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Library Construction Cost Estimating: A Step-By-Step Guide

— 16 min read

Construction Cost Estimating: A Step-By-Step Guide

By Bruno Pasini and Daniel Gray
Last Updated Aug 8, 2024

Construction estimating is the process of calculating all of the required costs for a
construction project, including direct costs (e.g. materials and worker wages) and
indirect costs (e.g. equipment depreciation and office worker salaries). Professional
construction estimators perform this essential step in the preconstruction process,
which helps ensure that owners and contractors are able to complete a construction
project profitably.

Estimating project costs accurately requires detailed knowledge of construction

materials, specifications, techniques, codes, and pricing trends. We'll walk through all
of the steps professional estimators use to determine costs on a project—from
reviewing a bid package all the way through accounting for contingency and profit.

0:07 / 22:26

Table of contents

The Importance of Accurate Estimating

 8 Steps in Construction Estimating
1. Review the bid package.
2. Conduct a site visit.
3. Perform a material takeoff.
4. Solicit pricing from suppliers and vendors.
5. Evaluate labor requirements.
6. Determine insurance and bonding costs.
7. Calculate overhead and indirect costs.
8. Account for profit and contingency.
Turning an Estimate into a Bid Proposal
Types of Estimates
Construction Estimating Software
Data-driven Estimating for Long-term Growth

The Importance of Accurate Estimating

Accurate estimating is essential for the success of any construction project. Both
owners and contractors rely on cost estimates to move a project from
preconstruction to completion.

Without an initial understanding of a project’s costs, owners cannot determine

whether a project is feasible within the allotted budget. After a preliminary estimate,
design or scope modifications may be required in order to alter project costs.

Contractors also depend on accurate estimates in order to prepare bids that are
competitive and profitable. A contractor that underestimates the cost of a project
could be forced to cut into their own profit margin to cover project costs.

On the other hand, overestimating the actual project costs could lead a contractor to
submit a bid that’s too high to be selected. Even in negotiated bidding scenarios,
construction estimates need to be accurate in order to strike a balance between the
owner’s budget and the contractor’s profit.
8 Steps in Construction Estimating
Construction estimators follow the same basic steps whether they work for a general
contractor, specialty contractor, or owner. When making a construction estimate,
estimators are typically working to come up with an accurate price for a specific
project as part of a competitive or negotiated bidding process.

In general, construction estimators follow a process that begins with reviewing bid
documents, including construction specifications and contract documents, and
includes steps to account for every known cost, including materials, labor, insurance,
and overhead. By the time an estimator is finished, they will have prepared a
construction estimate that takes into account all required costs as well as a markup
for profit and contingency.

1. Review the bid package.

The bid package contains all of the documents necessary for bidding: owner-
contractor agreements, bond forms, general conditions, supplementary general
conditions, and construction specifications. Contractors who bid on a project are
bound to complete the work laid out in the bid package, so a professional estimator
spends a significant amount of time to ensure they are familiar with every aspect of
the project.

Drawings are typically subdivided according to their purpose: site, architectural,

structural, mechanical, electrical, and more.

Both general contractors and specialty contractors will review the documents, but
specialty contractors often refer only to the documents that are relevant to the work
they will perform on the project.

When reviewing the bid package, construction estimators generally follow a standard
process.

1 Ensure that all drawings and specifications are present.

Documents may be numbered sequentially or subdivided according to the
preference of the design firm, so estimators take care that they have everything
necessary for an accurate estimate.
 2 Get an overview of the project.
With a quick scan through the specs, estimators get a rough idea of the scope
of a project, its material needs, and the quality of finishes.

3 Evaluate structural requirements.

By reviewing structural drawings, estimators begin to understand the material
and equipment needs of the building.

4 Review mechanical, electrical, and plumbing (MEP) requirements

Estimators take into account the ways in which a building’s MEP needs will
influence the construction process for the building, including potential
underground work.

5 Identify any nonstandard items.

Contractors tend to specialize in certain types of work, so estimators need to
pay special attention to unusual floor plans, features, or finishes that could
affect the project’s cost.

Throughout the estimating process, the estimator will continually refer back to the bid
documents to ensure that their estimate encompasses every aspect of the stated
specifications and requirements. By getting an overview of the documents, the
estimator takes their understanding of the project through every phase of building a
comprehensive and accurate estimate.

After getting an overview of the documents, an estimator for a general contractor will
also subdivide the project into work packages. Work packages may be later assigned
to specialty contractors, and they also serve the important purpose of ensuring that
all work is accounted for and no work is assigned twice.

By reviewing the technical specifications (also called construction specifications or

specs), the estimator can clearly see the scope of work according to various
divisions of the Construction Specification Institute (CSI)’s MasterFormat: concrete,
masonry, metals, finishes, plumbing, and dozens more.
For example, the estimator may create one work package that includes the materials
and labor for rough-in plumbing and another that covers windows and installation.
Many such work packages will be created for a single construction project.

Dividing the project into work packages requires extreme attention to detail:
The estimator must be careful that every aspect of the project is included in a
work package, or there will be work that has not been assigned to a contractor.
Later in the project, the general contractor will be on the hook for these
unaccounted project costs.
The estimator must also be sure that no project detail is included in multiple
work packages, or the ultimate bid may be too high to be competitive since
costs are multiplied unnecessarily.
In cases where an aspect of the project is divided into multiple work packages,
the estimator must clearly define the scope of each work package to ensure
that each portion is adequately completed by the parties responsible.
Once an estimator has divided all of the work into packages, the general contractor
can solicit bids from specialty contractors for some or all of the required construction
work.

Leverage estimating data through the entire project

lifecycle.
Learn how an industrial & infrastructure contractor transformed their estimating
process to improve efficiency and accuracy — and seamlessly connect
financials to work processes.

Read Their Story

2. Conduct a site visit.
In some cases, a site visit is required before submitting a bid. However, a site visit is
recommended in nearly all cases, as estimators can get a better sense about site
conditions from a thorough visit rather than simply relying on elevation drawings or
photographs of the proposed construction site.

Depending on the type of project, a specialty contractor may be less likely to perform
site visits, relying instead on the documentation provided by the project’s owner and
general contractor.

The main purpose of a site visit is for the estimator to better understand the
conditions of the site and how those are likely to influence the project costs.

For example:
A site with poor drainage, difficult subsurface soil conditions, or adjacent
buildings could add complexity and cost to a project.
A site lacking easy access could make it more difficult to maneuver equipment
and materials, increasing costs.
A site with poorly located utilities (water, electricity, etc.) could add
underground work requirements that raise the cost.
During a site visit, an estimator will make notes, take photographs, and collaborate
with contractors to determine the potential influence the site may have on delivering
the project successfully.
In addition to the site itself, the estimator should also familiarize themselves with the
surrounding area if they aren’t already aware of:
Local requirements (codes, permits) or regulations (noise, working hours,
parking)
Availability of specialty contractors and construction equipment rentals
Nearby roadways, which may need to accommodate heavy equipment or
delivery vehicles
Overall, the site visit is critical for estimators, who must determine the feasibility and
cost of delivering the project according to specifications in a set location.

3. Perform a material takeoff.

Estimators perform a material takeoff (also called a quantity takeoff) by reviewing the
construction documents and counting every item that is required for the project.
Material needs are typically listed according to the way they are measured. For
example:
Quantity (e.g. doors)
Area (e.g. drywall or flooring)
Volume (e.g. concrete)
Length (e.g. wire)
On large construction projects, the owner or engineer may create a bill of quantities
(BOQ) to simplify the bid leveling process. This document breaks down the scope of
work into an itemized list of activities and materials. Even when a BOQ is provided,
most contractors still perform a takeoff to verify the quantities and identify
discrepancies.

General contractors will typically do a takeoff in order to create accurate work

packages—either to complete themselves or assign to specialty contractors. A
specialty contractor typically reviews the specifications to perform their own material
takeoff in order to ensure they have an accurate count before reaching out to
suppliers and vendors.

After completing a takeoff, estimators have a comprehensive list of every material

that will be required to complete the project. Additionally, estimators will use
information from the takeoff to determine what equipment will be needed for each
work package.

Estimators may perform a manual takeoff, which involves using paper copies of
drawings, rulers, highlighters, digital measuring tools, and pencils to count and
measure the required materials using the specifications. Nowadays, most estimators
rely on digital takeoffs using construction estimating software, which greatly speeds
up the process. Nonetheless, many estimators still double-check the accuracy of the
digital takeoff to ensure that their estimate is accurate.

With this information, contractors are able to work with material and equipment
suppliers to get pricing information that they can use while creating a bid.

4. Solicit pricing from suppliers and vendors.

With a definitive list of materials and equipment, specialty contractors begin to work
with suppliers and vendors to get pricing information.

Specialty contractors have to be mindful of a few things when pricing materials.

Material waste requires ordering extra materials.

Contractors should work to eliminate unnecessary material waste, but some
waste (due to material sizing, for example) is inevitable. Ideally, a contractor will
be able to look back at past projects to calculate the expected amount of waste.

Bulk pricing may dictate order sizes.

For instance, a contractor may need 37,000 cubic yards for a project but find it is
more cost-effective to purchase 40,000 cubic yards due to supplier pricing
structures.

Quotes have limited lifespans.

A specialty contractor who receives a quote for materials needs to ensure that
quote is valid long enough to have their bid accepted and order materials for the
project.
Contractors who do not already own equipment essential for the project will also
need to reach out to equipment vendors to determine pricing for leasing or renting for
the duration of the project.

Since equipment may be owned, purchased, leased, or rented, contractors must

determine how the project affects associated equipment costs (for example
depreciation or maintenance) and build this information into their estimate.

At this point in the estimating process, contractors will have the first definitive dollar
figures that need to be included as project costs. From here on out, estimators will
add more direct, indirect, and overhead costs to understand the true financial burden
of the project from the contractor’s perspective.

5. Evaluate labor requirements.

With information from the takeoff, estimators can also determine the labor necessary
for a project. In short, the estimator needs to specify:
Which roles are required for the project?
How many hours of labor will be used to complete the project?
How productive the crew will be given data past projects and information
about the current project?
For specialty contractors, the crew mix usually consists of tradespeople, laborers,
and assistants. For general contractors, there may be project-specific managers or
other professionals whose roles are considered direct costs because they are tied to
one specific project.

In either case, estimators must be sure to calculate the loaded labor rate for wages
rather than simply multiplying total hours by hourly wage. The loaded labor rate
includes:
Wages
Taxes
Insurance (including health, dental, vision, or life insurance as well
unemployment and worker’s compensation insurance)
Retirement contributions
Union dues
Sick or vacation leave
Estimators must include all of the costs associated with employing someone for the
duration of a construction project, otherwise the estimate will not reflect the true cost
of labor.

6. Determine insurance and bonding costs.

Insurance and bonding mitigate risk for owners and contractors alike, but this benefit
comes with a cost that must be included in project estimates.

Nearly all construction companies require general liability insurance, and depending
on company size, scope, and role, they may also have other policies, including:
Builder’s risk insurance
Errors and omissions or professional liability insurance
Inland marine insurance
Commercial auto insurance
In addition to insurance, contractors working on public projects (and some
commercial projects) may require a variety of construction bonds, including:
Payment bonds
Performance bonds
Bid bonds
Both bonds and insurance cost money for contractors, which means that the costs
must be covered by the projects they complete.

Generally speaking, bond and insurance coverage have annual costs, which
contractors then spread across projects throughout the year. However, contractors
may need to secure additional bonding capacity or insurance coverage for a specific
job.

In any case, estimators must add the cost of bonding and insurance requirements to
the project estimate.

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7. Calculate overhead and indirect costs.

In addition to the direct project costs, estimators must also consider the indirect field
costs associated with construction as well as the overhead costs required for
running a construction business.

Indirect field costs could include:

Permits
Trailers or temporary offices
Site cleaning
Professional services
Equipment costs (depreciation, insurance, maintenance, taxes, and fuel)
Software
These costs, while not clearly laid out in the bid package, are necessary for the
construction of a project. Therefore, estimators consider the rate for each of these
items as well as the duration for which they’ll be needed (for example, in the case of a
temporary site office).
In addition to these indirect project costs, there are also general overhead costs, also
known general and administrative (G&A) expenses. These are the cost of doing
business—whether or not a contractor has projects to work on, they need to pay
these expenses.

To ensure that the business can keep operating, contractors need to wrap overhead
costs into their estimates by spreading them out over all of their projects annually.

A few common overhead expenses include:

Rent for office space
Administrative salaries
Software subscriptions
Utilities
Taxes
Depreciation
Insurance
Generally speaking, estimators consider the total expected annual revenue of the
company as well as the total expected annual overhead cost. With these two figures,
the estimator can allocate with reasonable accuracy a specific percentage of the
overhead cost to each project.

8. Account for profit and contingency.

After calculating all of the costs for a construction project, the estimator will adjust
the total to account for both profit margin and contingency. The profit is the fee that
the contractor earns for the contract—and that money can be reinvested to continue
growing the business. Contingency, on the other hand, is a portion of the contract set
aside for overruns and waste—which are generally to be expected on a construction
project.

Each construction business determines its own minimum attractive profit margin by
considering growth goals, market conditions, and more.

Similarly, contingency numbers vary significantly across the industry depending on

type of construction, company size, and project risk. Many construction businesses
usually add anywhere from 5-10% of the contract price to account for contingency.
At the end of this process, the estimator has determined the sales price that covers
all of the project costs—materials, labor, equipment, indirect field costs, overhead
costs, and contingency—and returns a healthy profit. With this number in hand,
contractors are prepared to submit a competitive bid or begin negotiations with a
project owner or general contractor.

Turning an Estimate into a Bid Proposal

Once the sales price is determined, a bid manager will typically create a construction
proposal that details everything included in the bid price in clear and concise terms.
Because bid reviewers will try to ensure that everything in the scope of work is
included in the bid price, it is important to use the same language shared in the
construction specifications and drawings.

Using the CSI format in the estimating process makes it easy to compare each
section of the bid price to a section of the specifications. Even when the bid is for a
lump sum contract, using a standard format makes it easier to create a schedule of
values while also improving the integration between estimating software and
accounting systems.

Types of Estimates
Estimators don’t only prepare construction estimates for the bidding process.
Different types of estimates serve different purposes depending on where it’s used in
the project lifecycle. For instance, an early estimate may simply provide a developer
with the rough cost for a particular project, giving a sense of whether it will be viable
to get financing.

Or a project in the midst of design may receive an estimate that helps determine
whether finishes need to be modified to keep the project in scope for the expected
budget.

The American Society of Professional Estimators (ASPE) details five levels of detail
in estimating.

Level Name Description

 Based on data from similar past projects, this type of
Order of
1 estimate provides a very rough idea of potential
magnitude
costs.

Schematic Typically involves cost per square foot calculations

2
design for existing buildings with similar scope and finishes.

Using a tentative design and lists of expected

Design
3 materials and quantities, estimators provide a rough
development
estimate for the project.

Construction Using a nearly finished design, estimators establish a

4
documents realistic budget for a project.

Contractors use the bid documents to prepare a bid

5 Bid estimate estimate, which is the cost at which they can
complete the project.

When referring to estimating, most contractors are referring to a bid estimate, which
is a precise evaluation of the costs associated with a particular project with a finished
design.

Construction Estimating Software

Construction estimating software can help streamline the process of creating a
construction estimate by automating certain aspects. That said, a skilled estimator is
still generally required for the process. Software tends to help with calculation and
tabulation, but a talented estimator has knowledge of construction projects, prices,
processes, and productivity rates that dictate which costs are entered into the
software.

In any case, construction estimating software has greatly reduced the burden faced
by estimators—and it has made it easier to make small adjustments without having to
manually recalculate entire projects.
Here are a few ways that estimator software supports the construction estimating
process:
Automated takeoffs powered by machine learning can automatically determine
the quantity of materials needed by scanning project drawings and documents.
Computer calculations reduce human error and enable estimators to make
small changes to costs that are reflected across the entire estimate
instantaneously.
Productivity increases for estimators using software, as they are able to focus
on the human aspects of estimating (determining which equipment is
necessary, finding better pricing information, etc.) rather than the manual
aspects.
Along with other construction management software, estimating software is key to
increasing productivity—and thus increasing the competitiveness of future bids.

Data-driven Estimating for Long-term Growth

Construction estimating is a crucial process for any construction business. Financial
management principles dictate that a business must understand its costs and turn a
profit in order to continue to grow — and that begins with excellent estimating
processes.

Financially sound construction businesses have a data-driven estimating process.

Job costing data from past projects as well as detailed understanding of indirect and
overhead costs enable companies to create estimates and submit bids that are both
competitive and profitable.

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CATEGORIES: PRECONSTRUCTION
TAGS: ESTIMATING

Written by

Bruno Pasini
Bruno Pasini is a Solutions Engineer at Procore, where he develops new tools to simplify and
streamline the preconstruction process. He spent nearly 20 years as an estimator and
project manager for general contractors and specialty contractors in New York and
California. He currently lives in San Diego.
View profile

Daniel Gray
27 articles
Daniel is an educator and writer with a speciality in construction. He has been writing
construction content for Procore since 2022, and previously served as a Procore Content
Manager before continuing to pursue an education career as an Assistant Headmaster for
Valor Education in Austin. Daniel's experience writing for construction — as well as several
clients under an agency — has broadened his knowledge and expertise across multiple
subjects.
View profile
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