Construction Estimate 101 – How To Estimate Construction Costs
Learning how to do a construction estimate takes time, skill, and above all…. experience and practice.
If you’re looking to learn how to estimate construction costs, than this article will serve as a great introduction for you. Plus we’ll point you to Estimating 101 – a course published on Construct-Ed (online learning for Pros, by Pros) that will cover these basics, and more.
Successful Construction Estimate, (Hopefully!) Successful Project.
All successful projects start with a great estimate. A good estimate will reveal key information about a project before the construction company bids or sells a project. Once a project is awarded, the estimate becomes the budget for the project. And it becomes an important tool for the project manager.
The responsibility for developing project estimates is assigned to different positions within the company depending on how the construction company is designed.
Companies that operate on a pure bid model such as government contractors may have a team of professional estimators whose job it is to read plans. These estimators complete take-offs and develop bids for projects.
Other companies who are more sales oriented may assign the responsibility of estimating projects to members of their sales team. The sales person develops their estimate as a basis for their sales proposal. They present their proposals to their customers in an effort to sell them the job.
Whether your company employs a team of estimators or they require their sales team to estimate projects, it is critical that good estimates are developed. Without developing good estimates, the future of the company is in doubt.
There are critical steps in estimating. Miss any of these steps and the estimate and the project will be negatively impacted.
Critical Steps to a Construction Estimate:
*Keep in mind – exactly how you accomplish each of these steps will depend on your company’s estimating practice, the tools you use for estimates, the trade you’re in, and what you’re trying to accomplish with the estimate.
For example, maybe you do your take-offs and put the data into a custom excel spreadsheet that you use for estimates. Or, maybe you work for a company that uses special estimating software.
The point is, whatever each of these steps look like for you – all are crucial to having a successful estimate.
1. Complete a Good Take-off
What is a take-off? To put it simply, a take-off is the process of taking off all of the critical information about a project. You take-off the quantities that you need to count in order to develop a cost estimate. The key here is knowing the difference between the information that is critical to developing an estimate and the information that is not.
Completing a take-off is not a simple process. You need to be familiar with the types of quantities that the different materials or details are measured in. If you are developing a roofing estimate, you need to count quantities in square feet. If you are an excavator you are measuring in cubic yards.
Leverage your knowledge with your trade. The quantities that you are familiar with on project sites are typically the quantities that are measured for take-offs.
Take-offs are completed either by reviewing a set of plans or by visiting the site. If you are dealing in new construction you probably don’t have a site to visit. The exception to this might be if you are an excavating contractor. Visiting a site before you quote the work might help you understand the topography of the land the challenges that your team will face in completing the project. If you don’t have a site to visit you will need to rely on plans provided. Learn to read the plans and learn to ask good questions.
If you are dealing with a building renovation or a replacement of a building component a site visit is mandatory. Attempting to estimate a project without visiting the site is difficult if not impossible. There are many tools out there that can help gather key information using satellite imagery. But without being on site there is no way to confirm that the information that you have is the most current.
2. Conduct Due Diligence
What is due diligence? It is defined as the reasonable steps taken by a person in order to satisfy a legal requirement, especially in buying or selling something. In the case of a construction project on an existing building, you are selling something.
Due diligence is the process of asking good questions and looking for good answers. Good estimators ask great questions. They look for answers to their questions. Professional estimators realize that without the answers to their most pressing questions that their estimates will be at best educated guesses.
So how do you complete your due diligence before finalizing your construction estimate? Here are a few tips:
Visit your project sites. Don’t fall into the temptation of allowing technology to do all of your work as an estimator. Technology is a tool just. But it requires interaction with its user to maximize its effectiveness. A hammer is just a lump of steel until it is swung by the person using it. Use technology to enhance your estimating process, not replace you as the estimator.
Ask questions of your site. Look at the project and ask yourself where the greatest challenges are going to come from. Every site has its challenges. There is always a source of heartburn with each project. The key is to identify those challenges during the estimating process and guard your company against those areas of risk.
Listen to your customer. A hallmark of a great salesperson is their ability to listen to their customers. Great estimators share this characteristic. Learn to listen well to your customers. Ask good questions and then listen to the reply. Allow the homeowner or the building manager to share their insights.
3. Worst Case Scenario vs. Most Likely vs. Best Case Scenario
A key to estimating is what is known as estimator’s intuition. Intuition is defined as the ability to understand something immediately without the need for conscious reasoning. In estimating, intuition is a combination of applying knowledge with experience to the characteristics of a potential project. Ignore intuition and you place your company at risk.
When an estimator develops a construction estimate they are really developing their negotiating positions. Their pricing that they will offer their customer is their starting point in the negotiations for the project. It is based on how they see the project unfolding.
Professional negotiators will use a three tier structure for developing their negotiation position. These are:
Worst Case Scenario – this level includes all of the things that can and might go wrong.
Most Likely Scenario – this is the level that the negotiator feels will most likely happen.
Best Case Scenario – this is the level where everything goes absolutely perfect.
Now apply these levels to estimating. You begin to see quickly how these levels apply to the estimating process. Let’s take a look:
Worst Case Scenario – in this situation, the estimator looks at everything from the Chicken Little position. Not only is the sky falling but the ground is crumbling underneath as well. If it can go wrong it will go wrong. The materials will increase in price by 20%. Labor sources will dry up. You name it and it will go wrong.
Most Likely Scenario – an estimator looks at the project and determines the areas where the project will have problems. This is based on experience and wisdom. They have been through a project like this before and chances are that something will go wrong at a specific point.
Best Case Scenario – everything with the project will go right. There will be no potholes. No labor issues. The customer will be a dream to deal with. No objections from the designer.
The problem with most contractors, especially new contractors starting out, is that they move quickly to the Best Case Scenario position. They overlook what can go wrong with a project. And when it goes wrong, they are not sufficiently protected from the occurrence and they can’t recover.
These levels also come into play when a small contractor begins to expand and begins developing construction estimates for crews to complete. Up to this point they are used to developing estimates for themselves. They know how fast they can complete a project. And they assume that everyone can complete it as fast as they can.
Assuming that a member of your team can complete a project as fast as you can be a major source of loss for a company owner. If you are a drywall contractor and can install a certain amount of sheet rock in an hour be careful not to assume that your team can do the same amount in your absence.
Advice from Industry Pros.
We asked those in the industry what they would add to performing a basic construction estimate, and we got two great responses to give you more insight on the factors involved in performing one.
Evan Harris serves as co-founder of SD Equity Partners, a San Diego based real estate finance company and operate across the country. They have been a successful small business for the last seven years and put together estimates for fix and flip projects on a daily basis.
Here’s what Evan had to say to those looking to estimate a remodel project:
“The best type of model estimation is a clear and transparent one. We always suggest a line-item estimation that covers as much detail as possible. Clients love thorough and transparent project proposals and the more information you can present, the more successful you will become.
As with most things in life, the motto “under promise, over deliver” is a fantastic rule to follow. Especially if you are working with someone that could be a repeat customer, the more you can save your client, the happier they will be.”
On marking up materials…
“Marking up materials is always a tough call. If your client looks up the price of the materials and sees that you marked them up, they can feel a bit taken advantage of and it could cause friction with the rest of the project.
A great way to side-step this potential problem is to include labor costs as a separate line-item in the material pricing section of the estimate. This labor cost should include the time spent purchasing, unpacking, and preparing the materials. By “marking up” the materials this way, you are honest in the fact that the process of obtaining the materials takes time and should be compensated and you do not have to worry about your client thinking that you are trying to “nickel and dime” them.”
Advice to beginners:
“The best piece of advice I can provide is to not get greedy. Get in the black and move on to the next project. In this industry, the best way to operate is to carefully complete as many projects as possible.. Even if the profit is not as high as you initially thought, it is important to keep moving. Completed projects are often great sources of referral work and the more you complete in your first year, the more opportunity you will have in year two and three.”
We also got input from Alex, at Rosh Metal.
“The use of a specific model of estimating costs will depend on the type of project, and sometimes, it might be useful to combine more models for a more accurate estimate.
For example, in the case of a recurring project, like a single story industrial building which or some common-place in-shop metal fabrication, we would opt for per unit model. It entails just calculating an as accurate as possible estimate of every possible piece as well as additional expenses (salaries, insurance, transportation etc.) and adding all that up.”
There’s a learning curve to estimating…
Alex goes on…
“There is also the learning curve factor. The more the crew repeat one same or similar task, the faster they will be in its completion in the future – and faster work means smaller expenses of course. At a certain point, this boils down to observing a trend.
To again use one story building example, we would just see how fast was work being done in the past and if there is an improvement trend, figure that one in as well (for example, the time to completion reduces by 5% every time, we would assume 3 or 4% less this time just to be safe). However, if there are some new big changes in the construction crew or any other set of employees, or if we need to co-operate with another contractor, than the learning curve model is basically inapplicable.”
On the “power-sizing” model…
“There is also the power-sizing model. A one story warehouse that is some 10 meters wide and 30 meters long has a surface area of 300m square. A 12 meters wide and 30 meters long warehouse will be 360 square meters large (20% larger than the first), but the costs are very unlikely to be 20% bigger. But, power seizing model is applicable for economies of scale so the formula we would use to calculate the cost is the following:cost of B = (Cost of A) [(“Size/Capacity” of B) / (“Size/Capacity” of A)] x Where “A” stands for the original product used for comparison, “B” for the product whose price is being estimated, and upper index “X” is the power-sizing exponent that has to be looked up in industrial books or our own databases.
If the exponent “x” is less than 1.0 than the economy of scales exists. If it is 1.0, then a 100% increase in project scope means a 100% increase in expenses, and if it is over 1.0, then the expenses are disproportionately bigger than the increase in project size.In the end, I would really like to point out again that all depends on the project and combining is necessary. But the model specific, the learning curve, and power-sizing models have worked out for us the best and I recommend them, combined or in isolation.The step-by-step list of estimating costs can be extremely long, so I would point out some of the costs that can be overlooked by parties on both side or that are very important to keep in mind.
These include the following:- Building Department fees for the city or area (Addition to Existing Structures, Pavement Cutting fee, Building permit, Project Revision fee, Zoning fee and other technicalities; these can be a slap across the wallet and across the morale at the same time)- Preparation and preparation costs; maybe there it is necessary to demolish something, or dig through or around city installation and infrastructure (plumbing, electricity, internet cables etc.) so it is very important to gather as much information as possible about the site and undergo detailed preparation.
Mistakes in Planning: Cheaper to Deal With Early.
“Every mistake in planning or preparation phase is much cheaper to deal with immediately than later when project is under way- Insist on acquiring material from one vendor, or the majority of material for that matter. If you can, for example, buy all the materials necessary for heating and cooling of the building from one vendor, then insist on doing so. Buying from different vendors might mean having to buy from people holding up to different conventions or simply dealing with material of disparate quality.
Pay special attention to foundations and what kind of preparations are necessary there. This depends the most on the terrain, so even if the new construction is identical to one you have completed a couple of months ago, do not carelessly assume that foundation requirements will not vary.
Marking up on materials will also depend on the size of the project and on material type. Some contractors I have talked to have a fixed ratio of 30% for material. But I think that this rate should not be fixed and fluctuate on factors such as how easy is material to come by, how expensive it is, how fragile, does it require special care while in our possession or not and how difficult it is to install or turn into a product. $4000 worth of steel beams will require a lower mark up, in our case since we are dealing with metal after all, than $4000 worth of glue. Steel must be tucked away in a closed space without too much moist and not necessarily regulated temperature and if the building site is not too far, then we will spend less time and money on transport. Glue, on the other hand, might require special care and it needs to be marked up more than steel.”
Advice to newbies…
“But, if I had to provide numbers, I would say that the markup ranges from 10% to 40%. Newbies to the business should ask for their money often and pick it up quick. Clients that are not pressured into payments by newbies spot that weakness easily and will try to exploit it for sure. There is no need to be coy about money, it is earned, and it is only fair to get it on time.
My recommendation would be around 9 to 10 % of net profit margin. This a reasonable amount that even covers the money the business owner would be expected to reap as a reward for taking on the risk of owning a business, but this is another thing that will vary from project to project. Riskier projects will require larger profit margins, after all it is fair to get extra profit for taking the extra risk, and big endeavors might leave the contractor with a hefty amount of money even in cases of a smaller margin. But, it still should even out at some 10% of net profit on the annual level.”
100 Ways to Estimate.
If you took 100 estimators from 100 different construction companies and put them all into the same room you will have 100 different ways to estimate the same project. No two companies and estimators look at the same project the same way.
There are foundational items that all estimators work from. For example, estimating is a math based profession. Attempt to develop an estimate without using math and you will not get far.
There are basic calculations that are needed for estimating in many different trades. We explore these basic calculations in our course Construction Estimating 101: Introduction to Construction Estimating. Check it out to watch a preview, or enroll in that on-demand course.
One of the best ways for you to succeed in construction estimating is to increase your experiences. Learn from your business and from those around you. Network with others through LinkedIn and your trade associations. Ask great questions… and listen to the answers. Build a core group who can support you as you grow in your abilities.
If you need to find more information on construction estimating- you can search for the following:
What would you add? Any tips or advice for beginning estimators?
Let us know what advice, software recommendations, etc. you’d give to new estimators!