Construction estimates are an integral part of successful project planning and execution. In this article, we’ll explore the importance of accurate estimating practices in construction projects—from breaking down the scope of the project to calculating costs. We’ll also provide valuable tips on how best to utilize construction software for improved precision. Unlocking these improvements can help you deliver reliable estimates that lead to better-executed projects.
Breaking down the construction scope
To assess the scope of a construction project, a project scope or Scope of Work (SOW) is created. The SOW is a comprehensive breakdown of all deliverables and commitments necessary to complete the project. It includes details such as the work, tasks, services, expected outcomes and schedule. The scope leaves nothing out so that all involved parties are clear on what they need to deliver.
Accurate cost estimation is essential for effective budgeting and financial planning of any project, and your project management teams depend on it. Without it, the project may face cost overruns, schedule delays, resource constraints and other related issues that can affect its success. Accurate analysis helps provide a realistic picture of what the project will require in terms of time, equipment, materials and labor.
Construction estimators and project managers can break down construction scopes into manageable phases and tasks. The most common ways are:
- Deliverable-based: The deliverable’s functions and physical components (e.g. Proposal or Budget complete) are the defining factors of the project work.
- Phase-based: The project goals focus on specific actions to achieve the final product (e.g. preconstruction, rough framing or MEP)
Calculating material costs
When calculating material costs for construction estimates, you might use square-footage pricing or unit-based pricing. We’ll explore both next.
Square-footage pricing
If you still need to develop the details of a construction project, then you use this method to create a preliminary estimate. The construction cost estimate relies on the project’s total square footage, and you may use historical data from similar types of construction projects to determine the cost per square foot.
Unit-based pricing
With this method, estimated construction costs depend on the number of units of a certain material required for the project. It’s possible to estimate the cost of construction in different ways. One common method is calculating it per cubic yard of concrete, per linear foot of piping or each electrical outlet. To provide this kind of precise construction estimate, you must have a thorough comprehension of the project plans and specifications.
When calculating material costs for a construction estimate, consider the following:
- Material specifications
- Quantity of materials
- Material wastage
- Material availability
- Storage for materials
- Transportation costs for materials
Assessing labor costs in your construction estimate
When determining construction estimates, two elements you can’t overlook are direct and indirect labor requirements. Direct labor costs refer to the wages and benefits paid directly to workers involved in the project. Supporting personnel such as supervisors, managers and administrative staff affect indirect labor costs.
Unit-based and square footage-based costing can calculate these labor costs. Unit-based pricing usually means using an hourly labor rate. In contrast, square footage-based pricing would use the total project square footage to calculate labor costs.
Some might use the Rule of Two to create a rough estimate of labor costs. This is where you use an estimate of how long a project would take and approximate the hourly rate. Then, multiply this figure by two. Lastly, you add 10–20% to the result to offset any hiccups.
Any of these options will be less accurate than using construction estimating software with historical data for more precise figures. Accurately calculating direct and indirect labor costs will give a better construction estimate for total project expenses.
When calculating your labor cost, you also need to consider any factors impacting the productivity of your construction team, which can depend on several factors:
- Project complexity
- Climate
- Skill level of workers
- Equipment that makes labor more efficient
- Recruiting and training cost
Accounting for overhead and contingencies
Indirect costs, also known as overhead costs, play a crucial role in creating your construction estimates. You can’t attribute these expenses directly to a specific project. However, they’re essential for the smooth functioning of the business and the successful execution of projects. Estimators and project managers distribute these expenses across all projects undertaken by the company.
Consider the following indirect costs for accurate and comprehensive construction estimates:
- Employee benefits
- Utilities (electricity, water, internet, etc.)
- Insurance premiums (general liability, workers’ compensation, etc.)
- Depreciation on equipment and vehicles
- Equipment and vehicle maintenance
- Accounting fees
- Licenses
- Taxes
- Transportation costs
- Storage costs
- Waste disposal costs
Successfully managing risks and uncertainties in construction estimating is crucial. Take a proactive approach by identifying, analyzing and responding to potential risks. Here are some effective strategies.
Use the right accounting software
Choosing the right accounting software can help streamline the construction estimating process and ensure precise financial management. These solutions allow you to determine actual costs from previous projects of a similar nature to help identify potential costs on the new project you’re estimating. Businesses using the right software can save time, improve estimate accuracy and effectively manage their finances.
Have a construction contingency fund
A construction contingency serves as a financial buffer to handle unforeseen expenses that may arise. This reserve fund acts as insurance against unexpected costs. You don’t assign it to any specific area of work or function. The size of the contingency fund depends on the size and complexity of the project.
Using estimating software and tools
Construction management software like RedTeam Flex and RedTeam Go have comprehensive features that simplify and optimize the estimation process. From accurate cost calculations to detailed material estimates, using comprehensive construction software eases the burden of developing cost estimates. Here are some key features that are foundational to RedTeam’s solutions:
Reporting and analysis
Our solutions include comprehensive reporting and analysis capabilities. This will enable you to understand the cost breakdown, identify areas to reduce costs and assess the project’s profitability.
Bid management
RedTeam’s software solutions support preparing and managing bids. They’ll help you create professional bid documents and efficiently keep track of bid estimates, submissions and vendor responses.
Integration with accounting software
Our construction management software solutions seamlessly bridge the gaps to your accounting and financial management workflows. This allows for a smooth transition from estimate to project budget to invoicing once the project has begun. It further ensures accurate tracking and processing of actual costs against the initial estimate.
Collaboration tools
RedTeam focuses on enabling collaboration. That’s why with RedTeam Flex and RedTeam Go multiple users can work on an estimate simultaneously. Real-time updates reduce the need for back-and-forth communication. Additionally, our solutions provide a platform for sharing comments and revisions, to allow for more effective and efficient internal collaboration during estimating.
Change order management
Easily track and document change orders, recalculate costs and swiftly generate change estimates with RedTeam’s construction management solutions.
Learn how RedTeam’s construction management solutions enable your team to create construction estimates and manage projects from start to finish.
Frequently Asked Questions
Q: Why is accurate cost estimation crucial for construction projects?
Accurate cost estimation ensures that projects stay within budget, prevents cost overruns and helps in efficient resource allocation. It provides a realistic picture of the project’s time, equipment, materials and labor requirements, leading to better financial planning and successful project execution.
Q: How can project managers break down the scope of a construction project?
Project managers can break down the scope of a construction project using a Scope of Work (SOW), which details all deliverables and commitments necessary to complete the project. The scope can be divided into manageable phases and tasks, either deliverable-based or phase-based, ensuring clarity for all involved parties.
Q: What are the common methods for calculating material costs in construction estimates?
Material costs in construction estimates can be calculated using square-footage pricing or unit-based pricing. Square-footage pricing relies on the total square footage of the project, while unit-based pricing depends on the number of units of a specific material required. Both methods require a thorough understanding of project plans and specifications.
Q: What factors should be considered when assessing labor costs in construction estimates?
When assessing labor costs, consider direct labor costs (wages and benefits for workers) and indirect labor costs (supporting personnel such as supervisors and administrative staff). Other factors include project complexity, climate, skill level of workers, equipment efficiency and recruiting and training costs.
Q: How do you account for overhead and contingencies in construction estimates?
Overhead costs, or indirect costs, are essential for the business’s smooth functioning and must be distributed across all projects. These include employee benefits, utilities, insurance premiums, equipment maintenance and more. Additionally, a construction contingency fund acts as a financial buffer to handle unforeseen expenses, ensuring project stability.
Q: What are the benefits of using construction estimating software?
Construction estimating software improves estimate accuracy, saves time and streamlines financial management. Features like reporting and analysis, bid management, integration with accounting software, collaboration tools and change order management optimize the estimation process, making it more efficient and precise.
Q: How does square-footage pricing differ from unit-based pricing?
Square-footage pricing estimates costs based on the project’s total square footage, often using historical data from similar projects. Unit-based pricing calculates costs based on the quantity of specific materials (e.g., per cubic yard of concrete or per linear foot of piping). Both methods have their applications depending on the project’s details and phase.
Q: What is the Rule of Two in estimating labor costs?
The Rule of Two is a rough estimate method where you estimate the project’s duration, multiply the hourly labor rate by two and add 10–20% to account for potential issues. While not highly accurate, it provides a quick estimate and can be complemented with more precise methods like construction estimating software.
Q: Why is having a construction contingency fund important?
A construction contingency fund acts as insurance against unexpected costs, providing financial stability and flexibility. It isn’t assigned to any specific area of work but is reserved for unforeseen expenses, ensuring that the project can continue smoothly despite unforeseen challenges.
Q: What are some top construction estimating software options available?
Some of the best construction estimating software options include Buildxact, PlanSwift by ConstructConnect, Procore, STACK and Sage Estimating. These tools offer various features to enhance estimate accuracy, manage bids, integrate with accounting software and facilitate collaboration, catering to different needs in construction project management.
