How to Estimate Construction Costs   

how to estimate construction costs

Inaccurate estimates might not be the root of all evil, but they sure can derail a project. When projects go over budget, they result in frustration, delays, missed timelines, terminated relationships, and loss of reputation for companies. 

As Runn reports, “budget and time limitations are the biggest cause of stress for project leaders, towering above the challenges of change management, meeting high expectations, and responsibility for helping other team members develop their skills.” 

Even with that said, the number of projects that fail to hit their budget targets is rather shocking. According to the above source, “35% of project failures were related to budget problems in 2021” and “only 43% of organizations completed most of their projects within budget during 2020.” Plus, “as many as 86% of projects are found to exceed their initial estimate, each construction project costing an average 28% more than anticipated.” 

Blown budgets result from many reasons, from poor communication and missing data to scope creep to external factors like material price increases. Far and away one of the most common reasons, however, is inaccurate budget estimates. When it comes to construction, estimating costs is a towering challenge. 

That’s why it’s so important to understand what construction cost estimation is and how to do it. Let’s dive in.  

What we cover:

What is construction cost estimation? 

Construction cost estimating systematically forecasts all costs associated with completing a project within a defined scope. In other words, any cost incurred to see a project through must fall under this heading. 

The cost estimate serves as a roadmap for a project to be bid on and built. Accurate construction cost estimates help determine if a project is feasible to build within a budget.  

If a project is overestimated, a contractor may lose out on an important bid and tarnish a relationship with an owner. Underestimate, and a contractor is now open to the risk of additional expenses that could create significant project disputes that put their reputation and business on the line.  

Accuracy is key and where construction cost estimating 101 comes in. 

Importance of estimating construction costs

Accurate cost estimation is vital for the success of any construction project. The biggest of these benefits includes:

  • Effective budgeting and financial planning: This is needed for fund allocation and realistic budgeting.
  • Efficient resource allocation: Accurate estimations help prevents delays and productivity loss caused by resource shortages.
  • Competitive bidding and contract wins: More realistic estimations can ensure more competitive proposals and help win construction bids.
  • Risk management: Identifies and addresses potential project risks and uncertainties.
  • Better owner or client satisfaction: When cost estimates are accurate and comprehensive, this helps build trust and enables informed decision-making for clients.

Types of cost estimates

There are several key types of construction estimates to know:

1. Conceptual estimate

A conceptual estimate is an estimate prepared using engineering concepts and avoiding the counting of individual pieces. As the name implies, conceptual estimates are generally made in the early phases of a project, predesign, before construction drawings are completed.

2. Design estimate

A design estimate is created during the design phase of the project lifecycle. They first start with the order of magnitude to determine a project's feasibility and are based on the schematic design. After the preliminary estimate, a more detailed estimate is followed by the design team.

3. Budget bid

A budget bid is a rough estimate of the costs of construction, which is prepared without a lot of detailed information on the quality or type of materials. This enables clients to make early, broad-sweeping decisions about target outcomes.

4. Control estimates

A control estimate is created once the contract is fully signed between the owner/client and the contractor. This type of estimate plans for any upcoming costs.

Common challenges in cost estimation

When estimating construction costs, some major challenges can arise and impact the accuracy of the estimates. Most common obstacles include:

1. Missing or inaccurate data and information

To address the issue of incomplete data, it's essential to gather as much information as possible before starting the estimation process. This includes collaborating with architects, engineers, and utilizing estimating software or tools. Using cloud based cost estimation tools can also help eliminate avoidable mistakes.

2. Project scope changes

Scope frequently changes on projects but dealing these changes requires effective communication with stakeholders, frequent updates to project plans and specifications all that can negatively impact the estimating process.

3. Inaccurate cost data

Reliable cost data is essential for accurate estimations. To ensure accurate cost data, teams will need to stay updated on market conditions, collaborate with industry experts, and use industry-specific cost databases or software.

4. Unrealistic schedules

Crunched timelines or unrealistic project schedule and expectations can impact cost estimations significantly. It's essential to set and communicate realistic project schedules including adequate time for estimation tasks to overcome any timeline hurdles.

Cost estimation process 

To estimate construction costs, you should follow these four key steps:

1. Understanding the project scope 

First and foremost, an estimator needs to understand a project’s scope comprehensively. Therefore, they are responsible for determining the project scope and objectives from the beginning, including what the owner or client expects from the completed project, any future expansions (if planned), and how the facility will be used by the end user. 

As a natural extension of this requirement, they must also identify key stakeholders upfront and determine the timelines needed to complete each phase of the project. The best way to ensure you capture all the details is to break down different tasks and deliverables into smaller tasks. This will make it easier to calculate costs and plan the project. 

2. Preparing for cost estimation 

The next step in estimating construction costs is to gather the information and documentation pertaining to the project. From there, you can analyze project designs, drawings, and specifications, then identify potential risks and challenges. 

To do this, be sure to analyze all of the construction documents and factors like construction methods, materials, and more.  

3. Conduct a construction takeoff 

A construction takeoff is the “process of listing and measuring the materials required for the project to calculate the cost to complete it. The construction takeoff is the first step in the estimation process and involves quantifying the materials necessary to start and execute the job.” 

Remember that in addition to listing the materials needed for the project, you need to know their respective quantities and costs too.  

4. Identify and estimate construction costs 

Construction cost estimates fall into two basic categories, and even the most hardened estimator is prone to miss details if they’re not careful. Let’s take a look at some of the common types of costs, then discuss tools and methods for estimating what the construction estimating costs would be for the project. 

Direct costs 

Direct costs include labor, materials determined from the construction takeoff, equipment, and subcontractor costs. 

Indirect costs 

It’s easy to forget about indirect costs when estimating construction costs. However, the cost of a project will include jobsite and trailer costs, admin costs, office personnel, insurance, taxes, permits, and personal protective and safety equipment. 

Tools for estimating construction costs 

So which technology and tools can you use to make estimating construction costs easier and more reliable?  

Cloud-based estimating tools 

Cloud-based cost-estimating solutions let you create more competitive bids in about half the time. For instance, solutions like Autodesk's ProEst offer a comprehensive cost database and automated workflows to streamline estimating and preconstruction tasks, all with the kind of accuracy and detail that results in more profitable jobs. 

Cloud-based takeoff tools 

Software like Autodesk Takeoff is another excellent cloud-based tool to help teams optimize their takeoff workflows. It can be used across 2D and 3D takeoffs, so teams can generate the quantities they need easily. Now you can generate figures faster from 3D models to save time and capture project scope with linear, count, and area takeoff in 2D, all in a single solution. Always stay on top of document version control to ensure all your estimators are working off the most up-to-date information. 

Cost management tools 

Cost management tools are particularly useful for costs once construction begins. However, they can help you improve cost control, gain real-time visibility of cost-related risks, and forecast accurately. They do this by centralizing all construction cost management activities in the cloud and within the context of the construction project. 

Common questions about construction costs 

Answering questions upfront is a great way to diminish the potential for confusion and budget overruns. Here are some of the most common aspects of construction cost estimating about which people have questions. 

How do project size and complexity interact? 

Neither size nor complexity is a complete answer in and of itself. Large buildings can prove simple if they’re low-complexity (hangars), while small buildings can be exceedingly finicky (medical clinics). That’s why understanding the project scope and design is critical. It’s important to approach size and complexity together to ensure good estimates. 

Does location matter? 

Yes, location matters greatly. Accessibility to the project site, local rules and regulations, and the cost of living in the area can all influence a construction budget significantly. Don’t forget to take them into account. 

How do labor availability and cost factor in? 

Consider the following when it comes to labor:  

  • Is labor readily available in the area? Is it expensive?  
  • If it’s not readily available or if it costs a good deal more than it does elsewhere (such as in big cities), how will you make room for it in the budget and still get the project done on time? 

What are the material costs and availability? 

Like labor, materials costs can hugely impact a budget. It’s important before you form any estimates to research the local cost of materials. Don’t forget to take into account tax breaks that might save considerable money – for instance, the domestic content incentive from the recently passed Inflation Reduction Act. 

What building codes and regulations do you need to know about? 

Not all cities and regions are alike. If a local regulation means you’ll need to change the way you normally approach a process, that can change costs by a healthy margin. Look into permitting rules, building codes, and so on before moving forward. 

Which environmental factors do you need to keep in mind? 

Environmental factors to consider include:  

  • How does the construction site’s location impact your environmental responsibilities?  
  • What due diligence must you complete upfront to pass federal, state, and local regulations?  
  • Will you have to pay for environmental consulting, reports, or permits? 

What is the difference between an estimate and a bid? 

In a nutshell, an estimate is a prediction of the expected costs for a construction project, while a bid is a formal offer to complete the project for a specific price. 

How accurate are construction cost estimates? 

The accuracy of a construction cost estimate depends on the quality of information available and the estimator's experience and expertise. For that reason, it’s critical to get everyone on the same page upfront and get all the details you can before attempting the estimate. 

Estimating construction costs: Final thoughts 

Estimating accurate construction costs is a challenging feat. But, with the right tools at your disposal, you’re much more likely to efficiently create accurate estimates that enable you to bid competitively and fall within budget. 

Ready to start estimating better? Learn more about how to create accurate construction estimates with Autodesk Construction Cloud. 

Grace Ellis

As Manager of Content Marketing Strategy at Autodesk and Editor in Chief of the Digital Builder Blog, Grace has nearly 15 years of experience creating world-class content for technology firms. She has been working within the construction technology space for the last 6+ years and is passionate about empowering industry professionals with cutting-edge tools and leading strategies that improve the quality of their jobs and lives.