Are you planning to start your construction project soon? Have you determined the financial requirements? Is the amount you’ve allocated sufficient to complete it?
When planning a project, having a realistic budget is crucial. Understanding how to estimate construction costs will help you stay on track with both your project and your finances.
The Cambridge Dictionary defines cost estimation as “a calculation of the probable cost of the product or project, based on information relating to the price of materials, labor, etc.” Projects incur both direct and indirect costs, including materials, equipment, utilities, and wages for workers.
Importance of cost estimation
Know your budget. Cost estimation is important because it helps you understand how much money you’re likely to spend. You can compare the estimate to your available resources and determine whether you need additional funding or adjustments to your plan. If the estimate is too high, you may need to revise your design or seek more resources.
Explore options. During the estimation process, it’s wise to compare the prices of your preferred materials with other alternatives to see where you can get the best deals. You might also explore different construction methods—some may be more cost-effective than others. Owners often use cost estimates to assess whether a project is worth pursuing.
Avoid overspending and secure profitability. Without a reliable estimate, you risk overspending or running out of funds before completing the project. Poor cost management can lead to significant financial losses. Accurate cost estimation helps you forecast expenses and manage them effectively, increasing the likelihood of achieving profitability.
Types of cost estimation
Preliminary estimate. Also known as a conceptual or schematic design estimate, this is often referred to by laypeople as a “rough estimate” or “ballpark figure.”
In the early planning stages, detailed information may be lacking. As a result, proponents rely on rough estimates to gauge a project’s viability and financial feasibility. These estimates typically carry a margin of error of around 10 to 15 percent.
Cost surveyors derive these estimates by analyzing expenses from similar past projects. They use standard rates per square meter based on historical data, adjusted for inflation or changes such as increases in regional labor wages.
Detailed estimate. This method breaks the project into smaller components, each assigned a specific unit price. It includes all materials, equipment, and labor necessary to complete the project. The total project estimate is then calculated by summing the costs of these individual components.
With a lower margin of error (typically 5 to 10 percent), this estimate is commonly used by contractors to determine pricing or evaluate the project’s feasibility.
Definitive construction estimate. This is the final price quoted in the construction contract. It includes all necessary expenses, including contractor overhead and markups to ensure profitability.
This estimate is used by developers and contractors as the project control baseline and is essential for bid evaluations, final contract negotiations, and claims assessment.
In conclusion, cost estimation forms the foundation of project budgeting and is essential to the success of any development. Various estimation methods are available, and the appropriate one depends on the project’s specifics and its stage in the development lifecycle. Moreover, effective project management ensures that the budget remains accurate and reliable throughout.
Henry L. Yap is an architect and a Fellow in both Environmental Planning and Real Estate Management. He currently serves as one of the Undersecretaries at the Department of Human Settlements and Urban Development.
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