According to research by KPMG, only 31% of construction projects come within 10% of the budget goal. That statistic means that nearly three-quarters of construction projects completely miss the mark. This trend is troubling because the ability to estimate costs and budgets directly contributes to your overall profitability.
It’s no easy feat, though. If you estimate too high, you risk losing out on a project. Estimate too low, and you risk completing a project and not making any money. Accurate estimates are critical.
However, if estimates were straightforward and simple, then there wouldn’t be an issue with meeting the mark. The process of creating an accurate estimate is tedious. Within the process, there are seemingly limitless areas to make costly mistakes.
Are accurate estimates even possible? Precise estimates take work, but they are feasible. These five methods and tips are surefire ways to ensure accurate estimates every time.
1. Thoroughly Examine the Site
This tip might seem obvious. However, to give an accurate estimate, you must thoroughly examine and understand the site. While many jobs require a pre-bid visit to the job site, you need to do much more than just look around.
While you’re there, you need to take measurements, assess the topography, analyze the soil. Get a feel for the traffic and road access to see how product delivery and staging will go. If possible, bring subcontractors who will be a part of the job with you to the site as well.
No two sites are the same, and thoroughly physically examining the site before making an estimate can help you pinpoint any potential problem spots in the future.
Don’t underthink the importance of visiting the job site. While it’s a time-consuming thing to do before you even land the job, it can be the real difference-maker between making an accurate estimate and failing to hit the mark.
2. Re-evaluate Your Takeoff Method
Let’s talk about takeoffs. Your takeoff could be the most crucial component to an accurate estimate. You have to figure out the exact quantities of supplies and materials and total up labor and equipment needs, and you have to do it all accurately.
There’s plenty of dispute on whether the “unit cost estimating” method or “stick estimating” approach is better. The reality is that both ways have their pros and cons. The unit cost estimating method is quicker, so it’s become the go-to method for many construction companies.
In the unit cost estimating method, you associate unit costs with each assembly. Turn those assemblies into line items, and determine a cost for each line. It’s much simpler than the alternative stick estimating method.
In the stick estimating method, you measure and calculate every individual component on the project, down to the hours it will take to complete each part of the job. It’s time-consuming. However, there’s no denying that it tends to be the more accurate of the two methods.
The problem with the stick estimating method is that you’re often on a time crunch to get estimates to the customer. The good news is that there’s some middle ground here.
To be ultra-safe, only use the unit cost method for ballpark estimations and the stick method for the estimate that determines your ending profitability. If that’s not feasible, then you need to incorporate software as part of your unit cost estimation process.
Use an estimating software to double-check your assembly estimates, and then be sure to have a reviewer overview your work, too.
3. Deep Dive into Your Subcontractor and Labor Costs
Labor costs, especially subcontractor labor costs, tend to be a huge variable in estimates. Labor costs in construction are notoriously high, yet 92% of contractors feel like their workers lack adequate skills for the job.
With labor costs on the rise and skilled labor on the decline, estimating labor costs can be a significant challenge. Higher paid workers can get jobs done quicker, while lower-paid workers take more man-hours. Totaling out which laborers make the most sense for you often involves estimating based on what you know about the workers, their skills, and the time the job will take. It’s no wonder that labor costs are so hard to nail down.
Analyze what you know about your workers and make the best estimates possible. However, when it comes to specialty contractors and subcontractors, there’s more that you can do. Determine their regular hourly wages and factor in state and federal payroll costs. Additionally, build out the crew and associated specialty crew costs.
Deep dive into your specialty contractors and subcontractors’ takeoffs and make sure that they didn’t miscalculate their costs. It’s not uncommon for subcontractors to over or underestimate their costs. Since they don’t deal with the end profit and loss, it’s your responsibility to ensure that their estimates are as accurate as yours are.
4. Safeguard Your Material Costs
Materials are another area that’s especially difficult to get right. Material costs can change dramatically from day to day as the price of materials rises and fall with supply and demand.
You never want to be in a situation where you’ve painstakingly calculated costs down to the wood frame construction and the number of screws, and then the material prices skyrocket your budget and plummet your profits.
Obviously, you can’t control market fluctuations. However, what you can do is solidify relationships with your material suppliers. Develop a relationship where they honestly and accurately give you prices throughout the estimation process.
Moreover, in established relationships, you can lock in those prices. Top tier suppliers will also steer you in a different direction if it doesn’t seem like the material is the right fit for your project or budget.
Additionally, you must understand scheduling delays and manufacturer turnaround times and figure that into your material choices and costs. If your manufacturer doesn’t usually produce in your desired timeline, you’re going to pay a premium for that, and you must account for the added cost in your estimate.
5. Account for Risk
Every construction project has some level of risk. From the very beginning, you have to assess and determine whether that risk is worth the reward. In most cases, the associated risks can be accounted for in your estimate, but it requires you to identify potential risks from the beginning.
While you aren’t a fortune teller, the best place to start is with previous projects like the one you’re bidding on. What types of things went wrong in those projects that ate into your margins and caused additional costs? Add those risks to your estimate.
Your goal with risk assessment is to determine the things that could derail the project accurately and budget the appropriate amount to handle those things. If you don’t have previous similar jobs, consider using estimating software, researching projects like it, and reaching out to contacts who can impart wisdom.
Boost Profits: Ensure Accurate Estimates Every Time
Estimates are always going to be a challenging part of the job. However, these five tips will make accurate estimates much more manageable.
Ultimately, to have accurate estimates, you need to be thorough and truly think through every step of the process. After you’ve completed an estimate, always have a second set of eyes review it. As long as you commit to the process and don’t cut corners, you’ll be on your way to more accurate estimates and larger profit margins in no time.
This is a guest post from Corey Tyner, the owner of Phoenix Fast Home Buyers and Arizona Cash Land Buyers. He is one of the top real estate investors in Arizona with over a decade of experience. His work has been featured on Bigger Pockets, Real Estate Agent Magazine, and several other real estate investor publications.
Further reading