Construction projects are very different from products manufactured in assembly lines: each building is unique, and this applies even for groups of buildings that look similar externally. Due to this fact, construction cost estimation must be performed individually for each project. This approach is very different from assembly line manufacturing, where all products are identical and have the same cost.
Inaccurate cost estimation is detrimental for construction projects. Both overestimation and underestimation have negative consequences:
When costs are overestimated, the owner ends up paying more than necessary or may decide not to proceed with the project. Contractors can also face negative consequences if they overestimate project costs: they are likely to lose in competitive bidding or they may be regarded as scammers, hurting their reputation.
When costs are underestimated, there are many unforeseen expenses during the construction phase. Based on how the contract is structured, these costs may affect the owner, the contractor, or both. There have been cases where developers or contractors end up bankrupt due to drastic underestimation in a large project.
There is always some uncertainty when estimating the cost of a construction project, but accuracy can be improved if the calculation is performed by experienced professionals, using reliable data and aided by software to speed up repetitive calculations.
Cost overestimation should not be confused with over-engineering, although both are detrimental for your project. Overestimation occurs when certain project elements have unreasonably high prices, while over-engineering occurs when excessive capacity is specified - your project costs more than necessary in both cases!
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Main Challenges in Construction Cost Estimation
The construction process of a building uses a wide variety of materials, and many of them are shipped from remote locations. Some of these materials have volatile prices in the international market, and a key example is steel. Also keep in mind that construction requires a significant input of man-hours, fuel and electricity.
Another limitation when estimating construction costs is time. In theory, estimators can break the list of materials down to exact quantities of bolts, nuts and nails. However, this approach demands a prohibitive amount of time, especially in large projects. This is also an expensive approach, since it consumes many hours of work that are paid for.
In modern construction practice, cost estimators use software-aided methods to speed up the process. A common approach is using unit prices, where construction costs are calculated for a discrete amount of work and then multiplied by the project total. Competitive bidding normally has a deadline for participating contractors, which means they can lose the job for being late.
How Construction Cost Estimators Manage Uncertainty
No construction estimate is 100% accurate, even if performed by an expert using the latest software package available. The normal practice is adding contingency as a percentage of the total project budget, determined by estimators based on their experience and the perceived uncertainty in each project.
Large projects are more susceptible to cost estimation errors, especially when unit prices are used. If a project element is repeated many times in a large construction, even a slight error can be amplified. Assume a skyscraper has 20,000 windows - if the cost of one window is overestimated by $50, the project becomes more expensive by one million dollars.
The project contract may include a special clause for materials that have volatile prices, such a steel. General price inflation and yearly wage increases are also important factors to consider, since they affect the price of all project inputs. Their effect is more noticeable in large projects that are built over several years, but an experienced cost estimator will take this into account.
The American Society of Professional Estimators classifies construction cost estimates according to five levels of accuracy. The following table summarizes them, in order of increasing accuracy:
1) Order of Magnitude Estimate
A very general cost estimate, used to assess the overall feasibility of the project and to decide if it merits further consideration.
2) Schematic Design Estimate
As implied by its name, this cost estimate is based on a general schematic design, providing more accuracy than an order of magnitude estimate.
3) Design Development Estimate
This cost estimate is based on an intermediate design, but before having the complete set of construction documents.
4) Construction Document Estimate
Cost estimate based on a complete design with detailed drawings and specifications.
5) Bid Estimate
The most accurate level of cost estimate, prepared by contractors who are competing for the project.
Although you cannot have complete accuracy when estimating construction costs, you should get the best possible estimate. A common error in construction is hiring the contractor with the lowest bid, if when the price is unrealistically low. The project cost is normally inflated with change orders in these cases, and the contractor may be unable to complete the job under a fixed price agreement.
Having a high-performance building design is beneficial, but you can take even better decisions if you also have an accurate cost estimate. This way, you can hire the contractor with the lowest realistic bid that meets your project requirements. New York City has the highest construction costs in the world, according to the Turner & Townsend 2018 International Construction Market Survey - accuracy pays off when estimating construction costs!
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