5 Types of Construction Cost Estimation and How to Do It

The wise construction manager knows that the actual cost of any project is only realized once the task is complete and all financial obligations have been accounted for. That’s because too many predictable and unpredictable factors can affect the cost of a major construction project.

Meanwhile, however challenging the task of predicting the total cost of a construction project may be, one thing is sure: precise construction cost estimation from the start is an absolute must.

That said, what steps should a construction manager take in order to estimate the cost of any given project accurately? This article gives an extended answer to that question by detailing the steps involved in construction cost estimation.

Read on to learn more about the process.

Table of Contents

1. What Is Construction Cost Estimating?
2. Why Is Construction Cost Estimation Crucial?
3. 5 Main Types of Construction Cost Estimates
   • Order of Magnitude Estimate
   • Schematic Design Estimate
   • Design Development Estimate
4. Conclusion

What Is Construction Cost Estimating?

In simple terms, the term refers to calculating the total expected cost of any construction project before it begins.

It includes all the components of a project, such as the labor, materials, permits, and other associated costs. A good estimation goes beyond the initial costs and considers possible problems and adjustments that may arise throughout the project’s life.

Typical cost estimation comprises two main components: direct and indirect costs.

1. Direct costs are expenses related to the physical construction work, such as materials, labor, and subcontractor fees.
2. Indirect costs include items like taxes, interest payments, insurance premiums, permits, etc., which may not be immediately apparent but must be accounted for to determine the total cost of the project.

Why Is Construction Cost Estimation Crucial?

Entering a construction project without properly estimating costs is a recipe for disaster.

Accurately predicting any job’s cost will help ensure that it meets the budget set by owners and other stakeholders involved in the project. This greatly depends on the quality of information and data available to your estimators.

Of course, no one can estimate a project with 100% accuracy in such a complex field as construction. Weather changes, frequent cost fluctuations, and numerous other factors in the job site make construction one of the less predictable industries.

So, when we are talking about a good or an accurate estimation, we mean that an estimator accounted for as many factors as possible that could affect the construction process. A good estimation secures the project stakeholders from unexpected losses, which can happen if the expenses go beyond the construction budget.

The purpose of good estimation is to create a base for you to set rational contracts with your sub/vendors to get the materials needed to finish the job without any financial surprises.

When Should Builders Estimate the Construction Costs of the Project?

The sooner, the better. 

Estimation shouldn’t come after the contract has started. Instead, it should be done before the project is awarded to ensure that parties involved understand the costs and budget associated with the job.

No property owner will enter into a contract where they are unsure if their budget is realistic, and no builder will want to be stuck with a project with costs beyond what the owner can afford.

5 Main Types of Construction Cost Estimates

There are 5 main types of cost estimations in construction, according to The American Society of Professional Estimators. These phases mainly differ in terms of the level of detail and accuracy, depending on the stage of the project and available data.

Let’s have a quick overview of each type.

#1 Order of Magnitude Estimate – Project Design Is Not Available Yet

The Order of Magnitude Estimate is used when the project design is not yet available. It is an early-stage estimate that provides a rough overview of the cost of the project, and it can help contractors determine if a project should continue forward or be pushed back.

This type of estimate is usually based on contractor experience along with available information about the project. It takes into account the scope of work, expected materials and labor costs, as well as any other factors that could affect the cost of construction.

#2 Schematic Design Estimate – Only the Schematic Design is Available

The Schematic Design Estimate is used when the project’s schematic design is available but the detailed design has not yet been completed. It takes into account more factors than an Order of Magnitude Estimate and provides a better idea of the construction costs.

The schematic design includes a basic layout of the project, such as the number and size of rooms and certain design elements. This type of design maps out the exterior, interior, and different structure systems, providing contractors with a more detailed overview of what resources they may need to complete the project.

#3 Design Development Estimate – The Initial Design is Available

The Design Development Estimate is used when the initial design of the project has been developed, and it takes into account more factors than a Schematic Design Estimate. It includes detailed information about materials, labor costs, and other factors that could affect the cost of construction.

This type of estimate requires contractors to dig deeper into the details of the project. It considers every element that could affect the cost and any potential changes that may need to be made along the way.

#4 Construction Document Estimate – Construction drawings are available

A construction document estimate is performed once blueprints and construction drawings are available. It considers all the details of the job, including the exact materials needed, labor costs, and any potential changes that may need to be made along the way.

Having construction drawings allows contractors to provide a more accurate estimate that factors in the actual size and shape of the building, as well as any other elements that could affect the cost.

This estimation phase can be considered almost final, as it is based on a detailed design and allows contractors to make informed decisions about the project.

#5 Bid Estimate – Construction documents are available

A construction bid estimate is the last step before the project is put out for bidding. It takes into account all the information gathered during the previous estimation phases and provides a detailed breakdown of estimated costs.

At this point, contractors have access to all the documents required for submitting bids and can make informed decisions based on the material and labor costs associated with each element of the job.

Bid estimates are used when bidding for projects and aim to provide contractors and investors with an accurate assessment of what the project will cost. The owner uses this estimate to compare different bids and choose the most favorable one for the job.