Getting a Project to Pencil as the Details Come into Focus
For developers, one of the earliest and most important questions about a potential project is: What is this going to cost to build?
Today, getting to an answer that supports a viable project is particularly challenging in California. Construction costs are only one part of the equation. Financing, equity requirements, insurance, development fees, approval timelines, land costs, and other development inputs all have to work within the same pro forma. The result is an environment in which projects that make sense on paper can become difficult to execute — and where establishing a realistic construction number early can play an important role in determining whether a project moves forward.
The Development Math Has Become More Difficult
The UC Berkeley Terner Center for Housing Innovation has called California the most expensive state in the country for multifamily construction, noting that many entitled projects are not moving forward because development costs cannot be supported by achievable rents or sales prices. Terner points to construction materials, debt financing and equity requirements, insurance, impact fees, inclusionary requirements, and lengthy approval processes as contributors to California’s development costs and unpredictability.
Making a project pencil isn’t simply a construction-cost problem. It’s a development-cost problem, and many of the variables affecting that equation are outside the developer’s, or general contractor’s, direct control.
Affordable Housing Adds Another Layer of Complexity
Affordable housing projects frequently require developers to assemble financing from multiple public sources, each with its own requirements and timeline. Terner Center research examining California Low-Income Housing Tax Credit projects found that, across comparable developments, each additional public funding source added an average of four months before construction could begin and was associated with approximately $20,460 in additional total development cost per unit. The finding illustrates an important reality: Time and complexity have a cost, even when they don’t appear in the construction contract.
Hotels Face Their Own Feasibility Pressures
Hotel owners and developers are confronting many of the same underlying challenges.
The 2026 HVS U.S. Hotel Development Cost Survey reports that hotel development remains constrained by elevated debt and equity costs and rising construction costs. Across the projects in its survey, HVS reported a median development cost of approximately $213,000 per room. But HVS specifically cautions against using these benchmarks to determine the cost of an individual hotel because project characteristics and location can materially change the development budget.
General contractors face essentially the same issue when developers ask us for early construction pricing.
The Bank Needs a Number, and the Plans Aren’t Ready
It’s common for developers, particularly those newer to the development process, to approach us early asking for “a rough number to take to the bank.” That number may be needed to evaluate a property, build a pro forma, talk with investors, or determine whether financing is achievable.
The challenge is that these projects often aren’t far enough along to price with a high degree of certainty. We may have early concepts or schematic drawings, but often we have little more than a site, approximate square footage, proposed unit or room count, and a general description of what the developer intends to build.
In these cases, we develop a conceptual estimate based on historical costs, current market conditions, and comparable projects we’ve built. It’s an informed starting point, but one that still relies on assumptions about the building, site, systems, and scope. The earlier the estimate, the more assumptions it necessarily contains.
A Preliminary Number Is Not Yet a Construction Budget
When plans are limited, there are simply things we don’t know yet. Site conditions, grading, shoring, utilities, parking, structural systems, mechanical, electrical, and plumbing (MEP) systems, materials, finishes, and jurisdictional requirements can all materially affect cost. Even projects that appear similar based on unit count, room count, or square footage can ultimately have very different construction costs.
If we’ve built a comparable multifamily development or hotel, its actual construction costs give us a valuable reference point. But we still need to understand how the proposed project differs in location, site conditions, building configuration, systems, finishes, timing, and other important cost drivers.
An early estimate, therefore, isn’t a promise of what the building will ultimately cost. It is the best construction-cost picture we can reasonably develop from the information available at that time. That distinction matters because a preliminary number can quickly become much more than preliminary.
The Risk Is When an Early Number Becomes a Fixed Number
A conceptual estimate may begin as one assumption among many in an early feasibility model. Then the developer uses it in the pro forma. The pro forma goes to investors. The construction number enters discussions with the lender. The project moves forward. Design advances. Months later, that preliminary number can begin to feel like the budget, even though the project has changed substantially since it was developed.
Meanwhile, civil engineering provides a clearer picture of the site. Structural and MEP systems are developed. Utilities become better understood. Jurisdictional comments arrive. Eventually, subcontractors can evaluate defined scopes rather than conceptual assumptions.
Each step replaces some uncertainty with actual project information, and that information can change cost. That doesn’t necessarily mean the original estimate was wrong. It means more information is available, and the construction number needs to evolve accordingly.
What Should a Developer Ask About an Early Estimate?
A preliminary estimate can be an extremely useful feasibility tool, but the number itself is only part of the information a developer needs.
Developers should also ask:
- What assumptions were made to arrive at the number?
- What major scopes or design decisions remain unknown or excluded?
- Which assumptions have the greatest potential to affect cost?
- What comparable projects or cost data informed the estimate?
- When should the project be priced again?
This context is particularly important when comparing preliminary numbers from different contractors. Two estimates may differ because the contractors made different assumptions about what the project will ultimately require.
A lower number isn’t necessarily a better number if important scope, risk, or unknowns are sitting outside it. The goal should be to understand both the number and the level of confidence behind it.
From a Feasibility Number to a Budget You Can Build
At the beginning, the construction number may be based largely on comparable projects and informed assumptions. As design progresses, those assumptions can be replaced with actual quantities, defined systems, site information, and increasingly detailed scope. Later, subcontractor and market pricing provide another level of validation.
Conceptual estimate → developing budget → subcontractor-validated pricing → construction budget
While terminology and timing will vary by project, the principle remains the same: The number should become more reliable as the project becomes more defined. If an early estimate remains untouched in the pro forma as the project advances and underlying assumptions change, the construction number needs to be revisited.
Getting Closer to the Number the Project Will Have to Live With
At Level 3 Construction, some of our earliest conversations with developers happen well before there are complete plans to estimate. In those situations, our job isn’t to pretend we know things that haven’t yet been determined. It’s to use our experience with comparable multifamily, affordable housing, mixed-use, and hotel projects to develop the most informed construction assumptions possible — and be clear about what is known, what is assumed, and what still needs to be resolved.
A preliminary construction estimate can help determine whether a project deserves the next investment of time and capital. As the project advances, the construction number should advance with it, gradually replacing assumptions with information specific to the project.
The objective isn’t to produce the lowest preliminary number that makes a project pencil on paper. It’s to get as close as possible, as early as possible, to the number the project will actually have to live with.