Why Construction Cost Estimates Are Important
A construction cost estimate is a projection of how much money a new structure will cost to build. This estimate plays a vital role in the success of a construction project.
“Providing accurate and detailed construction cost estimates early in the planning and design process allows you to create a roadmap for a successful project,” explains Marcene Taylor, President of construction estimating firm Marcene Taylor Inc. and former President of the American Society of Professional Estimators, an organization that represents construction estimators.
In the field of building construction management, owners use different types of estimates for different purposes. For example, you might use one type of estimate to evaluate whether a project aligns with your budget and use another type of estimate to assess how much a building costs to operate once you complete it. Owners also compare estimates from contractors in order to pick a winning bid.
Architects and engineers need to ascertain whether a building is appropriate (given its intended purpose) and safe (given the estimate). Contractors look to estimates in order to choose among subcontractor bids and determine whether they can make a profit on construction.
Construction cost estimating requires a great deal of skill and knowledge. Numerous firms dedicate themselves specifically to the estimating function. Some full-time estimators also work for construction, real estate development, architecture, and engineering companies.
Both owners and contractors need reliable estimates because these cost models serve as the foundation for a smoothly run, financially viable project. Here are the other major advantages of making solid construction cost estimates:
- Improves Plans: By reviewing the plans and specifications that produce estimates, you can find errors and omissions before you begin building. In this way, you can also identify gaps in scope or overlap among trade subcontractors.
- Saves Money: The estimating process can highlight opportunities for value engineering, which refers to the process of making changes to the design, material, or construction method to reduce costs without sacrificing usability.
- Allows You to Make Better Bid Comparisons: Owners who have construction cost estimates are able to evaluate contractor bids with more insight. These estimates allow owners to calculate how much of a profit margin a contractor is incorporating into their bid. Once you have the ability to figure out profit margins, then you can determine which bids are fair and realistic.
- Reduces Risk: When owners are able to plan for the cost and timing of construction, they are able to optimize the financing of a building and, thus, reduce the risk to their overall business. And when your projected completion dates and costs are more dependable, you can manage your real estate more efficiently. For example, a company with an accurate construction estimate can schedule the smooth relocation of employees into the new building. With a solid estimate, the company knows whether to sell or give up leases on the old property, so it does not have to carry unneeded space. With this knowledge, the company can also determine when to start hiring staff and acquiring inventory for a new store location without increasing costs prematurely. Using accurate estimates, contractors can reduce the risk of underbidding or making unrealistic commitments that would otherwise require overtime.
- Cuts Down on Change Orders: With a robust cost estimate, your project brings fewer surprises, requests for information (RFI), and change orders. This way, you increase the likelihood of staying on time and on budget. (For more on RFIs, see “How to Write and Respond to Construction RFIs Effectively.” For details on change orders, including templates, see “The Complete Collection of Free Change Order Forms and Templates.”)
What Costs Are Included in a Construction Cost Estimate?
Construction costs include all the expenses you generate when transforming a piece of land into a finished building ready for occupancy. These costs include everything from building permits to labor, materials, equipment, and professional fees.
Construction cost estimates do not include the cost of acquiring a site or furnishing a building. An owner includes those amounts in their project cost estimate and asset valuation.
Following are some of the main expense categories in construction cost estimating:
- Contingencies and Variances: Builders allocate reserves to cover unexpected conditions that can arise or to cover cost increases that can result from change orders, delays, or inclement weather.
- Equipment: The (rental, leasing, or amortizing) cost of machines you need for construction, such as earth movers and cranes
- Indirect Costs: Permit and inspection fees, administrative expenses, legal bills, technology, overhead, insurance, security, and utilities
- Labor: Wages and related costs (such as benefits, if applicable) factored by the number of workers and the necessary hours of work, including overtime
- Materials: Supplies ranging from screws and nails to cement, wood, and rebar
- Professional Fees: Architecture, design, and engineering costs
- Quality: The quality of your building affects your cost. Top-of-the-line fixtures, superior amenities, an aesthetically impressive design, a high-rise structure, and striking architectural details are more expensive. The construction industry grades commercial buildings as A, B, or C, designating them to be of high, average, or below-average quality, respectively.
- Other: Expenses such as environmental remediation, demolition, or disposal or government-mandated amenities such as parks and public art work
While these costs sound straightforward, construction estimators are sometimes required to give general estimates for elements that architects have not yet designed.
Jared Malapit, certified estimating professional and Principal at Precision Estimating Services explains, “The most difficult costs to estimate are the ones that do not appear on a plan or that the owner does not communicate during the early stages of design. In many cases, the owner’s only chance to communicate with potential contractors prior to construction is through the RFP (request for proposal) documents and plan sets. Errors and omissions in plans and specifications mean poor communication, which ultimately leads to delays and increased costs.”
In addition, you might encounter difficulties estimating some work scopes, such as framing, because the means and methods vary greatly among contractors, Malapit says.
Where Do Construction Estimators Get Cost Information?
To come up with forecasts for project costs in each of the expense categories above, construction estimators draw on different kinds of information, such as historical data and the opinions of technical experts. Following are the primary sources for construction cost information:
- Historical Data: Many cost estimation methods in construction rely on historical data, such as the cost per square foot to build past structures, the average labor costs per hour for trade specialties (such as plumbers or electricians), and the units of work, such as the cost per pile cast. The data can come from internal sources, such as a company’s own projects, or external sources, such as industry references. To learn more, consult “Construction Cost Estimating: The Basics and Beyond.”
- Cost Research: You can access the most current data by gathering contemporaneous cost checks. By amassing this kind of data, you increase accuracy, but the process can prove to be highly labor intensive. Imagine contacting suppliers to get a price quote for each individual input — i.e., all the materials, labor, and equipment you’ll need to build a big structure. Fortunately, books including Walker's Building Estimator's Reference Book and industry databases, such as RSMeans, perform this research by frequently sampling rates in hundreds of locations for labor, materials, equipment, and contractor overhead. These books and industry databases also supply data regarding profit margins.
Another way to find current costs is to use cost indexes, which reflect trends in prices for various construction inputs, as well as productivity and inflation. With this method, you factor construction industry reports and government data together. The Turner Building Index is one private gauge among many, and the Engineering News-Record, U.S. Census Bureau, and Federal Reserve Bank also produce price index information. - Expert Judgment: Experts in construction have a wealth of knowledge and can be a source of highly accurate information. For example, a master HVAC contractor has the expertise and experience to look at a building plan and estimate costs within a range. By repeating this process with each substructure or subcontractor, you can compile an overall estimate. For even more robust estimates, you can collect multiple estimates for each element of a job and average the numbers. Please see below for the types of construction cost estimates that rely on expert judgment.
If none of the above sources has adjusted their data, your estimating team should revise its numbers to reflect factors such as inflation, regional variances, or site conditions.
Cost Estimation Techniques in Construction Projects
Construction cost estimation techniques differ in their methodology, purpose, and degree of accuracy, making the discipline a complex one. Moreover, the nomenclature concerning the field’s techniques is vast and can cause confusion. In many cases, you’ll find multiple synonyms for one concept.
Gray areas also exist between different types of construction estimates, and estimates can fall into more than one category. Furthermore, most projects go through multiple rounds of estimating, with each round requiring a different estimate form and purpose. In all, you’ll find at least 45 different types, names, and methods for construction estimates.
The most important classification regarding construction cost estimates is the degree of accuracy. This level of accuracy (as well as the effort you require to achieve it) determines how and when you use a particular cost estimation technique in construction projects.
Another important division regarding estimation techniques is the figure with which you begin. Perhaps you choose to make a top-down estimate — i.e., start with a big-picture estimate and then add more details as you go along. Or perhaps you choose to make a bottom-up estimate — i.e., start with individual costs and then add them up.
Construction Cost Estimates by Level of Accuracy
The American Society of Professional Estimators (ASPE), the body that represents construction estimators, classifies estimates according to a five-level system. The least accurate and reliable label is Level 1, and the most accurate and reliable is Level 5. Confusingly, some authorities, such as the Association for the Advancement of Cost Engineering (AACE) and the U.S. Department of Energy (using its construction estimating directive), reverse the numbering, designating Level 1 as the most precise estimate.
Because you need a well-defined project plan in order to generate a pinpoint accurate cost estimate, it’s standard practice to create multiple estimates during the pre-design and design phases. These estimates become more accurate as your project’s level of definition increases.
If you’re an estimator working for an owner or a design team throughout the entire design process, you are continuously researching cost options and estimating costs as design work progresses and your project gains definition. The estimate that you work on (in preparation for your contractor to submit their bid) acts as the foundation for the construction work plan.
(Construction cost estimating has a lot in common with cost estimating for other types of projects. You can read more about key concepts and tips in “The Ultimate Guide to Project Cost Estimating.”)
In reality, this successive refinement of estimates occurs only when you’re working on exceptionally elaborate houses, multi-family housing, or commercial buildings. The significant effort that this kind of refinement requires only makes sense when a lot of money is at stake. As the size and complexity of a structure increase, so do the time and effort you invest in order to produce a detailed estimate.
On the other hand, you can easily generate a highly accurate estimate for a minor project. For example, in order to build a fence, you only need to do the following: make a list of all the materials you require (e.g., fence posts, post hole digger, cement, fence panels); keep a tally of all corresponding costs; check the prices at a hardware store; and add up the amounts to calculate a total.
When considering the complex five-level system, however, each level serves a variety of purposes, depending on how much certainty is needed about the project’s costs. Making a screening decision requires a less accurate estimate than evaluating a contractor bid does.
Here are details of each level under the ASPE system:
- Order-of-Magnitude Construction Estimate: This estimate is performed before project design begins. Owners use an order-of-magnitude estimate to determine if a project merits closer evaluation or to screen for the best project among several alternatives.
At this point, project definition stands at 0 to 2 percent and accuracy of the estimate is within a margin of 20 to 30 percent. Pete Fowler, professional cost estimator and President of Fowler Construction Services Inc., says this estimate has only a very basic work breakdown structure and approximates quantities for labor and materials, without a quantity takeoff.
Fowler says this level of estimate typically requires 1 to 4 hours of work. The AACE estimates that an order-of-magnitude estimate for a $20 million chemical processing plant would take 1 to 200 hours to produce.
The most common methods for order-of-magnitude construction estimates include educated guesses, judgment, analogous, parametric, and capacity factoring. We will explain those in detail.
This estimate is also called a rough order of magnitude, ballpark, idea study, guesstimate, concession license estimate, and rough cost estimate.
The most common use or purpose is for the concept, screening decision, or initial evaluation. - Level 2: Construction Feasibility Estimate: At this level, an estimate helps you determine feasibility and gives owners a basis for deciding whether to proceed with or reject a project.
Definition ranges from 5 to 20 percent and accuracy between 10 and 25 percent. Fowler says this document typically errs on the side of slightly overestimating anticipated costs and takes 2 to 24 hours to produce. According to the AACE, this estimate takes two to four times the effort of a Level 1 estimate.
This is sometimes called a conceptual, screening, factored, pre-design, intermediate, budget, or schematic design estimate.
The most common use or purpose of this estimate is for a go or no-go decision. - Level 3: Preliminary Construction Estimate: This estimate is based on a more defined project scope, and it gives owners a basis for choosing among design features and configurations, so they can select the best option. You might also present this estimate to lenders to obtain financing.
Project definition varies between 10 and 40 percent, and accuracy is within 10 to 15 percent. Fowler says this estimate uses a coded work breakdown structure (typically a numbered system for project components in a hierarchical order) along with quantity takeoffs (projections of material amounts) and the number of labor hours needed to achieve the desired outcome.
This sort of estimate takes 16 to 100 hours to create, according to Fowler. The effort involved is 3 to 10 times a Level 1 estimate, the AACE advises.
This is also called a design development, budget, scope, semi-detailed, preliminary control, authorization, target, and basic engineering phase estimate.
The most common use or purpose of this estimate is for design decisions and financing. - Level 4: Substantive Construction Estimate: This is a detailed estimate with a complete work breakdown and quantity takeoff based on near-final plans, specifications, and milestones. Quantities of materials and labor for each part of the project are well defined, along with their estimated costs.
Those are then totaled or “rolled up,” and profit margin, contingencies, and reserves are added. The project is more than 90 percent defined, and accuracy is 5 to 10 percent. Fowler says time to produce this estimate ranges from 50 to 200 hours, and the AACE puts preparation effort at 4 to 20 times a Level 1 estimate.
Contractors use substantive estimates to bid on projects, and owners use them to solicit and assess bids, as well as evaluate whether the project is progressing within budget.
Other names for this estimate are construction document, detailed control, execution phase, master control, engineer, government, bid, tender, and change order estimate.
The most common use or purpose of this estimate is for budget control, construction contract, and performance evaluation. - Level 5: Definitive Construction Estimate: This estimate is prepared using costs agreed on in the construction contract. In a sense, it is no longer an estimate; the final costs are known, though they can vary due to change orders or a contractor triggering penalty clauses.
A Level 5 estimate represents the maximum accuracy (0 to 2 percent variance) and virtually 100 percent project definition. This estimate is often completed after work begins.
Fowler describes a Level 5 estimate as a final pass on all items for clarity and ease of making references.
The AACE says that due to the degree of effort, definitive estimates are sometimes created only for certain important parts of a structure. If so, these estimates are used to spot check a contractor’s bid or to investigate disputes.
The organization says a definitive estimate requires 5 to 100 times the effort of developing a Level 1 estimate.
These are also called detailed, full detail, tender, final, control, trial, firm price, as-bid, master control, execution phase, and as-sold estimates.
The most common use or purpose of this estimate is for performance evaluation, project control, and dispute investigation.
Example of How Construction Firms Use Accuracy-Based Estimates
Let’s look at an example of how these accuracy-based estimates work in practice.
A food manufacturer completes a five-year plan in which it decides that baked goods are poised for rapid sales growth. After examining its bakery facilities, the company concludes that if growth meets its projections, its Midwest plant in Wisconsin will run out of capacity to meet demand in three years.
The firm anticipates that, at that point, it will put a new plant in service to serve the Lower Midwest and have its current plant supply the Upper Midwest. The real estate team scouts locations in southwestern Missouri and southeastern Kansas.
Construction cost estimators put together order-of-magnitude cost estimates for building the facility at two sites. Based on the estimates, the company buys the preferred site in Missouri. (In reality, other factors come into play, such as proximity to customers and distribution networks, but we will leave them aside for this example.)
About 18 months to two years before the old plant is due to reach capacity, the company develops a feasibility estimate to see if building a new plant still makes sense. When they confirm the need, the project team spends several months drawing up design options for the plant and puts together preliminary cost estimates for each. Executives evaluate the estimates and merits for each design, then select a final plant design.
The project team then has an engineering firm execute detailed design work, so they can tally material quantities. Next, cost estimators make a substantive estimate, which the team uses to put the project out to bid with contractors.
Builders break ground on the new factory about a year before targeted completion, and the project team compiles a definitive cost estimate. During construction, the owner and contractor assess progress based on the contract timeline and definitive cost estimate.
Simplified System of Construction Estimate Classification by Accuracy and Phase
You can also use a simpler system of classifying estimates by accuracy and project phase with just three categories: design, bid, and control estimates. In those categories, you’ll find the same specific estimate types as in the five-level system, such as a preliminary estimate.
- Design Estimates: These estimates, prepared during a project’s pre-design and design phases, generally start with very little information about the structure. In the pre-design phase, you begin with an order-of-magnitude estimate or screening estimate to evaluate if the project is viable.
For small or straightforward projects, a simple template, such as the simple construction estimate or contractor estimate templates in “Free Estimate Templates,” can help you determine an initial assessment of costs involved in a project.
Next comes the preliminary, feasibility, or conceptual estimate, which you base on the schematic design. Then the project progresses to the detailed estimate, or definitive estimate, which you base on a developed design, meaning all elements of the building have been defined.
The last of the design estimates is the engineer’s estimate or quantity estimate, which includes quantities for all materials, drawing on the construction documents that specify each piece of material and construction method. From beginning to end of the pre-design and design phases, estimate accuracy increases from Level 1 to Level 4 in the five levels discussed above. - Bid Estimates: Contractors prepare bid estimates in efforts to win the job of constructing the project. Contractors will draw from a number of data points to prepare their estimates, including direct costs, supervision costs, subcontractor quotes, and quantity takeoffs.
Accuracy here equates to Level 4 (substantive estimate) on the earlier scale. - Control Estimates: These are the most accurate estimates and include tender estimates, contract estimates, and project control estimates. These align with Level 5 (definitive estimate).
Prepared after an owner signs a contractor agreement and before construction begins, the control estimate functions as a baseline by which you assess and control actual construction costs. The control estimate also allows contractors to plan ahead to meet upcoming costs and determine the project’s cost to completion.
Another common technique in major construction project control is earned value analysis. This technique compares work completed to total planned work on various benchmarks, including schedule and cost. The amount completed or spent is calculated as a percentage of the planned amount to determine the builder’s earned value and to assess if the progress is on time and on budget. You can learn more about this technique and find earned value management templates in “The Champion’s Guide to Earned Value Management.” - Performance vs. Forecast Estimates: Earned value analysis is a performance-based estimating technique, also known as ETC or estimate to completion. Noting how much work has been completed, you can estimate how much more time and money the rest of construction requires. A significant amount of work, about 20 percent of the project, needs to occur before an ETC is reliable. But this technique can spotlight problems early and has an advantage of being objective.
Forecast-to-complete estimates are more subjective and predict how much time and money the remainder of the project will cost. This incorporates a construction manager’s judgment about how the work will progress, such as new challenges arising. Perhaps she knows that the wrong materials were delivered, so she adds time to the forecast for getting the right materials substituted and overtime costs for workers to install the late materials over a weekend. Those factors would not be reflected in an estimate based simply on the percentage of work completed. - Current Working Estimate: This estimate also serves a budget control objective and evolves over the course of the project, reflecting the latest cost and design information. A current working estimate also updates contingency costs and hardens numbers for any areas of uncertainty as early as possible.
Preliminary Estimating Method in Construction, Plus Intermediate and Final Estimates
Outside the ASPE’s five-level system, the term preliminary estimate applies to cost forecasts produced in the planning and feasibility stages of a project and includes order-of-magnitude, feasibility, and budget level estimates.
The idea that particular degrees of accuracy and estimation methods should be paired with certain phases of a project works both ways. Timing can determine an estimator’s choice of technique or level of accuracy.
Preliminary, intermediate, and final estimates approximately equate to design, bid, and control estimates.
Intermediate Construction Cost Estimates: Project teams produce an intermediate estimate after design work is finished and costs are generally known. Substantive estimates, discussed above, break down the costs according to project segment. Contingencies and profit margins are added to arrive at a total cost estimate.
Final Construction Cost Estimates: Final estimates are developed when all costs are identified, construction has been put out to tender, and bids are received. This estimate sets the contract value, and definitive estimates mentioned above are used.
Different Types of Construction Cost Estimates: Analogous and Parametric
Regarding accuracy, analogous and parametric are two of the major estimating models for forecasting construction costs. Analogous estimates are less accurate but faster and easier to produce. Parametric estimates are more accurate but take more time and effort to compile.
The choice between analogous and parametric estimates depends on the type of cost information you can access, how important accuracy is, and how much work you can do. Often, a combination of historical and current data, along with expert judgment, is used. See the parametric cost estimating templates below to forecast costs for materials and labor, as well as total costs.
Analogous Construction Cost Estimate: If you only know the cost of similar buildings, an analogous estimate is your best best in construction management. This technique works by taking past project costs and analogizing to your current project.
This kind of estimate is the fastest and easiest option but also the least accurate because no two buildings are exactly the same. Making comparisons is tricky.
Typically you employ analogous estimates early in the project when you have little information about your own structure.
An analogous estimate is also called top-down because it starts with a total cost. To refine a top-down estimate, you break this total into estimates for the major building components, then further into materials and other inputs.
Taking the example of our food company above with plans to build a new bakery, suppose that the firm built the Wisconsin plant for $12 million in nine months. Thus, it estimates the new plant will also cost $12 million and take nine months.
But things rarely work out this neatly in reality, and the difficulties of analogous estimates become evident. Remember that the old plant’s cost data will be five years old, and inflation is not factored in. You can consult references and make statistical adjustments. But there are limits to the level of precision you can achieve.
For example, suppose a technological advance reduces the power needs of the ovens in the new plant, but wiring for the new controls is more sophisticated. Using the analogous technique, it might be difficult to know how to adjust electrical costs from the old project to reflect these changes.
As the number of variables between the benchmark project and the new construction — such as differences in region, season, labor availability, and more — increases, so does the likelihood of inaccuracy in the analogous construction cost estimate.
Parametric Construction Cost Estimating: Using parametric estimating, you multiply a unit cost by the number of units in the construction project. For example, you can take the cost per square foot of similar structures and multiply that by the number of square feet in your current project.
Or you can look at functional units such as hospital construction costs on a per-bed basis, school construction costs on a per-student basis, and highway construction costs on a per-mile basis.
Parametric estimates are another form of top-down estimating. You can use historical data or current cost information with parametric estimates; expert judgment also comes into play. A parametric method called unit cost estimating works with the unit cost of project components and requires working drawings and specifications.
Download Parametric Cost Estimating Template
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Early in the estimating process, this might be based on assemblies, or combinations of materials that perform a specific function, such as the foundation or windows. The number of assemblies is multiplied by the unit cost. Buildings are divided into six major systems under a framework called Uniformat II, sanctioned by the ASTM standards organization; these components can be used in assembly construction cost estimates. You can expect the accuracy of these estimates to be within about 10 percent.
The major elements of buildings in the Uniformat system are the following: substructure, shell, interiors, services, equipment and furnishings, and special construction and demolition. Another system of organizing construction work based on materials called MasterFormat is also available.
Unit-cost estimating works well when there is a linear or direct one-to-one relationship between cost and units. But adjustments are often needed to reflect different site conditions, variations in quality, shortages of labor or materials, and more.
“Different trades have different techniques for estimating a job. For example, roofing is determined by the square foot, plumbing by the fixture count, and electrical by the opening,” says Bill Samuel, an Illinois real estate developer at Blue Ladder Development and general contractor.
Another approach to parametric estimating is to use area or volume to extrapolate construction costs. You can use the following estimates when you know the size and use of the proposed structure but little other information. An accuracy range of plus or minus 15 percent is common for these estimates.
- Plinth Estimate: The plinth estimate looks at the horizontal areas in the interior of a building and applies a cost factor per square foot, estimating each story separately.
- Cubic Foot Estimate: A cubic foot estimate takes into account the building’s volume. Multiply the plinth or horizontal area by the ceiling height of each story to arrive at a volume or cubic foot estimate. Soil excavation and pouring cement are also often measured in cubic feet.
- Square Foot Estimate: A square foot estimate typically considers only the finished floor area of a building and applies a historical unit cost to the number of square feet. You can calculate the areas of other unfinished and semi-finished parts of the building and use a lower cost factor to arrive at a total estimate.
Two parametric estimates that adjust for economies of scale in building plants are factor estimates based on capacity cost and equipment cost in process plants.
- Capacity Cost Factoring: This method, also called scale of operations or six-tenths factor, is used early in the project lifecycle for studying feasibility of plants and factories where capacity and cost do not vary one to one. (For example, economies of scale exist at larger capacities.) A factor or multiplier is applied to historical cost information for similar plants of different sizes to reflect the nonlinear relationship. The multiplier 0.6 is often used (thus, the name six-tenths factor). With this multiplier, doubling capacity of the factory raises costs by 50 percent, and tripling capacity increases construction costs by 100 percent.
- Equipment Cost Factoring: Similar to the capacity-driven estimate, the equipment cost factor estimate multiplies cost of equipment installed in a plant by a factor derived from the total installed cost of equipment in historical projects.
Examples of Parametric Construction Cost Estimates
In a simple parametric example, you want to estimate how much a new 135,000-square-foot luxury hotel in New York City will cost to build. You learn that recent high-end hotels ran an average $595 per square foot. By multiplying that unit cost by the number of units (in this case, square feet), you calculate that your project will cost $80.3 million to construct.
$595 x 135,000 square feet = $80.3 million
The basic parametric formula is the following:
Unit Cost x Number of Units = Cost Estimate
But the value of a parametric estimate becomes more evident when you get into detailed unit costs. For example, you could break your project into all the components or assemblies such as site work, structure, plumbing, roofing, and more. With a unit cost for each segment multiplied by the number of relevant units (square footage, length of pipe laid, labor hours, etc.), you would arrive at a more refined estimate.
In our bakery example, the company has decided that its new Missouri plant will be twice as big as its Wisconsin facility, which covered 60,000 square feet and cost $12 million (or $200 per square foot).
With this information, we can easily conclude the new building will cost twice as much.
Cost per square foot x square footage = Cost OR $200 x 120,000 square feet = $24 million
But for the old bakery, more of the construction budget was spent on the parts of the plant where ingredients were weighed, mixed, and baked, whereas the storage and loading bays cost less to build.
The parametric cost estimation can account for these variables by using unit data on the different plant areas. Suppose the storage area of the old plant consisted of 20,000 square feet at a cost of $100 per square foot (or $2 million total), while the food preparation area totalled 40,000 square feet at a cost of $250 per square foot (or $10 million).
(Food assembly cost per square foot x square feet) + (Storage area cost per square foot x square feet) = Cost
Or
($100 per square foot x 40,000 square feet) + ($250 per square foot x 80,000 square feet) = $24 million
These different unit costs become more important when expert judgment is factored in. Bakery construction experts know that since the old bakery was built, the firm has moved to just-in-time supply lines, thus needing less storage space. This enables the company to build more baking capacity in the same footprint and increase productivity.
The company’s new plant will have a food assembly area that is 1.25 times larger than the old plant’s with a storage area that is only half as large. Now the calculation can reflect a more accurate number of units for the smaller storage and loading area, as well as the larger baking area:
($100 per square foot x 20,000 square feet) + ($250 per square foot x 100,000 square feet) = $27 million
That’s $3 million more than the earlier estimate. By fine-tuning the unit amounts in this parametric estimate, the food company can avoid being surprised by the cost increase.
To further refine the estimate, the project team would factor the total by construction cost index information, adjusting for inflation/deflation and region.
Malapit says that parametric estimating is best used in pre-design work, the earliest design stages, and challenges or validations for a more detailed estimate.
Bottom-Up Construction Cost Estimating
Bottom-up, also known as stick, analytical, or deterministic estimating, is a highly accurate cost estimation technique that calculates total cost by adding up the cost of each input on a construction project.
Rather than calculating the cost per square foot of a bakery line, the bottom-up or stick estimate is granular and prices out the amount of concrete, steel, fasteners, wiring, labor, etc., in every aspect of the project. By multiplying all those units by cost reference amounts and adding them up, the team produces the estimate.
This method uses the bill of quantities, quantity takeoff, or material takeoff, a document that a quantity surveyor produces listing amounts for all the materials, parts, equipment, and labor required to complete each component of the structure as drawn on the plans.
Unless you use software, bottom-up estimates are time consuming because of the large number of data points involved.
“It is easy to take macro cost data such as cost per square foot of building (either from databases or past experiences) and apply those numbers to come up with a starting point for a project budget,” notes Malapit in comparing top-down and bottom-up estimating. “However, that approach doesn’t account for site-specific or schedule constraints, which can have dramatic cost impacts.
“We take a bottom-up approach to creating our cost estimates. This allows us to think through the project in detail and pass that understanding along to our clients – allowing them to not only understand how much their projects should cost, but also why and what opportunities may be available for value engineering the design.”
Analogous, parametric, and bottom-up estimates have their strengths and weaknesses, which you can see summarized below.
Construction Cost Estimating Methods That Rely on Judgment
Many cost estimating projects rely on the expertise of experienced builders and technical specialists to improve accuracy. But some estimating techniques depend on expert judgment even more heavily.
- Delphi Method: Named for the ancient oracle at Delphi, this method arose in the 20th century as a form of crowdsourcing, the idea that a group of knowledgeable people can arrive at a better solution than an individual working alone.
In this method, a group of experts submits its construction estimates to an organizer, who shares the responses anonymously, along with any supporting reasoning or calculations. The experts then revise their own estimates based on reviewing that material. The process continues through a predetermined number of rounds or until everyone reaches consensus.
A twist on this method is called the wideband Delphi or estimate-talk-estimate (ETE) method, which adds a group meeting before the subsequent round of estimating when participants discuss areas where their forecasts varied the most. - Three-Point Estimate: This technique uses the estimator’s projection of the probable high, low, and most likely construction cost estimates. These could be well-informed guesses or estimates derived from a combination of other techniques, including estimates of each structure component.
You can use the three-point estimate as a starting point to provide a range of likely construction costs. If you can employ statistical formulas such as triangular distribution (simple average of the values) or beta distribution (a weighted average in which the most likely value is given a higher weight), you can also use the method to arrive at a single estimate.
This method offers the advantage of accounting for risks. For example, when building a foundation, the high cost estimate might reflect a scenario where the crew encounters challenging site conditions, the low for especially suitable conditions, and most likely for average conditions.
This weighted average method is similar to the program evaluation and review technique (PERT), which you can learn about, find templates for, and use a calculator widget in “PERT 101.”
- Empirical Construction Cost Estimate: A specialist estimator arrives at this cost estimate. Its accuracy depends on data available and the expertise and experience of the person compiling the estimate. This estimate is described as empirical because the estimator’s past observations in the field shape the outcome.
Also in construction cost estimation, you’ll find empirical cost inferences, in which statistical analysis relates construction costs to a predictive model.
Other Methods and Types of Construction Cost Estimations
Several other construction estimate types in use differ due to purpose, technology, or approach.
- Resource-Based Estimate: You can apply resource-based cost estimating to construction inputs that can be measured in time, such as labor and equipment. To start this estimate, identify the timing for these resources in your calendar and schedules.
With this info, you calculate how much time a resource will be used. Then you can arrive at total hours (and related cost) for various parts of the project and the project as a whole.
While this can be very time-consuming to create, these estimates are more accurate than the average time reference figures you might call upon. Resource-based estimating is most common in projects that have interdependent, time-sensitive resources, such as a ship ferrying supplies to build an offshore oil drilling platform. When a ship arrives late, it throws off the timing of other activities.
Resource-based estimates contrast with activity-based construction estimates, which include bottom-up estimates. In those, you estimate the labor or equipment needs based on historical averages or your own past projects. - Model Estimate: The key differentiator of a model construction cost estimate is that it bases the quantity takeoff on a 3D computer-drawn model, rather than 2D plans and drawings. The model helps estimators better visualize the building and improves accuracy. The models have become possible thanks to the rise of building information modeling (BIM), which uses digital tools to make 3D representations of buildings. In a technique called model extraction, estimators create a quantity takeoff from the drawing.
- Allocation of Joint Costs Estimate: This estimate allocates costs that are difficult to assign to individual project elements by using different accounting formulas. For example, you can prorate field supervision proportionally to tasks based on their share of the total basic costs.
- Supplementary Estimate: A supplementary estimate is prepared in response to a change in scope — meaning design or structural elements not covered in the original construction documents — and reflects detailed costs for labor, materials, and other inputs for the added scope along with an updated total. This differs from a revised estimate in that the changes are out of scope.
- Revised Estimate: The revised construction cost estimate is an update to the original estimate required because of change orders, cost overruns, or savings within scope.
- Independent Construction Cost Estimate: Independent third parties not affiliated with builders or owners prepare these estimates. Construction estimating firms and independent estimators perform this work. Some government-funded construction projects require independent cost estimates that are used to crosscheck estimates presented by parties to the project.
- Bilateral Construction Estimate: This is also called a two-party estimate and comes into play when two parties, typically in government construction projects, have mutual interest or responsibility in the total cost of the project. The parties, which may be government agencies or different contractors, work together on the bilateral estimate. A bilateral modification is a contract change that both contractor and owner agree to as a result of a change order.
- Annual Repair Cost Estimate: This estimate looks at how much annual upkeep, repairs, and maintenance for a building will cost. In large construction projects, owners might want to know these costs so they can decide if a building will be efficient to operate in the long term. If not, they might pursue design or material changes. More typically, architects and engineers build operating cost control into their plans, so a maintenance cost estimate is more the domain of an owner’s facilities management team.
- Production Function Estimate: Production function estimates use statistical analysis to determine the maximum output that can be derived from a combination of inputs such as money and labor. Production function is rarely used for forecasting the cost of building a specific structure. These estimates are largely used by researchers and economists for big-picture purposes — for example, to explore tradeoffs in time and resources, track housing market dynamics, and gauge the economic contribution of the sector.
Expert Tips on How to Improve Construction Cost Estimating
Mistakes, inaccuracies, and lack of clarity are some of the most common weaknesses in construction cost estimates, and experienced pros have advice on how to combat them.
- Standardize the Process: “Having a consistent approach to compiling estimates helps to eliminate common mistakes, improves communication within the teams, and simplifies project management as well as quality control procedures,” recommends Malapit.
- Invest the Time to Study the Project in Depth:
Become knowledgeable about the project early, says Dave Shank, owner of Shank Glazing Solutions, which specializes in preparing construction estimates for glazing and bid consulting. “An estimator needs to get to know the job inside and out, fully understand scope and design requirements, in order to provide a responsible estimate on any project,” he notes.
- Don’t Stay Behind a Desk: A common mistake is preparing an estimate without touring the site, says Andrew Wilson, a construction cost estimator for a residential contractor in Madison, Wisconsin, who also runs a blog for contractors. Without a site visit, you could miss issues like poor access that complicates logistics and increases cost.
- Factor in Project-Specific Criteria: In the design phase, too many estimates rely solely on historical data, several estimators said. That overlooks site-specific or schedule constraints that can have a big impact on cost. “In estimates during the planning and design process, I believe most mistakes are made by relying on historical data only without looking at the specific needs, wants, and constraints of the current project,” Taylor contends.
- Double-Check Everything: “Mathematical errors are hard to catch in detailed spreadsheets, and other common mistakes are missing items or specifications, and areas of overlap between trades. Along with our standard estimating procedures, our estimating models have rigorous built-in checks to ensure that nothing slips through the cracks,” notes Malapit.
- Describe Scope Clearly in Estimates and Bids: “The greater the generality, the less precise the communication of scope. That usually causes problems once the estimate goes to contract,” warns Shank. “If we are crystal clear on scope, both inclusions and exclusions, there is now room for negotiations, value engineering, a distinct level of adequacy from competing bids, and can even assist the customer in understanding their own design.”
- Pay Close Attention to Subcontractor Bid Estimates: “When it comes to bidding, mistakes are made in developing the subcontractor scopes of work where pieces of work may either be missed or doubled up,” Taylor says.
In a study published in the Journal of Construction Engineering and Management, researchers Li Liu and Kai Zhu in Australia looked at how construction estimates could be improved at each phase by influencing factors within the team’s control, such as clarity of owner requirements, historical data quality, team experience, and team alignment. They sought to develop a framework that identified the critical factors at each phase to ensure effective estimation.
The study found that in the conceptual project stage, the most important factors were project information (such as scope definition), cost information (having historical data for similar jobs), and team experience (in the local market and with similar projects and contract types).
In the design stage, that shifts to estimation design (structure and methodology) and process, as well as project information and cost information. At the tendering stage, the focus falls on expected accuracy level, use of benchmarks, and team alignment (effective communication, team integration, and level of project manager involvement), along with estimation design and process. At the preconstruction phase, the critical factors are review of estimate, estimation design, team alignment, and benchmarking.
How Technology Changes Construction Cost Estimating
In today’s commercial construction industry, using software to prepare cost estimates is standard practice, as is using spreadsheets to format your output. These two applications in particular reduce errors.
In order to enhance this capability to reduce errors, some estimators customize their software models to perform cross-checks of estimates.
Common features of construction cost estimating software include historical databases, templates, project reporting, a cost database, a proposal generator, and an analysis of what-if scenarios.
In addition to standard industry software, machine learning, a cornerstone of artificial intelligence, has become a crucial tool for improving the efficiency of construction cost estimating. Artificial neural networks (ANN) are layered computing designed to emulate the reasoning of the human brain. They use data from actual building projects in order to create and train an algorithmic model to estimate costs for new construction projects.
In a paper published in the Journal of Artificial Intelligence, Mohammed Arafa and Mamoun Alqedra, professors in the civil engineering department at The Islamic University of Gaza, cited early success with ANN-enabled cost estimation. Since then, researchers around the globe have used machine learning to refine models for construction cost estimating.
In an Advances in Civil Engineering survey of computer-driven techniques, including machine learning, researchers in Saudi Arabia concluded that research gaps in construction estimating methods persist and future work should focus on adding human expertise. Such human contributions should include the provision of design work and a standard accuracy benchmark.
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