Financial estimating for a long-range facilities master plan is a tough endeavor. When you consider the challenges of estimating project costs 10-20 years in the future, you quickly realize how small decisions have big impact.

Without needing an accounting degree, this short article will outline a simple cost-estimating approach to help you and your clients start down the right path.

Starting from Hard Costs, Where do we go?

Hard costs represent the physical materials and labor of construction. Starting from hard costs, we still need to add soft costs, annual escalation, and contingency to create a Total Probable Cost for a proposed project.

Tip #1: Remember that Escalation is a Compounding Cost

It’s easy to forget that escalation is a compounding annual cost. This means that if the escalation is 3%, that percentage is being calculated against the escalated amount from the previous year.

Here is an example to show you the difference between a proper compounding escalation formula vs a non-compounding formula.

Assuming a very small project with $1 million in hard costs, a non-compounding escalation forecast for a 10-years-to-construction project is off by $60k. It's easy to see how this difference can quickly grow with larger projects.

A true compounding escalation number can have significant implications with a complex collection of projects. The good news is that compound escalation is a simple Excel formula and is provided in the template below.

Tip #2: Understand the Impact of Soft Costs

Soft costs include elements like management, engineering, and architecture fees. Since we are planning for projects that are not designed or engineered right now, the soft cost is also delayed until project initiation. Therefore, we cannot apply soft costs before applying escalation. We must apply escalation and then soft costs to reflect the real-world timeline.

Here is a demonstration of why that’s important. 

As you can see, the positioning of soft costs at the point of project initiation increases the Total Probable Cost. While this may be an unfortunate side effect, the end result is more accurate.

Tip #3: Understand the Long-Term Impact of Cost Estimating.

These critical elements come together to create a more accurate estimate of project costs far into the future. Let’s compare what a non-compounding and mispositioned soft cost formula leads to in comparison to a GoArchitect standard calculation.

Assuming a modest project with $20 million in hard costs, a non-compounding escalation forecast for a 10-years-to-construction project is off by $1.2 - $1.9 million. As project sizes and timelines increase, it becomes easy to see the importance of proper formula creation.

If you’d like to explore this data more, the example file is available for download. Please use the form below to download the template.