Construction Estimating Basics, 10 Steps for Subcontractors
In the world of construction estimating, you have to estimate and submit bids in order to win projects and stay in business. This means bidding low enough to win against many competing subcontractors, while high enough to cover all the actual costs like labor, material, subcontractors, equipment costs, and indirect cost otherwise known as overhead required to run your subcontracting business. And don’t forget including enough profit for taking on the risk and growing the business. In the steps below, we’ve outlined a proven construction estimating system for subcontractors to learn the basics with the ability to read the full chapters corresponding to the section.
10 Steps to estimate construction projects
- Choose the Right Work to Bid
- Reviewing Construction Specifications
- Reviewing Construction Drawings
- Performing a Construction Takeoff
- Creating your Construction Estimate
- Determining Overhead and Profit
- Building your Construction Proposal
- Construction Contract Basics
- Handling Change Orders
- Construction Estimating Software
Choose the Right Work to Bid
The first step in the construction estimating process is selecting the right type of work to bid. You should avoid bidding construction projects where you have limited experience and are more likely to make mistakes during the estimating process and the construction process should you win the project. There’s a learning curve for construction estimators and your project management team when taking on any new type of building construction that can eat into your profit and reputation if you make mistakes during the process.
Additionally, at what stage is the project in now, meaning are you bidding a project in the early design phase and expected to go through several iterations of design? At best, construction firms, should only provide order of magnitude pricing at this stage and leverage your experience to provide value engineering to differentiate your firm from others, but only when you have a relationship with the owner and/or general contractor.
Reviewing Construction Specifications
As a construction professional today, you have to review the full set of construction documents and ensure you’re working with the most up to date versions. You can no longer rely on the design team to ensure everything is within your division. Additionally, you need to review the division 01 general specifications and make note of construction business and construction management team qualifications, payment terms, bonding capacity, insurance requirements and make sure you can meet the qualifications and can live with the legal language should you win the construction project.
When you’re finished with the general specifications, it’s time to move onto your division specifications and make a note of the material grade, installation methodologies and responsibilities of costs (who provides what in the project) Generally the spec’s will determine the quality of materials while the drawings determine quantities. It’s important to highlight anything out of the ordinary and make sure you include these items in your bid. I’ve seen many construction companies take a black eye on an otherwise profitable project because they bid a less expensive material grade only to find out during the project execution that it was significantly more expensive. We suggest setting up your estimating process to follow the same CSI format the specifications are written in and checking these off as you go through the bid. This makes is easy to double check your work and clearly include and/or exclude sections during the cost estimating process.
Reviewing Construction Drawings
Like the specifications, you need to look over the full set of drawings at a high level to get an idea of the entire scope of work. You should review the architectural in addition to your divisional drawings to ensure you understand overlap between other trades, working heights and elevations that will affect construction costs like labor costs, material pricing and equipment costs. Once you have an understanding of the general construction (think birds eye view of the project) it’s time to review your divisional drawings taking note of any technical details that are depicted and watch for any discrepancies between the drawings and specifications. If you do find notes that conflict with the specifications you’ll need take note and be ready to write up a request for information (RFI).
Generally speaking in the construction industry, drawings supersede specifications when it comes to quantity, while specifications supersede drawings when it comes to material grade and quality and there is almost always a catch all note that says “when a conflict exists, use the highest quality and highest quantity” that is used to protect the design team. Unfortunately, this will put you at a disadvantage during the estimating process. The devil is in the details and it’s important to take notes and get clarification to ensure you’re building an accurate estimate and avoid any disputable change orders during the construction process that could put you in financial risk.
Performing a Construction Takeoff
The construction takeoff is the process of quantifying the various tasks included in your divisions scope of work from a set of construction drawings. To accomplish this, cost estimators use highlighters, click counters and digital scale masters or their favorite construction takeoff software to begin the process of counting and measuring items depicted the construction drawings. Performing a construction takeoff can vary greatly from one trade to the next, but we suggest starting with one item and counting and/or measuring page by page and keeping totals per sheet before moving to the next item. If you find something you missed earlier, immediately count it and adjust your previously noted takeoff quantity. Now total your quantities for each sheet and move to a quantity takeoff sheet where you can begin the process of extending out the quantities and begin construction cost estimate where you apply labor and material costs to those counts. As your estimating skills improve you’ll get in a rhythm of which items are the most important to count first to ensure you never miss anything important in your scope of work during the construction estimating process.
The Construction Estimate
Now that you have the quantities from the construction takeoff you’ll need to determine the cost for each item to determine your totals for each task to finish the cost estimation. To accomplish this, you need to determine the material and labor costs associated with each task and extend those out by the task quantity. Determining the material cost is simple, a quick call to your supplier or pricing service can give you this data, but the labor cost requires that you know how long it takes to install the material. This requires past production history and experience, or if you do not have past production history and limited field experience we suggest purchasing a historical cost database like RS Means or Craftsman data to use as a guide. These books provide construction cost data for labor and material based on US national averages and include cost estimate modifiers for different regions.
Once the labor unit is determined you’ll multiply that by the burdened labor rate (hourly wage + benefits + taxes) to determine the labor cost for the task. See the simple excel example quantity takeoff sheet below that includes material and labor costs per task and the totals summarized. Now you’ll want to summarize the total material cost and total labor hours for all the items and you’ll multiply the labor hours by your fully burdened labor rate to get your total labor cost for the task. Add these two numbers together to determine your total direct costs for the project and the basis for your estimate. Keep in mind, you’ll need to add line items for any other direct costs required for the installation like equipment rentals or subcontractors.
Determining Overhead and Profit
Now that we have our bid estimate (direct costs) we need to add profit and overhead to those costs to arrive at our sales price. While profit is pretty self-explanatory, overhead is not and is the total of all the other indirect expenses that are required to run your business including your office lease, estimating, sales, marketing, bookkeepers, and other expenses that must be paid to keep your business operating smoothly. Like profit, overhead is a percentage that you add to the project costs to land at your sales price. It’s important to note that there are direct overhead costs on a construction project and indirect, we explained the indirect above, but in many cases you’ll need to include a cost for construction management or project managers to go onsite for weekly meetings, deliver materials and ensure the project is delivered as sold. In the construction industry, many small construction businesses make the mistake of believing they do not have overhead and shouldn’t charge for it and this is not correct. You’re leaving money on the table and it’s in your best interest to figure out the overhead required to run and continually update this number as your business grows over time. We suggest finding an accountant that specializes in construction and running these calculations at least once per year.
Building your Construction Proposal
Now that we have our sales price, we need to create a construction proposal that details what is included in our bid price in clear and concise terms. We suggest using similar language to what was used in the construction specifications and drawings. This makes it easier for the general contractor and/or construction managers reviewing your bid price to ensure you’ve covered everything and that nothing major is missing from the scope of work included in your bid price.
In many cases, it helps if you build your estimating process around the CSI format so that you can easily compare one section of your bid price to a section of the specifications and make sure you never missing anything. Although you might provide a lump sum bid, this makes it easy to integrate your construction estimating software with your accounting system and to provide the general contractor with a detailed break-out in a systematic manner should it be requested. Because you’re following the CSI format, you can then add simple inclusions and exclusions with your bid that clarify what the general contractor is getting for the price. This is where it’s important to clarify anything that you’ve included or excluded to avoid any confusion once the project is awarded. Free Construction Proposal Template Here
Construction Contract Basics
There are a few types of construction contracts used by owners to secure a contractor to provide a service. This depends largely on the size of the project and the owners risk tolerance. We’ve outlined the three most common construction contract types below with a basic description.
- Firm Fixed Price or Lump Sum – the subcontractor delivers an agreed upon product for a firm fixed price. The subcontractor assumes the risk in this contract type, but can earn higher profit for taking that risk.
- Cost Plus Contracts – the owner agrees to pay for the cost of construction and assumes the risk of any expenses incurred. On top of that, they pay the subcontractor an agreed upon percentage above those costs.
- Time and Material Contracts – the owner pays for the time and material spent on the project by agreeing to an hourly rates and material required to complete the project. This is usually reserved for service work and/or small projects without a clearly defined scope.
Handling Change Orders
Once a construction project has been awarded, inevitably the scope of work will change due to budget, design, or omissions that require a pricing change to the construction contract. As a subcontractor, it’s important that you understand this process for each construction project and build a formal construction change order policy to ensure you’re able to charge for the services rendered.
It’s very common for subcontractors to receive a verbal approval to proceed with a change on the spot, but those change orders are then rejected later when it comes time to pay the bill because the proper approval process was not followed. Additionally, many contractors will do the work and never submit the paperwork because it feels time consuming at the end of a long day. This will happen and it’s a matter of building a procedure and making sure everyone on your team understands the approval process before proceeding with any changes to the construction contract.
Construction change orders can literally make or break a subcontractor, the most successful subcontractors make the most of these opportunities because it’s generally higher profit margin work and adds up quickly. Do not be the other type of subcontractor that is losing money when they cannot or do not even bill for these changes.
Construction Estimating Software
Modern cloud-based technology has made it easier than ever before for subcontractors of all sizes to systematize their estimating process with construction estimating software. By building a framework that has been proven successful, they are able to reduce the time it takes to build and streamline their construction estimating process significantly.
Construction estimating software increases estimating speed and productivity by removing manual, error prone activities like printing paper plans, duplicate data entry and manual calculations. You simply upload a set of digital plans, perform your construction takeoff and the construction cost estimate is being built during that process. You simply make adjustments, organize your break-outs and you have a customer facing quote without ever entering the same data twice into another system. As you estimate construction projects the system is able to save previously used assemblies, pricing, labor costs and improves the more you use it.
If you’re thinking that construction estimating seems like a lot of work, you’re right. Construction estimating requires a serious time commitment and this goes up significantly if you do not have a Construction estimating system in place. Construction estimating software can streamline the process by digitizing the cloud takeoff process and making it easy to apply prebuilt parts and assemblies to the quantity takeoff and estimating process all without re-entering the same data again. In the past, these products were expensive with heavy set up times and only viable for the largest of contractors, but the power of the cloud has made integrated cloud takeoff and estimating available to construction businesses of all sizes and for much less than what you would think. Contractors report a 2-3x increase in bidding speed with increased accuracy using construction estimating software allowing you to get away from excel spreadsheets and printed plans. Visit https://www.esticom.com today for a free 14-day trial of Esticom’s award winning takeoff and construction estimating software.
As a former Director of Sales & Estimating, Chris Lee has over 10 years of experience building high performance sales and estimating teams focused on increasing revenue and profit by winning large commercial projects