Cost estimation
Estimating costs means answering, at every stage of a project, the question "how much is this going to cost?" using the best information available at that moment. Early on, when only the idea or a preliminary design exists, you estimate by analogy or by benchmarks (cost per square meter of construction, cost per hospital bed, cost per kilometer of road). As the design is defined, you quantify real volumes and price them with unit rates, until you reach the detailed construction budget.
The key to a cost estimate is its accuracy level, which depends on how well defined the project is (engineering and scope). A widely used reference classification is that of AACE International (Association for the Advancement of Cost Engineering), which defines five classes: Class 5 (order of magnitude, ±30% to ±50%, with the project barely conceptual), Class 4 and Class 3 (intermediate, study estimate and preliminary budget), Class 2 (control, with advanced engineering) and Class 1 (definitive, ±5% to ±15%, with the detailed design complete). The greater the definition, the narrower the margin of error and the smaller the contingency required.
Cost estimation is used to decide whether a project is viable, to set the base budget and the financial ceiling, to compare design alternatives and to prepare a bid in a tender. It is the upstream activity that feeds the construction budget and the bill of quantities; in public works, the contracting agency prepares its own base budget (reference estimate) to evaluate the bidders’ proposals.
It is worth not confusing cost estimation with a progress payment (a work estimate). Cost estimation is a prediction of future spending (planning, before or during design). A progress payment, by contrast, is a periodic billing document: it values the work already completed in a given period so the contractor can invoice it. One predicts what a project will cost; the other bills what has already been built.
Example
For a 2,000 m² office building, an order-of-magnitude estimate (Class 5) uses a benchmark of $18,000 per m²: 2,000 × 18,000 = $36,000,000 with a range of ±40% (between $21.6 and $50.4 million). Once the detailed design is finished, the definitive estimate (Class 1) —based on real quantity takeoff and unit prices— yields $34,800,000 with a range of ±10%.
| Item | Unit | Quantity | Unit price | Amount |
|---|---|---|---|---|
| Materials | ||||
| Red clay brick | pza | 42.00 | $6.80 | $285.60 |
| Cement-sand mortar 1:4 | m³ | 0.030 | $2,150 | $64.50 |
| Labor | ||||
| Mason | jor | 0.180 | $520 | $93.60 |
| Laborer | jor | 0.180 | $380 | $68.40 |
| Equipment | ||||
| Small tools 3% | % | — | — | $4.86 |
Frequently asked questions
What is the difference between a cost estimate and a progress payment (work estimate)?
A cost estimate predicts how much a project will cost before or during design (planning); a progress payment is the document the contractor uses to bill periodically for work already completed. One calculates a future cost; the other values and bills actual progress.
What are the accuracy levels of a cost estimate?
They range from lower to higher project definition. The AACE classification defines five classes: Class 5 (order of magnitude, ±30% to ±50%), Classes 4 and 3 (intermediate, study and preliminary), Class 2 (control) and Class 1 (definitive, ±5% to ±15%). The more advanced the engineering, the tighter the margin of error.
How do you estimate the cost of a project at the conceptual stage?
When there is still no detailed design, you estimate by benchmarks or analogies: cost per square meter of construction, cost per unit produced (hospital bed, classroom, kilometer of road) or based on similar projects already built, adjusting for location, quality and date. It is an order-of-magnitude estimate, with a wide margin.