10 Powerful Construction Cost Estimation Steps

Table of Contents for Construction Cost Estimation Steps–

1. Introduction
2. Construction Cost Estimation Steps
   • 2.1 Collection of Inputs
   • 2.2 Enlisting of Specifications
   • 2.3 Work & Material Take-off
   • 2.4 Resource Estimation
   • 2.5 Estimation of Cost
   • 2.6 Consideration for Statutory Charges
   • 2.7 Overheads and Profits
   • 2.8 Contingencies
   • 2.9 Presentation of Project Budget
   • 2.10 Monitoring & Control Measures
3. Conclusion

1. Introduction                                                   

A project manager has to complete the project within the boundaries of scope, cost, time and quality. The boundaries are well defined in the contract. Variation in any of the boundary affects the other. Cost is one such boundary that directly involves the monetary aspect. It is the key factor to decide the viability of the project, payback period, financing method etc.

Since cost is such an important factor in project management. I have dedicated this article to the steps to determine the cost of a construction project. The steps of construction cost estimation have been detailed to provide an understanding of each of them. The examples have been included in each of the steps so you can relate to them.

I have got to learn about project budgeting in the year 2020-21. Due to pandemic, the budgeting became much difficult due to high risks. The greatest challenge to control the budget was absorbing the project risks and making it resilient. I have prepared the budgets, failed, learned and revised. So, it got me interested in writing the whole process into 10 steps for estimating construction project budget that I have mostly learned from my failures.

Let us get started.

2. Construction Cost Estimation Steps

The cost estimation for a construction project starts with the collection of inputs, proceeds with the analysis, interpretation and estimation, passes through checks and finally represented in prescribed formats. An Estimator estimates and pens the whole project expenditure in papers before making any actual spending on the project.

The Estimator may have the enterprise guidelines to prepare the cost estimates. He / She may also use their experience to set up the standards for cost estimation.

The cost estimation depends upon a number of factors like organisational standards, type of project, stakeholders’ expectations, constraints, type of contract etc.

The general steps for construction cost estimation that I have followed for my projects are mentioned below-

2.1 Collection of Inputs-

The project charter is referred for an initial cost estimate. The scope is compiled and the works are grouped. A site visit is done to ascertain the working conditions to take the consideration into the estimation. Site visit considerations include access to the site, distance from the nearest market, site conditions, terrain, space for material storage, space for workmen accommodation, water & power connection etc. The site visit brings the consideration of the above-mentioned aspects and each one of them has a cost associated with them.

The collection of inputs sets the foundation for cost estimation. As we say, a building cannot rest on a weak foundation. The same is true for input collection and cost estimation. The unclear and incomplete inputs lead to incorrect estimation. A lot of projects fail due to incorrect cost estimates.

A market study is one such aspect that has a significant impact on the project cost. The local market prices of the material and workmen required for the project must be determined.

2.2 Enlisting of Specifications-

The specifications for material, machinery and quality requirement of works are listed to consider in the cost estimation. For example, the grade of rebar, grade of concrete, make and model of equipment, design & operating parameters of equipment etc.

The prices change with the specifications. The higher-end specifications have higher prices. Also, the requirement of an item with rare specifications also lead to higher prices.

2.3 Work & Material Take-off-

The work and material calculations are based on the thumb rules or drawings (if available). Historical data of other projects of similar nature can be used as a reference for an initial estimate of work and material.

Initially, the detailed drawings are not available hence the broad idea of quantities is taken and the overheads are justified as per the work quantum. Also, as the detailed drawings are made available during the execution stage, the work and material take-off workings are detailed for every line item. This process keeps ongoing throughout the project stage.

2.4 Resource Estimation-

The manpower required to complete the project is estimated. The requirement is calculated for each work. The productivity of resources is generally known from historical data, it is beneficial to estimate the manpower and the project duration in conjugation with each other.

The estimation of the resources is followed by the grouping of resources of similar nature. For example, the masons required for each activity are added and represented on the project timeline. This helps in preparing a mobilisation plan for the workmen. The manpower required for the structural works is required initially and the finishing works’ manpower is required at later stages.

2.5 Estimation of Cost-

The material and resource estimated in the previous two steps are represented in monetary terms. The cost of workmen, material, equipment, and work is calculated based on the current market scenario.

For better estimation of cost, site landing prices should be considered. The site landing price of the material is the total incurred cost. It comprises the sum total of item cost, transportation, taxes/levies, overheads, etc.

For a longer project duration, the rates can be adjusted for inflation. A percentage of inflation is to be considered to average the prices over the project timeline. Government publishes the Wholesale Price Index data, Steel Price Change Data, Commodity Price Change, price forecasts, inflation forecasts etc. that can be used to form a basis for cost adjustment.

2.6 Consideration for Statutory Charges-

The projects operate under the applicable laws. The government imposes various charges on the organisations and the projects to run their expenses.

Some charges are related to banking systems such as risk mitigation such as Letter of Credit (LC) charges, Bank Guarantee (BG) charges, interest on the loan etc.

 Some of the charges that should be considered in a construction project cost estimate are-

1. Taxes like GST, VAT etc.
2. TDS
3. Customs duty for imported items
4. Company registration/renewal charges
5. Property taxes
6. Stamp-duties
7. Licenses for construction work, workmen etc.
8. Royalties
9. Other Statutory Permissions
10. LC Opening and Extension/Amendment/Renewal Charges
11. BG Charges
12. Interest on Loans taken for the project.

2.7 Overheads & Profits-

The overheads are the additional expenses for doing work. Some of the overheads are covered in the material and work take-off step, some covered in cost estimation and the rest in this step. Some of the examples of overheads are-

1. Offices
2. Internet Charges, IT Equipment, License for software use
3. Office furniture
4. Accommodation
5. Free food for staff and workmen
6. Transportation for staff and workmen
7. Salaries of staff
8. Staff Welfare
9. Power and water for staff and workmen accommodation
10. Housekeeping Charges
11. Maintenance of Office Vehicles
12. Maintenance of work equipment like batching plant, concrete pumps, transit mixers, vibrators, dewatering pumps etc.
13. Insurance Premiums of equipment and workmen, etc.

Some of the expenses are fixed on a monthly/annual basis, some are one-time capital expenditure and some are as per the usage. The overheads change from company to company and their size. They may range 10-25% of the project cost.

Profit for a construction contractor is generally added at 10% to the entire project cost. It may vary depending upon the nature of the project.

2.8 Building Contingency into Project Budget-

The contingencies are uncertainties. It is a tricky part, as the estimator has to add extra cost for uncertainties and also make the budget more accurate. So, a line of balance is required. The decision on the % of contingencies should be done considering the clarity of scope, quality, high market rate fluctuations etc.

Higher contingencies show the inability of an estimator to accurately estimate the project cost. On the other hand, lower contingency exposes the project to the risks of cost over-run.

In general, 3-5% contingency of project cost is taken. As the project progresses, the risks become clearer, hence the contingencies can be adjusted in the budget update.

Some of the contingencies are listed below but not limited to-

1. A drastic change in raw material prices
2. Increase in overheads due to delay in project
3. Change in statutory charges rate
4. Increase in inflation
5. Change in forex
6. Increased Overheads due to force majeure conditions
7. Unforeseen ground conditions

2.9 Presentation of Project Budget-

The project budget is the sum total of work and material costs, overheads, statutory charges, interest and contingencies. The budget is represented in the prescribed format of the organisation. The S-Curve is prepared. It allocates the cost over the project timeline. The S-Curve is used to prepare cash flow.

The various costs are grouped under heads. For example, separate heads can be made for the following but not limited to-

1. Equipment Cost
2. Construction Material Cost
3. Contractor/Sub-Contractor Cost
4. Statutory Charges
5. Overheads
6. Contingency

2.10 Baselining, Monitoring & Control-

The project budget agreed between the stakeholders is called the baseline budget. The monitoring is done in reference to the baseline budget. All the control parameters are defined in reference to the baseline budget.

The monitoring of the project budget is the first step of control. The proven method of project budget control is to prepare the baseline planned expenditures for a period and then comparing them to the actual expenditure throughout the period. Some of the techniques for project budget monitoring are-

1. Variance Analysis
2. Earned Value Analysis
3. Forecasting
4. Financial Analysis

3. Conclusion for Construction Cost Estimation Steps

The effective cost estimation depends upon an estimator. His/ Her skills, experience, understanding of the market trends, expertise over estimation software, etc. determine the success rate of the project in the financial aspect. This lead to a reduction in construction claims.

It is always fruitful to ask the right and more questions at the beginning of the cost estimation. The ‘What’, ‘Why’, ‘When’, ‘How’ for each scope item can give a good start to the cost estimation process.

The cost should be checked throughout the estimation and project execution process. The involvement of the execution team in the process helps in building the details in the costing of work. Expert judgement shall also be used to assess the cost of the project.

The cost of similar previous projects is a good check for the project cost. The cost proportion of budget heads may slightly differ from each other but the overall cost variance is not much. However, while comparing the cost with historical data, the scope difference between the projects must be considered and the historical cost should be adjusted for inflation if needed.

For more on cost estimation visit, the Wikipedia page here.

Did I miss anything to cover? Or want to share your insights about cost estimation? Let me know in the comments.

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