Project Cost Estimation in Construction: A Comprehensive Guide

What is Project Cost Estimation

Project Cost Estimation is useful to predict the expense of a project. The project expense is calculated by gathering all the information about a project, its plan, and its specifications.  

In the case of the construction industry, this means that you can calculate the anticipated expense of all the resources that are to be used throughout the construction cycle. Resources such as labor, materials, equipment, subcontractors, permits, overhead costs contingencies, etc. are usually calculated.  

Let’s understand this with an example

The Use of Project Estimation Tool in the Construction Sector: Example

Project Cost Estimation is a necessity before bidding for a new construction project. As a contractor or a construction company you need to know how much a project will cost you beforehand. So that you can submit your bid at a competitive but profitable price. 

Along with this, Project Estimation is also important when your clients come up to you with a predefined/pre-decided budget. With a tool to estimate costs, you can check if it is possible to deliver the project in their price range or not. You can present cost breakdowns, and reports offered by these tools. This gives way to negotiation. 

In short, the estimation process helps you prepare the bid. Not only that, it also helps you decide the contract price and finally to plan the construction process.   

So now, how do you estimate the cost of a project? You can do it easily by using the Project Cost Breakdown Structure. 

What is PCBS (Project Cost Breakdown Structure)

The Cost Breakdown Structure is a document that details all the costs associated with a project. The document is prepared by following the bottom-up analysis. It depicts all the costs in a hierarchical structure.    

Project Cost Breakdown Structures provide detailed information about the costs involved in each step of the workflow process. As a result, it gives you a better understanding of hidden costs.

Benefits of Using a CBS in a Project

A cost breakdown structure can help you in many ways. It helps you define the scope of the project, allows you to schedule tweaks and avoid risks. 

Define and re-define the scope of Project

By using a Cost Breakdown Structure Document the project managers remain informed about all the areas where money is being spent. So that they can decide to cut unnecessary or less important work if the budget exceeds. In short, they can define and then redefine the scope of the project without any hassle. 

Tweak Project Resources 

A project manager is responsible for completing the projects on time and in budget. Naturally, this means they have to make the optimum use of time. A technique that comes in handy during these times is called Crashing. This means the project manager recognizes those low-cost activities that can be sped up by doubling or tripling down the resources needed to complete them. The method reduces the project timeline without much impact on the budget. 

Avoid Risks

To avoid risks you need to know all the potential risks. A Cost Breakdown Structure document gives you just that. It informs the project managers about all the possible occurrences of a project, both positive and negative. They also get to know about the likelihood of their occurrence. Now, the project managers can focus on those high-risk, high-cost activities that need extra attention and avoid mishaps. 

Types of Project Costs

A project cost estimation tool can help calculate various types of project costs. Here are some of the common ones: 

Direct Costs

It includes all the expenses related to the procurement of materials, equipment rentals, permits, and money spent on labor wages, subcontractor’s fees, etc. 

For a construction company, these costs generally include calculating the cost of materials like cement, bricks, steel ,etc.

Indirect Costs

Indirect costs refer to costs related to administrative requirements, office space rent, insurance, insurance premiums etc.

Fixed Costs

These costs remain unaffected by the changes in the amount or the duration of work. They typically include costs related to software licenses, and annual insurance premiums.

Variable Costs

These costs increase or decrease based on the activities and resource requirements of a project. It will include expenses such as material consumption, cost of fuel or equipment ,etc.

One-time Costs

Just like the name suggests, one-time costs are those costs that occur only once during the entire project lifecycle. They include expenses related to project initiation, feasibility studies, project design, permits, legal fees, etc. 

Recurring Costs

There are certain ongoing expenses that continue to repeat periodically throughout the project cycle. Such costs are usually termed as recurring costs. These costs majorly include salaries, utility bills like electricity and water, and maintenance fees, etc. 

Contingency Costs

Every company allocates some additional funds to manage unforeseen events or changes. These costs help to avoid cost overruns. 

Overhead Costs

These costs are necessary to carry out the general operations of the business. They mainly include costs such as administrative salaries, utilities, office rent, or maintenance. 

What do your Project Estimators typically do? 

A project cost estimator is a person working to provide correct estimated cost information on upcoming projects. They support budgeting and bidding processes, aid financial planning, and facilitate quick decision making. 

They review project requirements 

The estimators examine the project plan in detail. This helps them understand the scope and complexity of the project. It helps them define the requirements of the project. 

Carry out Cost analysis

The estimators are responsible for keeping track of the current market price of all the resources and materials required for the project. For a construction project, this will mainly include labor rates, subcontractor costs, equipment rentals, permits, etc. 

They compile and organize data

After gathering all the data related to costs. The estimators work by compiling and organizing the data in a structured format. This gives way to detailed analysis and reporting. 

They collaborate with the team

After conducting thorough research on the project and compiling all the necessary data to gain estimates. The estimators work closely with the project managers, engineers, architects, etc. They try to keep a tab on the estimated and actual project costs to understand the requirements and constraints of the ongoing projects. 

Project Cost Estimation Techniques

Analogous Estimating

This estimating method takes into account the data available on projects completed in the past to estimate the cost of ongoing projects. It is based on the assumption that similar projects will have comparable costs. 

Parametric Estimating

This estimating method employs statistical models and algorithms to calculate costs. These models work on certain project parameters like the size, quantity, or complexity of the project. 

Bottom-up Estimating 

The bottom-up estimating method is used to aggregate the total project cost by estimating costs for individual project components or work packages. It is one of the most commonly used methods

Three-Point Estimating

This estimating method uses the PERT calculation method to estimate costs. It considers the optimistic, most likely, and pessimistic scenarios to calculate both time and cost. 

How to estimate Project Cost in 9 steps

Step 1: Define the Scope

It is very important to decide the scope of your project. Understand all the project tasks, the results you’re expected to deliver and resource requirements. Defining the scope of the project provides a solid foundation for accurate cost estimation at later stages. 

Step 2: Break Down the Project

Next it is advisable to divide your project into small doable tasks. This process is also known as Work Breakdown Structure or WBS. The breakdown of tasks gives way to the detailed estimation of the project costs.  

Step 3: Quickly Identify Resources

Now make a list of all the resources needed to complete each of the tasks mentioned in the previous step. It will include the calculation of resources such as labor, materials, equipment, subcontractors, etc.

Step 4: Obtain Quotes and Bids

Compare the quotes and bids from multiple suppliers and subcontractors. This way you can ensure that you receive premium materials and services. 

Step 5: Estimate Labor Costs

You also need to have a clear idea of how much money you’re spending on your labor task force. For this, consider their skill level and experience and calculate the costs accordingly. 

Step 6: Calculate Material Costs

Calculate the quantity of materials needed for each of the tasks then add the cost of each of these materials to get the total material cost. 

Step 7: Calculate Equipment Costs

Make a list of all the equipment required for the project. Generate an estimate of the cost of renting or purchasing the equipment. Make sure you don’t forget to calculate the money spent on all kinds of maintenance, fuel and electricity. 

Step 8: Account for Indirect Costs

There are many areas that are not tied to the defined tasks of a project but cost you money, they are known as contingency costs. These costs include expenses such as permits, insurance, overhead expenses, contingency reserves etc. 

Step 9: Summarize and Review

Finally, summarize all the estimated costs into a single document and calculate the total project cost. Review and re-review it to avoid errors. 

Bonus Step: Consider Inflation & Contingencies

Take into account the impact of inflation on the cost of materials, equipment, and labor force and plan your estimates accordingly.    

Are you thinking of purchasing a Project Estimation Tool?

Ask yourself these questions first…

Do you struggle to come up with realistic budgets and financial plans for your upcoming projects? 

Do you fall back in preparing competitive bids?

Have you ever failed in planning and allocating resources properly?

Does your team struggle to identify market uncertainties and risks? 

Do you fear losing your clients because you frequently fail to carry out clear communication with your clients?

Then, you most definitely need a Project Cost Estimation Tool

In short, It’s important to understand that project cost estimation is an iterative process. You not only need to stay updated on the current market trends but also possess a system that is powerful enough to refine and adjust the available information. Making manual changes again and again without a proper system may result in discrepancies. And that is why, we recommend a Project Cost Estimation tool.