Knowing how project management for construction works, you’ll know that construction estimates are crucial to securing contracts and staying in business. This means bidding low enough to beat many competing contractors but high enough to cover all actual costs such as labor and materials, equipment, and subcontractors. Don’t forget to include overhead expenses such as overhead to run the business as well as enough profit to take on the risk and grow the company. Below, we have outlined a proven system for contractors to learn construction estimating basics, and each section has been organized into chapters.
1. Choose the Right Work to Bid
If you manage construction companies, you know that a construction bid begins with selecting the correct type of work to be bid on. If you win a construction project, it is best to avoid bidding on projects beyond your experience. The process of estimating and building is more complicated. Therefore, you are more likely to make mistakes.
Building a new type of building has its learning curve for your construction estimators and project managers; making mistakes can negatively impact profitability and reputation.
Additionally, in what stage of the design process are you currently bidding? Is this a project from the beginning of the design phase that will go through several design iterations?
At this stage, construction firms should provide an estimate based on the order of magnitudes and then leverage their experience to provide value engineering to differentiate themselves from competitors, but only when they have established a relationship with the owner.
2. Reviewing Construction Specifications
In today’s competitive environment, you have to ensure you’re working with the most up-to-date construction documents.
It’s no longer possible to rely on the design team to ensure everything is within your divisions of work.
In addition, you should review the division 01 general specifications and note the construction crew management and business qualifications, payment terms, bonding capacity, and insurance requirements and ensure you can meet the qualifications and live with the legal language if you win the project.
After completing the general specifications, you should move on to the specific division specifications, noting the material grade, the installation methodology, and the responsibilities for costing (who will provide what). Generally speaking, the specifications will determine the quality of materials, while the drawings will determine quantities.
You should include any items that are out of the ordinary in your bid. For example, many people who manage construction projects for construction firms have been unjustly penalized for bidding a lower grade of material when the actual price was significantly higher, although the project was otherwise profitable.
3. Reviewing Construction Drawings
To get an overall idea of the scope of work, you should look at the full set of drawings at a high level.
In addition to reviewing the division’s drawings, you should review the architecture drawings to determine if there is overlap between other trades, working heights, and elevations that could affect construction costs like labor, materials, and equipment.
You should think about the project from a birds-eye view after gaining a general understanding of its construction. Then, taking note of any technical details provided by your division’s drawings and keeping an eye out for any discrepancies between the drawings and specifications, it’s time to examine your division’s drawings.
It is essential to take notice of notes that conflict with the specifications and to be prepared for a request for information (RFI). In general, drawings and specifications are very closely related when it comes to quantity. However, specifications override drawings when it comes to material grade and quality. In addition, there is nearly always a catch-all note that says, “when a conflict exists, use the highest quality and highest quantity.”
In the construction estimation process, this is a disadvantage for you. Making sure you clarify any questions and taking notes will help you build an accurate construction estimate and prevent disputable change orders during the construction process that could put your finances at risk.
4. Performing a Construction Take-off
Using construction drawings, the construction take-off helps quantify the scope of work for your division. To do so, cost estimators use highlighters, click counters, and digital scale masters or their favorite construction take-off software to begin counting and measuring items on the construction drawings.
The exact process of performing a construction take-off is always different for different trades, but we suggest you start with one item, count or measure each sheet, and keep a record of the totals for each sheet before you move to the next.
If you discover something you missed earlier, immediately count it and adjust your previous take-off quantity. Once you have totaled the quantities for each sheet, you can move to a take-off sheet where you can begin extending out the amounts and starting the process of estimating the construction costs.
You’ll learn what items are the most important to count first when you get better at construction estimating to ensure that you never overlook anything important.
5. Creating your Construction Estimate
To complete the cost estimation, you need to determine the cost of each item in the takeoff and the total costs of each task where task management takes place. To do this, you need to determine the material and labor costs associated with each task and multiply those by the quantity of the task.
It is simple to determine the material cost; ask your supplier or pricing service, but you need to know how long it takes to install the material to calculate the labor cost. We suggest ordering a historical cost database if you don’t have a historical cost history or limited field experience and would like to use that as a guide.
Construction costs are calculated using national averages based on labor and material costs, plus regional cost modification factors. To calculate the labor cost, multiply the wage rate by the burdened wage rate (average hourly wage plus benefits plus taxes).
Calculate the total direct costs for the project by adding these two numbers. If you’ve hired subcontractors or rented equipment, you’ll also need to add line items for these.
6. Determining Overhead and Profit
In order to arrive at our sales price, we need to add profit and overhead to our bid estimate (direct costs). The profit you make from your business is pretty obvious. Still, overhead is not, and it includes all the other indirect expenses that are required to run it, such as your office lease, estimating, sales, marketing, bookkeepers, and anything else you need to keep it functioning properly.
The overhead is the percentage of the project costs you add to your sales price in order to reach it. In addition to direct overhead costs, you will also need to include indirect ones, such as onsite management expenses, supplies, and project management for construction costs for delivering materials and ensuring the project is delivered as promised.
Many people who manage construction companies believe they don’t have overhead and therefore shouldn’t be charged for it in the construction industry, but this is incorrect. If you’ve hired subcontractors or rented equipment, you’ll also need to add line items for these.
A construction accountant should be contacted and the figures should be carried out annually.
7. Creating your Construction Proposal
As soon as we have our sales price, we will need to put together a construction proposal that outlines clearly and concisely what is included in the bid price. Use the same language as the construction specification and drawings.
So that anyone managing construction companies can quickly review your bid price to make sure nothing has been overlooked and that your bid price covers everything they need.
For the most part, building your estimating process on the CSI format is an excellent choice so that you can compare section by section of your bid price with the specifications and make sure you don’t overlook anything.
Even though you might provide a lump sum bid, the integration between your construction estimating software and your accounting system makes it easy to provide a detailed breakdown to the general contractor should it be requested.
You can add simple inclusions and exclusions during the bidding process that help the general contractor understand what he’s getting. If you have included or excluded anything, this is the place where it’s crucial to clarify so there are no misunderstandings upon awarding the job.
8. Construction Contract Basics
Individuals who manage construction projects use several types of construction contracts to secure contractors. Risk tolerance and the size of the project are both factors that should be considered. Below, we’ve outlined the three most common types of construction contracts.
A subcontractor pays a lump-sum payment or firm fixed price for the delivery of an agreed-upon product. This type of contract allows the subcontractor to earn higher profit by taking on the risk.
Contracts with Cost Plus – the owner agrees to pay for the construction cost and bears the risk of any additional expenses. Also, they pay a percentage above these costs to the subcontractor.
Time and Material Contracts -Owners who agree to an hourly rate and materials needed to complete a project pay for both the time and the material used on the project. Service work and small projects of uncertain scope generally fall into this category.
9. Handling Change Orders
Inevitably, as soon as a construction project has been awarded, the scope of work will change due to the budget, design, or omissions, which will require a price change to the contract. To ensure that you’re able to charge for the services you provide as a subcontractor, you must familiarize yourself with the construction change order process for every project.
It is common for subcontractors to receive verbal approval for a change on the spot, but then those change orders are rejected when the time comes to pay the bill since the proper approval process was not followed.
The contractors also tend to avoid submitting paperwork because it takes too much time after a long day. Construction contracts will change, so you’ll need to construct a process and ensure that all members of your team understand the approval process.
Subcontractors making the most of construction change orders are more successful because they provide a higher profit margin and accumulate quickly. Don’t be the other type of subcontractor that loses money when they can’t or don’t even bill for these changes.
10. Construction Software
By using construction estimating software, contractors of all sizes can systematize their estimating processes more efficiently than ever before. Their construction estimating process can be streamlined and significantly shortened if they adopt a framework that is proven to be effective.
With construction estimating software, you can eliminate time-consuming manual tasks like printing paper plans, entering duplicate data, and performing manual calculations. During this process, you upload your digital plans, perform your construction take-off, and build the construction costs estimate.
With just a few adjustments and break-outs, you have a quote that can be shown to the customer without ever having to re-enter the information multiple times. In addition, construction projects can be estimated by using previously saved assemblies, pricing, and labor costs as you use the system.
Scheduling software – it takes project management for construction to the next level, offering the ability to schedule multiple tasks, more accessible communication for tasks management, and clearer information dissemination. Moreover, it has subcontractor scheduling software specific for several trades, namely HVAC, electrical, plumbing, concrete, roofing, and painting.
Inventory Software – keep track of your inventory accurately and in a timely manner; you can also keep track of your costs, your efficiency, and your productivity beneficial in construction crew management.
Construction estimating may seem like a lot of work, and you are right. However, a construction estimating system reduces the amount of time required for estimation significantly.
The quantification process can be streamlined through construction estimating software by digitizing the process and allowing prebuilt parts and assemblies to be brought into the estimating process without re-entering information again. In addition, contractors who manage construction projects for various companies of all sizes and construction crew management now have access to integrated quantity take-off and estimating because of the cloud, which used to be expensive and inconvenient with long setup times.
When you use construction estimating software, you can get rid of excel spreadsheets and paper plan sheets, resulting in a 2-3x increase in bidding speed.