Estimating Construction Costs 101: Levels, Methods, and Essentials

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The cost estimate plays a critical role in the feasibility or profitability of any construction project. Estimating construction costs can be overwhelming for beginners, which is why cost estimator jobs rose by 11.5% between 2018 and 2019.

But wouldn’t you be glad to know that you don’t need to hire a cost construction estimator for your next project? Here’s a comprehensive DIY guide on the cost estimation of a construction project. By the end of this blog, you should be able to come up with professional cost estimates to bid quickly.

What is Estimating in Construction?

how to estimate construction costs: what is estimating in construction

Estimating construction costs is simply projecting the resources it’ll take to complete a construction project. This includes the material costs, labor costs, equipment rental costs, transportation costs, and profit margin of the contractor as well. Estimating the cost of construction is the next step after the plan/design is ready.

Estimating is a lengthy and tricky process, so most construction workers use estimating apps for faster calculations. Every contractor needs to estimate the cost of construction for multiple reasons, which brings us to the next point.

Why is Estimation Important in Construction?

how to estimate construction costs: why estimate important in construction

Estimation is the most crucial step in a construction project. Estimating the cost is necessary to determine the appropriate project budget, manage resources, schedule tasks, and assess the project’s feasibility before embarking on actual construction.

As mentioned earlier, the cost estimation process has multiple purposes. So, let’s discuss the major reasons why estimating the cost of construction is important.

1. Project feasibility

A project’s cost estimate determines its feasibility. Who does not dream about building a Taj Mahal of their own? There must be a reason why it is the only one 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, let’s assume a client wants you to build a house with marble stones in an area where they are hard to find. Even if the client is ready to pay whatever it takes, you should evaluate the requirements and decide whether to take the project or drop it.

2. Project profitability

Construction is a highly for-profit industry. As a construction contractor, you should only take on profitable projects, which is why accurately estimating project costs is required before billing the client. If the actual cost of building construction is higher than what your client can afford, you should not take on that project.

3. Procuring the finances

Quite often, contractors need to procure initial funds for projects. This is why they need cost estimators to determine how much funds they need to procure to commence the project.

4. Setting a budget

If you are starting a construction-related project, you need to closely watch your expenditure to ensure you don’t overshoot your budget. Creating an estimate helps determine the associated costs of any project.

5. Pitching the bid

An accurate cost estimation helps you to bid a fair price and win a project bid. Oftentimes, contractors need to pitch lower prices than the competition for the same project without losing out on their profits. This is only possible if you have accurately estimated the cost of the project.

Now you must have an idea of the importance of estimating the costs of construction. Apart from this, you must also know the home building construction software, which helps in solving most of the time-consuming tasks. But before knowing that, let’s know the most important aspects of estimating the cost of construction.

Essential Elements of Construction Cost Estimation

how to estimate construction costs: construction estimate essential element

  • Quantity takeoffs:
    This is the total quantity of materials and labor needed to complete a project.
  • Labor hours and labor costs:
    This is the total hours of labor required to complete a task and the associated cost.
  • Costs of materials:
    This is the total material cost that the project financier will have to bear.
  • Costs of equipment:
    This is the cost of renting or purchasing the equipment required to complete the project.
  • Subcontractor quotes:
    Most general contractors hire subcontractors at different stages in a project. The subcontractor quote gives the subcontractor an estimated price and breakdown of the labor and raw materials needed to deliver a project.
  • Joint costs:
    These costs in construction are expenditures that benefit more than one project objective.
  • Indirect costs:
    These are the costs that don’t directly affect the actual costs of the projects, such as the administrative and overhead costs.

These are the important elements a construction contractor should include in a professional estimate. But, with estimating software, you can automate the repetitive and mundane tasks and create professional estimates quicker and more accurately. Here is a list of construction estimating software that can be your helping hand to create estimates and invoices.

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Create professional estimates for your small or large projects with InvoiceOwl in just a few minutes.

5 Levels of Construction Cost Estimates

All construction and renovation projects consist of several processes. These processes require specific estimating of the cost of construction as per the best applicable construction management practices. Here are the five levels of construction cost estimates defined by the American Society of Professional Estimators.

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

Most professional estimating software lets you modify your estimates or invoices while keeping the client on the same page to avoid losing their trust. But, it’s always better to send clients accurate estimates of the cost of construction to make an excellent first impression.

Most Accurate Methods to Estimate the Cost of Construction Project

Construction estimates require focus and attention. A good estimate will ensure you bid competitively for projects and determine your capital cost, operating cost, and profit margin. Here are three methods for creating accurate estimates.

1. Unit pricing

This method of construction cost estimating is the most common. The unit pricing method is achieved by calculating the overall cost of the project based on unit costs.

Now, what’s unit cost estimating? Let’s suppose you are a painter, and you charge $1 per square footage. Your unit cost estimation is $1/SF.

To bill for the entire building project, you need to estimate all the indirect and direct costs. The right way to go about it is by listing out the direct costs before including the indirect costs like the cost of supervision, overruns, hiring subcontractors, fencing the project site, and similar expenses.

Here’s how to determine your unit prices with the example of the painter above. The first thing to consider is the unit price for the material, in this case, the cost of one can of paint. Next, consider how much area you can paint with that can. Now divide the price by the area.

To simplify:

Your unit price is = material cost/area covered in square footage.

Similarly, labor unit price = labor cost/area covered in square footage.

You can use this formula to determine the unit price for every project material. With the unit cost, you can then estimate the indirect costs, the margin for waste in the production function, and the margin for profit to determine what to bid.

how to estimate construction costs: Construction Cost Estimate Template

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Pro Tip

  • Estimating the direct and indirect unit prices will help you determine the actual cost of construction and aid you in drafting a competitive estimate to win more bids.

2. The square foot pricing (Aka the budget method)

When you are in a rush to bid on a project and in need of a faster construction estimating method, square footage pricing would be your best bet.

This method of estimating the cost is done by roughly analyzing the total work to be done and pitching a rough ballpark figure. It would surprise you that this is quite common in the construction business. There are usually negotiation rounds when bidding for projects, so in most cases, your initial price is never the final signing amount.

And sometimes, you have to prioritize a quick estimate over an accurate estimate, which is why many contractors use estimating software. What is the point if you spend hours calculating accurate estimates and fail to submit your bid on time? So, the square footage pricing method can be employed to get a rough project estimate based on the total scope of the project.

3. The rule of two

The Rule of Two is simple but also not recommended if you need an accurate estimate. We know that every cost has two sections: labor and material costs. After analyzing the scope of a project, calculate the number of labor hours required to complete the job. This will give you the total labor cost.

For example, if a construction project will take seven days for four workers to complete, you can call this half of the project cost. Now, multiply it by two and add 10% as a safety net. You will get better at this method as you implement it on actual projects, and the experience you gain in the field will help you calculate accurate labor hours.

So, the best tip for mastering this method is to be present at the site and gain experience as a supervisor. Again, this method might sound like a long shot, but it is perfect for quick estimation of costs for small construction projects. And your quoted cost of construction will always get negotiated, so be prepared for that.

So these are the three most effective methods to create a construction estimate for a project. However, a lot depends on factors like where your company is located, the nature of the project, your construction process, and the pricing model you follow as a contractor.

So, pick a method that is suitable for your project. Furthermore, if you need more answers on how to estimate construction costs, here are a few of the most frequently asked questions below.

Frequently Asked Questions
  1. How do you estimate the cost of construction?

    Every construction-related project has its unique requirements or challenges, so the cost would vary for every project. However, you draft an accurate construction cost estimate with any of these three methods:

    • The unit pricing method
    • The square footage pricing
    • The rule of two

  2. How do you calculate construction equipment costs?

    Depending on the size of the project and the equipment required, you may need to calculate the rental or purchasing costs of equipment.

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

Conclusion

If you want to make profits in the construction business, you have to learn how to estimate construction costs. And to get accurate estimates, you must understand the full scope of the project as well as other contingencies.

If you would like to draft estimates quicker and more accurately, try the easiest estimating app on the market—InvoiceOwl. With InvoiceOwl, contractors create professional estimates within minutes that include miscellaneous expenses to cover unexpected scenarios. InvoiceOwl is the best construction estimating software for small businesses with easily customizable templates and an intuitive user interface.

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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.

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