Accounting for Variances and the Estimating Process

One of the defining realizations of adulthood is the understanding that things generally cost more than you expect. As a kid, you save your money for weeks and head to the candy store with no expectation that your favorite candy bars will be out of reach by the time you get there. Fortunately, it only takes you coming up short once, due to circumstances you didn’t plan for, for you to learn to expect the unexpected.

This idea is incredibly important in regard to budgeting for a construction project and should be taken into consideration throughout the estimating process. A good estimate includes room for contingencies and it’s important to remember that the estimating process is ongoing (even through project closeout). By allocating costs for labor and cost changes, you are setting your company up for success.

Some things to keep in mind:

Wage Increases

This is a hard thing to forecast. For projects to be built, you need the right people to build them and sometimes getting the right people means paying more. With the current shortage of skilled laborers, there has been an increase in wages across the board and some skilled laborers can even name their price. If you end up in a labor bind, construction costs will inevitably rise and this should be accounted for throughout the estimating process.

Fluctuating Material Costs

Global markets fluctuate and therefore so does material costs. In general, prices are predictable but they also can also change quickly. Copper, for instance, rose dramatically during the manufacturing boom in China. With increased demand and/or supply shortages, the global economy drives prices up and your costs increase. This sounds like a daunting reality but fluctuating material costs are an outside factor that you can budget for during the estimating process.

Seasonal or Natural Events

Something as common as rainfall can drive your costs through the roof. With heavy rainfall, you might need to spend money to protect construction or restore the construction site after damage. Things like tornadoes, hurricanes, droughts, wildfires, and earthquakes can also cause devastating damage to sites and drive up costs before insurance money can come into play. Consider accounting for variances to combat these sort of events throughout the estimating process, especially if your region experiences them consistently.

Regulatory or Legal Issues

It is not uncommon for a project to face additional regulatory or legal issues, such as a demand for additional permits, once the project has already started and estimates have already been made. Non-compliance with such laws are incredibly bad and can end up costing a small fortune. You want to make sure you have the money budgeted for such legal issues as they arise, so you’re not stuck with larger fines later.

These are common variances to account for throughout the estimating process of your project. Have you seen any of the things above come into play with your projects? Would you add something to the list?

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