What is Cost Estimating?
Do you want to learn how to estimate a construction project?
You will first need to understand the concept of cost estimating? A very simple way to explain cost estimating is by saying that it consists on translating the components of a construction project into monetary numbers. This amount will later help you forecast how much you should charge your clients.
It’s one of the trickiest and more important steps of a construction project, as it can make or break the entire job.
Why? Because if you wrongfully estimate the expenses, your entire markup will be at risk and the fear of working for free is going to start creeping in.
Who Should be Responsible for Cost Estimating in a Construction Project?
If you work in a construction company you know that it’s very common to see the selling process being detached from the estimating process. Under my eyes, this is a HUGE MISTAKE. You should definitely have the same person doing both the selling and the cost estimation procedures.
According to my experience, you should have the same person doing both the selling and the cost estimating procedures. It makes sense.
Why? Because of three reasons:
- Duplication of Efforts: Doing business with both processes isolated from each other leads to a duplication of efforts. It’s maybe foolish to explain, but paying two salaries to two different people is substantially more expensive than paying to one individual for doing the same work.
- Fewer Errors: When the same person does both the selling and the estimating, the probability of mistakes are lower. There is no need to coordinate and errors don’t show up.
- Faster Process: As you should know, interacting with your customers quickly and effectively essential for your business. By having the estimation and selling systems divided you will add more obstacles between your company and your prospects.
ACTIONABLE ADVICE: Make the final decision of having the same professional making both the estimation and selling processes.
The 3 Advantages of Getting in Front of your Customers Quickly
I’ve been around this industry long enough to know that customer satisfaction is crucial not only for a construction business but for any business. And in order to make a customer happy, you must be speedy and exact.
On the other hand, if you want to learn how to estimate a construction project you must know that cost estimating is a substantial part of the quote you’re going to give your potential customer. It’s also what’s going to take the longest time to make.
Do you see where I’m going?
Being able to give your prospects a quote in no more than 3 to 5 days is going to make or break your deal. For larger projects, it can take up to 10 days, but no more than that.
The 3 advantages of following this advice are:
- Fidelity: Great customer service is tough to find, especially in the construction industry. Quotes take too long to be delivered and there are always added costs after the project starts. But, when a client finds it, it’s highly likely he’s going to stick with the company that offered superior customer care.
- Be More Professional: When ensuring an exact quote takes you half the time it takes your competitor, you will look immensely more professional and better suited for the job.
- Increase Sales: If your customer is happy with your fast service and quote’s turnaround, the benefits of the word of mouth will not take too long to come to your business.
ACTIONABLE ADVICE: Be sure to follow this guide step-by-step to estimate a construction project faster but very precisely.
How to Estimate a Construction Project: The Step by Step Guide
If you’ve read this whole article, you know that I’ve already mentioned that unit cost estimating is the best method for estimating the cost of a construction project. It’s fast and puts you in front of your customer quicker.
So, here I give you the step by step guide on how to estimate a construction project by using the Unit Cost Estimating Method.
Step 1: Begin Estimating From a Solid Construction Plan.
I’ve worked as a construction worker for many years and I have seen the same mistake being made again and again. That mistake is grounding the cost estimation procedure on improvised drawings instead of strong construction plans.
In case you’re asking what are these “conceptual drawings”, let me go ahead and tell you that these are rough ideas of what the construction design should be put on a piece of paper, without any measuring or control whatsoever.
In other words, there are a lot of construction companies that support their construction projects in hand-made drawings. Scary, right?
And let me tell you that if I know one thing in life is that a great construction project can ONLY be made from a rock-solid construction plan.
And.. What Makes a Solid Construction Plan?
A solid construction plan consists of the hard work of professionals sharing their knowledge and working together designing a construction project that lists all the necessary actions, labor, equipment, and materials needed to successfully make a structure.
Step 2: Compile All the Necessary Items for That Construction Project.
On this step, you’ll want to list all the items needed to make the construction project.
These elements need to be quantified in proper amounts. Otherwise, you’ll suffer the same consequences as if you were compiling your items from a mere drawing.
Another thing to be careful of is the amount of time you dedicate to this step. If you don’t take your time to study the specific quantities of material you’ll need, the probability of estimating things wrong are high.
Remember, if you want to learn how to estimate a construction project, try to think of the quantities when things go well, but also in case of things go wrong. Prevention is key.
Step 3: Attach a Unit Cost to Each Item From the Last Step.
I don’t like to deal with numbers, but in this industry, it’s very important to do it.
Attaching a unit cost to each item of your construction materials is the recommended method that has been confirmed to be highly effective. It has been found to be faster and more accurate than the rest of the methods.
Each unit cost associated will be highly related to the following factors:
- Method of Construction
- Labor Hours Needed
- Materials Used
- Technology Used
Each of these elements is a whole universe of the complexity of its own. To be able to correctly assign a price you’ll have to call or meet with quality subcontractors that will give you a quote.
Using this method will also get you back in front of the customer faster, ensuring that you maintain your reputation with the customer, which will enable you to earn recommendations and referrals in the future.
Step 4: Total Your Numbers in One Single Number.
You’ll need to total your numbers accurately and have them checked for mistakes by your most experienced employee. I find this step a little bit annoying, but indispensable.
In order to achieve faster and more exact results when totaling your numbers, you should apply the:
This is a key skill needed to quickly estimate numbers so that you will not get confused by decimals. It is simply the process of making long numbers simpler by “rounding’ them. You should round your numbers to the nearest units
By following this formula you’ll be able to make a pretty good estimate of the cost of the materials needed:
- Y = Total Estimated Cost of the Project
- Ui = Unit cost of each item
- Qi = Quantity of each item
This formula will allow you to estimate the construction project based on the number of elements to be used, its costs, and the specific quantity of each one.
Labor, Material and Equipment Formula
- Y = Total Cost
- Qi = Quantity of Each Material or Equipment
- Mi = Material i
- Ei = Equipment i
Thanks to this formula, you’ll be able to incorporate the cost of labor, equipment, and materials to the whole cost of the construction project, in specific amounts.
This is definitely one of the best formulas for estimating the cost of a construction project. It never fails me.
Step 5: Check Your Numbers.
Let me tell you something. Convincing a client about the viability of the numbers/total cost stated in your bid is one of the effective ways to earn leverage over your competitors. It will put you ahead.
You will need to check your numbers and go through it thoughtfully and thoroughly because that is what maintains you in the industry. You can’t afford to make any mistakes, otherwise, you could loose a good sizeable income.
It is also fair to say that for your numbers to be effective, they need to correspond with the bidding trend in your state/region.
Step 6: Apply Your Own Markup.
Defining your final price will determine whether you stay in the construction industry or not. Why? Because no business can survive without making money.
In this step, you’ll have to apply a markup over the cost previously estimated in order to ensure profits.
The question most beginners ask me is:
- Should we mark up our final price by how much?
The answer to this question is that this is determined by many factors like:
- The duration of the construction project: Most time equals more money in labor.
- Estimated overhead expense: It is estimated that most construction and production activities will have overhead expenses ranging from 10% to 30% of their revenue. I’ve heard hundreds of construction project managers telling me directly that they estimated their construction project the wrong way and their whole markup was covered by costs that hadn’t been estimated.
If you ask me, by applying a 30% markup on the whole construction project you’re covered. In my experience, this is enough, but as I told you, there are many factors to consider.
One of the things that I learned with the pass of the years is that in order to learn how to estimate a construction project you should make comparisons from many cost estimating methods in order to get to a correct number.
To address this I made the next formula for you. It is based on the factored unit cost estimation method:
- Ci = Purchase Cost of Major Component i
- Fi = Factor that Addresses the Variation of the Cost
- N = Number of Components
In this formula, the cost of units is factored as an allowance for the possibility of variations or materials that could have been forgotten in the unit cost estimation method.
Step 7: Give the Quote to Your Client.
In order to meet the deadline, most people send their bid in the mail or through email. That is not recommended for your business, as you will look un-professional.
My advise to you is to pitch your projects in person. Face to face, the old way.
Presenting your bid in person will give you the opportunity to interact with your client. Most times, the client will want clarifications on your methodology, the cost of materials and services. And you will have to be there to answer.
One helpful strategy to complement this is to make a list of important things in your bid which should be discussed with the client before he/she goes through the entire document. When doing this, you must be confident and open to erase any doubt.
Most contractors get “hooked up” in the mid of the contract because they bided below margin. This often occurs when there is a high competition for the project.
Here in WorkBootsGuru.com, we advise people not to fall into this trap. Be real, work with numbers and state categorically clear what you can do and how much you charge.
ACTIONABLE ADVICE: Follow the 7 steps taking your time and making sure you’re not giving up to sub-valuing your services.