Two Methods to Prepare Construction Cost Estimates

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7 Common Pitfalls when Construction Estimating
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As a contractor, you will need an accurate process for forecasting how much projects will cost and how long they will take to complete. This process can be carried out using two methods: Average Industry Pricing or Historical costs.

Construction Cost Estimating is used to determine a project’s scope and feasibility. As we know, it is important that this information is correctly assessed so that the contractor can decide whether to proceed with the project bid and so that the property owner has a holistic view of all associated costs and whether or not the budget needs to be modified. 

A good cost estimate helps to manage the client’s expectations and prevent the contractor from losing money. Accurate estimates are essential for projects big and small. Even minor miscalculations, especially if compounded over time, can have disastrous results on a businesses bottom line.

As an estimator, you will need to consider the following:

  • Direct costs
  • Indirect costs or overheads
  • Risk and contingencies 

Direct costs relate to all costs associated with the physical construction of a specific project. These expenses include labor, equipment, project duration and any additional subcontractor costs.

Indirect costs or overheads are the total of all the other indirect expenses that are needed to fulfil a project, including: 

  • 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 so it’s important that these are not overlooked. Failure to account for these costs will make it very difficult to run a profitable business. 

Below we'll examine two methods available to calculate a Construction Cost Estimate.

1. Average Industry Pricing

Cost guides are helpful references for anyone who prepares building and construction project estimates using the average industry pricing method. They provide approximate costing information on individual labour, materials and plant hire to make it easier to estimate more accurately. When you’re developing an estimate based on average industry pricing, you will need to take the following criteria into consideration:

  • Quantity take off
  • Material prices
  • Labour rate
  • Labour hour  
  • Subcontractor rates
  • Equipment costs
  • Contingencies
  • Indirect costs
  • Operational costs

Bear in mind, that material prices and labour rates may fluctuate and are subject to change based on time of year or location. Organisations like RICS provide construction data that you can tap into for a fee.

To be safe, we recommend a buffer of 10% - 20% on these calculations.

2. Historical Cost Data

Accurate historical data can be incredibly useful when building out a construction cost estimate. Why? 

  • It will save you time
  • It can help you to draw up more competitive bids
  • It can be used to justify costs to a client by comparing the costs of a similar scope of work 

Foresight and planning are key for success in construction. The ability to leverage accurate information from past work will help your business execute projects on budget, on schedule and anticipate possible roadblocks or challenges.

Historical cost estimates will be based on historical data, trends and past projects. Skilled estimators will be able to leverage their past experience and historical data from previous bids, for example.

Historical data will be used for cost estimating techniques including: 

  1. Cost per functional unit
  2. Cost per unit of floor area
  3. Stick estimating
  4. Allocation of joint costs
  5. Elemental cost estimating

These techniques are typically used in the early stages of cost analysis and throughout the design process.

When basing estimates on historical trends, it’s also a good idea to evaluate the location and city where the project took place because local real estate markets can have drastic price differences based on local economies as well as different inflation rates. 

Labor costs may vary between different regions which can have a huge impact on estimate accuracy, so it’s always wise to evaluate local labor costs when looking at historical trends. 

Whichever form of data you use, it’s critical to have reliable data. Changes in the price of construction costs can have a major impact on the accuracy of your estimate so it is always recommended that you use a trusted source. 

Sources of historical data include: 

  • Past bids
  • Databases
  • Periodicals
  • Commercial references

Ultimately, the use of historical data can help you to cut costs, generate profit opportunities, expose shortcomings, maximize resources, increase productivity and build a competitive advantage.


These methods are not mutually exclusive and relying on elements of both can build a reliable construction cost estimate for your next quote. 

ConX also has a Construction Estimate Template that you can download for free to help you with your future bidding. Download it here now:

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