Master the art of effective cost analysis while ensuring that your estimates are in the right ballpark using past projects as a comparison tool. Understand how to normalize costs, validate estimates, and leverage completed project data to secure effective pricing strategy.
Key Insights
- The article emphasizes the importance of analyzing estimated costs by comparing them with similar past projects, normalizing these costs to current values to ensure a true comparison.
- It underscores the importance of using completed projects' true cost data, rather than relying solely on estimated costs, to validate current project costs and ensure they are reasonable and within the correct range.
- The piece also suggests evaluating miscellaneous costs in your estimate in comparison to past projects, enabling you to validate the current project and justifying the pricing strategy to yourself and the management team.
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Analyzing the estimate costs. Compare it to similar estimates would be one great example. If you're building many McDonald's stores and you have three of them that were built just in the last two years, you should be able to compare some of the square foot costs to make sure they're coming out about right.
Even if the projects are different sizes, you can actually analyze the actual cost of the entire project divided by the square feet, which would give you square foot costs. You could do that for each project or you could even do it per trade. Since they're the same type of structure and serve the same purpose, you should still come up with some very good approximate costs per square foot.
So to give you an example of average square foot cost for a project size, if you look at the different elements required to build out one of these McDonald's restaurants, look at the cost associated with your kitchen, and if your kitchen is one and a half times the size as it was in the last estimate, then that cost should be applied based on the kitchen associated costs. Dining area would be done so accordingly as well. If it's twice the size, then just apply the dining area costs to help validate what that cost should be for the new project.
Unit cost analysis, this would be the same as actually identifying what the square foot cost is in one building compared to another. Now I did mention that there might be a project that you did a couple of years ago. Make sure that you take that project that's two years old and apply current costs to it.
Or let's just say that you anticipate that the costs for materials went up a certain percent and labor as well. That's what's referred to as normalizing your costs, making sure that the costs are suitable on both sides. So that when you compare your project to a project two years old of a similar structure, that you're actually doing a true comparison.
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Not to say that you can actually use the two-year-old costs with any budgets or any add-ons to that and use it for current costs, but as much as a double check just to provide a gut feeling as to does your current estimate comply with what you've been doing all along. Make sure that it's in the right ballpark. It helps even more if those past projects actually had a true job cost accounting done on them when the project was complete.
Supposing that project lost money, you probably want to look at that and find out how much-needed to be added to what and make sure that that is reflected on your current estimate going out the door. By utilizing the average trade cost for the project, meaning that you would take your electrical, your mechanical costs, your structural concrete, analyze what those actual costs were per square foot and compare that to your current cost per square foot. This is a great way of identifying and also validating to yourself, if not management in your company, as to how you came up with your pricing and how you validated or justified those costs.
So in general, by evaluating miscellaneous costs in your estimate compared to other projects that you've done in the past will help validate the current project moving forward. And also double check and make sure that if there's a true job cost on previous projects, that you use that information and not just the estimated costs. Any project that's been completed already actually has the true cost of construction.
