• The cost buckets in every estimate
  • Quantity takeoff: measure before you price

A construction estimate is your forecast of what a job will cost you, plus the overhead and profit you need on top. You build it from the bottom up: measure the work, price the materials, labor, equipment and subcontractors, add a contingency for what you can't yet see, then mark the total up so the job pays its share of running your business.

Two things decide whether the number holds up. The first is how complete the drawings and scope are when you price them. The second is whether your markup is calculated correctly. Both are covered below, followed by a worked example for a small job.

The cost buckets in every estimate

  • Materials. Everything that gets built in: lumber, concrete, drywall, fixtures, finishes. You price them from a quantity takeoff (below), with a waste allowance and current supplier prices. Get fresh quotes for anything whose price moves, and don't reuse last year's numbers.
  • Labor. Crew hours for each scope of work, multiplied by a burdened rate. That's the wage plus what each hour costs you on top of it: payroll taxes, workers' compensation, insurance and benefits.
  • Equipment. Rented equipment (rate, delivery, fuel) or your own (an hourly charge that covers ownership and upkeep), plus dumpsters and site services.
  • Subcontractors. Quotes from trades you hire. Send each sub the same written scope so their bids are comparable, and so there's no argument later about what was included.
  • Permits, fees and other job costs. Permits, inspections, job-specific insurance, design fees or surveys if they're in your scope. Lenders and owners sometimes call these "soft costs" to separate them from the physical "hard costs" of the build.
  • Contingency. An allowance for things that will cost money but can't be pinned down yet, such as conditions behind existing walls. It sits inside the job cost. It isn't profit.
  • Overhead and profit (OH&P). Overhead is what it costs to run the business regardless of the job: office, vehicles, admin staff, software, insurance that isn't job-specific. Profit is what's left after every cost, including overhead.

Quantity takeoff: measure before you price

A takeoff turns drawings or site measurements into quantities you can price:

  1. Measure. Take lengths, areas, volumes and counts from the drawings or the site.
  2. Group by scope. For example, all framing together and all drywall together.
  3. Add waste. Use allowances from your own past jobs; cutting, breakage and offcuts are real material you pay for.
  4. Price it. Use current supplier quotes, especially for items whose prices move.
  5. Roll up. Total each scope into one line, so the estimate reads as clear line items for the client.

Cross-check the result against the floor area or a similar past job. If the total is far out of line with your history, look for a missed scope or a wrong unit.

Labor: estimate from production rates

Price labor from your own production rates: how much of a scope your crew actually installs in a day. The arithmetic is:

  • Crew-days = quantity ÷ units your crew installs per day
  • Labor cost = crew-days × burdened cost per crew-day

Production rates vary with crew, site access and the type of work, so track actual days against estimated days on every job and build your own table. Published rate tables are a starting point when you have no history of your own. Your own numbers are the ones you can defend.

How accurate can the estimate be? The AACE classes

AACE International's Recommended Practice 56R-08 classifies estimates for the building and general construction industries into five classes. The class is set by one thing: how complete the project definition is when you price it. It covers residential and commercial buildings, renovation and site/civil work. (A separate practice, 18R-97, covers the process industries, such as chemical, petrochemical and hydrocarbon processing, and has wider ranges. Don't mix the two.)

  • Class 5. Definition 0% to 2%, used for concept screening. Typical accuracy: −20% to −30% low, +30% to +50% high.
  • Class 4. Definition 1% to 15%, used for schematic design or a concept study. Typical accuracy: −10% to −20% low, +20% to +30% high.
  • Class 3. Definition 10% to 40%, used for design development or budget authorization. Typical accuracy: −5% to −15% low, +10% to +20% high.
  • Class 2. Definition 30% to 75%, used for control or bid/tender. Typical accuracy: −5% to −10% low, +5% to +15% high.
  • Class 1. Definition 65% to 100%, used for check estimates, pre-bid and change orders. Typical accuracy: −3% to −5% low, +3% to +10% high.

Source: AACE 56R-08, Table 1 (rev. August 7, 2020).

Read the ranges carefully. AACE gives them at an 80% confidence interval, after an appropriate contingency has been added. It also notes that for complex or risky projects, the high end can be two to three times the range shown (56R-08).

The practical lesson for a small contractor: a fixed price is only as firm as the scope behind it. If you're asked for a fixed price on concept drawings, either get more definition first, or quote a budget range and say what it assumes.

Overhead and profit: get the math right

The common mistake is to add your overhead percentage and your profit percentage together and use that as a markup on cost. Overhead and profit are percentages of the selling price, and markup is applied to cost, so simply adding them undercharges.

If overhead is O% of revenue and your target net profit is P% of revenue, job costs can only be the remaining share of the price:

  • Price = job cost ÷ (1 − O − P)
  • Markup on cost = (O + P) ÷ (1 − O − P)

With overhead at 12% of revenue and a target profit of 8%, the right markup is 0.20 ÷ 0.80 = 25%, not 20%. The worked example shows what the difference is worth.

Find O from your own books: last year's overhead divided by last year's revenue. That number belongs to your business. There isn't a correct industry percentage to borrow.

Worked example: a basement room, priced from the ground up

Sample figures for illustration only. They aren't price benchmarks. Harbor Line Builders, a fictional small contractor, is pricing a basement room: about 120 linear feet of new partition walls, drywall on walls and ceiling, and paint. The electrical work goes to a sub. Harbor Line has measured the space, the client has signed off a written scope, and nothing in it is still being designed.

Materials (takeoff with waste, current supplier prices)

  • Framing lumber and fasteners, including 10% waste: $1,150
  • Drywall: 1,560 sq ft of board ÷ 32 sq ft per sheet = 48.75, rounded up to 49 sheets. Plus 12% waste = 54.9, rounded up to 55 sheets. 55 sheets × $16 = $880
  • Joint compound, tape and screws: $240
  • Primer and paint: $310
  • Materials total: $2,580

Labor (from Harbor Line's own tracked production rates)

  • Framing 2 days + hanging 1.5 + finishing 3 + painting 2 = 8.5 crew-days for a two-person crew
  • Burdened rate: $34 wage + $11 payroll taxes, workers' comp and insurance = $45 an hour
  • Crew-day: 2 people × 8 hours × $45 = $720
  • Labor total: 8.5 × $720 = $6,120

Other direct costs

  • Electrical subcontractor (written quote): $2,400
  • Drywall lift rental and dumpster: $420
  • Permit: $350

Direct cost: $2,580 + $6,120 + $2,400 + $420 + $350 = $11,870

Contingency: Harbor Line adds 5% because the basement walls may hide moisture or out-of-level floors: $593.50. Job cost: $12,463.50.

Overhead and profit: last year Harbor Line's overhead was $180,000 on $1,500,000 of revenue, which is 12%. It targets 8% net profit.

Price = $12,463.50 ÷ (1 − 0.12 − 0.08) = $12,463.50 ÷ 0.80 = $15,579.38

Check: $12,463.50 job cost + $1,869.53 overhead share (12%) + $1,246.35 profit (8%) = $15,579.38.

The common shortcut, for comparison: adding 12% + 8% = 20% to cost gives $12,463.50 × 1.20 = $14,956.20. Overhead still takes 12% of that ($1,794.74). That leaves $697.96, a 4.7% profit instead of 8%. The price is $623.18 lower, and the profit drops from $1,246.35 to $697.96, all because of arithmetic.

The class: this is a detailed unit-cost estimate with a full takeoff on a defined scope, which is the method AACE lists for Classes 1 and 2. A square-foot ballpark given on the first phone call would be a Class 5 number, and should be presented as a range.

Harbor Line sends the estimate as line items (materials, labor, electrical, equipment and permit, with the contingency explained) rather than one lump sum. That gives the client something concrete to approve, and gives both sides a baseline for change orders later. A construction estimate template or contractor estimate template has this structure ready to fill in.

Change orders, payment applications and AIA forms

No estimate survives every surprise on site, so agree in the contract how changes are handled. Changes should be written, priced and signed before the extra work starts, and the contract should state the markup on change-order work and how extra time is treated. See how to handle estimate revisions.

On jobs that use AIA Contract Documents, three forms come up again and again (AIA Contract Documents):

Payment applications are built from the same line items as your estimate, which is another reason to estimate by scope rather than as one lump sum. For billing in stages on non-AIA jobs, see progress invoicing and milestone invoicing. For the upfront payment, see deposit invoicing.

Public works: in the US, contractors and subcontractors on federally funded or assisted contracts over $2,000 for building, altering or repairing public buildings or public works must pay at least the locally prevailing wages and fringe benefits under the Davis-Bacon and Related Acts (US Department of Labor). Price labor at those rates, not your normal ones.

Before you send the estimate

  • Walk the site on any work involving existing conditions. Drawings don't show what's behind the walls.
  • Re-price materials whose prices move, close to the date you send the estimate.
  • Make sure every sub bid is priced against the same written scope.
  • Calculate the markup from your own overhead, using the formula above.
  • Put an expiry date on the estimate and state what it assumes and excludes.
  • Compare the total with a similar past job, and find out why if it's far off.

Once the client approves it, the same line items become your invoices. For what happens if a signed quote needs to be cancelled, see how to cancel a signed quote. More on the estimating process:

FAQ

How do I make a construction estimate step by step?

Review the drawings and scope, and walk the site if there are existing conditions. Do a quantity takeoff with waste allowances. Price materials from current supplier quotes and get subcontractor bids against a written scope. Price labor from your own production rates and a burdened hourly rate. Add equipment, permits and other job costs, then a contingency. Finally, apply your overhead and profit markup and compare the total with a similar past job.

How accurate should a construction estimate be?

It can only be as accurate as the project definition behind it. For building and general construction, AACE Recommended Practice 56R-08 gives typical ranges from −20% to −30% low and +30% to +50% high for a concept-stage Class 5 estimate. For a Class 1 estimate with near-complete definition, the range is −3% to −5% low and +3% to +10% high. Those ranges assume an appropriate contingency is already included.

What is the difference between markup and margin?

Markup is a percentage of your cost, and margin is a percentage of the selling price. If your overhead is 12% of revenue and you want 8% profit, you need a 25% markup on cost, not 20%. Use price = cost ÷ (1 − overhead share − profit share).

How much contingency should I add?

There's no single correct percentage. Base it on what is still unknown: existing conditions you can't see, design that isn't finished, and prices that may move. Explain on the estimate what the contingency covers. It is part of the job cost, not extra profit.

Do I need to use AIA forms?

No. AIA Contract Documents such as G701, G702 and G703 are one published set of standard forms for change orders and payment applications. Any contract you use needs to cover the same ground: how changes are agreed and priced, and how payment for work done is requested and approved.

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