What Is Construction Cost Estimating?
Construction cost estimating is the process of calculating all anticipated costs for a construction project, including materials, labor, equipment, and fees. Use construction estimates to create a project budget and to guide spending decisions for keeping the project on track.
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Main Types of Construction Cost Estimates
Different types of construction cost estimates correspond to each phase of a project. These include conceptual and preliminary estimates (completed during the planning phase), detailed and engineers’ estimates (design phase), bid estimates (bidding phase), and control estimates (construction phase).
You might conduct only one estimate for smaller projects, such as a new roof or a room remodel. But more complicated jobs, such as the construction of a new home or a commercial project, will involve a series of estimates. Construction cost estimates evolve in detail and accuracy as a project progresses, as more design and scope details become available.
Here are the types of cost estimates by phase:
- Planning and Feasibility Phase
- Conceptual Estimate: This estimate provides a rough, initial projection of costs based on the general idea of the project. It is often used for early decision-making, before design details are available.
- Feasibility Estimate: Use this estimate to assess whether the project is financially and technically viable by evaluating preliminary costs, potential revenue, and benefits.
- Preliminary Estimate: Get a more detailed analysis of expected costs to refine early planning and provide guidance for project adjustments.
- Budget Estimate: Establish a target budget and help secure project financing. This estimate typically relies on partial design details or historical cost data.
- Design Phase
- Detailed Estimate: This estimate breaks down project costs for materials, labor, equipment, and other elements as designs are further developed. It significantly improves budgeting accuracy.
- Definitive Estimate: This is a near-final estimate that reflects all clarified design details. It often serves as the official project budget used for approvals and planning.
- Engineer’s Estimate: This highly precise estimate is prepared by engineers and serves as a point of comparison to evaluate contractor bids.
- Bidding Phase
- Bid Estimate: This is a contractor’s comprehensive proposal. It details costs based on project plans and specifications, and you submit it competitively to win the project.
- Negotiated Bid: Develop this estimate collaboratively between the client and contractor to agree on project costs in noncompetitive situations. It is typically used for private or specialized projects.
- Construction Phase
- Control Estimate: This estimate tracks actual project spending compared to the planned budget. This estimate helps project managers identify and address variances in real time to ensure financial control. It is often supported by cost-tracking tools and detailed progress reports.
- Estimate at Completion (EAC): This estimate projects the total cost of the project by combining actual spending to date with anticipated future costs. The EAC ensures the project remains on track financially. Calculations might use the formula: EAC = Actual Costs + (Remaining Work ÷ Cost Performance Index)
ASPE Classifications: Aligning Phases with Accuracy Levels
The American Society of Professional Estimators (ASPE) uses a five-level system to classify estimates by detail and accuracy, rather than by project phases. Use ASPE’s standards alongside phased estimates to get clear expectations for cost accuracy at each stage. Doing so will help you set a realistic project budget from start to finish.
The ASPE levels are:
- Level 1: Order of Magnitude Estimate (plus or minus 20-30 percent accuracy): Similar to the conceptual estimate, this provides a broad early estimate.
- Level 2: Schematic Design Estimate (15-25 percent): Similar to the preliminary estimate, this estimate refines costs as you nail down project details.
- Level 3: Design Development Estimate (10-15 percent): Similar to the detailed estimate, it provides a clearer budget as designs solidify.
- Level 4: Construction Document Estimate (5-10 percent): Similar to the definitive estimate, create this to set the final project budget before construction.
- Level 5: Bid Estimate: This estimate matches the bid estimate, which is the contractor’s detailed proposal for the project.
The Elements of a Construction Cost Estimate
So what information do estimators use to create an estimate? The following are key terms and concepts, but be aware that there’s a large degree of overlap between some of them.
- Quantity Take-Off: Developed during the pre-construction phase, a quantity take-off measures the materials and labor needed to complete a project.
- Labor Hour: The labor hour, or man hour, is a unit of work that measures the output of one person working for one hour.
- Labor Rate: The labor rate is the amount per hour one pays to skilled craftsmen. This includes not just the basic hourly rate and benefits, but the added costs of overtime and payroll burdens, such as worker compensation and unemployment insurance. This template will help you keep track of wages and labor hours.
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- Material Prices: Since the cost of materials is prone to fluctuation based on market conditions and such factors as seasonal variations, cost estimators may look at historical cost data and the various phases of the buying cycle when calculating expected material prices.
- Equipment Costs: Equipment costs refer primarily to the cost of running, and possibly renting, heavy machinery, such as cement mixers and cranes. It’s important to note that the equipment in use influences how quickly you can complete the project, so the use of equipment actually impacts many costs outside of those directly associated with running the equipment.
- Subcontractor Quotes: Most contractors will hire multiple specialist subcontractors to complete parts of the construction. You add these subcontractors’ quotes to the contractor’s total estimate. (It can be helpful to use a tracker to collect all the subcontractor documentation in one place.
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- Indirect Costs: Indirect costs are expenses not directly associated with construction work, like administrative costs, transport costs, smaller types of equipment, temporary structures, design fees, legal fees, permits, and any number of other costs, depending on the particular project.
- Profits: Of course, in order to make a profit, the contractor adds a margin on to the cost of completing the work. Subcontractors do the same when preparing their own quotes.
- Contingencies: Since even the most accurate estimate is likely to be affected by unforeseeable factors, such as materials wastage, an estimate will usually have a predetermined sum of money built in to account for such added costs.
- Escalation: Escalation refers to the natural inflation of costs over time, and it’s especially vital to take into account for long-running projects. Some projects have escalation clauses that address how to handle this inflation.
- Bonds: An owner will usually require a contractor to arrange for the issuance of a performance bond in favor of the project owner. The bond functions as a kind of guarantee of delivery. Should the contractor fail to complete the project according to the terms of the contract, the owner is entitled to compensation for monetary losses up to the amount covered by the performance bond.
- Capital Costs: Capital costs are simply the costs associated with establishing a facility. These include the following: the cost of acquiring land; the cost of conducting feasibility studies and the pre-design phase; paying the architect, engineer, and specialist members of the design team; the total cost of construction, which covers not just materials, equipment, and labor, but also administrative, permitting, and supervision costs, as well as any insurance fees or taxes; the cost of any temporary equipment or structures that are not part of the final construction; the cost of hiring a commissioner; and the cost of inspecting the structure when it’s near completion.
- Operations and Maintenance Costs: More a concern for the owner than the contractor, one accounts for operations and maintenance costs during the design phase. Making choices that lower the total lifetime cost of a building may result in higher construction costs. Operating costs include land rent, the salaries of permanent operations staff, maintenance costs, renovation expenses (as needed), utilities, and insurance.
- Variances: Owners will often allocate construction budgets that are larger than cost estimates because even good, thorough cost estimates have a tendency to underestimate actual construction costs. This can happen for a number of reasons. For example, wage increases, which can be difficult to forecast, will make construction costs rise. Seasonal or natural events, such as heavy rainfall, may call for action to protect construction or restore the construction site. Large projects in urban areas may face regulatory or legal issues, such as a demand for additional permitting. And lastly, owners who begin construction without finalizing the project’s design will over-budget to account for design changes and the inevitable cost increases that result from throwing a project off schedule.
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How to Estimate Construction Costs
To estimate construction costs, start broadly and then dive into details. Start by observing and scoping. Next, discuss details with the client and break them down in the estimate. For bigger projects, you’ll create several estimates with increasing detail, while you may only create one for smaller projects.
Check out our roundup of free construction cost estimate templates, which includes options for specific trades, such as roofing, painting, and electrical.
Steps in Construction Cost Estimating
Most construction projects follow the same basic steps, including gathering project information, defining scope, and documenting estimations. Below, you’ll find a step-by-step guide to creating an accurate construction cost estimate for projects of any size.
1. Visit the Project Site
When a potential customer calls, your first step is to visit the project site to inspect conditions. This ensures you capture critical details that might not be evident from plans or descriptions alone. Thoroughly review what the client has in mind and basic information, such as if it is residential or commercial, big or small.
Aaron Lipman is the owner of Two Brothers Foundation Repair, a Houston-based construction company. “Always visit the site,” he advises. “Blueprints are helpful, but they don’t tell the whole story. I once estimated a repair based on plans alone, only to find a massive tree root under the surface during excavation. That surprise could have derailed the job if I hadn’t accounted for extra labor and tools.”
2. Provide Your Guidance
Clients often rely on your expertise to make informed decisions about their project. Be prepared to provide guidance on scope options and associated costs. Be prepared to answer questions such as, “What will this feature cost compared to that?” Your professional advice can shape the project’s direction and foster trust.
For more on client-contractor collaboration, see our guide on construction project planning. Also, try our free construction budget templates.
3. Define the Project Scope
Talk to the client first to understand their expectations. Use that information to clearly define the project scope by breaking it into detailed components such as structural elements (e.g., walls, plumbing) and aesthetic features (e.g., finishes, landscaping). Review all plans with the client to confirm mutual understanding. A well-defined scope helps to minimize misunderstandings, ensure realistic budgets, and prevent scope creep during construction.
“Break the job into small, detailed parts,” says Lipman. “For example, if you’re repairing a foundation, don’t just list ‘materials.’ You need to specify whether it’s rebar, concrete, piers, and even safety gear. Early on, I made the mistake of lumping costs together, so it was hard to pinpoint where adjustments were needed when unexpected expenses came up.”
Try one of these construction project scope templates to help define your project scope.
4. Gather Information and Data
Gather accurate, up-to-date pricing for materials, labor, and equipment. Contact suppliers for quotes, check regional labor rates, and consult recent project data for benchmarks. For recurring materials or tasks, consider maintaining a cost database to streamline future estimates.
5. Select the Type of Estimate to Create
Choose an estimate type that corresponds to the project phase. Early-stage projects might need a rough conceptual estimate, while near-final designs require a detailed or definitive estimate. Tailor the estimate’s detail to what you need at the time.
6. Calculate Project Quantities
Break down the project into parts — foundations, walls, finishes, etc. — and determine the amount or quantity you need for each. This step, often called takeoff, involves counting and measuring materials to build an accurate list of costs.
“Measure everything carefully,” advises Brendan Anderson, a second-generation roofer and the owner of Brix Systems Roofing in Kalispell, Montana. “Double-check your measurements and factor in things like angles, roof pitch, and waste. When I started, I underestimated material a couple of times — it was a nightmare scrambling to get more supplies mid-project. Now, I measure at least twice and always add a little buffer.”
7. Estimate Material, Labor, and Equipment Costs
Calculate costs for each major project area. Include the price of materials (plus delivery), labor (both rates and time required), and equipment (rental fees and maintenance). These core costs form the bulk of the estimate.
Mike Falahee, President of Marygrove Awning Co. in South Lyon, Michigan, says, “Succinctly list every cost. When someone can see exactly where their money is going, they like it. For instance, in my quotation for a Marygrove-louvered roof, I always include the costs of the motorized component separately. Trust starts to grow.”
Detailed labor estimates also keep projects on track, says Chris Stevenson, sales manager for 730 South Exteriors, a Denver roofing contractor.
“Breaking labor into specific tasks, such as prepping materials, installation, cleanup, and inspections, helps ensure accuracy,” Stevenson says. “This also builds client trust because it shows them exactly where their money is going. Over time, I’ve learned how to refine these breakdowns by tracking how long each step actually takes on past jobs. This level of detail prevents surprises and keeps the budget on track.”
8. Add Overhead and Indirect Costs
Include overhead and indirect costs, such as temporary on-site utilities, insurance, and permits. While these expenses don’t directly contribute to construction, they’re essential for project management. You should accurately account for them to avoid budget shortfalls.
9. Add Contingency Funds
Include a contingency fund, typically five to 15 percent of the total project cost, to cover unforeseen challenges such as a price change in materials or an unexpected site issue. Add this financial buffer up front to avoid mid-construction budget adjustments.
Lanyon Heinemann, president of JMK Contractor, a residential general contractor in Miami, emphasizes the value of contingency budgets. “Always include a contingency budget (usually five to 10 percent) to cover unforeseen expenses. This tip has saved me more than once when projects faced scope changes or material price increases. I learned this from the hard lessons of managing unexpected project shifts early in my career.”
Lipman echoes this. “The toughest lesson is understanding and accounting for variability. Material costs can fluctuate based on supply chain issues, seasons, or even local demand spikes,” he says. “For example, after Hurricane Harvey, the cost of concrete skyrocketed, and many new estimators didn’t know how to adjust their quotes. I had to learn that locking in material prices early or working with suppliers who offer stable contracts is essential for staying on budget. Flexibility helps, but it takes experience to know when to build it into the estimate and when to rely on fixed numbers.”
10. Review and Check Accuracy
Double-check all calculations and ensure that costs reflect current market conditions. Review any complex parts of the estimate with specialists to confirm accuracy. For example, you might ask an independent supplier about the price of materials or availability or talk with an experienced estimator.
11. Record Key Notes and Exclusions
Document key decisions, assumptions, and exclusions in the estimate. For instance, note if landscaping or certain finishes are not included. Doing this work helps avoid miscommunication down the line.
12. Finalize the Estimate
Present the estimate in a clear format to stakeholders. It should summarize total costs and break down major categories. Ensure it meets the client’s expectations and the project’s financial goals. Get formal sign-off on the estimate from the client.
13. Track and Update During Construction
As construction begins, regularly compare actual costs with the target to stay within budget using estimation or a financial comparison tool. Update the estimate if prices change or you make adjustments to the project scope.
14. Keep Your Records for Reference
Keep records of all project estimates, supporting documentation, and final costs. These records are invaluable for the following:
- Audits: Detailed records help you demonstrate compliance with financial and contractual obligations.
- Dispute Resolution: Documentation of past decisions, pricing, and scope clarifications protects your team against misunderstandings with the client.
- Future Projects: Use past data as benchmarks to refine accuracy.
Use cloud-based construction management software to securely archive this information. You can also review past estimates to refine your process and improve future accuracy. For more, read our guide on construction estimate methods.