Estimating and quoting building work without losing money

What is the difference between an estimate and a quote?

An estimate is your calculation of what a job will cost you. A quote is the price you offer the client, and it can become part of a binding contract once accepted.

Business Queensland describes an estimate given to a customer as a rough, non-binding guide, and a quote as your statement that you have the information you need to price the work properly. If the customer accepts it, the quote forms part of a legally binding contract. That is why a quote needs a clear scope, clear exclusions and an expiry date.

If you are giving an indicative figure before the design is settled, say clearly in writing that it is an estimate only and will change.

How do you build an estimate that doesn't miss anything?

Work from the documents, not from memory or a square-metre rate. A reliable method looks like this:

1. Read everything first. Drawings, specification, engineering, energy assessment, soil report, planning conditions and any site survey. Note anything unclear and ask before you price.
2. Take off the quantities. Measure each trade element — concrete, framing, linings, roofing, tiling, finishes — and record where each quantity came from.
3. Price materials with waste. Use current supplier prices and add realistic waste and offcut allowances for each material.
4. Price labour from productivity. Work out hours from realistic output rates for your crew, then apply your fully loaded labour cost, including super, leave, workers compensation and non-productive time.
5. Get subcontractor quotes. Compare them like for like, and read the exclusions closely. A cheap quote that excludes scaffolding or waste removal is not cheap.
6. Price the preliminaries. Site establishment, temporary fencing and amenities, scaffolding and edge protection, supervision, cleaning, waste, insurances, permits, inspections and site security.
7. Add overheads, contingency and margin, as separate, visible lines in your workings.

Keep the estimate in a structured spreadsheet or estimating system so you can compare it with actual costs at the end of the job. That comparison is what makes your next estimate better.

How should you price overheads and margin?

Overheads are the costs of running the business that do not belong to any one job: office rent, vehicles, software, insurance, accounting, licences, marketing and your own time spent quoting and managing. Work out your annual overheads, then recover them across the work you realistically expect to win in a year — as a percentage of costs, or as a weekly charge for each week a job runs.

Margin is the profit left after all costs, including overheads. It pays for risk, growth and the jobs that go wrong.

Builders often confuse markup with margin, and the gap costs money. A worked example:

• Job cost: $100,000, including overheads.
• Markup of 20%: price of $120,000 before GST.
• Margin on that price: $20,000 ÷ $120,000 = about 16.7%, not 20%.

If you want a true 20% margin, you need to divide cost by 0.8, giving a price of $125,000. Decide which measure your business uses, and use it consistently.

What are contingencies, prime cost items and provisional sums?

These three are often lumped together, but they work differently:

• Contingency is your own allowance for risk inside a fixed price — unknown ground conditions, weather, minor design gaps. It is not shown to the client as an adjustable amount; if it is not used, it becomes profit.
• Prime cost (PC) item is an allowance for an item, such as a fitting or appliance, that the client has not yet selected or whose price is not known when the contract is signed.
• Provisional sum (PS) is an allowance for work that cannot be priced precisely when the contract is signed, such as rock excavation or an air-conditioning installation.

PC items and provisional sums are adjusted to the actual cost, so the contract needs to say how that adjustment and any margin on increases will be calculated.

Residential building laws in some states regulate them closely. In Victoria, under the Domestic Building Contracts Act 1995:

• Section 20. The builder warrants that any provisional sum has been calculated with reasonable care and skill, taking account of the information reasonably available when the contract is made, including the nature and location of the site.
• Section 21. A builder must not enter into a domestic building contract with a PC item or provisional sum that is less than the reasonable cost of supplying the item or carrying out the work.
• Section 22. A major domestic building contract must include a separate schedule for each item or sum, with a description, a cost breakdown showing at least estimated quantities and unit costs, and how any amount charged above the actual increase will be worked out.
• Section 23. The builder must give the owner copies of invoices or receipts showing the cost of PC items and provisional sums.

Other states have their own rules for residential contracts, so check the home building legislation where you work. Deliberately low allowances that make a quote look cheaper are exactly what these laws target.

How do you quote GST correctly?

When you quote consumers, quote the total price including GST. Under the component pricing rule in section 48 of the Australian Consumer Law, if you state part of a price you must also state a single total price, at least as prominently, that includes any tax, duty, fee or charge such as GST, according to the ACCC.

Good practice is to show the total including GST as the headline figure, with the GST amount shown in the breakdown. Quoting ex-GST figures to a home owner invites disputes.

PC items and provisional sums should also state clearly whether they include GST and whether your margin is included, so the adjustment at the end is not argued over. Thresholds for residential contracts are also usually GST-inclusive: in New South Wales, for example, the NSW Government says a written contract is required for residential building work over $5,000 including GST, with a more detailed contract over $20,000.

How long should a quote stay valid?

Always include an expiry date. Business Queensland warns that material costs can increase quickly, and without an expiry date you may have to honour a quote that loses you money.

The right period depends on how volatile your prices are and how long your suppliers will hold theirs. Match your validity period to your suppliers’ and subcontractors’ quote periods, and state that the price will be reviewed if the client accepts after the expiry date or if the start date is delayed.

Also state in the quote:

• What it is based on. Drawing and specification revision numbers.
• What is excluded. Rock, contamination, authority fees, landscaping — whatever you have not priced.
• Assumptions. Site access, working hours, and the start date and duration you have allowed for.

Can you include a cost escalation clause?

On commercial work, rise and fall clauses are a matter for negotiation in the contract. On residential work, the law may restrict them.

In Victoria, section 15 of the Domestic Building Contracts Act 1995 says a builder must not enter into a domestic building contract with a cost escalation clause unless the contract price is more than $500,000 (or a higher amount set by regulation), or the clause is in a form approved by the Director. Even then, the clause is void unless, before the contract was signed, the owner was given an approved notice explaining it and signed or initialled next to the clause. The definition excludes increases for unforeseeable changes to government taxes and charges, and adjustments to PC items and provisional sums.

Where an escalation clause is not available, your protection is careful pricing: a short quote validity period, an allowance for expected price movement over the job, and early purchasing of volatile materials. Our guide to variations and extensions of time covers how to price changes once the job is under way, and building contract basics covers what to check before you sign.

Estimating and quoting checklist

• Documents read in full. Drawings, specification, engineering and reports, with questions asked.
• Quantities measured. Each element taken off and traceable to a drawing.
• Materials priced with waste. Current supplier prices, realistic waste factors.
• Labour priced from productivity. Fully loaded labour cost, not just the hourly wage.
• Subcontractor quotes compared. Like for like, with exclusions read.
• Preliminaries priced. Scaffolding, fencing, amenities, supervision, waste, insurance and permits.
• Overheads, contingency and margin. Separate lines, using margin and markup correctly.
• PC items and provisional sums. Realistic, itemised, and compliant with state law.
• GST-inclusive total. Single total price shown prominently for consumers.
• Expiry date and exclusions. Stated clearly on the quote.

For the bigger picture on costs, cash flow and licensing, see starting a building business in Australia.

Frequently asked questions