Construction projects are very different from products manufactured on assembly lines: each building is unique, and this applies even to groups of buildings that appear similar from the outside. Due to this fact, the construction cost estimate must be carried out individually for each project. This approach is very different from assembly line manufacturing, where all products are identical and cost the same.
Inaccurate cost estimation is detrimental to construction projects. 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 may also face negative consequences if they overestimate project costs: they are likely to lose out on tenders or may be considered fraudsters, damaging their reputation.
- When costs are underestimated, many unforeseen expenses occur during the construction phase. Based on how the contract is structured, these costs could affect the owner, the contractor, or both. There have been cases where developers or contractors have ended up bankrupt due to drastically underpricing a major project.
There is always some uncertainty when estimating the cost of a project, but accuracy can be improved if the calculation is carried out by experienced professionals, using reliable data and aided by software to speed up repetitive calculations.
Cost overestimation should not be confused with over-engineering, although both are detrimental to your project. Overestimation occurs when certain project elements are priced unreasonably high, while over-engineering occurs when excessive capacity is specified – your project costs more than necessary in both cases!
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Main Challenges in Estimating Construction Costs
The process of constructing a building uses a wide variety of materials, and many of them are shipped from remote locations. Some of these materials have volatile prices on the international market, and an important example is steel. Also remember that construction requires a significant consumption of labor hours, fuel and electricity.
Another limitation when estimating construction costs is time. In theory, estimators can break down the bill of materials into exact quantities of screws, nuts, and nails. However, this approach requires a prohibitive amount of time, especially on large projects. This is also an expensive approach as it consumes many paid working hours.
In modern construction practice, cost estimators use software-aided methods to speed up the process. A common approach is to use unit pricing, where construction costs are calculated for a discrete amount of work and then multiplied by the project total. The tender usually has a deadline for participating contractors, which means they could lose their jobs due to delay.
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. Normal practice is to add 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 design element is repeated many times on a large build, even a small error can be magnified. Suppose a skyscraper has 20,000 windows – if the cost of one window is overstated by $50, the project will be more expensive by a million dollars.
The project contract may include a special clause for materials with volatile prices, such as steel. General price inflation and annual wage increases are also important factors to consider, as they affect the price of all factors of production in the project. Its effect is most noticeable on large projects built over several years, but an experienced cost estimator will take it into account.
The American Society of Professional Estimators classifies construction cost estimates according to five levels of accuracy. The following table summarizes them, in order of increasing precision:
|
LEVEL |
DESCRIPTION |
|
1) Order of magnitude estimation |
A very general cost estimate is used to assess the overall viability of the project and to decide whether it merits further analysis. |
|
2) Schematic design estimation |
As its name implies, this cost estimate is based on a general schematic drawing, providing more precision than an order of magnitude estimate. |
|
3) Design development estimate |
This cost estimate is based on an intermediate design, but before having the full set of construction documents. |
|
4) Construction Document Estimation |
Cost estimate based on a complete project with detailed drawings and specifications. |
|
5) Bid Estimation |
The most accurate level of cost estimate, prepared by contractors bidding on the project. |
Final Recommendation
Although you cannot be completely accurate when estimating construction cost analysis , you should get the best estimate possible. A common mistake in construction is hiring the contractor with the lowest bid when the price is unrealistically low. The project cost is typically inflated with change orders in these cases, and the contractor may not be able to complete the work under a fixed-price agreement.
Having a high-performance construction project is beneficial, but you can make even better decisions if you also have an accurate estimate. 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 2018 Turner & Townsend International Construction Market Survey – precision pays off when managing construction costs.
