Anatomy of an Estimate
So what actually goes into an estimate and where do these costs come from? We’ll give a basic outline of each of the items and a basic idea of how estimators figure these costs.
Materials are probably the easiest thing to understand but possibly the most time consuming item for the estimator to figure. Quantities can be figured by using take-off calculators, standard quantities per unit, or historic data. Again this is possibly the most time consuming piece of an estimate.
Materials can be described as anything that remains in the structure as a finished product. Examples would be lumber, steel columns, windows, doors, roofing membrane, and the like. Items which are not figured in materials are things like profit, wage burdens, etc.
Direct Labor Costs
Direct labor costs are any wage for employees of the contractor that will perform work on the project. This should also be further defined to pertain to the materials described above. In other words, it’s the cost of labor involved to install the finished materials.
Indirect Labor Costs
Indirect labor costs are those expenses for items like fringe benefits, insurance, taxes. Other indirect labor costs are expenses that the contractor has to contribute such as social security and unemployment insurance. Indirect labor costs will vary from month to month depending on what laws or tax increases imposed by the state and federal governments. These costs can directly increase the cost of labor by 35% to 60% depending on location and type of work being performed.
Equipment costs are similar to direct labor costs in that they are the costs associated with the equipment that is used to install the materials described above. For example, the cost of running a front end loader to excavate a foundation for a 12 story building. Things that need to be accounted for within this cost would be maintenance costs, the ownership costs, and insurance.
After all that is figured a rate of production for the equipment would need to be figured to apply to the final estimate. An example would be digging 250 cy of dirt. How long does it take a front end loader to perform the work and at what cost. Multiply that by the amount of dirt and you come up with your cost for excavation of 250 cy of dirt.
Ownership and operating costs can get quite involved. You will need to account for the life expectancy of the equipment so you can see how many hours the machine is expected to run over the course of the project or year. The value will then be depreciated over that life to come up with an hourly ownership cost.
An owner or general contractor will typically not perform all the work on a given project therefore the owner or general contractor will need to contract with other companies to complete the project. The biggest thing in getting subcontractor bids is keeping it all fair. In order to do that the GC / Owner will bid the project out to several subcontractors to get the best price that meets the requirements of the project.
When an item in the project is not specifically called out, the contractor can put in an allowance. My personal preference is to keep this at a bare minimum. And from the owners side it makes more sense to specifically call out what they want in the project. It makes it much more simple to compare costs between different contractors. One method used to keep this to a minimum is to include an allowance in the bid documents. For example, let’s say there are 120 doors in the project but the architect or owner is unsure if they will be alder, maple, six panel, flush, etc. So the architect / owner will include an amount in the bid documents that states an amount for the 120 doors. This keeps the bids apples to apples.
Project overhead can be described as all the costs that can not be directly tied to the installation of materials in the project but are still necessary for the completion of the project. Some of these costs could be temporary heat, sanitary facilities, photographs, concrete testing, cleanup, legal expenses, and first aid supplies.
A subset of project overhead is General Overhead. These may include items like executive salaries, office furniture, payroll service, and advertising. This can also be called office overhead. These costs will typically range from 3 to 10 percent of the total contract price. Another large cost that can be covered here are bonds – bid bonds, performance bonds, payment bonds, etc. These costs can be fairly substantial so some research will be required to get the best bond at the least amount of cost transferred to the contractor.
The markup or margin can range from 5 to 20 percent of the total contract price. Although markup can be set at an overall percentage there can also be other considerations that will directly affect the contractors chances of being the low bidder. By that I mean maybe the company is slow at the time and they need work to continue in business. So they will decrease the markup to help insure that they are the low bidder. I’ve even heard of companies performing work at 0 fee just to keep their best employees working. Don’t get me wrong – this 0 fee is most often just a visual token as they will often hide the fee in other areas.
I hope this article has given you a better understanding of what is included in a budget estimate. This is a pretty basic idea of what is included – if you would like more information you can contact us and we will direct you to more informative articles.