Everything you need to know about construction estimating
What is construction estimating?
Construction estimating is the process of identifying and totalling the costs of a construction project, including labour costs, material costs and indirect costs like admin and legal fees. The aim is to create a construction cost estimate to bid for (and hopefully win) projects. This guide document outlines the cost per project so the client can compare quotes from different construction companies.
Why is construction cost estimating important?
Enhanced project planning
It’s nearly impossible to plan a project without knowing how much it'll cost, what materials and labour you need and how much time you have. Many moving parts are involved in a construction project, and understanding what budget you have to work with can help keep things running smoothly.
Higher profit margins
The more accurate the cost estimations, the better. When you accurately map out the costs involved in a project, you can set realistic profit margins and more effectively work toward those goals.
Better resource management
Most construction projects involve juggling multiple resources, including different construction teams, trades and suppliers. By estimating these expenditures, you can manage the project's cashflow and ensure everyone gets paid on time.
Incorrect construction estimating can lose bids or reduce profit margins, impacting your reputation. Accurately estimating costs and being realistic with prices generate more customer trust and encourage positive reviews and referrals.
Key components of a construction estimate
Indirect costs: These expenses are necessary for a project but don’t directly relate to construction activities, like admin fees, legal fees, utilities and permits.
Direct costs: These costs relate directly to construction activities, including materials and equipment like concrete mixers, scaffolding and plasterboards.
Labour costs: This category refers to your construction team's wages, often the most significant expense in a construction project. You should include tax and overtime in these costs.
Subcontractor costs: These expenses include outsourced labour, such as a skilled electrician or bricklayer, and their equipment.
When to use a construction estimate
It’s best to prepare a construction estimate in the early stages of a project. You should know the rough budget by the time bids open. You can then refine it as construction planning progresses.
3 cost estimation methods
Historical cost estimation considers the costs involved in a similar past project. For example, if you’re fitting a new bathroom for a customer, you can adjust the final prices of a previous bathroom installation for inflation. This method is the quickest way to generate an estimate but can lack accuracy if you don’t know much about a project.
Parametric estimation calculates the estimated costs of a project by multiplying standard rates by the project's dimensions. You need to know the square footage of the construction site, the materials you need and the cost of each material per square foot.
Bottom-up estimation prices each component of a construction project individually. For example, you can calculate the cost of the brickwork, the plastering and the electrical work separately and then add them up. This method is the most accurate way of estimating projects, but it can be time-consuming to research and get quotes for each component.
The 5 levels stages of construction cost estimates
Every construction proposal goes through five stages of construction estimating:
1. Preliminary estimate
Also called Rough Order of Magnitude (ROM), this estimate helps determine a rough price for a project early in the bidding process. The aim is to help project managers determine if the project is financially feasible or not.
2. Detailed estimate
Detailed estimates dig deeper into costs by breaking the project into smaller steps and pricing each unit individually. This estimate includes more accurate materials, labour and equipment pricing to calculate a total project cost.
3. Quantity estimate
Quantity estimates calculate job costs by breaking each step into quantifiable components and assigning a price for each piece. For example, it’ll estimate how much linoleum flooring you need for a twenty-square-foot kitchen.
4. Bid estimate
Also known as a definitive estimate, the bid estimate is the version you submit to the potential client. This construction estimate is what you’ll use to compete with other companies for the job. It must be as accurate as possible, considering all costs plus overhead costs and a buffer in case of delays or issues.
5. Cost control estimate
A cost control estimate is a working estimate that monitors costs throughout the lifespan of a project. It comprises three separate estimates: the budget estimate, the budgeted costs before construction begins and the estimated project completion fee. Regularly revise this estimate throughout the project to ensure it remains accurate.
Construction estimating best practice
Know your customer
Understanding the client's expectations is the first step. Be sure to understand their needs and desires, not just financially but also in terms of timeline, budget and goals. Taking this approach helps temper any unrealistic expectations and avoids misunderstandings later down the line.
Don’t underestimate labour
Labour costs are often the highest expense in a construction project and are often wildly underestimated. Add a buffer to labour costs when creating your construction cost estimate to allow for any overtime or delays.
Talk to your suppliers
The relationship with your suppliers is crucial to the success of a construction project. You’ll need to communicate with them regularly to get materials and discounts, and they may also provide valuable information about material and equipment costs.
Automate as much as possible
Calculating estimates from scratch can be extremely time-consuming and lead to errors. Instead, automate as much of the process as possible with construction estimating software. Within a few clicks, you can set prices for each project and build estimates based on past bids and quotes.
Use the right software
Choose software that makes your life easier. Look for something that'll streamline the process, reduce errors and accurately calculate pricing. MYOB’s Advanced Construction is ideal for project managers and planners who want to manage the costs involved in a construction project effectively.
Is your business ready for an ERP system?
MYOB Advanced Construction is an EPR system specifically designed for the building and construction industry. It offers scalable and affordable solutions for your construction project estimating needs.
Want to learn more about how trades and construction companies have achieved success with our Advanced Construction software? Explore our different ERP solutions, or contact us for more information today.