Construction Cost Estimating: Types, Steps, Methods & More

What Is Construction Cost Estimating?

Construction cost estimating involves forecasting the cost of a project based on available information. The result is a cost estimate—a detailed breakdown of expenses—that becomes more accurate as project details become clearer. 

To create these estimates, consider the most common project components, such as labor, equipment, materials, subcontractor fees, and indirect costs.

Various methods, such as parametric estimating, analogous estimating, and the bottom-up approach, can be used to calculate these costs. Each is suited to different stages and levels of project detail. 

The following sections elaborate on these types, steps, and methods for accurate construction cost estimating. Keep reading.

Why Is Construction Cost Estimating Important?

Construction cost estimating is crucial because it: 

1. Ensures you make a profit: If you don’t estimate the actual costs of a project, you may end up losing profits. And because there may be emergency costs and an extended project timeline, you may lose track of what’s been spent and take home little or no profit. 

2. Helps you stick to your budget: Without proper cost estimation, contractors may be forced to settle expenses out of pocket and buy expensive materials. Cost estimation ensures cost control at every level of the project. 

3. Allows contingency planning: Estimating construction costs includes planning for potential mishaps, unplanned expenses, and other unforeseen issues. This helps you avoid surprises down the line. 

4. Helps you find cost-effective vendor and subcontractor options: When working with an estimate, you look beyond lofty quotes and choose vendors whose quotes fit your budget. 

Now that you know how vital construction cost estimating is, let’s explore the types and methods of construction cost estimating.

What Are The Main Types of Construction Cost Estimates?

The different types of estimation for construction costs are based on the level of project planning and project design data available. 

They include:

• Type 1: Order of magnitude estimate

• Type 2: Design development estimate

• Type 3: Schematic design estimate

• Type 4: Bid estimate

• Type 5: Document estimate

Here’s a further look at when and how these types of construction cost estimates are used in construction projects.

1. Order of magnitude estimate

This is a rough, preliminary estimate used early in the project lifecycle before detailed design work starts. At this stage, many details remain unclear. The construction company only knows the type of construction (residential, commercial, industrial), project location, and general size.

To arrive at the estimate, the construction professional uses historical data from similar projects and approximates the cost of each item, considering the current economic situation.

Order of magnitude estimate is best used when:

• Little or no design work has been done.

• You want to know if a project is worth pursuing based on rough cost expectations.

• You need an idea of the potential costs so that rough budget allocations can be made for larger-scale planning.

2. Design development estimate

Here, the project includes a basic design concept, but it still lacks detailed design elements. The estimate is based on layout drawings and basic material specifications. 

It provides a more accurate cost prediction than the order of magnitude estimate, but it might change as the design evolves.

For example, if you're building a hospital, the design development estimate would include specifics like the number of patient rooms, types of finishes, and basic mechanical systems.

However, it's still not as precise as later-stage estimates because specific details may not yet be finalized.

Design development estimate type is best used when:

• The design is still in development before full construction documents are developed.

• Stakeholders need a more informed idea of costs in the mid-stages of planning.

• Investors and clients need a more realistic idea of the project’s financial scope.

3. Schematic design estimate

The schematic design estimate is developed when the design includes more detailed sketches and building layouts. Here, the construction expert has a general understanding of the materials, equipment, labor, and other resources required. 

Because the design elements are clearer at this stage, this estimate is more accurate than the previous ones. However, it’s still not fully detailed because the final choice of materials, construction methods, and specialized finishes might still be under consideration. 

Schematic design estimate type is best when:

• You need to know the impact of design choices on the overall cost.

• You’re seeking client approval for the general direction of the project before moving into more detailed design work.

4. Bid estimate

This is a detailed cost estimate submitted by a contractor or construction firm as part of a competitive bidding process. 

It’s based on fully developed construction documents, drawings, specifications, and project requirements. It’s highly accurate and considers all aspects of the project, including labor, materials, subcontractor costs, overhead, and profit margins.

It serves as the basis for contract negotiations. At this point, the project details are sufficiently refined, so the contractor can offer a cost estimate that reflects the actual scope of work.

Bid estimate type is best used when:

• You’re bidding for a project.

• You want to determine the contract price to negotiate better with the client.

5. Document estimate

The document estimate is the most detailed and precise cost estimate. 

It’s created once all construction documents, including architectural drawings, structural drawings, and detailed specifications, are finalized and ready for use in the actual construction phase. 

This estimate includes line-item costs for every material, labor cost, subcontractor work, and other construction-related expenses.

The document estimate is often used to set the final budget and can be adjusted if any changes or unexpected issues arise during construction. 

Document estimate type is best when:

• The project is fully designed, and all plans and specifications are available.

• You want to start precise budget tracking and project execution

Whether in the early planning phases or at the final stages of construction, understanding which estimate is most appropriate for each stage of the project ensures cost management remains on track from concept to completion. 

So, what components should you estimate the cost for at each stage of your project?

What Are the Key Components of Cost Estimating in Construction?

Key components include the primary construction requirements to be considered when estimating construction costs.

They are divided into direct and indirect costs. 

Direct costs are expenses that can be traced directly to the construction project. They include labor, materials, and equipment. 

Indirect costs are expenses not directly incurred by a project but associated with managing, supervising, and supporting the construction process. Examples include overhead, administrative fees, and insurance. 

The key components of cost estimating in construction are:

1. Labor costs

2. Equipment costs

3. Material costs

4. Subcontractor costs

5. Indirect costs

Let’s explain the first four in more detail.

1. Labor costs

Labor costs are one of the most critical components of direct costs in construction. These costs refer to the wages, benefits, and other compensation paid to the workers involved in the construction project. 

Labor costs can vary depending on the project's peculiarities, location, and the skill level of the workers required. 

For example, the mean hourly wage for a laborer in Alabama is $17.59, while for one in Florida it’s $21.08. 

Types of construction labor include:

• General laborers: Workers responsible for basic construction tasks like site preparation, moving materials, and assisting with equipment.

• Artisans: Electricians, plumbers, carpenters, and other skilled professionals.

• Supervisory staff: Project managers, foremen, and other supervisory personnel who oversee the work and ensure the project adheres to timelines and budgets.

Pro Tip: You can monitor, track execution, and assign tasks to various workers using ServiceTitan’s dispatch board, as seen here:

With this dispatch board, estimating labor costs is more manageable. It displays who did what, how much work has been done, and who’s been assigned the more demanding projects in a centralized interface.

Estimating labor costs requires considering the overall cost of working with each employee for the duration of the construction project. Decide whether you’ll be paying an hourly rate or a fixed project rate, then include taxes, PTOs, and other benefit costs.

2. Equipment costs

Construction projects often require the use of heavy machinery and equipment, such as excavators, cranes, bulldozers, and mixers. 

Equipment costs can include the purchase, rental, or leasing of these machines, as well as the cost of transporting, maintaining, and operating them.

For estimating purposes, equipment costs include:

• Purchase or rental costs: The upfront cost of purchasing or renting new equipment for the project's duration.

• Fuel and operational costs: The costs associated with operating equipment, such as fuel, maintenance, and repairs.

• Depreciation: If purchasing equipment, depreciation must be factored into the cost, as this reflects the equipment’s reduction in value over time.

Accurately estimating equipment costs involves considering the project's duration, the type of machinery required, and the usage frequency.

3. Material costs

Material costs include the raw materials required for the construction project, including everything from concrete, steel, and wood to finishes, paint, and landscaping materials. 

Material costs can vary widely depending on the type of project, material quality, and market conditions.

When estimating material costs, it’s essential to calculate:

• Quantity of materials

• Material prices and how long the quotes will last 

• Transportation and delivery

4. Subcontractor costs

In many construction projects, specialized jobs, such as electrical, plumbing, HVAC, or other trades, are subcontracted to third-party vendors. Subcontractor costs include the fees paid to these external companies or individuals for their services.

Subcontractor costs can be difficult to predict precisely, so it's essential to set aside contingency funds to cover unexpected changes or challenges during the project.

Let’s see how to draw up the cost estimate for your project based on these components and estimate types. 

How Can You Make Cost Estimates for a Construction Project?

The steps to help you build estimates for a construction project are:

1. Review the bid package

2. Review the site

3. Conduct a material takeoff

4. Request pricing quotes from suppliers

5. Understand labor requirements

6. Calculate overhead costs

7. Take bonding costs into account

8. Adjust for contingency and profits

If these steps seem like a lot of work, ServiceTitan offers a template that simplifies the entire process. It gives you a checklist for building your estimate without starting from scratch, which is even more helpful for repeatable projects where you can reuse the template.

Apart from the cost estimate templates, ServiceTitan provides an overall construction software solution for managing construction crews and costs. 

With the platform, you can manage your entire construction project from one dashboard. To create a dashboard for each project, follow these steps:

1. Create a new project to automatically get a project overview dashboard.

2. Fill in the project details: project name, photos, and job status. Assign crews, set start and proposed completion dates, a payment schedule, and write a short project description. 

3. Click “done”.

Once the dashboard is complete, you can visit the left navigation bar at any time to build estimates and manage payment, purchase orders, and your team. Even better, the details captured in the dashboard automatically change whenever a transaction associated with the project is recorded.

For example, when you pay for materials to use in the project, the details in the dashboard’s original (estimated) budget vs actual budget table change immediately. This makes it easier to track your finances in real time.

Now, let’s get into the steps of construction cost estimation:

1. Review the bid package

The bid package is the foundation for the entire estimating process. It typically includes important project documents like project specifications, blueprints, and contract terms. Reviewing these documents thoroughly helps you understand the project scope, required materials, timelines, and other details.

ServiceTitan offers an efficient way to organize and access bid packages, allowing you to attach and reference project documents directly within the platform. 

All drawings, plans, and documents are consolidated into one secure space. With the help of search filters and folders, your project team can quickly find and share what they need, ensuring everyone is aligned on key project details.

This removes the unnecessary back-and-forth during the estimation process.

2. Review the site

You can’t have an accurate estimate without reviewing the site. A site review helps you identify factors that may impact costs, such as site accessibility, soil type, and local weather conditions. 

It also helps identify potential issues, such as the need for soil treatment or grading, which could add to costs.

Here are some questions to ask:

• Can construction equipment easily reach the location? Are there any challenges, such as narrow roads or restricted access?

• What is the quality of the soil, and will it require grading or other preparation?

• Are there suppliers or vendors nearby, or will transportation costs for materials be significant?

Remember to document your site visit, capturing photos, notes, and other relevant details in real time. Incorporating these observations into your estimate reduces the chance of missing essential project needs.

3. Conduct a material takeoff

A material takeoff involves identifying and quantifying all the materials needed for the entire project, from start to finish. This ensures accountability for every item, preventing oversights that could result in cost overruns or delays.

Begin by analyzing the project plans and identifying each material and component required for constructing each area. This includes everything from concrete and steel to finishes and fixtures. A detailed material list will form the backbone of your cost estimate.

ServiceTitan offers an easy-to-use contractor inventory management tool that simplifies the takeoff process. It gives you an inventory of available materials, noting their locations, and automatically triggers replenishments when they’re out of stock.

This helps you track material purchases, vendor returns, transfers, and adjustments all in one place. 

4. Request pricing quotes from suppliers

Requesting pricing quotes from suppliers and vendors is important for accurately predicting how much you’ll spend and finding the most cost-effective option from your pool of suppliers. 

Make sure to factor in any supplier-specific delivery fees or times and confirm prices before sending the estimate.

ServiceTitan’s Pricebook Platform simplifies requesting and comparing quotes by giving you direct access to supplier catalogs for various industries.

 This way, you can confirm the current price of each material, tool, or piece of equipment without the hassle of back-and-forth emails or phone calls.

5. Understand labor requirements

Labor consumes the bulk of the estimated direct costs. 

To estimate labor expenses accurately, you need to account for the number of workers required, their hourly or daily rates, and the total labor hours for the project. Don’t forget to include specialized labor, such as subcontractors, artisans, or temporary labor, which can all impact the overall cost.

6. Calculate overhead costs

Overhead costs are the indirect costs of running your construction business, such as administrative expenses, office supplies, insurance, and utilities. These costs need to be included in your estimate to ensure you cover all operational expenses. Often, overhead is calculated as a percentage of the total project cost.

7. Take bonding costs into account

Bonding costs are expenses from insurance policies protecting the contract parties from financial losses if the project doesn’t go as planned. 

For larger construction projects, bonding is often required to guarantee the project will be completed according to the agreed-upon terms. Bonding costs can vary based on the size and type of project, and should be included in your overall estimate to avoid any financial surprises down the road.

8. Adjust for contingency and profit

Construction projects always come with many unplanned situations, miscellaneous expenses, and price hikes. All these must be accounted for to ensure you don’t cut into profits. So, make sure to calculate and adjust for expected profits.

Contingency amounts can vary based on the type of project or the level of uncertainty involved, but a good rule of thumb is to add between 5% and 15% to the total project cost.

This ensures you can allocate resources efficiently, avoid unexpected budget issues, and control project expenses.

When Should Construction Contractors Build Cost Estimates?

Very early in the project planning phase. As soon as there’s a desire to start a construction project. Estimation should go hand in hand with ideation. It can be just a round figure before it’s broken down into individual line items later.

What Are Some Common Methods For Construction Cost Estimating?

Your approach to cost estimating depends on various factors, such as the availability of historical data, project design, and available expertise. 

Here are the different methods of cost estimating: 

1. Parametric estimating method 

2. Bottom-up estimating method 

3. Two-point estimating method

4. Analogous method 

5. Data analysis method 

1. Parametric estimating

In this method, general project costs are obtained from previous projects with similar measurements and specifications. 

The process relies on identifying variables (parameters) that can influence costs, such as the construction area (square footage), volume, or the number of units to be built. 

For instance, if a building of X square meters costs a certain amount, it’s likely that a building of twice that area would cost twice as much. This is a rough estimate that can be used in the early stages of a project. 

However, it doesn’t consider project peculiarities, contingencies, and inflation increases. 

2. Bottom-up estimating

This is a detailed method of estimating construction project costs. 

It involves breaking down the project cost estimate into line items, such as materials, labor, and equipment, and then estimating their respective costs. Later, the individual costs are added to give the total project cost. 

This method is very detailed and often used when a high level of accuracy is required.

3. Two-point estimating

This method involves computing the average between an optimistic estimate (best case) and a pessimistic estimate (worst case) to predict the potential costs. The idea is that, by considering the extremes, the estimator can give a better picture of the possible costs, including risks and uncertainties.

For instance, the cost estimate for a bridge project, assuming there are no weather delays and the availability of all resources on time, could be $3 million. 

A pessimistic estimate, factoring in possible delays, resource shortages, and unforeseen problems, might bring the cost to $4 million. 

Using these two points, you can provide a range for the project, such as $3.5 million ± 15%.

4. Analogous estimating

This happens by using historical data to determine a project's cost. It’s a broad-level cost estimation that may be helpful in setting a budget, deciding if a project is feasible, and ensuring its profitability.

This is a more general approach than parametric estimating, as it doesn’t necessarily focus on specific parameters but overall costs. This method is often used early in the project lifecycle when detailed information is unavailable.

5. Data analysis estimating

The data analysis method involves analyzing patterns from past projects, identifying correlations, and applying statistical techniques to predict costs more accurately. This method can be highly effective for large, repetitive projects where past performance data is available.

Data analysis can even be used to predict the impact of factors like labor shortages or material price increases.

Streamline Projects With Construction Contractor Software

Accurate construction cost estimation will ensure that you deliver a project within the scheduled time and at the right quality while not compromising your profit margin. 

Construction cost estimation software like ServiceTitan helps you estimate job costs accurately by considering all potential costs. 

ServiceTitan is a cloud-based construction tool that helps construction contractors manage construction projects effectively, win bids using competitive and profitable estimates, and deliver projects on time. Users have noted a 25% increase in their revenue within their first ServiceTitan year.