Estimating Cost in Construction

What Is It & How Do You Calculate It

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What Is It & How Do You Calculate It 🚧

The goal is clear, win the bid. The road toward this goal is full of twists and turns and may include a detour or two and it begins with an estimate. As a construction cost estimator, the ability to pivot and adjust to unexpected changes is a necessary skill.

Regardless of how much effort you put into studying the possible outcomes, it may still rain on your parade if there is a shift in the forecast. And, when you’re talking about projects with dollar amounts in the millions along with tons of resources and jobs on the line, the pressure mounts quickly to deliver cost estimates that are pretty close to perfect.

So where do you start and how do you ensure your takeoffs and estimates are complete, precise, and see beyond the scope of the project to avoid unwanted surprises? Understanding the elements of cost estimating is the first step.

What is Construction Cost Estimating?

Construction cost estimating is a comprehensive calculation to determine the total budget needed to complete a project. As important as any other phase, your preconstruction estimate directly affects the goal to make money at the end. But there are no shortcuts to a profitable endgame. The total scope of the project must be factored into the estimate and mistakes can be costly even after construction is complete.

Many decisions must be made, and an accurate estimate is the starting line to delivering your project on time and on budget. It is worth the time and resources to ensure the highest profit is earned on your next construction project. If you become familiar with the basic structure behind cost estimating and back it up with an estimation software to do the heavy lifting, the quicker you can get to submitting bids and turning profits.

Types of Cost Estimates

Cost estimates are broken down into levels to ensure accuracy at every phase of the project. The different types of estimates include:

• Preliminary – At the start of the process this estimate purely serves as a rough idea of the cost based on limited information.

• Plinth Area – Covers the external dimensions of the structure and includes factors like the foundation type, roof construction, materials, and finishes.

• Cube Rate – Covers the total volume of the building and is normally the strategy used when calculating estimates for multistory structures.

• Elemental – With the use of drawings and specifications, this estimate paints a more accurate view of the total cost down to the structural frames, floor finishes, and more.

• Detailed Estimate – A detailed estimate is exactly how it sounds. Every detail and stage should be drawn up to get the most comprehensive cost estimate possible. Put together an itemized list of costs divided by trade with accurate estimates for all labor, materials, equipment, etc.

How Do You Calculate Construction Costs?

Once you have the big picture overview, it’s time to gather every small detail and make some calculations. This is where you start punching numbers and by collecting these elements of information:

• Direct Costs – Cost of materials, labor, and equipment

• Indirect Costs – Cost of utilities, legal fees, permits, etc.

• Labor Costs – Cost of paying your team including wages, taxes, and overtime

• Subcontractor Costs – Cost of work contracted out including labor, materials, and equipment

Common Cost Estimation Problems

Issues with your cost estimate are bound to happen, but you can catch common problems before they occur, including:

• Not Reviewing Your Work – Something as simple as taking your time and double-checking your work could spell big problems for your bid and your bottom line. Do not let this simple, but critical step cause you to lose time and most importantly, a bid.

• Staying Up on Material & Supply Costs – Since the pandemic, the price of everything has seen a spike and the impact has made your job of estimating more difficult.

• Labor Costs - While looking at the cost of materials, you should never underestimate the cost of labor. Prepare to pay a higher salary for workers with more experience. Estimate labor costs based on how many man-hours it will take to perform a task.

These obstacles are just a handful of what you may face as you navigate the steps toward a final estimate.

Conclusion

It is true that cost estimating your construction project will have several moving parts. All of which must be precise and cross-referenced to ensure total accuracy. Don’t let the seemingly heavy-lift keep you from your goal. Remember to think through each stage of the project and calculate the obvious as well as the not-so-obvious.

How to Read a Certificate of Insurance Form

How to Read a Certificate of Insurance Form

A certificate of insurance form establishes proof of insurance and summarizes your coverage on one page. Here's how to read and use a certificate of insurance.

When a new client hires your company, they want to know that working with you won’t increase their legal liability. Similarly, when you hire vendors or subcontractors for your firm, you want assurance that hiring them won’t harm you financially.

How do both parties put these concerns to rest? By obtaining a certificate of liability insurance from an insurance company.

A certificate of insurance (COI) form is a document that establishes proof of insurance. It lists you or your business as the policyholder or named insured. The form also specifies the type of liability insurance involved, the policy limits, and the effective dates of coverage, or policy period.

This shows everyone involved that you are adequately insured. By reviewing a COI, your customers can close deals knowing there’s an insurance safety net in place.

Why is a certificate of insurance important?

Most business owners strive to be competent, honest, and truthful. Sadly, reality may fall short of expectations. Vendors and business partnerships might:

• Not be as skilled as promised

• Fail to mention prior legal disputes

• Claim to have insurance, but it expired years ago

Asking for a current COI helps verify a potential vendor or subcontractor’s financial responsibility claims. When lining up work with a new client or vendor, never hesitate to provide or ask for a certificate of insurance form. It’s simply a good business practice.

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In what cases are certificates of insurance necessary?

Certificates of insurance have a wide application in the business world. Any time parties to a transaction are concerned about losses and legal liability – something most small businesses worry a lot about – certificates of insurance play an important role.

Here are some cases in which COIs are essential:

• A commercial property owner wants to confirm that a tenant has commercial general liability insurance, which protects against common business risks. The landlord wants to make sure that if a customer trips and falls on the landlord’s property, the tenant’s insurance policy will protect the tenant and landlord from the cost of a lawsuit.

• A manufacturer requests a COI from a contractor prior to beginning a facility renovation. Now the owner knows they won’t have to pay for any structural damage the remodeler may cause.

• A building design firm wants to insulate itself against the risks of bringing subcontractors onto its construction sites. Getting proof of insurance eliminates the risk of having to pay the medical bills of any injured workers employed by the subcontractor.

• A municipal government asks an engineering firm to provide a COI before starting a road construction project. This creates a liability barrier for the municipality, should the engineering firm draft a faulty design.

As you can see, whenever businesses engage in projects that can trigger losses for multiple parties, a certificate of insurance is the go-to document.

What are the main sections of a certificate of insurance form?

The Association for Cooperative Operations Research and Development (ACORD), a nonprofit insurance organization, provides a standard form used by most insurers, agents, and brokers. You may see it called the ACORD 25 or simply an ACORD certificate of insurance. This template COI includes:

• Date: When the form was issued.

• Disclaimer: Legal wording that says the certificate is a representation of your coverage, not the actual insurance policy.

• Producer: The insurance agent or broker who issued the certificate.

• Insured: The name and address of the person(s) or business covered by the policy.

• Insurance coverages: The type of insurance – typically general liability, commercial auto, umbrella insurance, or workers’ compensation. This section also shows policy numbers and their effective and expiration dates.

• Insurers: All companies providing the coverage listed above.

• Coverage limits: How much coverage in dollars each policy provides, with coverage subtypes.

• Description of operations, locations, vehicles: A catch-all space to respond to specific requests, such as being listed as an additional insured.

• Certificate holder: The person or company to whom the COI was issued.

• Cancellation: Notice that the certificate holder will be notified if the insured cancels the policy before the expiration date.

• Signature: Signature of the agent, broker, or an authorized representative of the agent or broker.

How to review a certificate of insurance

When you request a certificate of insurance from a person or business, you'll want to look the form over carefully. Once you receive it, here’s what to look for:

• Make sure the company name on the form matches the vendor name that you are hiring.

• Verify that the policy expiration date does not come before the completion date of your project. If it does, ask the vendor to submit another COI confirming the policy’s renewal.

• Make sure the company has a general liability policy at the very least, as well as workers’ compensation coverage. These policies will cover you for any third-party losses (property damage, bodily injuries, etc.) the vendor causes, as well as any injuries to their employees during your project.

• Determine that the vendor’s liability limits meet or exceed the limits on your own insurance. If they don’t, consider requiring the person to purchase additional insurance.

In rare cases, business owners will present counterfeit COIs because they can’t afford to maintain genuine insurance. If you have any reason to doubt someone, request the COI directly from the person’s insurance agent or broker.

Is a certificate of insurance form the same as an insurance policy?

No, a certificate of insurance is only a summary of existing insurance coverage. When you give a customer your COI, you’re not entering into a contract to cover that person’s losses. You’re just providing proof that you have insurance.

If you want to provide coverage to the certificate holder, you can make your customer an “additional insured” on your policy. This is easy to do. Just call or email your agent or broker and ask the person to amend your declarations page to include the name of your customer.

Hopefully, this gets you up to speed on why certificates of insurance are important and how to read them properly. If you need any additional help don’t hesitate to contact one of our agents today.