What Keeps Me Up at Night: Cost Estimating – 2025
By Greg Offner
Anyone need a wakeup call?
I’m sure many in the facility planning, design and construction industry have noticed, costs are nightmarish! Cost to plan, design and construct a building changed significantly in the past five years. There have been several projects bid and awarded recently which had fees and lump sum bid amounts that were thirty-five to almost fifty percent higher than similar projects bid and awarded just a few years ago! These increases are in spite of contractors are operating on lower margins, yet labor cost and material prices, as well as building materials and availability have remained so unstable, the term “guesstimate” is part of industry nomenclature. The good news? Looking ahead, 2024 and 2025 may be the beginning of a buyers’ market for those agencies considering facility expansions or renovations. The economic experts are seeing our industry trend toward stability in the marketplace.
The difficulty for owners will be having confidence in the cost forecast during these next two years. Historical costs are out the window and the savvy estimator will have to depend on real time market analysis. Regardless of the price, the necessity for consistency in the estimate format is vital to accurate forecasts. There are many estimate formats that can be used, and critical to the outcome is the input along with knowing where the dollars are in the estimate. As an owner or consultant that use project cost estimates we can’t afford to misinterpret the quality and value of the information in the estimate.
What’s in the number?
There are various methods employed during the estimating process, the accuracy level expected from estimates, and the level of risk associated with estimates need to be quantified. Your estimate classification system must help those involved with project estimates avoid misinterpretation of the numbers and what they represent. Projects have failed because of the misapplication and misrepresentation of estimates. Improving communications about the manner in which the estimate has been classified reduces business costs. There are several bedtime horror stories that will have you tossing and turning, all caused by poor business and financial decisions driven by misunderstandings of what the cost estimates represent.
My experience in the industry has taught me many lessons. One lesson is accurate estimating is the result of using a proven methodology-based approach when assembling a cost model. There are numerous characteristics that can be used to categorize cost estimate types but typical to these are degree of project definition. The “primary” characteristic that must be used in every methodology should be driven by the degree of project definition. Question one: “What are we building?” All the other characteristics are “secondary.” Categorizing cost estimates by degree of project definition is in keeping with the CMAA philosophy of Total Cost Management, which is a quality-driven process applied during the entire life cycle of a project. I am a Certified Construction Manager and can attest the process works. The American Association of Cost Engineers established five cost estimate classifications which are considered in our industry as an accepted practice.
Establishing the level of project definition is a continuous process. The AACE determined from benchmarking industry practices that three to five distinct categories are commonly used. The estimate class designations are labeled Class 1, 2, 3, 4, and 5. A Class 5 estimate is based upon the lowest level of project definition, and a Class 1 estimate is closest to complete project definition and maturity.
What do the numbers represent?
Estimates classifications help project stakeholders understand what the number represents. Estimate classifications, such as the ones used by AACE, correspond to the typical phases and opportunities for price evaluation used during a projects life cycle. Using the AACE classification methodology as a template we can better understand what the estimate represents.
A Class 5 estimate represents probable cost. This estimate is usually prepared from a feasibility study sometimes supported by random scribblings on a cocktail napkins or sketches made on scraps of paper. Class 5 estimates can represent a reasonable idea of what the project may cost. This estimate will consider historical costs and market statistics and usually has its foundation based on a best guess snapshot of probability. For example, I have knowledge the average public building could cost between $600 and $800 per square foot. However, they can cost more if allowed to develop uncontrolled. One of the pitfalls of this estimate level is owners are quick to publish this number as a budget.
A Class 4 estimates is based on a pen to paper conceptual design. This estimate also considers historical costs and market statistics but has more definition and will be based on a combination of best guess and empirical data. This class of estimate is based upon percent complete of project definition (roughly corresponding to percent complete of design). Class 4 estimates are usually prepared when a concept reaches a 10% complete level of definition. Class 4 estimates are usually used to establish a design to budget number Architects will work hard to adhere to as design progresses.
A Class 3 estimates is based on a conceptual design developed to a mid level schematic design. This estimate also considers historical costs and market statistics but has more definition than a Class 3. This cost model will be based on a combination of best guess, empirical data and measured quantities. This cost model will have a more refined level of information. Usually these estimates can zero in on foundation and structural requirements. This estimate usually becomes the budget, or control estimate by which future estimates are measured.
Class 2 estimates are based on a developed design sometimes referred to in the industry as a 100% DD level of information. This estimate continues to consider historical costs and market statistics and includes an extremely high level of definition, well beyond that of a Class 3 estimate. The estimate will have prices based upon a combination of empirical data and measured quantities and are usually a very accurate representation of what the actual bid price will be. This cost model will have a more refined level of information of what is in the number and will be reconciled to the Class 3 estimate to ensure the design is congruent to the budget. Usually these estimates will include accurate costs on the building skin and major building systems.
Class 1 estimates are based on a design referred to in the industry as a 100% Construction Documents, or Bid Documents. This estimate continues to consider historical costs and market statistics and includes a higher level of definition than the Class 4 estimate. The estimate will have prices based upon a combination of empirical data and measured quantities and are usually a very accurate representation of what the final construction cost will be. This cost model will be reconciled to the Class 3 estimate to ensure the bid documents are congruent to the budget.
Is the estimate accurate?
There is more to an estimate that material take-off and pricing. Estimates should consider design intent, scope definition, requirements, documents, specifications, project plans, drawings, calculations, learning’s from past projects, reconnaissance data, the labor market conditions, project location, environmental considerations, and other estimate-specific conditions that are often uncertain or difficult to assess. The level of project definition will drive the accuracy of every estimate. What keep many of us up at night are factors besides the known and available data that greatly affect estimate accuracy. Primary among these is the current state of our economy. It is difficult to depend on reference cost data and historical cost that change almost daily. It is even more difficult to develop an estimate with a “square foot” approach if you don’t have real-time cost available, data from projects using similar configurations, sustainable features and similar technologies.
As industry professionals our task is to make certain the estimates we provide our clients are not only realistic, but as accurate as humanly possible. Fortunately for me, I usually have a great group of other professionals alongside me. We share a mission of achieving an accuracy rate at within 3% of the bid price on every project. This really helps me get a good night’s sleep.
Gregory J. Offner, CCM, is a Criminal Justice Consultant serving the Planning, Design and Construction community, and a Correctional News Editorial Advisory Board member.
Editor’s Note—this article originally appeared in the Jan/Feb 2023 issue of Correctional News.