4 reasons why accurate cost estimation is important in construction

Posted 9/12/2020

For a contractor, perhaps the most crucial part of designing a project is determining the cost of implementing the project. The cost estimate for a project determines whether the owners proceed with the project, so the contractor must take every precaution necessary to not present an estimate that would prove either inadequate or outrageous. 

What Is Cost Estimation?

Cost estimation involves a prediction of what it would cost to erect a building -- the cost of equipment, materials and labor to be employed. Contractors for residential buildings have to do everything within their power to estimate cost correctly and avoid going beyond the budget and leaving their clients dissatisfied. 

Every construction activity should have been evaluated to help the contractor see a picture of the expected job before progressing. With correct estimates, contractors can make sure that the allocated budget can deliver the necessary project.

It's not uncommon for a client to entertain more than one cost estimator. As a contractor, you can work with engineers, architects or independent estimators to make sure the budget stays within the owner's desired time and cost. 

What Is Involved in Cost Estimates?

To estimate the cost of a residential building, the parameters to consider are not limited to labor and materials. Accurate cost estimates are a result of information gathered by estimators on various factors. The factors involved are:

  • Duration of project

  • Materials required for project 

  • Location

  • Labor requirements 

  • Building codes

  • Special equipment needed, etc. 

Cost estimators take various approaches to estimation. The approaches rely on the expertise of the estimator, the costs of previous similar projects, calculation of resource quantities, and data analysis. 

Importance of Accurate Construction Cost Estimation in Residential Construction 

1. Choosing a Contractor 

Cost estimation plays an important role in the selection of a residential contractor. Homeowners often have to compare estimates from bidding contractors to see which ones suit their interests better. 

A contractor with a history of accurate construction cost estimates would be a more favorable option for the homeowners. This is because when a project exceeds the construction estimate, it is the owner that has to pay for the mistake, either by altering expectations and designs or extending the budget.

2. Choosing the Types of Materials and Technology for a Project

When the cost of a project is properly estimated, the homeowners can decide upon the choices of materials to make, the size of the project, and the amount of time they are prepared to spend on the projects. 

As a contractor, you can verify the project's feasibility and tweak the purchases to fit into the estimate for the duration of the project. Parameters such as the number and type of the materials can be adjusted to suit the budget interests of the clients. 

3. Determining Labor Requirements

In the course of estimating the cost of a residential project, the estimate must account for labor and the prices for their different services. 

From roofers to electricians, plumbers, painters and masons, cost estimates account for every service that will be required in the course of building that project. 

4. Acquiring Administrative Approval

Administrative approval refers to an official assent from the individual(s) concerned with funding a  payment. Before the owners can fully give the go-ahead on any project, they must know what they are walking into. Cost estimates are also very useful in drafting contracts for review, as they are instrumental in making sure a project goes on without a hitch, and succeeding paperwork that needs to be filed like preliminary notices and waivers are also reliant on accurate estimation. Therefore, a cost estimation precedes administrative approval, which is necessary to begin a project. 

5. Encouraging Team Accountability

Accurate cost estimates provide the owners of a property with information regarding how long the project will take and how much money would go into it. While there may be room for some adjustment, the contractor and his team are still held accountable for any budget extensions. 

This promotes transparency in purchases, labor, and other costs-inducing areas. It helps fulfil the goal of not exceeding the estimated cost for the project. 


There are downsides to inaccurate estimates; they could be overestimated or underestimated, but they have negative effects either way. 

When there is cost overestimation, the owners have to shoulder more expenses than is necessary, and may even choose to discontinue the project. The project is likely to go to a contractor with a lower bid. On the other hand, when cost is underestimated, expenses turn up that cannot be covered by the budget; the owners and contractor may all be affected. 

Note that estimates are not infallible. No matter how accurate, they can be influenced by a number of unpredictable occurrences. For instance, factors like changes in weather and market value result in drastic alterations to cost and duration of a project. 

About the Author:

Chris Woodard is the Co-Founder of Handle.com, where they build software that helps contractors, subcontractors, and material suppliers with late payments. Handle.com also provides funding for construction businesses in the form of invoice factoring, material supply trade credit, and mechanics lien purchasing.