Cost Estimates

Generally

An approximation of the cost that would be incurred of a construction project to be launched

The cost estimate is the product of the cost estimating process

A cost estimate is used to evaluate the required funding

To compare with bids or tenders (Pre-tender Estimate)

The cost estimate has a single total value and may have identifiable component values

Substructure

Superstructure

COST
ESTIMATE

Finishes
Building
Services

Estimate accuracy is a measure of how closely the estimate is able to predict the actual
expenditures for the project (This can only be known after the project is completed)

Estimate accuracy is traditionally represented as a +/- percentage range around the point
estimate; with a stated confidence level that the actual cost outcome will fall within this range
An example: for a definitive estimate might be that the estimate has a -5/+10% range of accuracy with a 90%
confidence that the final value will fall in that range

The accuracy of an estimate is measured by how well the estimated cost compares to the actual
total installed cost

The accuracy of an early estimate depends on;

1. who was involved in preparing the estimate
2. how the estimate was prepared

3. what was known about the project

4. Other factors considered while preparing the estimate

For the same project, the range of uncertainty about the total estimate decreases, as illustrated
in the cone of uncertainty diagram

A good cost estimatewhile taking the form of a single numberis supported by detailed
documentation that describes how it was derived and how the expected funding will be spent in
order to achieve a given objective

This documentation is often titled Basis of Estimate (or BOE). Additional documentation may
accompany the estimate, including quantity takeoff documentation and supporting calculations,
quotes, etc.

Cost Contingency
Keywords: UNCERTAINITY

The estimated cost of events those are likely to occur of which the occurrence or the exact cost
is NOT definitely known at the moment of estimate preparation.

The estimated cost of known-unknowns that would occur in statistical basis

Another definition:

An amount added to an estimate to allow for items, conditions, or events for which the state,
occurrence, or effect is uncertain and incurs additional costs

Typically estimated using statistical analysis or judgment based on past asset or project
experience

Estimating and Contracting Contingency

To provide a compensation for;

Estimate accuracy based on assumed or measured quantity

Unanticipated market conditions

Scheduling delays and acceleration issues

Lack of bidding competition

Interfacing omissions between various work categories

Additional classification of Contingency depending on the current stage of the project life cycle

Design contingency / Design definition contingency

Design growth contingency

Change order / Variations contingency

Contingency exclusions

Major scope changes (such as changes in end product specification, capacities, building sizes, and
location of the asset or project)

Extraordinary events such as major strikes and natural disasters

Management reserves

Escalation and currency effects

Cost Contingencycontd
Known-unknowns include (but are not limited to);

planning and estimating errors and omissions

minor price fluctuations (other than general escalation)

Design developments and minor changes within the scope

Variations in market and environmental conditions.

Contingency is generally included in most estimates, and is expected to be expended

A key phrase above is that it is "expected to be expended". In other words, it is an item in an estimate
like any other, and should be estimated and included in every estimate and every budget. Because
management often thinks contingency money is "fat" that is not needed if a project team does its job
well, it is a controversial topic.
In general, there are four classes of methods used to estimate contingency

Expert judgment

Predetermined guidelines (with varying degrees of judgment and experimentation used)

Simulation analysis (primarily risk analysis judgment incorporated in a simulation such as MonteCarlo)

Parametric Modeling (empirically-based algorithm, usually derived through regression analysis,

with varying degrees of judgment used).

The selected method should comply with the first principles of risk management. I.e. the method must
start with risk identification, and only then are the probable cost of those risks quantified. In best
practice, the quantification will be probabilistic in nature (Monte-Carlo is a common method used for
quantification).
Contingency is included in budgets as a control account. As risks occur on a project, and money is
needed to pay for them, the contingency can be transferred to the appropriate accounts that need
it. The transfer and its reason is recorded. In risk management, risks are continually reassessed
during the course of a project, as are the needs for cost contingency

Design Development Contingency

Cost Estimating and Assessment Guide | Step-by-step

1. Define estimates purpose
a. Determine estimates purpose, required level of detail, and overall scope
b. Determine who will receive the estimate
2. Develop estimating plan
a. Determine the cost estimating team and develop its master schedule
b. Determine who will do what parts of the estimate (who is doing what?)
c. Outline the cost estimating approach
d. Develop the estimate timeline
3. Determine estimating structure
a. Define a work breakdown structure (WBS)
b. Choose the best estimating method for each WBS element
c. Identify potential cross-checks for likely major cost drivers
d. Develop a cost estimating checklist
4. Identify ground rules and assumptions
a. Clearly identify / define what the estimate includes and excludes
b. Identify specific assumptions (such as the estimates base year, including timephasing and life cycle, inflation assumptions
c. Identify any time or budget constraints
d. Identify material and/or equipment that would be supplied by the Client
e. Identify the use of existing facilities (Often disregarded from an estimate)
5. Obtain data

6. Develop point estimate and compare it to an independent cost estimate

7. Conduct sensitivity analysis
8. Conduct risk and uncertainty analysis
9. Document the estimate
10.

Present estimate to management for approval

11.

Update the estimate to reflect actual costs and changes