BUILDING COST ESTIMATES

Introduction
In general terms, an estimate is an evaluation of a future cost; a building cost
estimate is an attempt to determine the likely cost of some building work before the
work is done. In order to compile such a cost estimate, the estimator needs to
answer two basic questions:
1. How much work is required to be done?
2. What will it cost to do this work? In the construction industry, the process of
measuring the amount of work to be done is called taking off and the product
obtained from this process is referred to as a takeoff. After the work is measured,
the takeoff may then be processed and priced in a number of different ways
depending upon what the estimate is to be used for.
Estimates in the Residential Construction Industry There are a number of
different types of estimates in the residential construction industry, each serving a
different purpose. The type of estimate required in any given situation depends
upon the residential market served by the builder preparing the estimate, the
nature of the contract with the home purchaser or owner, and the purpose of the
estimate. Builders and Residential Markets There are basically three distinct groups
of builders serving the residential construction market: those that build new homes
for sale to home buyers; those that work under contract to the property owner to
build a custom home or renovate an existing property for the owner; and those that
construct multi-unit residential buildings for owners/developers. Spec Builders
This fi rst group of homebuilders buys land for building homes, often in the
form of housing lots in a new subdivision. Spec builders decide on the type of
houses to build and make many in-house decisions about the design of the homes
they will build. Because this business involves a certain amount of speculation, this
group is often referred to as speculative builders (spec builders), and a home built
before it has been sold is called a spec home. Some spec builders construct a series
of homes of basically the same design, almost like on a production line. These
builders are often called production builders. The main marketing tool of the spec
builder is the show home. The builder constructs a home of the design they have
decided upon and use it to show prospective buyers what they will receive if they
buy from this builder. When a sale is made, the builder enters into a contract with
the buyer to construct a similar home on one of the builders lots for an agreed sale
price. The buyer will generally have some choice about the construction of their new
home. The buyer will at least be allowed to select kitchen cabinets, fl oor fi nishes,
and paint colors. Sometimes spec builders offer much more fl exibility with regard to
design; they may start with a standard plan, then allow the buyer to make changes
in size, add or delete features, and so on to meet the buyers particular needs.
Because this homebuyer has so much infl uence in the fi nal design, these houses
are referred to as semi-custom homes.
Stipulated Lump Sum Contracts

Under the terms of a stipulated lump sum contract, often referred to as a fi

rm price contract, the builder agrees to complete the project as described in the
plans and specifi cations for a fi xed sum. As long as the scope of work is not
changed, the builder will be paid the agreed amount, no more, no less. For this
arrangement to succeed, the scope of work has to be precisely defi ned in the plans
and specifi cations. Any uncertainties will usually lead to disputes between the
owner and the builder. Because changes are almost inevitable on building contracts,
the terms of the contract will include a mechanism for making scope changes and
adjusting the contract price to refl ect these changes. Under the terms of these
contracts, the risk of cost overruns lies with the builder. If the cost of materials turns
out to be higher than estimated, the builder will pay the extra cost.
When bidders anticipate the possibility of price increases, they often add
contingency sums to their bid price to compensate for the risk they are taking. If
prices do not rise, these contingencies will simply add to the builders profi t on the
job. In order to shift contract risks to the owner, some builders have modifi ed the
terms of lump sum contracts (by means of an escalation clause) to allow price
increases to be added to the original contract sum. This results in what might be
called a variable price lump sum contract since the fi nal price will be adjusted for
price changes for materials, equipment, and possible subtrades. Stipulated lump
sum contracts are commonly used on custom home projects and on multi-unit
residential projects. When a competitive bid has been used to select a builder, the
successful bidder will usually be awarded a fi rm price contract. Also, the agreement
made by spec builders with homebuyers can be considered a kind of stipulated
price contract since the builder agrees to complete the home for the sale price.
However, there may be provisions in the sales agreement, similar to the escalation
clause previously mentioned, that allow the agreed price to rise when there are
unanticipated price increases.
Unit Price Contracts
Unit price contracts are appropriate when there is some uncertainty about
the amount of work to be done. These contracts are not often used on housing
projects since on most jobs the amount of work involved is established before a
builder is hired. There may, however, be situations, typically related to earthwork,
where some task is required but the quantity of this work is not known. For
example, a builder may have to remove an existing underground sewer pipe as part
of a project. The location of the pipe may be known but depth below grade is not.
Under the terms of a unit price contract, the builder would not bid a sum for the
whole job; instead he would quote unit prices for the work involved. In this example,
the builder may quote $15.00 per cubic yard for the trench excavation and $25.00
per cubic yard for common backfi ll. A unit price contract, therefore, has two parts:
1. Prices per unit of measurement for the different types of work involved in the
project, and 2. Measurement of the actual work completed. At the end of the job,
the amount of work completed is measured and recorded, and then the builder is
paid his unit prices multiplied by the quantity of work done. So, continuing the
example, if our builder excavates and backfi lls 100 cubic yards on the project, he
will be paid