Definition: The Cost Estimate Explained
The process of cost estimation is essential to businesses, particularly among construction. But also to individual consumers in a less formal sense. Whether you wish to have things done, or perform projects yourself -- gaining an accurate and reliable grasp of all the costs involved, in order to arrive at the total cost sum will help you to remain within budget and avoid cost overruns.
Tips
It often helps to find a credible spreadsheet for figuring costs, which can help to avoid omissions and oversights, and automatically compute total amounts based on variables.
Many of these can be found via free download. However whichever method of figuring the estimate you select, always try and minimize any uncertainties that can potentially affect what is to be paid, including the various risks, with as much reliablilty as realistically possible.
When gathering costs, obtain "how long the price can be held" from suppliers, contractors or sellers. And fixed lump sums are generally more predictable than hourly or cost-plus arrangements. Given the hourly/cost-plus arrangement, one strategy to better appoximate costs is to place a cap or a "not to exceed" limit on the project, service or item.
To borrow from lessons learned from the construction industry, it's important to make for potential allowances in the form of a time adjustment. Raw materials have a strong tendency to increase even over the period of a year, and these can fluctuate within a period of months or weeks. For example, if you are considered a house painting project, consider that some major manufacturers have increased the price of paints by as much as 40% or more over the 2010 to 2012 period alone.
Price increases caused by supply shortages may also come into play. For instance weather conditions such as drought can lead to surges in the price of many products for consumption; imposed politcal sanctions can lead to price rises, including for crude related products, which in-turn impacts the transport of goods across an economy. And shortages may have further implications that can affect quality, an important component that should be maintained in conjunction with cost -- one only needs to look at the drywall shortages within the U.S. and imported quality concerns with which it has previously been associated.
The fact of waste due to installation and/or production is more commonly known factor. Sometimes the suppliers themselves can help you with this.
For the above reasons and more, it is normally wise to arrive at a range amount such as "plus or minus 5 to 15%" for total figures keeping in mind that the actual sum may end up being greater or less than.