Determining the cost of building is as complex as it is critical to project success for any construction company. Each project is different, and there are a lot of factors that can impact the actual costs of building. Still, by developing a consistent strategy for tackling construction cost estimates, contractors can build more accurate bids to protect profits and win more work.

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Understanding construction estimates

Construction cost estimation isn’t a one-and-done exercise. There are different construction estimates used by project owners and contractors during various phases of construction projects.

Early cost estimates help owners pin down the exact scope of a construction project and help secure financing. Later construction cost estimates form the foundation of the construction bid and budget; accuracy in these estimates could determine the profit margin the contractor earns on the job. Further, construction estimates are revisited and altered throughout project progression.

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Accuracy is critical for construction estimates

Inaccurate estimates can quickly spell the end of a project: a high estimate can see a contractor overlooked for a lower bidder. A low estimate can lead to project delays or cost overruns.

An accurate cost estimate in construction depends on many different factors: how well the project is defined, how well estimators understand the project, and the accuracy of the cost data the estimator receives from suppliers and other sources, to start.

It would be unrealistic to expect an estimate to be perfectly accurate – there are too many factors at play to get construction costs exactly right – but the closer a project team can get, the better the chances of project success.

Here, we’ll discuss some critical steps project owners and contractors can take to create accurate construction cost estimates.

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Step-by-step guide for construction cost estimating

Step 1: Understand the scope of the project

Project owners often work with architects and designers to create a rough estimate to settle on a project scope during the design phase. These early conceptual estimates are created during the preconstruction phase and become the basis for developing a feasible scope for the project owner.

When the procurement phase begins and the project is opened to bidding, contractors need a firm grip on the exact scope of the project. Estimators should understand key deliverables, any project requirements, and constraints that impact the budget and timeline. For example, contractors need to know if the building site will be inaccessible for certain weeks due to a public festival or if local weather conditions are likely to impact the building site during some months during the build.

Contracting teams should send experienced team members to pre-bid meetings to view the project site to ensure as many of the variables are accounted for as possible. It would be hard to underestimate the importance of understanding the full scope of the project when determining a price for completing the work.

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Step 2: Collect project data

Next, estimators need to collect construction documents, drawings, and spec sheets to get a better idea of what it will take to complete the project. During this step, construction estimators can learn a lot by collaborating with specialty contractors, architects, materials suppliers, and other stakeholders on the project.

Relying solely on previous project data or databases of construction data can lead to missed details and disastrous results. Instead, estimators should recognize as many unique aspects of the current project as possible to represent true project costs.

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Step 3: Categorize costs

Once estimators have compiled all the project information, they can itemize costs and split them into cost categories where they can be tracked. Use a spreadsheet to estimate and manage expenses like labor, materials, equipment, permitting, and overhead expenses separately. Once the project begins, a payment system like Truss Payments can help keep costs organized by adding custom category tags to each expense. Truss even integrates with accounting systems for seamless financial workflows.

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Step 4: Estimate Quantities

Here’s where any past project data can really shine: analyze previous experiences in comparable situations to get real-world data. Managers tend to underestimate the time and expense it actually takes to complete tasks, so historical examples can help discern exactly how many labor hours the company used and how much material waste occurred.

Then, talk with project managers and team leads to discover unique aspects of the coming project that will impact those numbers.

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Step 5: Pricing

Research and lots of legwork can help contractors get up-to-date and locally accurate prices for each cost category. Be careful to consider market conditions and fluctuations that can impact materials prices and local wage laws or union rules that may impact labor costs.

Use Truss to update costs as they become available so teams can track them accurately. Set up instant vendor payments for seamless operations once the project begins.

Using tools like construction cost management software can streamline this process by centralizing real-time pricing data and enabling contractors to manage labor, material, and equipment costs more effectively.

Step 6: Contingency planning

Construction projects are great at surprises. No matter how thorough the planning and research, there are likely to be some stumbling blocks the project team has to overcome, whether it be bad weather, materials delays, or unexpected change orders. Estimators must be aware of the likelihood of unexpected circumstances and plan for them with a financial cushion or a contingency plan.

Adjust contingency amounts based on project complexity, a full risk assessment, and the team’s past performance to ensure adequate coverage.

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Step 7: Review

Finally, estimators should check their work. Thoroughly. And have others check it, too. A lot is riding on the accuracy of each estimation, and there are too many factors to consider them all, especially on large projects.

Run the estimate by trade partners to make sure all bases are covered and the numbers look right. Compare the estimated quantities and costs by industry standard, recognizing any deviation based on individual project characteristics. Every project is different, but pay close attention to numbers that deviate very far from going rates.

Financial tools like Truss can help compare current estimate numbers to the transaction history from previous projects to double-check that they align and form cohesive financial patterns.

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Conclusion

Contractors depend on accurate and complete construction estimates to keep projects running with adequate cash flow and profit. However, the cost estimating process can be very complex and is prone to errors and omissions. Contractors need to create a system for developing dependable estimates, and that process should begin with open communication and lots of collaboration between stakeholders.

Estimators need to take care to fully understand project scope, account any unique aspects of the project that may impact project cost, get timely numbers for labor and construction materials costs, and organize their findings in a way that makes it easy to budget and account for.

Truss can help contractors compare transaction histories with the current estimate, track costs throughout the life cycle of the project, and streamline accounting efforts from beginning to end.

Once a contracting team has developed a winning estimation process, it should systematize the steps to maintain a consistent strategy for getting it right.