Estimating costs and budgets in construction projects

How much is worth to execute a construction project? The million dollar question. To do this, the costs must be estimated. I think it is attributable to an appointment that seems to me magnificent, and which reflects the difficulty of answering the question posed:

“An estimate is the most optimistic prediction with a non-zero probability of being true”

In the next post we will reflect on the importance of cost estimation and the budgeting of a construction project.

Cost estimation processes and budgets in projects under construction

According to the PMBOK Guide (Guide to the basics of project management Project Management Institute) management costs of a project includes the following processes:

  • Estimate Costs: Develop an approximation of the financial resources needed to complete the project.
  • Determine the Budget: add the estimated costs to establish an authorized cost baseline.
  • Controlling Costs: Monitor the project situation to update the project budget and manage changes to the cost baseline.

These three processes could be grouped in two, since the estimation of costs and budgets in construction projects are carried out in a planning phase and control of costs is a more linear process, which is carried out along of the entire project.

Focusing on the processes that interest us for the post, based on the definitions of the PMBOK guide, the main ideas of the processes in question are presented:

  • Cost estimation: this is a quantitative prediction, in the form of currency, of the resources needed to carry out the project activities. Costs are estimated for all resources required for the project, i.e. personnel, materials, services, facilities, equipment, etc. In order to obtain this cost estimate for all activities, different tools (parametric, upward, three-valued, reserve analysis, etc.) will be used and a basis must be available, such as knowing the project and its activities, its Schedule, risks, etc.
  • Budget Determination: consists of adding up the estimated cost of all activities or work packages and being able to establish a baseline or cost reference plan. The project budget constitutes the funds authorized to carry out the project. The cost control will be based on this authorized budget and its corresponding baseline. In this process, the financing requirements are also obtained, if any.

Depending on the needs, the type and volume of the project, the cost estimate and the determination of a base budget can be converted into a single process. The number of people involved in these processes will also vary.

The tools for estimating costs will also vary depending on, for example, the phase of the project or the degree of definition of the project in that particular phase. The PMBOK guide talks about these processes within the project planning, but they can also be given prior to the start of the project, as could be the case for the budget determination for a tender.

It would have to be seen, depending on the structure of the organization and the project entity, whether or not the preparation of the bidding is part of the project or future project, or are, on the contrary, a project in itself, or they do not even enter into any of these assumptions.