Construction projects are very challenging with small chunks of profit margins. The average ratio of profit margin in the US for construction companies is 6%. However, some companies also achieve 10-12% profit with the help of the estimation reports. Yes, you read it right. This is the power of estimation for construction projects. From initial planning to the delivery, Estimations are the fuel for the success of a project. Various methods of estimation are used which are helpful at different stages of the construction project. In this blog, we will discuss the estimation for construction projects, the importance of construction estimation, its various types, technological advancements in the estimation industry, and future insights.
Key Takeaways
- Estimation is very important for the construction projects
- Accurate and precise estimation helps to get the significant profit margin in a project.
- Some challenges are also faced by the estimators which can be managed with the use of the latest software.
- Estimation reports is a quick guide for the management of budget, time, cost, labor and materials.
Why is Cost Estimation Important in Construction?
Cost estimation is the basic foundation for a successful construction project. Whether you are working on a financed project or with a client, construction cost estimation is the first concern in both cases. Precise and accurate cost estimation helps in the effective planning of the project. It enables the contractors to know the exact cost required for the completion of the project, ultimately they can bid more confidently on a project. Additionally, estimations give a precise budget to the financing parties of the project and they can confidently invest in the project. So, we can say that estimation reports help the clients, constructors, and financing parties to have a detailed view of the budgeting for the project. Besides this, cost estimation also helps in resource allocation. By finding out the materials with quantification and cost, constructors can manage the materials timely and also decide labor expertise required for the handling of the project, enabling them to manage the labor on time.
Types of Construction Estimation
There are five main types of construction estimation. All of them are used at various stages during the project life cycle. These five types are
Preliminary Cost Estimation
This cost estimation is done at a very early stage even without the drawings and designs of the project. Preliminary cost estimation is a detailed estimation that contractors use at the early stage of the project. It is known as the abstract cost estimate. This cost estimation helps the contractors to roughly analyze the estimated cost of the project. They can do this based on their expertise and previous projects history. For example, a concentrator can estimate the cost for a single-story house easily if he has already dealt with a residential project of the same size and scope. These cost estimates help the contractor to consider whether the project is worth taking or not. He comprehensively analyzes the required material, quantity, market prices for the materials, and the client budget. Abstract cost estimation is also helpful to understand the profit margin in a project which helps the constructors and contractors to go with a project or not.
Detailed Estimates
Detailed estimates are done in the second stage of the project. The second stage is when the initial drawings and the designs of the project are finalized. As the name indicates, this cost estimation splits the whole project into smaller components and estimators determine the cost for each unit of the project.
Let’s make it more simple to understand the importance of estimates in details.. A construction project is completed with many sub-contractors such as electrical, plumbing, and mechanical. So, in this estimation, estimators divide the whole project into various sub-projects and estimate the cost for each sub-project. This type of estimation gives detailed budget planning and time management.
Quantity Cost Estimates
As you can take an idea from its name, this cost estimation is based on the number of materials that are required to complete a project. The quantification of materials is known as the takeoff list. Different sub-projects in a construction project have different techniques. For example, the roofing cost is determined per square foot, plumbing by the fixtures, and electrical by the opening. For example, if a mason has to build a floor in a room, he will determine the number of bricks required to cover one square foot of the floor, then he will determine the cost of these required bricks and multiply it by the total square feet of the room. Similar procedures are done in other projects such as plumbing and electrical.
Bid Cost Estimate
This estimation is the most crucial and needs to be more authentic. Because this is presented to the contractors who are trying to win the project. This cost includes all subcontractors’ costs, plus overhead costs and the space for the fluctuation in the prices of the materials and the labor wedges. Based on bid cost estimates, contractors propose their services and on-time completion of the project with the help of this estimation attracts more clients.
Control Cost Estimates
These cost estimations are proceeded during the on-site work of the project. These help the contractors to control the cost with the changing scope of the project. It has three main parts
- the budget estimate for financing,
- the budgeted cost after contracting but before construction,
- the estimated cost to complete the project
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Benefits of Accurate Estimation
There are many benefits of accurate estimation for construction projects. Let’s explore some of points
- Budget Management
- Cost Effective Projects
- On-Time Completion
- Enhance Bid Win Ratio
- Enhance Communication Between the Construction Crew
- Resources Allocation
- Risk Management
- Contract Management
- Client Satisfaction
- Enhance Transition Rate
Budget Management
Precise cost estimation is very helpful in managing the budget. Estimation is a detailed report that provides the contractors with an overall view of the required cost for the project. Estimation reports tell the materials specification and estimated costs. Moreover, they also help with fluctuations in prices and shortages of material. So, contractors buy the materials on time within the budget.
Cost Effective Projects
Do you want to know the importance of cost estimations in construction projects ? Estimation helps to manage the overall cost of the project. From materials to labor costs and equipment rents, everything is estimated in the estimation report. A little bit of fluctuations are expected which are covered in terms of overhead cost.
On-Time Completion
Estimation enables the contractors to split the construction project into smaller sub-projects such as mechanical, electrical, and HVAC and they dedicate a specific period to each sub-contract. Division of a construction project into smaller milestones helps the construction manager to work confidently and complete on time.
Enhance Bid Win Ratio
Estimation reports for construction projects have detailed guidelines about the quantification, material specifications, overhead costs, and profit margin according to the project scope. They help the contractors to place the bid with confidence. Moreover, precise estimations help to win a bid with a competitive edge.
Enhance Communication Between the Construction Crew
Estimation reports are the detailed guidelines that explain each expected cost, budget management, and time management. Contractors discuss the details with the whole team and listen to their queries. Advance discussions even before the construction on the site starts help to address all the queries of the team, give time to solve them, and keep the whole team on the same page.
Resources Allocation
Materials specifications in the estimation reports help the contractors and constructors to allocate resources timely. Materials specifications in takeoff lists give an idea about what level of expertise is required for the project. The contractors manage the labor availability on time.
Risk Management
Many advancements in the estimation industry have taken place over the years. One of them is the usage of software that detects the potential risk factors and clashes. This enables the contractors to take the possible preventive measures to deal with these issues.
Contract Management
The estimators calculate the overall cost for each sub-contract. It helps the construction contractor to manage contracts with subcontractors that are beneficial for both parties.
Client Satisfaction
Completion of the construction project within time and the client’s budget helps to win the trust of the client.
Enhance Transition Rate
As you complete projects on time with estimation reports, it creates a positive impact in the market and enhances your positive image in the market which will bring more clients.
Challenges in Construction Estimation
Estimation brings some challenges for the estimators. They have to work hard on various aspects to give a precise cost estimation. Let’s discuss some common challenges
Fluctuating Material Costs
The prices of materials may vary according to the inflation rate. Sometimes, the projects are delayed due to approval or funding and the materials prices increase during this period which may be a big challenge for the estimators. The best solution for this is to approach the estimators for an initial estimation and cross-check it again after the approval of funding. Another solution is estimators can add a fair amount as overhead cost which compensates for the increasing prices.
Inaccuracy or Incomplete Data
Sometimes, estimators are provided with the wrong or incomplete information which leads to poor estimations. The solution to avoid this
Changed Project Scope and Complexity
The construction projects have become complex with time. New intricate designs, materials, and latest trends make the projects complex and can change the project scope which may alter the estimated cost in real. The solution to this challenge is estimators should use various cloud-based systems and software to know the latest trends and
Unforeseen Site Conditions
Site conditions such as soil, debris, and vegetation need extra spending to level the field. If estimators don’t have an idea about the site location, there are more chances that they will provide the wrong estimates to the clients. So, always visit the site before starting the estimation process.
Changes Regulatory Compliance
The standard regulatory codes also affect the estimation. The change in the standard codes for the construction may cause delays in approval which affect the timeline for the project working, ultimately leading to fluctuations in prices.
Communication Gap
As construction projects consist of various subcontracts a communication gap between subcontractors, stakeholders, and the construction team can cause many problems. The solution to this is to discuss the estimation reports with the whole crew, address their queries on time, and keep them on the same page before the construction work starts on the site.
Labor Availability
Estimation reports mention the cost of the labor. But, sometimes labor is not available on the required date, and due to a shortage of labor, the cost of labor hiring increases which may disrupt the estimated cost.
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Technological Advancements in Estimation
Various AI integration models have transformed the construction estimation industry. The BIM tool is mostly used now to detect potential clashes. It gives the 3D digital representation of the project before it starts on the site which is very helpful for the potential risk detection. Following are the most recent tools that are used for the estimation
- Clear Estimates
- Pro Est
- Contractor Foreman
- Plan swift sage estimating
- Procore
- Buildxact
- Smartbid
- RSMeans
- Active Takeoff
Summary
Construction is a complex industry with evolving features and trends. Exact estimation helps in budget management, time management, material quantification, determining labor costs, and preventing overhead costs. With many benefits, estimations also bring some challenging tasks to the table such as fluctuation in prices, unavailability of labor at times, project scope transformation, and many others. To meet these challenges, various AI-integrated tools are available which can reduce human errors and provide a more accurate cost estimation for the construction project.
Frequently Asked Questions
Why is estimation important in Construction?
Estimation reports are the backbone of construction projects’ success. Construction projects are very challenging with small chunks of profit margins. The average ratio of profit margin in the US for construction companies is 6%. However, some companies also achieve 10-12% profit with the help of the estimation reports. This is the importance of estimation in construction. From initial planning to the delivery, Estimations are the fuel for the success of a project.
What are the challenges in construction estimation?
Fluctuations in the prices, incomplete data, unavailability of the material, and project scope transformations are the big challenges for the estimators and the construction contractors.
What is the ratio of profit with accurate and precise estimation?
The average profit ratio for construction projects is 5%. However, with the help of accurate and precise estimation, this ratio enhances up to 10-12%.