Techniques for Estimating Construction Costs

There is a two-step process for estimating every construction project:

Step 1. Determine Your Costs

Step 2. Apply a Markup that will yield the appropriate profit after expenses

It is that simple, but it is not that easy if you don’t have a systematic process for producing an accurate estimate in a short amount of time.

The speed and accuracy at which you perform the steps above will directly influence the closing rate and potential profitability of your construction projects.

If you make your customers wait too long for a price, then you may lose the sale and may not have enough work to stay in business.

If your price, based on your estimated cost, is too low, then you will lose profits.  If your price is too high, then you will lose clients (potential sales).

In this article on FineHomebuilding.com, I describe techniques that will produce fast, accurate project estimates for your construction business by developing a database of pricing data that is specific to your company.

But before you can develop a fast, accurate system for estimating your construction projects, you need to stop doing a couple of things.

STOP ESTIMATING USING THESE TECHNIQUES

STICK ESTIMATING CONSTRUCTION COSTS

Stick estimating (counting every piece of material and determining every hour of labor) is an accurate way to determine your costs, but stick estimating is extremely inefficient.  Stick estimating can also lead to oversights if the project plans are not complete or you miss a scope item.

If you want fast, accurate estimates, then stop stick estimating.

ESTIMATING CONSTRUCTION COSTS BY HAND

The only technique more inefficient than stick estimating is estimating by hand.  Even if you are detailed with your takeoffs, scope, and notes, you will still miss something or hit the wrong button on the calculator.  Estimating by hand is prone to errors, is not repeatable, and a waste of your valuable time.

START ESTIMATING USING THESE TECHNIQUES

UNIT COST ESTIMATING

If you want to produce fast, accurate construction estimates, then you need to develop a unit cost method for estimating your construction projects.

Combining a unit cost method with the correct estimating software is the fastest, most accurate, and cost-effective way to produce construction estimates for your business.

WHAT IS THE BEST CONSTRUCTION ESTIMATING SOFTWARE?

I know this may seem vacuous, but the best estimating software for your construction business is the one that you will actually use.

Many good construction estimating programs are buried within bloated, complex, and expensive project management software.  Although these software programs contain many useful project management tools, there is usually a steep learning curve prior to implementation.

Dedicating time to learning a new program is fine, if you have the time, the resources, and the personnel to do so.

I am a fan of many estimating programs, but only if you understand the input and the formulas the program uses to calculate the costs, profits, and prices for your projects.

You know the old saying, “Garbage in.  Garbage out.”

If you need a system to produce fast, accurate estimates for your construction business, then you can use the techniques described below in a simple spreadsheet or in a packaged software program.

The core of every construction estimating program is the database of costs or pricing.  Developing your own database of construction pricing does not have to be complicated.  In fact, you might already have a database of information without even knowing it.

DEVELOPING A COST DATABASE FOR YOUR CONSTRUCTION ESTIMATES

In this previous post, I discussed how to use the prices you receive from your subcontractors to develop a database of costs for their associated scopes of work.

Much like developing a database for subcontractor pricing, the steps listed below will help you develop a unit cost or unit price database for your construction business.

Note: A unit-based cost does not include the markup.  A unit-based price includes the unit cost of the item with the markup applied.

STEP 1 – ESTIMATE THE SCHEDULE BASED UNIT PRICE

In this post (Three High-Level Metrics…), I describe how you can use a simple number like Total Revenue to develop metrics that inform you about the health of your construction business.

Using that same number, Total Revenue, you can determine the unit price for a given period of time for your business.

EXAMPLE:

If your Total Revenue was $500,000 last year, then the weekly price you produced was $9,615.

WEEKLY PRICE = $500,000 / 52 per yr = $9,615

Let’s assume that, in general, your company worked on one project at a time and then moved to the next.

When you get a call for your next project, you determine that will take about 5 weeks based on your experience.You can quickly estimate that the price for this job is around $48,000 (+/-).

SCHEDULE BASED UNIT PRICE = WEEKLY PRICE X ESTIMATED SCHEDULE

$9,615/wk X 5 weeks = $48,000

If your company has multiple crews working on multiple projects at any given time, you can factor that into the above calculations.

STEP 2 – ESTIMATE AN ASSEMBLY BASED UNIT PRICE

The stick estimating method accounts for every piece (materials in pieces or labor in hours).  But there is no need to develop a material list or a labor takeoff until you have sold the job.  Doing so is a waste of time.

A unit price method will account for the assembly of units that make up the project.

EXAMPLE:

Stick estimating requires that you list labor and equipment costs for excavation, total number of rebar, labor for setting rebar, cubic yards of concrete, and labor for placing concrete for a foundation.

An assembly unit price for this foundation would include all the labor, materials, and markup for each linear foot of foundation or cubic yard concrete poured.

LABOR AS AN ASSEMBLY

If you are a specialty or subcontractor and mainly sell labor only, then your labor price can be an assembly too.  (See my these articles – Developing a Base Rate and Calculating Your Labor Burden).

The Schedule Based Unit Price from the example in Step #1, helped us determine the approximate price of a 5-week project.

If we have determined that the unit price for an hour of labor is priced at $45/hr, then we can determine the labor price for a 3-person crew for a 5-week project as follows:

TOTAL LABOR PRICE = LABOR PRICE/HR/MN X CREW SIZE X HR/WK X # of WEEKS

TOTAL LABOR PRICE = $45/HR/MN X 3 X 40 X 5 = $27,000 LABOR PRICE

Once you have determined a schedule base price (Step #1) and an Assembly Based Unit Price (Step #3), you need to modify your price to take into account project-specific factors such as customizations, specialty items, and difficulties that are not included in your unit prices.

STEP 3 – ADD FACTORS TO YOUR UNIT PRICES

There are many factors that drive costs up on one project that may not be present on other jobs.  A vital part of developing a system for fast, accurate estimating is developing a standard list of production factors that you will apply to your pricing.

From my previous article, Calculating the Labor Budget in Your Construction Estimates:

The production rate [assumes] we live in a perfect world where all we have to do is show up and install [the work]. The production rate does not account for all the setup, breakdown, site conditions, and other difficulties that we will encounter when installing [the work].

You may determine that certain types of jobs require additional time, effort, and methods to be constructed properly and profitably.

For example, difficult job site conditions could add as much as 10% to your costs.  Even though you specialize in high-end custom work, a particular design might require as much as a 20% increase in your installation because of the fine level of detail required to install.

You do not work in a perfect world.  Add factors to your unit cost pricing on a per job basis to account for working in the real world.

STEP 4 – COMPARE THE UNIT PRICES TO RELEVANT DATA

Every job you sell, perform and track is a data point in your construction company’s database.  As you develop the database by tracking actual job costs, subcontractor costs, labor budgets, and compare those numbers to the techniques described in this article, your pricing database will become more and more accurate.

Revisit your database every month if you have less than one year’s worth of data (actual tracked costs).

Once you have a year’s worth of data in various forms then you can do a quarterly analysis and update.

Adjust prices when needed as driven by the data.

HOW TO SELL PROFITABLE CONSTRUCTION PROJECTS

The more accurate your numbers prove to be over time, the more confident you will become in your estimating.  Confidence in your estimating will not only increase the speed at which you produce your estimates, but will also help you close more sales.  More accurately priced construction projects will mean more profits for your business.

When you know how your construction projects are priced, then you can perform the work in a manner that reflects the data used in the estimate.

Using your own database to price your construction projects is like using a laser sight to hit the target.

Stop throwing darts.