Cost Estimation Methods Used In Construction

How much would it cost to build a house? Or construct a highway bridge? Or, repair a road. You know, that road with endless potholes. In fact, how much does it cost to do anything in construction? As you’d expect, there are many recognised methods for cost estimation. The method used will vary, depending on the quality of available data and the level of project definition. However, they all share the same goal: To determine the Anticipated Final Cost (AFP).

In this article, we’re going to investigate the different estimation methods available, how they work & when they should be used.

As you’d expect, the estimated cost for a project, becomes more accurate as design becomes more detailed. And as a result, the chosen method will likely change as a project evolves. The scale and complexity of a project will also affect the quality of cost data available. Repeatable projects should have more reliable benchmarks & cost data. Opposed to more bespoke, one-of-a-kind projects which may lack reliable data.

Estimation Methods

This figure, produced by the Infrastructure Projects Authority (IPA) shows how the estimation method may evolve as the project progresses.

Project estimating can be split into two camps – top-down estimating & bottom-up estimating:

Top-down estimating is the fastest route for cost estimation. However, is also considered the most unreliable. It utilises benchmarking against other projects to form a cost estimate. A top-down approach is often used in very early stages of a project concept & provides as a tool for early decision making.

Bottom-up estimating is much more time consuming. It’s based on first principles and provides an accurate cost of a project by understanding specific task requirements and programme duration. A bottom-up approach is used when a detailed design is available & is usually used for the budget when construction commences.

So let’s look at 3 common estimating methods used in construction.

Analogous Estimating

To start, we have analogous estimating. Analogous, simply meaning, comparing one thing to another, or in this case, one project to another. For this method, you’ll use historical data to find similar projects which have been carried out and use that data as a basis to form your estimate. This is often referred to as a “top-down” estimate. This estimation method Is used when the project is in the early stages and there are limited amounts of information available.

Parametric Cost Estimating

Moving on we have parametric cost estimating. This method uses historical data to provide an estimate on what the cost would be under different conditions. It’s achieved by identifying the unit cost from past projects and scaling the unit rate for the project estimate. For example, square footage. This method is flexible to the level of information available. It is often considered a more accurate approach than analogous estimating. However, it requires data of projects/ activities which are similar and scalable.

Bottom-Up Estimating / First Principles Estimating

Bottom-up estimating/ first principles estimating – this cost estimation is the most accurate estimating technique. It’s used when the project can be decomposed into manageable tasks, or when a works breakdown structure is available. First principles are applied to the detailed cost estimates. The works are broken down into packages, and estimates are built from the task up, considering task duration and resource requirements. This method is the most time consuming. However, offers the most cost surety.

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