There are three main types of construction estimates. According to ACivilEngineer.com, a company uses a specific type of estimate depending on what stage of the project it’s for and what items are being estimated.
- Preliminary Estimate
The Civil Engineering Daily defines preliminary estimates as “rough” or “approximate”. The reason for this is that estimates aren’t final; they’re just an approximate estimate of what a project will cost.
At the beginning of a project, when there is little information available, a preliminary estimate is made. According to Carnegie Mellon University, a screening estimate is a very early preliminary estimate that is based on information from similar projects done in the past.
In order to determine the cost of a project, a trade or home service company will use a preliminary estimate to figure out what to charge the client.
Once more information is available, a business can create a revised estimate, or detailed estimate, from the preliminary estimate.
For example, a roofer is asked by a client to redo the roof of his house. The roofer did a very similar project three months ago. He uses the estimate from his old project to make a preliminary estimate for his new project.
- Detailed Estimate
A company can turn a preliminary estimate into a detailed estimate. An accurate estimate can only be made when more information is available or the scope of the project is more clearly defined than before.Detailed estimates offer a great deal of information on quantities, costs, and rates—in other words, everything required for completing the project. All the line items are added together to reach the final cost, according to Civil Engineering Daily.
Besides these line items, detailed estimates can also include:
- Information on the rates used to calculate costs (see quantity estimate below)
- Drawings for the areas included in the project (including an index and key)
Detailed estimates are often used as a contractor’s budget estimate. This planning tool helps him know how much cash flow he needs and whether he requires financing, according to Carnegie Mellon University.
- Quantity Estimate
In a quantity estimate, all materials required to complete a project are listed in quantities. They are designed to give the client all of the quantities required for the job, as well as a price for each quantity. When it comes to construction, it’s a key estimating method.
Cost numbers are calculated by multiplying the dimensions on the project drawings by the rate for a particular item of work.
For instance, a painter is asked to repaint the entire interior of a house. She knows that repainting walls, ceilings and trim costs about $3 to $4 per square foot. The house is 3000 square feet. At $3 per square foot, the project would cost about $9000.
- Bid Estimate
You submit a bid estimate in the hopes of winning a project. According to Carnegie Mellon University, it is based on both a contractor’s earlier estimations and her desire to win the project, i.e. to deliver the top price in order to hopefully outbid her competitors.
A general contractor may only invest a lot of time and effort into this method of cost estimation if she believes she has a good chance of winning the bid. Otherwise, it’s a waste of time for her to do it.
A bid estimate can be drawn up based on plans provided by the client or on standard industry costs. If the contractor wants more accurate amounts, she will need to calculate specific labour, material and equipment costs for the project.
For example, a landscaper is hired to redo the backyard of a client’s house. He uses his hourly wage and material costs to arrive at a total for a bid estimate. The landscaper charges his standard hourly rate ($40 per hour) for 25 hours of work. However, he decides to mark up his material costs less than he usually does to outbid a competitor.
4 Project Cost Estimation Techniques
How exactly project managers complete a cost estimate depends upon a number of factors. Some organizations, for example, require all projects to be budgeted according to very specific policies; others may defer to the expertise of the project manager. Similarly, many organizations might work off of rough estimates in the earliest stages of project planning compared to later stages where more exact estimates are required.
Below, we explore four of the most common cost estimation techniques that you can leverage.
1. Analogous Estimating
Through analogous estimating, a project manager calculates the expected costs of a project based upon the known costs associated with a similar project that was completed in the past. This method of estimation relies upon a combination of historical data and expert judgment of the project manager.
Because no two projects are exactly the same, analogous estimating does have its limitations. As such, it is often leveraged in the earliest stages of project planning, when a rough estimate can suffice. Analogous estimating can also be used when there is relatively little information about the current project available.
2. Parametric Estimating
In parametric estimating, historical data and statistical modelling are used to assign a dollar value to certain project costs. This approach determines the underlying unit cost for a particular component of a project and then sells that unit cost as appropriate. It is much more accurate than analogous estimating but requires more initial data to accurately assess costs.
Parametric estimating is often used in construction. For example, an experienced construction manager might understand that the typical new home will cost a certain number of dollars per square foot (assuming a particular margin of error). If this average cost, the margin of error, and the square footage of a new project are known, then parametric estimating will allow them to identify a budget that should accurately fall within this range. Other examples might include estimating the cost per unit to print and bind a book or to build an electronic device.
3. Bottom-Up Estimating
In bottom-up estimating, a larger project is broken down into a number of smaller components. The project manager then estimates costs specifically for each of these smaller work packages. For example, if a project includes work that will be split between multiple departments within an organization, costs might be split out by department. Once all costs have been estimated, they are tallied into a single larger cost estimate for the project as a whole.
Because bottom-up estimating allows a project manager to take a more granular look at individual tasks within a project, this technique allows for a very accurate estimation process.
4. Three-Point Estimating
In three-point estimating, a project manager identifies three separate estimates for the costs associated with a project. The first point represents an “optimistic” estimate, where work is done and funds spent most efficiently; the second point represents the “pessimistic” estimate, where work is done and funds spent in the least efficient manner; and the third point represents the “most likely” scenario, which typically falls somewhere in the middle.
Three-point estimating relies on a number of weighted formulas and originates from the Program Analysis and Review Technique (PERT).