How to Create an Accurate House Cost Estimate: Start Today with Our Construction Cost Calculator
- John Soldier
- Sep 9, 2023
- 6 min read
Updated: May 21, 2024
If you’re on the exciting journey of building your dream home, one of the first and most critical steps is creating an accurate house cost estimate. This crucial phase sets the foundation for your entire project, influencing your budget, timeline, and overall satisfaction with the final result. However, estimating the cost of a house can be a daunting task, fraught with potential pitfalls and common mistakes that can derail your plans.
In our comprehensive guide, “How to Create an Accurate House Cost Estimate: Avoiding Common Mistakes and Getting Started Today,” we’ll walk you through the essential steps to ensure you get it right from the start. Whether you’re a seasoned homebuilder or embarking on your very first construction project, our expert insights and practical tips will help you navigate the intricacies of cost estimation with confidence. From understanding the key factors that influence your budget to avoiding the most common estimation errors, we’ve got you covered. Let’s embark on this journey together and set you on the path to realizing your dream home without breaking the bank.
WHAT IS A COST ESTIMATE, AND WHY DOES IT MATTER?
A home construction cost estimate is a detailed assessment of the anticipated expenses associated with building or renovating a residential property. It is a comprehensive breakdown of all the costs involved in the construction process, including materials, labor, permits, equipment, and any other expenditures necessary to complete the project. Home construction cost estimates matter for several reasons:
1.) Budget Planning: An accurate estimate helps you establish a realistic budget for your construction project. It ensures that you have a clear understanding of how much money you need to allocate for each phase of the project, preventing financial surprises and overruns.
2.) Project Feasibility: Before committing to a construction project, you need to determine if it is financially viable. A cost estimate allows you to assess whether the project aligns with your financial resources and goals.
3.) Resource Allocation: It helps in the efficient allocation of resources, including funds, labor, and materials. Knowing the expected costs enables you to allocate resources appropriately and avoid shortages or delays.
4.) Contract Negotiations: If you’re working with contractors or subcontractors, having a detailed estimate is crucial for negotiating fair and transparent contracts. It sets clear expectations for both parties regarding costs and project scope.
5.) Project Control: During construction, the estimate serves as a baseline against which you can measure actual expenses. This allows you to monitor the project’s progress and adjust as needed to remain within budget.
6.) Financing: If you will be using outside financing for the project, lenders often require a comprehensive cost estimate as part of your loan application to ensure that the project is financially sound and that the loan amount is appropriate.
7.) Risk Mitigation: Identifying potential cost overruns or areas where costs might escalate allows you to develop contingency plans and strategies to mitigate risk effectively.
In essence, a home construction cost estimate is a fundamental tool that empowers owners, builders, and project managers to make informed decisions, maintain control over the project’s financial capacity, and ultimately ensure the successful completion of the project.
WHY IS ESTIMATING SO IMPORTANT NOW MORE THAN EVER?
Before hoping into the nitty gritty of what this article is about, I can’t emphasize how important obtaining relevant & up-to-date information is in today’s construction market. We’re all aware of how volatile housing prices have been over the past three years. These housing price increases can be tracked to an increase in material cost & labor shortages among other things.
Below is a graph of the Mortenson Price Index detailing percentage price increases since the end of 2020. Lumber is highly indicative of the single-family construction market in most of the nation. Lumber has seen incredible price fluctuations over the past couple years topping out at over double the price of 2020 in 2022.
Many construction companies use historical data to predict the cost of future projects. Due to the unusual volatility of the construction market over the past few years, construction companies and owners alike have had to become extremely conservative in their future outlooks. While material prices are somewhat stabilizing and there is still room for opportunity, this graph represents one of numerous reasons why creating great estimates has become more of an art than ever before.
HOW TO CREATE AN ACCURATE HOUSE COST ESTIMATE FOR YOUR NEW HOME
Where you are in the design process will determine the level of accuracy of your cost estimate. The more detailed your plans, the more precise your cost estimate will be. There are three primary methods for developing a cost estimate for your home. You can determine which method is most optimal for you depending on what your needs are.
The following estimating techniques will be examined below:
Rough Order of Magnitude (ROM)
Price per Square Foot
Unit Price
ROUGH ORDER OF MAGNITUDE (ROM)
Producing a ROM is the simplest way of creating a cost estimate. They can provide rough cost estimates early in the design stage that allow owners to make informed decisions early. This method should get you within 20%-25% of your total home cost.
This process is fairly simple and can be used to either dictate the design process or vice versa. A relatively accurate ROM can be easily produced using the following equation:
Avg. Cost PSF * SF of Building * Quality of Finishes * Location Multiplier * Building With or Without GC
While ROMs are a great way to determine affordability early in the design process, keep in mind that you get back what you put in. Considering that this is the least intensive of all estimating methods, it is also the least accurate & incorporates a lot of assumptions. Costs that aren’t easily calculated using ROMs for example are sitework costs. Sitework costs are highly variable at this point & are not reliably depicted using this method. For example, are you building on a flat 0.5-acre lot or an undeveloped 10-acre plat? Either way, the ROM will come out the same. What can be more accurately absorbed from this approach however are the vertical structure/building costs.
Don’t have accurate cost data to work off of? Don’t worry, we’ve got you covered! Use our Single-Family Construction Cost Calculator below to get a rough estimate of what it might cost to build a single-family property in your area.
***Calculation does not include soft costs not typically carried by the General Contractor or Subcontractor (Land cost, Loan Origination fees, Design fees, etc.)
PRICE PER SQUARE FOOT
This method requires a bit more planning prior to using than the level of detail we need for a ROM. You should at least have a conceptual floor plan by this point. While a Price Per Square Foot estimate is still a conceptual estimate, it will take a few hours to compile & therefore will provide more accuracy than a ROM.
Square foot estimates offer a comprehensive breakdown of expenses, encompassing labor, materials, and professional services, among other elements. While they provide a more in-depth analysis than conceptual estimates, square foot estimates rely on average costs associated with constructing buildings of similar size, type, & purpose. These estimates prioritize efficiency and, therefore, do not delve into intricate specifics, such as the selection of particular materials. Their primary purpose is to provide a reasonably accurate projection of total construction costs, typically allowing for a margin of variation of approximately 20%.
This is when estimating becomes more specific to the particular project, there is no simple way to break this down as there are many theoretical scenarios at this point. Whether a project has a slab on grade or wood subfloor could have a significant impact in cost. One will require capillary break import while the other will require joist hangers and so on. These variations are worked out in the Price Per Square Foot estimate.
Example of Price Per Square Foot Estimate line items:
Framing Labor: $12/sf * 1,650sf $19,800 Framing Material: $6/sf * 1,650sf $9,900 Siding & Exterior Trim $9/sf * 1,650sf $14,850 etc.… etc.…
UNIT PRICING
Unit Pricing is the most specific and reliable way of estimating a project. You should have pretty much all the details of your project lined out including all architectural, structural, electrical, mechanical, and plumbing layouts complete and defined. Quantity Take-Offs (QTOs) will be performed using an estimating software such as Bluebeam Revu or On-Screen Takeoff. These quantities will be exported and multiplied by the unit costs of material, labor, and equipment until all costs are accounted for.
Unit Pricing provides the most definitive answer to what a project’s final cost may be. A good estimate using Unit Pricing may land within 5% of what the actual cost may be.
Example of Unit Pricing line items:
Framing Labor: $28.81/hr * 691hrs $19,907.71 Framing Material 1: $1/bf * 1500bf $1,500 Framing Material 2: $0.50/ea * 900ea $450 Framing Material 3: etc.…. etc.….
FINAL THOUGHTS
Monitoring construction costs throughout the design and construction lifecycle is paramount for both owners and construction managers to ensure well-informed decisions are made as they progress with their projects. If this is your first attempt at creating an estimate, there’s no need for concern. Estimates are, by nature, approximations. You should always strive to make them as accurate as possible but remember that refining this skill is a pursuit that individuals turn into careers.
If you or someone you know is encountering challenges in generating an estimate, please don’t hesitate to reach out to us! You can find out more about our services here.
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