How To Estimate Construction Costs: Our Comprehensive Guide

When discussing a construction project, one of the first things everyone wonders is how much money the project will ultimately cost. Whether it be a residential home project, a large office building or a bridge, the dollar-value of a project is important for obvious reasons. When we hear about an office building costing $50,000,000 to construct, it’s easy to be in awe of that much money. Not all of this is profit of course. In fact, the total profit kept by the companies involved may be as little as 10-15% of that, and that’s if all goes well! So how do contacting companies calculate the cost of the project? In this article, we’ll be discussing how to estimate construction costs – step by step.

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Required Information For Estimating Construction Costs

In order to estimate the cost of a construction project, we need a fair amount of information. In this article, we’ll focus on estimating construction costs in a Design-Bid-Build scenario:

1. The Owner of the project hires Architects & Engineers to design the new building/bridge/etc.
2. Architects & Engineers draft plans and written specifications, which outline the appearance, performance requirements, structural requirements and overall scope of work the project will require.
3. Contractors review these documents and submit a bid price to perform the project. In a Lump Sum bid scenario, a contractor’s bid represents one total dollar amount they’ll perform all of the work for.
4. The Owner and their Architect/Engineer review the bids and select a contractor to do the work.

Here’s what needs to be provided or determined before a construction project’s cost can be accurately estimated:

• Drawings & Written Specifications
• Required Timeframes & Completion Dates
• Contract Terms & Conditions
• Any Other Information Pertinent To The Project

Now that we’ve covered what is required before construction costs can be estimated, let’s get into how these costs are actually figured.

How To Estimate Construction Costs: The Necessary Ingredients

The first step in estimating construction costs is to break down all of the different types of costs that the project will require and estimate each one individually. Here’s a common way that construction budgets are split into categories:

• Labor Costs
• Equipment Costs
• Material Costs
• Subcontractor Costs
• Consultant Costs – Engineers, Surveyors, Etc.
• Contingency Funds
• Overhead Costs

For each part of the construction estimate outlined above, we must also consider the information we require per the earlier section, such as drawings, specifications, schedule, contract terms/conditions and project-specific requirements.

We’ll get into the specifics of each category below!

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Short On Time? Here’s Our Consolidated Summary Of All The Information Needed To Estimate Construction Costs!

• Labor Costs –
  • Working Hours – Standard, Overtime, Etc.
  • Trades Required & Their Unique Conditions
  • Hourly Rates
  • Means & Methods
  • Work Sequence
  • Production Rate
• Equipment Costs –
  • Timeframe Of Use
  • Rental Equipment Costs
  • Owned Equipment – Maintenance, Insurance, Depreciation, Etc.
  • Transportation & Logistics – Delivery, Storage, Etc.
  • Means, Methods & Sequence – Time In Use, Downtime, Etc.
• Material Costs –
  • Read Written Plans & Specs
  • Perform A Takeoff Based On Drawings
  • Consider Waste Factors
  • Shop Around For At Least Three Quotes
  • Purchase From As Few Suppliers As Possible
  • Proximity Of Suppliers To Site
  • Lead Time Of Each Material
• Subcontractor Costs
  • Shop Around For At Least Three Quotes
  • Subcontractors Must Meet Contractual Terms/Conditions
  • Clearly Define The Scope Of Work
  • Consider Coordination, Downtime, Etc.
  • Check References, Previous Projects & Reputation
• Consultant Costs – Engineers, Surveyors, Etc.
  • Clearly Define Scope Of Work
  • State Specific Project Deliverables
  • Ensure They Have Proper Insurance Coverage
  • Check References, Previous Projects & Reputation
• Contingency Funds
  • Additional Labor Costs
  • Labor Rate Increases
  • Material & Equipment Price Escalation
  • Wasted Materials
  • Mistakes & Rework
  • Grey Areas In The Scope Of Work
  • Delays & Disputes
  • General Cost Overruns
• Overhead Costs
  • Overhead – Managers, Office Staff, Office Space, Vehicles, Phones, Computers, Etc
  • Insurance
  • Bonds
  • Taxes
  • Warranties

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PROMOTION

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Related Articles:

• Time & Material Contract: Advantages & Disadvantages
• How Does Progress Billing Work In Construction? The 8 Essential Steps
• What Is A Construction Purchase Order? 13 Things To Include In A PO

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Estimating Labor Costs In Construction

Estimating labor costs in construction seems daunting, but it’s fairly straightforward when a systematic approach is followed.

This section assumes that you’ll be in charge of managing the actual labor forces performing the work, rather than just hiring a subcontractor to do it – we’ll get to that below.

This is the key information required before we can estimate labor costs:

Hours On The Project: Will The Work Be Performed In A Standard Eight Hours Per Day, Five Days Per Week? Will Overtime Or Off-Hours Work Be Required? These Factors Determine Hourly Labor Rates.

Specific Trades Required: Trades Like Carpenters, Ironworkers, Electricians, Equipment Operators, Plumbers, Etc. Have Different Hourly Rates.

Construction Means, Methods & Sequence: The Means & Methods Determine Exactly How The Project Will Need To Be Built, While The Sequence Outlines Each Step & The Order They’ll Be Done. For Example, Demolishing A Wall Takes A Lot Longer By Hand Than With Power Tools, But Some Projects Like Historic Renovations Require Hand Tools Only.

Production Rates: The Production Rate is the rate that each step can be completed. Concrete formwork can be built/set at a certain rate; per square foot of wall or floor; per cubic foot of concrete that will be poured, etc. Similarly, concrete can be poured at a certain rate per cubic foot, too. Every labor task can be broken into a Unit Of Measurement in order to be estimated – per foot, per hour, per day, etc.

As a recap, here is a consolidated list of the above steps for estimating construction labor costs:

• Working Hours – Standard? Overtime?
• Trades Required – Each Have Their Own Unique Conditions
• Hourly Rates – How Much Will Every Hour Of Every Worker Cost?
• Means & Methods
• Work Sequence
• Production Rate

Once the above information is known and defined, the only thing left to do is estimate the time and quantity of workers that each step will require.

Estimating Equipment Costs In Construction

Similar to labor cost, estimating equipment costs requires a few pieces of information to be defined first.

How long will the equipment be needed? As you can imagine, there will be a huge difference in cost between a crane being needed for one week vs three months.

Is the equipment owned or rented? If the equipment will be rented, we must get a rental quote in order to estimate this cost. If the equipment will be owned, we can either charge the same amount as what a rental company would charge for it, or we can determine a rate ourselves. This rate should reflect wear-and-tear costs, insurance, maintenance and depreciation.

Transportation & logistics: What will be the cost of delivering the equipment to the job site? Will it be stored near where the work will happen, or is it stored near the site?

Means, Methods & Sequence: Just like the labor section above, we must define the means and methods of the work that the equipment will be used for. For example, a boomlift might only be needed for a couple days’ work, but there might be three weeks in between those days! That’s a lot of downtime. The equipment must either sit there onsite or be removed/delivered later.

In summary, the following information must be considered when estimating equipment costs in construction:

• Timeframe Of Use
• Rented Equipment – Cost Of Renting The Specific Model Required
• Owned Equipment – Maintenance, Insurance, Depreciation, Etc.
• Transportation & Logistics – Delivery, Storage, Etc.
• Means, Methods & Sequence – Time In Use, Downtime, Etc.

For every portion of the project, these factors must be considered when estimating equipment costs.

Estimating Material Costs In Construction

Estimating material costs is a bit more tricky, but still straightforward when approaching it in a methodical manner.

First and foremost, it’s crucial to review written specifications and plans. These often include products that the Architect and/or Engineer who designed the project would like to see used on the job. These materials should be considered when performing the steps below.

The next step is to perform a takeoff. A takeoff is an estimate of each required material, based on the project’s drawings. Construction plans include dimensions and details that allow us to get a realistic idea of how much material will be needed.

Note: it’s extremely important to understand that the amount of material needed for the finished product is different than the amount of material that must be bought.

This is because there’s always going to be waste when buying construction materials!

There are so many materials required on different types of construction projects, and each one has a unique amount of waste to consider.

In terms of percentage, plywood will have a different amount of waste than concrete. Nearly all building materials have a 5% waste factor, but some like concrete, rebar and lumber can have as high as 25% waste factors.

Here are some common ways materials get wasted:

• Cutting lumber to exact size with misc. leftover pieces.
• Spillage and fixed-sized batches of concrete.
• Materials that require overlapping like rebar, shingles and waterproofing.
• Raw stock steel plates and bars getting cut to exact size.
• Bricks and masonry components sold by the pallet, not exact counts.
• Paints and caulking hardening over when partially used.
• Hardware and fasteners breaking or getting lost.

When estimating material costs on a construction project, it’s important to shop around. Make sure to get at least three quotes. Also, it’s a big time-saver to get materials from as few suppliers as possible to make things more efficient when the project is full swing.

Logistics play a role, too. How close the suppliers are to the job site, how long materials take to get (lead time) and whether or not they can deliver all affect the bottom line.

In summary, here are the steps to take when estimating material costs:

• Read written plans and specs for specific products.
• Perform a takeoff based on drawings.
• Consider waste factors on all materials required.
• Shop around and get at least three quotes.
• Purchase from as few suppliers as possible.
• Choose suppliers close to the site.
• Consider the lead time of each material.

Estimating Subcontractor Costs

When your construction estimate involves subcontractors, you won’t need to worry as much about labor/material costs, but you will need to worry about a few other things.

First off, it’s ideal to have at least three different subcontractors provide a price on the work. They should be vetted for financial health, references and positive performance history.

Subcontractors must be held to the same terms and conditions as the contractor hiring them. Contractual terms, time/performance requirements, drawings, specifications, insurance requirements and any other pertinent information must be communicated clearly and early to prospective subs.

The scope of work must also be clearly defined to the subcontractor. Outlining exactly what should and should not be included in a subcontractor’s bid via the drawings and specs is critical. This can be done in the form of highlighting drawings and providing a checklist.

It’s important to understand any coordination that must happen between you, the subcontractors and any other work onsite. Will they need to demobilize and re-mobilize several times? Will their work be tied to another contractor’s performance?

Subcontractors are responsible for estimating their own costs. The rest of the picture is up to us.

Consultant Costs In Construction

There are a variety of consultants that are common in the construction industry. Here are a few examples:

• Professional engineers.
• Land surveyors.
• Permit expeditors.
• Drafting & detailing (AutoCAD).
• Schedulers.

While they must comply with some contract requirements, they typically don’t provide “labor”. By labor, we mean workers that physically construct the building.

Instead, consultants are hired to provide an end result. Clearly defining the end result and project deliverables is the most important factor when requesting a price from a consultant.

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PROMOTION

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Consultants are in a unique position. They’re hired to help the project in their area of expertise, but they often don’t have ‘skin in the game’. For example, a land surveyor may make a mistake, which results in work onsite that needs to be redone. Who pays for that mistake?

Consultants like surveyors, engineers and others must have ‘errors and omissions‘ insurance. Essentially, this is an insurance policy that protects the consultant and anyone who is affected by the consultant’s mistake. In theory, the insurance policy will cover the cost of that mistake (I wish it was that easy). In any case, it’s important to understand the coverage a consultant can provide.

Consultants must also have a positive performance history and good references, too. A bad consultant can ruin an entire project.

Contingencies

Let’s get real. Construction projects rarely go as planned. Disputes arise, more material is required than expected, changes occur, delays happen, along with a variety of other cost-increasing situations.

Owners are not responsible for a contractor’s mistakes, disputes and delays. Some legitimate change orders will be needed, but as contractors, we can’t lean on the Owner for every cost increase.

Contingencies provide a cushion that covers realistic additional cost AND time increases. Having the funds and the ability to absorb these increases will keep the project moving and on track. They shouldn’t be seen as any form of profit until the end of the project, nor should they be cut from a project’s cost estimate in order to win a bid!

Example: Let’s say you’re shopping for a new car. You have a budget of $32,000. You see a car that has every option you want for $31,900, which you can drive away in a few days. Suddenly, an ad shows a similar car “starting at” $25,000. It’s tempting to think of all the money that could be saved, right? Turns out, the most basic model with fewer options and a crappier warranty is $25k, but the model you want is actually $33,900 and takes six weeks to deliver! You’d rather just go with the first car that has all the features you want, for the price you expect – all to not be surprised or disappointed later.

The same can be said for estimating construction costs. Paying to get what’s actually required is paramount.

Much like how engineers apply Factors of Safety in their calculations to ‘overdesign’, contractors must include Contingencies in their cost estimate.

Here are just a few of the many situations that contingency funds are needed for:

• Additional Labor Costs
• Labor Rate Increases
• Material & Equipment Price Escalation
• Wasted Materials
• Mistakes & Rework
• Grey Areas In The Scope Of Work
• Delays & Disputes
• General Cost Overruns

Contingencies typically add about 5-10% to the cost, but each one should be carefully considered.

Overhead & Soft Costs In Construction

Last, but CERTAINLY not least – the ‘soft costs’. These costs are for all the other work not directly related to job site performance. When estimating construction costs, one of the easiest way to lose massive amounts of money is to underestimate soft costs. Here are a few examples:

• Overhead – Managers, Office Staff, Office Space, Vehicles, Phones, Computers, Etc.
• Insurance – General Liability, Excess Liability, Worker’s Compensation, Material Storage & Equipment Operation Are Just A Few Examples
• Payment & Performance (P&P) Bond – Some Project’s Don’t Require Them, But P&P Bonds – Also Known As ‘Surety Bonds’ – Protect Owners If A Contractor Defaults. Bonds Can Cost Upwards Of 1% Of The Entire Project. On A $10M Project, This Is $100,000 In Cost To The Contractor! Best Not To Forget This Cost If A Bond Is Required.
• Taxes – Unless The Project Is Tax-Exempt, Contractor’s Must Pay Sales Tax On All Material Purchases. It’s Important To Consider Them In A Cost Estimate.
• Warranties – Contractors Must Be Able To Cover The Cost Of Faulty Materials, Improper Work & Maintenance For A Period Of Time After The Project Is Finished. These Costs Must Be Estimated & Factored In Ahead Of Time.

These soft costs cannot be forgotten. The above costs can be anywhere from 5-20% of a project’s total budget! In the event of an accident, for example, insurance may only cover a portion of the costs and the rest will fall on the contractor’s budget. Projects can fail and companies can close because of accidents and improper protections.

In Summary

Estimating construction costs is no picnic, and one wrong move can bring the project from being profitable to being completely underwater. Nobody wants this to happen! With a sound, methodical approach, we can ensure that our construction budgets are complete, all-encompassing and correct. After reading this article, you now have a fundamentals understanding of how to estimate construction costs! I truly hope you’ve found this helpful, and thanks a lot for reading.