How to Construction Estimate: A Guide for Small Contractors

10 minute read
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An accurate construction estimate is crucial for successful projects and happy clients. The process boils down to three key objectives: 

  1. Establishing the work required to fulfil a project scope
  2. Estimating the associated costs
  3. Evaluating (and avoiding) risk 

Poor estimating can lead to cost overruns which can in turn delay a project and damage your business relationships. For this reason, it’s important that the specific steps are followed to ensure all aspects of the project are taken into account, in addition to any relevant external factors such as weather or market fluctuations.

There are a number of widely used methods for calculating fixed and variable costs including:

  • Empirical Cost Inference
  • Production Function
  • Unit Cost Estimating
  • Allocation of Joint Costs
  • Stick estimating

Construction estimating will vary greatly for different builders, surveyors, contractors and construction companies. As a small construction contractor, it’s imperative that the process is carried out correctly.

As a construction cost estimator, you will have to look into a wide variety of costs including:

  • Location
  • Project duration
  • Labour
  • Materials
  • Specialised machinery
  • Building codes
  • Soil conditions

Project estimating can be laborious and requires razor sharp planning and attention to detail. The good news? We have outlined a process to set you and your small construction business up for success.

Bid on work that suits your strengths & capabilities

This may sound obvious, but you’d be surprised at how often this is overlooked. As a small construction contractor, it is important that you bid on the type of work that is suitable for your business and your expertise. This is important for two reasons:

  1. Bidding takes time and time is money. It’s great to be ambitious but don’t waste your resources bidding on projects where you’ll lose out to competitors who are better suited to the job.
  2. If you do happen to land a job where you’re out of your depth, whether it be too big or very complex, you’ll likely make mistakes along the way. These mistakes can be costly and will eat into your profit and reputation. There’s a learning curve for growing businesses which should be pursued, but it’s best to err on the side of caution, particularly for small and medium sized construction companies. 

There are a number of other factors to be considered:

  • What stage is the project at? 
  • Are you bidding at the early design phase?
  • Will there likely be multiple rounds of design edits?
  • Does the job require you to work with other subcontractors or will you be the sole entity working across this project?

In our experience, if the answer to any of the above is yes, we would advise submitting a rough order of magnitude (ROM) quote allowing you a buffer of +/- 25 - 50% .

Review Construction Specifications

A common pitfall in construction estimating occurs when the estimator fails to access all of the relevant documents and information. When carrying out your calculations, make sure you are always working with the most up-to-date documents for the project. Again, this sounds obvious but mistakes here happen more frequently than you think. Small margins of error compounded over time can result in big budgetary discrepancies so you want to avoid this at all costs. 

You’ll first need to look at the general specifications: your construction business as a whole, your team qualifications, payment terms, bonding capacity, and insurance requirements. You will also need to ensure you can meet all the qualifications and legal requirements associated with the construction project contract.

Next up are the division specifications. Here you will need to consider the material grade and quality of materials to be used, installation methodologies and responsibilities of costs. At this stage, if you spot any unusual or additional items, it’s important to make sure they are included in your bid.

Avoid estimating too high or too low. Buffers are handy but try to get as close to reality as possible. Either side can cause issues in terms of winning and keeping business.

Review Construction Drawings

Similar to the specifications, the project drawings will need to be studied in order to get a holistic view of the entire scope of work. First, you will need to examine the architectural drawings to ensure you are across all aspects of the project and how they will affect construction costs such as labor, material pricing and equipment.

Next you will need to review the divisional drawings:

  • Are there any technical details that need to be highlighted? 
  • Are the original spec’s aligned with what has been outlined in the drawings? 
  • Can you spot any discrepancies? 

Attention to detail here is key as if you can spot even a minor error it can save you a huge amount of time further down the line.

If you do in fact notice that there is some conflicting information, you can write up a request for information (RFI) to get clarity as to which document takes precedence and how to proceed. Having a paper trail here is important as it will avoid any disputable change orders further down the line that can otherwise leave you liable.

Do a Construction Takeoff

Depending on the complexity of the project, construction takeoffs can be quite time-consuming. For this reason, construction estimating software is becoming increasingly popular as it saves time and reduces the risk of human error. 

Your takeoff will include a comprehensive list of all the essential materials needed to complete your project. It is essential that construction takeoffs are carried out correctly, hence the growing trends towards the use of estimating software. If insufficient materials are ordered, it can result in project delays. Conversely, if the takeoff overestimates material figures, it can result in the project incurring additional costs for your business.

Create a Construction Estimate

Once you have the full list of materials and quantities needed, the next step is to calculate the cost for each individual item. From here you will be able to determine the total cost for materials, labour and the totals for each task. 

  1. Material costs are relatively straight forward and are usually calculated by ringing suppliers or searching online. 
  2. Once you have the costs for all listed materials, you will be able to calculate the total material cost for the project. It is this cost total that is factored into the final construction cost estimate.
  3. Labour costs are slightly more complex and typically require past production history. Don’t worry if your business does not have the relevant data to calculate these costs. It is possible to purchase historical cost databases from reliable sources.
  4. Remember to factor in costs such as equipment rentals or subcontractors.
  5. Now that you have worked out your labour cost and material cost, you can accurately predict the total estimated cost of your project. This is called your bid estimate.

Construction estimates are important as they provide an in-depth description of the project and the associated costs needed for it to be successfully completed. The estimate gives your clients a clear idea of how much they’ll need to invest in order to reach their desired outcome. 

Make sure whoever is in charge of the estimate process makes at least one visit to the proposed site. A strong estimator will be able to spot important considerations that will impact direct costs such as surrounding buildings, local infrastructure and weather patterns.

Determine Overheads & Profit

So, now that you have calculated your bid estimate, you’re almost ready to submit your bid proposal to the client. The final step in the estimating process is to determine your overheads and profits. Both are added as a percentage to your overall project costs for the bid. 

Overheads is the total of all the other indirect expenses that are needed to run your business: 

  • Operational costs
  • Administrative costs
  • Property leasing
  • Equipment rental
  • Delivery costs
  • Human resources 
  • Recruitment 
  • Sales and marketing
  • Accounting and finance

A common mistake that some businesses make is underestimating their overheads. If you are a small construction company or subcontractor, don’t sell yourself short and declare little to no overheads. Failure to account for these costs will make it very difficult to run a profitable business. 

Everyone in the construction industry knows that costs often run beyond the scope of the project. It’s the simple reality of the business. Of course it’s important to be competitive but don’t underestimate your costs at the expense of winning a bid which could ultimately leave you in financial trouble.

Always check that either you or the estimator has applied appropriate markups to the estimate to ensure that a profitable bid is submitted.

We suggest working with an accountant with expertise in this area who can calculate your average overhead costs. As your business grows, these figures should be reviewed and updated to reflect your on-going overhead costs.

Submit your bid proposal

Now it’s time for your bid proposal. This document will detail the estimated cost, scope, and work timeframe of the project which will hopefully result in winning the contract against competing developers. The client will usually put the bid out to tender to a number of builders and evaluate which proposal best reflects their budget and aspirations, and ultimately, who they think is best suited to carry out the job. 

A well-written and well-presented construction bid is essential, as it can make or break whether or not you succeed in winning the contract. The construction company with the lowest cost estimate and fastest turnaround time won’t necessarily be selected if they don’t accurately provide the right information. 

Even if successful, a poorly written construction bid can lead to mistakes, miscommunication, and delays further down the line so it’s imperative for all parties involved that they are thorough, detailed and accurate.

Here are some best practices for bid proposals:

a. Make sure all important criteria is included in the document :

  • All contact information, names, dates, addresses, etc
  • Project scope. Be as detailed as possible here.
  • Costs and include a detailed breakdown for each area
  • Terms and conditions
  • Terms of payments
  • Project timeline
  • Formal bid and signatures

b. Use simplified, standardized terms and avoid complicated language

c. Consider including appendices. This can be helpful for larger or complex projects

d. Source a customizable construction bid template 

e. Make sure the template is easy to use, edit and read

It’s important for you to pay attention to detail here as prospective clients will be more likely to trust a construction company whose bid submission is formally presented and well organised. 

Moreover, a clear and concise bidding proposal will help avoid miscommunications at later stages in the project. Having detailed documentation of all the project requirements will act as a reliable reference point. If your project should require fewer changes, it will ultimately save you, and your client, time and money.

Pitfalls to avoid when construction estimating

It is as important to know what to do, as it is to know what NOT to do. To help you plan more effectively, here are 7 common pitfalls to avoid when construction estimating that put businesses at risk, and what you can do to avoid them.

In summary

It is crucial that clients and other stakeholders in construction projects understand that estimates and project scopes are subject to change. Estimates are an essential step in the construction process and should always be as accurate as possible. However, the reality is that projects can be affected by unforeseeable factors, such as weather patterns or more recently, the impact of global pandemics. Changes like these can cause market fluctuations which can lead to project delays or price increases that would not have otherwise been predicted.

Once the project has begun, it is likely that the scope of work will change in some capacity. What’s important for you as the service provider is to ensure that all change orders are handled correctly. Keep a detailed record of all relevant changes and have the paperwork updated and signed to reflect the new scope of work. Updating paperwork can seem like a waste of time but it’s essential that this is not left to the side. Verbal orders and agreements should always be followed up with written clarification and sign off by the client. Luckily, solutions like contractor software exist and can help business owners keep track of estimates, change orders, client communication and more.

It is as important to know what to do, as it is to know what NOT to do. 7 common pitfalls to avoid when construction estimating is a han

As you can see, there’s an enormous amount of detail involved in the construction estimating. Investing in estimating software, like ConX Measure, can help you save time and reduce the chance of errors and miscalculations.

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