Construction cost estimates provide the backbone for construction project budgets and bids. Owners rely on both rough and detailed estimates to determine if projects are feasible and to know the amount of financing they will need to make their project a reality. How you estimate and conduct your project management can affect the accuracy of the budget for construction costs and that budget can reveal as early as possible if the job will deliver a satisfactory result for the homeowner and turn a profit for you, the builder.
“Providing accurate and detailed construction cost estimates early in the planning and design process allows you to create a roadmap for a successful project,” Marcene Taylor, president of construction estimating firm Marcene Taylor Inc., said.
There are many ways to develop a cost estimation for a project, depending on the amount of information and data you have about the project.
From preliminary estimates based on past projects, to detailed line-item estimates based on the construction bid documents, estimates can range from a ballpark figure to a well-developed proposal used to create formal bid estimates and customer contracts.
We’re going to look at the types of construction estimates, how they are developed, and how software can help you better meet your customer’s expectations.
When creating a project budget and schedule, two key types of estimates are budgetary estimates and phased estimates. Understanding when each one is appropriate and how they differ is crucial for project managers.
In this comprehensive guide, we’ll break down the key differences between budgetary and phased estimates, when to use each, and tips for developing accurate estimates.
What is a Budgetary Estimate?
A budgetary estimate provides a high-level approximation of project costs early in the planning process It’s created during project initiation to assess feasibility and get initial budget approval
Key features
- Developed with limited project details
- Typically accurate to +/- 25%
- Used for initial budgeting
- Based on past experience and expert judgment
- Accounts for the entire project budget
- Used for project selection and authorization
Budgetary estimates give a ballpark cost range before detailed planning. They allow rough order-of-magnitude budgets to be set.
What is a Phased Estimate?
Phased estimates provide a more accurate, detailed cost estimate for each phase of a project. They are developed during planning as more specifics become known.
Key features:
- Created for each project phase
- More accurate than budgetary estimates
- Used for phase budgets and control
- Based on a detailed work breakdown structure
- Developed using rigorous estimating techniques
- Tied to schedule activities and deliverables
- Used for phase funding and execution
Phased estimates support bottom-up budgeting and control for each project segment.
Key Differences
| Budgetary Estimates | Phased Estimates |
|---|---|
| Early project stage | Planning and execution |
| Entire project | Individual phases |
| Low accuracy (-25% to +75%) | Higher accuracy (-10% to +25%) |
| Limited details | Detailed WBS |
| Fast and inexpensive | Rigorous and time-consuming |
| Expert judgment | Accurate estimating techniques |
| Authorization and selection | Phase funding and control |
When to Use Each Type of Estimate
Use budgetary estimates for:
- Initial project screening
- Rough order of magnitude budgets
- Early cost-benefit analysis
- High-level feasibility assessment
- Executive approval and sponsorship
Use phased estimates for:
- Detailed work breakdown structure
- Phase budgets and schedules
- Bottom-up cost control
- Accurate procurement estimates
- Earned value management
- Phase funding requests
- Project accounting and control
Budgetary estimates provide a quick, low-cost way to evaluate project viability early on. Phased estimates support detailed control throughout execution.
How to Develop Budgetary and Phased Estimates
Budgetary Estimates
Tips for creating budgetary estimates:
- Leverage historical data from similar projects
- Consult with experts on costs
- Identify major cost drivers
- Include contingencies for uncertainty
- Adjust for known differences in scope and scale
- Present as cost ranges, not point estimates
- Clearly state methodology and assumptions
- Focus on big picture without details
Phased Estimates
Steps to create phased estimates:
- Break down project deliverables into detailed activities
- Estimate costs for each activity bottom-up
- Sum estimates per phase based on schedule
- Include support and overhead costs
- Refine estimates with 3-point technique
- Combine activities into phase packages
- Add appropriate contingency reserves
- Review estimate confidence and range
- Present methodology, assumptions, and risks
Creating accurate, reliable phased estimates takes time and effort. But it provides the detail needed for control.
Phased Estimates In Action
Let’s look at an example of budgetary and phased estimates for a building construction project:
Budgetary estimate:
- Developed based on cost per square foot of comparable buildings
- Total project size 50,000 sq ft
- Past projects averaged $200 per sq ft
- Budgetary estimate: $10,000,000 (50,000 sq ft x $200 per sq ft)
- Accuracy range: -25% to +75% (-$2,500,000 to +$7,500,000)
Phased estimates:
- Detailed WBS down to 10,000 activities
- Costs estimated bottom-up for each work package
- Summarized into phases:
- Design phase: $1.5M
- Permitting: $500K
- Site prep: $1.25M
- Foundations: $1.75M
- Structural: $2.5M
- MEP: $1.8M
- Finishes: $2.2M
- 10% contingency reserve added
- Total phased estimate: $11.7M
- Accuracy range: -10% to +25%
In this example, the early budgetary estimate provided an initial placeholder to assess feasibility and get project approval. The later bottom-up phased estimate delivered the detail needed to properly budget and manage the execution of each project segment.
Tips for Good Estimating
Follow these tips for effective budgetary and phased estimating:
- Clearly define estimate scope and accuracy method
- Use proper techniques for each estimate type
- Involve experts and leverage historical data
- Account for all cost elements including contingencies
- Document assumptions and identify risks
- Avoid excessive optimism or padding estimates
- Present estimates as ranges, not point numbers
- Update estimates as new information becomes available
- Estimate activity resources and durations separately
- Maintain meticulous estimate documentation
- Review estimate performance and improve techniques
Reliable estimates enable projects to meet budgets and achieve success. Continuously refining estimating competence pays dividends across all projects in an organization.
Key Takeaways
- Budgetary estimates provide high-level approximations while phased estimates offer detailed bottom-up projections.
- Budgetary estimates are used early for initial assessment and approval. Phased estimates support execution control.
- Budgetary estimates leverage past experience. Phased estimates require rigorous methodology.
- Estimating is a strategic capability. Continuously developing estimation skills and processes will improve forecasting.
Accurate budgetary and phased estimating is crucial for project management success. Understanding when and how to apply each technique will help optimize project planning and control.
Types of construction cost estimates
There are five main types of construction cost estimates: preliminary, detailed, quantity, bid, and control. Each is used for a different purpose at a different time in a project lifecycle.
A preliminary estimate, also called an abstract cost estimate, approximate cost, or budget estimate, is used in the early phases of a project, usually before design documents have been completed.
Project owners rely on preliminary estimates to help them have a rough estimate that helps them decide whether a project is financially feasible or not. They may use the preliminary estimate to determine how much financing they’ll need or if they can afford the project with existing funds. Often a preliminary estimate helps determine if a project will be undertaken or not before they involve too much of your time.
A preliminary estimate is usually based on the costs you’ve experienced on similar projects that you have recently completed. For example, a general contractor may provide a preliminary estimate for a new office building by looking at past office buildings of similar size. This kind of estimate is prepared with the understanding that a revised estimate with more specific cost detail must be completed before construction can begin.
As its name implies, a detailed estimate involves breaking down the project scope into smaller unit prices that can be priced individually. It includes costs for the materials, equipment and labor required to complete the project. Adding these gives you a total project cost.
In order to provide a detailed estimate, you need a design that is complete so you or your estimator can quantify the exact work that has to be done.
“An estimator needs to get to know the job inside and out, fully understand scope and design requirements, in order to provide a responsible estimate on any project,” says Dave Shank, owner of Shank Glazing Solutions, which specializes in preparing construction estimates for glazing and bid consulting.
The detailed estimate is based on completed design documents and how much labor will cost the contractor to provide. It is often the basis of the contractor’s initial building construction budget.
For example, a masonry contractor breaks out the work required for a brick wall by estimating the costs for the foundation, support structure, masonry materials and labor.
A quantity estimate is based on the actual number of units or amount of work that needs to be provided. The project is broken down into quantifiable pieces and all costs for each piece are added up to get the overall project estimate.
A quantity estimate is based on the count or measure of the amount of work and materials needed to complete the project. It is assumed that there is a standard cost for each unit of work and for the materials purchased. This is all typically quantified in a takeoff.
“Different trades have different techniques for estimating a job. For example, roofing is determined by the square foot, plumbing by the fixture count, and electrical by the opening,” according to Bill Samuel, an Illinois real estate developer at Blue Ladder Development and general contractor.
For example, a concrete contractor bids the foundation for a project based on the square footage of the slab. He has determined how much it costs for each square foot of foundation, including forms, materials and labor. Because of these differences, it’s best to use a digital takeoff tool that can adapt to your specific needs.
A bid estimate is the cost estimate that is submitted to a potential client in hopes of winning the job. It will include all the contractor’s costs for the project, plus allocated overhead costs and profit margin.
It’s important to factor those two items in a bid cost estimate because the bid estimate is often the definitive estimate used as the basis for the construction contract. The bid estimate is based on the contractor’s breakout of the building costs, plus markups for profit, overhead expenses and contingencies. Digital takeoff software typically allows for adding line items for markups and other expenses.
A control estimate is used for monitoring the project during construction and is comprised of three separate estimates: the budget estimate for financing, the budgeted cost after contracting but prior to construction, and the estimated cost to complete during the project. These budgets are revised on a regular basis to reflect approved customer change orders and actual costs incurred.
Other types of cost estimates
A historical estimate is based on costs from a project budget done in the past of similar size and scope. Often the cost is adjusted for inflation or other pricing factors.
A parametric estimate uses simple calculations to provide a cost estimate. It is often based on standard rates from a third party or a contractor’s historical data.
Similar to a parametric estimate, a plinth area estimate is based on a standard rate. The plinth area of a building is the area covered by the external dimensions of a building.
The plinth area is multiplied by a standard rate for construction in that area to arrive at an estimated cost for the project.
In a bottom-up estimate each activity is priced individually, then rolled up to the overall project cost. This is the most accurate way to estimate a project.
A three-point estimate is based on the average of expected costs in three scenarios: optimistic or best case, most likely or expected, and pessimistic or worst case.
The three values are added up and divided by 3 to get the average.
An equipment factored estimate is used for projects that involve the furnishing and installation of equipment.
The cost of the equipment is multiplied by an installation factor to arrive at the total cost. The installation factor includes subcontractors, direct labor costs, and materials.
Project Management Concept #20: Budgetary Estimate vs Phased Estimate
What is the difference between a budgetary and a phased estimate?
While it’s important for both types of estimates to account for unforeseen expenses and cost fluctuations, budgetary estimates allocate a specific amount of money for each month or time period throughout the project. Phased estimates, however, separate estimates for near-term work and future work.
What is the difference between a project estimate and a budget?
An estimate is an approximation, while a budget is the total amount of funds you have to complete your project. Usually, a project estimate becomes a project budget after the project sponsor or client approves it. One important distinction before we really dive in: before you estimate, you should know how much things cost internally.
What is phased estimating?
Phased estimating is a favorite among project managers because it requires cost and schedule commitments for only one phase of the project at a time. The phased estimating approach recognizes that it is impractical to demand a complete estimate at the beginning of the product life cycle.
When are budget estimates made?
Budget estimates are made at a later time in the project after the ROM estimates. Typically, Budget estimates are made during the Project Planning phase. Both Top-down and Analogous Estimating can be used to develop budget estimates. A Definitive Estimate is very different from ROM Estimate.
