Discover Cost Estimation Methods & Types In Construction (2024)

Construction cost estimation is the foundation upon which projects in the construction industry are created. These are careful computations that dictate timeframes, budgets, and the viability of the project; they are not just numbers. Construction estimates are essential at every stage of the project lifecycle, from the first idea to the last nail-driven home.

Note that there is a difference between cost estimation methods and types of cost estimation. These may be confusing, as there are many synonyms for the same concepts.

In this blog post, we will define types based on the level of accuracy implemented by the ASPE and methods as ways of estimating.

Types of Construction Estimates

It is customary to produce several cost estimates during the pre-design and design stages, since a precise estimate can only be produced with a clearly specified project plan. The more defined your project is, the more accurate these estimations become.

Estimates are categorized using a five-level system by the American Society of Professional Estimators (ASPE), an organization that represents construction estimators. Level 1 is the least accurate and trustworthy label, and Level 5 is the most accurate and trustworthy.

Strangely, some organizations, like the U.S. Department of Energy (through its construction estimating directive) and the Association for the Advancement of Cost Engineering (AACE), reverse the numbering and identify Level 1 as the most accurate estimate.

Below you will find the different types of construction estimates by levels of accuracy under the ASPE system:

1) Order of magnitude

The order of magnitude estimate refers to a rough approximation made during the early phases of project conception. Here, giving a ballpark value is more important than accuracy. It assists interested parties in deciding if the project is worthwhile pursuing further and is financially feasible.

For example, for a $10 million construction project, this estimate would involve quickly assessing the major components of the project and making rough calculations based on past experience or industry norms. Taking all factors into account (for instance reviewing documentation and researching industry norms), the order-of-magnitude estimate for a $10 million construction project might take approximately 8-11 hours, spread out over several days if necessary.

2) Feasibility Estimate

As the idea picks up steam, interested parties want a more thorough evaluation of its viability. Now for the feasibility estimate, which considers several variables including the site’s characteristics, applicable laws, and any dangers. This cost estimation method, though still wide in scope, helps stakeholders make well-informed decisions about moving on with the project. It gives a clearer sense of what lies ahead.

3) Preliminary Estimate

The preliminary estimate is based on a more defined project scope, and provides owners with a basis to select the optimal alternative by weighing design features and configurations. To get funding, you may also show this estimate to lenders. It considers things like the cost of labor, supplies, and equipment. Although preliminary estimates are not as thorough as later-stage estimates, they do set the foundation for more in-depth planning and budgeting.

The AACE advises that the effort involved in this stage is 3 to 10 times that of a Level 1 (order-of-magnitude) estimate.

4) Substantive Estimate

The degree of detail in the estimates increases as the project progresses. The substantive construction estimate is a detailed estimate which thoroughly examines every detail, taking no chances. Each step of the project is painstakingly examined and measured, down to the number of nails required to the price of licenses. This estimate acts as a trustworthy starting point for budgeting and as a point of reference for monitoring project expenses as work is completed.

5) Detailed Estimate

The detailed estimate, which is the highest level of the estimating stages, is a thorough analysis of all project-related expenses. This estimate accounts for even the tiniest expenses. It calls for careful planning, exact calculations, and an in-depth understanding of the building procedures. Even though it takes longer, the detailed estimate offers unmatched precision, guaranteeing that the project stays on schedule and under budget.

Top Construction Cost Estimation Methods

Cost estimation methods differ due to purpose, technology, or approach. From fast and easy (but less accurate) estimates to detailed ones that take more time and effort to compile, there is a variety of cost estimation methods in construction

Let’s explore the different ones below:

1) Analogous Estimate

Establishing analogies with previous projects is the basis of the analogous estimate method. Stakeholders can determine an estimate based on past data by contrasting the requirements of the current project with comparable completed initiatives. Although not very accurate, this approach offers a simple and rapid way to estimate expenditures at the beginning of a project.

2) Elemental Estimate

Theelemental cost estimateor elemental cost plan is a more accurate method and analysis of construction costs as it is based on further detailed drawings and specifications. Often clients employ the services of quantity surveyors who follow guidelines (as set out by various institutes) and this supports consistent and accurate costing. To ensure an accurate analysis, the building is split into components (e.g. structural frames, facades, floor finishes, etc.) which in turn are broken down into smaller categories with quantities, multiplied by cost rates, providing a total cost per component. Based on the area of the component a cost per square meter can be quantified. All components are summed up to provide a total building and cost per square meter.

3) Parametric Estimate

One technique for cost estimating stands out from the others due to its effectiveness and adaptability: parametric cost estimation. Predicting a project’s cost using a collection of parameters or factors is known as parametric cost estimate. Parametric estimates leverage statistical correlations between past data and project parameters to create cost approximations, as opposed to comprehensive estimates, which mostly rely on itemized lists and exact computations. When comprehensive information may be scarce in the early phases of project planning, this approach is especially helpful.

Let’s delve into its key subpoints:

3.1) Plinth Area Cost Estimate

One of the other methods of cost estimation in determining the approximate building cost, this estimate covers the built-up area of the building. This is the entire area that the external dimensions of the building cover on the ground floor or any floor level. A plinth area rate of building is estimated by identifying the plinth area cost rate of similar constructed buildings in the area.

Important factors to be considered when applying this method: foundation type, building height, type of materials to be used, roof construction and finishes.

3.2) Cubic Method of Estimating

The cubic method of estimating, or cube rate cost estimate,is an effective strategy for working out cost estimates for multistorey buildings. This type of estimate involves multiplying the volume content of the building by a rate/m3.

This is a more accurate approach than just a plinth estimate, as it covers the whole volume of the building – from floor to rooftop.

3.3) Square Root Estimate

The square foot estimate approach, which is widely used in the construction and real estate sectors, offers a simple and rapid way to estimate costs based on area. Stakeholders can get a ballpark estimate of project costs by multiplying the total square footage by a predetermined unit cost. Despite being straightforward, this approach provides quick insights for initial budgeting and viability analyses.

3.4) Capacity Cost Factoring Unit

The capacity cost factoring unit approach takes production capacity and technological specifications into consideration. It’s specifically designed for industrial projects with complicated machinery and equipment requirements. Stakeholders can get estimates that are in line with production objectives and operational requirements by accounting for equipment expenses per unit of capacity. This approach provides relevance and specificity for applications requiring specialist equipment.

3.5) Unit Cost Estimate

A mainstay of construction estimates, the unit cost estimate approach divides expenditures into distinct units like square meters or cubic yards. Achieving cost control and budget management is made easier for stakeholders by standardizing unit pricing for labor, materials, and overheads. This approach provides versatility and adaptability for a wide range of project sizes and types.

3.6) Equipment Factored Estimate

The equipment factored estimate approach incorporates equipment expenses directly into the estimated process for projects that largely rely on machinery and equipment. A thorough estimate that considers all project components can be obtained by stakeholders by factoring in equipment rates and material and labor expenses. With this approach, budgeting for projects requiring a lot of equipment is made accurate and accountable.

3.7) Assembly and System Estimates

This estimate method offers an integrated approach to cost estimation in projects with complicated assemblies and integrated systems. Stakeholders can get estimates that accurately represent the interconnectedness of the project by examining the interactions between components and subsystems. This approach encourages coherence and synergy in the cost estimation of complex buildings.

4) Bottom-up Estimating

Bottom-up estimating carefully constructs estimates from the bottom up using in-depth study and itemized breakdowns as a foundation. Through the consolidation of expenses for distinct elements and undertakings, interested parties are able to create all-encompassing approximations that ensure no detail is missed. This approach encourages accountability and openness while enabling stakeholders to comprehend the nuances of project expenses.

5) Three-point Estimate

The three-point estimate technique incorporates uncertainty and risk management concepts by considering the most likely, pessimistic, and optimistic scenarios. Stakeholders can create estimates that take variability and risk into account by considering best-case, worst-case, and most probable scenarios. This approach ensures robust project planning and execution by promoting preparedness and resilience in the face of unpredictability.

6) The Delphi Method

The Delphi technique gathers feedback from a panel of experts to reach a consensus estimate by utilizing expert judgment and collective intelligence. Through a process of iterative opinion collection and synthesis, stakeholders can derive estimates that represent collective wisdom. By encouraging cooperation and the exchange of knowledge, this approach reduces estimating biases and uncertainties.

7) Vendor Bid Analysis

As its name suggests, this method is used during the construction bidding process to assess competing bids and determine cost estimates when purchasing goods and services from outside suppliers. Through a thorough examination of offers from several vendors, stakeholders may determine which solutions are the most economical and competitive. By ensuring fairness and transparency in the vendor selection process, this strategy maximizes project value.

What Costs Are Included In A Construction Estimation?

A construction cost estimation encompasses a comprehensive array of expenses, meticulously calculated to provide a holistic view of project finances. Included within this estimation are direct costs such as materials, labor, and equipment, which form the backbone of project execution. Additionally, indirect costs such as permits, fees, and overheads are factored into account for administrative and regulatory requirements. Contingency allowances for unforeseen circ*mstances and inflationary adjustments ensure financial resilience and accuracy in budgeting.

Together, these components form a detailed and transparent assessment of the financial resources required to bring a construction project to fruition. Implementing a modern construction reporting system to track all expenses in real-time is a great practice to get a 360-view of the project and make informed cost-related decisions.

Where Do Construction Cost Estimators Find Their Data?

A well-crafted budget is the foundation of any successful construction project. Construction cost estimators are at the center of this budgeting process; they have the difficult job of producing precise estimates in the face of a plethora of unknowns. Let’s explore some of the knowledge bases that construction cost estimators use to traverse the tricky landscape of project costing.

1) Historical Data

History is a trustworthy source of information, and the building industry is no different. Estimators extract priceless information on labor, materials, costs, and schedules by analyzing historical data from completed projects. Through a review of previous, comparable project outcomes, estimators can find patterns, trends, and baselines that guide their present projections. By serving as a storehouse of knowledge gained from the past, historical data enables estimators to improve the precision of their forecasts.

2) Cost Research

It’s critical to stay up to date on construction trends and industry dynamics in the ever-changing construction sector. To get the most recent data on material prices, labor rates, equipment costs, and regulatory requirements, construction cost estimators carry out extensive cost research. To watch price changes and find cost-saving options, estimators pour over supplier catalogs, market assessments, and industry publications. They can reduce cost overruns and represent real-time realities by staying updated about market dynamics and adjusting their forecasts.

3) Expert Knowledge

The foundation of a successful building cost estimation is expertise. Experts in their field contribute a plethora of experience, intuition, and domain knowledge to the estimation process, enhancing it with priceless judgment and insights. To get a thorough grasp of project requirements and limits, construction cost estimators consult with architects, engineers, contractors, and other industry stakeholders. By means of group brainstorming sessions, expert consultations, and peer evaluations, estimators leverage collective intelligence to enhance their estimates and foresee possible obstacles.

Using Estimating Software for Accurate Results

As a contractor, no matter what type of construction cost estimation you are doing, you want them to be as accurate and efficient as possible. Poorly done estimates can result in wasted resources, wasted time, and the risk of running over budget. When creating an estimate, it is important to remove any risk of error.

This is where using estimator software can make a world of difference. Using a modern solution likeRIB Candyhelps estimators to produce faster, more accurate results. This can help you to win more bids and run projects more smoothly.

Final Thoughts

Cost estimationsare a critical part of any project. They help contractors understand the project’s requirements and clients understand their budget and financial needs. Different types of estimations are used during different stages of the project to keep things moving along efficiently.

Professional construction estimation software like RIB Candy provides powerful tender and resource analysis, planning, forecasting, and ‘cost vs. allowable’ reports. Its powerful features are also combined into a single-user interface to eliminate departmental silos and boost communication.

Furthermore, it provides pricing capabilities using First Principles Resource-Based Estimating to substantially improve project estimates’ speed, accuracy, transparency, and auditability. If you are ready to enjoy greater accuracy, faster cost estimation, and overall project control, book a demo for RIB Candy today!