Construction projects are very different from products manufactured in assembly lines: each building is unique, and this applies even to groups of buildings that look similar externally. Because of these dif ferences, construction cost estimation must be performed individually for each project. This approach is understandably unlike assembly line manufacturing, where all products are identical and have the same cost.
Inaccurate cost estimation is detrimental to construction projects, as both overestimation and underestimation have negative consequences.
When costs are overestimated, the owner ends up paying more than necessary, or may decide not to proceed with the project. Contractors can also face negative consequences if they overestimate project costs: they are likely to lose in competitive bidding, or they may be regarded as scammers, which will hurt their reputation.
When costs are underestimated, there’s no shield protecting contractors from the many unforeseen expenses during the construction phase. Based on how the contract is structured, these costs may affect the owner, the contractor, or both. There have been cases where developers or contractors end up bankrupt due to drastic underestimation in a large project.
There is always some uncertainty when estimating the cost of a construction project, but accuracy can be improved if the calculation is performed by experienced professionals, using reliable data and aided by software to speed up repetitive calculations.
Cost overestimation should not be confused with overengineering, although both are detrimental to your project. Overestimation occurs when certain project elements have unreasonably high prices, while over-engineering occurs when excessive capacity is specified — your project costs more than necessary in both cases!
Main Challenges in Construction Cost Estimation
The construction process of a building uses a wide variety of materials, some of which may be shipped from remote locations. These materials have volatile prices in the international market; a key example is steel. Also keep in mind that construction requires a significant input of man-hours, fuel, and electricity.
Another limitation when estimating construction costs is time. In theory, estimators can break the list of materials down to exact quantities of nuts, bolts, and nails. However, this approach demands a prohibitive amount of time, especially in large projects. This is also an expensive approach, since it consumes many hours of work that must be paid for.
In modern construction practice, cost estimators use softwareaided methods to speed up the process. A common approach is using unit prices, where construction costs are calculated for a discrete amount of work and then multiplied by the project total. Competitive bidding normally has a deadline for participating contractors, which means they can lose the job if they’re late.
How Construction Cost Estimators Manage Uncertainty
No construction cost analysis is 100% accurate, even if performed by an expert using the latest software package available. The normal practice is adding contingency as a percentage of the total project budget, determined by estimators based on their experience and the perceived uncertainty in each project.
Large projects are more susceptible to cost estimation errors, especially when unit prices are used. If a project element is repeated many times in a large construction project, even a slight error can be amplified. Assume a skyscraper has 20,000 windows — if the cost of one window is overestimated by $50 the project becomes more expensive by one million dollars.
The project contract may include a special clause for materials that have volatile prices, such as steel. General price inflation and yearly wage increases are also important factors to consider, since they affect the price of all project inputs. Their effect is more noticeable in large projects that are built over several years, but an experienced cost estimator will take this into account.
The American Society of Professional Estimators classifies construction cost estimates according to five levels of accuracy. The following summarizes these levels, in order of increasing accuracy:
- Order of Magnitude: A very general cost estimate that is used to assess the overall feasibility of the project and decide if it merits further consideration.
- Schematic Design: As implied by its name, this cost estimate is based on a general schematic design, providing more accuracy than an order-of-magnitude estimate.
- Design Development: This cost estimate is based on an intermediate design, but before having the complete set of construction documents.
- Construction Document: Cost estimate based on a complete design with detailed drawings and specifications.
- Bid: The most accurate level of cost estimate, prepared by contractors who are competing for the project.
Final Recommendation
Although you cannot be completely accurate when estimating construction costs, you should get the best possible estimate. And best doesn’t mean lowest. Don’t make the common error of hiring the contractor with the lowest bid when the price is unrealistic. The project cost is normally inflated with change orders in these cases, and the contractor may be unable to complete the job under a fixed-price agreement.
Having a high-performance building design is beneficial, but you can make even better decisions if you also have an accurate construction cost analysis. This way, you can hire the contractor with the lowest realistic bid that meets your project requirements. New York City has the highest construction costs in the world, according to the Turner & Townsend 2018 International Construction Market Survey — accuracy pays off when doing construction cost management.
About Nearby Engineers: One of the fastest growing MEP design firms in the construction industry, Nearby Engineers is licensed in 50 states. They have worked with 200+ leading franchise brands and completed 2,000+ projects across multiple sectors. For more information, see www.ny-engineers.com/franchise. This blog was reprinted with approval from Nearby Engineers, at www.ny-engineers.com/blog/construction-cost-estimation.
