How Accurate are Estimated Construction Costs? 

Estimated construction costs are the backbone of an entire project. This is true whether you’re doing a small-scale renovation or an entirely new build. If you’re starting a commercial real estate project in Memphis or the surrounding areas, there are a few things about the accuracy of estimated construction costs that are important to understand.

As the title suggests, “estimates” are never exact. So it’s important to understand what goes into a cost estimate, how accurate they should be at each stage of the construction process, and what can impact any changes that occur along the way.

What are Estimated Construction Costs? 

Construction cost estimating is, simply put, an estimation of a proposed project’s cost. 

Prior to a new build or renovation project, a cost estimate is made to evaluate a project’s scope of work for key stakeholders (such as project managers, architects, etc.) These key stakeholders will use this estimate to determine project feasibility, budget compliance, profit margins, resource management, and scheduling. 

This is because the estimate should involve the calculated total cost required to complete a project as defined by the proposed scope of work. 

You might think that the contractor can simply add up labor and materials and call it a day. But you’d be skipping a few key steps. 

Construction cost estimating is a complex procedure. It requires expert attention to detail and an intimate understanding of construction material sourcing, local codes, and pricing trends. 

It also requires the organization of a variety of tasks, resources, and stakeholders. Done well, it can help you avoid overlooking important cost implications now and down the road. 

The Importance of Estimated Construction Costs 

This cost estimate is created by a commercial construction company or contractor. It is important for several reasons. An inflated cost estimate could affect their competitiveness for a bid. Underestimating can lead to financial losses. 

The accuracy of your project’s cost estimation is highly important for you as a client or business owner. But it’s also important to the commercial construction company estimating and bidding for the opportunity to work on your project. 

In this article, we talked about how cost estimates that seem way above (or below) other contractors should raise alarm. If an estimate is much lower than others you’ve seen, it likely means your contractor is missing something. If it’s much higher, there are other factors to consider, too – like whether or not your contractor fully understands the scope of work in question. 

It’s to everyone’s benefit to pull together an estimate that is accurate and avoids surprises. 

An accurate estimated construction cost positions your commercial contractor as a trustworthy business owner. It also helps you avoid significant budgeting issues. 

Some businesses will go into projects with strict budgets, others use cost estimates to inform their budget. In either case, it’s important to recognize that, while budgets are largely subject to change, there are a few things you should be looking for to ensure your construction costs appear to be above board.

What Goes into an Estimated Construction Cost? 

There are several general areas that construction cost estimates take into consideration. Below is an overview. 

Market Survey 

A market survey provides an analysis of current market conditions. It takes into account things like labor availability, material costs, and industry trends. Understanding market conditions will help identify possible risks. It also allows your contractor to more accurately pull together a cost estimate that reflects the true cost of the project. 

Permits and Fees 

Exploration and understanding of local permits and fees is also important to an accurate cost estimate. It ensures legal compliance and takes into account potential hidden costs. It also ensures that a project avoids unnecessary delays that can pop up while waiting for required permits. 

Material Costs

Material costs are broken down into the most basic components – from the number of roof tiles you’ll need to the exact footage of required electrical wiring. But it doesn’t stop there. Evaluating these materials will also take into account material availability, quality, and reliability, too. 

Labor Costs

Labor costs are calculated by considering the total hours required for each task, along with the wage rates for the types of labor involved. 

Equipment Costs 

Equipment costs are also taken into consideration, calculating costs associated with equipment rentals, purchases, maintenance, and fuel. For example, what will it cost to rent that backhoe? Or, how much scaffolding will need to be provided? All of those factors are considered. 

Overhead and Profit 

A good estimated construction cost will also take into account overhead costs such as insurance, utilities, or project management fees in addition to the direct costs calculated. 

Site Conditions 

Site conditions, such as geotechnical factors, accessibility, and environmental considerations, can significantly impact estimated construction costs. This is because they require additional preparations, specialized equipment, or unexpected adjustments to the project plan.

Project Scope and Complexity

The scope and complexity of a project, including intricate design elements and the overall scale and duration, directly affect estimated construction costs. They do this by increasing the need for detailed planning, higher labor intensity, and the use of specialized materials and techniques.

After the details of the above are outlined per the scope of work, the contractor prices it based on current market rates. That is the cost estimate proposed to the project’s point of contact or stakeholder team. 

From there, key stakeholders can make an informed decision on the feasibility and proper financing for a particular project. To ensure that 

Steps to Creating a Construction Cost Estimate

Estimates, even compiled by the best, are never 100% correct. 

This is especially true considering the dynamic global economic changes due to COVID which have caused upsets in the global economy and industries around the globe (including construction financing). 

However, there are a few things you can do to improve your odds of receiving an accurate estimate. Here are things you and your contractor can work together on to ensure your cost estimation is as accurate as possible. 

Defining the Scope of Work

Every single aspect of an accurate construction estimate boils down to one thing: the scope of work. 

If the scope of work is not accurate, there’s no chance that the cost estimator will be. This is why it’s important that the contractor and estimate receiver both have a clear understanding of what is being built. 

Ensure that you’ve taken care not to omit any important information in the scope of work. Double-check unit measurements and calculations. If it makes sense, make sure your contractor does a site visit. 

Calculate Material or Quantity Takeoff

After your contractor has clearly outlined the scope of work, it is then up to them to come up with a comprehensive list of all materials, labor costs, equipment costs, etc. that will go into the project. 

This is called the Material “takeoff.” 

For smaller projects, such as small-scale construction or repairs, this list can be quite short. For new build-outs or bigger renovations, this process can become quite complex. 

Additional global estimate tools, like RSMeans, are used at this stage to review historical data for construction costs in your area and ensure accurate estimates. 

You may also want to consider working with a contractor who has experience with your specific area of focus.

Pricing the Work 

The final step in the construction estimate process is calculating the final cost. Once your contractor has outlined all the materials and labor needed, the next step is to assign a viable market cost to each line item. 

Accurate pricing is obtained through market research and global cost data software. 

You may notice a breakdown here of indirect costs vs direct costs. Direct costs are any costs associated with a specific task at a job site. This can include things such as onsite personnel or the purchase of wood or electrical wiring. 

Indirect costs are incurred while completing the project but aren’t directly connected to a specific task. This includes things such as insurance, legal services, or the power to the building. Insurance and bond costs here are important to consider. 

Your contractor will likely include general liability insurance, builder’s risk insurance, and professional liability insurance. These exist to protect you, their workers, and themselves. Things like bid bonds, performance bonds, payment bonds, etc. are also a measure of safety. They ensure your contractor fulfills their obligations per the contract. 

Evaluate and Tweak as Needed

No matter who you’re working with, pay careful attention to the work proposed and the corresponding cost estimate. 

At the end of the day, do the numbers make sense based on your understanding of the project? If not, make sure you get clarity from the contractor on where your understanding might differ. 

Conclusion 

Accurate construction cost estimation is a critical component of any successful project. By understanding the factors that influence costs and project scope, you can achieve a more reliable and precise budget. 
For your next construction project in Memphis, Arlington, or beyond, trust InterVision to provide expert support and ensure your financial planning is spot-on. Reach out to InterVision today to discuss how we can help you with all your construction needs.