clients is a breeze using VIIZR’s estimating software. All of your customer messages are stored in one convenient location, making it easy to stay on top of bid opportunities and respond to questions about your estimates in minutes. Once you’ve secured the job, our conversion software enables you to turn your estimates into robust invoices with a few clicks.
Our web-based platform keeps comprehensive records of your estimates so you’re easily able to compare bids and create new ones. Your service records are also digitally stored in a central location so providing quick and accurate responses to client questions is effortless.
Whether you want to dispatch and route your workers to job sites, adjust work orders, or schedule subcontractors, everything you need is conveniently available via our estimating solution. Give your construction business a major boost and watch your profits soar with estimating software that helps you win bids faster and better manage your projects. Get started with a free 14-day VIIZR trial today.