1. Capital Investment
Owners need estimating to work out the amount of Capital Investment they need to meet their business obligations, or the amount of money needed to make acquisitions of long term assets or money invested to improve turnover and profitability.
2. Viability of Projects
An estimate is required to assess the viability of projects. Owners can assess whether it is worthwhile going ahead with a project, and have reasonable chance to success, also whether it is able to completed for the money available and if it can produce a profit.
3. Financing
An estimate is required to determine funding required for the business’ needs. The source of funding can be debt finance (money borrowed from external sources) or equity finance (investing a company’s own money or from stakeholders in exchange for partial company ownership).
4. Business Case Analysis
Estimates can help provide justification and approval to the proposed business case and can assist management in making the decision for or against proceeding with the proposal and expected commercial benefit.
5. Project Delivery Strategy
Contractors assess various delivery methods or construction methodologies for completing projects. Delivery methods can be innovative, adopt the latest technologies and may help delivery a project faster and safer.
Estimating can provide a comparison of construction costs associated with different methods of delivery. A contractor can then select the best delivery strategy that takes into consideration the cost, schedule, safety and community impacts.
6. Cash Requirement
Owners need to be mindful of cash flow and estimate the amount of cash required on hand to be able to pay staff, subcontractors, vendors, debtors, deliver the projects, pay bonds and insurances. If a company has no idea of its cash position, it will very quickly fall into administration.
7. Risk & Contingency
When a company identifies risks, it needs to evaluate, analyse and rank them in terms of impact to the company. Companies will look at risks in terms of the worst case scenario and put controls in place to monitor and manage the risk. Estimating comes into play when quantifying the cost impact of a risk event to a company. Contingency plans are put in place to cover the risk events should they occur, even with controls in place for risk management.
8. Cost Forecasts
Estimates of proposed projects are needed to determine whether they can be delivered within the available funds allocated. If not, the proposals need to be scrapped, deferred or funded through other means such as financing or alternative contract models depending on the viability and importance of the project. If a company has not yet allocated funds to a proposal, a cost estimate will allow the company to obtain funding approval to proceed. If a project has already commenced, an estimate or forecast to complete is required to ensure that a project can still be completed within available funds.
9. Validate Quotations
Owners need estimating to be able to validate or challenge quotes received from external sources. Imagine if someone gave you a quote to paint your tiny house for $1m! Clients need to be able to have an estimate of expected costs to be able to assess quotes received from contractors and ensure that the figures are reasonable and in the right order of magnitude.
10. Approval to Release Funds
Once a construction contract is executed, the Owner needs to release enough funds to cover the contract, potential variations and contingency for the known and unknown risks. Funds will also need to include the Owner’s costs.