What's the Difference Between a Construction Bid and an Estimate?
Learn the terminology of the construction bidding world.
Customers sometimes use the terms bid and estimate interchangeably. Contractors, on the other hand, often attach specific meanings to each word. The two definitions correspond to different parts of the process of calculating a contractor’s internal costs and defining the final price to be charged to the customer. If your construction company is aiming for larger projects or public sector construction work, the following information on estimates and bids can help.
Estimates are About Costs
The customer wants to know the price of the job. As a contractor, you first need to know what expenses you will incur in doing the job – for example, your costs of materials and labor. The difference between the price you present to the customer (a price estimate) and your expenses (a costing estimate) will be your overall profit. A price estimate provides information to a customer, but is not necessarily a commitment from either side to go ahead with a project.
Levels of Accuracy in Estimates
An estimate presented to a customer as the price for a job is expected to be reasonably accurate. Price estimates that turn out to be wildly over or under the final price for a job might cast doubts on your competence as a contractor. On the other hand, your own internal estimates may vary in increasing order of accuracy as you plan for a project.
- Preliminary estimate (or a “ballpark” estimate). This helps you to assess the basic feasibility or interest of a project. Some projects may turn out to be the wrong size or involve risk that you prefer not to accept. If so, the preliminary estimate tells you that you can turn your attention to other more attractive projects.
- Square-foot estimate. If the project looks ‘doable’, a next level of estimate may be to use industry-standard unit costs per square foot, multiplied by the number of square feet (or metric/square meter equivalents.)
- Assembly estimate. This refines figures and calculations by considering each separate component of a construction project. Foundations, flooring, roofing, windows and sanitation for example may each require different levels of resources, compared to the general ‘one-size-fits-all’ approach of the square foot estimate above.
- Final estimate. This has the most detail and accuracy. It may involve getting written commitments from partners and subcontractors. It can then form the basis of a firm or official commitment that you make to your customer (see ‘Construction Bids’ below).
For a project to go ahead, you will need to make a firm offer to your customer. This is your construction bid. In it, you commit to providing your customer with a specified construction at a given price and often by a given date too. If the customer approves the bid, you are then expected to honor your commitment and carry out the work as described in the bid. Clearly, you need the most accurate cost estimates available in order to put the right price into your bid and make a satisfactory profit on the job.
I Want It Now!
Some estimates and bids, especially for bigger projects, may take considerable time and effort. For smaller projects however, customers may want to take a decision more quickly. They may sign with a contractor offering a reasonable or “good enough” estimate this week, rather than one that comes along with a better one next week. The price estimate may then simply become the bid that is signed by both parties for work to commence right away.
Saving Time and Energy in Preparing Estimates and Bids
A good solution to make construction estimates quickly, but still with fair accuracy, can therefore let you do better business as a contractor. Software programs to do this include easy-to-use applications with a built-in database of unit costs. Cloud-based versions can be accessed over the web on a pay-as-you-go basis: you only use and only pay for what you need.