In the highly competitive construction industry, precise financial information is required for accurate bid proposals, not only in the cost of materials and sub-contractor contracts, but also in labor forecasts. Knowing and anticipating the project’s expenses correctly provides a definitive advantage when competing for a contract, particularly on lengthy or large jobs where small discrepancies can compound exponentially, or the cost of building materials can fluctuate with market instability.
With all the uncertainties that are inherent to construction projects, there are some key best practices in developing a credible cost estimate:
– an accurate project scope
– access to detailed documentation and historical data
– standard processes and work break down structures to ensure that no portions of the estimate are omitted and make it easier to make comparisons to similar projects
– A risk analysis – Known costs should be included and unknown costs should be allowed for, and
– an independent review to establish confidence in the estimate
With the best of these circumstances, cost estimating is difficult. It requires both science and judgment. Deriving high-quality cost estimates depends on the quality of data, for example, historical databases, comprehensive project plans, and standard work break down structures and make it easier to make comparisons to similar projects. In most cases, the better the data, the better the resulting estimate will be.
A project’s approved cost estimate is generally used to create the project budget. Because a reasonable and supportable budget is essential to a project’s efficient and timely execution, a competent estimate is the key foundation of maximizing project profitability.