How Cost Estimates Work: Levels, Accuracy and Error Margins

A building cost is not one number that gets more precise. It is a series of different estimates, each made from more information than the one before, and each with its own job. The figure in a cost guide, the number an architect gives you at the first meeting, a quantity surveyor’s cost plan, a builder’s itemised quote and the sum you finally pay are separate things, and treating any one of them as another is the commonest way a renovation budget goes wrong.

This note sets out the levels in order, what each is built from, what it is good for, and how far each can be expected to miss, using the published classification schemes that professional estimators work to. The supporting notes in this section deal with how much contingency to hold and how this site prices its own figures.

The Levels at a Glance

The classes are matched to the stages by what has been designed, not by the name of the document. A builder’s “quote” given from a walk round with no drawings is a Class 5 number whatever it is called, and a cost plan built on a full measured survey and a detailed specification can be far better than its stage suggests. The sections below explain where each figure comes from.

The US Navy, Army and Marine Corps construction estimating manual uses the same ladder, from order of magnitude estimates made from limited information up to detailed estimates, which it calls the most accurate and the slowest to prepare.¹

The Sequence: RIBA Stages and NRM 1

Two documents organise the British sequence. The RIBA Plan of Work 2020 divides a project into stages from 0 (strategic definition) to 7 (use), and says what the cost work should be at each.² The RICS rules for estimating, NRM 1, name the estimates themselves.

The RIBA Plan of Work 2020 starts the money at Stage 0 with a rough order of cost estimate, which may be stated only as a cost per square metre.² At Stage 1 the cost consultant prepares order of cost estimates to test whether the emerging brief is feasible.² At Stage 2 comes the first formal cost plan, with an elemental analysis of the significant elements of cost.² At Stage 3 the cost plan is updated with increasing certainty as the design gains detail.² At Stage 4 the cost plan is worked up with full bills of quantities, unit cost items or pricing schedules, and becomes the pre-tender estimate.² At Stage 6 the adjusted contract sum is agreed to settle the final account.²

RICS NRM 1, the rulebook quantity surveyors use for this work, aligns its estimating stages with the RIBA Plan of Work 2020.³ Under NRM 1, order of cost estimates belong to RIBA Stages 0 and 1.³ Formal cost plan 1 is prepared at RIBA Stage 2, as the initial formal cost plan.³ Formal cost plans 2 and 3 follow at Stages 3 and 4, though NRM 1 notes that whether both are needed depends on the stage at which tenders are sought.³ An order of cost estimate is usually built by the floor area method: the gross internal floor area multiplied by a cost per square metre.³ Our note on how building work is measured explains why that area is the inside of the walls, not the outside.

On a typical home renovation most of these steps are compressed or skipped. There may be no cost consultant at all, the “cost plan” may be the homeowner’s own spreadsheet, and the first measured price is the builder’s quote. The levels still exist. Skipping one does not remove its uncertainty; it only means nobody has measured it.

What Each Level Is Good For

A cost-guide or per-m² ballpark answers one question: is this project in the right order of magnitude for the money I have? It is built from other people’s projects, averaged, and knows nothing about your house, your specification or your ground. It is the right tool for deciding whether to pay for design work, and the wrong tool for anything after that. Every figure on this site is at this level; how we build them is set out separately.

An order of cost estimate applies the same kind of rate to your own measured floor area and brief, and is where risk allowances first appear. It is good for setting a budget and choosing between options.

Cost plans break the cost into elements (substructure, frame, roof, finishes, services and so on) and are tightened as the drawings develop. Their job is control: keeping the design inside the budget while there is still time to change it cheaply.

A priced bill or itemised quote is the first figure that comes from someone who will actually do the work, priced against a defined scope. It is good for choosing a builder and, once accepted, for checking every later claim for extra money.

A fixed-price contract turns that quote into a commitment for the scope described. The final account is the only figure that is not an estimate.

How Far Each Level Can Miss

The AACE classes

AACE International, the cost engineering association, classifies estimates from Class 5, the least defined, to Class 1, by how much of the project has actually been defined.⁴ Its building version, Recommended Practice 56R-08, gives a range for each class at an 80% confidence interval.⁴

In AACE’s building matrix, Class 5 runs from 20% to 30% under to 30% to 50% over, and Class 4 from 10% to 20% under to 20% to 30% over.⁴ Class 3 runs from 5% to 15% under to 10% to 20% over.⁴ Class 2 runs from 5% to 10% under to 5% to 15% over, and Class 1 from 3% to 5% under to 3% to 10% over.⁴

Three things about those numbers matter more than the numbers themselves.

First, AACE’s ranges describe where about 80% of actual outcomes should fall once an appropriate contingency has been included.⁴ A cost guide figure has no contingency in it at all, so it is worse than the table suggests.

Second, for weak project systems and complex or risky projects, AACE warns that the high end can be two to three times its table figure.⁴ Opening up an old house is close to the definition of a risky project.

Third, the ranges are lopsided: at every class the over side is wider than the under side. Estimates miss high more than they miss low.

The process-industry version, Recommended Practice 18R-97, is the one most often quoted, and it is wider still: a Class 5 estimate there runs from 20% to 50% under to 30% to 100% over.⁵ The building version is the better guide for a house, but neither was written for one, and both describe estimates prepared by professional estimators with a defined scope in front of them.

The IPA’s targets for government projects

The UK Infrastructure and Projects Authority applies the same idea to public projects at their business-case gates. Its Cost Estimating Guidance says that an estimate’s reference class and confidence level should follow the evidenced maturity of the scope, not the calendar.⁶ At the strategic outline case, with under 5% of the project defined, its target range is 20% under to 50% over; at the outline business case, around 30% defined, 15% under to 30% over; at the full business case, over 60% defined, 10% either way.⁷ By exception the IPA accepts up to 50% under and 100% over at the first gate.⁷ As a project matures, the IPA notes, uncertainty decreases and the ranges shrink.⁶

Read across, the two schemes agree on the shape: a ballpark carries an error of tens of per cent, a priced design carries an error of a few per cent, and the error leans towards overrun.

Why Early Estimates Lean Low

The lean has a name. HM Treasury’s supplementary Green Book guidance starts from the finding that there is a demonstrated, systematic tendency for project appraisers to be overly optimistic.⁸ It tells appraisers to add an explicit uplift, based on past projects, until the causes have been dealt with.

Its recommended upper adjustments to capital cost are 24% for standard buildings and 51% for non-standard buildings.⁸ Non-standard, in the guidance’s definition, includes refurbishment projects.⁸ Those upper figures are the average historic optimism found at the outline business case stage, and the guidance says higher adjustments may be needed earlier.⁸ The lower bounds, 2% and 4%, are what a well-run project should reach by contract award.⁸

The figures come from a review of large public projects, so the percentages are not a domestic rule. What carries across is the direction and the ranking: estimates for new, standard buildings are optimistic, and estimates for refurbishment are about twice as optimistic.

What This Means When You Read a Cost Guide

1. A cost guide figure is a Class 5 number at best. It describes other people’s projects. Use it to decide whether to go further, not to set the budget you will spend.
2. Read the midpoint as more likely low than high. Take a £40,000 ballpark at AACE’s widest building range for Class 5: the outturn could reasonably land anywhere from £28,000 to £60,000, with £20,000 of that span above the ballpark and only £12,000 below it.
3. Expect more spread on an old house. Refurbishment sits in the non-standard group in the Treasury guidance, and AACE’s risky-project warning applies. Our note on the costs that only small jobs carry covers the other reason small domestic jobs run above published rates.
4. Ask what level any number is. Before comparing two figures, find out whether each is a ballpark, a cost plan or a priced quote, what it excludes, and what date it is priced at. A published rate also excludes things that your bill will not: why a published building rate is not what you pay walks through VAT, preliminaries and fees, and bringing an old building price to today’s money deals with the date.
5. Hold a contingency until the risky work is done. A range is not a contingency, and our contingency note explains the difference and how much to hold.

When the Price Becomes Fixed

The step from estimate to commitment is a legal one, not a technical one. Citizens Advice describes a quote as a promise to do work at an agreed price, and an estimate as the trader’s best guess.⁹ A quoted price can still rise if you agree to extra work the trader tells you is needed.⁹ It will also move by the difference between any provisional sum in the quote and the real cost of that item, which is why a quote full of provisional sums is closer to an estimate than it looks. Our notes on the difference between a quote and an estimate and on day rate against fixed price cover the contractual side.

After the work, the contract sum is adjusted for every variation and provisional sum and agreed as the final account. That is the number the earlier estimates were trying to predict, and the only one that does not need a margin of error. The budgeting side, from first benchmark to payment stages, is in our guide to budgeting and project-managing a home renovation, and the figures the site uses for its own ballparks are gathered in the UK Renovation Cost Index.