Before taking up a new construction project, any construction contractor has to estimate the involved costs. He then adds profit margin to those costs and makes a commercial bid for the project.
Accurate cost estimation is important
Construction is a highly fragmented and competitive industry. Naturally, the commercial quote can be a deciding factor for winning a project order.
There is very little margin for error for the cost estimation engineers.
If you quote too high, you may end up losing the opportunity. If you quote too low you will end up losing money on that job.
Accuracy of cost estimation can make or break a case for you.
Variation in the cost estimates
For a construction contractor, majority of costs come from following –
- Costs of construction material
- Labor costs for the construction process
- Subcontractor costs
- Material costs for special fabricated / assembled items
- Costs of equipment or machinery used for construction
- Project management consultants (PMC)
Cost of each of these items depends on multiple factors varying from project to project. Moreover, slight change in project conditions or scope of work can have a magnified impact on the costs. This cost sensitivity must also be accounted for.
Costs of construction material
The overall cost of construction materials is influenced by following factors –
- Material Take Off (MTO) which quantifies how much material of different types is required for construction
- Material list price or rates, determine how much those materials would cost
- Logistical and storage costs get added to the material costs
- Project site location will heavily influence the logistical costs and site conditions can also influence the MTO.
Some of all of these costs are usually captured in Bill of Materials or BOM for a project.
Depending on the nature of the project, any of the above factors can impact the accuracy of cost estimation.
For example – when bidding for a new type of project for which contractor has limited previous experience, accuracy of MTO is questionable.
In other cases where new materials are being used for the first time, material rates are can result in loss of accuracy.
Construction labor costs
Labor costs for doing the actual construction work are determined based on required number of mandays and labor rates (per manday) for different types of work.
- Number of mandays can be tricky to estimate for each new project. The effort required to do certain construction work is greatly influenced by – type of work, choice of method, complexity, site conditions etc.
- Labor rates depend on the type of work to be done, required skill levels and site location.
Usually, the labor effort estimation (number of mandays) is influenced by a large number of factors. However careful consideration of each factor will give a reasonably accurate labor cost estimation.
Subcontractor services may be used for doing some part of the construction project. Subcontractor costs are the product of the amount of work in subcontractor’s scope and the rate of that subcontractor.
Typically, subcontractor cost estimates are fairly accurate where previously known subcontractors are involved.
Specially fabricated items / equipment
Certain prefabricated / assembled items may be required in a project. Usually, these are not part of the standard BOM, nor found anywhere in previous purchase data.
Without a clear idea of a special item and its suppliers, cost estimators can struggle to zero in on a reasonable cost estimate.
Equipment & Machinery
Much like the labor costs, equipment & machinery costs are based on the product of machinery requirement and machinery rates.
Similar to the case of labor costs, variation in equipment/machinery costs comes from the uncertainty in estimated machinery requirements (in hours or days).
Exact equipment / machinery requirements may be difficult to estimate sometime, due to complexity of tasks, new type of machinery involved etc.
Project Management Consultants (PMC)
Services of project management consultants are hired on basis of their time spent on the site. So before the project starts, it is quite straight forward to estimate the project duration and requirement of PMC on site.
But when the project gets exceeded, so do the PMC costs. Normally, these are a very small fraction of the overall project budget and do not make a very significant impact on overall costs.
Overhead costs come from multiple different sources. The complexity in estimating overhead costs will vary depending on company policy, market conditions and many other factors that may not be even project dependent.
Nevertheless, estimating the overheads will provide a more accurate final estimate of profit margins.
Simultaneously working on multiple cost estimates
Construction being a highly fragmented and competitive industry, any contractor typically bids for multiple projects at a time.
For costing engineers, it is difficult to work on multiple estimates at a time and also ensure accuracy in all of them. There are simply too many factors / variables to be considered!
Standardization in cost estimation process and partial automation can help in reducing this complexity.
Coupled with the standardization of cost estimation, historical actual cost data from past projects can drastically improve the accuracy of cost estimation.
WorkPack for construction projects
WorkPack is an online platform for engineering & construction projects which helps the project managers and buyers to maintain their project BOM in an online spreadsheet and then purchase material against this BOM.
This helps in –
- Standardizing estimation process with online BOM spreadsheet
- Tracking the actual costs Vs budgeted costs (from BOM)
- Gathering historical prices of all material procured using WorkPack
- Using the historical prices to improve cost estimation
WorkPack has already helped project managers from different industries to streamline their cost estimation and procurement processes.
Can WorkPack help your team as well? Find out by taking a free trial.