In the construction industry, controlling costs from the earliest stages of a project is critical to ensuring its financial viability and overall success. One of the most essential tools for achieving this is the Order of Cost Estimate. This document provides a high-level overview of the potential costs involved in a project, offering invaluable insights even before detailed design work is initiated. For UK construction businesses, especially those working on projects with tight budgets and timelines, mastering the use of an Order of Cost Estimate can safeguard against unexpected expenses and enhance financial control.

In this guide, we’ll break down what an Order of Cost Estimate entails, how it’s prepared, and why it’s a crucial element for both clients and contractors in the UK construction sector.

What is an Order of Cost Estimate?

An Order of Cost Estimate is an early-stage approximation of the costs associated with a construction project. Its primary purpose is to provide a broad indication of the likely expenditure required for a project, giving stakeholders a baseline understanding of the project’s financial scope. It is typically used during the initial feasibility phase of a project, when only minimal design information is available.

The estimate encompasses all major cost components, such as:

• Construction costs
• Pre-construction fees (such as planning and design)
• Risk allowances
• Contingency budgets
• Preliminaries (site overheads, supervision, etc.)

Since this estimate is often based on limited information, it is less precise than more detailed estimates that are developed later in the design process, such as the Elemental Cost Plan. However, it remains an essential tool for decision-making, particularly for determining whether a project is financially viable at its earliest stages.

The Importance of the Order of Cost Estimate in UK Construction

1. Early Financial Visibility: Clients, contractors, and other stakeholders are keen to know if a project is feasible from a financial perspective long before designs are finalized. The Order of Cost Estimate offers them the earliest insight into potential costs.
2. Strategic Planning: Understanding the broad scope of costs early allows for strategic planning. Stakeholders can make informed decisions about project scope, design changes, and alternative approaches, reducing the risk of costly changes later on.
3. Securing Finance and Investment: Many UK construction businesses depend on financing from external investors or lenders. Having a clear Order of Cost Estimate helps to build confidence with financial backers, as it demonstrates that the project has undergone rigorous financial planning.
4. Project Viability: For some projects, the Order of Cost Estimate can determine whether the project proceeds at all. If initial estimates show that costs exceed the available budget, the project may be paused, re-scoped, or abandoned entirely, potentially saving significant time and resources.

How is the Order of Cost Estimate Prepared?

The methodology for preparing an Order of Cost Estimate follows the guidelines set out by the Royal Institution of Chartered Surveyors (RICS), specifically within the framework provided by the New Rules of Measurement (NRM), particularly NRM1 (Order of Cost Estimating and Elemental Cost Planning for Capital Building Works). This ensures consistency, accuracy, and reliability across the industry.

Key Steps in Developing an Order of Cost Estimate:

1. Project Brief and Scope Identification: The first step is understanding the project’s scope and client requirements. Even with minimal design details, it’s important to establish what the client wants, the project’s key functions, and any constraints.
2. Benchmarking and Historical Data: Cost estimators will often refer to historical data from similar projects to develop the Order of Cost Estimate. This benchmarking process provides a reference point, helping to forecast costs based on comparable past works.
3. Cost Data Sources: Estimators use a variety of cost data sources, such as pricing databases, industry publications, and information from previous projects. This data allows for the calculation of unit rates (cost per square metre, for example), which form the basis for estimating the construction cost.
4. Risk Allowance: As there is limited information available at the early stages, a risk allowance is factored into the estimate. This allowance covers uncertainties and potential changes that might arise as more details become available.
5. Contingencies: A contingency is also included to provide a buffer for unforeseen costs. This is not the same as the risk allowance, as contingencies typically cover unexpected issues that arise during the construction phase, whereas the risk allowance addresses uncertainties in the early planning stages.
6. Adjustments for Location and Inflation: In the UK, construction costs can vary significantly based on geographic location. London, for example, is typically more expensive than other regions. The Order of Cost Estimate will account for these variances, as well as anticipated inflation over the course of the project.
7. Preparation of a Summary: Once the estimate is calculated, it is summarised into a report that outlines the total anticipated cost and breaks down major cost categories. This report forms the foundation for future cost planning and refinement.

Key Considerations for Construction Businesses

For construction businesses in the UK, particularly those working on complex or large-scale projects, there are several key points to keep in mind when developing or using an Order of Cost Estimate:

1. Accuracy and Range: Given the early stage of the project, it’s important to remember that an Order of Cost Estimate is only an approximation. Therefore, it is common to present the estimate as a range, reflecting the uncertainty inherent in the early stages of design.
2. Regular Revisions: As a project progresses and more design details emerge, the Order of Cost Estimate should be regularly reviewed and updated. The goal is to continually refine the estimate, bringing it closer to the actual anticipated costs.
3. Collaboration: Early cost estimates are not prepared in isolation. It’s crucial to involve key stakeholders, including architects, engineers, and the client, in discussions to ensure all parties understand the scope and assumptions behind the estimate.
4. Client Communication: Clients should be made aware of the limitations of an early-stage estimate and the potential for cost variations as the project develops. This helps manage expectations and reduces the likelihood of disputes later in the project lifecycle.

When is the Order of Cost Estimate Produced?

As noted, the Order of Cost Estimate is typically produced during Stage 1: Preparation and Briefing. At this stage, detailed design work has not yet begun, so the estimate relies on broad assumptions, historical data, and minimal design input. This estimate serves as a vital tool for deciding whether to proceed with the project, adjusting its scope, or exploring alternative approaches to stay within the client’s budget.

While the Order of Cost Estimate is only an initial approximation, it sets the stage for future, more refined estimates as the project progresses through the later RIBA stages. For instance, during Stage 3 (Spatial Coordination) and Stage 4 (Technical Design), more detailed Cost Plans are developed, which provide an increasingly accurate breakdown of the project’s anticipated costs based on the evolving design.

Order of Cost Estimate vs. Cost Plan

It’s important to differentiate between an Order of Cost Estimate and a Cost Plan, as they serve distinct purposes at different stages of a project:

1. Order of Cost Estimate:
   • Timing: Produced at the very early stages of a project, typically during Stage 1 of the RIBA Plan of Work.
   • Accuracy: Less accurate due to the limited design information available. The estimate is based on high-level data such as historical costs and industry benchmarks.
   • Purpose: To give stakeholders a broad understanding of the potential costs and determine whether the project is financially viable in its early stages.
   • Flexibility: The estimate will likely change significantly as the design evolves and more detailed information becomes available.
2. Cost Plan:
   • Timing: Developed during the later stages of design, primarily in Stage 3 (Spatial Coordination) and Stage 4 (Technical Design).
   • Accuracy: Much more precise, as it is based on detailed designs, technical specifications, and refined cost data.
   • Purpose: To provide a detailed breakdown of the costs for each element of the project, serving as a reference for managing and controlling costs throughout the construction phase.
   • Granularity: A Cost Plan offers a granular breakdown of costs, including materials, labour, preliminaries, and specific construction activities.

In essence, while an Order of Cost Estimate provides an early financial snapshot, a Cost Plan offers a much more detailed and accurate forecast as the project progresses, forming the basis for cost control during construction.

Conclusion

The Order of Cost Estimate is a vital tool in the construction industry, providing early financial insight and helping stakeholders make informed decisions about project viability and scope. For UK construction businesses, understanding how to develop and use these estimates effectively can reduce risk, improve cost control, and ensure better outcomes for clients.