COST ESTIMATION TECHNIQUES FOR CONSTRUCTION INDUSTRY

A project study submitted in the partial fulfillment of the requirements for the subject

“ADVANCED SYSTEM MANAGEMENT”

Submitted By

SIDDHARTH SHRIVASTAV (ROLL NO. 52)

SUNIL SETHIA (ROLL NO. 61)

HARMINDER SINGH (ROLL NO. 19)

WASEEM AKRAM (ROLL NO. 70)

PRASAD BHASKHAR (ROLL NO. 74)

Under the guidance of

PROF. G.N. JAYANTHY

THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENT

HYDERABAD

CERTIFICATE

This is to certify that this is a project report on “COST ESTIMATION TECHNIQUES

FOR CONSTRUCTION INDUSTRY” submitted by Mr. Sunil Sethia, Mr. Siddharth

Shrivastav, Mr. Harminder Singh, Mr. Waseem Akram, and Mr. Prasad Bhaskar

(PGP/SS/2007-09) as a part of the curriculum for the third trimester. The work has

been undertaken and completed under the guidance of Prof. G.N. Jayanthy and is

satisfactory.

Prof:

Date:

ACKNOWLEDGEMENT

It gives us great pleasure in presenting our project work on “COST ESTIMATION

TECHNIQUES FOR CONSTRUCTION INDUSTRY”. We, the students of PGP/SS/2007-

09, IIPM-HYDERABAD successfully completed our project and would like to thank

Prof. G.N. Jayanthy for his timely encouragement, guidance and support.

We, as co-workers are also grateful to each other for the team work without

which this study could not have been completed successfully.

PREFACE

The primary objective of this report is to provide the readers the insight into the

COST ESTIMATION TECHNIQUES FOR CONSTRUCTION INDUSTRY.

We hope that the report has made the text interesting and lucid. In writing this

report, we have benefited immensely by referring to many publications and

articles. We express our gratitude to all such authors and publishers.

Any suggestions to improve this report in contents or in style are always welcome

and will be appreciated and acknowledged.

DECLARATION

We hereby declare that all the information that has been collected, analyzed and

documented for the project is authentic possession of us.

We would like to categorically mention that the work here has neither been

purchased nor acquired by any other unfair means. However, for the purpose of

the project, information already compiled in many sources has been utilized.

(Sunil Sethia) (Siddharth Shrivastav)

(Waseem Akram) (Harminder Singh)

(Prasad Bhaskar)

CONTENTS

INTRODUCTION

TYPES OF CONSTRUCTION CONTRACTS

PROJECT MANAGEMENT IN CONSTRUCTION BUSINESS

COST ESTIMATOR & COMMON PRACTISES

LEVELS OF ESTIMATES

COSTING METHODS

BIBLIOGRAPHY

INTRODUCTION

Managing a business is not an easy job, especially construction business. Keeping

a track of everything manually is very difficult and many times searching for

particular information can take lots of your time to get the required details.

Estimation is an important part of planning and is an important determinant in

effort and time required to do the job. The accuracy of estimate will greatly affect

the ability to deliver on time and within the constraints of the budget. It has been

observed that most accurate estimate leads to lowest cost development.

Knowing the future is something every company dreams of. Not only would it

help them operate at maximum potential, but it would also ensure that they did

not put a foot wrong. However, it is impossible for anybody, or anything, to

predict the future accurately. It is, however, not very difficult to predict a ‘very

near’ outcome based on previous and current scenarios.

The building and construction industry does not always run smoothly and has lots

of ups and down. Many factors contribute to the unpredictability of this sector

and it is therefore very important to operate as safely as possible. An accurate

estimate plays a vital role in preparing solid groundwork for the construction

projects.

In any business, risk identification and risk analysis are crucial for successful

implementation of business strategies. This enables to identify the likelihood of

success in a project to be undertaken, along with measures that help to minimize

the risk elements. The objective of risk management is to identify and then

measure the degree of the risk associated with different courses of action on a

project. The whole process of risk analysis helps in the overall decision-making

process.

TYPES OF CONSTRUCTION CONTRACTS:

Stipulated sum.

Lump sum unit price.

Cost plus a fee.

Design-build.

Bridging.

Cost plus a fee with a guaranteed maximum price (GMP).

Turn Key.

PROJECT MANAGEMENT IN CONSTRUCTION BUSINESS

Companies’ always feels that there construction projects are running smoothly.

As they walk from office to office asking there project managers how things are

going, their responses include some of the following:

"EVERYTHING'S OK."

"99 percent complete, just a few little things left."

"I think we'll finish on time."

"I'm getting all the signatures tomorrow."

"The paperwork is almost done."

"We're coming in close to budget."

"Only a few issues left to resolve."

"No problems I can't get handled."

But, are things going as well as you were told? A few days later, you get a call

from an angry customer screaming his project is three weeks late. Another is

upset he isn't getting the quality and service for which he contracted. Another

client demands you drop everything and fix his problem now. Your accounting

manager tells you some project managers are not doing their required paperwork

timely and several change orders have not been approved in advance by the

owner. An irate subcontractor calls threatening to pull off a job unless they get

paid for work completed two months ago. On an important job, the concrete

cylinder tests for the footings are not coming up to the design mix requirements.

You find out a building inspector has not approved a major installation your

foreman changed in the field.

And then, it gets even worse. Your accounts receivable aging report is not good,

and payments are being received slower on most projects. Four customers still

owe your company final retention payment on projects completed over three

months ago. The city will not release your offsite improvement bonds as there are

still outstanding items left to complete from over a year ago. There are six

outstanding change orders a customer refuses to pay. The month-end job cost

reports show the estimated final profit on five projects has slipped again without

notice.

NO PROJECT PROBLEMS?

These problems are symptomatic of companies run by owners who haven't taken

the time to make installing pro-active project management systems a priority.

These owners struggle and fail as they let project managers continually tell them

what they want to hear instead of the truth, avoiding conflict until it's too late.

Typical project management problems are encountered when companies don't

have standardized systems in place that guarantee everyone does business the

same way. You want consistent performance and results. You want everyone to

do business in a similar manner. You don't want to rely on your constant

reminding, checking and confronting to make sure everything is performed

exactly the way you want it done. You want your project managers to be

accountable and keep you informed of the real situation on every project.

Even if you have great managers, they will do things differently unless you have

written systems in place for all to follow. Six good project managers will do things

six different ways, late or not at all. This creates chaos, disorganization, stress and

lost profits. Your customers, subcontractors and suppliers can't deal with a

company that doesn't have consistent business standards and systems in place.

Could you imagine doing business with a bank that let each loan officer lend

based on their own personal standards? It wouldn't work. Can you imagine a

construction company where each project manager could decide if and when lien

releases or signed change orders were required or if the subcontract terms had to

be followed? It wouldn't work either.

Typical re-occurring problems are a result of the company owner not requiring

everyone to follow the company project management systems. Most companies

have general rules to follow, but don't have them written down. The owner then

tries to keep project managers herded like cats to follow the company rules. But

busy owners, over time, let their people slip from following written company

procedures, if they even have them. It's hard to keep people accountable to

systems that aren't written, reviewed, trained, tracked, followed and adhered to.

GET PROJECT DRIVEN!

Construction companies are project driven. Successful projects lead to profitable

growing companies. Owning and managing a successful general contracting

company for over twenty-nine years has taught me a simple truth: to build an

excellent company, you must get your project management systems installed,

pro-active and permanent. Excellent companies consistently hit their overall goals

and project management targets in the areas of time, budget, customer

satisfaction, quality and safety. They are focused on more than getting the jobs

done as efficiently as possible. They focus on being organized and have a

systemized pro-active approach to project management, so they can:

1. Consistently measure success.

2. Start and finish projects quickly.

3. Be on time and budget.

4. Meet their commitments.

5. Keep customers happy.

6. Create a great place to work.

7. Build teamwork.

8. Identify problems early.

9. Train and improve people.

10.Maximize and allocate resources.

11.Grow.

12.Make above-average profits.

WHAT ARE PRO-ACTIVE SYSTEMS?

Pro-active project management systems are repeatable and standardized written

organizational methods, procedures and guidelines that achieve project goals and

optimize resources of time, energy, money, people, equipment and materials

within a specific deadline. Project management is composed of several different

types of activities such as planning, assessing risk, estimating resources,

organizing work, assigning tasks, directing activities, monitoring, tracking,

reporting progress and finally analyzing results. Pro-active project management

systems control all project activities and deliver the desired and targeted results

on time and on budget, per the contracted scope of work, while minimizing risk.

FOUR STAGES OF "PRO-ACTIVE" PROJECT MANAGEMENT SYSTEMS

1. PROJECT GOALS AND OBJECTIVES

Consistent performance and success is more than getting organized and

training project managers to do business the same way. Most projects are started

without a plan and with hope that something good will happen. Successful

projects start with clear objectives and measurable results to achieve. Just trying

to do your best or trying to bring it in on budget and schedule will not guarantee

the bottom-line results you want at the completion of every job. Without clear

targets, you can't make project managers accountable or responsible for their

results. Before every project, sit down with the project team and lay out the goals

and objectives, including:

A. Overall Project Objectives.

B. Budget and Financial.

i. Job cost.

ii. Productivity.

iii. Profit.

C. Time and Schedule

i. Start

ii. Milestones

iii. Completion

iv. Punch-list

D. Quality.

E. Service.

F. Safety.

G. Customer satisfaction.

H. Training.

2. PROJECT PLANNING

Successful projects have written plans to insure they stay on track and hit their

goals. You wouldn't start a construction project without a detailed set of working

drawings or building plans. Project management is no different. There are certain

steps every project must follow that guarantee on-time and on-budget

completion and success. These steps must be identified and perfected as part of

your project management system. These systems can include pre-project start-up

meetings, procurement procedures, change order systems and shop drawing

standards.

The objective should be more than keeping the job moving. The intent is to hit the

goals and project milestones. Systems will make this happen. Project managers

must breakdown the project into small incremental steps that will insure

accomplishing the end results. By creating and following a project plan, the

manager can assign tasks and hold people accountable. In order to draft a

successful project plan, include the following:

A. Project specifications

B. Project requirements

C. Materials

D. Resources

E. Equipment

F. Labor

G. Cash-flow

H. Tasks

I. Schedule

J. Accountability

K. Responsibility

3. PROJECT PRODUCTION AND IMPLEMENTATION

The next step is to build the project. Ongoing organizational systems will keep

your project headed and tracking toward the desired end result. Each project

team member must know what is expected and what systems must be followed

before starting work. By establishing clear measurements and procedures for

project implementation, team members can get started on track and monitored

on an ongoing basis as to their progress. Consider which project management

systems will guarantee that every project will meet its goals:

A. Project control systems

B. Procurement systems

C. Installation systems

D. Tracking systems

E. Cost control systems

F. Quality control systems

G. Productivity systems

H. Training systems

I. Safety systems

J. Customer systems

4. PROJECT MONITORING AND EVALUATION

As you build each project, constant monitoring becomes easy for the owner or

upper management when systems are in place and being followed. When project

management systems are installed and used effectively, monthly evaluation

meetings become a simple check of what has been done properly and what needs

attention. When systems are used, problems become quick to identify, hard to

overlook or hide and can be addressed before it's too late.

PROJECT MANAGEMENT SYSTEMS ARE "PRO-ACTIVE"

A key success factor to owning and managing an organized and systemized

company is to select the systems that will insure the success of your operation. To

create pro-active project management systems, start by selecting the top ten

systems and procedures you feel, if implemented and followed, will guarantee

successful projects 90 percent of the time. Then you must be "pro-active" and

stay focused on these systems as "musts" for your managers to implement,

maintain, track and perform. It will be your job to monitor these priority systems

and force your project management team to adhere to these without exception.

For example, when ordering something with a credit card, they always insist on

getting your expiration date, no exceptions.

On-going safety program.

On-going training program.

Change order management.

Procurement procedures.

General contract checklist.

Subcontract checklists.

Purchase order checklist.

Required approval list.

Insurance requirements.

Submittal and shop drawing steps.

Project scheduling and monitoring.

Request for information systems.

Scope of work standards.

Specification review.

Customer service standards.

Customer satisfaction review.

Job cost reporting and review.

Progress payment procedures.

Project paperwork standards.

Contract documentation.

Contract administration.

Contract management.

Project communication.

Project management meetings.

PROJECT SUCCESS SYSTEM

Project goals targets.

Jobsite photos.

Updated schedule.

Proposed change order log.

Executed change order log.

Subcontract tracking log.

Accounts receivables.

Accounts payables.

Shop drawing and submittal log.

Job cost update.

Budget variance report.

COMPANY SUCCESS SYSTEM

Current project milestone tracking.

Sales and proposals.

Estimates and bids.

Pre-construction.

Procurement.

Project start-up.

Construction.

Completion.

Payment.

Overall strategy.

SYSTEMS THAT WORK

The following are a few of the top priority project management systems,

recommend to keep projects on track:

Project Start-Up System

1. Review bid/estimate/proposal.

2. Read complete contract.

3. Review complete plans.

4. Review complete specifications.

5. Visit jobsite.

6. Project goals and objectives.

7. Set-up project master budget.

8. Complete project checklist:

i. Insurance requirements

ii. Bonding requirements

iii. Billing and payment requirements

iv. Cash-flow needs

v. Discounts available

vi. Shop drawings and submittals

vii. Schedule and deadlines

viii. Long lead items

ix. Special tools and equipment

x. Meetings

xi. Signature of authority designated

xii. City and permit requirements

xiii. Site accessibility

xiv. Loading and unloading needs

xv. Project close-out requirements

9. Execute contract

PROCUREMENT SYSTEM

1. Always award to the lowest responsible bidder

BEFORE AWARDING CONTRACTS, REVIEW:

1. Bid scope of work

2. References

3. Financial capacity

4. Ability to meet schedule

5. Adequate manpower

6. Similar project experience

7. Quality workmanship

8. Professional

9. Training program

10.Safety program

REVIEW CONTRACT TERMS:

1. Final scope of work

2. Schedule

3. Delay clauses

4. Mandatory meetings

5. Clean-up and punch-list

6. Supervision

7. Change order procedures

8. Notice requirements

9. Payment procedures

EXECUTE ALL SUBCONTRACTS PRIOR TO STARTING JOB

COST ESTIMATOR & COMMON PRACTICE TRAITS

Cost estimators develop the cost information that business owners or managers,

professional design team members, and construction contractors need to make

budgetary and feasibility determinations. From an Owner's perspective the cost

estimate may be used to determine the project scope or whether the project

should proceed. The construction contractor's cost estimate will determine the

construction bid or whether the company will bid on the construction contract.

PRACTICES:

1. Awareness: The estimator should firstly consider the project scope and the

level of effort and resources needed to complete the task ahead; the

organization's financial capability, staff, and plant capacity (if working as an

estimator for a construction company) to complete the project.

Consider the time allotted for the construction of the project in

coordination with the owner's schedule needs.

Examine the general and special conditions of the contract and determine

the effect these requirements have on indirect costs.

Consider alternate methods of construction for the projects.

Review all sections of the drawings and division specifications to ascertain

an accurate perspective of the total project scope, level of design

discipline coordination, adequacy of details, and project constructability.

Make other members of the project team aware of any problems with the

project documents.

Communicate and coordinate information to other project team

members in a timely manner.

2. Uniformity: The estimator should develop a good system of estimating

forms and procedures that exactly meet the requirements of the project,

and that is understood and accessible by all team members. This system

should provide the ability to define material, labor hour and equipment

hour quantities required for the project. Material, labor, and equipment

unit costs are then applied to the quantities as developed in the quantity

survey. Apply amounts for overhead and profit, escalation, and contingency

in the final summary.

3. Consistency: Use methods for quantity surveys that are in logical order and

consistent with industry standard classification systems. These methods

should also meet the specific need of the company or client. Use of

consistent methods allows several estimators to complete various parts of

the quantity survey, or be continued later by another estimator.

Consistency also aids the identification of cost increases and decreases in

certain areas as the project progresses through the design stages. Combine

these surveys into the final account summaries.

4. Verification: The method and logic employed in the quantity survey must

be in a form, which can provide independent method of proof of the

accuracy of any portion of the survey.

5. Documentation: Document all portions of the estimate in a logical,

consistent, and legible manner. Estimators and other personnel may need

to review the original estimate when the specific details are vague. The

documentation must be clear and logical or it will be of little value to the

reader. Such instances may occur in change order preparation, settlements

of claims, and review of past estimates as preparation for new estimates on

similar projects.

6. Evaluation: When the estimate involves the use of bids from

subcontractors, check the bids for scope and responsiveness to the project.

Investigate the past performance records of subcontractors submitting

bids. Determine the level of competence and quality of performance.

7. Labor Hours: The detailed application of labor hours to a quantity is

primary in governing the accuracy and sufficiency of an estimate. The

accuracy of the project's schedule and work force requirements are

dependent on the evaluation and definition of the hours. The combined

costs for worker's compensation, unemployment insurance and social

security taxes are significant factors in the project costs. The most accurate

method for including these costs is to define labor hours and wage rates;

then apply percentages to the labor costs.

8. Value Engineering: Structure the estimate to aid in researching and

developing alternative methods that will result in cost optimization. These

alternative methods can include different construction methodology,

replacement materials, etc. Using the same level of detail in both the value

engineering studies and the base estimate is extremely important. This

provides a more precise comparison of costs for proposed alternate

methods.

9. Final Summaries: Provide methods for listing and calculating indirect costs.

Project scope governs the costs of overhead items such as insurance, home

office plant, and administrative personnel. Determine these costs in a

manner consistent with quantity survey applications. Consider other work

in progress, and/or owner occupancy of existing space that may have a

bearing on projected overhead costs. Determine amounts for performance

bonding, profits, escalation, and contingencies.

10. Analysis:

Develop methods for analyzing completed estimates to ascertain if they are

reasonable. When the estimate is beyond the normal range of costs for

similar projects, research the detail causes for possible errors.

Develop methods of analysis of post-bid estimates to find the reasons for

the lack of success in the bidding process.

Calculate the variation of the estimate from the low bid and low average

bids.

Determine from an outside source if there were subcontract or material

bids provided only to certain bidders.

Determine if bids were submitted by a representative number of

contractors for the level of construction quality expected.

Determine if the low bidder may have made omissions in the estimate.

Properly document this information for future use and guidance.

11. Conversion: Show estimating procedures that allow conversion of the

estimate to field cost systems so management can monitor and control

field activities. These procedures include methods of reporting field costs

for problem areas. Make reports daily or weekly rather than at some point

in time after the project is complete. Field cost reporting, when consistent

with estimating procedures, enables estimators to apply the knowledge

gained from these historical costs to future estimates, and help train field

personnel in labor hour and cost reporting that provide the level of

accuracy required.

12. Change Orders: Apply the highest level of detail from information provided

or available to the estimator. State quantities and costs for all material,

labor, equipment, and subcontract items of work. Define amount for

overhead, profit, taxes, and bond. Specific itemization of change order

proposals is essential in allowing the client to determine acceptability.

Upon approval, use the estimate detail as the definition of scope of the

change order.

LEVELS OF ESTIMATE

As a project is proposed and then developed, the estimate preparation and

information will change based on the needs of the Owner/Client/Designer. These

changes will require estimates to be prepared at different levels during the design

process with increasing degrees of information provided. It should also be noted

that within each level of estimate preparation, not all portions of the design

would be at the same level of completeness. For example, the architectural

design may be at 80% complete while the mechanical design is only 50%

complete. This is common through the design process, but should always be

noted in the estimate narrative.

In addition to construction costs, estimates for process or manufacturing areas

require information related to the involved processes such as product line

capacity, process layout, handling requirements, utility requirements, materials

and storage required, service requirements, flow diagrams, and raw materials

access.

The following descriptions constitute the different levels of an estimate. Estimates

within each of these levels may be prepared multiple times during the design

process as more information becomes available or changes are made to the

scope. As the level of the estimate increases it will become more detailed as more

information is provided; "unknowns" are eliminated; fewer assumptions are

made; and the pricing of the quantities become more detailed. Contingencies for

the aforementioned will be reduced as more design documentation is produced.

The levels of the construction cost estimate correspond to the typical phases of

the building design and development process and are considered standards

within the industry. These levels are as follows:

LEVEL 1 - ORDER OF MAGNITUDE

The purpose of the Level 1 estimate is to facilitate budgetary and feasibility

determinations. It is prepared to develop a project budget and is based on

historical information with adjustments made for specific project conditions.

Estimates are based on costs per square foot, number of cars/rooms/seats, etc.

Project information required for estimates at this level usually might include a

general functional description, schematic layout, geographic location; size

expressed as building area, numbers of people, seats, cars, etc., and intended use.

LEVEL 2 - CONCEPTUAL/SCHEMATIC DESIGN

The purpose of the Level 2 estimate level is to provide a more comprehensive

cost estimate to compare to the budgetary and feasibility determinations made at

Level 1 and will be typically based on a better definition of the scope of work. An

estimate at this level may be used to price various design schemes in order to see

which scheme best fits the budget, or it may be used to price various design

alternatives, or construction materials and methods for comparison. The goal at

the end of schematic design is to have a design scheme, program, and estimate

that can be contained within budget. The Level 2 estimate is based on the

previous level of information available at Level 1, in addition to more developed

schematic design criteria such as a detailed building program, schematic

drawings, sketches, renderings, diagrams, conceptual plans, elevations, sections

and preliminary specifications. Information is typically supplemented with

descriptions of soil and geotechnical conditions, utility requirements, foundation

requirements, construction type/size determinations, and any other information

that may have an impact on the estimated construction cost.

LEVEL 3 - DESIGN DEVELOPMENT

Estimates prepared at Level 3 are used to verify budget conformance as the scope

and design are finalized and final materials are selected. Information required for

this level typically includes not less than 25% complete drawings showing floor

plans, elevations, sections, typical details, preliminary schedules (finishes,

partitions, doors, and hardware etc.), engineering design criteria, system single

line diagrams, equipment layouts, and outline specifications.

The Level 3 estimate provides a greater amount of accuracy, made possible by

better defined and detailed design documentation. Estimates at this phase may

be used for value engineering applications before the completion of specifications

and design drawings.

LEVEL 4 - CONSTRUCTION DOCUMENTS

Level 4 estimates are used to confirm funding allocations, to again verify the

construction cost as design is being completed, for assessment of potential value

engineering opportunities before publication of the final project design

documentation for bids, and to identify any possible "design creep" items, and

their costs, caused by modifications during the completion of the construction

documents. This final construction document cost estimate will be used to

evaluate the subcontract pricing during the bid phase. Level 4 estimates are

typically based on construction documents not less than 90% complete.

LEVEL 5 - BID PHASE

The purpose of this level estimate is to develop probable costs in the preparation

and submittal of bids for contract with an Owner. In the traditional "design-bid-

build" delivery system, this would be with 100% completed and coordinated

documents. The Level 5 estimate will be used to evaluate sub-contractor bids and

change orders during the construction process.

In other delivery systems, becoming more widely used, such as design-build or

guaranteed maximum price, the bid could actually be prepared at an earlier level,

often Level 3 or Level 4. In such an instance estimates are prepared as previously

described along with progressive estimates as the design is completed. It should

be stressed that when preparing a bid at a prior estimate level, it is very

important to include a complete and thorough "Scope of Estimate" statement

that would state clearly such items assumptions, allowances, documents used for

the estimate, and contingency amounts included.

ELEMENTS OF A COST ESTIMATE

Quantity Takeoff: The foundation for a successful estimate relies upon reliable

identification (takeoff) of the quantities of the various materials involved in the

project.

Labor Hours: Labor hour amounts can be developed by crew analysis or applied

on a unit man-hour basis. The use of a labor pay per unit of work (ex: Rs. 150 per

cubic yard for grade beams or Rs.200 per cubic yard for walls) is only applicable

when the cost history supports the data being used. The estimator must make

allowance for the varying production capability that will occur based upon the

complexity of a project.

Labor Rates: The labor rate is the cost per hour for the craftsmen on the project.

To determine any craft rate, whether union or open shop, the estimator starts

with the basic wages and fringe benefits.

Material Prices: Material prices, especially in today's current market, fluctuate up

and down. The estimator must both understand and anticipate the frequency and

extent of the price variations and the timing of the buying cycle. Material prices

may be affected by:

Purchase at a peak or slack time of the year for the manufacturer.

Material availability.

Size of the order.

Delivery timeframe requirement.

Physical requirements for delivery, such as distance, road size, or site

access.

Payment terms and history on previous purchases

Sole-source items.

Exchange rates (if the material will be imported into the country).

Equipment Costs: Equipment rates depend on the project conditions to

determine the correct size or capacity of equipment required to perform the

work. When interfacing with other equipment, cycle times and equipment

capacity control the costs on the project. Costs will also differ if the equipment is

owned by the contractor as opposed to rent.

Subcontractor Quotes: A subcontractor quote, like the general estimate, contains

labor, material, equipment, indirect costs, and profit. It is dependent upon having

the quantities, labor hours, hourly rate, etc., prepared in a reliable manner just

like any other part of an estimate. The amount of the subcontractor quote is also

dependent upon the payment terms of the contract, and previous payment

history between the subcontractor and general contractor. Bonding costs should

also be considered.

Indirect Costs: Indirect costs consist of labor, material, and equipment items

required to support the overall project.

For the owner: design fees, permits, land acquisition costs, legal fees,

administration costs, etc.

For the contractor and subcontractor: mobilization, staffing, on-site job

office, temporary construction, temporary heat/cooling, and temporary

utilities, equipment, small tools and consumables, etc.

Profit Amount: Apply appropriate or contracted profit rate uniformly to all

contractors and to original bid and change orders.

The transfer of the estimate information to the field cost control system provides

management the opportunity to closely monitor and control construction costs as

they occur.

It should be noted that it is always good cost control practice to review and

evaluate the final cost estimate vs. the actual bid. This exercise is not another

level of estimate, but is a cost control mechanism and important data for

estimating future projects.

COSTING METHODS

COSTING METHODS

SPECIFIC ORDERS

JOB COSTING

(SMALL, SHORT-TERM JOBS)

BATCH COSTING

(SMALL, IDENTICAL UNITS)

CONTRACT COSTING

(LARGE, LONG-TERM)

CONTINUOUS

OPERATIONS

OUTPUT COSTING

(ONLY ONE PRODUCT)

SERVICE COSTING

(PRODUCT IS A SERVICE)

PROCESS COSTING

(PRODUCED IN STAGES)

Cost studies of building seek to ensure the efficient use of available resources to

the industry, and to increase the rate of growth of construction work in the most

efficient manner. Cost studies are then followed by a process of cost analysis, cost

planning and cost control, which must be monitored and managed in such a way

that deviations from the plan are detected and corrected in time so that

objectives can be met and met on time and within budget. The construction

project consists of the physical components: the structure, the mechanical and

electrical systems, and the architectural finishes. To guide him, the construction

manager must know the estimate of costs, the plans and specifications defining

the materials to be used, and the proper assembly of the materials. The task of

cost estimates is essential and important in project management since through

cost estimates budget forecasting and cost control, etc. can be carried out.

Estimating costs is of prime importance both in the preliminary and the

realization phase of a project. The preparation of an accurate preliminary

estimate is one of the most complicated subjects for designers and estimators.

The purpose of producing a pre-tender estimate can be classified into the following three categories:

Budgeting – this decides whether the project should proceed as envisaged.

Controlling – this uses the estimate as a control mechanism throughout the

design process.

Comparing – this uses the estimate as a basis for the evaluation of different

design solutions.

ESTIMATING METHODS

Pre-tender price estimating methods may also be classified as single price-rate,

measured analysis or cost models.

Table 1

Estimate Types

Stage Activity Plan of Work Estimating Types Cost Planning Process STAGE ACTIVITY PLAN OF WORK ESTIMATING TYPES COST PLANNING

PROCESS

1. Project

Identification

Consultation Preliminary Initial estimate

2. - Brief Feasibility Firm estimate

3. - Investigation Viability Preliminary Cost

Plan

4. Project Definition Constructional Detail Authorization Final cost plan

5. - Working Drawing Final budget Cost check

6. Project Execution Construction Control -

The degree of accuracy will very much depend on the type of information

provided to the quantity surveyor in addition to the quality of his pricing

information. Literature survey has elicited the following estimating methods:

FUNCTIONAL UNIT

CUBE METHOD

SUPERFICIAL AREA

SUPERFICIAL-PERIMETER

ELEMENTAL ANALYSIS

INTERPOLATION

RESOURCE ANALYSIS

COST ENGINEERING

STOREY-ENCLOSURE

STOREY-ENCLOSURE

Table 2

Methods for Pre – Tender

METHODS NOTES

CONFERENCE Based on a consensus viewpoint

FINANCIAL METHODS Used to determine cost limits or the building costs in a developer’s budget

UNIT Applicable to projects having standard units of accommodation. Often used to fix

cost limits for public sector building projects.

SUPERFICIAL Still widely used, and the most popular method of approximate estimating. Can

be applied to virtually all types of buildings.

SUPERFICIAL PERIMETER Never used in practice

CUBE Used to be a popular method amongst architects, but now in disuse.

STOREY ENCLOSURE Largely unused in practice

APPROXIMATE QUANTITIES Still a popular method on difficult and awkward contracts and where time

permits.

ELEMENTAL ESTIMATING Not strictly a method of approximate estimating, but more associated with cost

planning; used widely in both the public and private sectors for controlling costs.

RESOURCE ANALYSIS Used mainly by contractors for contract estimating and tendering and tendering

purposes.

COST ENGINEERING Mainly used for petrochemical engineering projects.

COST MODELS Still in the course of development. These methods may eventually prove to be

superior to the existing methods .

CONFERENCE ESTIMATE

This is a technique that can be used for the preparation of the earliest price

estimate given to the client. It is based on a collective view of a group of

individuals, and may at this stage not be quantified in any particular way. As for

the result, it has been shown that the group concerned must have relevant

experience of estimating the costs of similar projects. It is used in circumstances

where historical cost data may not be appropriate, as in the case of a prototype

project. It also offers a qualitative viewpoint to reinforce or otherwise a measured

estimate.

FINANCIAL METHOD

These are methods that fix a cost limit on the building design, based on either unit

of accommodation or rental values. The estimated cost of a project may be fixed

in relation to the number of pupils who are likely to attend a completed school.

The architect must then ensure that the design can be constructed within such a

cost limit. In the private sector, projects are often evaluated in terms of their

selling price or rental value. For example, in connection with a speculative

housing development a market research survey would determine the possible

selling price of dwellings on a new estate. The builder would then deduct other

development costs and profit from the total selling price, and the remainder

would represent the amount to be spent on building. Alternatively, building and

other development costs (excluding land) and profit could be calculated and

deducted from the total selling price in order to determine a maximum price to

be paid for the land. This method is used to avoid or reduce the risk or embarking

on a profitless venture. The assessment will take place at the outset, and certainly

before payment of the site purchase.

UNIT METHOD

The unit method of approximate estimating consists of choosing a standard unit

of accommodation and multiplying this by an approximate cost per unit. The

standard units may represent, for example:

• Schools – costs per pupil enplace

• Hospitals – costs per bed enplace

• Car parks – cost per car space

The technique is based on the fact that there is usually some close relationship

between the cost of a construction project and the number of functional units it

accommodates. Functional units are those factors which express the intended use

of the building better than any other. This method is extremely useful on

occasions where the building’s client requires a preliminary estimate based on

little more information than the basic units of accommodation.

The method of counting the number of units is extremely simple, but

considerable experience is necessary in order to select an appropriate rate. This

rate can be obtained by the careful analysis of a number of recently completed

projects of a similar type, size and construction. However, adjustments based on

professional judgment will always need to be made to take into account the

various site conditions, specification changes, market conditions regional changes

and inflation. It is one of the simplest and quickest methods to implement, but it

must be used with care. It suffers from the major disadvantage of lack of

precision, and should only be used for establishing general guidelines. It is

advisable, therefore, to express cost within a range of prices that can be useful for

budgetary estimating.

SUPERFICIAL AREA METHOD

This is still the most common method in use for early price estimating purposes.

The estimate of cost is easy to calculate and thus is expressed in a way that is

fairly and readily understood by those in the industry and the average

construction industry clients. The area of each of the floors is measured and then

multiplied by the cost per square meter. In order to provide comparability

between various schemes, the floor areas are calculated from the internal

dimensions of the building. It is largely a post-1945 method, and became

appropriate for projects such as schools and housing where storey heights were

similar. Storey heights, plan shape and methods of construction are particularly

important when deciding on the rate to be used. Another consideration which

favor the use of this method is that rates are readily available from many different

sources already operating, alternatively, they can be calculated very easily from

existing scheme cost data.

SUPERFICIAL PERIMETER METHOD

This method of approximate estimating is a variation on the superficial floor area

method. Realizing that the floor area has the greatest single variable-correlated

price produces a formula that showed an increase in the accuracy of early price

prediction. The formula combined floor area with the length of the building’s

perimeter. This is the second most important variable, and attempts to take into

account plan shape when linked with floor area. The wall/floor area ratio is

known to be an important factor in the economic design buildings. Tests have

indicated that more accurate results can be obtained than when using floor area

alone. Due to the reluctance of surveyors to change to this method of approach

and of cost data sources to publish appropriate rates, this method has not been

used in practice.

CUBE METHOD

The cube method of approximate estimating was used extensively at the

beginning of this century, but has since been superseded because of its inherent

disadvantages. It was a method extensively used by architects. All architects’

offices used to keep a ‘cube book’ for future estimating purposes. Once the

contract was signed its costs would be divided by the cubic content and entered

into office price book. The cost of a new job could then be determined by

calculating its volume and selecting an appropriate rate from the book. Even with

such a primitive method it was necessary to provide some rule for comparable

quantification of purposes.

STOREY-ENCLOSURE METHOD

In an attempt to overcome the many disadvantages of the other single-price

methods of estimating, a new method was devised using the following rules of

calculation.

i. Twice the area of the lowest floor.

ii. The area of the roof measured on plan.

iii. Twice the area of the upper floors, plus an addition of 15% for the first

floor, 30% for the second floor, 45% for the third floor, etc.

iv. The area of the external walls.

The Method Attempted to Take Into Account:

a. Plan shape (by measuring each floor)

b. Total floor area (by measuring the external wall area)

c. Vertical position of the floors (by using different multipliers for each floor)

d. Storey heights (ratio of floor and roof area to external wall area)

e. Overall building height (ratio of roof area to external wall area)

f. Extra costs of providing usable floor areas below ground (by using multipliers)

APPROXIMATE QUANTITIES

Approximate quantities provide a more detailed approximate estimate than any

of the methods described above. They represent composite items which are

measured by combining or grouping together typical bill-measured items.

Whereas the methods described above estimate costs on the basis of

measurement and some cost relationship, this method relates to the importance

of measurement. This method does provide a more detailed and reliable method

of approximate estimating, but involves more time and effort than any of the

methods (1)-(7). No particular rules of measurement exist, and the composite

items resulted from the experience of each individual surveyor. Also, considerably

more information is required from the designer if the method is to be applied in

practice. The method is therefore suited to a more advanced design stage. It is,

however, more reliable when one is attempting to estimate the costs of major

refurbishment projects. Approximate quantities should not be confused with the

bill of approximate quantities. The latter would be based on an agreed method of

measurement. The former, which is used for approximate estimating purposes,

would be much briefer because several of the bill items would be grouped

together within a single description. Contractors favor this method when they

have to prepare tenders on the basis of a drawing and specification projects.

ELEMENTAL ESTIMATING

The first stages of cost planning can be used to determine the approximate cost of

a construction project. This method analyses the cost of the project on an

elemental basis, attempting to make use of the cost analyses from other similar

projects. Cost planning, however, also seeks to do much more. It provides cost

advice during the design process, offering the client better value for money. It

keeps the designer fully informed of all the cost implications of the design in

relation to an approved approximate estimate and is likely to be accepted as the

tender sum. Full cost planning services today would also incorporate the

attributes of life-cycle costing and value engineering. Two alternative forms of

cost planning have been developed, although in practice a combination of both is

now generally used. The first form is known as elemental cost planning, where

the project must be designed within an overall framework of a cost limit. It is

often referred to as ‘designing to a cost’. In practice it is more appropriate to

public sector projects, which often incorporate some form of cost limit. The other

alternative form is comparative cost planning, where alternative designs can be

examined within an economic context. This method is referred to as ‘costing a

design’.

RESOURCE ANALYSIS

This is a method that is traditionally adopted by contractors’ estimators to

determine their individual rates for measured items in bills of quantities. Each

individual measured item is analyzed into its constituent parts such as labor,

materials and plant. Each part is then cost’d on the basis of output, gang size,

material quantities, plant hours, etc. Particular emphasis is placed on such project

features as type, size, location, shape and height as important factors affecting

the contractor’s costs. In theory the contractor will make extensive use of

feedback, although some evidence suggests that the whole process is largely

determined by value judgments on the basis of previous experience. Alternative

analytical methods can be calculated based on resource costs on the basis of

operations rather than individual bill items.

Resource estimating is not strictly a pre-tender method of price prediction,

because of the amount of time and the type of data required. It can, however, be

applied in circumstances where, for example, a new material or construction

process is envisaged. In these circumstances, where existing cost data are not

available the design team may have few alternatives available other than to refer

to resource-based estimating.

COST ENGINEERING METHODS

There are three methods used for capital cost estimating in the process-plant

industry. These are:

1. Functional Approach

The average cost of a functional unit in a process is the function of the various

process parameters. The estimated cost may therefore be represented in the

following way:

Cost = F (Q, T, P, M, CCI)

Where Q = capacity throughout

T = temperature

P = pressure

M = materials of construction, and

CCI = construction cost index

2. Factor Estimating

This method relies on costing from only a portion of the scheme and then

multiplying this by a factor to obtain the total cost. Zimmerman (1965) has called

these ratio-cost factors. Thus the total cost of a building project may be estimated

by multiplying the cost of the shell by, say, 1.6. A range of factors have been

derived empirically for different sorts of fixed capital equipment.

3. Exponent Estimating

The costs of similar plants or pieces of equipment of different sizes vary with the

size raised to some power.

C2 = ( Q2 )x

C1 Q1

Where C2 is the cost of the desired capacity Q2 and C1 is the cost of the known

capacity Q1. A frequent value of x is 0.6, and so relationship is often referred to as

the six-length rule. The exponent x can be determined by plotting actual historical

costs for the equipment or plant. These methods can also be used for estimating

the costs of building and civil engineering works.

COST MODELING METHOD

Cost modeling is a more modern method that can be used for forecasting the

estimated cost of a proposed construction project. Although they were first

suggested during the early 1970s, there is still only scant evidence of their use in

practice. However, considerable research has been undertaken in an attempt to

convert the theories into practice. The uncertainties about calculating project

costs have been discussed in several papers. It assumes a normal distribution for

various cost items and uses the probability estimating method with a 95%

confidence level as the estimation limit. It also discusses various probability

estimating methods and explains their applicability. It emphasizes that the

correlation between cost items must be considered in the probability estimating

methods when this correlation is significant.

The use of the computer has allowed more numerical methods such as statistical

and operational research techniques to be applied to the forecasting of

construction costs. Without computer facilities such applications would not be

possible. These models attempt to formulate a better representation of

construction costs than do their predecessors, by trying to discover the true

determinants of construction costs. There is, however, little evidence at the

present time that cost models offer any superiority over the traditional methods

in terms of forecasting performance. Computer application became stronger with

the fast development of mini and micro computers and especially with the

availability of software packages like spreadsheets and statistical packages, such

as SPSS, SAS, BMB and others. During the early phase of their development it was

assumed that estimating generally was solely a numerical process. This

assumption is now believed to be erroneous, and the models, to have any chance

of future practical application, must consider the input and expertise of the

surveyor or estimator. Cost models are developed to advance five major aspects

of cost information

a) Provide cost information quicker;

b) Provide more information for a more informed decision;

c) Provide more reliable cost information;

d) Provide information at an earlier stage in the design process; and

e) Provide information in a more understandable form

Causal or empirical models, regression models, simulation, heuristics, and expert

systems are example of tools used for cost modeling. Causal or empirical models

are symbolic models which are based on relationships between the design

variables and cost, and which have been derived from observation, experiment

and intuition. Application of these models can be conducted manually or by using

computer aided system. This method is easy to understand and can be related

quickly to the construction projects. One good example of causal or empirical

models is bills of quantities.

Regression analysis is a technique that uses the best fitted mathematical equation

to express the relationship between the variables studied. In any statistical

analysis of relationship, exact relationships are not generally observed. The

simplest form of regression analysis involve only one independent variable and

one dependent variable, this is called linear regression analysis. In the actual

practice, one dependent variable is affected by more than one independent

variables. Therefore in describing their relationship, a multiple regression analysis

would be applied. The equations developed are used for the purpose of

estimating.

A simulation model seeks to duplicate the behavior of the system under

investigation by studying the interactions among its components. Simulation is

done to avoid direct experiment error and it contains more variability if compared

to other research methods. The advantages using the simulation model is when

problems occur it can be resolved quickly is not possible if it is done analytically.

Secondly, it is easier to understand, and the assumptions to be made are fewer

Heuristic are rule-of-thumb procedures which enable a near-optimum solution to

be produced once the model has been built. It involves trial and errors based on

the knowledge from experiences and skills of those involved. In other words,

heuristic method of solution relies on intuitive or empirical rules that have the

potential to determine an improved solution relative to the current one. But

unfortunately, there was too little attention given on these rules of thumb in

recent years. Expert systems are computer programs that embody human

expertise. It can acts as intelligent assistants to human expert, the expert’s rule-

of-thumb are stored in the computer to help others to solve problems.

FORMULATE THE PROBLEM

COLLECTION OF DATA

ANALYSIS OF DATA

MODEL BUILDING

OPTIMUM MODEL

EVALUATION OF MODEL

TESTING APPLICATION

CONCLUSION

The present study is focused on the cost estimation in construction industry. The

main purpose is to establish the method of cost estimating for building

construction. A scale for rating the popularity of practicing the estimating

methods is used in this study.

BIBLIOGRAPHY

www.google.com

www.constructionbusinessowner.com

Malaysia Construction Industry

US Labor Articles

Kingston Business School