Chapter-5 Cost Establishment

ADDIS ABABA UNIVERSITY
ADDIS ABABA INSTITUTE OF TECHNOLOGY

DEPARTEMENT OF CIVIL ENGINEERING
Contract, Specification and Quantity Survey

(CENG 5101)
CHAPTER- 4
PROJECT COST ESTIMATION AND VALUATION
November 2011
(NASIR B.)
CONTENTS
 Introduction
 Information Required for Cost Estimation
 Knowledge and Managerial Skills for Cost

Estimation
 Types of Costing or Estimation
 Fundamental Approach to Construction

Cost Estimation
 Basic Cost Components of a construction
Project
 Unit Rate Analysis
4.1. Introduction
 Project Cost estimation is the process of valuing on monetary
expression, including the cost of all possible entrants necessary for
the planning, implementing and monitoring stages of the proposed
project under consideration.
 Cost estimation is the determination of the probable cost of a
project.
 Project Cost includes:
 Preliminary investigation (project appraisal costs)
 Design and supervision (consultancy cost )
 Construction works (contractor’s cost )
 Land owning cost, and
 Monitoring costs
3
4.1. Introduction Cont.
 An estimate serves a number of different functions, depending on the
stage of the project, as shown below :
 Feasibility: Initially feasibility of the project need to be determined
Feasibility Estimate (Conceptual).
 Schematic Design (Conceptual design): Sketches are prepared.
Major elements are defined Use a preliminary method to
estimate cost. Cost of each element is established (cost plan).
 Design Development: Progressively the scope of the project is
defined A series of preliminary estimates are done during this
phase to assure adherence to cost plan.
 Contract Document: Finalize drawings & Specifications:
Designer’s estimate to anticipate and check contractor’s bid
prices.
4
 Bidding Phase: Contractors prepare detailed estimate to submit
bids.
 Construction Phase: Estimates are prepared for cost for cost
Control and for change order evaluations.
Feasibility Estimate (Conceptual Estimate)
 Needed to make decision go/no go with project
 Costs include:
 Land
 Financing cost
 Consultations/Studies
 Engineering
 Project Management
 Construction
 Operation & Maintenance
5
Preliminary Estimates and Cost Planning
 The Conceptual Estimate found during feasibility becomes the initial
project budget
 Subsequent design development should remain within the limit of
this budget
 For that purpose, several preliminary estimates are performed as
more details become available through the design.
 Preliminary estimates assign cost to various assemblies (elements) of
the project (Cost Plan). {substructure, superstructure, interior
partitions & doors, exterior cladding ..etc.}
 Preliminary estimates allow for Value Analysis – Compare value of
an element with its cost Consider alternatives Select desired
option.
6
 Over all the main purpose of cost estimation can be summarized as
follow:
 know the volume of work in reference to the fund available
 determine actual cost per unit of item
 identifying engineering estimate of the work for bidding purpose
 work out economical use of materials , labor and equipments
 in cases of variations to determine the extra cost to be incurred
 when there is escalation, to work out the escalation in cost
7
4.2. Information required for cost estimation
 The following information is required to define cost per unit of work
 Correct information of the market price of the materials at the
time of need to be used as a basic price
 Correct information of the rates of various categories of skilled
and unskilled laborers as wage rates to be used for daily work
rate
 Output of laborers per day for various types of items
(productivity)
 Correct information of the rates of various categories of
equipments and tools as rental rates to be used for major items of
rates
 Up-to-date knowledge of the construction methods.
8
4.3. Knowledge and managerial skills for cost estimation
 The following knowledge, managerial talents, and degree of
construction experience make a good estimator.
 Ability to read and understand contract documents, with special
skills in reading construction drawings for all specialties and
related specifications.
 Ability to accurately take off the quantities of construction work
for which he or she is preparing the detail estimate.
 Ability to visualize the future building from drawings, which
usually requires some years of construction site experience.
 Knowledge of arithmetic, basic geometry, and statistics.
9
4.3. Knowledge and managerial skills for cost estimation
 The following knowledge, managerial talents, and degree of
construction experience make a good estimator.
 Familiarity with estimating software in depth and with available
building cost databases.
 Knowledge of building construction methods.
 Knowledge of labor productivity, crew composition, and impacts
of various forecasted site conditions on crew output.
 Possession of office managerial skills in organizing project-
related cost information.
 Ability to work under pressure and to meet all bid requirements
and deadlines.
10
4.4. Factors Affecting Cost Estimation
 Factors which affect the cost estimation are summarized as follow:
 Type and documentation of the project

 Construction scheduling
 Bidding environment
 Quality and availability of material and labor (given in
specification)
 Construction facilities /tools and method of construction
 Location of the site: Transportation charges
 Proper management
 Land charges (lease)
 Nature of subsurface condition
11
4.5. Types of Costing or Estimation
 Estimation can be broadly classified as preliminary (approximate)
and detailed.
Preliminary /approximate costing
 This type of cost estimation is required to know the financial
position of the client before costly detailed designs are carried out.
 Such estimates are based on practical knowledge and cost of similar
previous works. Examples of approximate cost estimations are as
follows:
A. Cost per functional unit
 Hospital =cost per bed, Dormitory = cost per student, Cinema or
theatre = cost per seat, residential buildings = cost per area, road
works = cost per kilometer length, culverts or bridges = cost per
meter span, water supply or sewerage projects = cost per head of
population.
12
Preliminary /approximate costing
B. Plinth area method – cost per m2
 Based on Plinth Area- roof area or external dimensions at the plinth
level (Courtyard & open area shall not be included)
 The rate per meter square is deduced from the cost of similar
building projects in the locality.
C. Cubical Content method – cost per m3
 Based on cubical contents of various buildings, i.e. Plinth area of the
building x height x cubic content rate.
 Height should be taken from the top of flat roof (or halfway of the
sloped roof) to the top of concrete in foundation.
13
Detailed Cost Estimate (Based on Item Rate)
 This is the most reliable and accurate type of estimate.
 The quantities of items are carefully prepared from the drawings and
the total cost worked out from up to date market rates.
 A detail cost estimate thus requires:
 Quantity surveying and
 Analysis of the different rates for the quantities prepared.
14
4.6. Fundamental approach to construction cost Estimation
 Efficient construction cost estimates shall address properly the
required project quality, time for completion of works and of course
the construction cost of the project.
 In deciding to participate in the intended project tender, the
contractor shall carefully assess the impact of the following key
factors:
 Type of project
 Method of tendering
 Type of construction contract
 Number and progress of contracts already at hand
 Resource availability i.e. skilled manpower, plants and
machineries
 Financial position
15
cont.
 Once decision is made to participate in the intended tender, the
contractor shall give due attention to the following major items
listed below
 General and particular conditions of contract contained in the
bidding documents
 Technical specifications
 Drawings
 Estimated bill of quantities
 Method of measurement
 Supporting documents such as information regarding geological
formations and hydrological data
 Site visits
 Construction method statements
16
cont.
A. General and particular conditions of contract
 Proper understanding of the general and particular conditions of
contract is mainly important for construction cost estimation in
identifying the responsibilities and cost implications on the project
 Amount and type of performance security
 Amount of advance payment and type of advance repayment
guarantee
 Time for completion of the whole project
 Limit of liquidated damages
 Retention money
 Claims and disputes settlement
17
cont.
A. General and particular conditions of contract
 Price escalation
 Tax exemptions
 Insurance of the works
 Owner’s risks
 Applicable laws
18
cont.
B. Technical Specification
 Technical specifications specify the following crucial information to
the contractor and it is the sole basis both for the construction
methods to be adapted and the construction cost of the project.
 Quality of materials
 Quality of machineries and plants
 Quality of workmanship
 Erection and installation methods
 Test and inspection requirements and methods
19
cont.
B. Technical Specification
 Technical specifications basically have restricted applications, which
usually define specific work items. Therefore, for a better
understanding and cost estimation of the project, the contractor must
check the given specifications for:
 Technical accuracy and adequacy
 Define and clear stipulations
 Fair and equitable requirements
 Formats which can be easily used during bidding and
construction
 Legal enforceability
20
C. Drawings
 The contractor mainly understands from the drawings what type of
construction methods to be adapted during cost estimation as well as
construction of the project.
 some of the construction methods which need to be addressed during
cost estimation of this building project are:
 Concrete production
 Concrete transportation and placement
 Transportation of construction materials to different floors
 Methods and type of scaffolding
 Types and methods of shuttering works
 Erection and installation of glazing works
 Temporary access for manpower working at different floors
 Skilled manpower requirement
21
cont.
D. Estimated Bill Quantities
 Estimated quantities of work are also the basis to determine the type
and number of resources to be deployed during construction of the
project.
 Moreover, construction methods shall be selected in such a way the
given quantity of works can be executed during the completion time
of the project.
22
cont.
D. Estimated Bill Quantities
 Based on the estimated quantity of works, the contractor shall decide
the method of construction to be adapted during executing of the
project such as:
 Type and size of crushing plants
 Type and size of mechanical mixers or batching plants
 Type, size and number of machineries such as dozers, graders,
loaders, rollers, dump trucks and so on.
 Skill and number of manpower requirement
 Type and quantity of construction materials
 And so on
23
cont.
E. Supporting Documents
 Supporting documents such as geological formations, hydrological
data and other technical reports like socio-economic studies are
usually provided by the owner to contractors for their own
interpretations for heavy construction projects.
 Therefore, the contractor shall have the technical ability and
experience in interpreting the technical data provided to determine
construction methods to be adapted which directly affects the
construction cost estimates.
24
cont.
F. Site Visit
 In order to prepare competent and reasonable construction cost
estimates, the contractor must visit the project site unless the site is
familiar to the contractor with previous reliable site information.
 Site visits are critically important especially when the contractor is
working with heavy construction project cost estimates such as road
works and hydropower projects.
 The contractor shall prepare his own checklists during the site visit
which shall address, but not limited to, the following issues which
have direct impact on the construction costs of the intended project.
25
cont.
F. Site Visit
i. Location of the site:
 It helps to determine the mobilization and demobilization costs.
 It also helps to determine the transportation cost of materials from

main material suppliers.
 Availability and expected wages of daily labors can be fairly
estimated based on the location of the site.
 Site location also helps to determine the type of camp facilities
required to be constructed such as project offices, living areas, food
accommodations and so on.
 Having proper understanding of site location and local weather
condition helps the contractor to determine salaries and benefits of
staffs, skilled manpower and daily laborers.
26
cont.
F. Site Visit
ii. Location of local construction material
 The contractor shall identify the location and quality of local
construction materials such as quarry area for gravel production,
sand, selected material, water as well as sub base and base course
materials in the case of road projects.
 Moreover, the contractor shall have the general understanding of the
site layout for different plants such as batching and crushing plants.
iii. Access Roads
 Site access roads to the main works, quarry areas, water supply, sand,
and the like shall be identified which incurs additional construction
and maintenance costs. These costs are extremely high, incase of
heavy construction sites such as road works, hydropower projects and
so on.
27
cont.
F. Site Visit
iv. Water and power supply
v. Communication facilities
vi. Environmental protection
vii. Existing facilities
F. Method of measurement
 Contractors shall thoroughly understand the method of measurement
incorporated within the bidding documents before starting any cost
breakdown calculations.
 BaTCoDA Technical specification and method of measurement
 ERA standard specifications
 Civil Engineering Standard Method of Measurement (CESMM)
28
cont.
G. Construction Method Statements
 Construction method statements give the clear picture of each project
activity execution during the construction phase of the project.
 The required quality of works as per the specifications, estimated
quantity of works, safety standards, as well as time for completion
are the sole basis in determining the construction method statements
of a project.
29
cont.
G. Construction Method Statements
 Construction method statements shall clearly indicate the following
crucial construction issues:
 Skill and number of manpower required
 Type and specification of equipments required
 Quantity and quality of materials required
 Proposed working crews
 Estimated crew productivity
 Estimated duration for completion
 Expected defects and remedial measures
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4.7. Basic Cost Components of a construction project
 Basically the cost of any construction project comprises
 Direct costs, which include the direct cost of materials, labor as
well as equipments and
 Indirect costs, which include but not limited to head office and
site overhead costs.
A. Direct Construction Cost
 Direct construction costs are all costs that can be specifically booked
with an activity in a project.
 The current trend is to assign as much as possible costs to direct costs
as these costs can be budgeted, monitored and controlled far more
effectively than the indirect costs.
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A. Direct Construction Cost
 The direct costs mainly include material, labor, equipment and
subcontract costs as described below.
 Direct material costs – These costs referring to the cost of
materials, consumables and components used for executing an
activity including the allowances for scrap and wastages.
 Direct labor costs – All costs related to the workers working on a
specific activity such as carpenters, masons, erectors, painters,
plumbers and so on.
 Direct equipment costs – These costs referring to the costs of
machineries and plants used in executing a specific activity.
 Subcontract costs – In case some specific activities are
subcontracted, the subcontract price will be considered as the
direct cost of the activities to be executed by the subcontractor.
32
B. Indirect Construction Cost
 Indirect construction costs are all costs, which can not be directly
booked under a specific activity in a construction project but required
to keep the whole project operational.
 These costs are also called overhead costs, which mainly include the
head office and site overhead costs.
i. Head office overhead costs
 Head office overhead costs are all costs required to run the whole
operation of the construction company, which usually administers
different projects at a time.
 These costs are not usually associated with specific project but rather
shared proportionally by all projects under the company.
33
 Some of the checklists for head office overhead costs are given below
with further clarifications.
 Senior management costs – These refer to costs related with salaries
and benefit packages of the senior management in the head office.
 Indirect labor costs – Staffs other than the senior management
members working at the head office such as the technical,
administrative, marketing, finance and supply staffs.
 Head office building costs – In both cases, costs are incurred in such
a way either rental costs will be paid, if the building is rented and
building depreciation will be considered, if the building is owned.
34
 Bidding Expenses – These costs are usually associated with bid
document purchases, site visit expenses, bid bonds and so on. These
costs are sometimes called sunk costs.
 Expertise service costs – These costs will be incurred when
professional services are required such as the services of external
auditors, lawyers, management consultants and external trainings.
 Office furniture and equipments – Different office furniture and
equipments are required depending on the size and standard of the
company.
 Office running expenses – The head office operation requires lots of
miscellaneous expenses such as telephones, fax, internet services,
stationery, mail services and so many others.
35
 Workshops, garages and warehouses – Costs related to central
workshops, garages and warehouses such as the depreciation costs of
the buildings or rental expenses.
 Bank charges – It is very natural that companies may borrow money
from banks. Therefore, the interest to be paid on the borrowed capital
shall be considered under the head office costs.
 Insurance charges – Employees medical insurance, office building
and small vehicles insurance.
 Transportation and travel expenses –costs related to transportation,
per diem and living expenses.
 Sundry expenses – These are miscellaneous expenses such as
advertisement expenses, reception parties and donations.
36
ii. Site overhead costs
 Site overhead costs are all costs required to run the whole operation
of a specific construction project at site level.
 These costs are not associated with specific activity in a project but
rather shared proportionally by all activities within the project. Some
of the site overhead costs are listed below with further clarifications.
 Site management costs – These costs refer to costs related with
salaries and benefit packages of the site management members in the
project site.
 Indirect labor costs – salaries and benefits of staffs other than the site
management members working at the project site such as site
engineers, office engineers, administrative and finance staffs, data
collectors and so on.
37
 Mobilization and demobilization costs –These costs are mainly
transportation costs.
 Tender Expenses – These costs are related with the costs of the
contract performance security, advance repayment guarantee,
contractor’s all risk insurance, insurance of the works and third party
insurance depending on the contract conditions agreed.
 Site offices –site offices are constructed from different materials such
as corrugated iron sheets, prefabricated materials, material packing
steel containers, steel structure and normal hollow concrete blocks.
 Expertise service costs – These costs will be incurred when
professional services are required at the project site such as lawyers,
claim experts and so on.
38
 Office furniture and equipments – Different office furniture and
equipments are required depending on the size and location of the
project.
 Office running expenses - The site office operation requires different
expenses such as telephones, fax, internet service, mail service and
stationery.
 Radio communications - If the coverage area of the construction
project is vast, hand held and stationed radio communications may be
used within the site and with the head office.
39
 Camp facilities – The costs of construction and operation of other
facilities such as restaurants, recreational centers and playgrounds are
also included under the camp facilities.
 Access roads – Depending on the topography and location of the
project site, different access roads may be required to construct such
as detour roads, access roads to quarry and disposal areas, etc.
 Water and power supply – All the site offices, camp facilities, the
construction itself requires water and power supply for operating the
whole project properly.
 Workshops garages and warehouses, Bank charges, Transportation
and travel expenses, Insurance charges, etc…
40
C. Risk Allowance
 Usually contractors incorporate risk allowances in their tender prices
to compensate the negative impacts of different risks such as
contractual, technical, political and economic risks.
 Contractual risks are usually stemming from the contract agreements
with the project owner, subcontractors and suppliers.
 Technical risks are associated usually with the clarification of the
technical specifications, working drawings, construction technology
and difficulties in understanding new method of constructions.
 Political and economic risks reflect the impact of political situations,
stability of economic policies, inflation and price escalation on the
execution of the intended construction project.
41
D. Profit and Income Tax
 construction projects are executed by contractors whereby these
contractors will commit to invest their capital to get maximum
possible profit from the contracts to be performed.
 A profit margin entirely depends on the market competitiveness and
company strategies.
 Any construction company operating a profitable business in
Ethiopia shall pay 30% of its gross profit as an income tax as per the
income tax proclamation No. 286/2002.
 If the contractor is registered for VAT, which is usually the case, the
contractor’s construction cost estimate shall also include Value Added
Tax which is 15% of the tender amount in accordance with the Value
Added Tax proclamation No. 285/2002.
42
4.8. Unit Rate Analysis
 Rate Analysis is the process of fixing cost per unit of measurement
for the different item of works.
 Total cost per unit of work (TC): Direct cost (DC) + Indirect cost
(IC)
 Direct Cost (DC) includes cost due to material (MC), cost due to
labor (LC), cost due to equipment (EC)
 Indirect Cost (IC) covers overhead costs, and contractor’s profit.
 In order to facilitate estimation Material break down is essential
 Different formats, Excel sheets and software (like CONMIS) are
used for rate analysis.
43
4.8. Unit Rate Analysis Cont.
 It is advisable that contractors shall adapt suitable construction cost
estimation formats which enables to see all the detailed cost
breakdowns of the required:
 Direct materials,
 Labor and equipment
 Head office and site overhead costs,
 Risk allowances,
 Profit,
 Income tax and
 Value Added Tax (VAT) or Turnover tax (TOT).
44
 construction cost estimation formats and procedures shall also serve
as the basis for different purposes as listed below in managing the
project during construction.
 Construction planning
 Project cash flow preparation
 Productivity data collection
 Material consumption data collection
 Construction monitoring
 Performance evaluation and controlling
 Performance related pay
 Subcontractor’s price evaluation
 Variations and claims substantiation
 Remedial measures and improvements
45
46
I. Direct Material Unit Cost (E)
 Direct material cost is the total cost of construction materials
required to execute a unit of specific activity in a project.
 In estimating the direct material cost, the contractor shall obtain the
quantity and quality of materials required to produce the specific
unit of an activity
47
 In order to have a better material cost estimation, contractors shall
develop their own material price database and the database should
contain, but not limited to, the following information:
 Material price at place of delivery
 Supplier’s address such as telephone, fax and mail address
 Supplier’s contact person
 Supplier’s email address and web site
 Supplier’s credit facility
 Country of origin
 Material delivery time
 Place of delivery such as at the supplier’s shop, project site,
Addis Ababa air port or Djibouti port
 Transportation charges usually per ton-km as well as transporters
48
 the contractor shall add the following costs to the material supplier’s
price to get the material unit cost at the project site:
 Loading expenses at the supplier’s place of delivery
 Transportation costs to the project site
 Insurance charges during transportation to the project site
 Unloading expenses at the project site
49
 Unless otherwise stated on the contract conditions and investment
incentives, contractors shall add the following costs, but not limited,
to the CIF Djibouti price to get the final material unit cost at the
project site.
 Port clearance
 Duty
 Excise tax
 Value Added Tax
 Customs clearance
 Clearing Agent’s fee
 Transportation cost from Port to the project site
 Insurance, if required, during transportation
 Unloading expenses at the project site
50
Example: Assume the CIF price at Djibouti Port for Re-bar is 4,115.53
Birr/ton
51
52
53
II. Direct Labor Unit Cost (F)
 In calculating the direct labor cost, contractors need to calculate the
direct labor hourly cost which is the total hourly cost of labor crew
required to execute a specific activity in the project.
 In estimating the direct labor hourly cost, the contractor shall obtain
the:
 Number of labor,
 Skill and labor utilization factor (UF)
 Labor basic salary and
 Labor index from his previous records and the labor market.
54
II. Direct Labor Unit Cost (F)
 Labor index is a multiplying factor of the basic salary which
represents the additional benefits whereby a worker gets from the
contractor such as:
 Severance pay
 Annual leave
 Occupational accident expenses
 Occupational disease expenses
 Overtime pay
 Occupational safety, health and working environment
 Benefits resulting from collective agreements
55
Labor Index Calculation
25.71 days/ mth
1. Regular Salary = = 1.00
25.71 days/ mth
2.0 days/ mth
2. Annual Leave = = 0.078
25.71 days/ mth
0.92 days/ mth
3.Public Holidays = = 0.036
25.71 days/ mth
1.5 days/ mth
4. Miscellaneous Leave = = 0.058
25.71 days/ mth
5 Benefits
0.08 days/ mth
5.1. Closing & supplies = = 0.003
25.71 days/ mth
3.43 days/ mth
5.2. Avg Annual Increase = = 0.133
25.71 days/ mth
5 days/ mth
6. Rainy Season Salary = = 0.1945
25.71 days/ mth
Sub Total 1.50
Contingency ( for work injury, dispute & labor union)
5 % of the total indexed cost = .05*1.46 0.08
Grand Total Indexed Factor 1.58
56
III. Direct Equipment Cost (G)
 In order to calculate the direct equipment cost, contractors need to
calculate the direct equipment hourly cost which is the total hourly
cost of equipment crew required to execute a specific activity in a
project.
 In estimating the direct equipment hourly cost, the contractor shall
obtain
 The number of equipments,
 Capacity and equipment utilization factor (UF), and
 The equipment hourly cost.
57
IV. Site Overhead Cost (I)
 It is easier to express the site overhead costs as a percentage of the
direct unit cost of an activity.
V. Head Office Overhead Cost (J)
58
VI. Risk Allowance (L)
 Let’s assume the following factors represent the percentage cost
increment of each cost component and the risk allowance will be
calculated as follows:
59
VII. Gross Profit (M)
 As an illustration, if the net profit margin is assumed to be P% of
the breakeven cost (direct costs + indirect costs + risk allowances),
the gross profit (net profit + income tax) can be calculated as
follows, which is X% of the breakeven cost.
60
VIII. Total unit price without VAT
 If the contractor is registered for VAT but the contract is VAT
exempted, the contractor’s unit price in his tender is the sum of direct
unit cost (H), indirect unit cost (K), risk allowance (L) and gross
profit (M).
IX. Total unit price without VAT
61
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62

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ADDIS ABABA UNIVERSITY

ADDIS ABABA INSTITUTE OF TECHNOLOGY

Contract, Specification and Quantity Survey

 Information Required for Cost Estimation

 Knowledge and Managerial Skills for Cost

 Fundamental Approach to Construction

 Type and documentation of the project

 It also helps to determine the transportation cost of materials from

V. Head Office Overhead Cost (J)

IX. Total unit price without VAT

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