Construction Cost Analysis: A Comprehensive Guide

When you think of successful construction projects, cost analysis is a crucial process that you can't ignored. It plays a major role in construction projects because it breakdown the project cost. Property owners with a new construction project looks at ways of maximizing the value of their project while still meeting their budget.

And this is where construction cost analysis comes in. This analysis assists you in deciding whether it is worth continuing with the project. In this article, we will look at how to perform a cost analysis, the ideal methods to use, and an example is also included. Let's get started.

What is Construction Cost Analysis?

Construction cost analysis method involves monitoring and evaluating a project's cost throughout the construction period. The construction company or owner can perform a cost analysis to identify cost saving opportunities in the project scope.

The company's management or workers can use it to identify where they are spending more of their resources and money. Also, it helps in checking whether the money is being used appropriately on the said project scope.

Cost analysis method can be used by construction companies, property owners, subcontractors, and general contractors. So, with these estimates, shareholders such as project developers, assistants, managers, accountants, and finance managers can benefit from it.

Benefits of Construction Cost Analysis

Here are the benefits of using cost analysis on construction projects:

1. Minimized financial risk

With a project cost analysis, you are able to manage and control construction expenses. This helps in closely tracking the calculations of labor expenses vs material costs.

2. Helps in Making Informed Decisions

By performing construction cost analysis, you'll know how to prioritize projects. You'll understand which one needs more project expenditures and the necessary steps to take to achieve it.

3. Becomes Easy to Identify Cost Overruns

Cost overruns are common in construction projects. However, cost analysis helps prevent overruns and provide a fallback position in case of any milestone delays. In this case, you will identify cost-saving opportunities by negotiating for better pricing, optimizing resource allocation, improving productivity, etc.

4. Support From Stakeholders

If the cost analysis provides detailed estimates that may help cut costs incurred, stakeholders may give their support for it. This it will be easy to win win more projects. Ideally, cost analysis helps in saving the project lifecycle. 

How to Conduct Construction Cost Analysis

For successful construction projects, construction cost analysis is an essential aspect. Even with the cost estimation methods listed above, you have to understand how to conduct the cost analysis. Here are steps that can help in a cost analysis project.

Have Cost Estimates

Before you start the cost analysis of your construction projects, you must have a budget. Through this budget, you can decide whether or not you want to continue with the project. For instance, if the target revenue you expect to receive in your company is $40,000 for the project, the estimated budget can help you make the decision.

List The Associated Costs of The Project

As you start your cost analysis, ensure you list all components associated with the construction project. Include the preliminary estimate of the project, as this can help consolidate unit costs. You can also include overhead expenses because the nature of the construction industry is the common cause of most construction challenges. The common elements for consideration include;

Cost Of Construction Tools and Equipment

• Staff compensation
• Material costs for tools such as fuel
• Cost of project materials
• Assign monetary value to elements

Next, think about how you will convert cost to monetary value. For this case, ensure each element you listed has a monetary value. You can make an informed decision by having transparent communication with the material suppliers.

Through supplier communication, you will know the cost of the equipment and materials needed for the project. Then, you can communicate with the construction management about any overhead costs, including taxes and labor.

Estimate Your Benefits

After you have listed all the costs, list the benefits you can estimate from this project. What do you stand to gain? To find out, check who will benefit from it and the goals you have for the project.

For instance, if you are doing the cost analysis for a construction project, it will assist in brand awareness of your company by including it in your portfolio.

Convert The Estimated Benefits To Monetary Value

The same way you assign monetary value to each element is the same thing to do to these benefits. Ensure every benefit has a monetary value. However, this estimation may not be accurate as there are factors determining the outcome of the construction project. To convert the estimated benefits, have a look at past projects that seem similar to the current project. Now, compare the actual benefits of both projects.

For instance, while cost estimating for the previous project, you had expected $70,000 in revenue for your company, but it earned you $50,000. This means for the new construction project you are estimating, you know how to estimate your revenue to $50,000.

Add the overall cost

At this stage, you need the total cost of the project. For instance;

Material cost+ labor cost+ construction cost =total construction cost

$ 2,000 + $15,000 + $25,000 =$42,000

Make necessary subtraction

Your construction cost analysis is not complete without the necessary deductions. To get the project's profitability, you still need to deduct the estimated benefits from the total construction project.

Let's say the total construction project is $42,000 while the estimated benefit is $25,000; your profitability is going to be;

$42,000- $25,000= $17,000

Compare your construction cost analysis to your set price

After you are done with the cost analysis, compare the two prices to determine if the project is worth it. If it's not worth it, you can let go of this construction project and focus on another.

Example of a Construction Cost Analysis for a Residential House

WAJOSE Construction Company is tasked with estimating the construction cost of a residential house with respect to the following specifications.

The land is located in a suburban area of 2,500 square feet. The design of the house includes a two-story building with three bedrooms and two bathrooms. The materials required are of standard quality. The projected timeline for this project is 6 months.

Construction cost breakdown

The preparation of the construction site which consists of clearing and grading, excavation and foundation, and utilities installation is a warded $10,000, $30,000, and $15,000 respectively.

The structure of the building consisting of framing, roofing and foundation is awarded $40,000, $15,000, and $20,000 respectively.

The exterior finishes including the windows and doors, siding, and exterior painting are awarded $15,000, $10,000, and $8,000 respectively. On the other hand, the interior finishes including the flooring, drywall and insulation, and interior painting is awarded $15,000, $20,000, and $10,000 respectively.

The kitchen appliances, and bathroom and lighting fixtures are awarded $10,000, and $13,000 each. Down to the mechanical system including the electricals, plumbing, and HVAC, its awarded $20,000, $15,000 and $25,000 respectively.

Others budgets include;

Unexpected expenses or a change in project scope: 5% of the total cost incurred: $20,000

Taxes and permits: $8,000

So, from the parameters above, the estimated overall cost of this project is;

Cost of all elements + unexpected expenses = Total construction cost

$10,000+$30,000+$15,000+$40,000+$15,000+$20,000+$10,000+$15,000+$8,000+$20,000+$20,000 =$223,000

So, the total construction cost of this project is $223,000

The estimated revenue of this project depends on a specific percentage of the total estimated cost. For instance, if you expect a 10% profit, then

Profit=10% of the estimated cost

Profit=0.10 x $223,000

=$22,300

So, the total estimated cost of this project is;

The total cost + profit

$223,000 + $22,300 =$245,300

Mind you, in the above total estimated cost, labor cost is not included. If included, the labor hours of each element has to be included. This example is just a simple construction project cost analysis. But, if we are to use the actual construction cost analysis methods like the ones listed below, the cost will be higher.

Why choose cost analysis? These construction method help in making informed decisions. Which is why the historical cost data of similar projects, construction industry market conditions, and professional judgment are most commonly considered.

Also, the company will have to adjust its profit margin depending on the market condition, risk management, and other project factors. All this can be done by using appropriate construction cost analysis methods. We will discuss this methods in detailed below.

How to Calculate Construction Costs

For a construction project to be successful, accurate cost estimation is needed. This is necessary when it comes to project planning, resource allocation, and budgeting. Here, we will explore the three most common methods for calculating construction costs.

• Elemental Cost Analysis
• Comparative Analysis
• Parametric Estimating

For each of these methods, you will learn their principles, applications, and benefits. Keep in mind that calculating construction costs is a complex task. So, you need to understand the parameters and factors involved.

Elemental Cost Analysis (ECA)

Elemental cost analysis is a construction cost analysis method involving breaking down a project into constituent elements and then assigning cost estimates to each element. The purpose of this method is to ensure detailed estimates and approaches are used to estimate the project costs by considering each element in the construction project.

This is how it works;

First, you will have to identify and define every element of your project. This should include the mechanical system, foundation, structural framework, finishes, and electrical systems.

After identification, you can assign cost estimates to each element. The estimates you make are based on expert judgments, industry standards, and historical cost data. With historical data from previous projects, you gain valuable insights about the cost of each element. Additionally, expert judgement is essential in estimating the cost of elements accurately.

Advantages of elemental cost analysis -Offers a detailed construction cost estimates

• Helps in identifying cost drivers and saving areas in the project
• Identifies cost overruns

It makes tracking and managing costs easy throughout the project lifecycle

Disadvantages of elemental cost analysis

• Needs access to historical data and industrial benchmarks, which is not always available
• The cost estimates rely on experts judgement
• Design alterations can affect the accuracy of the estimated cost

Elemental cost analysis remains a valuable cost estimation method even with the limitations mentioned. If provided with up-to-date information, it will provide a detailed approach to cost estimation and also help in achieving accurate cost estimation.

Comparative Analysis

In the comparative analysis method, the cost is done by comparing recent projects with a similar completed project(s). This method relies on the principle that construction projects with similar characteristics may have comparable cost estimates. This is how the analysis works;

The first thing is to identify any other similar completed projects. This should be in terms of size, scope, complexity, and project type. After analyzing the cost incurred in past projects, an estimation of is made.

Just like in the ECA method, when using comparative analysis, it's necessary to choose industry benchmarks which are similar to the current project. This means factors such as materials, construction methods, scope, and location have to be considered.

Advantages of comparative analysis

• It offers valuable insights into the overall project cost
• You can draw real-world basis estimation from past projects
• It's easy to identify cost drivers and patterns influencing the total cost

Disadvantages of comparative analysis

• It's difficult to find comparable project data as inaccurate estimations can lead to poor estimations
• It leads to negligence of the current project expenditures, such as design variations, site conditions, and technology used, leading to inaccurate cost estimate
• The limitations of comparative analysis can affect the project budget because of miscalculations. However, if combined with other methods, such as elemental cost analysis, it will provide valuable insights and accurate operating costs of the current project.

Parametric Estimating

The parametric estimating is a data-driven approach. This method calculates construction costs by relying on statistical and historical data. It establishes the costs between each project parameter and the construction cost to come up with an accurate cost estimation.

The principle used in this construction cost analysis method is that some project parameters can have a predictable impact on the project cost. The parameters that can be used to determine the project's actual costs include the linear footage, complexity rating, square footage, and other quantity measures in reference to project cost.

In parametric estimating, the statistical model developed will analyze the relationship between the construction parameters and the estimated costs. After this estimation, the same technique is used in the new project.

Advantages of parametric estimating

• It's an efficient method for generating cost estimates
• Provide accurate cost estimation as it relies on statistical analysis and historical data
• Applicable in various construction projects because of its scalability and adaptability

Disadvantages of parametric estimating -Since it relies heavily on statistical and historical data, outdated data may affect overall cost estimation

• It provides a general estimation based on the derived data, which may not account for unforeseen circumstances

The same with other cost estimation methods, combining parametric estimating methods with other methods and construction professionals judgement can guarantee an accurate cost estimation.

A Comparison Between Elemental Cost Analysis, Comparative Analysis, and Parametric Estimating

Now that you understand how construction cost analysis methods are used, you also have to know cost estimations are involved. Let's look at what cost estimation entails;

Construction Cost Estimation

The costs of a constructed facility to the owner include both initial capital costs and subsequent operation and maintenance costs. Each of these categories consists of a number of components. So, when looking at the capital cost of the construction project, it includes the expense of the initial establishment of the project. That is;

• Construction Financing
• Planning and feasibility measures
• Project design
• Land acquisition
• Insurance and taxes
• Field supervision
• Inspection and testing
• Equipment and furnishing

Now that the cost estimation is based on subsequent year's project life cycle, the following expenses are included;

• Utilities
• Operating staff
• Insurance and taxes
• Financing costs
• Land rent (if applicable)
• Labor cost
• Materials for repair and maintenance
• Any other owner's expense

Since the owner is interested in attaining a lower project cost that aligns with their investment objective, design professionals and architects must understand that apart from construction cost, its cost components are also essential.

Now, let's look at the estimation of construction cost.

Approach to Cost Estimation

One of the crucial steps in project management is cost estimating. This step establishes the project cost at various stages of project development. This is more of a prediction made by the cost engineer or an estimator based on the data provided.

Cost engineering, as defined by the American Association of Cost Engineers (AACE), involves the use of scientific principles and techniques to solve estimation problems. This includes business planning, cost control, and management science, profitability analysis, planning and scheduling, and project management.

Types of Construction Cost Estimates

The construction cost estimates are a substantial of the total project cost. The accuracy of these estimates varies at every project development stage. Ideally, the cost estimates made at the beginning stage end up being less accurate.

And because of different institutional requirements, you can view construction costs from various perspectives. Cost estimates are classified into three main categories: design, bid, and control cost estimates. So, when establishing the financing of a construction project, a design or bid estimate is the one commonly used.

• Design Estimates: In design estimates, the cost estimates are parallel to the planning and design. This includes preliminary estimates, screening estimates, detailed estimates, and engineers' estimates. The engineer's estimates are based on the plans and specifications of the construction project. The amount of the available design data increases with each estimate.

• Bid Estimates: When a contractor submits a bid estimate, it includes the overall construction cost, including field supervision. A markup to cover the profits and general overhead is also included. The cost of construction in bid estimates is a combination of the following: quantity takeoffs, construction procedures, and subcontractor quotations.

• Control Estimates: Control estimates play a bigger role in monitoring the ongoing construction project. With this method, you can estimate construction costs through;

• A budgeted cost done after contracting,
• A budget estimate for financing
• An estimated cost to project completion while construction progresses

How to Maximize the Use of Construction Cost Analysis

As mentioned earlier, building new structures is a large investment to make. So, the choices you make during construction planning significantly impacts your construction project. When you consider all the factors and elements listed in this article, you will definitely make an informed decision.

Maybe you are thinking that if a construction company does the cost estimation for you, everything will turn out okay. This may be true. But, think about it, what if the company estimates your projects based on how much profit they can make out of it? They can take advantage of you.

However, if you personally understand how construction cost analysis work, you can overcome this obstacle. A professional can help you understand it. But, now there is a better option. You can do cost estimation from your home.

Bottom Line

Downtobid recognizes the critical role of efficient bid invitations in construction projects. While it's not a substitute for professional cost analysis expertise, it provides tools designed to streamline the bid invitation process. By automating the identification of bid packages and facilitating the invitation of suitable subcontractors, Downtobid enhances the overall efficiency of the pre-construction phase.

Downtobid focuses on improving the bidding process. Try us out today at no cost.