The Art of Estimating Construction Costs: Tips for Building Contractors

A successful construction project starts with appropriately estimating construction costs. While this may seem like an easy project management task for building contractors, it's not always as simple as it sounds.

Taking the time to plan appropriately and make a budget for construction costs using available resources can help your project run smoother. Plus, accurately budgeting for your construction costs can help ensure your project's profitability.

In this guide, learn helpful tips to estimate construction costs that can help you improve accuracy and set up your project for success. Additionally, we will explore factors to consider to help you master the art of estimating costs as a building contractor.

Factors to Consider When Estimating Material and Labor Costs

Estimating material and labor costs accurately involves several factors. First, you need to consider the size and complexity of the project, which can greatly impact your budget. Understanding a project's scope is important to developing an accurate budget.

Any complex architectural designs or specialty designs will drive up the total cost budget. Carefully consider all aspects of your construction plan so you don't miss any needed materials.

The construction site's condition will also impact your material and labor cost projections. For example, consider the costs of excavation, foundation, and basic prerequisites you'll need to complete before you can start the project's construction phase.

This also includes utility, landscaping, and any other site work that may be required. The budget should also consider any factors that could impact access, storage constraints, security issues, or conditions requiring specialized equipment.

Beyond the material costs and labor costs, consider the project's estimated timeline and seasonal influences. Quick-turn projects may require a separate line item for overtime in the budgeting process.

And climate can’t be overlooked. Extreme cold and hot temperatures often force frequent breaks and shorter work days, which can negatively impact production. Project managers should also take market conditions and location-specific factors into consideration.

Using Historical Data and Industry Benchmarks

Analyze historical data and industry benchmarks to estimate construction costs more accurately, including labor costs and material costs. By examining historical data and trends, you can more accurately "ballpark" your budget and minimize the risk of errors.

This also involves taking a look at competitor costs, if this information is available. When considering historical data, remember to add an appropriate adjustment for inflation, which affects both material and labor costs.

Accounting for Unforeseen Expenses and Contingencies

Even the best, most well-laid-out plans will likely experience unforeseen expenses. Anticipate this by adding contingency money to your estimate. To maintain profitability and avoid budget overruns, consider the uncertainties that could occur in labor, materials, site conditions, and more.

Whoever is responsible for project management should regularly monitor changing costs and unforeseen changes in the plan. Instead of adopting a reactive attitude, aim to remain proactive throughout the project. Proactivity gives you time to make necessary adjustments when unforeseen expenses and contingencies arise.

Collaborating with Suppliers and Subcontractors

Collaborating with your suppliers and subcontractors for accurate quotes also helps maintain the accuracy of your construction budget. Obtaining material bids and project bids for labor can give you a realistic idea of what percentage of your budget to allot for each.

Another advantage of staying in communication with suppliers and subcontractors is relationship-building. As you build relationships, you’ll typically be more informed of price changes (up and down!) so you can plan accordingly.

Regularly Reviewing Costs and Updating Cost Estimates

A construction budget will never be exact, as things always change throughout the project. Despite your best attempts, it's normal for your budget to vary from your estimate. Regularly review and update the cost estimates throughout the project to help avoid major, stressful budget overruns.

Waiting until the end of the project means it's too late, whereas regularly checking in gives you time to scale the project down or make necessary adjustments to stay on budget. Depending on the project's duration, market conditions may change quite a bit (especially during longer projects). Updating your budget periodically to reflect current market conditions and changes in the industry helps alleviate future stressors.

Using a project management tool can also help you to keep everything organized and in one spot. Throughout the project, a project planning tool helps you to manage your timeline but also keeps a running tab of your expenses. This gives you an on-hand estimate of how much of the budget has been used at any given time.

Using Escalation Clauses to Help

One way that building contractors can protect themselves against major budget changes is by using an escalation clause. An escalation clause in the contract can protect contractors from major price changes in raw materials or labor.

Instead of taking on the cost burden and risking your profitability, an escalation clause requires the client to pay the difference in prices. Escalation clauses may be especially helpful in multi-year projects subject to lots of price changes. If you’ve never worked with an escalation clause and want to learn more, contact us, and we'll be happy to help.

What to Do When Cost Overruns Occur

Despite even the best project management, budget overruns can occur. Using these methods can help you mitigate risk and estimate to the best of your ability. If you do experience a cost overrun, talk to your team and set priorities. Identifying the root cause of the budget overrun can help you hone in on what adjustments can be made.

Contact McElroy Metal

Since 1963, McElroy Metal has offered the construction industry quality products and excellent customer service. The employee-owned components manufacturer is headquartered in Bossier City, LA., and has 14 manufacturing facilities across the United States. Quality, service, and performance have been the cornerstone of McElroy Metal's business philosophy and have contributed to the company's success over the years.

As an industry leader in metal roofing, metal siding, and substructural components, we're here to help assist building contractors like you. Whether you're working on a commercial construction project or a residential project, we offer a metal product that can meet your aesthetic and budgetary needs.

Contact McElroy Metal today or find a metal distributor near you to learn more.