What is Construction Project Cost Estimation?
The process of Construction Project Cost Estimation involves predicting the total cost that the construction of a particular project is expected to incur. Picture it as the financial plan of the project that defines the money spent, utilization of resources, and time. This is important for tracking the project costsâno one wants to face an additional bill after the work is done and the final touches are made!
Why is it Important?
Estimating costs is important for every project stakeholder. It not only helps you prevent cost overruns but also with effective management of resources and effective time management. Not having a cost estimation tool is like flying blind through a financial jungle. Youâll have to keep guessing in fear of what comes next.
Key Aspects of Project Cost Estimation
Cost estimation is both a science and an art in construction projects because it requires the knowledge of many factors that are likely to affect the cost. Of course, the final cost number seems quite accurate, but it is derived from the scope, labor, and material that changes quite often. Below, we provide a simple guide to help the new players understand the basics and get a better view of what is happening.
1. Direct Costs vs. Indirect Costs: Understanding the Difference
Direct Cost and Indirect Cost are the two important parts of the cost estimation process. Consider direct costs as the evident expenses at the construction site, as clear as the costs of ingredients in a cake. On the other hand, indirect costs are like electricity that you use to bake the cake â important but not as apparent.
Direct Costs:
These include all items and costs that are tied to the construction process including materials, manpower, and machinery. For instance, if you are constructing a house then the cost of buying bricks, wages paid to construction workers, or the cost of hiring a crane are all direct costs.
Indirect Costs:
These are the incidental costs that enable the construction process but are not directly linked to a particular activity. Consider things like the permit, the insurance, or the rent for the office space for example. As in the case of the cost of maintaining a bakery â it is necessary, but it does not constitute the cake itself.
2. Fixed Costs and Variable Costs
Fixed Costs:
These are like the fixed costs on a road trip â for instance, the cost of the car hire does not change depending on how many miles are clocked up. In construction, this would include things such as the price of a bobcat, office space, or a permanent workerâs wage.
Variable Costs:
Conversely, variable costs are quite tied to the needs of specific project activities. For instance, the longer you drive, the more fuel you will have to use. In construction, these costs may include the wages per hour for workingmen, and the prices of materials that vary depending on the quantity bought or the fuel for machinery.
3. Types of Cost Estimates
With the understanding of what is being calculated letâs take a look at how the costs are estimated.
Top-Down Estimation:
This is like trying to estimate the total cost of a particular trip with an estimated cost of a previous similar trip. Itâs a fast way and gives a rough idea but it is not very precise. For construction, this method uses the historical data from the same type of project.
Bottom-Up Estimation:
Letâs look at this as when you are planning your trip and you have to calculate the cost of your fuel, food, shelter, tolls, and so on and then sum it up. In construction, for instance, it involves making estimations on each part of the construction in order to get a total that is more reliable. Although it takes time, it is the most accurate way of doing things.
4. Contingency Costs: Expecting the Unexpected
Every project has its risks â it can be a delay due to bad weather, adverse site conditions, or lack of materials. Thatâs why estimators include contingency costs to prepare for the unknown; like carrying some extra snacks in the car in case there are traffic delays. Contingencies are useful in order to prevent increased costs and provide the necessary budget leeway.
5. Time-Related Costs: The Cost of Duration
Construction projects are not only a matter of spending money on materials and work; time has its own value. The longer the project the more you will have to pay for such things as equipment, labor, or temporary utilities such as electricity or water. Such costs are called time-related costs. Think about how much cheaper it would be to rent a movie if you had to return it in a month as opposed to the weekend.
Factors Influencing Construction Cost Estimation
Many factors influence construction costs and one can easily miss out on one and set the overall budget way off. Key considerations include:
1. Material Costs
Some materials such as steel, concrete, and wood may also vary in price based on the market and availability of such materials.
2. Labor Costs
Of course, the labor force is one of the most important elements of any construction project, but the price of labor depends on the region, demand for it, and the level of skills needed.
3. Site Conditions
Generally, a site that is hard to work on due to factors such as poor soil or difficult access will be costly to develop. Likewise, it is costly to develop urban areas because of the permits and rules that are imposed in such places.
Levels of Construction Cost Estimates
The cost estimates are not a one-time activity; they change as the project progresses. Consider it in the same way as planning a road trip, for instance. In the beginning, you have the general roadmap of the journey, but as you continue to lay down the plans it becomes more precise. According to the American Society of Professional Estimators (ASPE), there are five levels of estimates. Hereâs how each one works :
Level 1: Order of Magnitude
This is the âguesstimateâ phaseâlike saying, âI think this road trip will cost around $500 based on similar trips Iâve taken.â Itâs probably still too high and based on little to no data and rather assumptions. This rough estimate will do for now, but it is not very refined.
Level 2: Schematic
At this point, you have a rough map and youâre aware of the major roads. Youâre beginning to assume, âAlright, gas should be at this amount, and I will have to eat here and there.â It is, however, less specific rather than more general and might be grounded on more general plans, such as having a sketch or a general plan of the project.
Level 3: Preliminary
Now, that youâve chosen particular itineraries; you are aware of how long the journey will take and can therefore have a rough idea of how much fuel, food, and shelter you will need. This is the stage where your trip budget starts taking shape, just as a projectâs design development allows for more refined estimates based on the growing level of detail.
Level 4: Construction Document
This is like having your whole trip planned down to the minuteâwhere youâll stop, what youâll spend, and what youâll do. At this level, construction is done to detailed plans and blueprints, which makes it easier to give a very accurate cost estimate. You are well aware of all the material requirements, workforce, and equipment and are set to commence with the work!
Level 5: Definitive
Finally, you have the exact amount of money which has been planned for all the things and you are sure that you will not have to face any unexpected expenses. This is the most accurate and the last possible estimate and it is as if you know exactly how much your road trip will cost when you have included every single penny. In construction, this is the final estimate used in making the final bid.
How to Improve Cost Estimation Accuracy
As helpful as the tools and methods are, there are still things that can go awry. Here are some tips to sharpen your cost estimation game:
- Account for Risks: Consider construction delays, lack of workforce, or rise in material prices.
- Stay Updated: Check the market from time to time to provide for the fluctuations in cost.
- Use Historical Data Wisely: Make sure you compare your reference projects with your target project correctly to avoid mistakes.
Conclusion
Construction project cost estimation is one of the most important aspects of construction project management. Knowing the cost of your project before its commencement will prevent cost overruns and enable the project to be carried out without any hitches to the end of the project. By understanding cost estimation techniques, appropriate tools and technologies as well as emerging markets, it is possible to enhance the financial control of any project.
And of course, if you are in search of professional assistance or want to get an estimate for your project, visit bldon.com. We have years of experience and specialized tools to assist you in managing all the challenges associated with construction cost estimation.
