November 2024
Has everything been accounted for?
This is one of the critical questions to ask when assembling a construction cost estimate. Even small omissions can lead directly to overruns, delays and, ultimately, failed projects.
Many factors affecting cost estimation in construction can turn it into a daunting, complex process. Overlooking any of them or underestimating their impact can throw off the reliability and accuracy of the estimate, leading to overruns and compromising project outcomes and profitability. Megaprojects and any capital project receiving government funding will especially experience this.
The following factors vary from project to project but must be carefully considered to arrive at a thorough cost estimate. We start with scope definition—because without clarity around project requirements, the other factors become that much more difficult to manage.
1. Well-defined Scope
Everything starts with the project scope. Are the project requirements clearly defined? Are the deliverables and timelines outlined? Are the specifications accurate and complete?
Insufficient clarity at the outset and the failure to incorporate the expertise of key stakeholders across multiple disciplines make it challenging to estimate labor, material and equipment needs with any precision.
Lack of specifics can lead to fill-in-the-gap assumptions, raising the risk of over- or underestimating costs. A poorly defined scope may compel frequent updates during the project, forcing adjustments to the estimate. These updates can trigger repeated change orders during construction, which, if not carefully managed, add up to cost overruns.
2. Historical Data Availability
While every project is different, having access to comparable data gathered from bids, estimates and costs from similar prior projects can provide a solid reference to work from.
It’s not just about the actual costs and the accuracy of estimates in predicting cost outcomes. It’s also about the lessons drawn from that historical data: the suitability and effectiveness of cost estimation methods (such as parametric, bottom-up or analogous), risks that occurred and their financial impact, sufficiency of contingency funds and effectiveness of backup plans.
Naturally, this data has limitations due to project uniqueness, data age that renders it irrelevant and market fluctuations. To keep estimates relevant and accurate, adjustments will have to be made for inflation, the going labor rates reflective of the project location and current material pricing.
3. Material and Labor Costs
These factors can be hard to pin down—fluctuating throughout the estimating and construction stages. They tend to be harder to forecast because they’re subject to unpredictable factors.
Material pricing has been unstable in recent years but is starting to level out. Naturally, material limitations, general availability, supply chain disruptions and disaster-related shortages can impact costs. Plus, costs can vary depending on the material’s production location, which may involve tariffs or higher transportation costs if sourced abroad.
Labor costs can swing significantly depending on location (metropolitan vs. remote), seasonality, skill level, local demand and labor strikes (which may involve union negotiations). On top of that, the ongoing labor shortage, especially for skilled workers, can inflate wages as competition increases.
4. Inflation and Market Conditions
The longer a capital project takes to complete, the greater the risk of contending with cost increases over time due to variable inflation rates and changing market conditions. Given the construction industry’s susceptibility to these external forces, both factors introduce further volatility into cost estimation for everything from materials and equipment procurement to labor rates to energy costs.
Inflation is a common driver of rising resource costs. But market conditions—driven by local supply and demand, economic shifts and geopolitical issues—can muddle estimates if not taken into account.
These two external factors are among the most unpredictable and can chip away at project budgets and profitability as timelines expand. This underscores the need for accurate estimates that can better support proactive cost-control strategies to mitigate their impact.
5. Contingency Planning
Even with a meticulous estimate in hand, the unexpected is bound to happen, which would have been impossible to account for financially. Setting up a contingency fund covers this.
There isn’t a specific monetary value, percentage or formula guaranteeing that those extras are covered. However, the industry tends to hover within 5–10% of the construction costs.
Lacking a contingency fund or falling short of what’s ultimately needed can leave a construction company exposed to assuming a disproportionate share of financial risk, threatening its project margin and even its solvency.
Beyond the Numbers
A construction cost estimate isn’t just about numbers. It’s a process that plays an early and ongoing strategic role in keeping costs, delays and change orders in check. By proactively addressing the factors that affect construction cost estimation early on, the chances of on-time, on-budget project delivery go up.
If you’re looking to fine-tune your cost estimation process, Contruent Enterprise lifecycle cost management software has estimating capabilities to deliver more precise estimates faster. Learn more or request a demo today.