Estimating Construction Costs 101: Levels, Methods, and Essentials

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Whether it’s about the feasibility or profitability of a construction project, the cost estimate is the critical measure for starting the project.

We know estimating construction costs can get overwhelming for beginners. And you are not alone. The boost in the number of cost estimators is a clear sign that contractors are either not confident to do it by themselves, or don’t have enough time to spend.

But, what if we say, you do not need to hire a cost construction estimator at all. That would be great, right?

So, here we are to guide you on cost estimating a construction project on your own.

By the end of this blog, you would be able to come up with professional cost estimates to bid quickly.

What is Estimating in Construction?

what is estimating in construction

Estimating construction is a projection of the costs of construction for a project. It includes not only the material costs and labor costs but the rent of equipment, transportation, and profit margin of the contractor as well. Construction cost estimating is done after the plan/design is ready and before starting to work on it.

Estimating is indeed a tricky and lengthy process. Thus, most construction contractors use estimating software for saving time and energy, such as InvoiceOwl.

Every construction contractor needs to estimate the cost of construction for multiple reasons, which takes us to the next point.

Why is Estimation Important in Construction?

why estimate important in construction

Estimation is the most crucial step in a construction project for any construction company. And this is why it is done even before the project has started.

As mentioned earlier, the cost estimation process has multiple purposes.

So, let’s discuss the major reasons why estimating construction costs is important.

  • Knowing Project Feasibility

    The estimated costs of the project tell whether it is feasible or not.

    Who does not dream about building a Taj Mahel of their own?

    There must be a reason why is it the only of its kind.

    And the reason is its feasibility. Not every project is practical. And cost estimation is one of the biggest parameters to measure it.

    For example, if a client wants you to build a house of marble stones, somewhere the stone is not easily available. Even if the client is ready to pay the price, you should revalue your resources and the requirements. And based on that you should take on or drop the project.

  • Knowing Project Profitability

    Construction is a highly for-profit industry. As a construction contractor, you should start a project only if it is profitable.

    And here comes the cost stick estimating comes into the picture. If the actual cost of construction is higher than what your client can afford. You should not begin with the project.

  • Procuring the Finances

    Procuring finances is all based on the cost of construction estimators. Many times the contractors have to invest in the project initially. So, stick estimating construction costs give the contractor an idea of how much of the finance they need to procure.

  • Budgeting the Project

    If you are starting a construction project, you need to keep a close watch on how much you are spending. And the answer to how much you should spend on what comes only by stick estimating the total cost of the project.

  • Pitching the Bid

    A cost estimation helps you to bid a price for winning the job. You need to pitch a lower price than your competitors for the same project and still manage to earn profit out of the construction project. This is only possible if you have accurately estimated the project’s cost.

    Now you must have got an idea of the importance of estimating construction prices.

    But must be wondering what makes it so important?

Essential Elements of Construction Cost Estimation

construction estimate essential element

  • Quantity Takeoffs
    This is the total quantity of materials and labor you would need to complete the project.
  • Labor Hours and Labor Costs
    This gives you the hours of labor it would need to finish the task and the labor cost.
  • Costs of Materials
    This is the total material cost that the project financier will have to bear.
  • Costs of Equipment
    If you need to rent equipment, the estimate must include the equipment costs.
  • Subcontractor Quotes
    The general contractor needs to mention the various subcontractor quotes they have to hire for a particular task.
  • Joint costs
    Joint cost is the cost of more than one job in the project.
  • Indirect Costs
    The indirect costs are basically the costs that indirectly affect the actual costs. For example the administrative costs and the overhead costs.

    These were the important elements that a construction contractor must include in an estimation.

    You have to include all these elements to make it a professional estimate. And But, what you can do is automate the repetitive and mundane tasks so that you can spend more time and energy on the cost of engineering.

    Thus, always choose the option of filling out the columns like client business information, your company logo and details, item lists with descriptions, rates, taxes, and the calculations automatically.

    Wait, who said you don’t have such an option?

    Don’t you know about InvoiceOwl?

    With InvoiceOwl, you can easily fill out all the details automatically and calculate the correct amount every time. You must try it for yourself and see how helpful it is.

    Now, what about at what stage do you need to estimate the building construction?

    Yes, that’s important too.

    So, let’s get into it.

5 Levels of Construction Cost Estimates

Ever heard “Rome wasn’t built in a day”?

The same goes for construction projects. Even a small residential building consists of several construction processes from starting step 1. Whether it is step 1 or the last step, it needs a specific estimation as per the best construction management practices.

Basically, it can be classified into 5 levels defined by the American Society of Professional Estimators.

Level Stage Objective Accuracy
Ⅰ.
Order of Magnitude Estimate
Before the design To know the feasibility of the project Very low
Ⅱ.
Schematic Design Estimate
Based on schematic design To know the initial capital costs the contractor needs to invest Low
Ⅲ.
Design Development Estimate
Based on the initial project design To know a rough estimated overall project cost Moderate
Ⅳ.
Construction Document Estimate
Based on the blueprint and building design with specifications To know the actual project costs High
Ⅴ.
Bid Estimate
Final estimate based on all the available drawings, plans, and blueprints To bid estimates for the project including cost overruns, maintenance costs, supervision costs, operating costs, and profit margin Very high

That was simpler than you thought, right?

If this is simple, wait till you work with the InvoiceOwl estimate software. When you have this much to count, it is quite natural and acceptable that you miss out on one small detail. And after all, cost overruns are also a reality.

So does that cost you your profit?

Not at all!

Thus, the InvoiceOwl software lets you add change orders to your invoice and help you keep the client on the same page without losing their trust.

But, precaution is better than the cure. Thus, we should see the 3 methods that help you create accurate estimates in the first place.

Most Accurate Methods to Estimate the Cost of Construction Project

Construction estimates is something that needs your 100% attention. Not only because it decides how much will you make out of the project but, whether you will get the project or not in the first place.

Thus, we are here to help you with 3 methods to create accurate estimates.

  1. Method – 1: The Unit Pricing

    Sometimes you should keep it as simple as it can be.

    The unit pricing method is the most common way of construction estimating. You must have used this method as a construction cost estimator and didn’t know.

    This method is calculating the overall cost based on unit costs.

    Now, what’s a unit cost estimation?

    Let’s suppose you are a painter and you charge $1 per square foot. That’s exactly what your unit cost estimation is. $1/SF.

    To bill for the entire construction project, you need to estimate all the direct costs and indirect costs as well.

    The right way to go about it is by knowing the direct costs and then including the indirect costs like the cost of supervision, overruns, hiring subcontractors, fencing the project site, and similar expenses. This way you know the actual costs and how much it cost the way you do.

    But what if you don’t know your unit price?

    Relax! It’s quite simple.

    Let’s continue the above example of the painter. If you need to know your unit price for the material, know the cost of 1 can of paint. Know how much of the area you can paint with that 1 can. Now divide the price by the area.

    To simplify:

    The material unit price = Material cost/Area covered in square foot

    Similarly:

    The labor unit price = Lanor cost/ Area covered in square foot

    You have to do this for every material you use and save those costs as your for future reference. You have to calculate it only once and you can use it multiple times.

    So, now you know that if you have to paint a wall of 80SF, exactly how much it will cost you.

    Once you know how much it would cost you, add all the indirect costs, margin for waste in the production function, and the margin for profit, you know much to bid.

  2. Construction Cost Estimate Template

    iconDownload Template Now

    Pro Tip

    Knowing both the direct and indirect unit prices separately will help you bid a competitive estimate and negotiate much better.

  3. Method – 2: The Square Foot Pricing (aka The Budget Method)

    Are you in a rush to bid on a quote?

    Are you in search of the cost of construction estimating method that gives you an estimated amount the quickest?

    Then the square foot pricing is the best for you.

    This cost of construction estimating is done by roughly analyzing the total work to be done and throwing a rough ball part figure to bid quickly.

    Are you shocked?

    Well, let’s just say that the construction business is known for negotiations. If you think that the price you quote will be the final signing amount, you are far from the reality.

    And sometimes you have to prioritize a quick estimate than an accurate estimate. What is the point if you spend hours calculating accurate estimates just for failing to bid a price on time?

    So, throwing a rough figure based on the total scope of the project helps you get the job by negotiating.

  4. Method – 3: The Rule of Two Methods

    The rule of two is simple. This is again not recommended if you want to calculate an exact estimate.

    We know that every actual cost has two sections. Labor and material costs.

    After analyzing the scope of the project, calculate the number of labor hours you would need to complete the job. This will give you the total labor cost.

    For example, you know that to construct this project you will take 4 guys and 7 days. So, you know half of the project cost. Now, multiply it by 2 and add 10% as a safety net.

    You will be better at this method as you go by it with the production function. The experience you gain in the field will help you calculate accurate labor hours.

    So, the best tip for acing this method is by being present at the site and gaining experience as a supervisor.

    Again, we know this method might sound like a shot in the dark. But this is perfect for small projects and quick cost for construction estimating. And the price that you quote is always getting to be negotiated so you need to be prepared for that.

    So these were the 3 most effective methods to create a detailed estimate. However, a lot depends on factors like where you locate your company, what nature of the project is, what construction process you deploy, and what pricing model you follow as a contractor.

    So, pick the method that is the best for your particular project. Furthermore, if you have any doubts regarding estimating the costs of construction, we have tried to answer the most frequent questions below. Hope you find answers to your questions.

Frequently Asked Questions
  1. How do you estimate construction costs?

    The cost of construction estimating is somewhat different for every project. Every project has some unique requirements or challenges that need to be considered in the cost of construction estimates. However, you can practice any of the three methods for the estimate.

    • The unit pricing method
    • The square foot pricing
    • The rule of two methods

  2. How do you calculate construction equipment costs?

    Basically, you need to calculate two costs of equipment that are purchasing costs and rental costs.

    • Purchasing cost = equipment price + tax – resell price
    • Rental cost = labor + maintenance + fuel + wear and tear of parts + overhead.

Conclusion

If you want to take on huge projects, you need to pay attention to the expense estimate accuracy and have to be quick too. Know the scope of the project and choose what do you want to prioritize.

We hope this blog has helped you to know how can you come up with a bid estimate instantly and accurately.

And if you don’t want to lose a project because you were late to pitch the budget estimate, InvoiceOwl is an apt estimate and invoicing software solution for you. It saves all your cost data and client data to help you with a quick and precise price estimate. Moreover, once you get the job done, you can issue an invoice by converting the estimate produced into an invoice.

So, and create cost estimates today!

Author Bio
Jeel Patel
Jeel Patel
Founder

Jeel Patel is the Founder of InvoiceOwl and is the main curator & writer of the content found on this site. With ideals of quality, commitment, and perseverance, he believes in creating lasting business relationships with the clients.

United States

Santa Clara

US