Correctly Estimating the Cost of a Building Project: 5 Tips
Project cost is one of the most difficult—and most important—estimations for any construction company to get right. You want to be able to set manageable expectations for your client, but also present a budget that is attractive enough for them to choose you as their general or sub-contractor while still making a profit yourself.
Due to lack of information, ever-changing prices, and the unpredictability of the labor market, cost estimation is anything but an exact science. One example of this would be the estimation variance in construction material choices like choosing a stick-built home vs. a more modern ICF-built structure. Builders may not be as familiar with newer materials and options. Depending on how your contract is set up, miscalculating the budget could mean a lot more than a few red faces—it could mean the failure of your business.
The good news is there are organizational techniques you can implement that reduce the risk of over- or under-budgeting. You’re never going to estimate a project down to the dollar, but getting close will help build your reputation and grow your business.
1. Be As Detailed As Possible
Nothing can derail a project faster than having a bid that was based on a loose understanding of a project’s cost. But it can be tricky to track down accurate information, and the tendency to use broad allowances can help cut down the amount of time taken to get the estimate out the door.
Whatever you do, suppress these urges and dedicate more time to tracking down detailed information. It’s common for contractors to overlook things like:
- cost of materials
- labor availability
Follow up on these uncertainties with the architect, product, and material suppliers, and even the local unions to build a more solid budgetary foundation to get the project started on.
The more detailed your estimate is, the more accurate it will be. There will always be things that you can’t anticipate or control, but hanging your reputation on guesses will sink your business. If you’re working with subcontractors, be sure to secure hard line bids for their work to solidify those numbers.
In the end, you should have a detailed budget with line items for just about everything. It keeps your estimate honest, and works to build trust with your customers.
2. Create a Master Checklist...and Use It
There’s no better way to keep your team (and yourself) organized than developing a master checklist. You can create hierarchies within the checklist based on critical path items that are standard events that happen over all projects or jobs.
The checklist should include things like:
- collecting bids from subcontractors
- lead times for ordering windows and doors
- weekly tasks like client and architect meetings
- scheduling site walks
Programs like Asana, Evernote, and Google Docs are great for creating and distributing your checklist and having it live online. All of them offer free services up to a certain capacity, and can be easily tested to see what works best for your company.
You can also use checklists to manage employees, clients, and customers without being too hands on and avoiding micromanagement pitfalls that can make some people uneasy.
The best part? Checklists reduce the risk involved in having complex projects, and remove the excuse-making that can arise as a result of an unorganized work force.
Create it. Modify it. Distribute it. Use it.
3. Identify Potential Project Risks and Their Costs
There are always unforeseen circumstances that could take a bite out of your project budget. However, some of these things can be identified before the contract goes out the door.
You should always build a contingency into your estimates (usually around 10%), but that should never be an excuse to be lazy about the up-front detective work you should be doing to map out potential risks.
If you have enough experience, you might already have an idea of where to expect hiccups. If you aren’t quite as seasoned as other members of your team, lean on them for wiping out any blind spots in your estimate. A second opinion never hurts.
4. Account For Soft Costs and Overhead
Permit fees, inspector salaries, and internal management overhead can pick apart a budget before the first screw goes into the wall. You should have a completely separate section of your cost estimate that outlines any soft costs that might be associated with construction.
These soft costs vary widely depending on jurisdiction and project scope, so be sure to do your research ahead of time and account for it internally.
This comes down to business sense more than anything else. If you’re not paying yourself and your employees first, you can’t possibly take care of your clients and customers.
5. Be Selective About the Jobs You Bid
Hopefully you have enough work coming in where you can be a bit choosey about where your resources are being invested. Sometimes, an impossible job comes along that has no chance of coming in on budget, but you’re the one person on the planet who can get it done. And while that might be true, it’s also a risk you shouldn’t be willing to bet your reputation on.
Working good jobs with good clients is the best way to create an honest cost estimate that isn’t met with a raised eyebrow. A lower bid might get you a few jobs in the short term, but can ruin you over time. The clients that know your value won’t argue with you over nickels and dimes—they will pay for the work it takes to get the job done.