A Guide to Estimating Equipment Costs in Construction

In the construction industry, precision and foresight for any project is essential for success. From colossal skyscraper buildings to more intricate infrastructure projects, the industry demands meticulous planning and execution. Before that can happen the process starts with the crucial task of estimating equipment costs; something that can impose serious risks if underestimated.

Estimating accurate equipment costs is key to avoiding a multitude of challenges that could potentially derail even the most well-thought-out plans of a new construction project. However, the costs of construction equipment rising in alignment with the economic crisis is something to be aware of. A monthly statistics report of building materials and components from gov.uk found that the construction material price of “all work” increased by 10.4% in January 2023, compared to January 2022.

[Source: Monthly Statistics Report of Building Materials and Components, Gov.uk 2023]

It was also forecast in Planning, BIM & Construction Today that the rising cost of materials was going to be the biggest challenge for the industry in the year 2023. Therefore it is crucial to understand how to estimate equipment costs to ensure you take the necessary steps to budget, plan, allocate resources and be on top of risk management for a successfully organised project.

So how do you make the right financial decisions when you are in the preconstruction process? In this article, we will cover the importance of making accurate estimates and guiding you through the requirements of how to estimate equipment costs.

Why is it important to make accurate estimates?

Making accurate estimates is the foundation of a successful construction project. Both the project owner and contractor will use these accurate estimates to stay on track with the multiple costs of equipment, labour and machinery prices - to name a few. Failure to make the correct estimations can result in a misunderstanding of whether the budget is practical enough to do the job.

Not only that but there are areas in the planning process that can naturally change, such as not being able to work on the construction area under adverse weather conditions; so it is always crucial to allow for costs to fluctuate under unforeseen circumstances.

Accurate estimates are also used for contractors to make competitive bidding decisions. In the construction industry, contractors often bid for projects based on cost calculations. Already having the knowledge of approximate costs allows them to submit a competitive bid that confidently reflects the actual costs involved, generating a higher chance of winning the contract. Although it is vital to prepare rough calculations to avoid underestimating the costs of the project, it is just as important to avoid offering a higher price than other competitors in case you are not chosen - accuracy is key.

Steps to estimate equipment cost in construction

To make accurate project cost estimations, a construction estimator will follow a method that ranges from reviewing the bid package, organising site visits and obtaining all the necessary documents, to then evaluating additional costs in terms of labour and equipment. The whole planning process will be able to determine how much the project will cost, and possible contingency plans that might need to be considered in case of any challenges.

The following steps to make the estimation are as follows:

Bid package review

The bid package will hold all of the necessary information for the bidding process, such as:

• The project scope and schedule
• Contract documents
• Contractor’s responsibilities (labour, materials, equipment and supervision)
• Any required permits and approvals
• Health and safety requirements
• Insurance and bonding
• Change orders (handling any changes to the original contract, evaluating the changes such as price and unusual features that could impact the cost)
• Financial payment information
• Unforeseen circumstances, such as natural disasters
• Termination clause
• Indemnification
• Legal regulations

Once all of these documents are obtained, additional drawings and mockups of the site’s architectural, electrical, mechanical and structural details will be required. The estimator will constantly refer back to the aforementioned drawings and documents to ensure that the construction plan covers all required aspects of the project. The work must be divided into packages so that the general contractor can put in bids from specialty contractors for some of the construction work.

Site visit induction

Construction estimators can achieve a clearer picture of the project by actually visiting the site before the bidding submission. They can understand the location, anything that might influence the cost, and any potential challenges that perhaps a drawing may not be able to replicate. For example, subsurface conditions like soil type and strength can impact the foundation design.

The benefit of visiting the site allows for the estimator to familiarise themselves with the knowledge of the local area: residential working hours, parking regulations, or roads for larger equipment to be transported through. These elements all play a factor in the cost and suitability of the project.

Conduction of material takeoff

After a review and site visit, a material takeoff is usually made afterward. It is a method of identifying the materials required for the construction project. For example, the type, quantity and measurements of materials. While a material takeoff concentrates on the vital materials for the project, a quantity takeoff is the measurement of the overall cost of all the construction factors: overhead, labour and project cost.

Request supplier and vendor pricing

Once the essential materials and equipment for the project are accounted for, a specialty contractor will work with the suppliers and vendors. The contractor must be aware of preventing any material waste, as well as making the appropriate cost-effective decisions when it comes to bulk pricing and order sizes.

If there is equipment that the contractor does not already own, they will need to contact equipment vendors and estimate the financial options (lease or rent) mixed with a timeframe of the duration they will need it for. For example, if the project required compaction equipment such as a tampering roller, the contractor would need to determine how long it would take to operate and when it would be returned. This can impact the overall cost of the project depending on the prices given, so contractors must be aware of the effects that purchasing or leasing equipment will have on the project.

Determining the labour

No project can go forth without the labour to do so. An estimator needs to evaluate just how many people it will take to complete the construction that aligns with the deadline.

They must consider:

• The number of staff required
• How many hours of labour are needed
• Staff wages and taxes
• Employee health and safety
• Insurance
• Annual leave and sick absences

Insurance and bonding costs

To avoid health and safety risks, insurance and bonding can help with unexpected problems such as accidents, injuries and property damage. The types of insurance include:

General liability insurance: protects against claims of injury, property damage and personal injury caused by construction work.

Worker’s compensation insurance: coverage for medical costs and lost wages for injured builders working on the site.

Builder’s risk insurance: coverage to protect against damage to the construction project, including materials such as soil and asphalt, and equipment such as forklifts and concrete mixers.

Professional liability insurance: also known as E&O, it protects against claims of professional negligence or errors by architects, engineers and other professionals involved in the process.

Bonds can provide financial security to the project owner and subcontractors to confirm they will be compensated in case of a default from the contractor. If the contractor fails to abide by the contractual obligations, the bonding company can assist with the situation. Construction bonds can cover:

Bid bonds: financial assurance to the project owner that the contractor will enter into a contract at the bid price if awarded the contract.

Performance bonds: a guarantee that the contractor will perform the work according to the agreed terms and conditions.

Payment bonds: confirms all subcontractors, builders and suppliers are paid for their work and materials involved in the construction.

Calculating overhead costs

Construction estimators also have to consider any indirect costs within the project, which can include:

• Equipment repair costs
• Cleaning
• Temporary offices
• Permits

Although these variables may not be meticulously planned at the beginning, it is important to consider the finances of the above factors, as well as any overhead costs such as administrative work and depreciation.

Adjusting profit margins and contingency

As with any big project, contingency plans must be accounted for. After all the above is estimated, the remainder of the budget will be assigned for any waste and unforeseen circumstantial costs. The profit can then be reinvested into the company for future projects.

Discover funding solutions for construction finance

Cash flow is essential to the construction industry, which is why it is really important to make the right financial decisions for upcoming projects. At Union Business Finance, our construction finance provides specialised funding solutions tailored to your needs, so you can complete your project to a high standard and build your credibility.

We can offer funding for:

• New plant machinery
• New projects for upcoming contracts
• Acquisition of new land/buildings
• Light & heavy vehicles

To speak to our experienced team of finance brokers, contact us.