Practical Estimating for Engineering and Other Works using Project Management Methodology

7/30/2019 Practical Estimating for Engineering and Other Works using Project Management Methodology

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ESTIMATING FOR CONTRACT ADMINISTRATION

INTRODUCTION

Parviz F. Rad1 has definedestimating as the art and science of using historical data,personal expertise, institutional memory, and the project scope statement to predictthe resources expenditures, total cost and duration of a project.

The project estimate is the product of an estimating procedure which specifies theexpected cost to perform a stipulated task or to acquire an item in a project.

A project estimate is required at various phases of a project such as the Initiating;Planning; Executing; Controlling; and Close out phases. The activities in the phasesmay be stated as indicated below:

Table 1

Initiating Planning Executing Controlling Close outandOperations

Selection ofproject, landacquisition,hiringprofessionalsfor feasibilitystudies,procurementof services,hiring ofagents forvarious tasks

Preparation ofplans byowner,professionals,agent andproject teamin-house or byoutsourcingthe services.

Preparation oftenderdocuments,tenderinvitation,award ofcontract,execution ofcontracts,Supply ofgoods,Constructionsupervision,equipmenttesting,verification

Administration ofcontracts,Contractpayment,reporting.

Completion ofthe contracts,occupation,commissioning, finalaccounts,provision ofwarrantiesetc,,maintenance,defectsliability periodandamendments

The owner, project manager, project team, consultant and/or contractor mustdetermine cost at each phase of a project for decision making, control, definingstrategic direction and determining profit. The project estimate derives thesecosts. The accuracy of estimates at each stage is dependent on the personnelabilities in estimating, the accuracy of the historic data, the relevance of thedata, the duration of the project, the project activities, uncertainty, complexity,equipment used and the degree project team commitment.

1 Pariz F Rad, Project Estimating and Cost Management, Management Concepts (2002) pg. 1

Allan Cunningham: 2012


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The estimate is refined in each phase dependent on the information that is available.An initial estimate follows:

Example A:

Housing Development Company Limited has decided to implement a new housingdevelopment project for the HDC Ltd. The Project Manager has recently constructedsimilar housing developments comprising ten (10) houses in the same location asproposed at $460,000 per house. Twelve (12) new houses are proposed in the newhousing development. (Note: No market changes are expected)

The Initial Protect Estimate:The project estimate for the development project would be:

= 12 x $460,000.00 = $5,520,000.00.

Rodney Turner2 suggests that project estimates are needed at each phase of a projectfor the following reasons:

THE USE OF ESTIMATES

1. Assessing Project Viability (Aid in Decision-Making). An initial program orproject estimate assists the project manager in the decision making. Managementrequires an estimate of the project to compare the estimate of cash flows.

2. A Basis for Obtaining Funding. After the approval of the project is obtained, theproject must be financed. An estimate of the cost for the financial requirementmust be prepared. ( In Example A, HDC Limited would estimate the total projectfunds required by obtaining an estimate for management cost and other omittedcosts)

3. As A Basis of Control. The estimate is prepared as a measure to controlexpenditure on a project. The item, task or project expenditure is used as ameasure called a baseline. The control estimate has four (4) steps:

Step 1. Estimate the future performanceStep 2. Monitor the actual performanceStep 3. Calculate the difference, called the varianceStep 4. Take action to correct according to size of variance as follows:

Where the variance is negligible or zero continue theproject without change; if the variance is significant but recoverable : plan recovery if the variance is large : revise estimate



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(In Example A, ABS Company would seek to keep project cost to within$5200,000.00 )

4. Manage Cash Flow. The estimate is used in preparing cash flows. Zealous project

managers set goals of completing projects early and to under spend while thecompany may go into liquidation because bankers called in the overdraft halfwaythough the project. ( In Example A, ABS Company Limited would determine thecash expenditure at time intervals seeking to keep the project cost to within$5,200,000.00)

5. Allocate Resources. The resources can be assigned weekly in accordance withthe estimate. (In Example A, ABS Company Limited the project manager is the onlyallocated human resource identified for the project.)

6. Estimate Duration. The estimate of time is determined by comparing the work

content to resources availability. (In Example A, ABS Company Limited determinesthe duration time for the new housing development.)

7. Prepare Tenders. To prepare a tender price an or anticipated tender priceestimate of the project cost must determined. This estimate can be used to forecastthe profit or determine the cost to the client/ owner. ( In Example A, theprocurement of construction services would be determined at a later stage i.e. atExecution Stage, prior to the tender a tender estimate would be prepared)

Parties in project require the estimate as follows:



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Cabinet/ Board ofDirectors/ MajorStakeholders

Program or ProjectManger/ ProjectEngineer/Coordinators

Consultant/Designers

Suppliers ,Contractors ,Subcontractors,Vendors

Decide on go orno of the project

Determine

funding Determine

resources Determine profit Determine

duration For control Determine

procurementplan


Determine

funding Determine



procurementplan

To prepare

tender To evaluate

tender prices To evaluate

variations To determine

extensions tothe contract


Determine

funding Determine



procurementplan

To prepare

tender To evaluate

tender prices To evaluate

alternatives


Determine

funding Determine



procurementplan

To prepare

tender

To comparesubcontractorsprices

To submit forvariation works

2. PROJECT ESTIMATING ACCURACY

The accuracy of the estimate for each purpose and at each stage is dependent on: The accuracy, amount and quality of the historic data The spectrum of estimates ranges from the rough to the very detailed The probability of the actual that if it will meet the predicted costs The relevance of the data, the duration of the project, the project activities,

uncertainty, complexity, equipment used and the degree project teamcommitment.

Rodney Turner 2also suggests the use of the binomial theorem in determining theaccuracy of an estimate. This theorem states that the percentage error of the part, as

a percentage of the whole, is inversely proportional to the square root of the size of


+ e%= S

+E % s


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Were S = Project duration, s = part duration, e = accuracy of the part, and E theproject accuracy. Using these Turner proposes the following accuracy.

Table 2

Type of

estimate

Accuracy (%) Level of effort as %

of accuracy of project cost

Stage of

production

Proposal + 30% to +50%

0.02 0.1 Pre-proposaland initiation

Budget + 20% to +35%

0.1 0.3 Proposal andinitiation

Sanction + 10% to +25%

0.3 1.0 Design andappraisal

Control + 5% to + 15% 1 3 Implementation andplanning

Tender + 2% to + 5% 5 10 Tenderpreparation

Other authors have suggested the accuracy to be adopted. In an effort to monitor andforecast variance (i.e. the accuracy) of the estimate, the actual estimate to theprojected estimates should be complied for all estimates. The accuracy can then berefined and trends determined.

3.0 TYPES OF ESTIMATES

The same estimate therefore cannot serve all the purposes as stated above. Manyauthors have proposed types of estimates for example, Rodney Turner2 suggest five(5) estimate types as note above, Proposal, Budget, Sanction, Control and Tender inthe project life cycle.

Harold Kerzner2 suggests three (3) types. Thus estimates are often defined by theirmethod and not by the life cycle of the project, as follows:

Table 3:

Type of estimate Method of estimatingOrder of magnitude Without detailed engineering data, determined by

using past experience, scale factors, capacityestimates etc. example cost of $/ kilowatt (kW)for energy estimate.

2 Harold Kerzner, Project Management, A system Approach to Planning , Scheduling and Controlling, 8th

Edition, John Wiley & Sons , Inc. (2003) pg. 511-624



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Approximate Without detailed engineering data, determinedfrom previous projects that are of similar scope,capacity and may be similar activities adjustedfor capacity and technology.

Definitive A detailed estimate determined by building upthe costs from well-defined engineering data

including a minimum of vendor quotes, fairlycomplete plans, specifications, unit prices andestimate to complete, and/or the use of Bills ofQuantities.

Rory Burke4 proposes three types (3) of estimates; these are defined in the stages ofthe lifecycle of the project as follows:Table 4:

Type of estimate Method of estimatingConceptual (Also called Orderof magnitude, Budget figure,Ball-park figure, Thumb suck,

Plucked from the air)

Based upon a limited scope of works usingscale factors. This estimate is not a legalbinding document. This estimate gives a level

of accuracy of + 25%.



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Type of estimate Method of estimatingFeasibility (Preliminary orcomparative estimate)

The estimate is made without detailedengineering data, based on previous projecthaving scope of work and capacity. Thisestimate gives a level of accuracy of + 10%.(A number of techniques are suggested byRory4 to keep the accuracy these include

needs analysis, Cost-benefit Analysis. Thecost- benefit Analysis includes : The Pareto improvement criteria The Hicks-Kaldor test The willingness to pay test

Definitive ( also detailedestimate, project controlestimate, quotation or tender)

Determined from a considerable amount ofdata incorporating: a detailed scope of work,detailed drawings, specifications, vendorquotations, (which are now legally binding)and site surveys. This estimate gives a levelof accuracy of + 5%.

J. Davidson Frame5 proposes two types (2) of estimates; these are defined by themethod of estimating as follows:Table 5:

Type of estimate Method of estimating

Bottom-up Approach The estimate is prepared by gathering vastamounts of detailed cost data on eachcomponent of the project. Once the data isgathered, they are rolled for an overall

estimate of costs for the whole project.

Top-down Approach orParametric Cost Estimate

This estimate eschews the detail data oneach component of the project. Once thedata is gathered, they are rolled for anoverall estimate of costs for the wholeproject.

J. Davidson Frame states that the estimating approaches are as follows:

Bottom-up ApproachThe methods focus on tracking cost element associated with the project. The totalproject cost is the sum of costs of all the individual elements. The most commonapproach is to prepare a Work Breakdown Structure (WBS) as a guide to identifying



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the cost elements. Cost data are then gathered at the bottom-most level of the WBS.An example of a Bottom-up Estimate is as follows:

ABS COMPANY LIMITEDNEW HOUSING DEVELOPMENT- BOTTM UP ESTIMATE

The Top-down Estimate or Parametric Estimate

This type of estimate is formulated by estimating fundamental parametric costestimates by examining fundamental parametric relationships. Parameters determinethe fundamental relationship.

For Example the cost of the Design Fees for ABS Company Limited is estimated asfollows:

Table 6:


InfrastructureCost

$470,000

New Housing Development EstimateABS Company Limited

$5,520,000

Design Fees

$400,000

ConstructionCosts

$4,000,000

Marketing andAdministration

Cost$250,000


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Professional on the Design stage(500person hours @ $ 200 per hour) $100,000

Technical Support Staff( 1 x professional hours , 500 hours @ $ 100 perhour)

$50,000

Total Direct Wages $150,000

Fringe benefits + overhead etc( From historical records a multiple of the direct costx 2.666) $250,000

Total Labor cost

( Total Direct Cost + Fringe benefits + overheadcost)

$4000,000

This method can be used initially on a project to determine the design fees for anyproject.

Parviz F. Rad1 suggests three estimating models in a WBS:

Level 1

Level

Parviz F. Rads notes that many organizations use different estimate titles and that notall organizations use titles in internal and external estimate project. Parviz F. Radstates that were the WBS is the base of reference with very little project informationavailable, only level zero of the WBS is the total project, will be estimated using themodel shown above in Table 7. Once more information becomes available, individuallevel one elements will be estimated of again using these models.The project would be the summary of level one (1) elements, and can be moreaccurate. Level two (2) items of the WBS are defined and estimated as additionalinformation is made available. Finally, once the project has been divided into itssmallest units and planned at the lowest level of the WBS, the lowest level units arethen estimated using experience or the appropriate models of estimating.


Project

Level 1 Level 1 Level 1

Level 2 Level 2 Level 2

Level 3 Level 3Level 3

Level 4 Level 4Level 4

Analogous

Parametric

Bottom-up


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Analogous Estimates When developing analogous estimates the project mangeruses the values of the deliverables available: types, functions, requirements, designcharacteristics, capacity, size, location, cost constraints, and quality expectations.Generally, analogous tools are ratios.

The general ratios are:

Equipment Ratio or Capacity Factor used in construction, industrial, and processprojects. The prime is that there is a linear relationship between the cost and durationof the project and one or more of the basic features of the proposed project cost. Theratios are refined or normalized from personal experiences; company files, orpublished industry-specific data. For example, experience has shown that the cost ofmajor turbines are 30% of the total cost of the plant, in the software industry systemdevelopment is 30% of the total project cost, and only 20% for coding and 75 % of thecost is labor.

Other ratios are used such as:

The Tree- Quarter Rule The square Root Rule The two-third Rule Ranging Estimate

Additionally expert judgement in estimating is used. This involves the communicationwith one or more experts to prepare the estimate. Parviz F. Rad defines additionallymodular estimating and parametric estimating being very similar as follows:

Modular Estimating: This method is used for estimating physical deliverables, suchas refineries, power stations, office buildings, or manufacturing plants. The facilities

are characterized by indices describing the quantity and size of the several keycomponents such as power rating and number of pumps and turbines, size of plantfloor, capacity, and number of cranes. The modular estimates the uses historical dataand predictive formulas developed from modules characterized to estimate theprojects cost, duration, and the amount of necessary resources. Modular estimatesare used primarily in the construction, process and manufacturing projects.

Parametric Model: Similar to the modular model parametric models uses historicaldata as the basis of the models predictive features. However, the characteristic areprimarily performance indicators such as speed, accuracy, tolerance, reliability,friendliness, error rate, and complexity of the environment of the deliverables.

Parametric estimates are used primarily in software development and systemsdevelopment projects. The output of parametric models includes the cost of majorphases, duration of projects major phases, total project cost, and resourcerequirements.



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The input and output in these estimates is as follows (Parviz F. Rad):

Table 8:

Construction and Industrial Projects

A. Input

Project Type Frame Exterior Material Roof Type Ground Conditions Desired floor space Equipment type

B. Output

Design Cost Structure Cost Equipment Cost Crew Size Labor Cost Phase Duration Project Duration

System Development ProjectsA. Input Reliability Data size Project Complexity Error Rate Number of Querries Function Points Labor Skills

B. Output Analysis Cost Implementation Cost Transition Cost Testing Cost Phase Duration Project Duration

4.0 HOW TO PREPARE ESTIMATES:

Estimates are prepared in various ways depending on the type of project and the timegiven to prepare the estimate. There is no need for an estimator to expend vastamounts of time and hoping obtain high accuracy value and overrun the projectbudget trying to achieve a more accurate estimate. The time spend i.e. cost must bein order of the returns i.e. profit / benefits. Many industries have prepared Estimatingmanuals in an effort to standardize estimating procedures. A generic plan ofestimating is suggested as follows (adapted from Dennis R. Mudd6 and B. Cook 7):

1 Determine the project requirements, indices etc.2 Plan the estimating process. (This will include the following as a minimum

Conduct a preliminary study

Conduct a material and sub-contractors enquire

Carry out a project Study and Project MethodologyDetermine Resources and equipment requirements

Estimate the Direct costs, determine risks, and contingency

Conduct cost calculations

Prepare the estimate report3 Study the requirements these may have been provided verbally, or in the form

of written statements, drawing and discussions.4 Make enquires on the requirements5 Determine if historical data is available to prepare the estimate



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6 Determine the project indices etc.7 Dispatch vendor enquires for quotations for the vendor estimates8 Visit the site, project sponsor and review the design etc.9 Price small items10 Plan the works11 Determine resources12 Determine the total estimate

13 Do arithmetic checks on the estimates14 Submit estimate

Where estimates are required in a short time the requirements are determine and anappropriate estimate method adopted to prepare the estimate.Sources of data available to estimators in preparing estimates areas suggested by B.Cook:

Labor output and constants for work Company files, project files, cost data and past analysis

Material prices for suppliers Newspaper clippings Trade magazines, buyers guides, catalogues Quotations from venders, subcontractors and Human Resources Agencies Lessons learnt files Professional Advice from others Trade books that are up to date

5.0 ESTIMATING TYPE PROPOSAL

Many types of estimates have been presented four; (4) types the proposed as a

standard for estimators using the project life cycle approach as follows:

InitiatingMethod

PlanningMethod

ExecutingMethod

ControllingMethod

Order of Magnitude

Preliminary Ballpark Proposal

Approximate Conceptual Budget Figure Analogous

Budget Approximate Bottom -up Bottom down Parametric

Modular

Sanction Definitive Bottom -up Bottom

-down

control

Each method uses a different methodology in the estimating process. Thetitle of the estimate defines the phase of the project life cycle. Theestimating tyes are those as defined in the body of this paper



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6.0 FLAWS IN ESTIMATING

Estimates can be flawed in many ways in the estimating process as follows:1. Inexperienced Estimators6: The preparation of estimates by inexperienced

estimators i.e. estimator does not know what they are doing. Most estimates areprepared by individuals with certain technical experience and others with the

responsibility for carrying out the estimating task and presenting the estimate tohigher level management. Unfortunately these individuals generally scratch theirheads, think back to past experiences, make a phone calls and then come up withthe estimate. These estimates therefore are not prepared in a consistent manner.The estimate for the same items may vary every time by the same individuals ifrequested for the same project estimate on another day of the week. The issue isthat most estimates are made by amateurs who fall into the following traps:

They tend to be optimistic about what is needed to do the job andconsequently underestimate the potential problems They tend to leave out activities, items and other things out of theestimate

They do not use a consistent methodology

Solution:A method to deal with this problem is to:

Give training on estimating processes, train that estimating is an art andscience. The curriculum must include the methodologies such as parametricestimating etc. Companies should have tight methodologies when preparing theirorganizations estimates. These organizations should have forms and costingsheets, analysis methodology, company estimating files and records, explicitmethods for determining accuracy variances etc.

2. Lack of Continuity between the pre-award and post award Phases:Estimates who are sales staff under value the product to gain commissions. Themore products sold the higher the commission. If the opportunity slips, the estimateis reduced to get the order. In government the executing agency for a MultilateralLoan should lead in preparing the estimates for the project.Solution:Have a team approach for accountability.

3. Unclear Scope: The scope of the project is unclear at the estimating stage andthe estimate is made on assumptions that are incomplete in scope. These

assumptions may have errors in the quality of the work, the time for completion,the risks involved, the cost for the suppliers items to be purchased. For example thePiarco Airport Project, the need for an additional Fire Station was omitted from thescope and the cost had to be added at a later stage for Airport Authoritycertification at millions of dollars and lost credibility among other things.

Solution:Clarify the scope. Ask questions. Determine what is in and not in the scope. Whenare items to be delivered?



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4. Politics: The estimate is adjusted for political reasons in the organization. Accurateestimates submitted to higher management who after glancing at it cut out itemsor reduce items to make the estimate more acceptable to upper management. Thishas occurred in the process for obtaining international loans.

Solution:The development of clear defined procedures for the preparation of estimates.

5. Errors in Normalizing the data: The historic data may not be adjusted or mayhave assumed no inflation, market changes, possible increases in oil prices or otherrelated factors in the pricing of an item.

Solution:Consider the risks in the preparation of the estimates to avoid costing errors. Track

factors that affect variations in the estimate. Determine the factors in theestimating process that will significantly affect cost.

6. Gross errors: Errors in the typing and tacking off of data in the preparation of

estimates have cased major costing errors. This may happen when the estimatorgives the secretary/ typist to complete the report and no checks are made oncomplete document. A recent bid in the authors office was received upon inspectionan item was not multiplied across thus the tenderer could not hold to his price. Theerror would have cost the supplier all of his profit. The original tender price wascorrect, as prepared by the estimator.

Solution: Diligence is need at all stages of estimating, all work must be checked.Arithmetic checks should be introduced into the estimating process. The use ofcomputer software would assist. The use of spreadsheet packages etc. should beused extensively.

7. Scope Changes during the Implementation: During the implementation thescope of works changes i.e. the designs, variations etc.

Solution: All a contingency for the scope creep and changes. Try to define thescope in the inception and planning stages of the project. Prepare a contingencyplan for the estimate and project.

8. Lack of Information on the Project, therefore cost escalates: Theinefficiency of management, supervision, suppliers and labor lead to costescalation. This results in changes in the contract.

Solution:Adequate controls are needed in the implementation stage to avoid escalation.

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REFERENCES

1 Pariz F Rad, Project Estimating and Cost Management, Management Concepts(2002)

2 J. Rodney Turner, The Handbook of ProjectBased Management, 2nd EditionMcGraw-HillBook Company (1999)

3 Harold Kerner, Project Management : A System Approach to Planning,Scheduling, and Controlling , 8th Edition, John Wiley & Sons, Inc. (2003)

4 Rory Burke, Project Management, Planning and Control, 2nd Edition, John Wiley& Sons, (1993)

5 J. Davidson Frame, The New Project Management, Jossey-Bass Publishers,(1994)

6 Dennis R. Mud, Estimating and Tendering for Construction Work, Butterworths,

(1984)

7 B. Cook, Contract Planning and Contract Procedures , The Macmillan Press Ltd.,(1981)

Practical Estimating for Engineering and Other Works using Project Management Methodology

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