David A. Pogorilich and Brett Trudeau | Ankura Consulting Group
What A Construction Estimate Is And What It Is Not
A construction estimate is an educated guess based on experience and industry standards as to what a specific project with a specific scope of work may cost in a particular area of the country during a particular time frame. Its basis is historical cost data adjusted per price indices unique to the geographic area in which the work will be accomplished. It is not and should not be confused with a contractor’s bid which can be and is influenced by several internal and external factors that get rolled into the price for which the contractor is willing to do the work (its bid).
The Purpose Of A Construction Estimate
A construction estimate has several roles in the construction life cycle. Until a project is ready to be constructed and financing is in place, the estimate is the best guess of what a project may ultimately cost in terms of dollars and time. Estimates can be used:
- For budgetary purposes as part of a go, no-go decision process.
- As a check against incoming bids from third-party contractors.
- As part of a business plan when gathering financial partners and/or loan information.
- As a component of a five-year or longer master plan.
- The basis of a construction loan.
- Part of bigger financial planning purposes, such as bonding and insurance capabilities.
Once a project is awarded, the estimate serves as a baseline or check for developing a construction budget and is turned into a scope buyout where the educated “best guess” evolves into agreed-upon (contracted) costs. However, estimating continues through the project life cycle. Scope creep, owner-issued changes, and other unplanned adjustments are a normal part of a construction project; all of which require estimating the time and cost to perform. When the project nears completion, the information is memorialized for future estimating purposes.
Estimating Process
Estimates should be done in phases, wherein the level of effort matches the commitment to the project. Initially, you will determine if the project is feasible, or potentially profitable, for your business strategy.
A feasibility estimate assesses the financial viability of executing the project before dedicating manpower and other resources to it full-time. It involves defining the purpose, size, and level of quality of the built components.
After a project is deemed feasible, estimates will be built and issued around the design deliverables of the project. Typically, an updated and more detailed estimate will be produced for the Schematic Design (SD), Design Development (DD), Permit Set, and Construction Documents (CD) sets of project documents. From a contractor’s perspective, the estimate can then be converted into a bid proposal at the time it is requested by the owner.
What A Construction Estimate Is Not
A construction estimate is not a bid. Bids will include the time and cost estimated to complete the project but will be amended to include proprietary strategies to win the work and typically are considered an offer under contract law. These strategies are affected by internal and external factors:
- Level of competitiveness/how many bidders?
- How badly does the company need the work?
- Is the project a favor to a valued client or more of a want than a need?
- Is the project needed to keep key crews employed and not lose them?
- Is this a new market for the contractor?
The markups and fees associated with the bid in these different scenarios can vary widely and thereby affect the final proposed price.
- Is the contractor a specialist in this type of work?
- The supply of contractors with the required skill level may be limited and therefore can command a higher price for the work.
- What is the confidence level in the accuracy of the bid documents?
- The less confident, the more contingency and allowances will be built into the bid for unforeseen circumstances.
Using An Estimate In Avoiding Damages Disputes
The estimate is the first step to knowing what the project “might cost.” It is vital to avoiding surprises at startup and financial issues down the road. It also allows the owner or contractor to determine if the bids received are in the “ballpark” or if not analyze what might be driving a much higher or lower bid price.
As the size and complexity of projects increase, so does the need for accuracy and thoroughness in your estimates. Accurate estimates prevent unexpected costs by being thorough in defining the scope and expected costs associated with the work. Disputes arise from misunderstandings and unclear expectations that compound over the course of a project. By setting the boundaries early, the roadmap to success has been laid.
Conclusion
A construction estimate is a useful tool and the first step to understanding the costs and resources that will be committed to your new project. It is used for planning and budgeting purposes. It is not a competitive bid, nor contractually binding. It is a good resource for avoiding disputes when used properly and can be a viable ally in executing projects successfully from many perspectives.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.