Discovering midway through a project that it was priced too low is every contractor’s nightmare. Overlook a couple of line items, and there goes your profit margin. While this is a concern for all contractors, it’s a particular hazard for newer contractors who are still learning the ins and outs of pricing a construction project.
It’s highly unlikely that the final cost of a project will be exactly what you estimated, and it’s even more unlikely that the difference will be in your favor. Wouldn’t it be nice if your profit margin turned out to be higher than anticipated? However, experienced contractors know that’s not often the case, which is why it’s important to look at long-term financial results rather than short-term profits. The best way to help ensure that those long-term results support the continued health and growth of your business is to be consistent in the way you price each construction project. Here are some tips to get you started.
Construction Project Cost Elements
Regardless of project size, every construction project estimate needs to include the same cost categories:
What materials will be used and in what quantity? What do they cost? Are there seasonal fluctuations in the cost of materials? Are the prices of those materials stable or likely to increase before the project is completed? Is there an additional cost to transport materials to the work site?
How many labor hours (defined as one person working for one hour) will be needed to complete the project, and at what rate? Labor rates should include the hourly wage paid for different crafts as well as the burden of taxes, unemployment insurance, and benefits. Don’t forget the additional costs associated with overtime.
Will heavy equipment be needed? If so, what is the cost of running it for the required number of hours? Will it be necessary to rent equipment and, if so, what will that cost?
Will specialist subcontractors be used? If so, you’ll need to obtain quotes from them. Review those quotes carefully and make sure they’re realistic before including them in your project pricing.
Indirect costs include things like permits and legal fees, administrative costs, onsite utilities, transport costs, insurance, surety bond premiums, and so on.
What is your desired profit margin? Fail to add that into your project price, and you’ll be working for free!
Things happen. Materials are wasted. It may take more labor hours than estimated to complete a particular task. You’ll need to add enough in your pricing plan to cover the cost of such unforeseen events (10-20% of the total project cost is typical).
Cost Estimation Approaches
There are several approaches to estimating construction costs. Some are easier, faster, or more accurate than others. If you don’t already have a preferred approach, consider the following:
This approach relates inputs, such as labor and materials, to the output (number of square feet built). This method is often used for commercial projects like building hospitals or schools, when there is data available to use in estimating different cost elements. These may include, for example, the labor hours required to complete 300,000 square feet of hospital construction or the amount of acoustic tile needed for 65,000 square feet of school construction.
Stick estimating involves listing out all the costs for every aspect of a given project (addressing the categories we just examined) and determining the cost of each. When done carefully, stick estimating can be very accurate. However, it can be very tedious and time consuming, which can lead to errors due to lapses in attention and focus.
Unit Cost Estimating
In unit cost estimating, the project is broken down into major components or systems, and the cost of each of these components is estimated based on past experience with similar work. Then detailed costs are estimated for each of those major components or systems. While this can be great for experienced contractors, this may not be the best cost estimation method for a relatively new contractor lacking experience with the particular type of project being priced.
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