Why does it matter?

When estimating construction project costs, there is usually a lot at stake. If our estimate is wrong, meaning it is not roughly equal to the true costs of doing the work, then several important things can happen including:

  • Making an incorrect investment decision. For example, a project developer may invest in a project that is not financially viable because they underestimate the costs.

  • Signing a contract and committing ourselves to an unprofitable project. For example, a contractor underestimates project costs and signs a fixed-fee contract for less than the true costs of the work.

  • Losing out on the opportunity to partake in a profitable project. For example, if a project developer chooses not to invest in a project because they believe costs are too high, when in reality, they are not.

Become a great estimator!

How do we ensure our estimate is correct?

Obviously, the best way to make sure our estimate is correct is to get it right, to begin with. We should make sure we are following the correct processes, giving the estimate the time and attention it deserves and doing our best to avoid any mistakes. Unfortunately, it is a reality that our estimate will contain some errors and omissions.


There are several important ways we can increase the accuracy of our estimate. We can use one, many or all of these methods. The more methods we use, the more accurate our estimate is likely to be.


1. Review our own work


The first step should always be to check over our own work. Retrace your steps. Begin by going through the project scope and drawings to check everything has been covered and the bill of quantities is correct. Next, check each individual activity that they have been priced correctly. Review the individual labour, plant, material and sub-contract rates and confirm they are correct. Finally, make sure there are no formula and calculation errors.



2. Arrange for an independent estimator to check over our work


Finding mistakes in our own work can be challenging. This is true for several reasons including confirmation bias where we unconsciously overlook mistakes, familiarity where we do not question important assumptions, and also because we lack fresh perspective.

To overcome these shortfalls, ask an independent person to check over your work. Send them your estimate, including all your workings and assumptions. They will then perform the same checks as you did on your own estimate:

  • Is the scope comprehensive? Have we covered off everything in the scope of works and design?

  • Are our assumptions correct?

  • Are we using the correct productivities?

  • Did we build up our labour, plant, material and sub-contract rates correctly? 

  • And are our calculations correct?


To ensure this runs as smoothly as possible when preparing our estimate, we need to make our workings as traceable as possible. We want to prepare our estimate so somebody can easily review it and quickly understand our logic and why we have made the decisions we have. If our workings are unclear, it will be difficult for somebody to independently check over our estimate without having to start from scratch.


3. Complete a detailed review of large dollar-value items


An estimate takes time and effort to prepare. When pricing a multi-million dollar project, we may need to review hundreds of drawings and estimate the costs of hundreds of different activities. If we had an infinite amount of time and budget, we would perform a detailed review of every single activity. However, this is not the case.


We have a limited amount of time and resources with which to prepare our estimate. With these limited resources, we need to ensure our estimate is as accurate as possible. Therefore, we need to apply the 80/20 rule to this process.

When reviewing the estimate, focus on the things that matter. What are the activities and resources that have the biggest impact on the overall estimate? While a project may have 20 activities, it is unlikely that every estimate will form 5% of the budget. More likely is that one activity may make up over 30% of the total budget, and others may only make up 1 or 2%. With our limited time, we are much better off ensuring that the bigger activities are estimated correctly.

Similarly, there may be specific resources, like labour rates, that have a massive impact on the overall estimate. Being out by a couple of dollars on a labour rate could potentially mean being hundreds of thousands of dollars out on our overall estimate. 

Understand what the drivers of your estimate are and make sure these are correct.


4. Perform parametric checks for similar activities


Parametric estimating is the process of using historical data to benchmark activities. We look at similar activities on other projects and compare these to our project.


If on a previous project, we spent $500k to install 1km of electrical conduits, then it costs roughly $500 per m. If on our project, we have 2km of conduit to install, then we know our budget should be around $1m.

Between projects, there will be different resource rates, ground conditions, sub-contractors and other factors that impact these rates. They will vary and we would not expect them to be exactly the same. However, they should be roughly equal and we should understand why they differ. 

Parametric estimating will provide us with a good benchmark of how accurate our direct cost estimates are and flag any errors.


5. Top-down comparisons


Parametric estimating is a useful way to check specific activities are estimated correctly. Top-down estimates allow us to benchmark the entire project. We can also complete a top-down comparison to check our estimate. This involves comparing the overall estimated project costs to other similar projects.


This is only a high-level check and can be a good way to check that no major costs are missed. A top-down estimate can be made more effective by reviewing the entirety of another project’s expenditure records to ensure all costs are accounted for in our estimate.