There are different types of cost estimating methods used in construction. The choice of method depends on the stage and type of the project being estimated. When a bid needs to be submitted to a client, a detailed estimate is often required. A detailed estimate allows for a high degree of accuracy, enabling bid pricing that is competitive and profitable for the business.

Generating a detailed estimate can be challenging, because the number of resources required in any given project can be extensive. Construction estimating software can help make this process easier and faster. However, regardless of whether you are using specialized software, you can generate a detailed estimate using the 5 steps outlined in this article.

Step 1: Build a library of resources and their unit cost

Resources are the basic building blocks used to estimate the cost of a construction project. Cost estimation is the process of calculating the cost of all the resources required to carry out a project.

Start by building a list of resources and their unit costs. This will be the library of resources that you will use in all your estimates. You can start populating it with the resources you think you will need for your first project, and it will continue to grow as you estimate more projects. You can speed up building this library by purchasing an initial data set from a construction cost data provider, or by using historical project estimates or procurement records.

Categorize the resources based on a system that makes sense for your business. The most common resource categories are the 4Ms: manpower, material, machinery, and money. You may want to add a subcontractor category if you work with subcontractors. At BidBow, we recommend breaking down money into two separate categories, finance, and margins. Creating subcategories within each resource category can also be helpful when it comes to filtering and reporting on your data. 

A resource record would typically include the following fields at a minimum:

  • Resource Description
  • Category
  • Subcategory
  • Measurement Unit
  • Unit Cost

Step 2: Build a library of activities and their unit cost

Activities are groups of resources that produce an output. Consider creating an activity anytime you need to estimate a group of resources that work together to produce an output, especially if the activity reoccurs in multiple projects. Activities can significantly simplify estimation. By using activities, you can reduce the need to individually estimate resources, and you can factor in productivity in your estimates.

The following is an example to illustrate activities. "Casting concrete for a foundation" is an example of an activity that may be required in many construction projects. Estimating its cost requires calculating the cost of a group of resources, such as masons, laborers, concrete vibrator, concrete pump, and potable water for curing. To estimate its cost, we need to determine the quantity of each of the resources required to produce a specific output.

This activity may be defined as follows:

Activity description: Casting concrete for foundation

Output: 40 CUM

Resources required to produce 40 CUM:

1ResourceUnitQuantityUnit CostCost
2MasonDay1From resource libraryC2 x D2
3LaborerDay6From resource libraryC3 x D3
4Concrete vibratorDay2From resource libraryC4 x D4
5Concrete pump chargesCUM40From resource libraryC5 x D5
6Potable water for curingCUM2From resource libraryC6 x D6
    Total Cost

Unit Cost = Total Cost / Output

Multiplying the quantity by the unit cost of each resource then adding up all the results generates the total cost of the activity. The total cost is divided by the output (40 CUM) to generate the unit cost of the activity. The unit cost can then be used to estimate this activity more quickly when a project requires it.

Resources and activities can be linked such that when resource costs change, the cost of any impacted activities is updated automatically. This is one of the many areas specialized construction estimating software can help automate.

Creating a building block library of resources and activities that is relevant for your business is a prerequisite to estimating your projects. Steps 1 and 2 describe how you can build this library, but these steps only need to be performed once. Afterwards, you can simply adjust your library as needed. For instance, when resource rates change, or when new resources or activities need to be added. Once you have a library of resources and activities created, any future cost estimation exercise can be done by following steps 3 to 5.

Step 3: Estimate the cost of direct items

Direct items are the project pay items that need to be estimated. The list of direct items typically comes from the client as a “Bill of Quantity” or a bid document. However, direct items can also be generated internally from project specifications and drawings.

Each direct item is estimated using the library of activities and resources built in the first two steps. The following is an example to illustrate how direct items can be estimated.

Direct item description: Concrete for foundation

Quantity: 2000 CUM

Resources and activities required per unit of the direct item:

1Resource or ActivityUnitQuantityFactorUnit CostCost
2Activity: Casting concrete for foundationCUM1 1From activity libraryC2 x D2 x E2
3Resource: Concrete 40/20 SRCCUM11.02From resource libraryC3 x D3 x E3
4Activity: Steel rebars cutting, bending and fixing in structuresKG100 1From activity libraryC4 x D4 x E4
5Resource: Steel reinforcement grade 460KG1001.05From resource libraryC5 x D5 x E5
     Total Cost Per Unit

Total Direct Item Cost = Total Cost Per Unit x Quantity

Multiplying the quantity by the unit cost by the factor (used to account for material waste) of each resource or activity, then adding up all the results generates the total cost per unit of the direct item. This cost is multiplied by the direct item quantity to generate the total cost for this direct item.

All direct items are calculated in the same way, then the total cost of all direct items is added up to determine the total project direct cost.

At BidBow, we recommend calculating the direct cost based on estimated quantities as well. This provides estimators two pricing scenarios to evaluate before determining the bid price. One that is based on quantities provided by the client, and another that is based on estimated quantities determined by the estimator.

Step 4: Estimate the cost of indirect items

Indirect items are sometimes called overheads. They are the additional costs that are not directly related to a pay item. Some common examples are bank charges, insurance, supervision staff, and project margins. Indirect items tend to be very similar from one project to the next, so we recommend creating a list of the most common types of indirect items that can be used as a template across all projects.

Indirect costs are usually sums of money (like bank or insurance charges), duration-based costs (such as supervision staff), or percentages (such as project margins).

Identify and estimate each indirect item using the library of resources. The following is an example to illustrate how indirect items can be estimated.

Indirect item description: Supervision engineers

Quantity: 24 Months (the duration of the project)

Resources required per unit of the indirect item:

1ResourceUnitQuantityUnit CostCost
2Civil EngineerMonth4From resource libraryC2 x D2
3Electrical EngineerMonth1From resource libraryC3 x D3
4Materials EngineerMonth0.5From resource libraryC4 x D4
5Mechanical EngineerMonth0.5From resource libraryC5 x D5
    Total Cost Per Unit

Total Indirect Item Cost = Total Cost Per Unit x Quantity

Multiplying the quantity by the unit cost of each resource then adding up all the results generates the total cost per unit of the indirect item. This cost is multiplied by the indirect item quantity to generate the total cost for this indirect item.

All indirect items are calculated in the same way, then the total cost of all indirect items is added up to determine the total project indirect cost.

Similar to direct items, we recommend calculating the indirect cost based on estimated quantities as well. Additionally, project margins are considered an indirect item, which includes profit margin, head office margin, risk margin and other margins as resources. Project margins can be calculated as percentages of the project price or the project direct cost depending on the business strategy.

Step 5: Generate the project price

The project price is calculated by adding the project direct cost and project indirect cost generated in steps 3 and 4.

At BidBow, we recommend generating at least 2 pricing scenarios and comparing them. The first price is the sum of the direct cost and indirect cost based on quantities. The second price is the sum of the direct cost and indirect cost based on estimated quantities. Getting visibility of both scenarios allows you to evaluate your pricing options for competitiveness and profitability. You can then either select one of the two calculated pricing scenarios, or you can come up with your own target price based on the analysis.

From the selected price, the markup percentage is calculated by dividing the indirect cost by the direct cost. The markup percentage can then be applied to all the direct items. Strategic markup allocation with uneven distribution of markup is often critical for contractors. Specialized construction estimating software can simplify strategic markup allocation and help you hit your target price.

By using the process outlined in this article, you can generate detailed estimates with the level of accuracy needed to bid in a competitive and profitable way. While building your initial library of resources and activities can take some upfront work, the effort pays off exponentially with every project bid you estimate.

Cost estimation is one of the most important functions in a construction company. Done right, it can be the key reason companies win projects and build a thriving business. Done wrong, it can lead to significant loss of time, effort, and money. Given challenging global economic conditions and a highly competitive market, it is understandable that construction leaders are shining the light on cost estimation to gain a competitive advantage and improve their bid outcomes.

Cost estimation is inherently a simple process

Despite its challenges, cost estimation is inherently a simple process. Cost estimation is the process of calculating the cost of all the resources required to carry out a project. At a high level, all one would need to do is identify all the resources needed to execute the project, determine the cost and quantity of each resource, multiply the cost by the quantity of each , then add up all the numbers.

Sounds simple enough, right?

Not quite.

The challenges of cost estimation

If estimation is simple in concept, where do the challenges lie? Well, as it turns out, when it comes to cost estimation, the devil is in the detail. If you speak with any construction estimator, they will be quick to articulate the many aspects of the job that make it challenging.

In speaking with many estimators, below are the challenges we hear most often at BidBow:

  • Estimation is highly data-driven, but it still involves a lot of guesswork. Rich data sources (such as historical project data, supplier quotes, 3rd party cost data, and internal cost records) will significantly help with estimation. But even with all this data available, there is still a lot of guesswork involved. An estimator needs the right data, but almost equally, an estimator needs an abundance of imagination. Since there is no way to know how a given construction project will be carried out, the best estimators are those who are best at imagining the project and making the right assumptions around it. They do so by combining good data with their imagination, experience, and judgement.
  • Estimation requires strong and timely alignment across stakeholders. Cost estimators do not work in a bubble. There are many stakeholders throughout the company who need information from estimators, and who can provide valuable insights to estimators. It is through this collaboration that companies can achieve the best possible outcomes. To facilitate this collaboration, estimators often need to share reports, use insights to quickly adjust estimates, perform what-if analysis, and evaluate different pricing scenarios - all within very short timelines before finalizing a bid. Without the right tools in place, this process can be challenging and time consuming.
  • Estimation is a constant balancing act. Every estimator wants the most accurate estimates, but there is a point where spending more time on being more accurate is not worth the gains. A great estimator knows where accuracy matters and where it does not, and can balance between accuracy and efficiency. Estimators need to continuously assess the ROI of their own efforts and spend their time on areas that provide the best returns.
  • Estimation is resource extensive and time-consuming. There is a vast number of resources required in most construction projects. This makes the process of identifying, quantifying, and estimating resources a time-consuming exercise. Many estimators use groups of related resources, or assemblies, to speed up estimation. This can be made much easier with estimating software. Unfortunately, many estimators are still working in spreadsheets. Without the right tools in place, it becomes increasingly difficult to scale their efforts.
  • A wide variance in productivity leads to a wide variance in estimation. Estimating resource quantities often requires making assumptions around resource productivity. A group of resources with a higher productivity rate will require fewer resources and thus a lower cost. A group with a lower productivity rate will require more resources resulting in a higher cost. The wide range of possibility in productivity rates can lead to a wide variance in potential cost. Estimating productivity is another area that requires experience and insight on behalf of the estimator.
  • Managing indirect costs can be ambiguous. One of the areas where construction companies try to differentiate is in how they manage their indirect costs, sometimes called overheads. The challenge is that calculating and allocating those indirect costs can be ambiguous. Underestimating can lead to decreased profits and potentially operating at a loss. Overestimating can lead to pricing too high and potentially losing many bids. Many companies do not use a common language when defining their indirect costs, let alone have a standard way of calculating them. This is often a big area of potential improvement in estimation.

Cost estimation opportunities: people, process, and technology

To succeed with cost estimation and bid outcomes, construction leaders need to prioritize having the right combination of people, process, and technology.

To begin with, construction leaders need great estimators. Estimators are the lifeblood of a construction company, and they have a remarkably challenging, detail-oriented, and specialized job. Only few can claim mastery of this craft after spending years honing it. Many companies struggle to hire, develop, and retain estimators. Those most likely to succeed are the leaders who recognize the importance of the estimation function, invest in developing and retaining estimators, and provide them with the support, training, and tools that they need to be effective. A company culture that recognizes the importance of estimation will also provide the right organizational structure and support to enable effective collaboration and decision making.

Having defined estimation processes and methods helps people speak the same language, communicate more effectively, and arrive at decisions more quickly. Standardized estimation methods enable new hires to quickly get up to speed on how estimation is carried out at the company, allowing them to deliver more quickly and effectively.

The right technology is a key ingredient for estimation success. Cost estimating software can automate many of the repetitive, time consuming aspects of estimation. All specialized construction estimating software will typically include the ability to manage and maintain a database of resources, and groups of resources (assemblies), to speed up estimation. In addition to calculating cost, the best tools also provide rich reporting, what-if analysis, evaluation of pricing scenarios, vendor quote comparisons, tracking of executed works, and other functions that make cost estimation easier, faster, and more accurate.

If your company is struggling with low bid win rates and low profit margins, then it’s time to give cost estimation more attention. Inspecting whether you have the right combination of people, process, and technology is your first step towards a thriving construction business, higher bid win rates, and increased profitability.

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