Construction Cost Handbook: Everything You Need to Know

In construction, risks are undeniable factors involved in every project. One of the underlying risks is costing. How much will it cost? Are you sticking to a strict financial forecast? Is there a way you can plan your money and avoid unexpected changes that may occur over time throughout your project? Estimating construction costs is considered the foundation of a good construction project because it can guide you from concept to completion. 

The following guide will help you avoid misunderstandings about cost estimates and maintain better control over the financial situation of your project. The principles are important for anyone, from seasoned contractors to first-time builders, so that they can adapt to changes that may arise during the course of the project. Now let’s look at key aspects of construction cost.

Table of Content

• Understanding Construction Cost and Its Estimation 
• How to Calculate Construction Cost
• Common Mistakes to Avoid in Estimating Construction Cost
• Construction Cost Estimation Software
• Conclusion

Understanding Construction Cost and Its Estimation

Construction cost is the expense in the form of construction materials, human resources, equipment, permits from competent authorities or any other resources used in the construction process. Collecting and analysing data on construction costs is useful in controlling costs and facilitating strategic financial planning to avoid cost overruns that lead to time delays and losses. 

Construction cost estimation is the technique of assessing all the expenses that would be used in order to fully deliver a construction project. There are 5 main types of construction cost estimating: preliminary, detailed, quantity, bid, and control. Each type is useful for different specific requirements throughout the project at various stages of the project life cycle. 

Contractors use them when they evaluate the potential of a project and decide whether to bid on it or not. Reasonable construction cost estimating also determines the scope of the project, the type of resources that will be used during construction, the time it will take to complete the construction, and the cost of the entire project. 

Construction Cost Estimation Process

Whether working for a general contractor, specialty contractor, or owner, the research and analysis process of construction estimators is similar. When preparing a construction estimate, their goal is to come up with an accurate price for a given construction project in a competitive or negotiated bidding process. Here are 8 key steps to an accurate cost estimate: 

1. Review the Bid Package: Read all documents such as contracts, conditions, and specifications to understand the needs and challenges of the project.

2. Conduct a Site Survey: Evaluate site conditions including drainage, soil, access, and utilities to predict additional costs.

3. Conduct a Material Take-off: List all materials needed, organized by quantity, area, volume, or length.

4. Request Quotes from Suppliers: Negotiate with suppliers to get the best price for the materials and consider shrinkage and other volume discounts.

5. Calculate Labour Requirements: Calculate labour requirements, including roles, hours, and loaded labour rates (wages, taxes, insurance).

6. Determine Insurance and Bonding Expenses: Include the expenses for any necessary insurance and bonds to limit risks.

7. Calculate Overhead and Indirect Costs: Include a contingency based on costs such as permits, site offices, and other costs not directly related to the construction process such as rent, wages, utilities, etc.

8. Add Profit and Contingency: Include a profit margin and contingency (usually 5-10%) to cover unforeseen expenditures and ensure the company’s profitability.

Common Mistakes in Construction Cost Estimation 

It can be difficult at times to come up with a good estimate of construction costs. Avoiding common pitfalls can save time, money and headaches: 

• Overlooking Costs: This is where one may not take a holistic approach to budgeting, thus leading to shortfalls. Double/triple-check to ensure no aspect of the project is overlooked. Gather as much information as possible about the different phases of a project. 
• Underestimating Costs: Some of these are the following negative impacts attributed to optimistic capital project estimating methods. Adhere to the following principles when calculating: be realistic and make precise calculations. If it is mandatory to provide such estimates, then consult some professional help. 
• Ignoring Market Trends: Construction costs may not be constant. Keep up with changes in the market and update estimates when necessary. 
• Poor Documentation: Incomplete or faulty documentation might result in mistakes. Keep thorough records and evaluate them on a regular basis. 

Read more: Reasons why construction projects’ cost overruns 

Construction Cost Estimation Software

Modern technology has revolutionised construction cost estimating. Estimating software offers numerous benefits: 

• Automated calculations reduce human errors. 
• Software streamlines the estimating process, saving time. 
• Easily organise and access cost data. 

These programs utilise databases of cost information and integrate with project management tools. Users enter project information, and the program creates detailed cost estimates with breakdowns of materials, labour, and other expenses.   

Enterprise Resource Planning (ERP) systems not only include project costing module but also give a larger range of functionality than standalone estimating software. ERP solutions cover the whole business cycle, from project tendering to customer and subcontractor claims. It includes certification, unified project cost monitoring, purchasing, inventory management, and customisable project billing procedures. The systems also integrate construction projects to HR, payroll and accounting. Those project management modules allow information to flow effortlessly between your corporate office and project site offices.  

While estimating software focuses solely on cost estimation, ERP systems include entire project management features, making them a better alternative for bigger and more complicated projects.

Read more: The Importance of ERP Systems for Construction Management 

Conclusion

Understanding and effectively calculating construction expenses is critical to the success of any building project. You may keep your project on time and within budget by using a systematic approach, avoiding frequent pitfalls, and using modern software tools, such as Synergix Construction ERP solution. With careful preparation and extensive research, you can master the art of predicting construction costs and meet your project objectives in an efficient and effective manner.

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