Cost estimation challenges and opportunities

Posted by Hadeel Dabbagh on October 14, 2021

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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