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 staff
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),
Differing 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.

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 different 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.

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5.3 Types of Construction Cost Estimates
Construction cost constitutes only a fraction, though a substantial fraction, of the
total project cost. However, it is the part of the cost under the control of the
construction project manager. The required levels of accuracy of construction cost
estimates vary at different stages of project development, ranging from ball park
figures in the early stage to fairly reliable figures for budget control prior to
construction. Since design decisions made at the beginning stage of a project life
cycle are more tentative than those made at a later stage, the cost estimates made at
the earlier stage are expected to be less accurate. Generally, the accuracy of a cost
estimate will reflect the information available at the time of estimation.

Construction cost estimates may be viewed from different perspectives because of

different institutional requirements. In spite of the many types of cost estimates
used at different stages of a project, cost estimates can best be classified into three
major categories according to their functions. A construction cost estimate serves
one of the three basic functions: design, bid and control. For establishing the
financing of a project, either a design estimate or a bid estimate is used.

1. Design Estimates. For the owner or its designated design professionals, the
types of cost estimates encountered run parallel with the planning and
design as follows:
o Screening estimates (or order of magnitude estimates)
o Preliminary estimates (or conceptual estimates)
o Detailed estimates (or definitive estimates)
o Engineer's estimates based on plans and specifications

For each of these different estimates, the amount of design information

available typically increases.

2. Bid Estimates. For the contractor, a bid estimate submitted to the owner
either for competitive bidding or negotiation consists of direct construction
cost including field supervision, plus a markup to cover general overhead
and profits. The direct cost of construction for bid estimates is usually
derived from a combination of the following approaches.
o Subcontractor quotations
o Quantity takeoffs
o Construction procedures.
3. 3. Control Estimates. For monitoring the project during construction, a
control estimate is derived from available information to establish:
o Budget estimate for financing
o Budgeted cost after contracting but prior to construction
o Estimated cost to completion during the progress of construction.

Design Estimates
In the planning and design stages of a project, various design estimates reflect the
progress of the design. At the very early stage, the screening estimate or order of
magnitude estimate is usually made before the facility is designed, and must
therefore rely on the cost data of similar facilities built in the past. A preliminary
estimate or conceptual estimate is based on the conceptual design of the facility at
the state when the basic technologies for the design are known. The detailed
estimate or definitive estimate is made when the scope of work is clearly defined
and the detailed design is in progress so that the essential features of the facility are
identifiable. Theengineer's estimate is based on the completed plans and
specifications when they are ready for the owner to solicit bids from construction
contractors. In preparing these estimates, the design professional will include
expected amounts for contractors' overhead and profits.

The costs associated with a facility may be decomposed into a hierarchy of levels
that are appropriate for the purpose of cost estimation. The level of detail in
decomposing the facility into tasks depends on the type of cost estimate to be
prepared. For conceptual estimates, for example, the level of detail in defining
tasks is quite coarse; for detailed estimates, the level of detail can be quite fine.

As an example, consider the cost estimates for a proposed bridge across a river. A
screening estimate is made for each of the potential alternatives, such as a tied arch
bridge or a cantilever truss bridge. As the bridge type is selected, e.g. the
technology is chosen to be a tied arch bridge instead of some new bridge form, a
preliminary estimate is made on the basis of the layout of the selected bridge form
on the basis of the preliminary or conceptual design. When the detailed design has
progressed to a point when the essential details are known, a detailed estimate is
made on the basis of the well defined scope of the project. When the detailed plans
and specifications are completed, an engineer's estimate can be made on the basis
of items and quantities of work.

Bid Estimates

The contractor's bid estimates often reflect the desire of the contractor to secure the
job as well as the estimating tools at its disposal. Some contractors have well
established cost estimating procedures while others do not. Since only the lowest
bidder will be the winner of the contract in most bidding contests, any effort
devoted to cost estimating is a loss to the contractor who is not a successful bidder.
Consequently, the contractor may put in the least amount of possible effort for
making a cost estimate if it believes that its chance of success is not high.

If a general contractor intends to use subcontractors in the construction of a

facility, it may solicit price quotations for various tasks to be subcontracted to
specialty subcontractors. Thus, the general subcontractor will shift the burden of
cost estimating to subcontractors. If all or part of the construction is to be
undertaken by the general contractor, a bid estimate may be prepared on the basis
 of the quantity takeoffs from the plans provided by the owner or on the basis of the
construction procedures devised by the contractor for implementing the project.
For example, the cost of a footing of a certain type and size may be found in
commercial publications on cost data which can be used to facilitate cost estimates
from quantity takeoffs. However, the contractor may want to assess the actual cost
of construction by considering the actual construction procedures to be used and
the associated costs if the project is deemed to be different from typical designs.
Hence, items such as labor, material and equipment needed to perform various
tasks may be used as parameters for the cost estimates.

Control Estimates

Both the owner and the contractor must adopt some base line for cost control
during the construction. For the owner, a budget estimate must be adopted early
enough for planning long term financing of the facility. Consequently, the detailed
estimate is often used as the budget estimate since it is sufficient definitive to
reflect the project scope and is available long before the engineer's estimate. As the
work progresses, the budgeted cost must be revised periodically to reflect the
estimated cost to completion. A revised estimated cost is necessary either because
of change orders initiated by the owner or due to unexpected cost overruns or
savings.

For the contractor, the bid estimate is usually regarded as the budget estimate,
which will be used for control purposes as well as for planning construction
financing. The budgeted cost should also be updated periodically to reflect the
estimated cost to completion as well as to insure adequate cash flows for the
completion of the project.

Productivity in building desing and construction

Productivity is the relationship between goods and services produced and the resources used. This
concept is critical for the development of any business activity, as those that do not improve
their productivity compared to their competitors, are likely to fail.
An increase in production does not necessarily translate into an increase in productivity. To
increase productivity, all processes that constitute a companys activity must be analysed and their
efficiency optimised. The resources necessary to increase productivity are:
Capital investment:
Design of new procedures or improvement of existing ones.
Installation of more modern machinery or equipment, with a greater capacity or modernisation of
existing equipment.
Improved management through a reduction in:
Work involved in the product.
Work involved in the process.
Unproductive time.
 Productivity must not be confused with performance, which is the relationship between forecast and
executed work.
Loss in productivity (in terms of time of execution) results from inefficiencies in the total time invested
throughout an operation.
The time taken for activities can be broken down into the following:
Base work content. This is the quantity of work that would be required to manufacture a product or
develop an activity if the project were to be perfect, if the procedure, manufacturing or execution
method were ideal or if there were no losses in time attributable to any cause. This is the minimum
possible time for execution.
Unnecessary work. This is additional work required due to poor design or specification of the
product, or inefficient production or operating methods.
Ineffective or unproductive time, due to deficiencies in management or deficiencies in workers