I am running tight on time this week so I am posting an article that my son Matthew and I co-authored for an architect/ builders magazine. The article outlines the process of construction estimating….yes it is a process! It has been summarized here. In future articles I will expand on these topics. If you are interested in an expanded discussion on the most crucial step in the estimating process then go back and read my blog on “Scope, Scope, Scope!” Enjoy!
The estimating process begins with a thorough understanding (and visualization) of the project’s scope of work. Architects and engineers define scope in plans and specifications but for construction estimating this scope is incomplete. Successful “hard bid” contractors know very well that scoping construction goes well beyond the AE scope and must include field specific scope. The realities of the site such as weather, on-going operations, soils conditions, access/ egress, security, safety, site lay-out, environment protections and other context scope must be considered as well as the means and methods that the work will be executed. These all impact the overall cost of the project.
A big part of the estimating process is mentally building the project multiple times before the project even breaks ground. Scoping construction requires a knowledge of the construction processes, thinking like a contractor and building the project before the project is built. Some of the best estimators I know are those that come from the field and understand that estimating is NOT just about unit costing but more about the impact that AE, context and execution scope have on each unit cost.
Quantifying the project is the next step in the estimating process. The “take-off” is just another opportunity to go wrong….many have! Converting scope to quantities requires a solid understanding of math, drawing scales, swell and waste factors, plan reading, common construction practices, and conversion factors. Indeed, an accurate quantity take-off representing the complete scope of work is then the solid foundation to which unit prices are applied.
The third step in the estimating process is the application of unit costs to the quantified scope of work. Competitive bidding contractors will get their unit costs from subcontractors, vendors, suppliers, and their own cost records. These are excellent resources for pricing but typically they are not readily available to budgetary estimators such as architects and engineers. Budgetary estimators get their unit costs from some of the above sources but also from published national average cost data. Just “knowing” a construction cost database does NOT an estimator make. Pricing a project goes well beyond cost data books. In pricing a project the aggregate project total is more than just the summation of unit material, labor and equipment but must also include labor burden requirements such as social security contributions by the contractor, unemployment taxes, insurances, subcontractor costs (including their overhead and profit), sales taxes, bonds, and finally the general contractor’s overhead and profit. Typically the published unit costs do not include all the above. Each reference construction cost database handles these components differently. Pricing must be comprehensive and include all the direct and indirect costs associated with the project AND the cost of being in business as a contractor.
The final step in the cost estimating process is to double check the results. It is good practice to set the cost estimate up against historical project costs, another estimator’s review or comparable costs per unit floor area or assemblies costs. It is very easy to go through a project scoping, quantifying and pricing and still miss a costly component. In a rush to meet a deadline once I missed the landscaping in the back parking area and did not catch this until a final review of the estimate…ooops!. Even this engineer periodically gets lost in the details and has missed pieces of scope before; please keep this between the two of us.
Construction management in a nutshell is the planning, organizing, implementing and controlling of a project’s time, costs, resources and cash flow. Construction projects are made up of hundreds of interdependent tasks that have a specific order that they must occur. Success in construction management begins with a well thought out plan for the unfolding of events. The secret to a good plan for construction; build it before you build it. Without first a good plan all else is chaos.
Following establishing a good project “plan” is the organization of that plan into tools that can be used to implement the project. Examples of project organizing tools are budgets, schedules, cash flow diagrams, manning charts and resource schedules. The secret of success here is that they must be realistic. Unrealistic tools tied to an unrealistic game plan is a sure way for construction project failure. Successful construction management always starts with a realistic organized plan.
The organized tools, tied to a realistic plan, are used to implement the construction project. These tools are the sheets of music that each member of the construction team will play from. The secret to success here is having the right team in place to implement the project. The “right” team is one that is operating in sync with the other members and the organized plan. Leadership is key to the success in the implementing of a construction project.
Construction projects never unfold exactly how they are planned; this is a given! Success in construction management allows for deviation from an organized plan as it is being implemented. The key to success here is the timely revisions to the project plan, updating the tools accordingly and then implementing the changes without missing a beat in the orchestrating of the project. Here again, leadership is key. Construction project leadership comes with experience.
Successful construction management does not just happen. Any construction project failures, the results of which are overrun budgets, costly court battles, project completion delays and poor project quality, could have been avoided if time and effort were put into these principles of succesful construction management. It don’t come easy!
Let’s start with a little bit of sarcasm. Imagine an advertisement for the latest construction estimating software; “….. With click and drag speed you can choose from thousands of line items of unit cost national average data and build accurate cost estimates….blah, blah, blah! ” This is not a real advertisement; I made it up to make a point. Thrifty, speedy estimating software coupled with unit cost construction data does NOT an accurate estimate make!!!
There is No Time: Let’s be honest; we all get lazy particularly when we are pressed for time. We are always looking for shortcuts in our “means” to get to an “end.” The facilities manager is already strapped for time with another demanding tenant, tight timelines, on-going operations, and emergency fixes. Budgetary estimating is just another pesky necessity that gets in the way of progress. The problem is that decisions on facilities issues are generally made based on cost considerations. There is always someone asking “how much is it going to cost?” The budget estimate is just another task that takes from the already limited time in a day.
The truth is that when time is tight, shortcuts are taken. Sadly, some budgets are derived from a “click and drag speed” application of software. Unit pricing is thrown at a project from a data source with little thought given… verbatim! It is then “ipso-presto” and another budget cost estimate is ready to wreak havoc on a project as reality is revealed. Just because it comes from a published resource and is well-known does not make it correct for your project. Choosing, Clicking, and dragging is not construction estimating. Much like the old adage “you always get what you pay for” for accurate budget estimators this is “you get the accuracy from it from the accuracy you put into it.”
The Consequences: Starting a project with a poorly thought-out project cost plan is simply setting the project up for budget overruns, under runs and run away froms. Failing to plan is planning to fail! In the long run it is easier to put the time in up front to establish a correct budget then it is to deal with the project in a crisis mode as the job unfolds. The first crisis will occur when the contractor bids are greater than the budget estimate. Ooops! It is here that you can ask the customer to cut scope or return to the funding source and ask for more money. Good luck on either account. Accurate budgetary estimating requires a thought out effort of building the project before the project is built. All scope, quantities and unit pricing must reflect the realities of the project or suffer the consequences.
Construction Costing: The process of construction cost estimating starts with scope and ends with the pricing of the project quantities. Pricing the project is a lot more than a spreadsheet and unit prices from an average cost database. Contractors have pricing sources such as vendors, subcontractor’s, suppliers and their own historical costs. They are usually secretive about these prices because they reflect their own discounts and productivity…things that make them competitive. Budgetary estimators must rely on their own sources such as the internet, select vendors and published cost data. Published costs are not generally site specific and they reflect an average job, with average productivity and average hassles. This is typically not your project. Unit costs will have to be adjusted away from an average to fit the realities of your project. Unit costs for direct activities include material, labor and equipment. These are the direct costs; directly attributable to the physical final project. Then there are the indirect costs; these are all the cost items that support to the direct activities.
Direct Costs: The direct construction costs are those that are attributable to any of the direct activities or tasks required to put the components of the project together. The hard costs for construction materials, labor and equipment are the direct costs. Many of the national average published cost data unit costs are focused only on direct costing of construction in a place of average productivity in an average context working environment. Average is the starting point. The estimator will have to make necessary adjustments to the average unit construction costs to fit the complex specifics of the project being estimated. These adjustments come from knowledge of the “average” of the database and how the project deviates from that.
Then there is the issue of bare costing or total direct costing. Bare is exactly that; it is the bare cost of the direct activities less any mark ups for labor burden, taxes, bond, overhead and profit. The total unit direct costs should then include all the direct additions to labor, materials and equipment. Labor is adjusted for necessary “burdens” such as social security (fica), federal and state unemployment (futa, suta). All direct costs are then adjusted to include home office overhead and profit for the installing contractor. All these adjustments to bare direct construction costs can get complicated and must be understood as applied to the specific job but also understood in the published unit cost data. Are they included in the data or do they need to be added? The adjustments to very bare direct costs can be 40% to 50% higher depending on the mix of labor and material. The misunderstanding of direct costs and published cost data is usually where the first mistakes are made in construction costing.
Indirect Costs: The indirect costs are those project costs that are indirectly attributable to all the direct stuff. Site specific indirect costs include site superintendent, site trailers, permits, temporary utilities and other support for all the direct activities. Site overhead costs can be 5% to 15% of the overall project cost. Other indirect costs include performance bond, payment bond, sales taxes, contingencies and markups for overhead and profit for the general contractor. This markup is over and above what a subcontractor will mark up for overhead and profit on the direct costs. This double mark up of overhead and profit is the reality of construction and construction costing.
Costing Construction: You can see that a simple application of unit costs from a national average cost database from a quickly applied software module is not construction estimating. Costing construction is much more than just an application of unit prices. Don’t get me wrong, estimating software is great and helpful. Published construction cost data is also very helpful for budgetary estimating and for checks and balances in bidding. It is in the application of the software and unit costs where some budgetary estimates go very wrong.
I heard the Critical Path Method (CPM) defined once as a management technique for losing your shirt under perfect control! Not so funny if you have ever been at the management end of a tight timeline, in an old facility, around on-going operations with the concrete truck on its way and the formwork delayed because the backhoe is out of fuel!! Welcome to the world of construction; stuff happens! With construction nothing is ever really under “perfect control” but with the right systems in place you can get close.
The Metrics: Just the knowing that a project is out of control is crucial to keeping a project under control. Put another way; isn’t it good to know you are going bankrupt as you are going bankrupt? At least then you can make some adjustments to avoid the disaster! The secret is in the knowing first and reacting second! Projects that spiral towards failure are those that can’t break out of reacting because the “knowing” is incorrect or it does not exist. Knowing what? Knowing where the key project metrics such as time, costs, resources, and cash flow are relative to a datum (the project plan). Good project managers will always know where these project metrics are because they are indicative of the immediate health of the project. In a project management cycle the metrics are Planned, Implemented, Measured (actual vs. budgeted) and then reacted to, correcting for deviations by making changes to the original plan. This is the project control cycle and it is continuous as a project unfolds. It is inevitable with all the things going on in construction; stuff just happens! Plans must change. The project control cycle will show the deviations to the plan which will help in making corrections as long as the original project plan was accurate. Comparing project “actuals” to a false plan will lead to poor corrections that can spiral the project more out of control. A poor plan for time, costs, resources and cash flow is sometimes worse than no plan. Good planning matters!!
Failing to Plan is Planning to Fail: Imagine a trip from Seattle to San Diego using a road map to Dallas, Texas. As you travel south the road signs point you in a direction that does not match the plan causing great consternation to the driver. Hasty plans make for troubling travel. Failing to plan a project (correctly) is like setting your project up for failure. We have all been at that place where the physical project must start because time is tight (it always is) and “there is no time to waste.” Myself, I would much rather “lose” a few weeks at the upfront in properly planning a project and regain that time many times over as the project unfolds. All good projects are built several times before they are finally physically built. Absolutely! Poorly planned projects are often found spiraling downward into a reactive mode which will just add to the lost time, increased costs, inefficient implementation of resources and negative cash flow. As the saying goes….failing to plan is planning to fail!
Cost Control: In the project control loop the projects actual costs are measured against budgeted costs. This measurement will show the deviations in planned vs. budgeted which is key to controlling a projects cost. With a well thought out “cost plan” (the budget) the deviations will be manageable and adjustments can be made to minimize the impact on the final cost of the project. If a project budget does not exist or is poorly thought out, then controlling costs is difficult (someone please explain this to the executive branch of our federal government). At the heart of and crucial to controlling costs is an accurate cost estimate which translates into a cost budget. A cost estimate then is very important to cost control. The four phases of cost estimating and in turn accurately budgeting a projects cost are:
Scoping Phase: The best approach to scoping a project is to think through building the project from the ground up. Think like a contractor and include the scope of means and methods for executing the work as well as the scope issues relative to the context (location, weather, traffic, safety measures, economic conditions, availability of resources…) of where the project is built. Construction scope is much more than that which is spelled out in plans and specifications. Anticipating context and execution scope are often times overlooked in budget estimating. Scope, scope, scope!! The best estimators that I have ever worked with are those that come from the field because they know scope from the ground up. A prerequisite to construction estimating and budgeting should be the working at a trade to learn the field end of construction which is so important to capturing correct scope. Scope is the foundation to every other phase of construction estimating. If scope is wrong a project budget is wrong. Enough said!
Quantify Phase: Quantity take-off is the converting of all tasks of scope into quantities so that they can be priced. Mistakes in quantities can be significant. Common errors are generally with math or converting units from one measure to another. If the scope is well thought out, then quantities will follow. Quantities should always be checked and double checked.
Pricing Phase: Pricing is the application of accurate unit costs to the project task quantities. Common mistakes are applying unit costs where the units are different from the quantity take-off (i.e. Cubic Yards vs. Cubic feet). Note also that a project’s overall cost goes well beyond just the direct costing of direct activities. A project cost should also include the indirect costs such as site specific overhead (indirectly attributable to all the project direct costs and can be 5% to 15% of project cost), home office overhead, profit, bond, sales taxes and even certain contingencies.
Double Check Phase: All good cost estimates are checked and double checked prior to establishing it as the project budget or bid price for a project. An estimate double check is always most effective by putting the project down for a day and return with a fresh mindset.
Keeping Your Shirt Under Perfect Control: At the foundation of project cost control is an accurate cost estimate. In actuality the foundation to any of the project metrics of time, costs, resources, and cash flow is also an accurate estimate. Time schedules, resource schedules and cash flow plans all come from a well thought out cost estimate. Building a project before a project is built! Having a complete and accurate plan for a project is the secret to keeping your shirt under perfect control!
One Engineer’s Perspective
It is said that all good jokes have a bit of truth in the punch line. This is the case (I think) in a joke I heard about those of us engineer’s that do budgetary construction cost estimating. The joke is set up with a question: What is the definition of an “engineer’s estimate”? Answer: The cost of construction in heaven. Ouch! Not so funny but it does have a bit of truth in it. The reality is, engineers (and architects alike) do not have a great record with accurate budget cost estimates through the design phases. Construction estimating (particularly with remodel projects) has a lot to do with the “heaven” of well-defined plans and specifications but also much accounting for the “hell” of the physical construction in the field. Everything fits well in the plan; the devil is in the physically getting the project built. Budgeting or bidding construction is all about capturing the realities of the heaven and hell in the project in the estimating process. This article is about the process of cost estimating construction and getting it right!
The process of construction cost estimating always begins with a thorough understanding of the project’s scope of work. Architects and engineers (AE’s) define scope well in plans and specifications but for construction estimating this scope is incomplete. Successful contractors will tell you that construction scoping for estimating purposes (as with scheduling) goes well beyond the AE scope and includes field specific realities such as weather, on-going operations, soils conditions, access/ egress to the site, security, safety, time of the year, site lay out, environmental considerations and other site specific scope. Beyond the context scope the estimator needs to account for the means and methods used in the execution of the work. All scope has a cost. The best estimators will think like a contractor and mentally build the project many times before the project is actually built. The savvy estimator knows construction well and is able to identify and capture the AE, context and execution scope in the process of estimating the projected cost of a project.
I fondly remember my college calculus classes because for someone who likes numbers, calculus problem solving was fun. Don’t tell anyone but I actually will read a calculus book for enjoyment! With calculus you can sum up many minute pieces of an area or volume and arrive at a very accurate conclusion. How does this relate to construction estimating? Well, you can improve the accuracy of a project’s budgetary estimate by breaking the project up into pieces and pricing them separately then adding them up to make the “whole” again. As long as you can define the parts and know enough about construction to think through the AE, Context and means execution of the work issues you will arrive at an accurate cost conclusion for a project. I call this eating your elephant one bite at a time. Any scary project can be accurately budgeted with some knowledge of construction scope and understanding of the pieces. Many times I have speculated on the cost of a project as a whole and then proceeded to put the time into quantifying and pricing the pieces to find out my “whole” guess was off base. Of course many people react with “but that takes time.” They’re right, it does take time! Accurate cost estimating for correctly budgeting projects takes an investment of time. Welcome to the world of estimating. There is definitely a time/accuracy tradeoff in construction cost estimating. If you want to put little time into budget estimating a project you will most likely arrive at some degree of inaccuracy in the estimate depending on the ugliness of the elephant. The typical estimating process on the owner’s side will generally start with a Conceptual OR Order of Magnitude cost estimate. This is quick and based primarily on historical (at times hysterical) numbers. Typically the elephant is not defined and many assumptions are made about scope. With this type of estimate I would not feel uncomfortable with a 15% to 20% estimate contingency depending on the size of the project. New construction projects are easier to get your conceptual arms around because there are good historical numbers on new construction projects. Historical costs per unit floor area are helpful with new construction projects. Remodel projects are more conceptually challenged because of the uniqueness inherent in repair/remodel projects. I have not yet seen an identical repair/remodel project. Budgeting at a conceptual stage of design (AE Scope) is a challenge; the complete scope is fuzzy and it takes a good imagination to swallow the project in large undefined bites.
As the project moves through a design process a second cost estimate is typically (should be anyway) compiled at the design/development stage of design (40% thereabouts). Project owners are wise to perform this second estimate just to make certain that the project is still within budget. If the project exceeds budget it is easier to deal with scope changes at design development rather than at the time of bid opening where it is discovered that you cannot afford the project. This happens all the time and it is frustrating because it may mean going back to the funding source for more funds OR cutting the project scope. Neither option is pleasant. Correct budgetary estimating through the design process can prevent this embarrassing dilemma. The approach taken here is an improvement in accuracy over the conceptual cost estimate because the project is better defined. A typical approach is to break the project up into “assembly” type pieces. Assemblies are great for budgeting projects at this stage of design and with the right thought process and good assembly unit costs the accuracy is much improved. I would peg the contingency factor at about +/- 15% depending on the size of the job. An example of an assembly bite of an elephant might be a 4” concrete slab on grade with welded wire fabric, a steel trowel finish and 4” of granular base. In current local dollars (Seattle) this would run around $6.50 per SF depending on the site, time of the year and location of the placement.
A third estimate is generally completed at an 80% working drawing stage of design. This type of estimate is closest to the one bite at a time philosophy and is called Unit Price estimating. Unit price estimating is time consuming because at the current design so much of the scope is defined right down to the size of the reinforcing steel and specified quality of roofing material on the roof. An accurate budget is arrived at by looking at the pieces, scoping them, quantifying and unit pricing. The summation of all the estimated pieces is then the whole. As a project is better defined and the bites become clearer theoretically the contingency is reduced. At this stage of design with a good unit price estimate a +/- 5% to 10% estimate contingency is applicable. Contingency is to cover the “stuff” left out or not yet defined and is related also to the knowledge of the cost estimator of filling in the blanks with some construction experience.
In construction budget estimating through a design process 3 different cost estimates are generally performed. The reason is to keep a project design in line with a budget. The time and cost required to eat a project in pieces is worth it if accuracy in budgeting is achieved. Inaccurate budgeting costs an owner time and money.