In construction, the different terminology for winning projects can be a bit tricky. Not only are there slight differences between estimates, quotes, and bids and proposals—but people throughout the industry tend to use different words for each. For example, while some contractors use the word “bid”, some may use the word “proposal”.
For that reason, we wanted to dedicate an entire lesson to the meanings behind an estimate, quote, bid, and proposal—as well as how each works within the pre-construction process.
What is a Construction Estimate?
We all perform estimations in our everyday lives. We eyeball ingredients when we’re cooking. We guess how far we can travel on the gas left in our fuel tanks. We tell our friends, “I’ll be there in about an hour”—based on an estimate of how long we think it will take to get to the party.
Well, construction estimates aren’t too different from these estimations that we make in our regular lives. Why? Because–whatever the scenario may be—we’re making our best educated guess.
When performing a construction estimate—like for the construction of a new garage, for example—the contractor will consider construction drawings, materials needed, how much labor might be required, and any other information that may affect the cost. Using this information, the contractor will make their best educated guess as to how much the job will cost the potential client.
However—as we’re about to explain—it’s important to understand that there’s a substantial difference between an estimate for a potential client… and estimating the cost of a project.
When you do an estimate for a potential client, he or she is usually just looking for a ballpark price—something to give them a general idea of the cost. Typically, the potential client just wants to know if the job is even financially possible for them.
Consider an example involving a bathroom remodel…
If a client requests an estimate from you, you will have to make some assumptions and adjustments for overhead—or the money above the material and labor costs that you—the contractor—will most likely need for other necessary purposes. This “overhead”—which is typically 10% to 30%—may be necessary for taxes, insurance, transportation, and other expenses like that. It’s a rookie maneuver to provide estimates to clients without considering these inevitable overhead costs.
And remember that the client is most likely going to obtain estimates from other contractors as well. So do your best to aim your estimate in the “Goldilocks range”—that is, not too high, but not too low… just the right amount. We know this can be tricky, but hitting the sweet spot with each estimate is what’s going to make you a contractor that generals millions per year with your construction business. So take estimates seriously and make an effort to master the skill of estimating over the course of your career… It will pay off.
Still using the bathroom remodel as an example, you will need to consider other factors of the job as well—including the materials the client would like to use for flooring and fixtures, what bathroom appliances may be necessary, and whether any specialized labor or equipment may be necessary to do the job. And you can check your cost estimate against typical cost-per-square-foot calculations for bathroom remodels and use your best judgement to estimate what your new bathroom will cost your client. How can you check this cost estimate? Well, it’s much easier than it used to be “back in the day.” These days, you can simply use Google to find typical cost-per-square-foot calculations for the various types of jobs.
When it comes to a client estimate, do your best to make your estimates as accurate as possible with the information that you have available. However, you should not expect your estimates to be perfect. You probably won’t know the exact cost of materials until the client has approved the purchase of these materials and is ready to move forward. Regarding the plumbing and electrical situation, it’s unlikely that you’ll know the exact details and whether or not you’ll have to hire subcontractors for this type of work. And you won’t know for sure if the exact type of tile the client wants for the bathroom floor will be available locally or if it must be imported… As you can imagine, it’s almost impossible to nail the exact numbers for all of the factors involved with the estimate.
For that reason, it’s always a good idea to be honest and straightforward with the client and remind them that these are estimates, not prices.
Here are a few tips to help create a solid estimate:
- With some exceptions, do not include exact quantities of materials or exact time frames for work. These figures are likely to change between the time you provide the estimate and when more information is available—closer to when the work will be ordered. Rookie contractors make the mistake of being impatient and impulsive… and they pay for this later on.
- Put an expiration date on the estimate. An expiration date clearly communicates to the client that the market conditions may change. And—although these changes usually occur within months—sometimes changes can even occur during weeks or days. For example, the price of imported tile can change significantly if a country were to fall into a recession—or consider how material costs skyrocketed during the Covid pandemic.
- Clearly label your estimate—making sure it says “estimate” at the top of the document. And the text should explain that the estimate is not binding. A “binding contract” is any agreement that’s legally enforceable—meaning that if you sign the contract and don’t fulfill your end of the bargain, the client can take you to court.
- Although some contractors provide verbal estimates to potential clients, we always recommend getting things in writing. Why? Because—not only will estimates in writing help with possible disagreements between you and the client during the job—but if you ever get sued by a client, a verbal agreement is pretty much useless in a court of law. But, we’ll cover this in more detail later in the lesson.
A cost estimate is a forecast or best educated guess of the total cost for materials, labor, and other expenses for a particular construction project.
Cost estimates are prepared by doing due-diligence—such as reviewing specifications, plans, and performing site visits—to get a strong understanding of every single expenditure that may be associated with a particular project.
Most of the larger construction companies employ professional estimators to ensure that the cost estimate it’s as precise as possible. And these professional estimators utilize these levels of detail while performing their estimates:
- First comes an “order of magnitude estimate”—which is essentially the client estimate we described before. This order of magnitude estimate is intended to give the project owner just a rough idea of what costs might be.
- Second is the “schematic design estimate”—which is based on square foot costs of similar projects in the same area.
- Third comes the “design development estimate”—which will further refine the design of the project, as well as define more of the materials required. At this point, plans and specifications should be detailed enough that all of the quantities can be developed from them.
- The fourth level is the “construction document estimate”—which is a professional estimation based on materials and systems required for the project in its final design. This is only possible after project design is complete and approved.
- The 5th and most in-depth level of cost estimation is the “bid estimate.” If an estimate is included in a bid, it should be based on a completed and published drawing set that includes all relevant specifications.
Keep in mind that the bid estimate is the number you use to compete with other contractors for the awarding of the job so you want it to be competitive. However, you don’t want it to be too low, because there will be little-to-no room for change once estimates get to the bids and proposals phase.
A quote is a detailed document for a potential construction project that contains a breakdown of the expected costs—including labor, materials, and quantities.
Quotes are typically valid for a short period of time—usually about a month. Like we mentioned earlier with estimates, the cost of materials and labor can fluctuate due to changes in the market.
And remember that quotes should contain information detailed enough so that the client can accept the quote as-is—it’s industry best practice to honor a quote even in the event of minor cost overruns. For that reason, you should be ready to perform the contract for the quoted price if the project owner accepts it. That being said, quotes are not binding contracts—which is the case with bids and proposals.