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A Complete Guide to Construction Project Cost Estimation

The financial significance of a construction project is always one of the primary considerations for the project owners and stakeholders. The impact of project costs on its schedule, quality, and scope drive the stakeholders to put their time and effort into an accurate and precise construction cost estimation from an early stage. 

Whether; it is a large civil project, low scale project, or renovation or remodeling, cost estimation is critical in determining the project feasibility, irrespective of its type and size. For megaproject or large civil project because of the public fund involvement and large scope, cost estimation becomes crucial for displaying and increasing accountability, transparency, and trust in the project management ability of the contractors. When time-line and budget are linked, precise cost estimation gains significance for revenue generation and payment to lenders.

The accuracy level of an estimated project cost helps in avoiding overrunning or underrunning of the project’s budget, the decline in profit margins, deadline failures, and overworking of workers.

What Is Project Cost Estimation and Its Purpose

Project cost estimation is the process of forecasting or predicting the cost value of materials, human resources, equipment and tools, and operations required during the entire construction phase of the project. The Estimation process brings down the scope of the project into small and manageable parts, and an expected total construction cost forecasted using information like experience, similar jobs, and industry competence.

The role of cost estimation is vital and integral to project cost management.  A project cost depends on several factors and their relationship like capital cost (land acquisition, planning & feasibility study, architectural & engineering design, construction financing, insurance & taxes during construction, etc.), operation and maintenance cost like operating staff, labor, and materials for maintenance, periodic renovation, financing cost, utilities, etc.  The cost value of these factors varies with the nature, size, and location of the project.

The primary purpose of cost estimation is to determine an approximate quantity, cost, and price of these resources required to complete the project within its scope limit. These values are also used in bidding for new business from the prospective clients, inform the budget planning process and resource management.

When to Approach Cost Estimation

The Cost estimation process starts at an early stage of the project; the complexity and several uncertain factors necessitate continuously revise the estimation at several different phases of the construction. And an accurate prediction of construction cost results in a more specific and precise project planning like tasks and resources required to complete the work, schedule management, the delegation of work, and timeline.

The several different phases of a project construction where cost estimation is approached and thoroughly revised are

1. Commissioning of a Project

Commissioning of a project is generally kickoff by an experienced firm at an early stage and may last until up to a year of use; this is a verification process that ensures a building designed, constructed, and finally delivered on the terms and requirements of the owner.

2. Pre-designing

The pre-designing or planning phase of a project determines and defines project requirements like several functions to be performed, overall cost estimation of the project, location, and other legal formalities to comply.

3 Formation of Design Team to Develop a Structure

The project owner consults an architect who further creates a design team of specialized consultants to meet several specific design requirements in terms of acoustics, space, HVAC, safety, etc. The architect develops a high-level design to the owner for approval at the schematic design phase; further, the architect meets the consultant to meet other specifics of the design requirement known as the design development phase. Then construction drawings and documents are created, which are used by the contractor. The Estimator presents a revised cost estimate at this stage, inlined to the architect design structure.

4. Bidding and Final Contract Approval

Thefinal construction documents that define the scope of work along with bidding documents and technical and financial requirements get released to the contractor. Based on these documents, the contractor forecasts the project cost. The contractor, once selected, shares contract documents with the owner, models like lump sum contract, unit price contract, and the cost-plus contract, gets followed based on the construction drawings completion.

5. Construction

During the construction process, the contractor keeps an eye on the cost control; actual expenditure is thoroughly compared with the estimated cost to manage the profit margin.

6. Close-out and Completion

After the contractor’s demand at the near –completion stage of the project, inspection gets done by the architect. Any mentioned incomplete work and needed corrections by the architect in the punch list later gets completed by the contractor. And a certificate of final completion gets issued by the architect after final inspection, the contractor is liable for final payment.

Approaches to Construction Cost Estimation

Construction Cost Estimation sets a baseline for the cost, which is referred thoroughly to the project construction lifecycle to manage and control the project cost.

Here is the list of few basic approaches followed by cost estimator or cost engineer lone or in combination.

Production Function

The relationship between the volume of the construction and one of the factors of production like labor, material, or capital, referred to as production function. For example, the relationship between the size of a building (in square feet) and the input labor (labor hours per square feet). So, for a specific level of output, we need to choose a set of values for the input factors to minimize the production cost.

Empirical Estimation of Cost Function

Here, statistical techniques relate the cost of construction, to some critical or vital part of the system and estimate the best parameter values in an assumed cost function.

Unit Cost Estimation

As described in the bill of materials, a unit cost is assigned to each task or the facility component initially, and then products of quantities are multiplied with the respective unit cost, the total cost determined with their summation.

Allocation of Joint Cost

Each expenditure item is assigned to particular characteristics of the project operation to develop a cost function for operation. For example, the Basic cost accounts get classified in the labor, material, equipment, supervision, and office over-head category. And these costs are further allocated to various subdivision tasks of the project.

Cost Estimation Techniques Companies Must Follow

The accuracy level of construction cost estimate varies with the stages of project development because of the availability of the information. Based on the function, the cost estimation techniques get categorized into three parts.

1. Design Estimate -Several types of cost estimation gets performed during the planning and design stage; the design information increases gradually with each design estimate.

  • Screening Estimate/Order of magnitude estimate
  • Preliminary estimates
  • Detailed estimates
  • Engineer’s estimate

2. Bid Estimate –The construction cost submitted by the contractor as bid estimate includes

  • Subcontractor quotations
  • Quantity takeoffs
  • Construction procedures.

3. Control Estimate – Control estimate is determined tomonitor the project during construction, it helps in developing

  • The estimated budget for financing
  • Estimated budget after contracting and before construction
  • The estimated cost of project completion during the progress of construction

Design Estimate

Several estimates developedduring the design stage reflect the progress of the project. Screening estimate created before the facility design refers to the cost data of the similar built past project. Based on conceptual design, the preliminary estimate gets developed, a detailed estimate gets developed when the scope of work is clearly defined. And lastly, the engineer’s estimate based on construction documents, completed plans, and specifications get developed.

Bid Estimate

A contractor’s chance of winning the bid depends on its cost estimate; the lowest bidder has a high chance of getting the project. The cost estimate might get prepared by the subcontractor if the general contractor plans to use it for construction. And when a general contractor plans to construct a part of the whole facility or whole, a cost estimate is prepared based on quantity takes off (provided by owner) or construction procedure (provided by a subcontractor).

Control Estimate

As a cost-control measure, abaseline cost estimate needs to be adopted by the owner and contractor. For long term financing of the project, a budget estimate has to be adopted. As the work progress, budget cost be revised periodically for an adequate cash flow, and a revised and updated estimated cost created because of unexpected overruns or cost savings.

Best Practices for Precise Cost Estimation

With the introduction of cost estimation software like Connecteam, Invoice simple, Quilder, and Building calculator, the process of cost estimation has eased. Still, the role of a cost estimator or cost engineer is crucial in precise and accurate cost forecasting.

A cost estimator must adopt these practices to avoid any pitfalls and get an accurate cost estimate.

Follow Industry Norms and Standards

For the measurement units, a Cost estimator should follow the industry norms and standards, and all the documents related to costing, quantity surveys filled regularly easy verification and handover.

Identify Indirect Cost

It is the responsibility of the cost estimator to identify, calculate, and show measures to record indirect costs.

Evaluate Bid Estimate

Based on the past performance of the subcontractor, the estimator evaluates the bid estimate and also reviews construction drawings in terms of constructability and scope of the work.

Cost control and Change Orders Impact

To compare the actual and estimated cost, the estimator tracks the cost variation in the field and identify the areas where it varies and the reason behind it. The impact of the change order and its detail is also monitored and tracked by the estimator.

Seek Expert Assistance for Precise Cost Estimation

MSK Consultants and Engineers is a leading architectural and civil engineering services company providing professional cost estimation services. With a team of experts, and years of experience in delivering hundreds of projects in different geographies, MSK is aware of the construction codes and standards to be followed. Apart from the precision of the deliverables, adherence to global standards and nomenclature can make the cost estimation and cost control part easier for your project team to refer. To book a quick consultation or a custom quote, contact us today.


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