I want to start by looking at the process of a construction project. Some delicate project management and planning are required before the job can even start the pre-construction phase.
You will likely have a project manager alongside a team of engineers and architects working with the owner to develop a set of plans. If the owner is smart, they would consider involving the contractor they want to work with too.
At some point in the planning phase, the owner will want to have a cost estimate to know how much the project will cost them. If the design is not yet complete and many details are still missing, we as the contractor can only provide a rough cost estimate at this point.
Creating an accurate or fixed price to submit to the project owner at this point would be challenging.
The owner must understand that the rough estimate price is not final but something they can use to begin budgeting. In the construction industry, we also refer to this price as a ROM (Rough Order of Magnitude).
This article will teach you about the rough estimate and how to use it in the construction industry best.
We will also look at some of the steps you would need to consider if developing a rough estimate as well.
What is a Rough Estimate?
A rough estimate or rough order of magnitude (ROM) is a price you’ll generate based on a general scope of work provided by a project owner. You’ll create a list of assumptions to calculate how much it will cost to complete a project. The rough estimate is best suited for budgeting purposes, and the detailed estimate will follow once the project documents are complete.
I will preface this by saying it’s not only project owners that ask you for a rough estimate, but I’ve had contractors ask me for this as well.
If you ever get asked the question, don’t feel obligated to give a number immediately. While it’s a rough estimate, it still takes some time to determine the cost.
Giving a number right away could get you into some trouble when it comes to actually pricing out the work, especially if your detailed estimate is higher than what you said verbally.
What are the Benefits of a Rough Estimate?
So, you have a little information on a rough estimate, but why use this versus a typical estimate?
One reason is that the rough estimate allows the customer to assess the cost of the project and determine if it is feasible. They can adjust the scope or proceed as intended by getting an idea of how much it will cost.
Second, rough estimates can save you time. I typically send rough estimates via email versus spending time to create a detailed price and proposal. I simply state how much the work will cost and what it covers in the email.
Be careful on this, you’ll need to be clear on what your price includes. If not, the contractor or owner could hold you liable to any work that was not specifically identified in your estimate scope.
Also, depending on the project’s complexity, this will impact the level of detail you should provide for your rough estimate.
If the scope is small, this might be sufficient for sending your price in writing via email. For a larger project, consider going through the normal steps of generating an estimate based on the information that you currently have.
These are the main reasons rough estimates can be valuable in the construction industry. Once you get good at figuring out how to price out work, you can reliably create rough estimates to provide to customers.
Now that you have some information about rough estimates, why don’t we cover how you can create one?
How to Create a Rough Estimate
The first and most important part of creating a rough estimate is working out the project scope of work with the customer. You and the customer must be on the same page before you can even consider calculating any cost.
Once you understand the scope, you can begin gathering any details about the project that might also impact the price. The more detailed information you have, the more accurate the rough estimate will be.
You would be off to a great start if you could gather a preliminary construction drawing set for your estimate.
Unfortunately, this is not always the case. Some owners might not have the budget to hire a design team, leaving you to make assumptions on your estimate.
Let’s say you have a solid understanding of the project. Now you’ll need to determine a monetary value for the work.
First, you’ll want to go through and determine what equipment and material you’ll require for the project. Once you have this information, you should contact your vendors and suppliers to get pricing on said equipment and material.
You’ll insert the price your vendors and subcontractors received into your final rough estimate value.
Second, you’ll need to determine the labor hours required for the project. Without a set of plans, it could be challenging to determine this. If you have the resources, consider working with one of your construction superintendents to determine the hours required.
If you don’t have someone to go to and ask about the labor hours, you’ll need to use your best judgment. My advice, go conservative with your estimate; that way, you protect yourself when it comes time to provide a detailed estimate.
With the labor hours, you can use a fixed rate to calculate the costs. You’ll take the labor hours calculated and multiply this by the labor rate to get your costs. This is an example of a rough calculation method to estimate costs.
When using union labor, you’ll need to, at a minimum, cover the expenses for their wages and fringes. It will be up to you to determine if you will raise this amount for your rough estimate. Your goal is to make some money on the project, and you can do this by raising the labor rate in your estimate.
Note that labor hours do not only apply to your field crew. Consider your time as a project manager, engineer, and any other staff working on the project. This can be any warehouse workers, drafters, project admin, etc.
Consider some of these items as overhead costs, but you better put more money into overhead or risk cutting your profit margin.
Here’s a graphic that you can save when you want to look back at how to create a rough estimate in the future.
Factors to Consider When Creating a Rough Estimate
If tasked with creating a rough estimate, there are some things that you should consider.
- The purpose of the rough estimate: Is the estimate for owner budgeting purposes, or are they looking for ballpark figures from various contractors? Depending on how you answer this question, it can change various factors. Owner budgeting is more conservative, while an owner shopping around might require a bit more aggressive price so you can win the job.
- The time available to create your estimate: To improve the estimate accuracy, you should take the time to gather pricing from local vendors and subcontractors involved. They need some time to generate their price, and knowing your deadline lets you know if you’ll be able to wait. If not, you’ll need to insert a number that’s your best guess on the amount; be conservative!
- The level of accuracy required: The estimate’s accuracy will determine two things, the time you require to prepare your price and the information you’ll require. With more time, you can figure out the details of the job and price everything accordingly. Otherwise, you’ll require detailed construction documents which provide the information required to price out a job.
How to Use a Rough Estimate to Make Informed Decisions
Once a rough estimate is complete, you might wonder what’s next?
For one, it can help owners decide whether to proceed with the construction project. If they realize the costs are higher than expected, they can decide to postpone the project or reduce/alter the scope of work.
Another example is providing a rough cost estimate to a general contractor. Let’s say they wanted to gauge how much a change order would cost them; they will ask you for a number. They can take that number you give them and determine how they might want to approach the project owner with the added costs.
With anything in business, money can be a deciding factor for many different things. Primarily, it will determine a project’s feasibility and the extent of the scope with a finite budget.
The Limitations of Rough Estimates
As we already know, rough estimates could be more accurate. Hence why we call them “rough.”
So, as the contractor, you’re going to end up submitting a price on the conservative side. You’ll add more hours and costs than necessary to cover yourself for the detailed estimate.
But for the owner, this means the rough estimate could make them think that the cost of their project will be much greater than the actual cost. While they can budget based on the rough estimate, they must know that the costs are not final.
Rough estimates also take time, regardless of how much detail you include. Of course, more detail equals more time, but this detracts from your other work.
Most of the time, you must redo the estimate and provide a detailed version later. So essentially, you’re providing the rough version as an added benefit to the owner.
That’s not necessarily a bad thing, though; if a project owner agrees to your price from the rough estimate, there is a good chance you’ll get the job. When you provide your detailed version and the owner sees a lower dollar amount, they’ll be happy about the savings.
That said, you need to make sure proceeding with generating a rough estimate makes sense. Use your judgment to determine if performing the work would make your company money.
If there’s too much risk involved, the job is too large for your company, or the project contains work outside your scope, you might want to reconsider providing that estimate.
Rough estimates are a crucial part of the pre-construction phase in the construction industry. They serve as preliminary cost assessments based upon a general scope of work and are crucial for budgeting purposes.
Rough estimates benefit project owners in their financial planning and save time for contractors who can communicate expected costs and work scope through a quick email.
Precision and caution are necessary while generating a rough estimate, as hasty, uninformed calculations could lead to complications.
Creating a rough estimate involves:
- Defining the scope of work with the client.
- Estimating the costs of labor and materials.
- Accounting for overhead costs.
Time availability and the purpose of the estimate are vital factors that can influence the calculation process.
A well-made rough estimate can help owners decide the feasibility of a project and its scope or help contractors gauge costs for changes in the project.
It would be best if you didn’t overlook the limitations of rough estimates. They are typically conservative, potentially leading project owners to anticipate higher costs. Moreover, rough estimates require time and are generally reworked into detailed estimates later.
Therefore, it is essential to gauge whether the provision of a rough estimate is suitable for each specific project. Therefore, you can use this as a tool for determining the feasibility of the work for your company; use them wisely and strategically.
Thank you for reading.
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