Published on 02nd June 2022
Cost estimation is a basic yet important activity of cost engineering - a devoted practice in project management. Cost estimation is necessary for estimating, controlling, and forecasting various costs to be incurred during the course of a project.
Every construction project has a budget and a timeline. Estimating the cost in advance is often necessary to keep the budget under control. This is before even a single physical activity concerning the project takes place.
This practice of projecting the construction cost in advance is called cost estimation or cost estimate for a project. Cost estimating plays an important role as the construction management can decide whether to proceed with a project based on the preliminary estimate.
Project managers use cost estimates to establish the scope and viability of a project as well as to allocate budgets. Contractors use them to determine whether or not to bid on a project. After all, meeting the financial feasibility and project scope is key to a successful construction project.
Cost estimation for construction projects can be defined as the sum total of all the costs incurred during the course of a project, program, or construction operation. It is a product of an extended cost estimating process. Although the cost estimate is a singular value, it may have several identifiable component values.
A cost estimate is essentially required to assist project feasibility studies or funding requirements during the planning phase of a project. For this reason, specialized professionals, known as cost estimators, are employed.
These cost estimators collect and analyze data in order to estimate the amount of money, time, and resources required for a construction project. Their objective is to produce accurate estimates to finish a project on schedule and within budget.
High capital-intensive construction projects require coordination between various stakeholders. Such projects are also prone to economic, sociological, and political obstacles. These obstacles frequently eclipse the engineering and construction difficulty of such projects. As a result, the difference between the early project cost estimates and the bid price or final project cost is considerably high.
That is where credible and close to accurate cost estimation, taking into account all the factors, comes helpful in mitigating the cost overrun.
Furthermore, the project owners can estimate the cost in advance to get an idea of the approximate capital a project might need. In case, they decide to invite third parties for construction, they will have a rough estimate of the bidding prices. This will ensure they can reject bidders quoting too high a price for the project. Likewise, third-party contractors can estimate the overall cost of a project to bid at the optimum bidding range to enhance their chances of winning the contract.
The cost required for a project is generally divided into two broad categories.
Fixed Capital - This capital is required for the initial establishment of the project. Here are the expenses that come under the fixed capital.
Operating capital - This capital is required for the operation and maintenance of the facility. Here are the expenses that come under the operating capital.
The construction cost estimate is a systematic procedure that follows different steps. Here is the order of various steps cost estimators take to reach an accurate estimate.
Professionals use order of magnitude estimations to analyze a project and determine whether it is worth pursuing. These estimations have a margin error of 30% to 50%.
If the project owners are impressed by order of magnitude estimate results, they proceed with the feasibility study. In this step, they follow a more precise cost estimation with a narrower margin of error.
A preliminary ("budget level") estimate offers more detail involving different expenditure categories. Companies undertaking the construction often begin to accumulate project funding once an initial estimate is completed.
Generally, companies perform a FEED (Front End Engineering Design) study to calculate the estimated cost required for the project, outlining the engineering design. After the designs have been finished, a substantive estimate is made. This enables businesses to base their calculations on the necessary materials for completing the project.
When all the above steps are complete, cost estimation for projects takes the real values and factors into consideration for calculating the actual cost rather than a guess.
Construction cost estimating is unique to projects, and factors affecting it are also industry-specific. Here are some factors that are akin to most major construction projects.
This is by far the primary factor influencing the cost estimating process. The cost and time can severely differ for a project of similar magnitude if the geographic conditions vary. This geographic condition can include soil topography, nature of the rock, waterlogged soil, and wind conditions.
The distance of the project site plays a major role in deciding costs. If the site is far away from economic centers, contractors have to bear the increased cost of transportation. Likewise, they have to pay higher wages to laborers in a bustling urban area.
Regulatory compliance may be different depending upon where the construction site is. If the regulatory requirements are stricter, companies may have to spend more to fulfill the regulations.
Time is another aspect that can also affect costs significantly. Construction megaprojects often suffer from delays due to a variety of reasons. The project owners may incur higher costs due to such delays in the project schedule.
On the other hand, short-term projects may suffer higher charges for failing to complete the project on time.
Fluctuating market conditions are a big contributor to unexpected increments in the actual cost of a project. Along with fluctuations in the market, construction material and labor costs also change, which play a significant role in deciding the cost of a labor-intensive construction project.
Therefore, companies undertaking large projects often keep a contingency plan ready to encounter the unexpected material cost rise during the timeline of a project.
Construction cost estimators use several estimation techniques, which may vary in speed and accuracy. Most prominent among these techniques are listed below:
A production function is calculated based on the input and output relationship. Input can be labor or materials, and output can be the resultant built area.
So if a contractor wants to get a specific output, the input has to be defined accordingly. In this way, calculating the cost of input becomes easy. This method is appropriate for specific projects like building schools and hospitals.
This estimation method is highly accurate though it is highly time-consuming. In this method, every component is listed, and the cost is calculated based on the list. But making this list is hectic and time-consuming. The estimating service professionals undertaking the estimation task may lose focus, thereby increasing the likelihood of committing errors.
This statistical method uses regression analyses to calculate the cost of construction by prediction models. The accuracy, thus, is directly dependent upon the quality of the predictive model used in the analysis. Moreover, the estimating team should have a thorough familiarity with individual predictors.
The unit cost estimation uses the unit costs associated with every assembly involved in a construction project. It is among the most popular methods used by estimators as it is fairly quick and accurate.
This method is useful for calculating the costs of certain methods, which are otherwise difficult to calculate individually. For example, the estimation team can proportionally add the field supervision cost to a task that shares the total basic costs.
Cost estimates are useful when they are reliable and precise. Good cost estimation for construction projects has several characteristics. Some of the notable characteristics can be outlined as follows:
A cost estimate is believed to be accurate when it is useful for practical purposes. Besides using the most accurate estimating tools available, estimators need to ensure accurate construction estimates by revising estimates as the project progresses. They also need to include contingencies in their review plans.
Construction stakeholders or project sponsors who approve the budgets always want to know that the estimated cost is based on proven facts and practical experience. That is why professional estimators combine expert judgment and use fixed values for variables such as unit costs and work rates to make the construction cost estimates more credible.
Because project managers are ultimately held accountable for cost estimates, it is critical that the assumptions underlying estimates are defined and documented in writing. Furthermore, they should reflect in the monthly budget statements. Proper construction document eliminates misunderstandings and assists stakeholders in understanding the rationale for estimate adjustments.
Estimators should check and verify estimates to eliminate discrepancies in cost estimates caused due to use of different procedures. To eliminate discrepancies or redundancies in estimation data, estimators can use cost estimating software.
Risks are always unforeseen, and no one can rule out the possibilities of risks. Hence, it is critical to include them in cost projections. Along with risks, the cost estimating team should also allocate contingency reserves. Instead of underestimating the risks, project owners should also prepare cost deviation tolerance thresholds.
Maintaining uniformity while cost calculations of various projects of similar magnitude and type is a key criterion to judge the efficacy of the estimation. This is possible only when the unit prices are stable across projects except for inflation.
Checking the underlying data for accuracy is required to confirm the validity of a cost estimate. Improve validity by using established cost estimation techniques that are well-known to all.
Cost verification is the process of ensuring that the mathematical procedures involved in an estimate were carried out correctly. Estimates that are correctly documented make cost verification much easier.
There are several pitfalls that can undermine the accurate construction estimate. From poor raw data to incoordination may be a few reasons for inaccurate estimation. Here are some commonly found causes for inaccurate estimations.
Cost estimate accuracy tends to improve when estimators, project teams, and organizations acquire experience working on similar projects. Inexperienced estimators may be unfamiliar with the scope of a project. This may result in using the wrong estimating methodologies.
Organizations may commit mistakes while using analogous estimate methods if they have no experience with projects that use this method.
Most global megaprojects in the construction industry take years to complete. Due to the time gap, the cost estimated at the beginning and closing cost or bid estimate may mismatch.
Since accurate estimating depends on the project scope is defined and what the owners expect out of the project. Hence, its accuracy changes when the defining factors of the project change. With time new challenges may arise, which hamper the cost estimation. Hence, maintaining a definite construction schedule throughout the construction process may not be possible for the construction company.
As the new information becomes available, the estimators may fail to consider and review the initial construction estimate. A frequent example of such errors is not considering the fluctuating currency value that may severely impact the overall cost.
Accurate estimates become more difficult when the human resource involvement grows. Work efficiency and working methods of all the stakeholders may be different, which may cause variations in the results produced. Also, the lack of coordination between the participating teams can cause further deviations from accurate estimations.
Engineering Design is the crucial stage when a project is reviewed before it comes into existence. It’s the stage where the project owners also get an idea about the probable cost through cost estimation.
However, the cost estimating team must consider all the factors that might cause deviations in the calculations. By doing so they can be prepared to mitigate any unforeseen instances that might overrun the cost when the project is in its execution stage. A near to perfect detailed estimate is more likely to provide effective solutions for the project owners to alleviate cost overruns.
