Chapter Three

Cost Estimating Approach

“For a project manager to effectively plan and

control a project, accurate estimating is essential”
Quality and accuracy of an estimate depends on:
• Time Available
• Information Available
• Techniques Employed
• Expertise and Experience of the Estimator
Level of information

Time now

Near
Future
Future
6 months
Low
Time
 Level of Information along a Project life-cycle

Concept Design Implement Comm Operation

f ormation
Leve l of in

Concept

Design

Implement

Commission
Operation phase
Types and methods of Estimates
A) Approximate Estimate
- Preliminary Estimates: Preliminary Estimates are
employed in the early planning phases of a proposed project to
match an owner's needs
- Intermediate Estimates

B) Detailed Estimate
- Final Estimates
Estimating Methods

• Project Comparison Estimating or Parametric Cost Estimating

• Area & Volume Estimating
• Assembly & System Estimating, and
• Unit Price & Schedule Estimating
Relative Accuracy of Estimate Types
Relative Accuracy

Time Spent Preparing Estimate

Estimating Methods (Cont’d)

1. Project Comparison Estimating or Parametric Cost Estimating

Used in early planning stages
Little information is known about the program
Overall project parameters are only known
Estimating Methods (Cont’d)

Data needed for Parametric Cost Estimation

1. Historical/past project data set
 Gross area
 Number of Floors
 Volume
 Assignable gross area
 Surface area to volume ratio
 Exterior Finishing
 Interior finishing
2. Cost Indexes
Over time and space
 Location index
 Price and labor indices
Estimating Methods (Cont’d)

• Adjustments to Historical Data

1. Inflation
To account for changes in value for money;
 Historical escalation index;
 Predictive Escalation index;
2. Price Indices
Estimating Methods (Cont’d)

Factors Affecting Building Costs

 Construction Factors
 Construction method and productivity
 Design Factors
1. Building function
2. Structural system
3. Height of building
4. Complexity of foundation work
5. Exterior finishing
6. Quality of interior decorating
7. Accessibility to the site
Estimating Methods (Cont’d)

2. Square Foot & Cubic Foot Estimates

Used for developing both preliminary and intermediate budgets
based on historical data
Needs measurement and calculation of floor areas and volumes
of the proposed spaces

More accurate estimates made with this method make adjustments and additions
for
- regional cost indices,
- local labor market rates, and
- interpolation between available cost tables.
Estimating Methods (Cont’d)

3. Assembly & Systems Estimates

Assemblies or systems group the work of several trades or disciplines
and/or work items into a single unit for estimating purposes
Intermediate level estimates performed when design drawings are
between 50% and 75% complete
Estimating Methods (Cont’d)

4. Unit Price and Schedule Estimating

The work is divided into the smallest possible work increments, and a
"unit price" is established for each piece

Detailed estimates performed when design drawings are complete

Most accurate means of projecting construction costs
Estimating Methods (Cont’d)

• Common Errors in Estimating

1. Procedural errors
1) accuracy in pricing; 2) cost involved in pricing; 3) time
required for pricing; 4) availability of methods of pricing; and 5)
availability of price data
2. Human errors
 changes in design and incomplete information;
 accidental errors caused by procedural mistakes, e.g. omitting
items, using wrong dimensions;
 judgmental errors caused by poor or wrong judgment on the
part of the estimator, e.g. overlooking, poor pricing, and not
allowing wastage
3. Uncertain nature of the project
3.2 Detailed Cost Estimates
 TENDER PRICE
INCLUDES

ALL-IN LABOR RATE

BUILT UP LABOR PER HOUR
UNIT RATES LABOR OUTPUT CONSTANT

MATERIAL COST INCLUDING

MATERIAL DELIVERY CHARGES

UNLOADING

WASTE ALLOWANCE

HIRE CHARGE PER HOUR PLANT

PLANT OUTPUTS
PLANT OPETATOR COSTS
ATENDANT, LABOR COSTS
NOMINATED
SUB-
CONTRACTORS
WORK
DOMESTIC LABOR ONLY

OVERHEADS
AND PROFIT

MARKET
ASSESSEMENT
Disposition of Cost Calculation
i) Direct Costs
a) Material Costs
- Quantity
- Loading, unloading and transportation costs
- Wastages
b) Labor Costs
- Standard wages
- Extra pay
- Supplementary pay
c) Equipment Costs
- Ownership of plant
- Hire of plant
Main factors in building up a rate:
* Standing costs
* Operating costs
d) Costs for Sub-Constructor
 UNIT RATE
BUILD UPS

LABOR MATERIAL PLANT

ALL IN OUTPUT GANG HIRE OPERATOR FUEL ATTENDANT

LABOR CONSTANT RATE COST COST COST LABOR
RATE PET UNIT OF BUILD UPS COST
MEASURE

SUPPLY COST UNLOADING WASTE

DELIVERED PLANT COST
COSTS ALLOWANCE
LABOR TO SITE PER UNIT OF
COSTS MEASURE
PER UNIT OF
MEASURE
MATERIAL
COST
ON SITE

MATERIAL
COST
PER UNIT OF
MEASURE

UNIT RATE COST

PER UNIT OF
MEASURE
 Disposition of Cost Calculation (Cont’d)
ii) Indirect Costs
a) Site Overhead Costs

b) General Overhead Costs

c) Risk and Profit

Direct Cost + Indirect Costs = Bid Sum

+ Value - added Tax (VAT)

Bid sum inclusive turnover tax /vat

Direct cost + Site overhead Cost = Production Cost

Production cost +General overhead cost = Self-costs
Self- costs + Risk& profit = Bid sum
Bid sum + Vat = Bid sum inclusive vat.
 Execution of Cost Calculation: Pricing

a) Construction Material Costs

Information required are:

- Quantity of material required to produce a unit amount
- Basic price at the source of material
- Transport, loading and unloading to the site
- Waste/loss

Ex. Calculation of material costs for 1m3 of C-25 grade concrete.

Required information for the calculation of material cost
        Type and quantity of materials for a unit amount of work.
        Basic price including transportation, loading and unloading of
materials.
        Loss or wastage amount.
- 1Qtl of cement at Mugher - 55 Birr
- 1truck of Sand (13 m3 ) from source to Site 1500 Birr
- 1 truck of gravel (6m3) from source to site 800 Birr
- 1m3 water 1 Birr
- Transportation cost 0.07 Birr/Qtl/Km
- Wastage 5%

Cost per
Type of material Unit Qty *Rate Unit
Cement Qtl 3.6 62 223.2
Sand m3 0.5 115.38 57.69
Gravel m3 0.75 133.33 99.9975
Water m3 0.3 1 0.3
Sum 381.19
Loss(5%) 19.06
Total 400.25 Birr/m3
(b) Labor Costs

All costs, which result from the building /construction works of the
employees on site include:-
- Standard wages – basic current wage rate
- Extra and supplementary pay for
        Production bonus
        Long continuity of Service (permanent laborer)
        Over time pay
        Merit increase
        Property creating performance
        Less favorable condition /allowances
-Social Service payments
        Holiday pay if any
        Health insurance
        Unemployment insurance
        Payment during sickness
(b) Labor Costs
Required information for the calculation of labor cost
- Number and type of skilled and unskilled manpower for a particular type of work,
(Crew)
- Performance of crew per hour for a unit amount of work
- Indexed hourly cost of the workman ship.
- Utilization factor(UF) of the workmanship: Share of a particular personal
per hour for the specified work.
Example: Calculation of indexed hourly cost for carpenter
        Standard wage:- 40 birr /day
        Extra pay (for long continuity of service)
1Birr /hr for 60 % of the carpenters
        Over time
50 weekly working hours / 44 weekly working hours/
6 overtime hours with 25% increment
        Property- Creating performance
For 80% of the employees 0.25birr /hr
        Supplements: 10% of wage

Solution:
Standard wage..........................................5 Birr /hr
Extra pay = 0.6 (1) ...................................0.6 birr/hr
Over time 6x0.25 x 5...............................0.15 birr/hr
50
Property creating performance 0.80(0.25) = 0.2 birr/hr
Supplements= 0.1(5) ..............................…..0.5birr/hr
Total..................................................…….. 6.45 b/hr.
Example2. Calculation of labor cost for a m3 of concrete; production rate 1.25 m3 /hr

Labour No UF Indexed Hourly cost

hourly cost (Birr)
Forman 1 1/2 7.29 3.645

Plasterer 2 1 4.28 8.76

Carpenter 1 1/4 6.45 1.61

Bar bender 1 1/4 6.45 1.61

D. Laborer 18 1 1.13 20.34

Total       35.97

Labour cost = 35.97/1.25= 28.78/m3

(c) Equipment Costs

Required information for the calculation of Equipment cost

  - Type of equipment for a particular item of work.
  - Performance of equipment per hour for a unit amount of work (production rate)

Two methods of calculation are followed.

I) With charges accounted for depreciation, interest return and monthly repair costs
II) With monthly rental charges.
Example: Calculation of equipment cost for m3 of concrete
Mixer - Original cost = 50,000 Birr
Useful life = 3yrs
Interest rate=6.5%
Monthly repair cost with supplies: - 700 Birr
Virbrator- Original cost = 5,000 Birr
Useful life = 7yrs
Repair cost monthly = 50 Birr
 i) Mixer
Depreciation (d)
50,000 Birr = 7.89 Birr/hr
3x12(22x8) hr
Interest of return (i)
1/3 [50,000 (1+0.0665)3 - 50,000] Birr /year = 3465.83 Birr/year

Hourly cost 3465.88/(12x8x22) = 1.641 Birr/hr

Hourly repair cost = 700/8x22 = 3.98 Birr/hr

Hourly Mixer cost = 7.89 + 1.641+ 3.98 = 13.511 Birr/hr

Type of equipment No UF Hourly rate Hourly Cost

Mixer 1 1 1 13.51 13.51
Virbrator 1 1 0.81 0.81
Total hourly cost (Birr) 14.32

Excel format
3. Two approaches for cost calculation
i/ Cost Calculation with predetermined charges

ii/ Cost Calculation through the bid sum

Unit price = Surcharge x direct itemized cost

i/ Cost Calculation with predetermined charges

Example: Establish the unit price of 1 m3 concrete considered for in the

previous examples. Given that the surcharge for the indirect cost is 35%.
Material cost= 400.25
Labour cost = 28.78
Equipment cost = 11.04
Direct cost = 440.07
Indirect cost = 0.35 (440.07) = 154.02
Unite price = 440.07 + 154.02= 494.1 Birr/ m3
ii/ Cost Calculation through the bid sum
- Amounts for site overhead costs, general overhead costs,
risk and profit are ascertained separately for each project
Four steps for this calculation method:
-     Establishing the production costs
-     Establishing the bid sum
-    Establishing the surcharges on direct itemized costs
Surcharge = Bid sum .
Direct itemized cost
-     Establishing the unit prices
3.4 PRO-RATA RATES
- A pro-rata rate is the procedure of determining unit
prices of items that undergo changes in output or
quality of materials from the original contract
- Major assumption behind the concept is that;
- Material, equipment and indirect costs can
readily be determined or available from existing
prices
-  Labor cost component is uncertain for the new
item and is difficult to adjust
There are three main methods of assessing pro-rata rates
1. By Derivation
2. By Reconciliation of Analysis
3. By Analogy

1. By Derivation
• Is done by derivation from two or more similar unit
rates
Example: Deriving a rate for 25mm cement screed from 20mm and
40mm cement screed with same mix laid to similar
specification
2. By Reconciliation of Analysis
• Most frequent method for pro-rating
• It is assumed that, in the contract bill rates, the labor
outputs and profit and markup are the only variables that
are uncertain
Assumption: Slight variation in markup would not affect
the final rates. Hence, labor rates for similar items can be
derived from existing rate to apply to new rates
• Hence break down the existing rate into material, labor
and equipment. Take the LABOR OUTPUT of the item
and use it for a similar item
1st Step:
Break down a unit rate into its component to arrive fairly
closely at the figures included by the contractor as labor
component.
2nd Step:
Apply the labor cost to arrive at a pro rata rate of a similar
item
3. By Analogy
• Used for items of different description, or even trades, which
are equivalent in labor, or labor and material
Example: Deriving a rate for joinery of a different description of
hardwood to that given
End of Chapter 3