This essentially means that the project is broken down into subcomponents that will generate costs. These subcomponents are called cost centres which should be priced in order to retrieve all necessary costs from the client. In fact, the cost of preparing unsuccessful bids could be a relevant cost centre itself as it is considered to be an administrative cost affecting your budget.
How to prepare a detailed construction estimate
The preparation of a detailed estimate requires that the estimator break the project into cost centres or cost subelements.
What are cost centres?
It is these costs that the estimator must develop on the basis of the characteristic resources required, namely, man-hours, materials, subcontractors, equipment-hours or any funds needed to accomplish the work or meet the requirements associated with the cost centre.
The cost centre in the construction industry relates to some physical subcomponent of the project, such as excavation piles, excavation, steel erection, interior dry wall installation etc. Certain non-physical components of the work generate costs that should also be considered. These items should be listed as “indirects” and are typical costs that are not directly connected with physical components or end items in the facility to be constructed. These items generate costs that must be recovered and may include insurance and bond premiums, fees for licences and permits required by the contract, expenses related to on site safety and home office overheads projected as allocated to the job.
These items may be referred to as general conditions or general requirements although they may not be specifically referred to in the contract documents. These items fall into categories for conditions of contract and general requirements of the contract.
When preparing a bid estimators create a general framework with cost recovery in mind. Estimators should therefore have knowledge of the technologies involved in building the project, which allows them to divide projects into individual pieces of work, namely physical subcomponents, systems, etc These work packages will naturally consume resources generating costs that must be recovered from the client.
The construction bidding process
Getting the deal done!
What are the steps followed to develop the estimate?
A chart of cost accounts acts as a guide or checklist as the estimator reviews the plans and specifications to highlight which cost centres are present in the contract being estimated.
The estimator should generally follow certain steps in developing the estimate:
Break the project into cost centres.
Estimate the quantities required for most cost centres that represent physical end items which is commonly called quantity takeoff. For those cost centres that relate to nonphysical items determine an appropriate parameter for cost calculation, namely, the level of builder’s risk insurance required by the contract or the amounts of the required bonds.
Price development for physical work items may require an analysis of the production rates to be achieved based on resource analysis. The estimate should therefore:
- Assume work team composition to include number of workers, skilled and unskilled, and equipment required.
- Estimate an hourly production rate based on the technology being used.
- Make an estimate of the efficiency to be achieved on this job, considering site conditions and other factors.
- Calculate the effective unit price.
Calculate the total price for each cost centre by multiplying the required quantity by the unit price. This multiplication is called an extension and this process is called running the extensions.