Costing Construction

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.