Construction estimating is the process of anticipating the expense of building a physical structure. Construction budgeting is the process of collecting bids to compile the exact costs of the project. While the estimating process is helpful in guiding a homeowner through the decision process, the budgeting step is essential, and one of the most crucial in the construction process.
Not all construction estimates are created equal
A construction estimate is a broad range number given early in the stages of pre-construction, which allows the homeowner to decide if the project is financially feasible. Many contractors will quote a lump-sum construction estimate shortly after looking at the project without validating its accuracy. If you get an “estimate” like this, run the other way. A better approach is for the contractor to spend some time, after the initial meeting, itemizing each job cost to explain how that lump sum is derived. While this approach is more time-consuming, it makes the homeowner feel more confident and comfortable with the integrity of the contractor. An itemized estimate can typically be put together in a week or two.
When information and plans may not be complete, the estimator must blend known data, such as a building’s size and scope, with other details based on unit costs, assumptions, historical data, and best judgment. As the design is refined, the final budget is based more on solid information.
A construction budget may take months to compile numbers and all design aspects are needed before a budget can be created (i.e., architectural plans, engineering, and specifications). A budget needs to be as accurate as possible because profit margins (the livelihood of the contractor) are impacted if any budgeted costs for the project are off by even the slightest amount. Every successful project starts with a precise and accurate cost budget.
It is our goal to share the information in this blog post to inform clients, potential clients, and those interested in the home building and remodeling industry of all the elements and work that goes into each estimate and budget your contractor provides.
Types of Construction Contracts
In an estimate-style proposal, every labor activity and material in the project is listed in painstaking detail but is not validated for accuracy. Rather than being billed off the estimate, the homeowner is billed for the actual materials used, actual hours worked, and work performed by subcontractors. The contractor’s fee is expressed in the form of a percentage of the project cost. This type of contract is also called a time-material or cost-plus contract.
These contracts are the most transparent since you will see very clearly how much profit the contractor is making, but these contracts can be very large and complicated, since they may list hundreds of different line items. Nothing will be left out—not even peripherals such as permits, roll-off dumpsters, and debris pickup.
The downside of the cost-plus contract is that construction starts based on approvals of estimates, rather than firm bids. This means the total price at the end of the project may be far different from what you initially expected to pay.
An alternative contract is fixed-price or stipulated-sum. Much like cost-plus, early-stage itemized estimation of the project cost is the first step in deciding if the project is financially feasible. Step two, under stipulated-sum contracts, is to design the entire project from plans and engineering to final finishing touches. This is done before construction begins and allows the contractor to create an accurate construction budget using real bids. Knowing the final price of the project before signing a contract allows the homeowner an opportunity to organize funding sources and plan actual expenditures in advance. Specifying all of the finishes upfront also allows for the project to run more smoothly.
Why is the Estimate Important?
Accurate estimates win new projects and business for companies. In the bid estimation phase, construction documents, take-offs, and other direct costs are used to allow the estimator to determine an approximation of job costs. Customers and builders are concerned about the price of a project because of the financial impact of expenditure overrun and the failure of project completion. It is in the interest of BOTH parties to spend time researching and estimating the expenses. No one wants to lose money, and construction estimating provides a useful tool in project management.
At Timber Ridge Properties our main priority is communication. From our initial construction estimate to finishing touches we want you to understand every element of your project and feel as though you are great hands. There are quite a few contractors out there that will try to reel you in with an incomplete estimate that makes the deal look pretty sweet but in the end, there are hidden costs and fees that make your project even more time-consuming and expensive than it originally should have been. We believe in full transparency.
If we sound like your type of builder – give us a call!