Building budgets grow out of historical estimates into near-accurate quotes through changing design and construction detail across a project’s lifecycle.
In the first few meetings, building designers, owner, and contractors forecast the cost of erecting a structure before signing off on construction. It’s important to evaluate assumptions underlying the initial budget as a project moves through shifting priorities, change orders, design revamps, and unexpected circumstances.
Massive losses are incurred when off-the-mark estimates upset feasibility and scope requirements. As a rule of thumb, project managers accept multiple bids on a given project to nail down a fair estimate through earned value analysis, which ensures no one pays more or less than what they should by tracking project performance against cost and time estimates.
Without further ado, let’s break down one of the gigantic bills in recorded history.
Elements of Building Cost
- Divide Cost Heads
Building costs are split into capital costs and maintenance costs.
A one-time expense, a capital spend helps set up the facility including expenses directly impacting its establishment. Some of them are:
- Acquisition of land (whether joining plots, remodelling, or holding)
- Project planning and feasibility testing
- Architectural and engineering design
- Materials used, labour and equipment involved in construction
- Tax and insurance payments
- Overheads incurred by owner, contractor, any middleman costs
- Property furnishing
- Jobsite supervision
- Project financing
Operational costs toward maintaining the building over the project life cycle include:
- Applicable taxes and insurance payments
- General and miscellaneous operating expenses including utilities
- Upgrading and refilling material inputs and onboarding new labor if needed
- Renovations
- Profit Margins
Every businessperson from the owner to the last subcontractor add a margin of profit to their service package that figures into the overall budget. - Contingencies
No budget can ever account for sudden events and the full scope of expected eventualities. Natural events such as flash floods may need protective equipment. Dynamic political events may call for securing additional permits extending project timelines and eventually, cost. - Soaring Prices
Inflationary trends are part and parcel of the business cycle spurning a chain reaction from base material cost rises to labour cost upticks, ultimately weighing on initial estimates.
- Profit Margins
Best Practices for Cost Estimation
Understanding Key Estimate Types
- Design Estimates: In the pre-planning phase, owners get together with their key financial decision makers in the boardroom to approve financing for a project. This is then taken to the meeting where owners consult with designers and engineers on shaping the most optimal design for the planned structure. Some of the estimates discussed:
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- Screening estimates, (or order of magnitude estimates)
- Preliminary estimates, (or conceptual estimates)
- Detailed estimates (or definitive estimates)
- Engineer’s estimates based on plans and specifications
For each estimate, the degree of design information increases usually.
- Bid Estimates: Contractors factor in the direct construction cost including field supervision, profit markup to cover cost overheads when sending a bid estimate to the owner. The direct cost of construction is deduced by combining subcontractor quotations, quantity takeoffs, and construction procedures. Read more about bid estimates here.
- Control Estimates: Monitoring the construction requires a control estimate that’s derived from current information about budgeted cost after contracting and prior to construction. It involves the estimated cost of completion during the progress of construction.
Estimation Techniques
Dozens of estimation methods are used in tandem based on project needs. However, we can classify them into four major techniques:
- Project Comparison Estimating: A widely used estimation method in the early planning stages where several variables are unknown, leaving builders and owners to arrive at ballpark estimates. Its accuracy may fall in the range of 15-25% of the actual project value, based on past similar projects. Cost can be estimated by accounting for exact number of areas in a given space; for instance, the number of rooms in a school or wards in a hospital. This can be compared to regional projects of a similar scope.
- Cube Rate Cost Estimating: Drawn out of historical data, early and interim estimate, this is one of the more fair estimation methods since designs and specs are somewhat substantially developed by now. It allows the measurement and calculation of floor areas and volumes of proposed spaces. Large estimating firms have a large database of past project estimates—these are often adjusted for regional cost indices, local labour rates, and special site conditions or in-progress design features.
- Detailed Cost Estimating: Such an estimate is laid out when concerned administrative authority signals a go-ahead on construction. This is the most accurate estimation method where quantities of work are measured and an itemized cost of work noted. A contingency cost of 3-5% is attached to this estimate. A solid estimate contains general and detailed specification, drawings, calculations, and a rate schedule.
- Unit Price and Schedule Estimating: This estimation technique breaks down the construction work into manageable chunks with a “unit price” assigned for each chunk. These unit prices are multiplied by desired quantity off take to arrive at individual costs. They are summed up to determine the final cost.
From delivering materials to furnishing the space, all costs divided up as singular activities are estimated, and these differ by project while providing an accurate picture of the demand and supply interplay of the market at the time. - Yearly Repair Cost Estimating: Every structure requires a yearly repair budget to plan for maintenance costs allowing its safety and integrity.
Choosing the Right Contractor
Estimating costs is delicate business. Therefore, choosing a contractor who is capable of delivering a fair estimate is critical as budgetary overruns can permanently cripple construction businesses.
Many pitfalls plague faulty estimations but the common ones include misreading project documents, mediocre understanding of project scope and associated costs, and even incorrectly entering cost figures in project documents. If working on a mega project, these errors can amplify to huge losses. Despite best intentions, many contractors inadvertently skip a step or two such as viewing the site thoroughly and assessing plausible natural conditions that may impact the estimate. These steps are routinely taken for granted as a contractor’s whim might tell them they know enough to give a solid estimate.
Avoid these costly mistakes and choose a contractor who knows your project inside out and doesn’t make arbitrary decisions without careful consideration.
What building construction estimations work best for you?
