Which of the following methods of estimating cost is the most accurate and most time consuming?
Why Construction Cost Estimates Are ImportantA construction cost estimate is a projection of how much money a new structure will cost to build. This estimate plays a vital role in the success of a construction project. Show
“Providing accurate and detailed construction cost estimates early in the planning and design process allows you to create a roadmap for a successful project,” explains Marcene Taylor, President of construction estimating firm Marcene Taylor Inc. and former President of the American Society of Professional Estimators, an organization that represents construction estimators. In the field of building construction management, owners use different types of estimates for different purposes. For example, you might use one type of estimate to evaluate whether a project aligns with your budget and use another type of estimate to assess how much a building costs to operate once you complete it. Owners also compare estimates from contractors in order to pick a winning bid. Architects and engineers need to ascertain whether a building is appropriate (given its intended purpose) and safe (given the estimate). Contractors look to estimates in order to choose among subcontractor bids and determine whether they can make a profit on construction. Construction cost estimating requires a great deal of skill and knowledge. Numerous firms dedicate themselves specifically to the estimating function. Some full-time estimators also work for construction, real estate development, architecture, and engineering companies. Both owners and contractors need reliable estimates because these cost models serve as the foundation for a smoothly run, financially viable project. Here are the other major advantages of making solid construction cost estimates:
What Costs Are Included in a Construction Cost Estimate?Construction costs include all the expenses you generate when transforming a piece of land into a finished building ready for occupancy. These costs include everything from building permits to labor, materials, equipment, and professional fees. Construction cost estimates do not include the cost of acquiring a site or furnishing a building. An owner includes those amounts in their project cost estimate and asset valuation. Following are some of the main expense categories in construction cost estimating:
While these costs sound straightforward, construction estimators are sometimes required to give general estimates for elements that architects have not yet designed. Jared Malapit, certified estimating professional and Principal at Precision Estimating Services explains, “The most difficult costs to estimate are the ones that do not appear on a plan or that the owner does not communicate during the early stages of design. In many cases, the owner’s only chance to communicate with potential contractors prior to construction is through the RFP (request for proposal) documents and plan sets. Errors and omissions in plans and specifications mean poor communication, which ultimately leads to delays and increased costs.” In addition, you might encounter difficulties estimating some work scopes, such as framing, because the means and methods vary greatly among contractors, Malapit says. Where Do Construction Estimators Get Cost Information?To come up with forecasts for project costs in each of the expense categories above, construction estimators draw on different kinds of information, such as historical data and the opinions of technical experts. Following are the primary sources for construction cost information:
If none of the above sources has adjusted their data, your estimating team should revise its numbers to reflect factors such as inflation, regional variances, or site conditions. Cost Estimation Techniques in Construction ProjectsConstruction cost estimation techniques differ in their methodology, purpose, and degree of accuracy, making the discipline a complex one. Moreover, the nomenclature concerning the field’s techniques is vast and can cause confusion. In many cases, you’ll find multiple synonyms for one concept. Gray areas also exist between different types of construction estimates, and estimates can fall into more than one category. Furthermore, most projects go through multiple rounds of estimating, with each round requiring a different estimate form and purpose. In all, you’ll find at least 45 different types, names, and methods for construction estimates. The most important classification regarding construction cost estimates is the degree of accuracy. This level of accuracy (as well as the effort you require to achieve it) determines how and when you use a particular cost estimation technique in construction projects. Another important division regarding estimation techniques is the figure with which you begin. Perhaps you choose to make a top-down estimate — i.e., start with a big-picture estimate and then add more details as you go along. Or perhaps you choose to make a bottom-up estimate — i.e., start with individual costs and then add them up. Construction Cost Estimates by Level of AccuracyThe American Society of Professional Estimators (ASPE), the body that represents construction estimators, classifies estimates according to a five-level system. The least accurate and reliable label is Level 1, and the most accurate and reliable is Level 5. Confusingly, some authorities, such as the Association for the Advancement of Cost Engineering (AACE) and the U.S. Department of Energy (using its construction estimating directive), reverse the numbering, designating Level 1 as the most precise estimate. Because you need a well-defined project plan in order to generate a pinpoint accurate cost estimate, it’s standard practice to create multiple estimates during the pre-design and design phases. These estimates become more accurate as your project’s level of definition increases. If you’re an estimator working for an owner or a design team throughout the entire design process, you are continuously researching cost options and estimating costs as design work progresses and your project gains definition. The estimate that you work on (in preparation for your contractor to submit their bid) acts as the foundation for the construction work plan. (Construction cost estimating has a lot in common with cost estimating for other types of projects. You can read more about key concepts and tips in “The Ultimate Guide to Project Cost Estimating.”) In reality, this successive refinement of estimates occurs only when you’re working on exceptionally elaborate houses, multi-family housing, or commercial buildings. The significant effort that this kind of refinement requires only makes sense when a lot of money is at stake. As the size and complexity of a structure increase, so do the time and effort you invest in order to produce a detailed estimate. On the other hand, you can easily generate a highly accurate estimate for a minor project. For example, in order to build a fence, you only need to do the following: make a list of all the materials you require (e.g., fence posts, post hole digger, cement, fence panels); keep a tally of all corresponding costs; check the prices at a hardware store; and add up the amounts to calculate a total. When considering the complex five-level system, however, each level serves a variety of purposes, depending on how much certainty is needed about the project’s costs. Making a screening decision requires a less accurate estimate than evaluating a contractor bid does. Here are details of each level under the ASPE system:
Example of How Construction Firms Use Accuracy-Based EstimatesLet’s look at an example of how these accuracy-based estimates work in practice. A food manufacturer completes a five-year plan in which it decides that baked goods are poised for rapid sales growth. After examining its bakery facilities, the company concludes that if growth meets its projections, its Midwest plant in Wisconsin will run out of capacity to meet demand in three years. The firm anticipates that, at that point, it will put a new plant in service to serve the Lower Midwest and have its current plant supply the Upper Midwest. The real estate team scouts locations in southwestern Missouri and southeastern Kansas. Construction cost estimators put together order-of-magnitude cost estimates for building the facility at two sites. Based on the estimates, the company buys the preferred site in Missouri. (In reality, other factors come into play, such as proximity to customers and distribution networks, but we will leave them aside for this example.) About 18 months to two years before the old plant is due to reach capacity, the company develops a feasibility estimate to see if building a new plant still makes sense. When they confirm the need, the project team spends several months drawing up design options for the plant and puts together preliminary cost estimates for each. Executives evaluate the estimates and merits for each design, then select a final plant design. The project team then has an engineering firm execute detailed design work, so they can tally material quantities. Next, cost estimators make a substantive estimate, which the team uses to put the project out to bid with contractors. Builders break ground on the new factory about a year before targeted completion, and the project team compiles a definitive cost estimate. During construction, the owner and contractor assess progress based on the contract timeline and definitive cost estimate. Simplified System of Construction Estimate Classification by Accuracy and PhaseYou can also use a simpler system of classifying estimates by accuracy and project phase with just three categories: design, bid, and control estimates. In those categories, you’ll find the same specific estimate types as in the five-level system, such as a preliminary estimate.
Preliminary Estimating Method in Construction, Plus Intermediate and Final EstimatesOutside the ASPE’s five-level system, the term preliminary estimate applies to cost forecasts produced in the planning and feasibility stages of a project and includes order-of-magnitude, feasibility, and budget level estimates. The idea that particular degrees of accuracy and estimation methods should be paired with certain phases of a project works both ways. Timing can determine an estimator’s choice of technique or level of accuracy. Preliminary, intermediate, and final estimates approximately equate to design, bid, and control estimates. Intermediate Construction Cost Estimates: Project teams produce an intermediate estimate after design work is finished and costs are generally known. Substantive estimates, discussed above, break down the costs according to project segment. Contingencies and profit margins are added to arrive at a total cost estimate. Final Construction Cost Estimates: Final estimates are developed when all costs are identified, construction has been put out to tender, and bids are received. This estimate sets the contract value, and definitive estimates mentioned above are used. Different Types of Construction Cost Estimates: Analogous and ParametricRegarding accuracy, analogous and parametric are two of the major estimating models for forecasting construction costs. Analogous estimates are less accurate but faster and easier to produce. Parametric estimates are more accurate but take more time and effort to compile. The choice between analogous and parametric estimates depends on the type of cost information you can access, how important accuracy is, and how much work you can do. Often, a combination of historical and current data, along with expert judgment, is used. See the parametric cost estimating templates below to forecast costs for materials and labor, as well as total costs. Analogous Construction Cost Estimate: If you only know the cost of similar buildings, an analogous estimate is your best best in construction management. This technique works by taking past project costs and analogizing to your current project. This kind of estimate is the fastest and easiest option but also the least accurate because no two buildings are exactly the same. Making comparisons is tricky. Typically you employ analogous estimates early in the project when you have little information about your own structure. An analogous estimate is also called top-down because it starts with a total cost. To refine a top-down estimate, you break this total into estimates for the major building components, then further into materials and other inputs. Taking the example of our food company above with plans to build a new bakery, suppose that the firm built the Wisconsin plant for $12 million in nine months. Thus, it estimates the new plant will also cost $12 million and take nine months. But things rarely work out this neatly in reality, and the difficulties of analogous estimates become evident. Remember that the old plant’s cost data will be five years old, and inflation is not factored in. You can consult references and make statistical adjustments. But there are limits to the level of precision you can achieve. For example, suppose a technological advance reduces the power needs of the ovens in the new plant, but wiring for the new controls is more sophisticated. Using the analogous technique, it might be difficult to know how to adjust electrical costs from the old project to reflect these changes. As the number of variables between the benchmark project and the new construction — such as differences in region, season, labor availability, and more — increases, so does the likelihood of inaccuracy in the analogous construction cost estimate. Parametric Construction Cost Estimating: Using parametric estimating, you multiply a unit cost by the number of units in the construction project. For example, you can take the cost per square foot of similar structures and multiply that by the number of square feet in your current project. Or you can look at functional units such as hospital construction costs on a per-bed basis, school construction costs on a per-student basis, and highway construction costs on a per-mile basis. Parametric estimates are another form of top-down estimating. You can use historical data or current cost information with parametric estimates; expert judgment also comes into play. A parametric method called unit cost estimating works with the unit cost of project components and requires working drawings and specifications. Download Parametric Cost Estimating Template Excel | Word | Smartsheet Early in the estimating process, this might be based on assemblies, or combinations of materials that perform a specific function, such as the foundation or windows. The number of assemblies is multiplied by the unit cost. Buildings are divided into six major systems under a framework called Uniformat II, sanctioned by the ASTM standards organization; these components can be used in assembly construction cost estimates. You can expect the accuracy of these estimates to be within about 10 percent. The major elements of buildings in the Uniformat system are the following: substructure, shell, interiors, services, equipment and furnishings, and special construction and demolition. Another system of organizing construction work based on materials called MasterFormat is also available. Unit-cost estimating works well when there is a linear or direct one-to-one relationship between cost and units. But adjustments are often needed to reflect different site conditions, variations in quality, shortages of labor or materials, and more. “Different trades have different techniques for estimating a job. For example, roofing is determined by the square foot, plumbing by the fixture count, and electrical by the opening,” says Bill Samuel, an Illinois real estate developer at Blue Ladder Development and general contractor. Another approach to parametric estimating is to use area or volume to extrapolate construction costs. You can use the following estimates when you know the size and use of the proposed structure but little other information. An accuracy range of plus or minus 15 percent is common for these estimates.
Two parametric estimates that adjust for economies of scale in building plants are factor estimates based on capacity cost and equipment cost in process plants.
Examples of Parametric Construction Cost EstimatesIn a simple parametric example, you want to estimate how much a new 135,000-square-foot luxury hotel in New York City will cost to build. You learn that recent high-end hotels ran an average $595 per square foot. By multiplying that unit cost by the number of units (in this case, square feet), you calculate that your project will cost $80.3 million to construct. $595 x 135,000 square feet = $80.3 million The basic parametric formula is the following: Unit Cost x Number of Units = Cost Estimate But the value of a parametric estimate becomes more evident when you get into detailed unit costs. For example, you could break your project into all the components or assemblies such as site work, structure, plumbing, roofing, and more. With a unit cost for each segment multiplied by the number of relevant units (square footage, length of pipe laid, labor hours, etc.), you would arrive at a more refined estimate. In our bakery example, the company has decided that its new Missouri plant will be twice as big as its Wisconsin facility, which covered 60,000 square feet and cost $12 million (or $200 per square foot). With this information, we can easily conclude the new building will cost twice as much. Cost per square foot x square footage = Cost OR $200 x 120,000 square feet = $24 million But for the old bakery, more of the construction budget was spent on the parts of the plant where ingredients were weighed, mixed, and baked, whereas the storage and loading bays cost less to build. The parametric cost estimation can account for these variables by using unit data on the different plant areas. Suppose the storage area of the old plant consisted of 20,000 square feet at a cost of $100 per square foot (or $2 million total), while the food preparation area totalled 40,000 square feet at a cost of $250 per square foot (or $10 million). (Food assembly cost per square foot x square feet) + (Storage area cost per square foot x square feet) = Cost These different unit costs become more important when expert judgment is factored in. Bakery construction experts know that since the old bakery was built, the firm has moved to just-in-time supply lines, thus needing less storage space. This enables the company to build more baking capacity in the same footprint and increase productivity. The company’s new plant will have a food assembly area that is 1.25 times larger than the old plant’s with a storage area that is only half as large. Now the calculation can reflect a more accurate number of units for the smaller storage and loading area, as well as the larger baking area: ($100 per square foot x 20,000 square feet) + ($250 per square foot x 100,000 square feet) = $27 million That’s $3 million more than the earlier estimate. By fine-tuning the unit amounts in this parametric estimate, the food company can avoid being surprised by the cost increase. To further refine the estimate, the project team would factor the total by construction cost index information, adjusting for inflation/deflation and region. Malapit says that parametric estimating is best used in pre-design work, the earliest design stages, and challenges or validations for a more detailed estimate. Bottom-Up Construction Cost EstimatingBottom-up, also known as stick, analytical, or deterministic estimating, is a highly accurate cost estimation technique that calculates total cost by adding up the cost of each input on a construction project. Rather than calculating the cost per square foot of a bakery line, the bottom-up or stick estimate is granular and prices out the amount of concrete, steel, fasteners, wiring, labor, etc., in every aspect of the project. By multiplying all those units by cost reference amounts and adding them up, the team produces the estimate. This method uses the bill of quantities, quantity takeoff, or material takeoff, a document that a quantity surveyor produces listing amounts for all the materials, parts, equipment, and labor required to complete each component of the structure as drawn on the plans. Unless you use software, bottom-up estimates are time consuming because of the large number of data points involved. “It is easy to take macro cost data such as cost per square foot of building (either from databases or past experiences) and apply those numbers to come up with a starting point for a project budget,” notes Malapit in comparing top-down and bottom-up estimating. “However, that approach doesn’t account for site-specific or schedule constraints, which can have dramatic cost impacts. “We take a bottom-up approach to creating our cost estimates. This allows us to think through the project in detail and pass that understanding along to our clients – allowing them to not only understand how much their projects should cost, but also why and what opportunities may be available for value engineering the design.” Analogous, parametric, and bottom-up estimates have their strengths and weaknesses, which you can see summarized below. Construction Cost Estimating Methods That Rely on JudgmentMany cost estimating projects rely on the expertise of experienced builders and technical specialists to improve accuracy. But some estimating techniques depend on expert judgment even more heavily.
Other Methods and Types of Construction Cost EstimationsSeveral other construction estimate types in use differ due to purpose, technology, or approach.
Expert Tips on How to Improve Construction Cost EstimatingMistakes, inaccuracies, and lack of clarity are some of the most common weaknesses in construction cost estimates, and experienced pros have advice on how to combat them.
In a study published in the Journal of Construction Engineering and Management, researchers Li Liu and Kai Zhu in Australia looked at how construction estimates could be improved at each phase by influencing factors within the team’s control, such as clarity of owner requirements, historical data quality, team experience, and team alignment. They sought to develop a framework that identified the critical factors at each phase to ensure effective estimation. The study found that in the conceptual project stage, the most important factors were project information (such as scope definition), cost information (having historical data for similar jobs), and team experience (in the local market and with similar projects and contract types). In the design stage, that shifts to estimation design (structure and methodology) and process, as well as project information and cost information. At the tendering stage, the focus falls on expected accuracy level, use of benchmarks, and team alignment (effective communication, team integration, and level of project manager involvement), along with estimation design and process. At the preconstruction phase, the critical factors are review of estimate, estimation design, team alignment, and benchmarking. Construction Estimates for Government Projects and an Estimate ChecklistThe process of performing construction estimates for government projects is subject to highly rigorous procedures and contracting rules. These procedures and rules, in turn, impact your estimates. The U.S. federal government requires all contracts with a value of more than $100,000 to submit to an independent government estimate (IGE). Developed and overseen by the Department of the Interior (DOI), IGEs calculate estimates without input from contractors. The DOI uses these estimates as a basis for setting aside funding and assessing bids. The General Services Administration, the acquisition arm of the U.S. government, has a 92-page manual for construction estimates. Each project phase has matching estimate requirements. The Federal Highway Administration, which funds many road and transit construction projects, suggests checking the following points as part of estimate quality control.
How Technology Changes Construction Cost EstimatingIn today’s commercial construction industry, using software to prepare cost estimates is standard practice, as is using spreadsheets to format your output. These two applications in particular reduce errors. In order to enhance this capability to reduce errors, some estimators customize their software models to perform cross-checks of estimates. Common features of construction cost estimating software include historical databases, templates, project reporting, a cost database, a proposal generator, and an analysis of what-if scenarios. In addition to standard industry software, machine learning, a cornerstone of artificial intelligence, has become a crucial tool for improving the efficiency of construction cost estimating. Artificial neural networks (ANN) are layered computing designed to emulate the reasoning of the human brain. They use data from actual building projects in order to create and train an algorithmic model to estimate costs for new construction projects. In a paper published in the Journal of Artificial Intelligence, Mohammed Arafa and Mamoun Alqedra, professors in the civil engineering department at The Islamic University of Gaza, cited early success with ANN-enabled cost estimation. Since then, researchers around the globe have used machine learning to refine models for construction cost estimating. In an Advances in Civil Engineering survey of computer-driven techniques, including machine learning, researchers in Saudi Arabia concluded that research gaps in construction estimating methods persist and future work should focus on adding human expertise. Such human contributions should include the provision of design work and a standard accuracy benchmark. Improve Your Construction Cost Estimates with SmartsheetFrom pre-construction to project closeout, keep all stakeholders in the loop with real-time collaboration and automated updates so you can make better, more informed decisions, all while landing your projects on time and within budget. The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed. When teams have clarity into the work getting done, there’s no telling how much more they can accomplish in the same amount of time. Try Smartsheet for free, today. |