October 2024
The early stages of a project lay the foundation for its progress throughout construction and how well it achieves expected outcomes.
Two critical steps in the early stages—cost estimating and cost planning—directly influence a project’s financial success. While they’re closely related, they have unique roles.
Whereas cost estimating leverages available project data to predict how much a project will cost overall, cost planning dives deeper, zeroing in on the details of resources and their strategic allocation to stay within budget.
Understanding their distinct roles in guiding a project’s financial direction can help project managers better leverage them to control the cost outcome.
Cost Estimation
Cost estimation is the jumping-off point of a project. No construction project can get off the ground without it, nor can the project’s budget. Knowing how to budget for and fund the project requires having a comprehensive idea of the essential costs involved, especially for something so capital-intensive.
These costs are based on what’s known at the time, often limited to the data on hand. This data can come from completed projects with similar components (which can also help identify potential issues to account for and areas for cost savings), industry benchmarks and whatever project-specific information is available.
Cost estimation is about delineating the fundamentals of what it takes and how much it costs to build a structure, making its purpose more operational.
There’s nothing simple about cost estimates. They can be rather complex, characterized by the amount and classifications of costs to account for, the different types of estimates and the methods used to create them.
Each estimate starts broad and conceptual, tightening as planning and design advance and incorporating more details as they emerge. Eventually, this leads to a final, more detailed estimate. Along this continuum, there are various estimate types, each with a distinct focus—detailed estimates, assembly estimates, and unit price estimates, to name a few.
The methods used to compile these estimates are equally diverse. Common approaches include bottom-up, analogous and parametric estimating, each suited to different project needs. Each one has its own unique strengths and weaknesses, but all play a crucial role in developing an accurate projection of costs.
Regardless of the type or technique, what matters most is producing a quality cost estimate. Among the key factors are its accuracy, degree of certainty, risk allowance and source credibility. A well-prepared estimate ensures the project stays on track. And it becomes the foundation for effective cost planning.
Cost Planning
With cost estimates in place, a key concern becomes: How will we control those estimated costs throughout construction? That’s where the cost plan comes in, providing structure and strategy for ongoing cost control.
While the cost plan is based on the cost estimate, it goes much further, accounting for a broader range of cost details—such as indirect and direct costs, contingencies, internal and external risks, resources, wage rates and profit margins. More than just detailing these project specifics, the cost plan outlines how associated costs will be managed throughout all stages of construction.
A cost plan plays several important roles, including:
• Refining the budget into a more detailed, realistic iteration that expands on the initial cost estimate.
• Identifying known risks, their contingencies and their forecasted cost impact so the budget can adequately account for these variables.
• Creating a resource plan to optimize the allocation and management of resources for each task or activity.
• Serving as a tool to track actual costs against planned costs as the project progresses.
Cost planning is not a one-and-done exercise. It’s a continual work in progress that is analyzed, updated and managed throughout construction, ensuring the project stays within budget.
Key Differences Between Cost Estimation And Cost Planning
Now that the relationship between cost estimation and cost planning has been detailed, these are how their differences line up:
| Cost Estimating | Cost Planning | |
|---|---|---|
| Purpose | • Operational • Outlining specific component costs • Predicting general project costs for budget | • Creating a strategic, structured plan for cost control • Refining budget and resources • Tracking costs and performance Identifying risks and cost impact |
| Level of Detail | • Ranges from less precise based on available early data to more detail as planning and design are developed • Costs of individual components and tasks to inform budgets and resources | • Fairly detailed to assemble the budget and resource plan • Budget further allocated across activities and resources • Bigger picture to include financial aspects of risks, backup plans, profits |
| Decision-Making Impact | • Assisting in scope adjustment • Securing budget approvals • Choosing materials, labor and construction method • Identifying areas for cost savings, initial budget adjustments | • Considers overall financial impact • Specifying strategies for risk and contingency impact assessment and management • Making better-informed ongoing adjustments to scope, schedule or design while preserving the budget |
Optimizing Cost Estimating and Cost Planning
Cost estimation and cost planning play important roles in the construction process. Both are essential for ensuring that capital-intensive projects are well-prepared to meet their planned outcomes, while protecting profit margins. Maximizing the effectiveness of each one requires focus and efficiency, and both can benefit from a cost management solution to help guide both processes.
Contruent can help. With its Contruent Enterprise solution, the company empowers project owners and construction companies to start their projects off on the right foot with optimized cost estimating and cost planning, so their projects can achieve the desired outcomes. Learn more or request a demo today.