Cost Estimation in Project Management
A cost estimate is the approximation of the cost of a program, project, or operation. The cost estimate is the product of the cost estimating process. The cost estimate has a single total value and may have identifiable component values.
A problem with a cost overrun can be avoided with a credible, reliable, and accurate cost estimate. A cost estimator is the professional who prepares cost estimates.
There are different types of cost estimators, whose title may be preceded by a modifier, such as building estimator, or electrical estimator, or chief estimator.
The Purpose of the Estimate
Selection of materials — Residential, commercial, and industrial projects require uniquely different materials. A receptacle designed for a residential home cannot be installed in an industrial hazardous location, and the cost difference in these two types of receptacles can reach several thousand dollars. The estimator must select the proper materials that meet the requirements of the contract specifications, the National Electrical Code (NEC), and the authority having jurisdiction (AHJ).
Required quantity of materials — Accuracy is key to the estimating process. Quality detailed installation drawings should provide the estimator with the ability to determine accurate quantities of materials required for the project.
Labor requirement — The estimator must have a full understanding of labor units. Each item required to build a project has an associated labor unit. Labor units require adjustment due to the conditions of installation. For example, a luminaire installed in a warehouse at 30 ft above the finished floor will require more labor for the same luminaire being installed at 10 ft. Labor units are determined by the project type and conditions of installation. In addition to direct labor, most projects will have indirect labor, such as a non-working foreman, design engineer, and project manager. Typically, indirect labor is related to the project’s administration and supervision.
Equipment, tools, and consumables — Equipment such as lifts, generators and trenching machines must be included in rental costs if you do not own the equipment. Consumables are materials and tools that the estimator doesn’t include in his take-off. These items are difficult to quantify. Consumables are real project costs and should be included in the estimate. Following are some examples of consumables for the average project: bandsaw blades, drill bits, electrical tape, phasing tape, rags, and threading oil. One method of covering these costs is to use a percentage of your total database material on the project. Here are some suggestions: commercial (2%), correctional (3%), and industrial (5%).
Getting An Accurate Estimate From A Qualified Estimator: What To Expect
As we’ve reviewed, when it comes to any construction project, getting an accurate estimate from an experienced estimator is an invaluable service to your company. Whether they’re a construction company’s estimator or an independent contractor, the estimator you choose to work with should be able to furnish an accurate estimate that’s detailed enough for you to secure adequate financing and begin your project.
A professional estimator should possess some (if not all) of the following qualifications:
- A proven method for preparing accurate estimates
- A thorough understanding of architectural drawings
- An in-depth knowledge of building materials, construction methods, building codes, and industry trends
- Extensive experience in construction work and knowledge of the cost of materials, material lead times, hourly output of workers, overhead expenses, and other costs
- The ability to calculate costs with accuracy and precision
- The ability to collect, classify, and evaluate relevant data
A construction company that works with inexperienced estimators can suffer from cost overruns, resulting in added client expenditures and a damaged reputation to your business. As a client, working with Real Estimate Service estimators may endanger the future of your company. Therefore, it’s essential to ascertain that the estimator you hire is a dedicated estimator whose only job is estimating. Many construction firms utilize their project managers to prepare estimates when they’re busy; however, this does not follow best practices. A successful business requires the expertise of a seasoned, professional construction estimator who deals with trade contractors and suppliers on a daily basis, not just when the workflow is stagnant.
Principles of Cost Estimation
1. Cost estimation is used to predict the quantity, cost and price of the resources required by the scope of a project. A project might be any process that is started to perform work activities and/or create assets. The accuracy of the estimate depends heavily on the level of project scope definition: as the design and conditions of the project become better defined, so do the estimated values. Think of the 5 estimate classes of AACE shared above.
2. Cost estimation is needed to provide decision-makers with the means to make investment decisions, choose between alternatives and to set up the budget during the front end of projects. For this, estimates made by vendors and contractors need to be validated by clients as well. In later phases of the project, the budget estimate is used as a baseline to assess the performance of a project.
Related to this principle, it is always challenging to collect and read the huge amount of cost data, which doesn’t help with the decision making. Analyzing and visualizing the cost data opens the doors to making the data useful and meaningful. The dashboards of a project control software system are the data-driven graphical representations of a project; dashboards can provide decision-makers with a quick overview of a project’s progress and turn the data into decision points.
3. Estimating is done by breaking down the total scope of a project in manageable parts, to which resources can be assigned and cost. There are standardised ways of breaking down a project, like the Work Breakdown Structure (WBS) and the Cost Breakdown Structure (CBS), but depending on the needs of the project team and external parties multiple structures are often implemented to align reporting and sharing of cost data.
4. A cost estimate is more than a list of costs. It also includes a detailed Basis of Estimate (BOE) report that describes the assumptions, inclusions, exclusions, accuracy and other aspects that are needed to interpret the total project cost. Otherwise, it would be a meaningless number. The BOE is required to communicate the estimate to the various parties involved in the decision making but is also handy during closeout when the performance of the project is compared with other projects. It is the vital part often overlooked, that allows you to learn from your experience and mistakes.