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Basic Techniques for Construction Cost Estimating There is no substitute for a complete, reasonably-detailed, properly documented construction cost estimate prepared for the appropriate quantities of work. A complete discussion of proper construction cost estimating techniques is well beyond the scope of this blog post, which presents only basic elements of complete cost estimates. The following should be considered:

1. During the project’s final design (construction documents) phase, and possibly earlier in some cases, construction cost estimates are typically organized in accordance with the version of MasterFormat, by the Construction Specifications Institute (CSI), that will be used for organizing the project manual, including the construction specifications.
2. Reasonably accurate estimates of quantities are a critical element for accurate construction cost estimates. Incorrect quantities can have a significant effect on the project’s estimated cost, even when all other aspects of the cost estimate are appropriate. Where computer models, such as computer-aided drafting and design (CAD), building information models (BIM), or civil information models (CIM) are used for determining quantities used in cost estimates, appropriate “reality checks” should be performed to verify the accuracy of quantities determined via computer models.
3. Where experience and prior bid or price proposal results are used as a basis for construction cost estimates, the basis-of-estimate information should be reasonably recent and very similar in nature, scope, and quality to the required work for which the construction cost estimate is prepared.
4. The backlog of work in the local bidding market can influence the availability and cost of resources in the supply chain, such as labor, construction equipment and machinery, materials and equipment incorporated into the work, and other costs). This is more of an influence on bulky commodity, low bid-focused sectors—such as highways and bridges, linear utility work, and civil/site work—that are very reliant on local supply chains (e.g., quarries and other borrow material sources, asphalt plants, ready-mix concrete plants, precast concrete items, etc.) with high freight costs compared to material costs. It is less influential though still pertinent, for non-metal, non-concrete architectural building elements and in heavy process sectors such as the water or energy market sectors, where higher cost equipment items (e.g., blowers, pumps, centrifuges, turbines, generators, and other process-mechanical and electrical equipment) are seldom local and have the opposite ratio of freight-to-product cost.  
5. Price quotes from perspective suppliers:
6. Typically, recent price quotations from prospective suppliers of materials and equipment should be obtained and saved in the project file of the entity preparing the construction cost estimate, in a dedicated directory.
7. Price quotes should be obtained for all major equipment to be incorporated into the work. Where certain materials will be a significant component of the probable construction cost, quotes should also be obtained from materials suppliers (for example, obtain price quotes for piping materials for water conveyance and sewerage projects).
8. Updated quotes should be obtained at appropriate points in the project’s design phase (not less than at each interim and final submittal of the design professional’s deliverables), and incorporated into the construction cost estimate.
9. Quotes should be obtained from multiple perspective suppliers, preferably for the products and manufacturers indicated by name in the construction specifications. the design professional’s or CMa’s construction cost estimate should not be based on just one prospective supplier’s price quote.
10. Understand that prospective suppliers’ price quotes, unless prepared in response to a formal solicitation with detailed specifications and contractual requirements, are typically based on the manufacturer’s own contractual terms and conditions (which are typically favorable to the supplier and inconsistent with owners’ own, or the design professional’s standard “Division 00” construction documents), and often exclude spare parts and extra materials, and onsite services (such as checkout, startup, field quality control, and training of facility operation and maintenance personnel). Such exclusions or omissions may result in significant cost differences between budgetary quotes furnished during a project’s design stage and actual bids or price proposals for construction.
11. Suppliers typically furnish to design professionals “budgetary quotes”, which may be for amounts greater than an actual price proposal furnished to prospective bidders or proposers shortly before bids or proposals are due. This approach helps suppliers avoid “showing all their cards” until the proper time.  The extent to which budgetary quotes may vary from actual quotes is highly variable and no generalized rule applies.
12. Materials and equipment suppliers typically view contractual risk differently than do construction contractors and often seek to avoid contractual risk and thus, typically exclude such costs from their budgetary (design stage) price quotations. Therefore, based on the specific project, requirements of the owner-contractor construction contract, and other matters, appropriate considerations should be incorporated into the construction cost estimates, rather than taking prospective suppliers’ budgetary price quotes without careful consideration. For example, on one past project featuring an equipment purchase contract worth approximately $9 million, the apparent successful bidder (an equipment manufacturer) advised that, if it would be allowed to furnish its typical insurance coverage rather than the insurance coverage required by the owner-drafted equipment purchase contract, the bidder would reduce its price by $1 million. Admittedly, this is likely an extreme example, with specific governing circumstances, but it illustrates how design professionals, CMa’s, and project owners may not fully appreciate the impact of “non-material” costs on suppliers’ price quotes for materials and equipment.
13. Actively inquire of prospective suppliers, when new or updated price quotes are solicited, information on current price volatility and market factors that are likely to affect pricing bid or proposed to the owner.
14. Costs for renting major, anticipated construction equipment and machinery, should be included in construction cost estimates. Such costs may be obtained from equipment rental sources, such as the Equipment Rental Rate Blue Book, by Equipment Watch, certain states’ department of transportation (such as California DOT (“CalTrans”)), and selected, published, construction cost estimating guidelines, such as S. Means Construction Cost Data. Construction equipment rental firms in the area of the project site may also be useful in identifying such costs.
15. An appropriate factor for anticipated escalation during construction should be included in construction cost estimates. Where the contract price will be on the basis of stipulated prices (either one or more lump sums and/or unit prices), the owner is requiring the contractor to take the risk of fluctuations in cost after the contract is signed and effective. When construction materials and equipment may be procured over a lengthy period, which is common on larger projects with longer durations, bidders and proposers will typically include in their bids and price proposals assumed increases in cost between the time the bid or price proposal is submitted to the owner and when the final purchase order for the subject items is signed and effective. Many suppliers’ price proposals expressly indicate the pricing is valid for a limited time, perhaps as short as seven days, in some cases. A common method of accounting for such price increases is to include in the construction cost estimate a factor to escalate all construction costs to the assumed midpoint of construction, based on an assumed rate of inflation and interest rate. However, other considerations may be applicable for certain projects and a single approach is not necessarily appropriate for all situations relative to cost escalation to be included in construction cost estimates. The industry periodical, Engineering News Record (ENR), tracks and publishes data on construction cost escalation.  ENR’s basic, high-level cost escalation data is available online, while more-detailed information may be available to ENR subscribers. Published cost escalation data, such as ENR’s, is merely a record of what has already happened, and predictions of future costs, where published, can be very uncertain. In spring, 2022, the Associated General Contractors of America (AGC) issued a press release indicating that, in general, construction costs had increased by a staggering 22 percent during the prior 12-month period.
16. Virtually every bid or price proposal for a construction contract includes contingencies hidden in the bid or proposed prices, to cover unanticipated costs and costs over which the contractor will have little or no control. The more contractual risk is allocated to the contractor, the greater will be the amount of contractor contingencies included in the bid or proposed prices. The design stage construction cost estimates should include appropriate amounts for such considerations, unique to the project and construction contract. For example, where a project owner’s unique “Division 00” documents include a provision prohibiting increases in contract price and contract times due to unanticipated, differing site conditions, or a “no-damages-for owner-caused-delays” provision, such clauses are likely to result in bidders and proposers adding contingencies hidden in their prices.
17. Include appropriate amounts for construction costs often alternatively referred to as “Division 00 and 01 costs”, “general conditions costs”, “general requirements costs”, and “field overhead costs”. Although many design professional project teams may include approximately 10 percent of the subtotal of estimated construction costs for Divisions 02-49 work, such rules of thumb should always be tempered with consideration of the project’s realities. For example, while costs for performance and payment bonds and insurance are “typically” approximately 1 to 1.5 percent of the construction contract price, various factors may necessitate using other rules of thumb; to illustrate, in 2014-2015, costs of bonds and insurance on capital projects in the New York City area sometimes approached five percent of the total construction contract price. Also, regarding costs for bonds and insurance, the construction duration until substantial completion, and the duration of the contractor’s correction period (typically one year after substantial completion) influence the contractor’s costs. Other risk factors also influence the cost of bonds and insurance.
18. Construction cost estimates should include an appropriate amount for the contractor’s business overhead costs unrelated to performing the project. Often, 10 percent of the construction cost subtotal is incorporated into construction cost estimates for the contractor’s overhead.
19. An appropriate estimate of the contractor’s benefit (profit) must be included. While many design professionals or CMa’s may assume a profit markup of five percent, many contractors will use seven or ten percent and, furthermore, may further increase the profit markup when they are required to accept significant contractual risk. the design professional’s or CMa’s project teams preparing construction cost estimates should bear in mind that risk is transferred to another party for an associated cost, and, with greater risk, the associated reward (profit) is typically also greater.
20. While most construction cost estimates are compared against the bid prices or proposal prices, many design professionals’ or CMa’s construction cost estimates are relied on by project owners for budgeting all construction costs. When this is the case, construction cost estimates should not only indicate probable bid or proposal pricing prior to construction, but should also include an assumed amount for construction change orders. Although many project teams may include five percent for construction phase changes, when the project is likely to be subject to differing site conditions or other potential cost increases, other assumed amounts for construction stage changes may be necessary.
21. The purpose of the cost estimate prepared by the design professional or CMa should be mutually understood by both the owner, CMa, and the design professional. Many design stage cost estimates are for construction only. However, occasionally such estimates are project cost estimates, where construction is but a single element. Project cost estimates must include appropriate amounts for design professional services, CMa services (if any), owner-hired field quality control (such as code-required special inspectors), project financing costs, fees paid by the owner to other professionals such as attorneys, accountants, and risk managers, property acquisition, owner relocation costs, cost of furnishings (as applicable), and other costs. Often, the design professional or CMa is not in a position to accurately estimate such costs, aside from the cost of their own services, and direction from the owner should be expressly obtained.

Construction cost estimates should be specific to the project and geographic region. It is typically inappropriate to apply construction costs on recent projects in, say, New York City (a very expensive construction market) to a project in Rapid City, South Dakota.

Also, a reactionary tendency to pile on markups and contingencies under the mistaken assumption of “more is better”, should be avoided. Owners are seeking accurate construction cost estimates, not estimates that are overinflated. An estimate that misses its mark on the high side may be just as harmful to the project, owner, design professional, and CMa as one that is too low.

As with any other professional services deliverable, qualified personnel, familiar with the project, construction contract risk allocations, site conditions,  local market factors, and other considerations, should be assigned to prepare the construction cost estimate. Appropriate quality assurance (QA) and quality control (QC) should be exercised for construction cost estimates.

Click here to read Part Three of Construction Cost Estimates--Advice for Accuracy in a Volatile Market