What Is an Estimate?

An estimate in its essence is an assessment of the probable total cost of some future activity. We put together estimates all the
time in our everyday lives, often with little or no calculating. For example, we might say, “If I drive into town today, it will cost
$12 to park” or “I’m going to have to come up with more than $1,000 if I have to replace that computer.” Estimating also occurs
in all industries and government agencies for two purposes that cover a variety of possibilities:
• To prepare budgets for future expenditures, or
• To try to anticipate what something will cost to implement: for example, setting up a new coffee station in the office

Unlike the everyday situations, these two examples generally involve some analysis and calculation. To estimate the cost of the
new coffee station, for instance, you would probably first identify what tasks have to be completed to get the new facility up
and running. Second, you would try to measure in some way the size of these tasks, which would help you with the last step:
assessing the cost of the tasks. This basic approach is exactly how we prepare an estimate for a construction project:
• Identify the work items that have to be completed to finish the project.
• Measure the size of these work items.
• Assess the likely cost of this work.

Definitions

Tender
A tender is an offer in writing to execute specific work, supply materials within a fixed time frame, as per conditions of the
contract. It is a submission made by a contractor in response to an invitation to tender. In construction the main tender
process is generally for the selection of the contractors that will construct the work.
CCDC
CCDC stands for Canadian Construction Document Committee.
Invitation to Tender (ITT)
An invitation to tender (ITT) or mostly know as a call for bids or a request for tenders. Is a formal, structured procedure f or
generating competing offers from potential suppliers or contractors looking to obtain the work.
CCDC 2
CCDC 2 – Stipulated Price Contract is the industry standard prime contract between Owner and prime Contractor. This
contract establishes a single, pre-determined fixed price, or lump sum, for the project. The contract outlines the high-level
administrative requirements and procedures needed for construction projects, including the role and authority of the
consultant, procedures for changes in the work, work by other contractors, insurance requirements, prerequisites for Ready-
for-Takeover, dispute resolution procedures, early occupancy by the Owner, and more.
Consultant
The consultant serves as the project owner’s advocate. They ensure that the contractor fulfills all conditions of the contract. Is
usually the architect or engineer.

The Role of Estimating in the

Construction Industry
Estimates serve a number of different functions in the construction process (see Figure 1.1). In the early stages of a
construction program, the owner needs an estimate of the probable cost of construction to assess the financial feasibility of the
project. This conceptual estimate has to be prepared from a minimum amount of information because it is required at a time
when the project is often little more than a vague idea in the mind of the owner. There will be few if any design details at this
stage because the design process will not begin until the owner is satisfied that the cost of proceeding with it is justified.
Once the design of the project is under way, budget amounts can be established for the various elements of the project using
procedures for a preliminary estimate. These cost budgets are compiled in a cost plan, which is a summary of all anticipated
project expenditures. The budget amounts contained in the cost plan are verified from time to time during the design phase
using more accurate estimating methods based on the specific design details that emerge in this phase of the project. This cost
management process also includes estimating the cost of alternative designs so that informed decisions can be made on what
to include in the design. When the design is completed, a final pre-bid estimate can be compiled to anticipate the contractor’s
bid price for the work. If this estimate is accurate, the bid prices obtained will be within the owner’s budget for the project.

Most contracts that transpire in the construction industry result from competing bids from contractors to supply goods and
services to meet certain specifications for a stipulated sum of money. The sum of money specified in such a bid represents the
total amount that the contractor will receive for performing the work described in the contract; clearly, an accurate forecast of
the cost of the work is necessary if the contractor is to profit from his or her endeavors and also be competitive. Providing this
cost forecast is the prime function of the contractor’s bid estimate prepared from the drawings and specifications supplied by
the owner to define the scope of the contract work.

Estimates are also required after work starts on the project. In cost control programs, estimating is required to help control
the expenditure of funds on a project. Contractors set cost targets based on their estimates of the cost of each component of
the work, and then they compare the actual cost of work against these target amounts to discover where corrective action is
needed to bring productivity up to required levels. Often during construction operations the owner or the designer asks the
contractor to quote prices for proposed changes in the scope of work. Each of these quotes amounts to a mini-bid that involves
an estimate of the full cost of the change followed by an offer to make the change for the price quoted to the owner.

Also, during the course of construction, estimates are prepared to establish the value of work done on a project. Most larger
construction contracts allow the builder to be paid monthly, the amount being the value of work completed each month. These
estimates can involve a full takeoff and pricing of the work done (detailed estimate) but are more often based on a simple
trade breakdown of the contract sum. The percentage amount of work now in place for each trade on the breakdown is
assessed, and the resulting values are summed up to establish the full payment.

Conceptual Estimates

Even though there may still be owners who proceed with a project on the basis of no more than the feeling that it will succeed,
most of the people and organizations that decide to build come to this decision after careful analysis of two primary factors:
the value of the development and the cost of the development.
The value of a proposed facility can be appraised from the profits that are expected to flow after its construction, or, if the
concept of profits is not applicable to the venture, it can be based on an assessment of the benefits that are expected to
materialize from the completion of the project. In either case an attempt will be made to quantify the utility of the proposed
development in terms of a monetary value. As costs and benefits are usually extended over a number of years, monetary value
will normally be determined by means of “present worth” analysis or other “time value of money” concepts.

Using this analysis, a feasible project can be defined as one in which the anticipated value of all benefits exceeds the estimated
total cost of putting the project in place. The cost profile of any project embraces many constituents, including the cost of the
land required, the cost of financing the project, the legal and general administrative costs, the cost of designing and
administrating the work, and, of course, the construction cost of the work. Further costs may also need to be considered, such
as commissioning costs, operating costs, and, possibly, marketing costs. All of these amounts must be determined by estimate.

Some costs are relatively easy to establish. The costs of land and financing, for instance, are not difficult to determine because
current market prices and rates are normally accessible, but the amount of what is most often the major cost component, the
construction cost, is far more difficult to ascertain with any certainty. We will see that the most accurate way to predetermine
the cost of construction work is by means of a detailed estimate using the methods employed by contractors. However, a
detailed estimate requires a defined scope of work, and as we have said, this is generally not available at this stage in the
project program.
So, a conceptual estimate is normally produced from merely the notion the owner has of what he or she would like to see
constructed. If the owner’s analysis has begun with the assessed value of a particular project, he or she should be in a position
to say that this project is viable if it can be built for a certain price, where this price is the maximum amount the owner is
willing to pay for obtaining the benefits that are anticipated from the project. In other words, owners would like to determine
if their project can be built profitably. Alternatively, they may have a defined budget amount, in which case they may ask,
“What can I build for this amount, and will it be profitable?”
In either case the owner needs an estimate of the cost of the work, which, at this stage, is referred to as the conceptual
estimate. This estimate, because of the lack of design details, must be prepared using one of the approximate estimating
techniques considered in the following section, but this is not to say that a crude approximation of costs will suffice. The
feasibility decision, which may involve thousands, if not millions, of dollars, is of major importance to most owners, so the
accuracy of the predicted costs used in the calculations is crucial if the decisions that follow are to be sound.

Preliminary Estimates and Cost Planning

As we have previously suggested, a decision to proceed with the venture signifies that the perceived benefits
justify the project cost. The largest component of this cost is often the construction cost established by the conceptual
estimate. This estimated sum becomes the construction budget, and, if the project is to remain feasible, it is clear that the
actual construction cost must not exceed this budget. Cost planning and subsequent cost control are pursued with the
objective of meeting the budget.
After the decision to continue the project has been made, the design team will form and begin to prepare a
first schematic design of the work. This design consists of preliminary drawings and specifications that depict the general
scope of the project, including the shape, size, and layout of the design but with little detail at this stage.

As the design develops, a number of preliminary estimates can be prepared informing the designers that their proposed
design does or does not meet the project budget. The preliminary estimates can also assist the designers by providing cost
information about alternative design details so that they can make more informed design decisions. By evaluating the benefits
and costs of a proposed design improvement, the designers can determine if the improvements are justified.

To facilitate a more detailed evaluation of the benefits and costs of a project and its constituent parts, preliminary estimates
can be subdivided into prices for groupings of building components that are common to most buildings. These groupings are
referred to as assemblies or elements and include substructure, superstructure, exterior cladding, interior partitions and doors,
vertical movement, and so on. The set of prices for these elements is referred to as the cost plan.

In the process of value analysis, the estimated cost of each element in the cost plan is compared with the perceived value of
that element to consider if the sum allocated to that component part of the building is justified by the value provided by the
component. At the time of the conceptual estimate, the estimator will have made numerous assumptions about these
elements based on discussions with the owner and perception of the owner’s needs. For instance, the exterior cladding of the
building may have been assumed to be concrete block masonry. During the
design stage it might be suggested that the cladding be changed to brick masonry. Cost estimates of the alternatives and the
relative benefits of the two systems will be evaluated to determine if the extra cost of the more expensive brick cladding is
justified by the increased value of a brick masonry over a concrete block exterior. Then, if a decision to spend the extra amount
on exterior cladding is made and the overall budget is still to be maintained, a saving in another element must be found to
balance the additional cost of the cladding.

In this fashion the design and accompanying estimates proceed until the design is complete and we have a budget in place that
reflects all the key design decisions. There are many possible reasons why this final budget may differ from that prepared at
the conceptual stage, but if cost planning has been properly applied, each step in reaching this point will have been made in
awareness of its cost implications, and when contractor’s bids are received, there will be no surprises
for the owner.

Preparing Construction Estimates

Methods of preparing estimates can be divided into two

main categories:
1. Preliminary estimating techniques
2. Detailed estimating techniques

The method adopted by the estimator mostly depends on what the estimate is to be used for and how much project
information is available. Estimates prepared in the early stages of a project generally have to rely on preliminary methods
because there is insufficient information to compile a detailed estimate. However, t certain techniques are available that can
allow detailed estimates to be generated from very little information. Preliminary (shortcut) methods are also used to prepare
estimates for cost management, not because there is a lack of information but rather because there is insufficient time
available to use detailed estimating techniques.

There are three further factors that have a significant influence on how an estimator goes about preparing a construction
estimate:
1. The type of project to be built
2. The delivery system used to move from the developer’s project idea to a finished structure
3. The nature of the contract(s) used in the delivery system

Figure 1.2 lists a number of different construction projects and identifies the estimating method that is usually adopted for
each type of project.
Project Delivery Systems and Estimating

Different project delivery systems make use of different types of estimates—conceptual, preliminary, and detailed—at various
stages in the development of the project, depending on how well the scope of work is defined at that particular stage.
Although the traditional design-bid-build delivery system is still used extensively, the use of innovative alternatives continues
to grow. This shift has resulted in a greater reliance on preliminary estimating methods because contractors and construction
managers are now being hired before project design has started, which means there is little or no information available to
prepare a detailed estimate.

Traditional (Design-Bid-Build) Delivery

The traditional delivery system (see Figure 1.3) requires the project to be fully designed before work begins and then makes
use of a single general contractor who assumes responsibility for constructing the entire project on the terms of a lump-sum
contract with the owner. With this system, a series of estimates is used as outlined in Figure 1.1. The conceptual estimates and
preliminary estimates that accompany the development of the design are meant to manage the cost of the project so that the
bid price obtained when the design is complete is within the budget of the owner. These early estimates generally do not relate
directly to any construction contracts, but they may be used as a basis for the fee charged by consultants involved in the design
process. For instance, the conceptual estimate of a proposed development may indicate that the construction cost will be $5
million. The prime consultant could use this sum to calculate the fee of $300,000 quoted to the owner as the price to design the
project. The design contract between the owner and the prime consultant could also refer to the $5 million estimate because
the owner’s budget and the terms of the contract may require the consultant to design a project that meets this budget. From
this you can appreciate the need for accuracy in the conceptual estimate that is developed from so little information.

Construction Management Delivery

One alternative to the traditional system of project delivery is the use of a construction management organization. This form of
organization (see Figure 1.4) seeks to facilitate overlap between project stages, often referred to as fast tracking, to allow
earlier completion of the project. Fast tracking is achieved by dividing the project into a number of phases. This approach
allows construction work to begin after the design and bid for only phase one are complete. Phase one may consist of nothing
more than demolition and site preparation, which require very little time for design. While the work on this first phase
proceeds, the design continues for phase two, which may be the building foundation system. Bids for this phase are then
obtained so that a second contractor can be hired to start work on phase two as the first phase nears completion. The project
continues in this fashion, phase after phase, until the entire project is in place.
With this organization structure, the construction manager assumes the responsibility for overall control and coordination
of the construction work that was provided by the general contractor under the traditional organization. One of the main
duties of the construction manager is cost control. This function is accomplished using conceptual and preliminary estimates
to produce a cost plan as previously described. The cost plan, however, now has to be broken down into a number of subplans
corresponding to the number of phases involved.

With the traditional organization, the general contractor’s bid will indicate, before work begins, the total money required for
construction, but with the construction management approach, the owner will have to wait until the bid on the final phase of
work is received before the total price is known. With the traditional organization, if cost planning has not been
effective and the contractor’s bid is unacceptable, there is an opportunity to make changes or even cancel the project before
incurring construction expenses. These opportunities are not possible with a fast-tracked project because construction work
will be well under way and much of it paid for by the time the bid for the final phase is received.

Because, on a fast-tracked project, the owner has to commit to the project long before the total price is certain, the owner has
to make serious decisions about the continuing viability of the project based solely on the information provided by
preliminary estimates. The need for accurate estimates on this type of project is paramount—estimates need to be continually
reviewed and updated as phases are completed and the design proceeds on subsequent phases.

Consequently, to achieve any success with a fast-tracked project, the estimating abilities of the construction manager and his
or her team have to meet the highest standard; if they do not, cost and schedule objectives will not be met.
Design-Build Delivery

Another alternative to traditional project delivery is the design-build concept (see Figure 1.5). In this approach, the owner
deals with a single organization that assumes the responsibility for both the design and the construction of the project. Design-
build is not a new approach to construction—it has been around in turnkey and package deal forms for many years—but in
recent years there has been such a resurgence of interest in this format that design-build has become the delivery system of
choice for many types of project, especially infrastructure projects often undertaken as public-private partnership, or P3,
initiatives.

Public-private partnerships are usually formed between a government agency such as a school board and a private
organization that is often a conglomerate consisting of a financier, a builder, and perhaps a facility operator. The scope of the
P3 arrangement is usually far wider than a design-build agreement, but the role and method of pursuing estimating are very
similar in each case.

With the design-build method, the owner indicates that he or she requires a certain facility and usually outlines some
parameters relating to location, size, design, and the desired time of occupancy. The owner may have prepared some
preliminary design sketches, but, more often, design-build contractors competing for the work will each submit outlines of
designs that they believe will satisfy the owner’s needs, together with a price for the project. On the face of it, this concept may
resemble a general contractor’s firm-price bid, but, in fact, it is very different from the contractor’s bid associated with
traditional project delivery.

Unlike a general contractor’s bid, which is obtained by means of a detailed estimate of a precisely defined scope of work, the
price included in the design-build contractor’s proposal will have to come from a conceptual estimate. This estimate will be
based on a design that, at this time, will probably consist of little more than a few rough sketches, some outline specifications,
and, possibly, an architect’s three-dimensional model of the concept. Here again, the need for care and accuracy in this
conceptual estimate is quite obvious when you consider that the design-build contractor is assuming the responsibility for
both the design and the construction of a project for the price quoted.
Estimates for Different Types of Contracts

As mentioned, most general contractors and subtrades enter into lump-sum contracts on the terms that they will perform a
defined scope of work for the sum that they stipulated when they submitted their bids. But there are a number of different
types of contracts, other than lump-sum, that call for different types of estimates.

Cost-Plus Contracts

Cost-plus contracts are usually the owner’s choice of last resort because they can place the owner in a vulnerable
financial position. Not only is the total cost of construction uncertain when the work begins, but also, under this type of
contract, the owner may not be able to avoid paying for the contractor’s mistakes and inefficiencies.

There are, however, a number of reasons why an owner may make this selection. A cost-plus contract may be used if it is
imperative that the work get under way quickly or if the work is very difficult to define, such as extensive renovations to old
buildings. In both situations the fact that work can begin without the need for detailed drawings can make a cost-plus contract
a viable proposition. Also, if an owner has worked with a contractor in the past with good results, the owner may wish to avoid
the time and expense of the bid process by awarding a cost-plus contract.

Because cost-plus contracts are followed by, rather than preceded by, the costing of the operations, there is little need for
estimating with these types of contracts. However, under the terms of some cost-plus contracts, the contractor offers to
perform the work for a guaranteed maximum price. In this case careful estimating is required to determine the maximum
price offered by the contractor, but much of the estimate will be based on “allowances” because the lack of specific design
details will prevent the establishment of firm prices.

Unit-Price Contracts

Unit-price, or measurement and payment, contracts are based on a pricing schedule that consists of a breakdown of the work
and estimated quantities for each of the items on the breakdown as shown in Figure 1.6. This payment schedule, together with
outline drawings, is provided by the designers for the use of prospective contractors in preparing their bids.

The bidding contractor enters a unit price against each of the items, and the total bid is determined from the aggregate of these
prices multiplied by the estimated quantity of each item (see Figure 1.7). The contract subsequently awarded to the successful
bidder provides that this contractor is paid for the actual quantity of each work item executed, multiplied by the bid unit price
for that item. This approach enables the owner to obtain competitive prices and exert some control over the total amount paid
for a project in which the final quantity of work is difficult to predetermine. Examples of where this type of contract is used
include civil engineering works, especially those that contain much underground construction in which the nature of the
ground encountered is not accurately discernible before the work begins. The contractor’s estimating procedure for unit price
contracts is similar to the detailed method used for lump-sum contracts, but the bid price must be dissected into unit prices,
each of which has to include an overhead and profit component.
Detailed Estimates

Before we begin to examine all the particular aspects of this topic, it may be useful to consider what the essence of this subject
is. Whether prepared by hand, by computer spreadsheet, or by means of a totally computerized system, a detailed estimate can
be analyzed in terms of the six principal stages of the process:

Stage 1. Quantity Takeoff—The work to be performed by the contractor is measured in accordance with standard rules of
measurement.
Stage 2. Recap Quantities—The quantities of work taken off are sorted and listed to comply with the CSI MasterFormat or
other standard to facilitate the process of pricing.
Stage 3. Pricing the Recap—Prices for the required labor, equipment, and materials are entered against the quantities to
determine the estimated cost of the contractor’s work.
Stage 4. Pricing Subcontractor’s Work—Prices are obtained from competing subtrades who quote to perform the work of their
trade; then, usually, the lowest bid from each trade is entered into the estimate.
Stage 5. Pricing General Expenses—The costs of the anticipated project overheads are calculated and added to the estimate.
Stage 6. Summary and Bid—All the estimated prices are summarized, the contractor’s markup is added, and the tender
documents are completed. The bid can then be submitted and, finally, the bid results recorded and analyzed.

The detailed estimating method, rather than any of the other estimating methods considered, is far more likely to produce a
price that is an accurate forecast of the actual costs of building a construction project. Because the very survival of contractors
and subtrades who obtain work by offering firm price bids often rests on the accuracy of their estimating, it will come as no
surprise that detailed estimating is the method of choice for bid preparation in the highly competitive construction industry.

The basis of a detailed estimate is the accurate assessment of the work in the form of a quantity takeoff that can only be
obtained from the full design of the project. Because of this requirement and also because detailed estimating is such a time-
consuming process, preliminary estimates are usually prepared by the other quicker but less accurate methods previously
considered. However, on lump-sum contracts in which cost analysts wish to accurately anticipate the value of bids to avoid
surprises to the owner, they will prepare a detailed estimate in the same fashion as bidders, using the design drawings before
they are made available to bidding contractors.

Estimating and Construction Safety

The Occupational Safety and Health Administration (OSHA) safety standards are the law, and contractors who fail to comply
with the requirements of this legislation face possible fines or even imprisonment. Most contractors take this law very
seriously, so the estimator has to ensure that the estimate is based on methods and materials that comply with its provisions
and that the pricing of estimates reflects these requirements. However, safety in the construction industry is not just
compliance with OSHA. There is a growing awareness among construction companies of the cost of poor safety on the work
site.
Apart from the direct cost of construction accidents, which is reflected in higher worker’s compensation insurance and
property insurance premiums, there is a large number of what are often hidden costs, including the following:
1. Tool and equipment repair and maintenance costs
2. Production interruptions and delay costs
3. Legal expenses
4. Expenditure on emergency supplies and equipment
5. Replacement equipment rentals
6. Investigative and administrative expenses
7. Cost of hiring and training replacement personnel
8. Overtime payments and other costs incurred in trying to catch up
9. Decreased output of injured workers on return
10. Damage to company reputation and subsequent loss of business

Because these costs can be substantial and may have a significant impact on the competitiveness of an organization, many
construction companies have been encouraged to introduce vigorous safety programs at their job sites. Such project safety
programs do, admittedly, have a cost, which is accounted for in the general expenses section of an estimate. However, with a
successful companywide safety program in place, estimators are able to use far more competitive prices in the estimates they
prepare, which not only improves the bid success rate but also helps to achieve the financial success of the project and,
consequently, the improved profitability of the company.
Summary

• Estimating serves a number of purposes in the construction process, including preparation of bids and cost control.
• The role of the estimator includes preparing conceptual estimates, preliminary estimates, and prebid and post-bid
estimates over the course of all phases of a construction project.

• Conceptual estimates are used to assess the feasibility of a project by comparing the anticipated cost with the value of
a proposed project.

• Preliminary estimates are used throughout the design stage of a project, primarily to ensure that the project budget is
not exceeded.

• Different project delivery systems—traditional design-bid-build, construction management, and design-build—make

use of conceptual, preliminary, and detailed estimates at various stages during the course of a project.

• Although firm-price lump-sum contracts are used on most construction projects, owners may adopt a cost-plus
alternative when the scope of work is difficult to define or when there is insufficient time to prepare complete design
documents before work begins.

• Detailed estimates may still be required with a cost-plus contract in which a guaranteed maximum price is involved.

• Unit-price contracts call for a breakdown of the work and a separate unit price for each item on the breakdown. This
requires the estimator to prepare a series of unit prices, each of which has to account for the labor, materials, and
equipment involved and needs to include overhead and profit components.

• A detailed estimate is the most accurate forecast of construction costs but can only be prepared given a defined scope
of work in the form of detailed drawings and specifications.
A detailed estimate comprises six steps:
o Takeoff quantities
o Recap quantities
o Recap pricing
o Subcontractors’ work pricing
o General expenses pricing
o Estimate summary

• The estimator should be aware of Occupational Safety and Health Administration safety requirements and account for
the cost of safety programs in construction estimates.

Example Takeoff Sheet: