Making Accurate Estimates in Uncertain Times

Rise above market volatility with tried and true best practices
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Sponsored by Gordian
Moderated by Peter J. Arsenault, FAIA, NCARB, LEED-AP

Learning Objectives:

  1. Investigate the cost-estimating process and how it lays the foundation for the success of a construction project as part of an overall project management plan, even in turbulent economic conditions.
  2. Explore the types and details of a construction scope of work (SOW), including what should be communicated and the details of conducting a proper one.
  3. Recognize the importance of trustworthy data when creating a construction cost estimate, including sources to access such data.
  4. Examine common and avoidable construction-estimating mistakes.

Credits:

AIA
1 AIA LU/Elective
IACET
0.1 IACET CEU*
PDH
1 PDH*

2020 has been a year unlike any other—one that has brought challenges and changes that none of us could have expected. The human costs of the coronavirus have been immense. The economic impacts have been crippling. The unprecedent and daunting market volatility has been especially hard on the construction industry. According to Gordian’s RSMeans database, which is generally considered the industry’s most reliable source of construction costs, 97% of all materials experienced a price change from 2020 to 2021. More than half of these changes were increases—and these are only material costs. Equipment prices increased more than 80% on the whole, and a jaw-dropping 98% of labor costs went up.

How are construction estimators supposed to do their jobs well with so much volatility in the marketplace? How can they be confident in their estimates?

Photo: jeffbergen/E+/Getty Images

Preparing accurate and reliable cost estimates for a building project involves a collaborative effort using multiple tools and data sources.

One of the best ways to combat unpredictable markets like we saw in 2020 is by following best practices as it concerns the construction estimating process. More than simply the application of unit prices against quantities, cost estimating is part art, part science. This course covers that spectrum.

Based on this comprehensive approach to cost estimating, this course will address the different types of construction estimates, factors that influence the accuracy of those estimates, and the best-practice process to create reliable, relevant, and accurate cost estimates throughout the design and construction process. In so doing, it is the intent to help participants recognize the multiple tools available to them to build better cost estimates while avoiding some common mistakes.

THE STANDARD ESTIMATING PROCESS

Construction projects come in all sizes (from small to large to very large) and in all types (from new construction to renovation to a mix of each). Nonetheless, the design process is typically the same for all projects, starting with a conceptual or preliminary design, moving into a more detailed design and ending with final construction documents. Each of these design phases plus the construction phase provide an evolving amount of information and detail on which a construction cost estimate can be based. Therefore, the first thing to take into account is that any cost estimate can only be as good as the information provided based on the development stage of the project.

Image courtesy of RSMeans data from Gordian

Not all cost estimates are created equal. Shown here are four different types of cost estimates that are each useful and possible based on the design phase of a project.

Recognizing this variability as the project evolves, there are different types of cost estimates that can be prepared using different techniques to suit the available level of detail and information. These types can be summarized as follows:

  • Budgetary estimate. When a project is being planned, the building owner needs to know how much to budget, often before the entire scope of the project is known or before the design and construction team is engaged. At best then, the estimate will be a rough order of magnitude number or cost range. Since there are no details to base it on, the data used for this type of budget will need to be based on other similar projects in the geographic location/market where the project is being built. There will also be a need to account for some expected price increases and inflation by the time the project is developed far enough along to start initiating construction contracts. Because of the uncertainties of available information at this stage, it is reasonable to expect that the final construction costs could vary by 25% (plus or minus) compared to a budgetary estimate. Hence, building in a contingency and allowing for some flexibility in financing is appropriate at this stage. If that’s not possible and the owner needs to identify a fixed maximum budget, then an estimate at this stage can help determine how realistic a budget number is (or is not). If the estimate is higher than the available budget, a discussion will need to take place regarding options for increased funds versus reducing some aspects of the project, such as size or features.
  • Conceptual estimate. At the point that a building design concept is developed enough to indicate the preliminary size and configuration of a building, numbers can start to be calculated based on that design. Since details will likely still be thin at this stage, the best approach will be to use square footage as the basis of the cost estimate. Here, again, the data will rely on other buildings of a type that is the same or at least similar to the one being designed. To the extent that specific spaces are identified for different uses (i.e., classroom space compared to laboratory space compared to offices, etc.) the square-footage calculations can be honed to match the type of space with the relevant cost data from comparable uses. The data will again need to be adjusted for the difference between past construction and anticipated future costs, as well as specific geographic location. Nonetheless, a well-done conceptual estimate should be able to come within 20% of the final actual cost, barring any significant changes in the design. That should be enough to provide the design team with feedback as to whether it appears that the proposed conceptual design can reasonably stay within the budget or if some design changes are needed to do so.
  • Systems and assemblies estimate. As the design progresses, decisions are typically made about the specific construction assemblies being used and the building systems being incorporated. Pricing for those systems and assemblies can be undertaken based on the decisions made and the size or extent of each of them. Since cost data can be selected to suit the specific project choices, the accuracy of this type of estimate can be expected to increase to within 15% (plus or minus) of the final construction cost.
  • Unit price estimate. Once the project gets to the construction-document phase, the full level of detail provided will allow for individual unit pricing as the basis of a cost estimate. In this type of 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 drawings to bid. Construction estimates at this stage can be very detailed, with a reasonable expectation that they are within 10% of actual cost. In fact, very experienced and skilled estimators can routinely achieve accuracy within 5% of final costs and often take professional pride in doing so.

Image courtesy of RSMeans data from Gordian

The amount of time required to prepare a cost estimate will increase with the level of detail available or needed in that estimate. With more detail, accuracy also increases proportionately.

As described above, the accuracy of each type of construction cost estimate can be expected to increase as the level of detail increases based on design decisions being made and more specific construction information being determined. Accordingly, each one also requires more time to accurately produce. Budgetary estimates can reasonably be prepared in a matter of minutes or hours, while square-footage and systems/assemblies estimates will require multiple hours or days of concentrated effort. Ultimately, the more involved unit-price construction estimates will likely require one or more weeks to produce in an accurate manner. Hence, the appropriate time needed to produce estimates at each level of project development should be factored into the overall design and planning process. In the long run, it is easier to schedule in the time and do the cost estimating as the project unfolds to establish a correct budget than it is to deal with the project in crisis mode later on.

Following this evolutionary process also allows for the orderly and methodical “building” of the project on a cost basis by using well-thought-out information based on recognizing where the project is and matching the type of cost estimate accordingly. In order to keep cost-estimate expectations in line with reality, all scope, quantities and pricing data must reflect the realities of the project design, to the extent they are known at each phase. Planning for such a proper cost-estimating process that is synchronized with the design and construction process is the recommended best way to proceed. Failing to do so simply sets the project up for failure in any number of ways. The most likely is that costs will not be accurately accounted for, causing bids or contracts to be higher than the estimates and likely causing angst and redesign woes not only for the building owner but for the rest of the project team too. Almost as bad are cost underruns if things were removed from a project design that were desired by the owner and could have been included except for misplaced fear of exceeding the budget. Updating the budget as the project progresses also allows for double checks on things like a creeping up of the project scope of work (SOW), any changes in complexity of construction, changes due to the time of year that the project may get built, or changes requested by the owner. With so many variables, it is clear that attention to the process and use of good information is critical to maintain efficiency and accuracy.

Based on all of the above, we will next walk through the four main steps of a successful cost-estimating process at every phase. Specifically, these steps are:

  1. Capture the SOW.
  2. Quantity takeoff: Convert scope to quantities.
  3. Price the quantities.
  4. Validate: Double check and apply wisdom.

Following these four steps at each phase of the process offers the ability to improve the cost-estimate accuracy by adding a consistent approach that has been used by cost-estimating professionals as an ongoing best practice.

 

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Originally published in Engineering News Record
Originally published in February 2021

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