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Cost Estimating and Budgeting “Control your budget before it’s too late.”

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Definition of a Construction Cost Estimate
An estimate is a forecast or prediction of what the actual cost will be when a given task or project is completed, based on the owner’s objectives in terms of cost, time, and technical performance.

Cost estimating can make or break a business. The development of accurate and useful cost estimates requires application of special knowledge, skills, principles and procedures at every phase in a construction project. Many project owners enlist the services of a construction manager during the programming and pre-design phase for two main reasons: to conduct feasibility studies, and to provide timely cost advice. An independent construction manager can prepare a preliminary cost estimate upon completion of the programming and schematic design documents. This is helpful when the owner establishes a realistic budget estimate and helps an owner determine affordability of a project.  The construction manager also provides cost estimates to guide design decisions regarding selection of systems, materials, and equipment and to control architecture and engineering service fees.

For many years, one of the common phrases used in my office was, “Bad budgets lead to bad decisions.”  In other words, if a project is launched with a bad budget it will cause an owner to make downstream decisions that reduce the quality of a project and increase risks. Most owners conceive of their projects in one of two ways.  They may seek to build a facility that serves their needs within a set budget; or, they may program a project to be built for the lowest costs.  In either case, if the scope of work hasn’t been fully defined, the project budget is likely to be too low and the project will exceed budget constraints.

Design-to-Budget Concept
During programming of a project, making sketches of alternative design concepts that appear to satisfy owner requirements helps communicate and fix the project scope of work, aids in determining project feasibility, and provides more input for developing realistic estimates, budgets, and schedules.  Conceptual cost estimates should be prepared for each alternative to ensure selection of the best systems and components.  Once the systems have been selected, design professionals can develop detailed drawings and specifications suitable for obtaining competitive bids from contractors to perform construction and secure necessary building permits.  These studies optimize value in the programming and preliminary design phases when the opportunities to control project costs are greatest.

Project owners should request that design professionals develop designs in accordance with the agreed upon budgeted dollar amount for design and construction of the project.  This “design to budget” concept makes cost part of the design criteria in addition to the other functional and technical criteria.  This will also help reduce the need for redesign and subsequent costly change orders, disputes, and delays later in the design or construction procurement phases if it is discovered that the project is running over budget.

What is Estimating?
Process of analyzing or calculating the amounts of material, labor, and equipment necessary to complete a task; it is a statistical art rather than an exact science.

Estimating is often viewed as an art rather than a science.  It can be thought of as the art of predicting -- with reasonable accuracy -- the eventual construction cost of a project.  Cost estimates are prepared at each phase of the construction project life cycle for different reasons and with increasing ranges of accuracy.  Many standard design professional and construction management contracts contain provisions that require periodic construction cost estimates during each phase of a construction project to improve cost control.

The problem with estimating is that one never knows precisely what the future holds.  Estimators are often required to predict costs without the benefit of detailed and complete drawings and specifications reflecting the project scope and quality.

When a project progresses and a design develops, the scope of work and unknowns are identified and, therefore, cost estimating accuracy increases proportionately.  The cost of preparing an estimate also rises in direct proportion to the degree of accuracy required.  It is not uncommon for owners to develop project budgets by soliciting free input from designers or contractors without the benefit of engineered designs.  This could be risky because the scope of work isn’t fixed, and architects and contractors may be inclined to make lower, overly optimistic quotes to get owners to proceed with their projects.  Without the benefit of detailed and complete documents reflecting project scope, quality, and performance requirements, there could be costly changes and delays.  Design consultants and contractors usually set change orders at high profit margins.

People Do a Better Job of Estimating if They Follow Some Principles:
1. Thoroughly investigate factors likely to affect the project cost:
- labor, methods, materials, equipment, contractors
- making sure the scope of work is detailed and complete as defined by the (WBS) Work Breakdown Structure.  It is often agreed that the best way to control costs is to control the scope of a project.  The work breakdown structure is a checklist of activities required to complete a project as envisioned by the planner. 
If the WBS is inaccurate or incomplete, the cost estimate will be wrong.  Remember, scope creep causes budget creep.
2. Remember, cost estimates do not come free, and the cost rises rapidly with the accuracy required.
3. Update estimates as a project progresses to verify that the project will remain within budget.
4. Consider the various types of costs:  fixed, variable, direct and indirect, sunk costs, opportunity costs.

Types of Costs
1. Fixed costs do not change with variations in production output or volume. Examples are overhead costs such as property insurance, real estate taxes, rent or mortgage, and salaries of departmental managers.
2. Variable costs tend to change with output.  Direct material, direct labor, and operating supplies are examples of variable costs.
3. Direct costs are assignable or can be directly traced to a specific task, product, or project.  Examples are materials or equipment that become part of the installation.  Labor or project personnel assigned to a project such as carpenter, project manager, field superintendent, or project accountant may be considered as direct costs.  Subcontracts are also direct costs.
4. Project overhead includes costs such as home office project personnel, estimator, insurance, rent or mortgage.
5. Indirect costs are not directly assignable or cannot be directly traced to the end product, process, or project.  Indirect costs may include certain types of insurance, property taxes, mortgages, lease costs, and maintenance.
6. Sunk costs are costs which are committed and cannot be recovered.
7. Opportunity costs represent alternative investment opportunities that are foregone because available funds have been allocated to something else.
A major responsibility of project managers and programmers is preparation of cost estimates that accurately predict the probable cost of a project in order to allow owners to make the best decisions.

Order of magnitude and budget estimates prepared during the planning, programming, and early design phase should come with a large contingency allowance expressed as a percentage of the overall estimate. This allows the coverage of the cost of unknowns that will surface as the design develops.  That contingency can shrink as more facts become known about the project and there are less mystery elements to cover against.

Three Main Types of Estimates


Order of Magnitude Estimate:

1. Approximate estimate made without detailed data.
2. Typically based on historical cost figures, rule of thumb and square foot costs.
3. Used during the early planning and programming phase for initial evaluation of a project.
4. Accuracy is usually low (-30% to + 50%), depending on how much information is available.
5. Sometimes called conceptual or ball park estimate.


Budget Estimate:

1. Used to establish the funds required and for obtaining approval for a project.
2. Based on flow diagrams, layout, equipment details, preliminary drawings and specifications. Generally, the design must be at least 30% complete.
3. Used during the early planning and programming phase for initial evaluation of a project
4. Accuracy is (-15% to 30%), depending how much information is available, and policy.
5. Sometimes called: appropriation, design or control estimate.

Definitive Estimate:
1. Used for bid proposals, bid evaluations, contract changes, extra work, and legal claims
2. Based on well-defined data, drawings, specifications, equipment quotations, and site data. Generally, the design must be complete.
3. Accuracy is (-5% to + 10%), depending how much information is available, and policy.
4. Sometimes called: construction estimate, lump sum, check.

Common Methods of Estimating Construction Project Costs:
1. Square Foot Estimate (e.g., cost per s.f. of ceiling tile)
2. Unit Price Estimate - involves breaking a structure or system down into its individual components and pricing each component separately (e.g., $100.00 /fixture = $100.00 x quantity)
3. Systems (assemblies) Estimate — e.g., a sidewalk system (gravel fill, WWF, concrete, placing concrete, broom finish).
Common Methods of Estimating Construction Project Costs

Estimating accuracy increases in the later stages of design because more information is available to configure estimates into systems.  For example: A building mechanical system can be broken down into smaller subsystems (heating system, cooling system, air distribution system, humidification system, temperature control system, plumbing system) or an electrical system can be broken down into power distribution system and lighting system. The units used for cost estimating are smaller in a systems estimate.  The accuracy increases when more information is available, and it is broken down into more detailed units that can be individually priced and estimated.  Rather than estimating construction costs using square feet of overall building floor space, or number of beds to be accommodated in a new hospital building, or Btus per square foot, or miles of road, a more detailed line-item estimate can be prepared based on subsystem and component costs. 

Components of a Estimate:
1. Labor (self-performed work)
2. Materials
3. Equipment
4. Subcontractors
5. Supplies
6. General Conditions
7. Overhead and Profit
8. Taxes (payroll and sales)

Components of an Estimate:
Estimating the cost of labor is difficult, because the estimator must know productivity rates for labor (e.g., lineal feet pipe installed per man hour, lighting fixtures per hour) in addition to hourly wage rates.  Productivity varies by crew and can also be affected by weather as well as job site conditions.
General requirements costs include the field office, field people such as field superintendent and laborers, safety, security, fencing, temporary power, temporary heat or temporary toilet facilities, etc., that are necessary to do the job.  If the responsibilities and associated costs are not assigned to a subcontractor, they must be included and accounted for in the general requirements.

Overhead costs include main office expenses such as office rent or real estate costs, vehicles, clerical staff, top management salaries, marketing, legal and accounting fees.  Overhead is generally calculated as a percentage of direct job costs and applied to the overall construction cost estimate, with an additional cost mark-up for profit, which is also calculated as a percentage of the other costs.  In the CSI (Construction Specifications Institute) format, Division 1 is general requirements.

The costs of past projects serve as your best rough guides for cost estimates as they provide a historical background.

Where do we get unit prices for labor?
1. Historical Data
2. Market
3. Unions (Union Rates)
4. Guidebook Estimates

Getting written unit price estimates and proposals in the open marketplace from architects, engineers, tradesmen and contractors who will actually do the job is always best.

Unions have standard hourly labor rates for construction tradespeople such as laborers, carpenters, electricians, plumbers, pipe fitters, operating engineers, iron workers, etc., who are union members.  These rates change regularly, so it is key to get data from the local union regarding current and scheduled rate changes.  There are separate labor rates for each trade, which can be further broken down into journeymen rates, apprentice rates, overtime rates and weekend rates. 

There are also labor rates known as “Davis-Bacon Wage Rates,” which are mandated by the Department of Labor for use in public projects. These wage rates vary by city and state. They can be found on http://www.dol.gov or www.constructionworkzone.com/wages

Guidebooks such as those published by R.S. Means and BNi Building News are useful for very rough preliminary estimates when there is not enough time to get another estimate or bid.  They can also be useful for double checking against another estimate.

Good organization is critical in preparing reliable estimates and avoiding mistakes.  It is important that all the estimate source documents be catalogued carefully, including programming and scope of work, requests for proposals, bid documents, addenda, contract documents, consultant proposals, equipment lists, material and equipment vendor price quotations, and subcontractor pricing information.  Also, identify the purpose of a cost estimate, sources of information used, and dates of all documents used in preparing a cost estimate.  You may need to refer to those documents if questions and problems arise later in the project development. 

The most widely used formats for organizing construction project estimates and specifications are developed by the Construction Specifications Institute.  The Uniformat system categories are often used to organize programming and early design phase estimates.  The Masterformat 16 Division Format or recently expanded Masterformat that contains 50 divisions is used for more detailed estimates prepared for bidding and construction purposes.  The CSI Uniformat and Masterformat systems are also useful as a checklist to help make sure important items have not been left out of an estimate.

Remember that estimating is an art and not a science; you can’t possibly predict every cost that will occur in the construction process. But, by checking and double-checking your figures, you can find and prevent many of the important omissions that can come back to bite you as the project gets underway.
This is an excerpt from the new book Creating Facility Program Requirements: A Pre-Design Guide for Project Owners which offers a complete "toolbox" of procedures and techniques that will ensure the pre-design phase of your project is as complete and thorough as it could possibly be.  Published by BNi Building News and available at: www.bnibooks.com.

Tags: Costs, Estimating Construction



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