If you’re in the construction industry, you already understand that the livelihood of your business heavily depends on your ability to estimate costs accurately. It’s a skill needed to win projects, improve planning, manage resources and boost profit margins.
In this guide, you’ll learn more about the cost estimating process and ways to improve cost estimates’ accuracy effectively.
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What Is Construction Cost Estimating?
Construction cost estimating involves projected expenses associated with building a particular project. It factors in the cost of materials, labor and overruns.
Why Is Accurate Cost Estimating Important?
There are many reasons why cost estimating is vital for contractors.
Improved Project Planning
It’s challenging to execute a construction project and meet deadlines on time without proper planning since many components are involved. Not only do you need to coordinate the ordering of supplies and ensure you have enough manpower to complete the task at hand, but you also need the funds to make it happen. But if you underestimate costs, it could derail the plan you developed for the project.
Higher Profit Margins
Overestimating and underestimating construction costs can have negative consequences. If you overestimate the costs, you’ll likely lose bids to other contractors. And if you underestimate the costs of a construction project and win bids, you’ll have lower profit margins.
More Accurate Resource Management
You’ll also want to know how much will be spent on materials and labor during each phase of the process. By accurately estimating these expenditures, you’ll be able to manage your company’s cashflow more effectively.
Higher Contractor Reputation
Losing bids isn’t the only negative consequence when you overestimate the costs of a construction project. Your company could also take a hit to its reputation or be regarded as a business that wants to rip others off. But if you accurately estimate construction costs, you could get a boost to your reputation as a contractor.
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Who Prepares Cost Estimates?
It would depend on the size and scope of the project. However, contractors and subcontractors often prepare cost estimates and may solicit input from engineers and architects to confirm that the calculations are accurate. But it’s not uncommon to see cost estimates prepared by construction sales representatives, qualified independent estimators or in-house estimators at architectural firms.
The Cost Estimating Process
These methods are commonly used to estimate construction costs:
- The Rule of Two Method: calculate the cost of labor, multiply that figure by two, and add a 10 percent buffer to determine the estimated expenditures associated with the project
- The Square Foot (or Budget) Method: refer to historical contracts to determine the average construction cost per square foot and use this figure to estimate costs for the project you’re bidding on – generally, half of the costs will go to materials, and the other half labor, but ensure that you include a buffer for potential overrun
- The Unit Pricing Method: calculate the costs of labor and materials and divide it by the square footage of the property or area of the unit you’ll be working on
Tips on Improving Accuracy
Review Past Similar Projects
If you already have several projects under your belt, refer to the projected and actual expenditures for those similar in size and scope to what you’re planning to bid on.
Develop a Template
Instead of starting from scratch each time you need to estimate construction costs, create a template to simplify the process. Save it in a safe place like your computer that’s easily accessible when you need it.
Verify Material Prices
Material prices fluctuate with changes in market conditions. So, what you paid last week could be far lower or higher than what you’ll pay today, and it would be very unfortunate if your cost estimate were computed based on inaccurate pricing data.
Confirm Local Labor Data
Like material prices, labor rates could also fluctuate with demand. Do your homework and refer to local labor data to accurately price out projected labor costs.
Check Subcontractor Proposals
If you subcontract the work to another company, you must request proposals instead of playing the guessing game. Otherwise, you could end up coming out of pocket to cover their costs if you win the bid.
Use Estimating Software
Construction cost estimating software will require an investment but is usually well worth the cost. You will spare yourself the hassle of sorting through spreadsheets and performing complex calculations to come up with projections. Plus, you’ll have what you need to bid on projects in record time.
As you establish yourself as a key player in the construction industry, the need for increased capital could arise. Bank loans and business lines of credit are viable options, but there’s also a viable materials financing option worth considering.
It’s called Billd and it lets you purchase the materials you need with no upfront costs. Here’s how it works:
- Step 1: Fill out a form to have someone contact you to qualify for commercial material financing.
- Step 2: Enroll and upload a material quote from your supplier.
- Step 3: Billd pays your supplier directly, upfront on your behalf
- Step 4: Your supplier ships the materials directly to your job site.
- Step 5: Your company repays Billd for the materials within 120 days.
Enroll with Billd today to get started. It’s fast, easy and only takes filling out a simple form.