Design Driven by Accurate Cost Data

Using independent, up-to-date sources helps assure project success

By Peter J. Arsenault, FAIA, NCARB, LEED AP

All construction projects cost money to execute. The question the owner wants answered with some degree of predictability is, “How much?” Providing a credible response is dependent on the ability to accurately estimate costs and use that information to influence design decisions, which in turn impact the cost. Given the large number of variables and potential for changes throughout the design and construction process, many see this as a daunting task. However, by acknowledging a few fundamental principles and recognizing the value of comparative pricing analysis, cost estimating can be viewed as a valuable design tool to create quality buildings that work within the owners’ cost parameters. As such, this course will look at construction cost estimating from the standpoint of using reliable cost data to inform design decision-making. In the process, it can support meeting all of the stated project design goals.

Factors Affecting Construction Cost Estimating

Different projects can present very different design requirements and construction conditions. When it comes to estimating the costs of those different projects, there are at least three common areas that can affect the process.

Client Factors

Different clients may have very different expectations related to “what” they want for cost-estimating services. A private client with the ability to finance a project within a comfortable range may require only a rough estimate of costs from the design professional and instead rely on his or her own resources to analyze costs and negotiate prices separately. Or the client may be limited in the amount of financing available and have a high need to understand and control costs, thus relying heavily on the project team to direct and assist that effort. By contrast, a public client often has a stated maximum budget that is the result of legislation or public bonds being issued, hence he or she can be very sensitive to the need to avoid cost overruns since it is a big deal to attempt to go back and obtain additional funding. As such, most public clients ask for cost estimates to be prepared and updated at each project-phase submission (i.e., schematic, design development, construction documents, etc.) if the project is managed that way. In any of these or other situations, being sensitive to the client needs for cost estimating means the project team may need to tailor the way information is analyzed and presented to suit individual buildings.

Human Factors

The question of “who” is going to do the cost estimating for a project needs to be answered fairly early in the process. In some cases, a large professional practice may have in-house personnel and well-established office standards for preparing cost estimates for all of its projects. In other cases, it may be just one or two people in a firm who do the cost estimating as part of a much broader job description. Alternatively, someone other than the design professional may do the cost estimating. That could be a construction management company that is retained early in the design process, or it could be an independent firm who focuses only on cost-estimating services. In some cases, the client may require such an independent cost estimate as a “double check” on the estimate prepared by the project team. Either way, the people responsible for the cost estimating need to be identified early in the design process, with everyone feeling comfortable about their qualifications and experience.

Data Factors

With an understanding of “what” is needed in a cost estimate and “who” is providing it, the remaining decision is “where” the cost data will come from. The obvious need is for a reliable and up-to-date source of data on which a cost estimate can be based. Such sources can include a variety of choices such as historical project data, information from suppliers, direct information from subcontractors, or other direct personal contacts. However, data from those sources may be rather subjective and probably need to be scrutinized to ensure they are directly applicable and timely for the project at hand. Further, the information available needs to match the level of cost estimating detail needed for different phases of a project. For example, early on, square-footage costs for general budgeting or schematic purposes may be all that is reasonable or required. As a project progresses and specific roof assemblies, wall assemblies, or similar construction systems are identified, the cost data needs to be updated to match the specified designs. Finally, when all (or nearly all) project information is identified, a fully detailed cost estimate can be created that is based on individual unit costs for material, labor, and equipment for each part of the construction work.

In light of the variety of data needs above, many estimators rely on independent, third-party, published cost data that is available in print or online. The advantage of the online sources is that they are regularly updated, while printed books may only come out once a year or so. For estimates that need to be based on the most current conditions, the online sources will make the most sense. Further, independent data typically addresses regional and local cost differences, allowing it to be customized or tailored to a particular project location, accounting for differences in the labor markets, material availability, and other factors. Perhaps the biggest advantage of these published data sources is that they are prepared by organizations that have full-time staff to focus on researching and identifying objective data for all construction trades and scopes of work. As such, they bring an element of independent credibility and experience to a project for accurate and up-to-date information. The fact that a project cost estimator can then rely on this data to apply it as appropriate to a customized cost estimate at different levels of development means the data can be useful throughout the entire design and construction process.

Data-Driven Design

Cost estimating is a process that tracks directly with the design process. Recognizing that projects of all sizes need to meet the owner’s budget, designers need some costing feedback along the way to determine if the design being created is on track or not. By having a reliable cost estimate at each phase of design, assessments can be made as to whether the design is within a comfortable margin of cost or if some changes need to be made in the design to stay on budget. This is a not just a technical issue for design firms. It has been observed that one of the most common complaints from building owners that creates a lack of trust in designers is cost overruns. On the negative side, this can be an issue for risk management if an owner finds out during bidding that the design is way over budget and holds the designers liable for excessive costs, time delays (to redesign and re-bid), or both. On the positive side, if a firm has a proven track record of producing designs that stay close to an owner’s budget, that becomes an important marketing message.

So how does this play out in a typical project? Design is still a process since even with the use of computers, it takes time to create a well-designed building, with several milestone phases that require review and feedback from the owner before moving on to the next phase. Some firms are using building information modeling (BIM) to create their designs and, arguably, the computerized model is just one continuous, evolving creation. But even in this case, there are established levels of detail that everyone on the design team progresses through, stopping along the way for feedback and review from the owner. In the most sophisticated of BIM processes, cost information is linked to the modeled components and systems. Sometimes referred to as 5-D modeling (with 3-D being physical, 4-D adding time scheduling, and 5-D referring to cost estimating), the computer program calculates area and quantities as the building project is being modeled. It then links that information to unit or assembly price information and calculates the costs on an ongoing basis as the design develops or changes are made. In this case, the computer program still needs a good, reliable, and accurate source of cost data. So while it is a variation on the process of doing a cost estimate independent of the model, the underlying need for good data remains. Fortunately, most BIM software will allow for the importing of or linking to outside, independent cost data. In any scenario, the cost estimate is only as good and reliable as the information on which it is based.

With all of the above in mind, let’s take a closer look at the most common phases of a project and how cost data can inform each one.

Schematic Design

Schematic designs, by definition, don’t have a lot of detail. They are intended to capture an overall basic concept with a number of assumptions made about the major constructions systems. Often, several schematic concepts are generated and compared to each other to determine which one makes the most sense for a particular project. In this case, it is common to assess cost simply on a square-foot basis related to the design assumptions made. Using a data source that allows for customized inputs means that things like building type and location can be identified first, followed by number of stories, square footage, and basic construction type (i.e., steel frame, concrete, masonry, etc.). Online versions of this type of data base allow for a customized square footage cost to be developed pretty quickly (usually a matter of minutes) once the basic parameters of a schematic design are identified and input. That means it is pretty easy to then go back and input the comparable parameters for any subsequent schematic design or variation and compare the costs. So, for example, if one design is based on more square footage on a lower level and less on upper levels compared to a design that is spread more equally among floors, the relative difference in cost can probably be identified. Or if a similar building was constructed in one city and the current project is in a different one, the difference between costs in the two locations might be revealed so the design can be adjusted accordingly (i.e., perhaps make it bigger or smaller). This is probably the most fundamental way that good cost data can drive design, but recognize that the margin of accuracy is broad at this stage, probably on the order of a plus or minus 20 percent variation compared to where the final cost may end up. Nonetheless, it can certainly help make sure that the project cost is in the right ballpark and let the design team know if it needs to be careful of costs or are in a comfortable position. It can also be very useful for the comparative analysis of different designs since the relative differences can be identified.

Design Development

Once a design concept is agreed upon, it is time to start getting more specific about how it will be built. The design development phase is the time when fundamental choices get made to select the structural system, type of building enclosures (wall systems, roof assemblies, openings, etc.), type of mechanical system, and basic parameters of plumbing and electrical systems. Once identified, each of these building systems or assemblies can be the subject of a specific cost estimate. Once again, if there is a concern about staying within budget, variations on different systems can be identified and compared to determine if there is any significant difference in cost between them or not. This might also be the time to address questions regarding the cost of a high-performance building. For example, if there is a desire to achieve a highly energy-efficient building or even a net-zero design, having good cost information at this stage can inform designers and the owner as to whether or not those goals can be achieved within budget. This would require generating a full cost estimate for the whole building to see if items that may cost more (i.e., insulation and solar panels) are offset by items that may cost less (i.e., smaller HVAC systems). In this way a truly informed design can be developed without simply guessing or hoping that design goals can be achieved. The available level of detail means that accuracy of a systems-based cost estimate can now increase to plus or minus 15 percent of expected final cost.

Construction Documents

Here is where all of the final specifications and details are generated so there are no longer any assumptions needed. Rather, a very specific unit-based pricing can be undertaken to generate a full final cost estimate. Specific quantity takeoffs of materials and products can be identified, corresponding labor crews and time can be associated with each, and any equipment needs identified. This can also be the time to assess and tweak anything in response to any changing market conditions before releasing the project to bid. As such, it provides a good bar to assess quotes and prices received to determine how competitive different companies might be and who to negotiate and finalize a contract with. Construction estimates at this stage can be very detailed with a reasonable expectation that they are within 10 percent of actual cost. In fact, very experienced and skilled estimators can routinely achieve accuracy within 5 percent of final costs and often take professional pride in doing so.

Construction Phase

Once a project has moved into construction, it doesn’t necessarily mean that there is no longer a need for cost estimating. While everyone prefers to avoid them, change orders do happen. Having a reliable cost estimate already in place can allow the assessment of a change to happen readily. It can also reveal any other aspects of the construction that might be affected, such that not only might an additional cost be identified, but a credit back to the owner might be justified as well. This allows for a double check on the prices being submitted for change orders and helps assure that all parties are being treated fairly during construction.

Throughout the entire design and construction process, then, properly used independent cost data and estimating processes provide real, informative value to a project. Using data to drive design decisions all along the way allows for adjustments to be made in a timely manner and helps assure that different variations can be tried to remain within budget.

Value Engineering

A reliable and credible cost-estimating process is a necessary prerequisite to undertaking any efforts to compare and control costs. The term “value engineering” is often used to describe the process of doing such comparisons with the intention of not only staying within budget but also truly getting the best value for the building owner. This term was first used during World War II by an employee of General Electric (GE) named Lawrence Miles. Tasked with finding materials in extreme shortages during the war, he needed to get creative and resourceful to still meet the needs of GE customers. Accordingly, he felt forced to evaluate alternative materials that could still meet the performance requirements of the materials they would have normally use in their production. In so doing, he created a standard method to compare, contrast, and assess materials and determine their suitability.

Value engineering often gets proposed when a budget is found to be exceeded at any point in a design and construction process. In this case, there are commonly two alternatives. First, the project team and the building owner can agree that the extra cost is warranted, and the budget can then be increased accordingly. This might be true if something changed or was added to the original scope of the project or a new design or performance requirement was introduced. If this route is not an option, then the second alternative is to enter into the value-engineering process. In essence, that means finding ways to make design adjustments that still meet project goals while allowing for better value, thus returning to an in-budget condition. It is worth noting that value engineering does not need to be limited to first costs of construction only but can take into account the longer-term operational and maintenance costs where that is important to the owner. In that way, a truly informed decision-making process can be undertaken that doesn’t simply protect the construction budget while causing operational headaches later on.

This approach has been applied to building design and construction in a number of ways. When it used openly and continuously during design, it can allow for multiple iterations of potential material and assembly solutions to be evaluated and assessed. In this case, it is a means of seeking the best value for the building owner while still meeting all of the design and performance requirements identified by the design team. It has sometimes been used improperly too, simply as a mantra to cut costs without regard for the desirable or needed aspects of the project that certain materials and systems contribute. Hence, before it is undertaken, it must be clearly understood by all stakeholders.

Undertaking value engineering commonly includes a six-step process that is intended to be truly objective. These steps can be summarized as follows:

1. What is this? The focus of the value-engineering effort is to identify the specific materials, components, assemblies, and systems that make up a project. Then it requires taking a focused look at the selected items being scrutinized in the project and clearly identifying each of them.
2. What does this do? Each identified item then needs to be looked at in terms of function. If it contributes to a design function, that needs to be articulated. If it contributes to the short- or long-term performance of the building, the level of performance and a description of how it does that should be defined. If it does both to one degree or another, its multifunctionality should be clearly understood. The analysis of the specified or selected item is important for the next steps so this should be done with reasonable thoroughness.
3. What else could do this? This is the point where alternatives are identified. Using the item description and functionality as a basis, a review of other available options is undertaken. At this point, all potential choices should just be objectively identified regardless of cost.
4. Can this still deliver the experience the owner demands? Each identified alternative now needs to be assessed. Can it really do the same things that the original item can? Does it provide the same or acceptably similar design characteristics? Can it be shown to perform as well or better than the original item? This step may involve a side-by-side comparison of the specifications for each, or an in-situ review of how they both look and fit within the rest of the design. Either way, a fair and honest comparison is needed to determine which ones are acceptable and which ones are not.
5. How much will this cost? Now to the crux of the matter: What is the difference in cost between the original and acceptable alternative item(s)? This is where the full power of cost estimating is needed not only to be sure that material or product costs are accurate between the two but also that labor or other costs are fairly represented for each. For example, it makes little sense to save a small amount on a product if it is going to require twice as much labor to install it. Therefore, all aspects of a unit cost for each proposed alternative need to be accounted for. Once the two items are fairly and consistently estimated in terms of cost, they can then be compared so that an assessment can be made as to whether it is worth making the substitution or staying with the original design.
6. What will do the best job for the longest time? Once each of the options are fully analyzed as described, it is time to make the value judgement. The choice should go to the option with the highest likelihood of success in a project that provides the owner with the greatest value. That means it was not eliminated from consideration because of not meeting design and performance criteria and it represents the best overall cost option. It also needs to have enough quality that it will not wear out quickly or cause other operational problems. Hence, this step is all about identifying the best product, at the best price, with the best operational record.

As should be clear by now, the key to a good value-engineering process is access to a good and reliable source of construction cost data. Third-party, independent cost data will provide the most objectivity and allow everyone involved to make accurate, informed decisions. In the end, it is all about identifying the best alternatives.

Predicting Future Costs

There is one other aspect about doing cost estimates that needs to be taken into account—namely, time. Projects of any size can take years to plan, design, and develop before any actual construction contracts are signed and costs agreed to. Therefore, an estimate done during the design process needs to be based on the future point when the construction is actually being paid for. While historical data and inflation rate trends for construction have been typically used to adjust current costs, that all assumes a stable construction industry environment and little volatility in costs. Anyone who lived through 2008 knows that those conditions are never guaranteed. Hence, construction cost estimates done during design may become quickly outdated once it’s time to start construction if conditions change.

The recession of 2008 caused considerable disruption in the construction industry and is the source of a number of valuable, albeit painful lessons in addressing future costs. In particular, cost-estimating specialists and economists have observed some of the following.

• Labor force: Following the crash, a significant number of subcontractors and smaller contractors left the construction industry. A few years later, owners and serial builders began to slowly plan for regrowth; however, in the midst of this planning, the construction labor force reduced by three-fifths (60 percent). This reduced supply of qualified labor has not only pushed up the cost of that labor, but it has also led to real time delays, which can have its own impact on total project costs.
• Material costs: The volatility and price fluctuations of individual materials used can vary greatly year-over-year based on interactions of various commodities markets and construction demand (i.e., volume of materials needed). Natural disasters and economic conditions around the country have also created volatility in the availability and pricing of many construction materials. In recent times, international trade issues have affected the cost of materials, including the imposition of tariffs, which has created uncertain pricing.
• Total cost impacts: Bare material, labor, and equipment rates account for 79 percent of total construction costs on average. Thus, the volatility of commodity markets and decreased supply of labor has a dramatic impact on the cost to build. Historical build costs and factors used in previous years became obsolete, and more importantly, building owners became keenly aware of these escalating costs. This led to design and construction professionals being held more accountable than ever to manage to their forecasted total budgets.

All of these impacts directly affect the ability of any estimator to create a trustworthy cost estimate. Without a means to address them, serious problems of project management and liability can occur.

Predictive Cost Data

Based on the above, it is easy to see why traditional forecast data, developed during a time of far less computing power and availability of “big data,” simply does not meet the needs of today’s professionals for accuracy of planning and future budgeting. A technique to address these shortcomings has been developed by at least one construction-data company and is referred to as “predictive cost data.” It was created and is maintained using a hybrid methodology that combines classical econometric techniques with contemporary data-mining methodology. However, it differs from traditional econometric forecasts in two ways.

First, traditional econometric forecasts are based on macroeconomic theory, even when analyses of historical values of those macroeconomic indicators demonstrate them to be statistically insignificant predictors. Predictive cost models disregard theory altogether and are instead based exclusively on data-driven empirical evidence. This empirical evidence is the result of extensive exploratory data analyses and pattern-seeking visualizations of historical cost data with economic and market indicators prior to model development. This approach has been extensively researched and validated by Dr. Edward Leamer, professor of global economics and management at the University of California, Los Angeles. Only economic indicators that have been approved in exploratory analyses become candidates for model development, testing, validation, and resulting predictive cost estimates.

Second, predictive cost data uses mining techniques and principles to improve traditional econometric modeling practices. This family of processes and analyses has evolved since the 1990s from a mix of classical statistical principles and more contemporary computer science and machine-learning methods. In this case, the data-mining methodology is specifically designed to analyze observational data instead of experimental data, as in classical statistical and econometric techniques. It is a robust methodology that takes advantage of recent increases in computing power, data visualization techniques, and updated statistical procedures to find patterns and determine structural drivers of construction material and labor costs. Measures of these drivers and their relationships to each other and to construction costs, along with their associated lead or lag times, are then represented in a statistical algorithm that predicts future values for a defined material and location.

How well does this predictive cost data model work? Combined validation results have shown 95.6 percent of predictive values are within plus or minus 3 percent of year-over-year actual values when applied to the approximately 56,000 surveyed materials. Further, quality predictive models are constantly monitored for degeneration of accuracy, which is to be expected as economic and market conditions change. Decisions can be made as to whether a model needs to be refit, remodeled or rebuilt altogether based upon ongoing quarterly updates of external economic, construction-specific, and market-condition indicators data. In addition, special analyses and model checking can be performed as changes in market conditions are announced, such as with recent tariffs imposed on steel and aluminum.

Having access to this longer-term predictive cost data can help construction projects from several standpoints. For building owners and developers, predictive cost data dives deeper than just the costs of site selection and land acquisition—it provides a view into the market for labor availability and material price increases that could support building in the identified location. Furthermore, real estate developers often negotiate tenant fit-outs and build to suit projects. These negotiations include determining the price of certain items up to two years in advance. If the prices have increased by the time construction begins, the overall project is already over budget. To avoid that, predictive cost data allows real estate professionals to evaluate markets for labor availability and accurately predict material prices to negotiate better future contracts for long-term project success.

For design and construction teams, managing a budget over time can be a real challenge. Take, for example, a fast-food restaurant that plans to open 100 new stores over the next five years. Each store will be in a different location, and in time, the costs of materials and labor will rise and fall in different markets. Predictive data does more than give an estimate of the total cost or even scaling cost over time; rather, it allows the project team to optimize the build schedule and determine when and where the next store should be erected based on market conditions. When using a true predictive multivariate database including individual material, labor, and equipment data, statistical tests show that cost estimates have been accurate within less than 3 percent up to three years in advance of the construction start. This means that owners, architects, engineers and other construction professionals can confidently predict future costs by applying a predictive cost dataset to even conceptual construction square foot models.

Ultimately, the core value of using accurate predictive cost data at the material, labor, and equipment level is the unprecedented ability afforded to construction professionals to understand future costs of projects. It also provides a reliable source to help building owners to plan on a reasonable contingency to cover price fluctuations if they are expected to occur. Of course, such future-proofing techniques can be complex to develop, maintain, and incorporate. Therefore, it is likely going to be best to rely on independent, third-party sources to provide reliable predictive cost data.

Conclusion

Accurate and reliable cost estimating is an important part of any construction project. There are a variety of factors that can influence the quality and credibility of any cost estimate. Once a process is established though, regular updating of a cost estimate, including variations to suit different design options, can help design professionals make better, more informed decisions to work within a building owner’s budget. When appropriate, incorporating a proper value-engineering process based on accurate estimates can reveal the best choices to give the owner the best value for the investment. In situations where the actual construction is in the future, predictive cost data is an emerging but extremely valuable tool to achieve greater accuracy. In all cases, independent, professional, third-party cost-estimating data sources provide design professionals with an added layer of credibility and reliability to meet budget and cost requirements for all types of construction projects.

Peter J. Arsenault, FAIA, NCARB, LEED AP, is a nationally known architect and the author of more than 200 continuing education courses for design professionals. www.pjaarch.com, www.linkedin.com/in/pjaarch