Suvarna Consultancy is a top notch consultancy in the domain of Project Management of Construction projects. It renders different services to its clients and Cost Estimation is one among them. Here we will have a detailed look at the Cost Estimation Services and different aspects allied to it.
Cost Estimation in Construction Projects
Cost estimation is an integral part of the construction project, and to run a successful construction project, the benefits of cost estimation cannot be denied. The estimate forms the baseline for cost control. Hence it is essential to do the estimation carefully.
In this article, we will study more about cost estimating and will understand some related terminologies.
Let’s understand the basics first:
What is cost estimation?
What do we mean by estimation in simple terms? Estimation refers to educated guessing. Similarly, cost estimation in construction projects refers to approximating the expenses well in advance so that the cost planning can be done.
Let’s consider a simple scenario; you are planning to get your house painted, so you need to approximate the amount that is going to be spent. You need to know this amount even before planning for your expenses and arranging for the funds. Similarly, you need to estimate the amount spent on your construction project well in advance to do the cost planning properly. This amount is referred to as the estimation in the construction project.
Types of estimates in construction projects:
Preliminary estimates: establish a higher level of accuracy and helps in initial budgets; however, the reliabi9lity of the numbers are not always precise, and hence this estimation method is not so commonly employed. If you want to follow the preliminary expenses, your user does that under an expert’s supervision. Square foot method is a common estimation technique. The preliminary estimation procedure is time consuming, as well.
Detailed estimates: As implied by the name, the detailed estimate involves checking all the nitty-gritty and calculating based on that.
Design estimates: These are the estimates that run parallel with the planning and design. This can be further subdivided into screening estimates, engineer’s estimates, etc. The design estimates portray the progress of the design. This information is beneficial to the project managers.
Bid estimates: The bid estimate comprises the direct construction cost. It can include field supervision, overhead, profits, etc. The bid estimate is essential in getting a new client. In many clients, the .lowest bidder is given the responsibility if new projects.
Control estimates: Control estimate aids in budget estimate, cost calculation, etc.
Process of estimation in the construction projects:
Let’s have a look into the estimation process in the construction projects:
In simple terms, the estimation process in the construction projects aims in answering the below questions:
How many: This refers to the quantities
How much: This refers to the pricing that is going to be involved
How long: this refers to the amount of time that everything in the production process will be con summed. For instance, ‘how long’ can refer to the productivity of the employees involved in the construction projects.
Hence once you have all the answers to the above questions, you can consider that your estimation was correctly done.
You can do the below things which will help you I the cost estimation process:
Reviewing the plans and specs is essential to understand the big picture before talking about the nitty-gritty. Check for the particular condition clauses etc. that could affect the cost. Check for the future prospects of the project as well. For instance, if you notice that a mall will be constructed near your construction site, then it is likely that the selling price o0f the project will augment in the future, and hence the pricing plan needs to be determined accordingly.
Some red flag items or ether things that demand immediate attention must be highlighted to the estimator well in advance, much before the cost estimation. The budgeting process is being carried out.
Developing the list of questions and clarifications:
Developing a list of questions and the answers can also be helpful. You need to have all the details handy before the pre-bid meeting.
The pre-bidding meeting is an important step, and the cost estimator must prepare for this meeting well. Generally, these meetings occur at the project site and if any red flag issues need to be highlighted in the pre-bid meeting. The estimator can take part in the meeting himself, or he can send any of his representation. Suppose any representative is attending the meeting on behalf of the estimator; in that case, it is the representative’s responsibility to communicate all the essential information so that there are no gaps.
Site visits is an essential step in cost estimation. The cost estimation process cannot be carried out effectively without visiting the site. When you walk around the site, you get relevant information like measuring the land, the water facilities, etc. Also, you come to know if there are any shortcomings. It is the estimator’s responsibility to find out the problematic zones and highlight that in advance. The estimator should note the below things which will help him in the estimation process:
Distance from the corporate offices:
This is an essential factor to consider and cannot be ignored. The estimator should notice the distance of the site from the co9rporate offices. If the project is located far away from the corporate offices, then it is more likely that the cost will be stagnated and it will have a lower population of the people who work in the corporate offices.
Site conditions: The site conditions cannot be necessary before the estimation of the cost.
Soil data: Soil data is also an important part and it must be taken into consideration before the cost estimation. If the soil is more fertile you can expect the cost of your project to increase in future.
Location merits: Is your project located near a movie theatre or a shopping mall? If yes the project price will likely increase in the near future. So while bidding you need to consider this.
Parking: Does your construction site have places for parking? If the answer is yes then the prices will likely increase.
Safety of the area: Safety of the area must also be considered before doing the cost estimation and before the bidding happens.
What all is required for a correct cost estimation: An accurate cost estimation required the below things:
Historical cost data: The cost estimate can be prepared based on the historical data on the construction costs. The project manager must examine the part records of the project and do a attend analysis. Hence when you are involved in the cost estimation and cost control process of the construction projects, you must maintain the records properly to be analysed in the future. By checking the historical data, you know the features and specifications of vendors’ data in the past. You can also get hold of the commercial cost reference manuals for doing estimation. The historical data must be used carefully. The cost associated may increase over a period of time. Hence the cost estimator must consider the cost increase of the associated items before determining the cost estimation based on past reports.
Detailed step for building an estimate:
The estimation process is not straightforward and may require you to pour your blood, sweat, and tears.
1. Visit your site: Site visiting forms the primary step of building an estimate. It would help if you watched all the things minutely before commencing the estimation process.
2. Determine the WBS: The Work building structure is an essential aspect of cost estimation. It is imperative to be familiar with the construction materials and methods for determining the WBS. The contractor needs to quantify and do the pricing of each work step. It would help if you did not overlook anything while calculating the estimation. The WBS will portray the project as a series of interrelated elements. This facilitates the cost control process to a significant extent. The performance and schedule can also be tracked with the help of WBS.WBS helps in the assignment of responsibilities for all the work elements of the project. The breakdown forms the skeleton of cost control and cost estimation in the construction projects.
3. Quantifying: You need to quantify the materials, labour, and general conditions before pricing any work. How many is vital to be calculated before how much. It is imperative to read and interpret the plans involved in construction projects and know the basic estimation calculation before quantifying. You will need to utilize algebra for measuring the ratio and proportion and geometry for cubic measurements. Quantifying of material is more comfortable as compared to the other estimating activities.
4. Consider the taxes: The tax consideration forms an essential part of cost estimation. Mainly two types of taxes are considered which sales tax is, and the other one is payroll tax. Payroll tax is also referred to as the labor burden and must be added in the labor column. The payroll tax may consist of an employer’s portion of the social security tax, worker compensation, unemployment tax, employee benefits like health insurance, life insurance, vacation, teethe sales tax needs rot to be added in the material column.
5. Obtain bids from subcontractor and vendor: The subcontractor and vendor bids form an essential part of the cost estimation process. When your estimation team estimates the self-performed work prices, they must also gather the prices from the vendors and subcontractors. A failure to obtain the bids from subcontractors and vendors can result in a significant cost estimation gap. Ideally, you should so0licit the bids, receive the bids, analyse the bids, and then choose the bids.
6. Reporting is an integral part of cost estimation, and the reports can be prepared daily, weekly, or monthly. It will help have job logs, diaries, daily field reports, time cards, and the subcontractor billing estimates in the cost estimation process.
Basic approaches to cost estimation:
The cost estimator uses one or the combination of the below approaches to do the estimation process:
Production Function: Production function is the relationship between construction volume and production factor.
Empirical cost reference: Empirical estimation refers to statistical techniques that include the construction cost or facility operation. The empirical cost estimate aims to determine the best parameter values or constants in the estimated cost function. Usually, regression analysis techniques are employed to find the empirical cost reference.
Unit Cost: A cost associated with each of the facility components is referred to as the unit cost. Unit cost determination is a straight forward process. For this, the process needs to be segregated into several tasks. Each of the referred tasks is important for the construction of the facility. The hourly rate needs to be accurately calculated for specialty labor. Once you have determined the overall rate, you need to determine the rate for individual crew members.For bidding estimation, the unit cost is utilized even though the contractor decomposes the project into different levels of the below-mentioned hierarchies:
Subcontractor quotation: Subcontractor quotation is an integral part of cost estimation; however, the accuracy of the estimation also depends on the genuineness of the quotations.
Construction Procedures: If this is practiced, then the project can be split into labor, material, and equipment to perform various tasks in the project.
Various formulas are utilized for cost estimation. Simple Unit cost formula factored estimate formula, and formula based on labor material and equipment are essential for cost estimation.Allocation cost or joint cost: The essential cost involved in the allocation process is the joint cost. In construction projects, the necessary costs may imply the labor cost, the material costs, the construction equipment cost, construction supervision, and general office overhead.
Other factors to keep in mind for cost estimation:
1. Allowance for contingencies: In most of the construction projects, you can find an allowance for contingencies. This implies unexpected costs during construction. The contingency amount is determined by the historical experience and the difficulties of the task associated with a construction project. If the contingent amount is unutilized throughout the project, it is released at the end of the construction project. This amount can be saved and can be utilized in your next project. A good project manager will make fair use of the contingency allowance and try to save the next project.
2. Computer-aided cost estimation: You can find much software for cost estimation. These tools are sometimes better than manual estimation as it gives more accurate reports and saves time. These tools help you get faster bids so that you can set a good impression on your clients. Another significant benefit of using the cost estimation tools is that you can be up-to-date with all the changes. The cost of the estimating tools may vary depending on several factors. For instance, if you own a big company and many employees need to use the cost estimation tool, you need to pay more for the same. Most of the cost estimation software are cloud-based, and some of them are on-premises software. For apparent reason s the cloud-based software are more popular. The popular tools for cost estimation in construction projects include pro contractor estimation and Plan swift. These tools facilitate the cost estimation process and help you to create bids and track your expenditures.
3. Factor estimating It is also used by many project managers for cost estimation. When No MTO or schedule is present, then this methodology is utilized.
4. Check cost centres: It is also imperative to view the project by cost centres. You need to check every aspect to prevent overruns in case of a mishap.
Thus the above article will guide you in cost estimation. Cost estimation can act as a two-way sword. Once you give very high bidding, you may lose the bid, and your project may go to some other contractor. On the other hand, if your bidding is low, you will fail to achieve the desired ROI. If the cost estimation is done carefully, then it can result in long term profits.
You can take help of some esteemed project management company like Suvarna Consultancy to get support in the Cost estimation process. They also have an ERP named CCIS or Construction Cost Information System that can help you in doing cost estimation efficiently and effectively.