Construction cost estimating 101: Learning the basics

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Basics of construction cost estimating

In the construction industry, one of the main challenges is managing building projects that have unique features and requirements. However, all projects have elements things in common: a scope of work, a time schedule, and a budget. Construction cost estimation is a fundamental skill for engineering firms and contractors since important project decisions are based on costs.

The accuracy of cost estimates improves throughout the design phase, as the project is specified in greater detail.

  • When there are no construction documents yet, only a broad estimate is possible based on the project scale and the type of facility.
  • Engineering firms and contractors with experience in many projects can use historic cost data to improve the accuracy of preliminary estimates.
  • Once the design process is complete, the construction drawings and technical specifications allow more accuracy.

The ownership costs of a building can be classified into capital expenditures, operation costs and maintenance costs. Capital costs tend to get more attention during design and construction, but there is also a great opportunity to save on operation and maintenance. For example, energy-efficient equipment normally comes at a higher price, but the long-term savings outweigh the additional cost.

Importance of accurate cost estimation

Construction cost estimates have different purposes depending on who performs the calculation. For instance, an engineering firm in charge of design performs a cost estimate that serves as a reference during bidding and construction. On the other hand, contractors provide cost estimates where they aim for a competitive price while achieving a reasonable profit.

Cost estimates are necessary when applying value engineering and tracking the construction process. The completed work can be compared with the planned work to determine if the project is on schedule, while the cumulative cost is compared with the budgeted cost.

  • For example, if the cumulative cost exceeds the planned cost, there are two possibilities: the project could be exceeding its budget (unfavorable scenario), but the completed work could also be ahead of schedule (favorable scenario).
  • Project managers can reach conclusions by comparing planned costs, actual costs, and the scope of work completed.

Since many project decisions are based on cost, a major estimation error can have serious consequences. Both project owners and contractors are affected when construction costs are underestimated. Normally, the party responsible for the error must assume the extra costs. Owners may end up spending more than they had budgeted, and contractors may be forced to complete projects with reduced profits or even losses.

Read more: Contract award playbook – What to do when you have just been awarded a contract

Cost estimates are also useful when analyzing measures that improve any aspect of building performance. These measures increase the project budget, but they can yield greater benefits over time. The following are some examples of measures that make buildings more expensive initially, in exchange for high savings during operation and maintenance:

  • LED lighting fixtures can achieve electricity savings of 30% to 90% compared with conventional lighting systems. They also last much longer, saving many lamp replacements over time.
  • Variable refrigerant flow systems and water-cooled chillers are among the most efficient air conditioning systems for large areas. Ductless mini-splits with a high nameplate efficiency are recommended for small-scale applications.

The construction cost estimation process

Since cost estimates are based on specifications and other technical data, they can be classified based on the information available.

  • An order of magnitude estimate is based on the project size and type of building, as mentioned above. This type of cost estimate is the least accurate since the information is still limited. However, an order of magnitude estimate can help the client decide if the project makes sense as a business decision.
  • As the design process reaches the schematic design and design development phases, cost estimation can be performed with greater accuracy.
  • Cost estimates are much more accurate when they are based on a complete set of construction documents.

Construction cost estimates must consider all expenses necessary to complete the project, including materials, equipment and labor. In the case of contractors, the offer must also include overhead costs and a contingency budget. Design engineers also consider labor and overhead when estimating construction costs, but this information is assumed. On the other hand, contractor bids are based on the actual costs of each firm.

Cost estimates are often based on unit prices, where the estimator calculates costs per unit of work, and then multiplies them by the total. The optimal unit to use depends on the type of work. For example, costs per square foot are suitable for flooring and roofing items, while costs per linear foot are better suited for columns and beams. Cost estimates are normally broken down by areas, such as structural components, mechanical systems, electrical installations, plumbing systems, fire protection, etc.

Project owners often focus on price when selecting a contractor, but an offer that is unreasonably low should raise suspicion. Cost estimates from the design firm are useful in this case since they come from a neutral third party that is not bidding. They provide a useful reference to determine if a contractor bid is too high or too low.

Using building information modeling for cost estimation

Building Information Modeling (BIM) has the potential to improve the accuracy of cost estimates. Structural elements and building system components can be visualized better than in 2D drawings, allowing a more accurate calculation. BIM can also automate many calculations, speeding up the cost estimation process. BIM is especially useful in projects with complex layouts since cost estimations from 2D drawings can be very challenging.

Find also: BIM software guide – 3D is nice but data is what you need

Since BIM can automate part of the cost estimation process, it is a useful tool to analyze design decisions. When engineers have many options to meet a specific project need, they can analyze the cost of each alternative more easily. While this process is also possible without BIM, the calculations consume much more time.

Once a building is complete, BIM remains a useful tool for facility management. If an expansion or renovation is needed, BIM can improve the accuracy of cost estimates. Projects in existing buildings are much more difficult to estimate when information is limited since the installations must be inspected directly. On the other hand, a BIM model reveals the location of all components, even those embedded in walls or floor slabs.

About the author:  Michael Tobias is the founder and principal of Chicago Engineers, an Inc 5000 Fastest Growing Company in America. He leads a team of 30+ mechanical, electrical, plumbing, and fire protection engineers from the company headquarters in New York City; and has led over 1,000 projects in Chicago, New York, New Jersey, Pennsylvania, Connecticut, Florida, Maryland, and California, as well as Singapore and Malaysia.

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Topics: Project management

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