The service cooperative is another cooperative type formed by persons engaged in the same

occupation to deal with common concerns including building up employment security and
maintaining the members' existing occupation.

How to Estimate Project Costs

In a world of limited funds, as a project manage you're constantly deciding how to get
the most return for your investment. The more accurate your estimate of project cost is,
the better able you will be to manage your projects budget. Therefore, estimating a
projects costs is important for several reasons:

It enables you to weigh anticipated benefits against anticipated costs to see

whether the project makes sense.

It allows you to see whether the necessary funds are available to support the
project.

It serves as a guideline to help ensure that you have sufficient funds to complete
the project.

Although you may not develop and monitor detailed budgets for all your projects,
knowing how to work with project costs can make you a better project manager and
increase your chances of project success.
A project budget is a detailed, time-phased estimate of all resource costs for your
project. You typically develop a budget in stages from an initial rough estimate to a
detailed estimate to a completed, approved project budget. On occasion, you may even
revise your approved budget while your project is in progress.
Your projects budget includes both direct and indirect costs.
Direct costs include the following:

Salaries for team members on your project

Specific materials, supplies, and equipment for your project

Travel to perform work on your project

Subcontracts that provide support exclusively to your project

Indirect costs fall into the following two categories:

Overhead costs: Costs for products and services for your project that are
difficult to subdivide and allocate directly. Examples include employee benefits,

office space rent, general supplies, and the costs of furniture, fixtures, and
equipment.
You need an office to work on your project activities, and office space costs money.
However, your organization has an annual lease for office space, the space has
many individual offices and work areas, and people work on numerous projects
throughout the year. Because you have no clear records that specify the dollar
amount of the total rent thats just for the time you spend in your office working on
just this projects activities, your office space is treated as an indirect project cost.

General and administrative costs: Expenditures that keep your organization

operational (if your organization doesnt exist, you cant perform your project).
Examples include salaries of your contracts department, finance department, and
top management as well as fees for general accounting and legal services.

Suppose youre planning to design, develop, and produce a company brochure. Direct
costs for this project may include the following:

Labor: Salaries for you and other team members for the hours you work on the
brochure

Materials: The special paper stock for the brochure

Travel: The costs for driving to investigate firms that may design your brochure
cover

Subcontract: The services of an outside company to design the cover art

Indirect costs for this project may include the following:

Employee benefits: Benefits (such as annual, sick, and holiday leave; health
and life insurance; and retirement plan contributions) in addition to salary while you
and the other team members are working on the brochure

Rent: The cost of the office space you use when youre developing the copy for
the brochure

Equipment: The computer you use to compose the copy for the brochure

Management and administrative salaries: A portion of the salaries of upper

managers and staff who perform the administrative duties necessary to keep your
organization functioning

5. Cost Estimation

5.1 Costs Associated with Constructed Facilities

The costs of a constructed facility to the owner include both the
initial capital cost and the subsequent operation and maintenance
costs. Each of these major cost categories consists of a number of
cost components.

The capital cost for a construction project includes the expenses related to the inital
establishment of the facility:
Land acquisition, including assembly, holding and
improvement
Planning and feasibility studies
Architectural and engineering design
Construction, including materials, equipment and labor
Field supervision of construction
Construction financing
Insurance and taxes during construction
Owner's general office overhead
Equipment and furnishings not included in construction
Inspection and testing
The operation and maintenance cost in subsequent years over the
project life cycle includes the following expenses:
Land rent, if applicable
Operating staf
Labor and material for maintenance and repairs
Periodic renovations

 Insurance and taxes

Financing costs
Utilities
Owner's other expenses
The magnitude of each of these cost components depends on the
nature, size and location of the project as well as the management
organization, among many considerations. The owner is interested
in achieving the lowest possible overall project cost that is
consistent with its investment objectives.
It is important for design professionals and construction managers to realize that while
the construction cost may be the single largest component of the capital cost, other
cost components are not insignificant. For example, land acquisition costs are a major
expenditure for building construction in high-density urban areas, and construction
financing costs can reach the same order of magnitude as the construction cost in large
projects such as the construction of nuclear power plants.
From the owner's perspective, it is equally important to estimate the corresponding
operation and maintenance cost of each alternative for a proposed facility in order to
analyze the life cycle costs. The large expenditures needed for facility maintenance,
especially for publicly owned infrastructure, are reminders of the neglect in the past to
consider fully the implications of operation and maintenance cost in the design stage.
In most construction budgets, there is an allowance for contingencies or unexpected
costs occuring during construction. This contingency amount may be included within
each cost item or be included in a single category of construction contingency. The
amount of contingency is based on historical experience and the expected difficulty of
a particular construction project. For example, one construction firm makes estimates
of the expected cost in five different areas:
Design development changes,
Schedule adjustments,
General administration changes (such as wage rates),

 Difering site conditions for those expected, and

Third party requirements imposed during construction, such as
new permits.
Contingent amounts not spent for construction can be released near
the end of construction to the owner or to add additional project
elements.
In this chapter, we shall focus on the estimation of construction cost, with only
occasional reference to other cost components. In Chapter 6, we shall deal with the
economic evaluation of a constructed facility on the basis of both the capital cost and
the operation and maintenance cost in the life cycle of the facility. It is at this stage
that tradeoffs between operating and capital costs can be analyzed.
Example 5-1: Energy project resource demands [1]
The resources demands for three types of major energy projects
investigated during the energy crisis in the 1970's are shown in
Table 5-1. These projects are: (1) an oil shale project with a capacity
of 50,000 barrels of oil product per day; (2) a coal gasification
project that makes gas with a heating value of 320 billions of British
thermal units per day, or equivalent to about 50,000 barrels of oil
product per day; and (3) a tar sand project with a capacity of
150,000 barrels of oil product per day.
For each project, the cost in billions of dollars, the engineering manpower requirement
for basic design in thousands of hours, the engineering manpower requirement for
detailed engineering in millions of hours, the skilled labor requirement for
construction in millions of hours and the material requirement in billions of dollars are
shown in Table 5-1. To build several projects of such an order of magnitude
concurrently could drive up the costs and strain the availability of all resources
required to complete the projects. Consequently, cost estimation often represents an
exercise in professional judgment instead of merely compiling a bill of quantities and
collecting cost data to reach a total estimate mechanically.
TABLE 5-1 Resource Requirements of Some Major Energy Projects

Oil shale
(50,000
barrels/day)

Coal gasification
(320 billions
BTU/day)

Tar Sands
(150,000
barrels/day)

Cost
($ billion)

2.5

8 to 10

Basic design
(Thousands of
hours)

80

200

100

Detailed
engineering
(Millions of
hours)

3 to 4

4 to 5

6 to 8

Construction
(Millions of
hours)

20

30

40

2.5

Materials
($ billion)

Source: Exxon Research and Engineering Company, Florham Park,

NJ

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5.2 Approaches to Cost Estimation
Cost estimating is one of the most important steps in project
management. A cost estimate establishes the base line of the
project cost at diferent stages of development of the project. A cost
estimate at a given stage of project development represents a
prediction provided by the cost engineer or estimator on the basis of
available data. According to the American Association of Cost
Engineers, cost engineering is defined as that area of engineering
practice where engineering judgment and experience are utilized in
the application of scientific principles and techniques to the problem
of cost estimation, cost control and profitability.

Virtually all cost estimation is performed according to one or some combination of the
following basic approaches:
Production function. In microeconomics, the relationship between the output of a
process and the necessary resources is referred to as the production function. In
construction, the production function may be expressed by the relationship between
the volume of construction and a factor of production such as labor or capital. A
production function relates the amount or volume of output to the various inputs of
labor, material and equipment. For example, the amount of output Q may be derived
as a function of various input factors x1, x2, ..., xn by means of mathematical and/or
statistical methods. Thus, for a specified level of output, we may attempt to find a set
of values for the input factors so as to minimize the production cost. The relationship
between the size of a building project (expressed in square feet) to the input labor
(expressed in labor hours per square foot) is an example of a production function for
construction. Several such production functions are shown in Figure 3-3 of Chapter 3.
Empirical cost inference. Empirical estimation of cost functions requires statistical
techniques which relate the cost of constructing or operating a facility to a few
important characteristics or attributes of the system. The role of statistical inference is
to estimate the best parameter values or constants in an assumed cost function.
Usually, this is accomplished by means of regression analysis techniques.
Unit costs for bill of quantities. A unit cost is assigned to each of the facility
components or tasks as represented by the bill of quantities. The total cost is the
summation of the products of the quantities multiplied by the corresponding unit
costs. The unit cost method is straightforward in principle but quite laborious in
application. The initial step is to break down or disaggregate a process into a number
of tasks. Collectively, these tasks must be completed for the construction of a facility.
Once these tasks are defined and quantities representing these tasks are assessed, a
unit cost is assigned to each and then the total cost is determined by summing the
costs incurred in each task. The level of detail in decomposing into tasks will vary
considerably from one estimate to another.
Allocation of joint costs. Allocations of cost from existing accounts may be used to
develop a cost function of an operation. The basic idea in this method is that each
expenditure item can be assigned to particular characteristics of the operation. Ideally,
the allocation of joint costs should be causally related to the category of basic costs in

an allocation process. In many instances, however, a causal relationship between the

allocation factor and the cost item cannot be identified or may not exist. For example,
in construction projects, the accounts for basic costs may be classified according to (1)
labor, (2) material, (3) construction equipment, (4) construction supervision, and (5)
general office overhead. These basic costs may then be allocated proportionally to
various tasks which are subdivisions of a project.