7 Types of Cost Estimates in Construction (With Pros and Cons)

7 Types of Cost Estimates in Construction (With Pros and Cons)

Last Updated on December 2, 2021 by Construction Digest

The history of measuring and valuing construction costs is long, very detailed, and extremely important to the construction industry.

As the need for cost estimating became apparent (in order to create accurate budgets), various methods of estimating were devised.

This guide will cover 8 notable types of cost estimates in construction their purpose, their advantages, disadvantages, and examples.

1. Lump Sum or Guaranteed Maximum Price (GMP) Estimate

The lump sum estimate is an estimate where the price is written on a fixed-price contract based on predetermined conditions set by the contractor.

A GMP estimation does not typically take into account possible change orders that may be issued during construction which often lead to claims between the contractor and owner for additional expenditures.

These additional expenditures are the primary issue with GMP estimates.

Advantages:

  • Owner does not need to authorize change orders (decreasing paperwork)
  • Extensive budgets and schedules for project completion timeframes can be set prior to bid process

Disadvantages:

  • No allowances made for unforeseen issues; therefore, no opportunity for contingency funds (potentially increasing risk of going over budget and/or schedule)

Example: The Pontchartrain Bridge in New Orleans is a great example of a successfully completed lump sum estimate.

By using this estimation method, both the owner and contractor were able to create an accurate bidding structure which ultimately resulted in only one bid being submitted on the $25,000,000 job.

Total construction time was also accurately predicted to last only 14 months due to the GMP process.

2. Unit Rate Estimate

A unit rate estimate is a type of construction cost estimate in which a contractor or subcontractor lists all/most of their costs by unit prices based on current market rates.

The use of this method allows for an approximate estimation of total costs required for completion without taking into account contingencies or other allowances (e.g. overhead).

Advantages:

  • Prevents large fluctuations in estimated costs due to unknown/unforeseen conditions; maintains clear allocation of fixed and variable expenses

Disadvantages:

  • Does not allow for accurate budgets and schedules; does not allow for the creation of contingency funds
  • Cannot be used if unit prices fluctuate frequently (e.g., subcontractors typically use this method)

Example: If you were to estimate how much it would cost to rent a cruise ship outfitted with all the amenities needed for your wedding, you could create an estimation using this method by simply listing all of your desired expenses (e.g., catering, decorations, band).

Adding them up, and then dividing that number by the total number of guests you plan on inviting.

This unit rate estimate does not take into account contingencies (e.g., unexpected guest RSVPs or luggage restrictions) so it will likely have a margin of error.

But it will be an accurate enough estimate to allow you to make general plans for your wedding.

3. Percentage of Completion (POC) Estimate

This type of cost estimate is typically used by subcontractors who use their own rates and costs on the job.

The percentage of completion method assigns a predetermined value to each phase or task completed.

This allows for an equitable distribution of labor-based expenses over time (i.e., it decreases the financial exposure to the contractor).

This estimation does not include allowances for overhead or contingencies, but rather allocates all money earned proportionately based on work completed (not hours worked).

Advantages:

  • Prevents large fluctuations in estimated costs due to unknown/unforeseen conditions; maintains clear allocation of fixed and variable expenses
  • Prevents large fluctuations in estimated costs due to unknown/unforeseen conditions; allows for accurate budgets and schedules

Disadvantages:

  • Does not allow for accurate allocations of expenses because it excludes allowances for overhead or contingencies

Example: If a subcontractor has a rate of $40 per hour to install drywall, they would create an estimate by allotting earnings from their job based on the percentage of work completed.

In this example, if the subcontractor had finished 25% of their current job then they would calculate 25% as a fraction (25/100) as a decimal (.25) OR as a percentage (%) multiplied by hundred (25%).

Then the subcontractor would multiply 40 times .25 to find out how much they should charge per hour for drywall installation on this project.

This estimation method allows the subcontractor to create a margin of error because it does not include allowances for overhead or contingency expenses, but it will still provide an accurate approximation of cost that is equitable across time.

4. Direct Cost Estimate

A direct cost estimate is a type of construction cost estimate in which the expected costs are calculated by multiplying the estimated quantities needed for completion with market prices per unit (i.e. linear models).

Advantages:

  • Prevents large fluctuations in estimated costs due to unknown/unforeseen conditions; allows for accurate budgets and schedules

Disadvantages:

  • Does not allow for accurate allocations of expenses because it excludes allowances for overhead or contingencies

Example: If you were estimating how much it would cost to paint your house, you would use this method by simply multiplying all the units you need (e.g., gallons) with the price per gallon.

This estimation method allows for a margin of error because it does not include allowances for overhead or contingency expenses, but it will still provide an accurate approximation of cost that is equitable across time.

5. Analogous Estimate

Analogous estimates are based on the construction costs of other similar projects to create a budget and schedule.

Advantages:

  • Prevents large fluctuations in estimated costs due to unknown/unforeseen conditions; allows for accurate budgets and schedules

Disadvantages:

  • Does not allow for accurate allocations of expenses because it excludes allowances for overhead or contingencies

Example: If you were estimating how much it would cost to have your kitchen remodeled, you could use this method by identifying the costs of a kitchen remodel from a previous project.

This estimation method allows for a margin of error because it does not include allowances for overhead or contingency expenses.

But it will still provide an accurate approximation of cost that is equitable across time.

6. Bottom-Up Estimate

The bottom-up estimate is typically used by construction managers and subcontractors who develop their own rates and use their company’s resources on the job.

For example, a carpenter would multiply hours needed with their standard hourly rate to create an estimate.

The bottom-up method typically assigns different values to each piece of equipment or resource used in order to allocate all fixed and variable expenses proportionately over time (i.e., it decreases financial exposure).

Advantages:

  • Can be used to discover the cost of resources needed for a project; allows for accurate budgets and schedules

7. Markup Estimate

A markup estimate is a type of construction cost estimate in which costs are estimated by multiplying costs with an additional percentage markup.

This estimation method is also referred to as the cost-plus method because it calculates both direct and indirect costs plus an overall profit margin for the company.

Advantages:

  • Prevents large fluctuations in estimated costs due to unknown/unforeseen conditions; allows for accurate budgets and schedules

Disadvantages:

  • Does not allow for accurate allocations of expenses because it excludes allowances for overhead or contingencies; may produce estimates that are overinflated to compensate for possible negative outcomes (e.g., cost-plus pricing)

Example: If you were estimating how much it would cost to build a new set of bookshelves, you would use this method by multiplying the amount needed (i.e., board feet) with the market price per board foot, then adding an additional percentage on top to cover your company’s profit margin.

This estimation method allows for a margin of error because it does not include allowances for overhead or contingency expenses, but it will still provide an accurate approximation of cost that is equitable across time.


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