Cost estimation is one of the most critical steps in project management, right from project initiation to closure. It involves forecasting the cost of variables for the successful completion of a construction project. Contractors can test the assumptions of an initial budget using a series of cost estimation techniques.
Accurate cost estimation can help contractors and project owners make informed decisions. With strict budgets, cost estimation ensures that a project remains financially feasible through and through.
What is a Cost Estimate in a Construction Project?
Construction estimates refer to the cost of items and human resources the contractor and project owner expect to incur from start to completion of a construction project. It includes the costs of labour, raw materials, equipment, and overhead costs.
In many cases, most people tend to confuse construction estimates with project quotes, bids, and proposals. While people use these terms interchangeably, they mean different things. This post by Procore Technologies insightfully explains how a quote, bid, and proposal differ in actual application.
Cost Categories in a Construction Project
As a contractor, it is essential to understand the various categories of construction costs before choosing an estimation method. That will not only give you a sense of clarity but also help you choose the right method that works best for your construction firm.
Generally, construction costs fall under two major categories, namely direct and indirect costs. That is the most straightforward classification for defining construction expenses.
- Direct Costs: Refer to the expenses explicitly billed to a particular project. They include wages for project teams, fuel for construction equipment, and funds spent on project-specific risks.
- Indirect Costs: Refer to expenses that are indirectly associated with a particular phase in a construction project. Some of these expenses include security costs, utility bills, and quality control.
Cost estimation goes beyond merely listing project costs. It highlights assumptions made for proposed expenses. Some specific project expenses include labour, equipment, services, material, software, hardware, facilities, and contingency costs.
Methods of Cost Estimation in Construction Projects
Now that you know the basics of cost estimation in construction, let’s look at the techniques that most professionals utilize to formulate accurate estimates in construction projects. They combine several estimation techniques to achieve high levels of accuracy.
1. Analogous Estimating
Analogous estimating, also known as top-down estimating, uses historical project data to estimate the cost of a new project. This estimation method is ideal for construction firms that contract similar projects repeatedly.
When there is a minor difference between new and similar projects, estimators can adjust the analogous estimate to fulfill the requirements of the new project. The estimation method is used mostly in the early stages of a construction project.
2. Bottom-Up Estimating
Bottom-up estimating, also known as analytical estimating, is the most accurate cost estimation technique. It divides the deliverables of a construction project into several work packages, with each package consisting of specific individual tasks.
Estimators evaluate the cost of every task and work package as a whole and add them up to get the total cost. While bottom-up estimating is considered as the most reliable technique, it is time-consuming, especially when evaluating costs for a large construction project.
3. Expert Judgment
This cost estimation technique relies on the knowledge and experience of specialists. An expert evaluates the cost of the current project by referring to similar projects in the past, and make corrective adjustments.
Since various projects are likely to differ in complexity, experts always present estimates as a range. For that reason, the method is mostly used to determine the feasibility of a project.
4. Parametric Estimating
Parametric estimating utilizes statistical modelling and historical data, to evaluate the costs of projects, especially those involving similar and repetitive tasks. With this technique, estimators must first divide the construction project into work units and determine costs per unit. They then multiply the costs per unit by the number of units to get the total cost. Such units include feet for lengths and square yards for floor and ceiling.
5. Empirical Costing Methods
Empirical costing is also suitable for estimating the costs of comparable projects. In this technique, experts use paper or software-based systems to draw experiences from previous projects, allowing them to obtain necessary data to make accurate estimations. The method is accurate as it is automated and also draws insights from existing data.
6. Three-Point Estimating
Three-point estimating uses a statistical method known as Program Analysis and Review Technique (PERT), which analyzes project costs, duration, and activities by determining pessimistic (Cp), Optimistic (Co), and Most Likely (Cm) estimates. The technique uses different formulae to calculate the total cost.
The effectiveness of a cost estimation technique relies on its general performance. While there are several methods of establishing cost estimates, it is vital to consider their characteristics to find which will work best for you. Some of the features to consider while selecting a method include accuracy, confidence level, credibility, validity, precision, and reliability.