Why Accurate Construction Estimating is Crucial for Success

Construction cost estimating trips up some of the best project owners because there are so many possible places for a construction project to go off track. But with the right mix of knowledge, preparation, and technology, an accurate construction estimate is within reach.

This step-by-step guide breaks down the actions you should take, the challenges you may encounter, and the best practices for building an accurate construction estimate. 

Read on to learn:

What Is Construction Cost Estimating?

Construction estimating is the process of predicting the total cost of a construction project. This includes calculating the costs of materials, labor, equipment, and overhead.

A precise estimate helps owners and stakeholders understand the financial commitment of a project before breaking ground.

Construction cost estimates use bid management, market conditions, and cost databases to:

• Secure accurate project budgets and funding approvals.
• Assess financial feasibility.
• Ensure cost alignment with long-term investment goals.
• Estimate long-term asset performance.

When owners understand these factors, they make well-informed decisions that ensure project viability.

Construction estimating is different from a contractor's cost estimating. Rather than focusing on a contractor's detailed cost breakdowns and profit margins for a well-defined set of tasks, construction estimating looks at the project as a whole. And it often occurs at a stage when project scope and requirements are still being developed.

The Core Steps of Estimating Construction Costs

These core steps can be used to build the construction cost estimate plan. As you work through these steps, consider documenting the process to customize it to your business needs in later projects.

Step 1: Define Project Scope and Requirements

This is the goal-setting section of your estimation process. What outcomes do you need to hit, and what limitations do you have? Consider:

• Space requirements: How big the lot is and zoning laws around height?
• Performance needs: What will be done in the space, including any outlier cases?
• Quality level: What materials or workmanship are required according to zoning and project requirements?
• Functional program: The who, what, when, where, and why of the space.

The point of this step is to define the boundaries you need to work within. This way, you can offer trade-offs when you work out cost categories.

Step 2: Identify All Cost Categories

An accurate cost estimate for construction gives a detailed breakdown of all costs in a financial plan that covers all project aspects before starting. This requires owners to analyze total costs, potential risks, cost-cutting measures, and the budget's sensitivity to market changes.

To develop reliable cost estimates, you need to use accurate data sources with reliable data. The primary components of a detailed construction cost estimate include:

• Direct Costs: The expenses you expect to incur for the actual work, including material costs that account for alternatives and price fluctuations, labor costs, and equipment costs.
• Indirect costs: Additional expenses, like jobsite management, permits, insurance, and temporary facilities, that are sometimes overlooked but are critically important. They can represent 10-15% of total project costs and require careful analysis.
• Soft costs: These are intangible, indirect but essential expenses, like design fees, legal expenses, commissioning, and financing.Contingency allowances: Funds reserved for unforeseen conditions or changes. Those changes may be in design, construction, or owner contingency.
• Escalation factors: Adjustments for projected inflation and market conditions.

While these cost components form the foundation of an estimate, achieving accuracy requires the right data and tools. Two critical elements that enhance estimate precision are:

• Cost database: A centralized, up-to-date cost database ensures material and labor prices reflect current market conditions, helping owners avoid inaccurate projections.

• Bid management software: Organizing and evaluating bids from multiple contractors ensures competitive pricing, which directly informs the estimating phase.

A tool like Kahua's Bid Management software helps you to collect, analyze, and compare pricing information from multiple sources, ensuring comprehensive coverage of all project elements.

Step 3: Select your estimating methodology

The construction cost estimate methodology you choose will be determined by the type of project, how accurate you need the information to be within your budgeting requirements, and the types of data at hand and the current level of design for your project.

Here’s a quick overview to get you started:

Each method has its strengths and weaknesses. For maximum reliability, many prefer to employ multiple methodologies as the project progresses. For example, they may transition from parametric to unit cost to detailed estimating as more information becomes available.

Step 4: Gather Accurate Cost Data

Construction estimates rely heavily on the owner’s ability to identify and gather accurate data. Experience will play a large part in this process, as does access to methods of verification. Owners will need to gather data on:

• Labor and materials from suppliers and contractors.

• Local market conditions and volatility according to the rate of construction and types of projects.

• Historical project data from internal records or past experience.

• Quotes and bids gathered for this particular project and past projects of comparable nature.

• Cost databases that reflect material, labor, and market cost fluctuations.

Gather this information in a spreadsheet or bid management software.

The advantage of bid management software is that your current bids become tomorrow’s historical cost data. You can update the estimate versus actual cost in the bid management software for even more accurate estimating in the future.

Step 5: Build and Assemble the Estimate

Build your estimate by breaking the project into its obvious components based on the work needed. For example, you may break community park construction into design, land clearance, materials, installation, paving, and maintenance.

• Roll up costs: Estimate the direct, indirect, and soft costs outlined in step 2 for each of your project sections. Labor, equipment, and haul-off line items should have their own costs that roll up to the project section of land clearance. Repeat for all project sections; then, add up the total costs of the sections to achieve the estimate.

• Apply markup, contingency, and escalation: Markup for indirect costs and other add-ons, contingencies for unknowns, and escalation cost percentages should be clearly stated in the estimate, along with any future calculations tied to pricing updates or project clarifications.

• Document assumptions: Create an assumption log for the estimate that clearly states what is included or excluded from the assumption and what data was used to make the assumption. Make the log a living document, where new data is added to provide context and update the estimate.

Step 6: Review, Validate, and Update

A good construction cost estimate isn’t a static document that’s sent to stakeholders and whoever holds the purse strings. A good estimate becomes an analytical tool that tells the story of the project.

Consider using peer review with trusted companies and partners — a second opinion may call out inconsistencies and errors in thinking. Run the estimate through a risk analysis to understand any blind spots and have it validated by financial partners.

It’s also a good idea to schedule updates to check the estimate against actual milestones along the project timeline.

Finally, don’t just use internal stakeholders to validate the process. Consult with contractors to validate processes and identify any oversights. This communication is especially useful in the early stages of Design-build and construction management at risk (CMAR) projects.

How Delivery Methods Influence the Estimating Process

Your approach to construction estimating will vary significantly depending on your chosen project delivery method.

• For design-bid-build projects, owners receive detailed estimates after design completion, with contractors submitting competitive bids. This method provides cost certainty but limits early collaboration.

• In design-build arrangements, the integrated team develops estimates throughout the design process. This allows for real-time cost feedback and design adjustments.

• Construction management at risk involves early contractor engagement, with estimating occurring at multiple design milestones. This enables value engineering while maintaining competitive pricing.

• Integrated project delivery features collaborative estimating with open-book pricing and shared risk/reward structures among all stakeholders.

Each delivery method requires bid management that you can manage only with the right estimating approach for the project structure.

Tools and Technology That Improve Estimate Accuracy

Modern technology improves efficiency, accuracy, and collaboration in construction estimation.

• Digital tools like cost management software streamline workflows and reduce errors in the estimation process.

• Construction analytics tools can analyze historical data to reveal cost trends and risks, enabling data-driven decisions and more accurate cost estimates.

• Building information modeling (BIM) technology extracts quantities directly from 3D models, dramatically improving accuracy and speed.

• Cloud platforms enable real-time collaboration among distributed teams, incorporating diverse expertise into estimates and ensuring alignment in costs and expectations.

Integrations between estimating systems and owner platforms streamline the bid management processes. This way, estimates reflect actual market conditions rather than theoretical projections.

Common Pitfalls in Construction Cost Estimating

Construction cost estimating spans the entire project and often includes unknowns that can balloon even the most detailed estimates.

Address these challenges in your risk assessments and with stakeholders:

• Underestimating indirect costs: Budget for 10-15% of total project costs. This amount can be reduced as indirect costs become clearer.

• Failing to account for scope creep: Document what extra projects or extensions will be included and approval processes.

• Outdated cost data: Use the most reliable and up-to-date data available.

• Ignoring labor availability: Keep up with seasonality and local labor markets.

• Not applying escalation correctly: Look at the entire length of the project and price indices for that timeline. Consider adding an escalation clause for transparency.

• Overreliance on a single estimating method: Account for variances in methodology accuracy and data needed. Consider hybrid estimates and updates as the project proceeds.

Most of all, reliable data and clear communication can go a long way to providing an accurate estimate.

How Accurate Estimates Impact ROI

Underestimating project costs leads to budget shortfalls that can trigger negative outcomes. Project delays while searching for additional funding can become a public relations (PR) nightmare and impact future projects.

Scope reductions due to budget shortfalls compromise project objectives and expected outcomes. And worst of all, insurmountable underfunding may lead to project abandonment, which means all parties lose.

While it feels safer, overestimation also carries risks. Inflated budgets can make viable projects appear financially unfeasible, leading to missed opportunities. Capital that could be deployed elsewhere remains tied up unnecessarily, reducing overall portfolio performance.

Precise construction estimating directly correlates with positive return on investment (ROI) with:

• Improved cash flow management and financing terms.

• More efficient capital allocation across the project portfolio.

• Reduced contingency requirements when estimates demonstrate reliability.

• Faster decision-making based on trustworthy financial projections.

• Prevention of budget overruns that erode investment returns.

• More accurate capital planning.

• Audit-ready financials and processes.

• Improved public accountability because your organization delivers on promises.

Selecting Estimating Software

Owners evaluating construction estimating software should focus on solutions that align with their specific project types, organizational capabilities, and integration requirements.

Look for platforms that offer comprehensive databases, integration with design software and BIM platforms, historical data analysis for benchmarking, and collaboration features.

Some commonly used construction estimating software options include:

• Destini: Supports preconstruction estimating and early-stage cost planning.

• Ediphi: Delivers cloud-based estimating and preconstruction cost management.

• STACK: Designed for takeoff and estimating, suitable for contractors and estimators.

• RSMeans Data Online: Offers a vast cost database for accurate pricing.

While these tools enhance estimating capabilities, pair them with bid management and construction analytics tools for a complete cost estimation strategy.

Improve Your Construction Estimation With Kahua

Accurate construction cost estimating starts with reliable cost data and competitive bid management. Kahua helps owners streamline the estimating phase through robust bid management software, ensuring:

• Better bid competition leads to better pricing.

• Centralized data for clear stakeholder communication and analysis.

• Strong cost insights that impact today’s project and better position you for tomorrow’s projects.

• Document controls and transparency for audit-ready public sector projects.

Kahua’s construction analytics tools provide valuable cost insights that reduce risk, increase capital efficiency, and keep your organization compliant.

Want to take control of your estimates and your budgets? Get a demo of Kahua’s bid management and analytics solutions today.