Four Common Cost-Estimation Errors that put Your Construction Business at Risk
Cost-estimation errors can have a significant impact on businesses, projects, and financial outcomes. Accurate cost estimation is crucial for effective planning, budgeting, and decision-making processes. However, despite best intentions, organizations often encounter challenges and pitfalls that lead to inaccuracies in cost projections. These errors can stem from various factors, including insufficient data, flawed methodologies, unpredictable market conditions, and inadequate risk assessment. Recognizing and addressing cost-estimation errors is essential for minimizing financial risks, optimizing resource allocation, and ensuring the successful execution of projects and initiatives.
In construction projects, profitability is often not determined until after completing the project. Furthermore, the profitability at completion could significantly differ from the anticipated figures at the time of the bid. The ideal situation for a construction company is to accurately estimate and forecast profitability before commencing the project. Otherwise, the company not only wastes money on work but also puts the business at risk.
To help you handle this process more effectively, here are four of the most common cost-estimating errors that put your business at risk, along with what to do about them:
The calculation ought to provide a high-level summary of the project, the most granular information, and related costs for each line item. This way, we eliminate the black-box method and enable everyone, regardless of skill level, to quickly grasp the cost-determination process. Transparency also fosters cooperation and encourages best-practice sharing throughout the company.
Making changes at the last minute can cause cost and estimation errors, such as missing line items or formula miscalculations resulting from cutting and pasting. These simple mistakes have the potential to transform a successful project into a loss. Reliable cost estimation systems with built-in formulas can help avoid many, if not all, of these errors.
Underestimating subcontractor costs
When estimating a construction project, relying on outdated information regarding service and material costs can significantly impact the project cost. It is crucial to regularly update material costs and subcontractor services. Implementing a framework that can automatically generate requests for proposals for materials and services can assist in mitigating these estimation challenges.
Repeating the lack of risk estimation
To assess risks and minimize confusion, it is essential to analyze what went wrong on previous projects. This allows us to identify and reduce the likelihood of encountering similar risks in the future.
According to national industry studies, businesses can improve project execution by using software solutions and modern construction techniques. Technological advancement has reduced costs and mistakes in the industry by relying heavily on efficient scheduling, planning, and innovation.
However, the industry faces numerous challenges due to its reliance on multiple tools and frameworks that operate in a silo. The average number of toolsets used in the construction industry is eight. This includes but is not limited to:
Project Management Tool
Scheduling tools such as MS Project or Wrike
Local Hard Drive to store documents such as estimation sheet, transmittals, and RFIs
It’s extremely difficult to find a solution that works and fits all your needs during the construction life cycle. We’ve all been in that position before. As a result, AlphaBOLD implemented the BUILDFitters framework specifically for the construction industry to eliminate the industry’s challenges and centralize all business operations with one tool.
- Display a high-level overview of project costs for each cost class and the detailed cost for each cost code.
- The system enables companies to clone an existing estimation to track any improvements and changes made to the original estimate and monitor estimation revisions and accurate calculation of estimation line items.
- The system facilitates a prequalification tool to help in selecting and shortlisting the most appropriate vendors for the job. Based on the services required and materials needed for the project, the system automatically generates and sends a request for proposal to the selected proposed vendors.
- From Lead to Opportunity and Estimation to Bidding, Preconstruction, Contract, and Project Execution, the BUILDFitters framework stores details relevant to each stage and step of the construction life cycle. This data can be used in PowerBI reports to explain project success better and assess the lessons learned in each project based on the data provided.
- BUILDFitters is a one-stop-shop platform that enables you to automate and control business processes, store project documents, generate templates, connect with your team, track project budget, and obtain real data on timesheet and material used vs. estimated vs. On-hand and on-order, and effectively manage your project.
Conclusively, this post investigated the four most common cost-estimation errors that put businesses in the AEC space at risk. It also discussed how AlphaBOLD’s BUILDFitters solution can help overcome these cost-estimation errors and risks while helping you manage your projects better. If you would like to know more about our amazing solution, feel free to reach out to us!