As a consultant, I am fortunate to work in many different industries on various projects involving all types of customers and contractors. Based on my experience, I have developed the following perspective on the issue of cost. Starting with the contractor, The TRUE COST of a project is not known until the project is completed, all of the invoices are paid, and the accountant has reconciled the books.
The ESTIMATED COST of a project is the contractor’s expectations on how much the project will cost based on estimating guides, “swag”, or previous true job costs.
The BID COST of a project is how much the contractor wants to charge the customer to do the project. It includes the estimated cost plus overhead and profit. The contractor considers risk versus reward when establishing the bid cost.
Now with the customer, The EXPECTED COST is how much the customer is will to pay for the project. This may be based on previous experience, a guess, other bids, a third party estimate, or industry standard (ie – $/sq ft).
The BUDGET COST is how much the customer can afford. Hopefully the customer establishes a reasonable and accurate expected cost then factors in a contingency for unknowns, changes, and available funds. Ideally, the magnitude of these costs increase in order from true cost to budget cost. Meaning, the contractor makes a reasonable profit at the end of the project and the customer meets the time and financial expections for the project.
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