Construction estimating is the process of calculating all of the required costs for a construction project, including direct costs (e.g. materials and worker wages) and indirect costs (e.g. equipment depreciation and office worker salaries). Professional construction estimators perform this essential step in the preconstruction process, which helps ensure that owners and contractors are able to complete a construction project profitably.
Estimating project costs accurately requires detailed knowledge of construction materials, specifications, techniques, codes, and pricing trends. We'll walk through all of the steps professional estimators use to determine costs on a project—from reviewing a bid package all the way through accounting for contingency and profit.
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Accurate estimating is essential for the success of any construction project. Both owners and contractors rely on cost estimates to move a project from preconstruction to completion.
Without an initial understanding of a project’s costs, owners cannot determine whether a project is feasible within the allotted budget. After a preliminary estimate, design or scope modifications may be required in order to alter project costs.
Contractors also depend on accurate estimates in order to prepare bids that are competitive and profitable. A contractor that underestimates the cost of a project could be forced to cut into their own profit margin to cover project costs.
On the other hand, overestimating the actual project costs could lead a contractor to submit a bid that’s too high to be selected. Even in negotiated bidding scenarios, construction estimates need to be accurate in order to strike a balance between the owner’s budget and the contractor’s profit.
Construction estimators follow the same basic steps whether they work for a general contractor, specialty contractor, or owner. When making a construction estimate, estimators are typically working to come up with an accurate price for a specific project as part of a competitive or negotiated bidding process.
In general, construction estimators follow a process that begins with reviewing bid documents, including construction specifications and contract documents, and includes steps to account for every known cost, including materials, labor, insurance, and overhead. By the time an estimator is finished, they will have prepared a construction estimate that takes into account all required costs as well as a markup for profit and contingency.
The bid package contains all of the documents necessary for bidding: owner-contractor agreements, bond forms, general conditions, supplementary general conditions, and construction specifications. Contractors who bid on a project are bound to complete the work laid out in the bid package, so a professional estimator spends a significant amount of time to ensure they are familiar with every aspect of the project.
Drawings are typically subdivided according to their purpose: site, architectural, structural, mechanical, electrical, and more.
Both general contractors and specialty contractors will review the documents, but specialty contractors often refer only to the documents that are relevant to the work they will perform on the project.
When reviewing the bid package, construction estimators generally follow a standard process.
Throughout the estimating process, the estimator will continually refer back to the bid documents to ensure that their estimate encompasses every aspect of the stated specifications and requirements. By getting an overview of the documents, the estimator takes their understanding of the project through every phase of building a comprehensive and accurate estimate.
After getting an overview of the documents, an estimator for a general contractor will also subdivide the project into work packages. Work packages may be later assigned to specialty contractors, and they also serve the important purpose of ensuring that all work is accounted for and no work is assigned twice.
By reviewing the technical specifications (also called construction specifications or specs), the estimator can clearly see the scope of work according to various divisions of the Construction Specification Institute (CSI)’s MasterFormat: concrete, masonry, metals, finishes, plumbing, and dozens more.
For example, the estimator may create one work package that includes the materials and labor for rough-in plumbing and another that covers windows and installation. Many such work packages will be created for a single construction project.
Dividing the project into work packages requires extreme attention to detail:
The estimator must be careful that every aspect of the project is included in a work package, or there will be work that has not been assigned to a contractor. Later in the project, the general contractor will be on the hook for these unaccounted project costs.
The estimator must also be sure that no project detail is included in multiple work packages, or the ultimate bid may be too high to be competitive since costs are multiplied unnecessarily.
In cases where an aspect of the project is divided into multiple work packages, the estimator must clearly define the scope of each work package to ensure that each portion is adequately completed by the parties responsible.
Once an estimator has divided all of the work into packages, the general contractor can solicit bids from specialty contractors for some or all of the required construction work.
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In some cases, a site visit is required before submitting a bid. However, a site visit is recommended in nearly all cases, as estimators can get a better sense about site conditions from a thorough visit rather than simply relying on elevation drawings or photographs of the proposed construction site.
Depending on the type of project, a specialty contractor may be less likely to perform site visits, relying instead on the documentation provided by the project’s owner and general contractor.
The main purpose of a site visit is for the estimator to better understand the conditions of the site and how those are likely to influence the project costs.
A site with poor drainage, difficult subsurface soil conditions, or adjacent buildings could add complexity and cost to a project.
A site lacking easy access could make it more difficult to maneuver equipment and materials, increasing costs.
A site with poorly located utilities (water, electricity, etc.) could add underground work requirements that raise the cost.
During a site visit, an estimator will make notes, take photographs, and collaborate with contractors to determine the potential influence the site may have on delivering the project successfully.
In addition to the site itself, the estimator should also familiarize themselves with the surrounding area if they aren’t already aware of:
Local requirements (codes, permits) or regulations (noise, working hours, parking) Availability of specialty contractors and construction equipment rentals Nearby roadways, which may need to accommodate heavy equipment or delivery vehiclesOverall, the site visit is critical for estimators, who must determine the feasibility and cost of delivering the project according to specifications in a set location.
Estimators perform a material takeoff (also called a quantity takeoff) by reviewing the construction documents and counting every item that is required for the project. Material needs are typically listed according to the way they are measured. For example:
Quantity (e.g. doors) Area (e.g. drywall or flooring) Volume (e.g. concrete) Length (e.g. wire)On large construction projects, the owner or engineer may create a bill of quantities (BOQ) to simplify the bid leveling process. This document breaks down the scope of work into an itemized list of activities and materials. Even when a BOQ is provided, most contractors still perform a takeoff to verify the quantities and identify discrepancies.
General contractors will typically do a takeoff in order to create accurate work packages—either to complete themselves or assign to specialty contractors. A specialty contractor typically reviews the specifications to perform their own material takeoff in order to ensure they have an accurate count before reaching out to suppliers and vendors.
After completing a takeoff, estimators have a comprehensive list of every material that will be required to complete the project. Additionally, estimators will use information from the takeoff to determine what equipment will be needed for each work package.
Estimators may perform a manual takeoff, which involves using paper copies of drawings, rulers, highlighters, digital measuring tools, and pencils to count and measure the required materials using the specifications. Nowadays, most estimators rely on digital takeoffs using construction estimating software, which greatly speeds up the process. Nonetheless, many estimators still double-check the accuracy of the digital takeoff to ensure that their estimate is accurate.
With this information, contractors are able to work with material and equipment suppliers to get pricing information that they can use while creating a bid.
With a definitive list of materials and equipment, specialty contractors begin to work with suppliers and vendors to get pricing information.
Specialty contractors have to be mindful of a few things when pricing materials.
Contractors who do not already own equipment essential for the project will also need to reach out to equipment vendors to determine pricing for leasing or renting for the duration of the project.
Since equipment may be owned, purchased, leased, or rented, contractors must determine how the project affects associated equipment costs (for example depreciation or maintenance) and build this information into their estimate.
At this point in the estimating process, contractors will have the first definitive dollar figures that need to be included as project costs. From here on out, estimators will add more direct, indirect, and overhead costs to understand the true financial burden of the project from the contractor’s perspective.
With information from the takeoff, estimators can also determine the labor necessary for a project. In short, the estimator needs to specify:
Which roles are required for the project? How many hours of labor will be used to complete the project? How productive the crew will be given data past projects and information about the current project?For specialty contractors, the crew mix usually consists of tradespeople, laborers, and assistants. For general contractors, there may be project-specific managers or other professionals whose roles are considered direct costs because they are tied to one specific project.
In either case, estimators must be sure to calculate the loaded labor rate for wages rather than simply multiplying total hours by hourly wage. The loaded labor rate includes:
Insurance (including health, dental, vision, or life insurance as well unemployment and worker’s compensation insurance)
Retirement contributions Sick or vacation leaveEstimators must include all of the costs associated with employing someone for the duration of a construction project, otherwise the estimate will not reflect the true cost of labor.
Insurance and bonding mitigate risk for owners and contractors alike, but this benefit comes with a cost that must be included in project estimates.
Nearly all construction companies require general liability insurance, and depending on company size, scope, and role, they may also have other policies, including:
Inland marine insurance Commercial auto insuranceIn addition to insurance, contractors working on public projects (and some commercial projects) may require a variety of construction bonds, including:
Both bonds and insurance cost money for contractors, which means that the costs must be covered by the projects they complete.
Generally speaking, bond and insurance coverage have annual costs, which contractors then spread across projects throughout the year. However, contractors may need to secure additional bonding capacity or insurance coverage for a specific job.
In any case, estimators must add the cost of bonding and insurance requirements to the project estimate.
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In addition to the direct project costs, estimators must also consider the indirect field costs associated with construction as well as the overhead costs required for running a construction business.
Indirect field costs could include:
