Speaker 1: In today's video, we're going to cover the basics behind estimating and budgeting construction projects. I'm going to talk about the different types of estimates within the construction industry, as well as the best way to get better accuracy on future estimates. So let's go. So whether you're a general contractor, a construction manager, or a subcontractor, you stay in business by winning or getting awarded new construction projects. Sounds pretty straightforward and easy. Well, a large amount of projects in construction are actually awarded based on the lowest qualified bid, meaning the lowest cost, making construction a fairly competitive industry, which keeps the pencil sharp. So for every project that someone is awarded, they likely bid and lost a few other projects. So large construction companies are constantly estimating multiple projects at a time to ensure that they have a good backlog of awarded projects to keep the train moving. A backlog is essentially all the projects sitting in an awarded and an approved state that are set to start at a later date. Backlogs can be tracked a few months out, a few quarters out, or even a few years out. Backlogs influence companies on how they should plan future staffing needs. So estimating and construction actually starts with business development, which can simply be the owner of a smaller company or a team of individuals at a larger company. Business development's responsibility is to bring new work back into the company and keep current client relationships strong for potential repeat business. So the business development group has to understand what their company's strengths and what their company's weaknesses are to ensure that they don't chase unnecessary risk or overextend their company into unfamiliar markets. Business development can be boiled down into your company's sales team. So BD or business development chases the work, which leads to the transition and handoff to an estimating team. Some projects require bid qualifications in order to be allowed to even provide an estimate, which means that the company has to first meet some set of requirements. Companies might be required to provide their financials to show either a general contractor or CM that they're actually financially stable enough to take part in the project. Some owners have lengthy payment terms, meaning you complete the work, you submit a bill, and you might not get paid for 90 plus days depending on the project. It could be 30 days, it could be more, all depending. So a contractor might be floating hundreds of thousands of dollars in the meantime waiting for those payments. And bidding qualifications are not always specific just to financial status. They could be based on things such as a company's EMR or experience modification rating, which is how companies are rated based on safety. And finally, there are also projects referred to as negotiated projects or negotiated work, which for the most part are repeat clients which don't put the contractor through that competitive bidding process. So before we get into the different stages of estimating, it's good to understand that different projects require different levels of transparency of their estimates. The level of detail and the amount of backup required to be shown in an estimate is the requirement of the contract type and what's included within the instruction to bidders. The instruction to bidders is a document sent out along with the drawings and specifications that contractors are to follow when providing their estimate. These instructions to bidders tell the GC, the CM, or other subcontractors whether a one-line estimate, meaning you see one number which is just the total cost, is acceptable, or if multiple line items are required which would show potential breakout prices such as labor, material, equipment, tax, bond, fee, etc. So the owner and design team prepare drawings and specifications working together through a series of phases. They start with the programming phase, then the schematic design, then design development, then the bid document phase. Depending on the contract and project delivery method, the owner and design team might need to lean on a general contractor, a construction manager, or an owner's rep to provide budgets at each of these phases to ensure that the final bid documents are on track to remain within the owner's overall budget expectations. Without these backchecks throughout these design phases, the final project estimate could be blown way beyond the initial budget, leading to redesign and potentially more wasted time and money. The architect and the design team are usually able to assist the owner in understanding general costs along the way as well. Again, these backchecks happen in some project delivery methods, but not all. So when estimating at the programming phase, you're talking extremely high level because there are really no drawings yet. The GC, CM, or owner's rep will often share a cost per square foot estimate based on similar projects that have been recently completed. These are typically referred to as conceptual estimates and give the owner an initial gut check to see whether they want to move forward or not with the project or certain aspects of the project. So assuming the owner and the design team do decide to move forward into the schematic design phase and the design development phases, the GC, CM, or owner's rep will start to put further detail into these estimates and start to break them out into either CSI divisional groups or individual CSI divisions. So for example, here is a conceptual estimate. Here is a schematic design estimate. Here is a design development estimate. So when you're budgeting at the design development phase, the owner really should have a good understanding of what their total cost on the project is going to be. At the design development stage, if anything is still highly uncertain or details are still incomplete, an estimator should provide a plug number for that missing scope. This can be referred to as an allowance. An allowance is a separate line item of dollars included in the overall budget for scope that needs to be completed, but a dollar value can't yet be quantified. For example, the owner wants some custom artwork in the main lobby of their new building, but doesn't exactly know what that is yet. To properly budget for this project, an estimator will put a line item in their estimate for a certain dollar value to cover that scope. Or you can include a clarification in your final estimate that states no costs are carried or assumed for that unknown scope. The benefit of having an allowance in your budget to the owner is that the owner understands roughly what the cost could be, and this just helps the owner budget on their end as they secure funding for the project. This also allows the project to move forward while the details around that scope are finalized. Once the scope is finalized for that artwork, the allowance is there and ready to be used within the overall budget. One other item that can be found in a commercial construction project budget is a contingency line item. Contingency is yet another separate line item of dollars that can be tapped into for specific use based on the agreements between the owner and the contractor in the initial contract. Again, every project requirements are different, so this process and these examples I'm using are going to change and be dependent on each project and each client. All right, so let's walk through the layers of estimating a large commercial construction project. This example is going to be from the viewpoint of one general contractor bidding against other general contractors. So the GC receives the bid documents, which includes construction drawings, specifications, and other documents such as land surveys, geotechnical reports, and more. The GC needs to first establish two basic things to get going. The GC needs to establish what is in scope, which simply means what is required of them in their contract to be completed during this project. And number two, what is not in scope, which means what is not required of them and what is not in their contract. To understand this, the GC or the construction manager needs to read through and understand all of the drawings, the specifications, the schedule requirements, the bid instructions, or previously established contract requirements. If there is any confusion as to what's owed, the managing contractor or the subcontractors can issue pre-bid RFIs to request information from the design team or the owner for these clarifications. So the managing contractor that is bidding this work, which could be a GC or ACM, now understands what is in their scope and what's going to be in their contract, which is also going to be everything that they'll need to include in their estimate as a cost line item. General contractors will likely self-perform aspects of scope on the project. However, they likely won't self-perform every aspect of scope on a project because they're not set up to do so or they're not competitive in every CSI division. So self-performed scope will be estimated in-house by the general contractor. The remaining non-self-performed scope are cost gaps that the GC will need to fill. Once that number is presented and accepted contractually with an owner, any remaining scope gaps become the responsibility of the contractors through the language in the contract. This essentially just means that everything in the bidding documents has a cost associated with it. So for the GC or the CM to make sure that they have all the dollars accounted for in their overall estimate and eliminate any scope gaps, GCs and CMs need to find subcontractors to bid on these gaps of scope. The general contractor or construction manager compile all this leftover scope into bid packages for subcontractors to price. This process breaks down the overall project into smaller packages which align with the CSI divisions. So for example, a GC might self-perform the CSI division 03 concrete scope on a project but not the division 7 roofing or the division 8 glazing. While the GC needs to put together bid packages to get the roofing and glazing prices while simultaneously completing their own estimate for the concrete scope. Project managers for construction companies typically write and track down subcontractor bid package estimates which would be the roofing and glazing package in this example. Meanwhile, a combination of the project management team and the estimating group compile the self-perform estimate which would be the concrete in this example. A detailed bid package to the subcontractor group is a must because it clarifies exactly what you as the general contractor or construction manager are asking the subcontractor to include in their price. A vague bid package typically leads to more scope gaps because assumptions are made and there's usually some sort of unclear communication during that process. So the GC and CM compile these bid packages and then they send it out to a handful of bidders for each division to ensure that each bid package is getting a competitive price which is going to help their overall number back to the owner. This is why the GC or CM and subcontractor relationship is highly important. The GC still has to read each of the received estimates to ensure that the subcontractor didn't provide any exclusions or clarifications that left gaps in the scope. The GC is trying to get an apples-to-apples comparison amongst bidders in this process to ensure that pricing is accurate and more importantly they need to ensure that the bid package scope is fully covered by the subcontractor's estimate. The general contractor does this for all scope packages that they won't be self-performing during the bid and estimate phase of a project. As estimates come in, the project managers will review these estimates and go back and forth confirming that all scope is covered. Now talking about the scope that the GC will self-perform, they actually need to provide their own detailed estimate. So let's use the example of a GC self-performing carpentry scope such as setting door frames, hanging doors, and installing door hardware. The GC will need to calculate costs associated with their labor, material, equipment, and tax which will become a line item in their overall estimate that goes back to the owner along with these other subcontractor bid packages. So to do this the general contractor will likely use a few different types of software to generate their estimate. The estimator in this scenario will start with software capable of performing a takeoff. A takeoff in construction is the process of figuring out exact quantities of material needed for the scope you're estimating. You don't necessarily need a program to do this. You could do this with a hard copy set of drawings and a highlighter as well. The program is there to assist on more complex projects that might have a lot more information or detail to track. Examples of takeoff software in the construction industry include Onscreen Takeoff, Procore, Bluebeam, among others. I'm going to use a fairly simple example and start with a floor plan that has five doors on it and let's assume that we've uploaded this into our takeoff software. Now this floor plan shows me a quantity but it really doesn't tell me much more beyond that. So I need to go elsewhere in the construction documents to gather details about these doors. In this instance I'm going to locate the doors, frames, and hardware schedule. So I see door number one and door number five have a hollow metal frame. They're wooden doors and the hardware package is number one. Both of these doors are the same. The hardware package is going to be found elsewhere in the drawings or the specifications. So door number two and door number three are wood frame. These are pocket doors with a hardware package of two. Both of these doors are actually the same as well. Last, door number four is a huge six foot wide by 14 foot tall door with a hardware package of three. So what I'm doing here is organizing this takeoff into different groups of similar materials. Another example would be if you had carpet in some locations within the building and vinyl flooring in others. You would separate your square footage quantities based on those different materials. The purpose of doing this is because different materials have different cost values as well as different labor install durations. Estimated quantities can be different depending on the material type. It can be based on square foot, cubic yards, linear foot, or in the sense of doors, frames, and hardware, we'll look at it as each. The reason why I use three different types of doors, frames, and hardware groups is because each one is going to have different material costs as well as different install durations. We're grouping them because once we price one condition, we're able to multiply it by the total quantity shown on the drawings to get our total cost. Okay, so when I'm completing a takeoff, I click on each of these and the takeoff software is going to provide me with total quantities in a summary format once I'm complete. So we're going to go through and make sure that we've scoured both the drawings and this door schedule to just make sure that they both align. Because if there's something shown on the drawing that's not shown in the schedule, we technically still owe it because it's in the contract documents. The next step after this is taking this takeoff information and getting your material, labor, equipment, and tax rolled up into your estimate based on those quantities. So you can either transfer your takeoff information into an Excel and calculate your costs in that Excel or use another construction software to compile your self-perform estimate. Some big estimating software names in the industry include Destiny and Timberline. These estimating softwares are used because they can easily do the math on complex assemblies. Well, what's an assembly you may ask? Well, using our doors, frames, and hardware example, we would set up three assemblies in our estimating software. The first assembly would be for our doors number one and number five because they were the same. Our second assembly would be for doors number two and number three because those were the same. And our last assembly would be for the one-off door number four. An assembly includes all costs associated with a specific takeoff item. So looking closer, the first assembly would look something like this, which is a typical door assembly. It's essentially that finite detail that uses a combination of historical or verified costs and multiplies it by the quantity you gathered from your takeoff software. This relieves estimators in reinventing cost estimates whereas they can click and find typical assemblies used in typical construction projects. As you estimate more projects, you can build up your library of assemblies. You'll have to adjust unit rates within those assemblies as prices in construction change. If the assembly doesn't exist or it's a unique condition, you just create one and then you can just enter quantities against it. If we were looking to build an assembly for our large door, we'll just need to consider the size of that door. How many people are needed to install it? How many hours will it take to install? What is the cost because it is a larger door? Is there any equipment needed? So the benefit of having these assemblies is that if the owner decides to add another large door, you already know the cost because you've already done this estimate. All you need to do is multiply it by the quantity 2. So as an estimator, you'll repeat this process for any items that are included in your scope. Again, these are more complex softwares that are used because this estimate turns into a tracking means for project managers down the road. You don't have to necessarily use these softwares. Again, you can set up some equations in Excel to do the same exact thing. You're not going to take every square foot of the building and estimate it separately. You're going to take one square foot and multiply it by how many square foot you have of that same material. So the GC takes all of their self-performed estimates, all of the lowest qualifying bidding subcontractor estimates that they chased after, all of their prepared general conditions, any applicable allowances and contingency, their fee, any taxes, and the GC just puts all this together with the schedule, bid clarifications and exclusions, and submits this to the owner to hopefully get awarded the project. Since the owner bid this out to multiple GCs, the owner then looks at each GC's bid to ensure everything is included that needs to be. The owner then awards the project and everyone is off to the races. So the secret to getting the best estimates moving forward is by using actual cost tracked during the course of construction on ongoing projects or previous construction projects. This is referred to as historical data. As an estimator, you take that information with you so you can really back check whether your estimate is competitive or not. Okay, so this was estimating 101, and this video could have been a few hours long, but I'm going to call it a day. What I will do in future videos is make some videos working in some of these programs I mentioned to show you the actual process. So if you're interested, please hit that subscribe button below. Don't forget to drop a comment and stay tuned for everything construction. So as always, be better, build better, and bye for now.