Unfortunately, the profit of a construction project is often determined long after completion. The expectation and the actual profitability can vary significantly due to various factors that impact the resource consumption, time utilisation and quality of a construction project. In an ideal situation, business owners should appropriately and accurately measure profitability long before the ground is broken. If the profitability is not calculated before the project begins, it increases the risk of losing money during the project, putting the business owner, property owner and contractor at risk. Here, there is a common misconception that losses occur after the project starts and are usually taking place due to circumstances that are beyond the control of the business owner or the contractor.
In contrast, the reality is very different. Experienced contractors understand that money loss often originates from the cost estimation process. To help you navigate across the obstacles of the cost estimation process and better prepare you for your upcoming project, this article will list the top 10 construction estimating mistakes.
What is the cost-estimation process in construction?
In construction projects, cost estimation can be described as the total of all incurred costs during the operation. The three main methods of estimating cost include the expert judgement method, parametric estimating method and analogous estimating method. Irrespective of the chosen method, cost estimating begins by agreeing upon the basis, collecting scope documents, estimating direct costs, peer reviewing and then creating the final estimate.
Top 10 construction estimating mistakes
The budget can be overrun without proper cost estimation, and profitability can be negatively impacted. The top 10 construction estimating mistakes include:
Opaqueness: The lack of transparency is one of the most common cost-estimating mistakes in a construction project. In an ideal situation, the estimate should provide a top-level snapshot of the project where every item and its granular details are listed, along with its estimated cost. By utilising this approach, the black box approach can be eliminated, allowing anyone in the construction project to quickly understand the cost determination process, regardless of their level of experience or role. The added benefit of enhanced transparency is that it improves collaboration and enhances sharing of best practices across the company, allowing the project to be completed in a cost-effective and timely manner.
Last-minute changes: Any last-minute changes, such as addressing formula errors or adding forgotten items, can quickly turn a profitable project into one that drains your financial resources. An excellent method to mitigate such issues is to utilise built-in formulas or double-check the formulas that are used. Accurate cost estimation systems also propagate the usage of assembly libraries so that no line items are forgotten.
Ignoring weaknesses: Business owners make the mistake of focusing on strengths alone and often ignore the weaknesses of their projects. The consequence of focusing on strengths alone is that proficiency and expertise are concentrated in certain areas, and other areas are left alone. If there is equal distribution of proficiency and expertise, you will have a more detailed estimate of your project. Additionally, if you bring in expert advice to highlight your weaknesses and create plans to turn these weaknesses into strengths, you will have a lesser margin of error. Some business owners utilise predefined modules or templates from reliable sources to fill in any knowledge gaps in their projects.
Underestimating the cost of labour: To accurately calculate cost estimate, detailed labour information needs to be included, and you need to capture all assemblies. In this manner, any quantity changes would automatically be reflected in the labour cost.
Lack of margin calculation algorithm: Your final cost will differ from the initial bid if you base your profitability solely on sales. Here, it is essential to factor in critical variables such as labour cost, supply cost, and material cost to increase profit.
Incorrect resource allocation: Allocation should be planned in the pre-implementation phase. Alternatively, to mitigate the issue of excess resource allocation, lean construction management principles can be utilised.
Diversified attention: Some business owners make the mistake of falling into the temptation of pursuing every project. The real cost of every project should be weighed against its cons before you pursue it.
Bottom-up approach: Traditionally, bottom-up approaches lack strategic as well as critical thinking and can be time-consuming. Taking a top-down approach makes it easier to cost estimate the process by putting numbers across line items.
Unidimensional view: A limited view during the cost estimation process will limit your profitability, as the focus is unidimensional. All essential factors, such as labour cost, competitive pricing, resource allocation, best practices, et cetera, should be factored in to diversify the project’s focal point.
Limited risk estimation: It is essential to analyse previous projects, and highlight potential profit drains to determine risks and minimise uncertainty in the current project. The lack of successive risk estimation is what damages profitability in the majority of the cases.
Without spending appropriate time in the cost estimation process, your profitability is susceptible to deterioration. When conducting cost estimation, it is helpful to have a multidimensional view, conduct successive risk estimation, utilise a top-down approach, estimate labour cost appropriately, factor in any last-minute changes, and enhance transparency.