Estimating construction projects as a new GC can be intimidating, read this guide to construction estimating and find the method that works
One of the toughest parts of a general contractor’s job is estimating costs. One of the reasons this is so tough, is that there are a lot of variables at play. Costs can vary greatly depending on the going rate for labor, commodities prices, and product supply in relationship to demand. Unfortunately, bidding is also critical for business. Here is a guide to the process, including both methods and special considerations to ensure the numbers are accurate.
Before we begin, let’s talk about the importance of estimate accuracy. In short, inaccurate estimates are bad for business. If you give an estimate that doesn’t realize an adequate profit or, worse, loses money, it can put you out of business. On the other hand, being too generous with your bidding probably means you are going to lose the bid. If you don’t lose it, then the customer might feel cheated when those bills come in.
Even more importantly, depending on your jurisdiction these estimates can double as contracts. This means that if you give an inaccurate bid and it is accepted, you must do the work for the agreed price. This means you lose the opportunity to charge a higher price later. Also, make sure that you specify what is included in your bid. Doing so protects you, because if something is added later then you can charge the customer for it. You’ll also have less chance of a dispute that ends up in court. In short, accurate estimates are your business’ best friend.
There are three basic methods for estimating the cost of a project. Each method has its strengths and weaknesses. Depending on your manpower, the complexity of each job, and other factors, any method can be used successfully.
With the “stick method” or unit method, you will count the cost of everything that’s used, then add overhead and profit. Doing this requires a thorough understanding of everything that you will need to complete the project, as well as the cost of each item. In addition, you will add the cost of labor. We have another article on this aspect of estimating.
To find out how much you will need to spend on materials, you need to look at the plans. Using a digital scale pen, measure all the walls of your project. This will tell you how many square feet of wall you need, and from this you can count the number of sheetrock pieces. In addition, you can use this to estimate the number of beams and other items needed. Count the doors, windows, and other features.
Next, add up the other costs. For example, you will need help from office staff in addition to the laborers. For instance, you might have to rent a crane or excavating equipment that you don’t normally use. Another cost to include is the hiring of subcontractors. Especially if you’re starting out as a contractor, there’s a good chance you won’t have a plumber or electrician on staff. Make sure you know how much these are going to cost. Once you have these totals, you can determine total costs based on client specifications.
This option is much simpler, and it can be just as accurate if you have adequate industry information. Here, you look at what each piece of the project will cost. For example, a contractor building a single-family home will have one price per square foot for a kitchen, bathroom, living room, bedroom, and garage. Kitchens are very expensive to build due to the amount of plumbing and electrical segments, plus they might have a fuel line for the stove. Bathrooms are a little bit less expensive, but fixtures cost money. Bedrooms and living rooms, on the other hand, are relatively cheap.
To estimate material costs this way, determine the unit cost by different assembly. Let’s say you are building a three bedroom, two bath house with a garage and deck. You’ll add together the combined square footage of the bedrooms and multiply it by the square foot price. Then, do the same thing with your bathrooms. Next, add on the costs for your living room, garage, and deck. Total all of these unit costs, and you will have the total.
Here's the thing with using the unit method: you must have an all-inclusive cost structure for each unit. That means that you are considering the cost of having a cement mixer come over and pour the garage or bathroom floor. And, you must include the cost of hiring a plumber in your bathrooms and kitchen figures.
Finally, there’s arriving at a total based on how much you think labor is going to cost. In a nutshell, this method is based on the premise that you will spend about as much on materials and other costs as you do on labor. So, to do this you are just going to take the labor number and double it to get a total.
At the end of the day, you are considering the same set of costs with stick and unit methods. You’re just calculating them differently. Calculating by the stick method gives a detailed view of the costs, while the unit method relies on an average for its accuracy. Depending on the complexity of your project, either might be better. The main advantage of stick estimating is that it’s easy to plug in a different cost value if, for instance, the homeowner decides they want more expensive cabinets. On the other hand, unit method estimates are faster to build. Finally, basing the total on labor costs runs the risk of your project owner asking a lot of questions. If you are dealing with a homeowner, be prepared to justify that number.
No matter which method you choose, don’t forget to add markup. Most experts recommend doing this at each step along the way. Therefore, for the stick method you’ll include profit for each piece of materials, as well as adding it to your labor rates. Unit method calculations will add the total profit for each part of the project. Finally, the labor cost method will add markup to the labor section and the materials section. Keep in mind, you’ll need to keep track of percentages no matter which method you choose.
Takeoff is the process of determining how many screws and pieces of sheetrock you need to complete the project. Experts say that you can do this at estimate stage or later, after the bid has been won. If you do it now, it’ll slow down estimating while you count everything. If done later, you might have unpleasant surprises. This is especially true if you need to break down totals because you’re having trouble getting everything ordered. If you have no inventory of building materials, this issue can be a real headache.
On the other hand, a “shopping list” up front has its advantages. For smaller contractors, having a takeoff list upfront allows the office staff to place materials orders as soon as the contract is signed. If there are issues obtaining materials, then there is more time to solve the problem. This isn’t a huge issue if the materials are needed later in the process, however.
At the end of the day, whether or not you do a takeoff at estimate stage depends on the method you are using to estimate your costs. Using the stick method generates a takeoff list automatically. Minor adjustments might have to be done later, but you at least have a good estimate. On the other hand, using the unit or double labor method doesn’t generate a takeoff list. In this case, making a list upfront is a waste of time. However, you’ll need to do it as soon as the contract is signed.
No matter how you decide to calculate costs for estimating purposes, it’s critical that each line item is accurate. Prices can vary significantly from one state to another, and even within the same state. For instance, it is much more expensive to live in the part of Virginia that is backed up to Washington, DC than it is to live in the Appalachian part of the state. You’ll find similar situations all over the country.
Unfortunately, guessing your costs wrong will result in an inaccurate estimate. This will be true no matter which calculation method you use. As the saying goes, garbage in, garbage out. Your calculations are only as good as your information. To ensure accuracy, you need to rely on regional information. Industry publications aren’t always accurate, so be sure to obtain accurate figures through the construction grapevine and by surveying local sales prices.
No matter where you live, inflation is a part of life. Commodities prices rise and fall with the seasons, and with the law of supply and demand. Even production costs to obtain commodities can influence prices. In addition, there’s inflation and transportation issues to consider. This kind of price fluctuation tends to affect a wide variety of markets at the same time.
On the other hand, there are local conditions that can affect prices. Are you making an estimate to fix a hurricane-damaged house? This kind of natural disaster will increase the price of construction materials in the immediate area. Demand is much higher, and transportation is harder at the same time. Building boom? You might have some suppliers cashing in. No matter what the market conditions are, be sure to keep track of them. In extreme cases, you might have to add a little bit of extra into an estimate to meet these contingencies.
Joyne provides a number of material price tracking dashboards that track material price movements each month, we can be a great place to find the current average prices for common items.
Labor pricing is highly variable based on region. We know of one metropolitan area where there is a formal state minimum wage, but the effective minimum is much higher. In this case, there is a labor shortage and employers across the state line two miles away must pay a higher minimum. As a result, employers on both sides of the border pay about the same for similar work. Drive fifteen miles away, however, and labor prices vary significantly. If you use state average labor rates for that particular area, you’ll end up underestimating expenses.
Even without a significant labor rate variation for an entire area, you might see it in a particular trade. Some areas might be short on electricians or plumbers, with contractors having to pay higher rates as a result. You need to ensure that going rate is reflected in numbers. Fortunately, if you are an established contractor there’s a good chance you can use historical data to predict labor rate. For newcomers to the business, be sure to get area-specific and current intelligence.
If all of this sounds complicated, you’re right. Construction estimating is tough because of the large numbers of materials and individual labor units. Worse, if you’re a new contractor then unit and double-labor calculation methods will be harder to use. Unit pricing often takes advantage of a lot of experience. Using Excel helps, but it will only get you so far. Fortunately, there are some software programs that can help. With accurate information, they can increase accuracy and cut time spent by about 75%. At Joyne, we provide free estimating software as part of our pre-construction platform.
These are all-in-one construction management software. Typically, they will have a basic bidding/estimating functionality. Just input item costs, and the program can prepare a quote you can send to your clients. Most of these platforms will also have project management, customer relations, billing, and other functions as well.
Most of these have takeoff functionality as well. Some estimating programs will have regional cost data built in and will update these on a regular basis. This data is usually around 12 months our of date, while they provide a good starting point, it’s always important to verify information, this information makes your job easier. If you aren’t ready to fully automate your business processes, these are a solid option. The Joyne platform provides a comprehensive database of over 6 million building material prices, which you can access when preparing your estimates for free.
Unfortunately, everything we have discussed so far assumes that you either have an in-house estimator or do the job yourself. Hiring a designated estimator is expensive, and they create a significant amount of overhead. Likewise, having the owner do estimating takes him away from some of the other aspects of running the business. Who knows, he might spend most of his time doing it! Worse, this isn’t scalable for very long.
Especially if you’re just starting out, consider outsourcing your estimating. Beginning contractors often don’t produce a large number of estimates each week. However, they might have a relatively low conversion rate due to a lack of name recognition and a track record. However, outsourcing the estimating process frees up staff hours to actually do construction work. You’ll have an experienced estimator who can do the job faster. These professionals charge a flat fee per estimate, so you can just write a check.
Of course, as your business grows it might be more cost effective to hire your own estimator. Experts say that the break even point is around 10 bids each week. For a small firm that builds family homes, it may take a while to reach this point. Depending on your business needs, your mileage may vary.
Estimating is an intimidating part of the construction business. There are many moving parts, and errors are easy to make. Fortunately, with the tips discussed here, you will be better prepared to tackle this challenge. Then, you can do what you enjoy: build things, and make a profit doing it.