The Stages of Residential Construction Estimating
Builders and remodelers know that estimating a construction project isn't a one-time event—it's an evolving process that changes as they learn more about the clients, the site, and the project scope. All of these can take several rounds of investigation and calculation before arriving at a total cost to present to the homeowner.
However, clients will often take the first preliminary number you give them and treat it like it's gospel, leading them to question and push back on any updated numbers they hear. This phenomenon is called "Anchoring Bias," and it occurs when someone relies heavily on the very first piece of information they receive, even when subsequent information becomes available.
Homeowners who succumb to an anchoring bias without any context will then use this information to shop around for a "better price" or to negotiate what they think the project should cost. This can spell disaster for a remodeler or builder's profitability.
This is why it's critical to have a solid upfront pre-construction process to educate clients on how long construction cost estimating takes and all the steps you take to arrive at the final number. It also sets the expectation of why they'll see different numbers as the process progresses, which helps avoid sudden sticker shock or them needing to shop around your estimate.
What is Construction Estimating
Simply put, construction estimating is predicting the costs of a remodeling or custom home-building project, and it's comprised of two key components:
Estimating the direct project costs, also known as the cost of goods
Calculating the correct markup to contribute to the indirect costs of running your business, also known as overhead and net profit margin contribution
But in actuality, it's much deeper than that.
Estimating is a crucial step in the construction process since accurately calculating the costs of a home renovation or new build directly affects profitability. Even the slightest errors in estimating can greatly impact your bottom line.
And being profitable is what the livelihood of contractors depends on. Let's use this illustration to demonstrate.
Think of Pacman as a remodeler.
He's trying to sell remodeling and custom-building projects while dodging the obstacles in his way.
However, instead of brightly-colored ghosts, those obstacles are
Incorrectly quoted cost of goods like labor, materials, and trades
Not charging the markup he needs to be profitable
Bidding against himself by lowering an estimate to "win the job"
The one truth in any residential construction project is that the cost of goods will never decrease. In fact, they are more than likely to increase between the time you quote a job and actually start construction. And, as you can see, they represent the largest portion of Pacman's body.
The remaining space in our illustration is the contribution to both overhead and net profit, which comes from the markup you've added to your cost of goods. So, if you don't add the proper markup or lower your overall quote to get the job, you're sacrificing those two components and lowering your profit margins, which means less profit for you.
Key Components of a Construction Estimate
When estimating projects, there are direct project costs (COGs) and the builder's markup, which covers their overhead, also known as indirect costs.
Direct costs are those directly related to the building process, while indirect costs cover necessary expenses that support the project but aren't linked to specific tasks.
Direct Costs
Direct costs on a residential construction estimate are the costs or expenses related to specific construction activities that form the basis of a project. This includes everything needed to remodel or build the home, such as labor, materials, and trade partners. Direct costs are also known as your Cost of Goods (COGS).
Indirect Costs
Indirect costs are operating or overhead costs. They are not connected to one specific construction activity but are essential for a business to complete projects profitably and efficiently. Examples of indirect costs include administrative costs such as your bookkeeper or the license or purchase of construction management software, which can help build your estimates and manage project budgets and schedules.
Markup Covers Your Indirect Costs
Every remodeling or custom home-building estimate must include the correct markup to be profitable. And it needs to be included in every version of each construction estimate.
But how you include that markup can differ depending on whether you're a general contractor or remodeler versus a specialty trade business.
When it comes to including the correct markup as a specialty contractor, trade partners will often use an "Overhead Labor Recovery" model to ensure their markup is built into their hourly costs. This is because trade partners only have labor and materials that they can effectively mark up, whereas remodelers and general contractors have labor, materials, and trades to markup.
Most builders and remodeling contractors use a "revenue volume approach" to calculate their markup on estimates, which is a mathematical equation that looks like this:
Step 1: Projected Revenue - Overhead - Net Profit = Projected Cost of Goods
Step 2: Target Gross revenue / Cost of goods = the markup rate you need to charge on your jobs to be profitable
For a deep dive into how to calculate markup and why it's critical for running a profitable remodeling business, click here.
The Importance of Accurate Construction Estimating
Accurate estimates are important because they ensure a project plan is feasible before it starts, giving builders, clients, and everyone involved a clear idea of the estimated costs. This helps determine if the project fits the client's budget and ensures the builder can profitably complete the full scope of work.
An accurate estimate also allows builders to analyze their current and future workloads so they can make strategic decisions such as:
1. Do we have enough on-site labor to perform the work required?
2. Do we have enough supervisors to perform the work well?
3. What elements should we be looking to sub-contract out instead of performing with in-house labor?
Key Factors That Influence Construction Estimating
Being a successful builder or remodeler means charging the right amount for your work. To do that, you need to ensure that you're providing prospective clients with accurate estimates that take into account a multitude of factors, such as:
All Direct Costs
This includes all labor, materials, and trade partners required to execute the full scope of work. The availability of people and materials can fluctuate constantly and be affected by external forces like market and weather conditions. Commodity-based materials like lumber, for instance, can fluctuate in cost daily, and the availability of trade partners can change during strong economic times when remodeling or building projects are in greater demand.
The Project's Location
Whether the project is in an urban center or a rural town can impact labor and material costs, the availability of people to complete the work, and the overall talent pool. Urban projects might be more expensive, but they are easier to source materials and labor. Rural-based work will likely be cheaper, but finding available trades or sourcing materials may be more difficult.
Site Characteristics
This is particularly important in urban centers where houses are built on small lots and there are a considerable amount of condominium buildings. In these situations, things like tight lot lines or limited access to buildings can impact the cost of completing a project because you might not be able to get the necessary equipment or machinery onto the job site or fit multiple team members in the unit simultaneously. Situations like this can add extra cost and time to the job.
Project Complexity
The level of detail in a remodeling project can impact the overall cost, as can the level of finishings chosen. Intricate flooring patterns, large format tile, or expansive and detailed millwork will add considerable cost and time, driving up the overall cost.
Past Experience
Drawing on experiences from previous projects is a great way to help you factor in costs for upcoming work - especially if you're using construction management software that tracks data on previous work. Learn how Buildwise can instantly leverage data across all your projects to spot issues and provide references as you build new estimates.
Aligning the Client's Budget
One of the most important steps in estimating a project is understanding the client's intended investment level before the project starts. This is important to ensure that no one's time is wasted pricing out a project a client can't afford.
This process is more straightforward for cost-plus builders since the estimate is transparent, and clients see the actual costs as they unfold. However, it can be trickier for fixed-price contractors, as clients might be more tight-lipped about their actual budgets because they think whatever they tell the contractor will be the price they see on the estimate.
The goal of this phase is simple: make sure the project is financially realistic before moving forward. There's no value in signing a client up for pre-construction if their scope of work (SOW) is three times what they originally planned to spend. If they can't confirm they have more funds available, it's better to have a conversation early about what is feasible within their budget. This transparency helps set the right expectations and prevents frustration down the road.
Clarify the Amount
One key mistake that homeowners make when considering their available budget for a remodeling or custom building project is that their intended budget will also include these two items:
Sales taxes that your state or province requires you to charge (if applicable)
A 10% contingency that a builder will advise them to have access to for unexpected issues during construction
Contingencies, whether for fixed cost or cost-plus contracts, are put into place to cover a very specific list of unexpected expenses that can arise, such as:
Projects taking longer than expected
Slight increases in material cost
Miscalculations on material takeoff
Increases in trade pricing vs. what was initially budgeted for
Learn more about contingencies and how to explain them to your clients here.
By following this process, you'll stand out from other remodelers and builders who rarely share this level of insight with homeowners. Plus, you'll confirm the project's feasibility before investing 24–36 hours in the pre-construction process.
The Four Phases in Estimating a Residential Construction Project
One of the best ways to explain the estimating process to your clients is to have them imagine they are looking through a telescope.
At first, the image is fuzzy and unclear. But, as they adjust the lenses and hone in on an image, it becomes clearer until it's finally fully in focus.
Moving through the process of getting a preliminary estimate to the final, ready-for-client-sign-off price works the same way. The best way to get clients on board with that process is to give them a visual of how you estimate and what the stages of that process look like.
That visual might look something like this:
ROM or Rough Order of Magnitude
ROM pricing estimates a project's level of effort and cost to complete. It helps ensure all stakeholders understand the scale and complexity of the project and sets the wheels in motion for further discovery, planning, and decision-making.
It's usually made early on in the process when little details are available. In most residential construction projects, it's the initial rough estimate that comes together after you've walked through the house with the clients and loosely discussed what they want.
At this estimate stage, the difference between the estimated and actual costs can be as great as 50%. As more details become available, that difference will shrink.
To your clients, it's a "high-level look at what is possible, but until we take the next step and get aligned on budget and scope targets, and get some floor plans drawn up, this a best guess."
Schematic Design Pricing
Schematic Design pricing is the first step in transforming the vision in a client's head onto paper. It's where architects, contractors, and homeowners meet to discuss the renovation and its requirements and determine what will be included in the design plans. This is the point where floor plans and possibly exterior elevations happen.
To your clients, it's "the point in the project when the house starts to come to life visually. You can get a sense of how it will feel to walk through the spaces, but the exact details needed to build it aren't finalized yet."
Design Development Pricing
The third step in the process is Design Development Pricing. In the Design Development phase, the basic plans and exterior elevations from the schematic design are looked at more closely, adjusted, and added to.
This is where all the essential details and specifications needed for construction are worked out, like the layout, materials, and systems, so everything is ready to move forward. This often includes interior elevations so the contractor can better understand the FF&E (furnishings, fixtures, and equipment) going into the home.
For your clients, it's "the point in the project where the designer's input is included in the plans to give the team a better understanding of all the design selections and materials needed so that we can create more accurate pricing."
Issued for Construction Pricing
This last stage in the estimating process is when the builder has enough information to prepare a realistically accurate estimate for the homeowner. They've received final plans that include structural, heating/mechanical design, and all the additions and changes made during the previous three stages. This allows them to see the full picture of the project and adjust all cost groups accordingly.
For your clients, this is "the point in the pre-construction process where they can feel confident in the numbers they are being given, minus any unforeseen site conditions, client/designer changes, and potential cost/time overruns due to circumstances beyond the contractor's control."
How the Construction Estimating Process Works
One thing I've said countless times over the years to remodelers and custom builders is that estimating is not a numbers problem.
It's a scope of work problem.
Your job is to align the scope of work with the intended budget so that you aren't doing more work than you're being paid for.
When you create an estimate, you're taking a snapshot in time. That estimate is what the project looks like at that moment. But as you move deeper into the process and learn more about the project, that snapshot will change, and your estimate will become more accurate.
As you get more detailed drawings, learn more about the project site and its characteristics, meet with and get pricing from vendors and trade partners, and learn more about what the client wants, including capturing their input on design decisions, the closer you get to a final, accurate project cost. That's because more details are solidified, leaving fewer things to chance.
Eight Steps of the Estimating Process
A truly accurate and well-composed estimate follows a repeatable process to ensure that as much detail as is known is captured in the estimate document.
That means moving through all the stages of information gathering from the first client meeting to their final sign-off and updating your pricing with each piece of information.
It's important to note that at this stage, you should be retained into a pre-construction agreement so that all of your time and energy is being paid. For more on why getting paid for your estimating process is critical to your success, click here.
This image best illustrates how you, as a residential contractor, will move through the estimating process:
Let's review each stage in detail.
Information Compilation
This is the initial stage of any residential construction project. It involves meeting the client and getting an overview of their inspiration for their home, learning about their wants and needs, taking photos of the space, and sometimes creating as-built drawings by hiring a third-party service or handling internally if you're a design/build business. This is the point where you know the absolute least amount about the project.
Scope of Work
Based on the information captured during initial client meetings, your next step is to create a scope of work document that outlines everything the client is looking to achieve during their remodel or custom build. This document will define the scope of work, highlight the unknowns and risk elements, and indicate where to hold space for allowances for decisions that have not yet been made.
Take Offs
During this phase, you'll determine your labor, material, and trade partner needs and use that information to build the preliminary estimate. During this process of building the preliminary estimate, you will also consider variations on the full scope if you see that the total estimated cost exceeds the client's available funds. A good approach is to build the full estimate first, then build variations of the same estimate:
Phasing larger scopes of work
"Right-sizing" a home by removing partitions instead of adding additions
"White box" approach, which is building the estimate to primed-drywall and stairs but no floors or finishing
By creating variations, you'll be prepared to help educate your clients on what options there are to meet their needs while remaining on budget.
Make sure that you have all preliminary estimates peer-reviewed to ensure you haven't missed anything or to capture alternatives to the variations you've prepared. Once completed, the preliminary estimate and alternate options should be presented to the client in person.
Learn more about why you always want to present estimates to clients in person here.
Trade Inputs
This is the point where you'll want to schedule a "Trade Day" for your trade partners to view the space, ask questions, and provide input. It's a good idea to prepare construction documents for them to review before visiting the site and to keep with them during the visit so they can fully understand the proposed scope of work and prepare any questions. This includes the building plans, highlighted if possible for that specific trade's scope, and a Request for Proposals (RFP) document. The RFP document outlines the scope of work, the terms and conditions of working together, and any special considerations, such as options the trade should provide pricing for.
Most importantly, the RFP outlines the deadline for when you need to receive pricing.
Proposal Preparation
During this phase, you'll track down the trades to get official costs from them and use that information to update the overall project estimate. Once this is done, it's time to create a proposal document for your clients.
Presentation and Revisions
At this stage, it's time to present a proposed estimate to your clients in person and work with them to value engineer that proposal so that the detailed estimate aligns with their investment level.
Once you've captured that information, you'll adjust the estimate and either present it to them in person or email it to them.
Client Sign Off
Congratulations - you've made it through the entire estimating process and are now ready to enter into a construction contract with your clients.
How Construction Estimating Software Helps Build Better Estimates
Once upon a time, contractors had to estimate projects by hand, doing every task manually. Not only was this a daunting task, but it left huge opportunities for errors to happen.
Thankfully, construction estimating software came along to help automate parts of the estimating process, making the job easier and more accurate.
Here are some ways that construction estimating software helps remodelers and builders create better estimates.
Allows for On-Screen Take-offs
While this process isn't perfected yet, there are some estimating software programs that are powered by machine learning and can automatically determine the quantity takeoff needed by scanning project drawings and documents. Others still require user inputs to calculate take-offs, making this process easier. Either way, having a human review is critical as AI is still pretty poor as of the writing of this article.
Estimating Software Creates Templates
Using construction estimating software allows you to build estimates once and then copy and adjust them for subsequent jobs, saving time and allowing you to produce more estimates efficiently.
Reduces Human Error
Using computer calculations is less risky than manually estimating a project using spreadsheets. While spreadsheets are great for certain tasks, it's easy to accidentally delete or change a formula, resulting in an inaccurate estimate and lost profitability.
Should You Hire an In-house Construction Estimator
Estimating is a crucial but time-consuming task many builders often rush through, leading to costly mistakes. To streamline the process and improve the accuracy of the cost estimation process, some builders and remodelers outsource estimating to a third-party firm, while others hire in-house construction estimators who can focus solely on this task without the daily interruptions of running a business.
What An In-House Or External Estimator Does
Hiring an estimator removes the heavy lifting from the estimating process by shifting most of the work to someone else, allowing you to simply review and make adjustments as needed.
For many contractors, this is an opportunity to free up valuable time to focus on other aspects of their business, such as client relationships, project management, and business growth.
Not sure if an in-house estimator is right for your residential construction business? Click here to determine if it's the right move for you.
The Benefits of Using an Estimator
Many general contractors consider hiring an in-house estimator, and with good reason. They can benefit your residential construction business with increased accuracy, efficiency, and profitability.
Here are six ways your remodeling business can benefit from using an in-house estimator:
Project Volume And Scale
If your company is handling a significant number of pre-construction projects with varying levels of complexity, an in-house estimator can streamline the estimation process, making it quicker and more efficient. An in-house estimator also provides scalability, allowing you to handle increased project demands.
Consistency, Accuracy, and Reduced Risk
An in-house estimator spends their entire day working on estimates, which means they are consistent and accurate. Consistent and accurate cost estimates reduce the risk of underpricing or overpricing projects. In the long term, this helps pay for the initial investment of hiring an estimator.
Specialization and Industry Knowledge
In-house estimators have more specialized knowledge and a better understanding of materials, labor costs, and local market conditions, which makes them suited to this role. However, that knowledge is only helpful if their experience is relevant. An estimator who previously worked in commercial or multi-unit residential construction doesn't have the same experiences as a single-dwelling housing estimator, so it's important to consider the person's professional background before hiring them.
Time Efficiency
When you have an in-house estimator taking the burden of estimating off of your project managers, they can stay focused on the projects in progress and support when pricing additional work, like change orders. This ensures that estimates are prepared accurately and that jobsite work is done more efficiently.
Competitive Edge
A dedicated estimator can compile estimates quicker, giving you a competitive edge. This means you can respond to bid opportunities faster than other remodelers in your neighborhood and take on more work.
Relationship Building
An in-house estimator can build relationships with suppliers and trade partners, negotiate better pricing and terms, and positively impact project costs.
What You Need to Consider Before You Hire an Estimator
Hiring a full-time estimator is a commitment. So naturally, there are things you need to consider before making that move. An estimator increases your overhead costs, and ensuring your business can handle that is important.
A crucial component to consider before hiring an estimator is whether or not you currently have a PAID pre-construction process. The goal is to ensure this position is fully billable in the pre-construction process, allowing you to achieve close to 100% cost recovery through the fees you charge.
For more on why charging for estimates is critical, watch this:
You should also be looking at how many projects you have each week, month, and year and whether or not that volume of work can support hiring someone full-time.
Another huge consideration for whether your business is ready to hire an estimator is whether bringing someone into this role can improve your estimating overall and prevent you from losing profit by filling a missing gap in your current skill set.
To answer this question, you need to look at which method of estimating you're currently using and how it can be improved by adding this person.
Quantitative Surveying Method
Many professional estimators take this approach to estimating residential construction projects. Quantitative surveying is a detailed process where every project component is meticulously measured and calculated to determine the exact quantities of materials and labor needed.
Also known as the "sticks and bricks" method, it breaks down the work into individual items and calculates their quantities rather than relying on rough approximations.
Relying on Trades
This method is typically used by project management firms who need to bid out projects to multiple trade partners for each trade discipline and is generally reserved for larger projects where more trade partners are involved.
In this approach, the burden of work shifts from calculating to detailing scopes of work, meeting with trades, and chasing pricing from them.
Volume Based Approach
Generally used in smaller projects where there isn't a need to count sticks and bricks or utilize trade partners as part of the estimating process, a volume-based approach uses preset "recipes" for unit cost estimating. This could look like quoting $X per square foot or $X per lineal foot for materials and labor.
Another thing to consider is whether you need someone with an engineering mindset who will just churn out numbers and estimates over and over, or whether you want that person to be a dynamic part of your sales team and help sell those estimates to clients. It's rare to find both skills in the same individual!
The Bottom Line on Construction Estimating
Construction estimating is far more than just predicting costs—it's the foundation of a successful remodeling or custom home-building project.
Accurate estimating protects both the builder's profit and the client's budget. It ensures that projects are feasible, resources are allocated efficiently, and unexpected costs are minimized.
Combined with a well-structured pre-construction process, it helps builders arrive at more accurate estimates and educates clients on why numbers might change along the way.
By setting clear expectations about how estimates evolve and the factors that influence them, builders can foster trust and transparency with their clients and help educate them on why they shouldn't focus only on the bottom line or the builder that comes in with the lowest number.
Using construction estimating software can help improve accuracy and efficiency by automating key aspects of the estimating process. This reduces manual effort and minimizes errors.
Construction estimating software, like Buildwise, also lets estimators focus on strategic decisions rather than repetitive tasks by creating reusable templates and matching current projects with data from past projects, ultimately leading to more reliable and profitable estimates.
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