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Building Better Cost Estimates

Achieving greater accuracy by filling your estimating toolbox
[ Page 4 of 5 ]        
Sponsored by Gordian
By Peter J. Arsenault, FAIA, NCARB, LEED AP

Step 3: Pricing the Estimate

This is the part for which everyone has been asking: What is the price? You now have the basic information to start to answer that with the scope defined and the corresponding quantities determined. The next step is to pair those with good, reliable and up-to-date pricing data. Just like elsewhere, good data put into this step allows for good estimates to come out.

Identifying Costs

The key to accurate pricing is to recognize and truly know the different types of costs that go into each part of a construction project. The ones that most people focus on are the direct costs, sometimes called bare costs. These are made up primarily of three things: material, labor and equipment.

Building-construction costs come in multiple forms. Understanding how to price each of them is always critical to arrive at a reasonable total price.

  • Material. The material costs come directly from the materials (including assemblies, products and systems) defined in the scope multiplied times the quantity (defined in the takeoff) to determine their direct cost.
  • Labor. This is the cost of installing those materials and may be calculated a number of different ways. Some labor or trade costs can be calculated on a unit basis (i.e., so much per square foot), but for many others, it is better to consider the actual hourly cost of having one or more crews on site for as long as it should take to do the work. If the estimate is based on the latter method, then the full labor cost needs to be taken into account. It is not just the hourly rate paid to the employee but also the labor burden cost to the employers for taxes, social security, insurance, etc. that are part of the overall hourly billing rates. In some cases, there may be a subcontractor that provides the labor, so those costs should be identified based on the appropriate basis. It has often been thought that labor costs are about equal to material costs for many trades, but that is an assumption that does not prove to be always true. Therefore, it is just as important to understand the cost of labor in a given project location as it is to understand the material costs.
  • Equipment. The equipment costs are related directly to the construction-process scope to identify the need for renting or leasing equipment, such as a tower crane, scaffolding, or any special equipment needed to carry out the project. These costs are usually calculated on a time basis (days, weeks, months), which is why the process scope is important here.

Direct costs will typically make up 70–80% of the total cost of a project, so they definitely need to be carefully calculated. However, the rest of the project cost is still significant and needs to be understood as well. These non-direct costs can involve a number of things that will vary based on the project and state of the construction market, including:

  • Site overhead. Someone needs to be onsite to manage and oversee the day-to-day progress of the work. For small projects, that may be a site superintendent alone, while on larger projects, it may involve multiple people working out of a construction trailer. Therefore the cost and its percentage of the total project can vary but be expected to range between 5–15% of the total project cost.
  • Home-office overhead. In addition to the site personnel, a construction company will be providing support to all of its projects from the home office for things like project accounting, billing, employment records, paperwork processing, etc. Those costs are typically spread proportionately across the various projects in the form of a contractor’s general overhead. These costs can similarly vary and commonly range between 5–10% of the total project cost.
  • Contractor profit. There would be little interest in forming a construction company if it were simply a pass-through of money for materials, labor, equipment and overhead. Rather, the owners of the company expect a reasonable profit from their efforts and the risk that they take to deliver a project within the contract price. How much profit they will build into their price can obviously vary based on how competitive they want to be and how much risk they perceive in the project (i.e., profit margin will be a hedge against any potential losses). All of that will be influenced by the local construction market, but it is usually prudent to factor in 5–15% of the total project cost for a profit line.

In addition to all of these costs, there are some other items that need to be addressed that may or may not apply, including:

  • Sales taxes. Government projects and not-for-profit owners are typically tax-exempt and can provide appropriate documentation for that. Some capital improvements are also by nature exempt from sales tax even with for-profit building owners. Nonetheless, in some cases, sales tax does apply, and in those cases, it needs to be added onto the applicable costs. Note that in some cases it will apply only to materials and equipment, but in other cases it may also apply to labor.
  • Performance bond. A performance bond is essentially a project-specific insurance policy in which an owner can take some comfort to protect the investment in the construction process, but it also comes with a cost. If it is required by the owner or other circumstances, it needs to be factored in since it is not insignificant.

Once all of the above costs are identified and tallied, it is tempting to simply say, “Here is the total.” But depending on the stage of the project, that could be problematic since it has already been noted that earlier phases offer inherently less information and hence less accuracy in cost estimating. It is therefore very prudent to always add in a contingency to the calculated total. This contingent amount can be used to make up for information yet to be developed in the design, but it can also be there to allow for unforeseen circumstances during construction, such as buried conditions or unexpected time delays. Depending on the comfort level of the completeness of the available information, the estimate contingency can be added anywhere between 2–20% of the total project cost.

Sources of Cost Information

For each of the different types of costs that are put into a total estimate, there needs to be a reliable source for pricing out each of those costs. Those sources can take several forms. The person or firm doing the cost estimating may have a file of current records that includes some relevant cost data or even prior estimates that are deemed capable of providing pricing for a current project. It may also be possible to solicit some actual quotations or direct estimates from subcontractors or vendors for material and labor costs applicable to the project. All of this hinges on the cost estimator’s experience in determining not only the current accuracy of this data but also its applicability to the project at hand.

There are multiple sources of cost data and information available, and all of them should be considered when building a cost estimate.

In light of the variety of cost-data needs, many estimators move beyond their own internal sources and also rely on independent, third-party, published cost data that is available in print or online. The advantage of online sources is that they are regularly updated, while printed books may only come out once a year or so. For estimates that need to be based on the most current conditions, online sources will make the most sense. Further, independent data typically addresses regional and local cost differences, allowing it to be customized or tailored to a particular project location accounting for differences in the labor markets, material availability and other factors. Perhaps the biggest advantage of these published data sources is that they are prepared by organizations that have full-time staff to focus on researching and identifying objective data for all construction trades and SOW. As such, they bring an element of independent credibility and experience to a project for accurate and up-to-date information. Cost estimators can then rely on this independent data to apply it to a customized cost estimate at different levels of development throughout the entire design and construction process.

 

[ Page 4 of 5 ]        
Originally published in Engineering News-Record

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