Cost Engineering

1. Fundamental Principles of Cost Engineering

1.1 Introduction
1.2 Definitions and Terminology to Cost Engineers
1.3 Cost Engineering Traits
1.4 The Function of Cost Engineering in Construction
1.5 Considerations in Costing

2. Construction Pricing and Contracting

2.1 Tendering Policy and Procedure
2.2 Contract Provisions for Risk Allocation
2.3 Construction Contracts

3. Cost Estimating Approach

3.1 Types and Methods of Estimates
3.2 Preliminary Cost Estimate
3.3 Detailed Cost Estimate

4. Introduction to Value Engineering

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1. Fundamental Principles of Cost Engineering
1.1 Introduction
Before taking up any construction work for its execution, the owner or
builder should have a thorough knowledge about the volume of work that
can be completed within the limits of his fund or the probable cost that may
be required to complete the contemplated work. It is therefore necessary to
prepare the probable cost or estimate for the intended work from its design
plan and specifications. Otherwise it may so happen that the work has to be
stopped before its completion due to shortage of funds and or materials.
There are many costs associated with construction projects. Some are not
directly associated with the construction itself but are important to quantify
because they can be a significant factor in whether or not the project goes
forward and feasible. These include the initial capital cost and the
subsequent operation and maintenance costs. Each of these major cost
categories consists of a number of cost components:
Land acquisition, including assembly, holding and improvement
 Planning and feasibility studies
 Architectural and engineering design
 Construction, including materials, equipment and labor
 Field supervision of construction
 Construction financing including overhead costs
 Insurance and taxes during construction
 Owner's general office overhead
 Equipment and furnishings not included in construction
 Inspection and testing
The operation and maintenance cost in subsequent years over the project life
cycle includes the following expenses:
 Land rent, if applicable
 Operating staff
 Labor and material for maintenance and repairs
 Periodic renovations
 Insurance and taxes
 Financing costs
 Utilities
 Owner's other expenses

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It is important for design professionals and construction managers to realize
that while the construction cost may be the single largest component of the
capital cost, other cost components are not insignificant. Early on, the owner
wants to understand the nature of these costs as well as have some indication
of what the construction itself will cost in order to analyze the life cycle
costs and determine the worthy fullness of the investment. The Cost-Benefit
Analysis can serve as a decision making tool to address all the costs and the
corresponding associated benefits worth to the owner.
Cost Engineering is a dynamic process that begins in the very early stages of
a project and ends when the project is turned over to the owner. As a project
moves along time, the amount of information generated increases. The
information improves an estimate’s accuracy but also costs more to develop
and takes more time. Cost estimating is critical in the development of the
project because it informs the owner of costs, which in turn guide design
decisions.
Cost Engineers consider past projects while anticipating new factors. Some
of these factors include:
 Current technologies ,
 Market demand and supply of material and labor,
 Quantities of materials,
 Collective bargaining agreements of suppliers and buyers,
 Level of quality,
 Requirements for completion.
A good database of actual costs from past project experiences facilitate the
preparation of a quick and accurate cost estimate. Cost Engineers spent
considerable time and resources developing and protecting this database.
Each new project provides a clearer picture of the actual cost of construction
and adds to the value of the data. Larger design and construction companies
maintain their own databases. Smaller companies may rely on the data
developed from independent cost consultants and cost data suppliers.

1.2 Definitions and Terminology for Cost Engineers

Prior to the disposition of the overall concept of costing, it would be to the
interest of Cost Engineers to define the following terminology for an ease

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reference and common understanding as they are used in the Construction
Industry.
 Construction Costs: valued consumption of goods /material/
and performance /labor work/ of different kind and amount for
the purpose of the production.
 Depreciation/ Depletion Costs: Costs of goods/equipment/ or
plant distributed for the whole useful life to compensate its
deterioration to the work. Although a nonlinear relationship
exists, a linear or a straight-line
Average method is often preferred.
Original Value
100%
Depreciation Value

Full Depreciation
Residual Value

Residual Value

Useful Life “n” years

Residual Value: refers to current value of goods determined

by reducing the depletion cost from the original value.
 Interest Value/Rate: Value of goods foregone by not using
resources at their best allocation. E.g. Opportunity Cost. An
interest rate is accounted for cash deposited in any bank being a
compensation granted for not using the money at its best
allocation. (e.g. Investment)
 All-in Material Rate: A rate which includes the cost of material
delivered to site, waste, unloading, handling, storage and
preparing for use.
 Basic Material Price/Index: Unit price of the material including
transportation, unloading, waste, handling, storage and
preparing for use.
 All-in Labor Rate: A compounded rate which includes payment
to operatives and the costs which arise directly from the
employment of labor.
 All-in Plant Rate: A compounded rate which includes the costs
originating from the ownership or hire of plant together with
operating costs.
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  Direct Costs: Costs directly rendered to the production of the
work. It includes, all-in material costs, all-in labor costs and all-
in plant costs.
 Overhead Costs: Costs incurred not to the direct itemized works
but indirectly to the overall production and performance of the
work. E.g.
 Secretarial services,
 Transportation facilities,
 Administrative works,
 Utility provisions: energy, water, communication,
sanitation,

General Overhead Costs

Two forms of Overhead Costs

Site Overhead Costs

 General Overhead Costs: The cost of administering a company

and providing off-site services. The apportionment of head
office overheads to projects and to the company as a whole is
decided by management as part of management policy.
 Site Overhead Costs: The cost of administering a project and
providing general plant, site staff, facilities and site based
services and other items not included in all-in rates.
 Mark-up Costs: the sum added to an estimate in respect of the
general overhead costs including profit and risk.
 Production Costs: Costs representing the sum of direct costs
(all-in costs) and site overhead costs. Costs required for
production of the works on site.

1.3 Management Planning

The goal of a project manager is to complete projects on time and within
budget. The best way to accomplish this goal is to plan for it, so the two key
tasks in planning are costing and scheduling. Therefore understanding the

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Cost Estimating and Cost Budgeting processes that develop the costing
documents will help obtain ones goal.
Cost Estimating is the process of developing an approximation of the cost
of the resources needed to complete project activities including the
consideration of the possible fluctuations and other variances such as risk.
Throughout the Cost Estimating process various alternatives are considered
to assure accurate and effective estimates. This process is conjoined with the
Activity Resource Estimating process and is foundational work necessary
for Cost Budgeting.
The inputs to the cost estimating process are outputs from the
other planning processes. These include the project scope
statement, the project management plan, the work breakdown
structure, staffing management plan, and organizational process
assets. The main outputs of the cost estimating process are the
Activity Cost Estimates and the Activity Cost Estimate
Supporting Detail.

 Activity Cost Estimates - These are assessments of the probable

costs of the resources necessary to complete project activities.
 Activity Cost Estimate Supporting Detail - This provides a
description of the activity's scope of work, documentation about how
the estimate was developed, known constraints, explanations of any
assumptions that were made, and a range of possible results.

Cost budgeting is the process of aggregating the estimated costs of

individual activities or work packages to establish a cost baseline. It requires
having all cost estimating processes completed. The difference between cost
estimates and a cost budget is that the cost estimates portray costs by
category, versus a cost budget which displays costs across time. The inputs
into the Cost Budgeting process are:
 Activity Cost Estimates - These predict the cost for the project work.
 Activity Cost Supporting Detail - This provides useful data on how
the estimate came about.
 Project Schedule and the Resource Calendar - Both dictate when
project activities occur and when associated budget monies will be
spent.
 The Contract This details purchasing requirements and associated
cost.
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  The Cost Management Plan -This reflects how project costs will be
controlled.

The end result of the Cost Budgeting process is a Cost Baseline, which is a
time-phased budget that will be used to measure and monitor overall cost
performance on the project—usually displayed in the form of an S-curve.
Additionally, the Cost Budgeting process will produce Project Funding
Requirements, including a management reserve amount that is included
along with the cost baseline to compensate for either early progress or cost
overruns.

The Estimating Problem

How does a cost engineer
estimate the cost of a
construction project?

Fig. The estimating objective: to hit the target.

The Figure illustrates subjective estimates attempting to hit the target, which
is the actual cost. The subjective value chosen by each estimator was
considered to represent the resources required by each firm to complete an
example office-building project. We can see that the estimates are all
scattered around the target of actual cost. Hitting the target is not a common
occurrence and is an inbuilt problem of estimating.
Briefly, let us consider an estimator pricing a brickwork item.
What are the difficulties presented? They are as follows:
1. Choice of work method.
2. Output of crew (given the firm’s unique efficiency).
3. Cost of labor
4. Cost of material and selection of an appropriate wastage
allowance.
5. Addition of overheads and profit

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Choice of work Method
There may be many or only a few work methods available. For instance,
should the estimator assume a three-man or a four-man crew, composed of
two or three bricklayer with either one or two laborers? Will there be central
mortar mixing or individual mixers for each crew? How will the brickwork
be constructed? Will trestles or proper standing scaffolding be used? Where
will work commence from? What restrictions will the other trades impose
on the masonry work?
All possibilities must be investigated, and the most economical possibility
should be chosen.
Output of crew
The output chosen will be based on past performance, since the estimator
will assume that this performance will be repeated in the future. As will be
explained later, recording and properly documenting job site performance is
helpful to the estimator when he or she considers future projects.
Manipulation of these historical data may occur; for example, decreasing
output to allow for restricted working condition. Whatever manipulation
occurs, the estimator is faced with the difficulty of trying to assess what
output will be achieved.
Cost of labor
How much will the contractor be required to pay for labor? The estimator
must predict this cost. The labor cost will vary depending on job location,
availability of skilled labor, contract wage regulations, union or open shop
labor requirements, general market conditions, and so on.
Cost of Material
This can be predicted with a fair degree of accuracy if the material in
question is in ready supply and is frequently purchased. The quantity of
material required must be accurately measured from the drawing and is not
dependent on the crew performance or work method adopted. Although
the estimator must not only consider the finished in -place quantity of
material, but also must allow for a wastage factor, this factor can vary
dramatically and is highly dependent on the performance and work
procedures adopted by the crew.

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Addition for overheads and profit
This amount will depend on company policy, market condition, and many
other variables that will be discussed later. It is, as you can imagine, very
important to incorporate overhead and profit into the final estimate.

Variances between estimates and actual costs do occur. The estimator,

unfortunately, always appears to be incorrect, since an estimate is an
“estimate”, which is a forecast of the anticipated future cost. Many forces
can, in reality, cause the actual cost to vary from the estimated cost. It
sometimes appears to owners and management that, when the estimate does
not equal the actual costs, a mistake has been made. Because it is an
estimate, it should always be expected that the actual cost will vary
somewhat from the estimated cost. It is the job of the estimator to minimize
the extent of variance between estimate and actual cost. Any data collection
system must be able to recognize that variances exist.

Variability of Estimates

The following are where cost variances between one estimate and another
can occur:
1. Quantity take off.
2. Material Costs.
3. Labor Costs.
4. Labor productivity forecasts.
5. Work Methods.
6. Construction equipment costs.
7. Indirect Job costs.
8. Subcontractor quotations.
9. Quotations from material suppliers.
10. Unknown site conditions.
11. Locational Factors.
12. Cost associated with the time element of the construction project and
escalation costs.
13. Staging and project start up costs.
14. Overheads.
15. Profit element.
16. Contingency and risk allocation.
17. Errors in estimate formulation.
18. Basis of information used to formulate estimate.
19. Market forces.
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The total cost estimate is made up of numerous smaller cost estimates for
each activity required to complete the overall project. The estimating
equation is therefore composed of a series of calculations, the estimator has
to assess and propose a monetary solution. The total cost estimate is the
total of all the minor monetary solutions.
Each assessment the estimator performs is based on:
 Previously recorded data (historical data)
 The estimators own past experience.
 Previous experience of others.
 Hunches/intuition.
The final assessment is subjective. The estimator will decide what
productivity to allow, or what birr allowance or unit price to use. This
subjective act is the main reason why estimates vary. If you give identical
drawings and specifications to 100 estimators, you will get 100 different cost
estimates.
Figure below indicates the factors influencing variance in an estimate.

Historical date Subjective hunches

Variance

Information provided
Estimating experience
by others

Basic reasons for variances being introduced into cost estimates – the
subjective assessment.

1.3 Cost Engineering Traits

Cost Engineering shares common traits of the following:

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 Conflicting Issues of quality, size, performance and cost: As
projects develop, there is continual competition among issues of
quality, size, performance and cost. Owners want to have the biggest
facility with the best finishes and systems that will perform over time
with least possible amount of money. With these criteria, it is likely
that conflicts are bound to arise.

Owner
Need
Decision on
quality & Cost
Designer/
Constructor

Cost Information
Project Information

Cost Engineers

The design and construction team uses estimates to ensure that good
cost information developed and a feedback loop established so that
these conflicts can be addressed as quickly as possible. As project
information becomes available, it is passed through a costing exercise.
The owner can then decide to proceed based on this information or
ask for some alteration in the design. The designer can then devise
ways to meet the cost targets. Through this feedback loop, conflicting
demands of cost versus performance can be resolved.
 Cost Engineering combines both science and art: Cost estimates are
a product of information supplied by the designer, the owner and the
suppliers. Experienced Cost Engineers use much judgment in
interpreting and configuring this information.
 Cost Engineering does not offer guarantees of costs: Used properly,
however, can be important tool in bringing a project under or at

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 budget. The costs developed during design and even at the bidding
stage are almost never the final and complete costs of the project.
 Costing can only be as accurate as the information upon which it is
based: Cost accuracy depends on many factors. Document
completeness, data base accuracy, the skill and judgment of the Cost
Engineer.
 Cost estimate accuracy increases as the design becomes more
precisely defined: A normal feature of the design process is that
earlier stages of design are less precise than later stages. Cost
information provided at schematic and preliminary design will by
nature be less accurate than the ones provided at design developments.

Inputs

 Scope
Definition

 Time to
Prepare Costing
Accuracy
 Quality of
Cost Data

 Cost
Engineers
Skill

 Cost estimate is based on previous estimates: A good, accurate

estimate does not stand alone. It is the product of lessons learned from
previous estimates.
 Costing requires standard computing methodology and
procedures: As the design proceeds, the level of details
increases. Costing as a consequence becomes more complex
reflecting the many different factors that go into each unit of
work. Calculations increase in number and the potential to leave
something out becomes greater. Only through adherence to
strict methods and procedures that mistakes can be minimized.

1.4 The Function of Cost Engineering in Construction

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 From an owner’s perspective, ascertain the necessary amount required
to complete the proposed work for his decision and arranging finance
for the same. For public construction works, cost estimates are
required to obtain administrative approval, allotment of fund and
technical sanction.
 It can guide the decision among two or three possible options.
Identifying costs early facilitates sound decision making, but such
estimates will have little hard design information.
 Cost Engineering offers guidelines to the designer, who selects
materials and sizes the project to fall within the owner’s budget. As
the project proceeds, the design must be continually compared to this
budget. If it begins to exceed the budget, the designer must determine
the best alternatives for cost reduction.
 At the end of the design process, estimates are prepared to figure the
bid prices of individual contractors under the competitive bidding.
 Cost estimates form the base core for negotiation between the signing
parties in a contract agreement. The project management team often
prepares a detailed estimate at this point to verify the accuracy of the
bid prices and to negotiate with the trade contractors.
 Cost engineering can be used by the project manager to define the
scope of the work for each subcontractor as well as determine fair
pricing. Because each estimate is broken down by units of work, the
project manager can extract information regarding quantity and cost
for the particular situation. Cost Engineering can also be used as a
planning tool. Procurement specialists use to define how much of a
given item will need to be purchased. In the field, superintendents
consult the estimate to determine the total quantity of work to be built
in a particular location, the total number of hours needed to do the
work, and the materials required.
 Cost Engineering can also help to fix up completion period from the
volume of works involved in the estimate.
 Cost Engineering helps to justify investments from cost-benefit
analysis.
 Estimate is required to invite tenders and prepare bills for payment.
 Cost Engineering helps for valuation of existing property which itself
is for a number of purposes.
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1.5 Considerations in Costing
Project price is affected by the size of the project, the quality of the project,
the location, construction time, and other general market conditions. The
accuracy of costing is directly affected by the ability of the Cost Engineer to
properly analyze these basic issues.
1. Project Size
The size of the project is a factor of the owner’s needs. At the conceptual
stage, size is an issue of basic capacity, such as apartment units for a real
state developer or kilometers of roadway for highway engineering. As the
project becomes better defined, its size begins to be quantified more
accurately.
The principle of economy of scale is an important factor when addressing
project size. Essentially as projects get bigger, they get more expensive but
at a less rapid rate. This occurs because the larger the project, the more
efficiently people and equipment can be used. Also as people repeat task,
they get better and faster, reducing the cost of labor. On large commercial
building and heavy engineering projects, worker productivity is plotted into
learning curves. Cost Engineers treat project size by establishing tables that
recognize the typical size of a project and a respective price and then adjust
up or down from this norm.
Average time required per unit

Learning Curve

Number of Units

As operations continue, crews learn so that the time required to complete the
next like unit is less. In general for buildings built to the same specification

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in the same locality, the larger building will have the lower unit area cost.
This is mainly to the decreasing contribution of the exterior walls plus the
economy of scale usually achievable in larger buildings. As an example, the
area conversion scale shown below will give a factor to convert costs for the
typical size building to an adjusted cost for the particular project.

.8 .85 .90 .95 1.0 1.05 1.1 1.15 1.2

Cost Multiplier Curve
Cost Multiplier Index

0.5 0.6 0.7 0.8 0.9 1.0 2.0 3.0

Area Conversion Scale

Building Type Median Cost per M2 Typical Size

(USD) Gross M2
Apartments 550 1890
Banks 1233 378
Colleges 1074 4,500
Gymnasiums 770 1728
Fig: Typical project size and method for modifying for economy of
scale.

Example: Determine the cost per m2 of 3780 m2 apartment

building.
Area Conversion Scale = Proposed Area/ Typical Size
= 3780/1890 = 2.0
From the conversion curve, one can get a cost multiplier
index of 0.95
Adjusted Cost per m2 = 0.95 x 550 = 522.5 USD

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2. Project Quality
An owner may require a high quality project to create a specific image or
may need facilities for a specific use. Whatever the reason, the consequences
are always the same: an increase in costs. Early in the project, the Cost
Engineer must discuss expectations of quality with the users, the designers
and applicable government agencies.
3. Project Location
Constructing a facility in a locality is very different from constructing one
on other areas. The differences are in labor costs, the availability of
materials and equipment, delivery logistics, local regulations, and climate
conditions. Material costs are a factor of availability, competition, and
access to efficient methods of transportation. Labor costs, particularly
unionized labor, are a factor of the strength of the local bargaining unit. The
cost of labor is also a factor the degree of sophistication and level of training
found at the project location. On some projects the numbers and the skill
levels of workers required are not available locally and must be imported.
Understanding the need for such importation adds significantly to the
accuracy of an estimate.
Local conditions can influence the costs of the project. The need for citizen
involvement, local taxes or fees, and government requirements all can cost
the project money. Extreme climatic conditions, political instability, and
earthquake zones all add to the cost in ways that may not be entirely obvious
without some investigation.
The cost of labor and material in different locations can be predicted by
establishing location indices for different cities and parts of the country. An
index is created for a particular city by comparing the cost of labor,
equipment and material for that city to the national average. This allows an
estimator using national average costs to adjust the estimate to a particular
location. Most design and construction companies have developed an
accurate record of location indices, which they use for their pricing, or they
buy this cost data from national pricing suppliers. To predict the costs of
other local factors, such as political instability, a company either uses its
own experience in the locale or teams up with a local partner who knows
how the local atmosphere can affect project costs.

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Various locational difficulties are described:
1. Remoteness
2. Confined sites
3. Labor availability
4. Weather
5. Design considerations (related to location).
6. Vandalism and site security
Remoteness
A remote construction site, for example, a project site located in valleys of
Gibe River, poses a contracting organization with a difficult set of problems
to cope with.
Communication Problems
If adequate communications such as telephone are not available, then a
radio or cellular-type installation is required. A telephone is a requisite to
any construction project: lack of communication during the construction
process can result in major, costly errors. In addition, because the project
location is further away from the head office, additional long-distance
telephone charges will be incurred.
Transportation Problems
All material and labor must be transported to the building site. If the
transport route is poor (if, indeed, any route exists at all), then delays in
material deliveries may occur; large vehicles may damage narrow bridges
(case of Gilgel Gibe Hydro-power project) or other items of property,
whose replacements costs must be borne by the contractor.
It may be necessary for the contractor to widen the existing route or
construct a bridge to allow material trailers access into the job site. The
route that is proposed should be studied carefully by the estimator.
Existing capacity of existing bridges on route should be established to
verify if equipment loads can be accommodated of if the bridge needs to
be strengthened by the contractor. Finally, the cost of hauling items of
equipment to the job site increases as the distance increases. Given these
considerations, the requirement for management to make the correct
equipment selections becomes very important.

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 Increased Material Cost
Increased material cost is primarily due to increased transport charges
such as when distance for haulage from the depot to a remote job site is
longer than the haulage associated with other construction projects the
estimator has previously worked on. Avery4 found that if the material
was fragile or hazardous, then transport costs fluctuated widely depending
on distance. He also discovered that the bulk materials with low initial
cost, such as sand and gravel, tend to be the most adversely affected by
distance and difficult transport conditions. Ferry crossing or bridges with
tolls increase the basic cost of materials.
Power and Water
Power and water are a necessity for building construction. Water is
needed for materials such as concrete, for cleaning the building, and for
many other uses. Salt water is not acceptable in most specifications for
concrete or mortar mixing, so remote projects without a convenient
domestic water supply, even if the site has access to thousands of gallon of
seawater; require water to be trucked to the job site. The cost of water
depends on the hauling costs. In some instances wells can be dug to pump
water to the surface; of course, the costs involved must be considered in
the estimate.
If no power source is available, then power must be provided by
generators.

Confined Sites

The problems associated with confined sites generally take the form of
congestion resulting in restricted working areas resulting in low productivity
from labor and equipment. These difficulties are generally associated with
downtown sites, but this need not always be the case.
In extreme cases, congestion can limit the choice of work methods, types of
equipment used, and size of crew to be employed. Careful investigation of
the problems likely to be associated with each particular site will allow a
realistic assessment of factors such as productivity to be made. Project
startup requires a careful utilization of resources in order to provide
production outputs that maximize profits. Confined sites create logistical
problems. Material movement should be minimized: each time an item of

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material is moved, its cost to install in place increases. When materials are
delivered to a confined site, the material should be used immediately. If this
is not possible, a storage area should be available to receive the material, or,
if possible, the material should be offloaded directly at its intended
utilization point.
The estimator needs to consider the unique logistical problems associated
with each job site. These problems, including restricted access, restricted
material lay down area, restricted equipment storage areas, and restricted
location for site trailers, affect the type of equipment that can be used, the
effective management of the job, the worker productivity, and the amount of
labor involved in handling material. Since confined sites nearly always pose
logistical problems, the unit prices used by the estimator must account for
the increased costs.

Labor Availability

Each location has varying amount of available skilled and unskilled labor,
depending on the condition of the local economy. If labor of any kind is not
available locally (as may be the case in remote areas), then labor must be
imported from other location. In order to move labor from one area to
another, a financial incentive is usually required. The magnitude of this
incentive will vary depending on the state of the labor market. If labor is
imported, accommodations may have to be provided. Labor camps
comprising full time kitchen staff, dormitories, leisure facilities, etc., have
been set up on major construction project to house the contractor’s labor
force. The leisure facilities keep the labor force relaxed and occupied during
any rest periods. Living and working on a remote construction site can be
very demoralizing, after a while, and by keeping the morale level high, labor
turnover is reduced. Generally, the cost of importing labor will follow the
laws of supply and demand.

Weather

Since the building process is highly weather dependent, extreme conditions

can greatly affect building costs. These extreme weather conditions include
large amount of rain or snow, occurrences of ice and frost, and high
humidity and heat. Their effects on cost include the following situation.
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Concrete pours in temperatures below 40 degrees Fahrenheit require special
precaution. With cold weather concreting, the cost of admixtures,
insulation the formwork, removing ice from formwork, and protecting the
freshly placed concrete from dropping below the specified temperatures
must be taken in to account by the estimator. Not only does cold weather
affect concrete, but hot weather concreting has its associated problems as
well. During periods when the temperature exceeds 80 degrees Fahrenheit,
special precautions are required to reduce and maintain the concrete below
this temperature. For example, ingredients such as the water may be cooled
or chopped ice can be utilized. Another alternative is to use liquid nitrogen
to cool the concrete. Admixtures and low heat cement can be used to control
the set and hardening times of the concrete to achieve the design strength
and quality. All these precautions and procedures increase the cost of
pouring, placing, and curing concrete.
Exposed sites may have problems associated with high winds, which affect
crane and hoisting operations, and the contractor’s dust control program.
Additional temporary bracing to partly completed structures may be required
to prevent a collapse due to high wind gusts. In areas where hurricanes
occur, the estimator should consider the cost of temporary measures required
to prevent damage to a structure before, during, and after a hurricane. It
would be prudent to allow for the costs involved in bracing, tieing down
structures providing sand banks, garaging equipment, and storing particular
materials such as doors and windows off the job site, unless safe, dry, and
secure storage exists on the project.
Labor productivity is also associated with the weather. During poor weather
when it is cold, damp, and windy, the morale of workers exposed to adverse
elements, drops, which in turn results in a decline of productivity. During
days when it may be impossible to work, such as during a torrential rain, the
productivity is zero.

Design Considerations (related to location)

The location of a project has certain aspects that must be considered by a
designer. For example, in historic sites all designs must harmonize with the
existing historical buildings (example around Lalibela). Planning
committees may dictate the material selections and configurations that
designers must abide by to suit certain local conditions.
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These design considerations can create estimating problems in historic
districts. The estimator must know if the materials specified are, in fact,
locally available of if local labor exists to carry out complicated historical
work, such as ornate plaster work; if not, a specialist will be required.
Traditional building techniques tended to be labor intensive. If the same
techniques must be repeated, then the estimator must be familiar with the
procedures involved. If workers are required to use traditional, building
methods with which they are unfamiliar, then a learning curve cost needs to
be built into any unit price.
The local climate also dictates the designer’s choices in mechanical and
electrical systems and in the choice of materials and design of the building
envelope. Material resources will fluctuate from location to location
throughout the country, and the designer must investigate what materials are
locally and economically available.
Finally, each locality tends to have its own construction trade practices, and
the estimator should be familiar with them.

Vandalism and Site Security

Site integrity is an important problem in urban areas. Protective measures
can be expensive, for example, when 24-hour guard service and perimeter
enclosures, are required. The level of security will depend on the risk to the
project from the surrounding neighborhood. The local police should be
consulted.

4. Construction Time
A project is estimated at a given point in time, but usually the actual
procurement and field construction occur at some point in the future.
Sometimes this future can be years away, especially in the case of a very
large or phased project. The estimate, then, must take into consideration
when the actual project will be built. Labor and material costs usually
escalate in time; so by examining past and current trends, the estimator can
predict where these costs will be at the time of actual construction.
Other:
An estimator who accurately incorporates project size, project quality,
location, and time has an estimate that reflects the fair value for the project.
20
In a normal market without any unusual circumstances, this estimate should
reflect the price that is paid.
Market conditions, however, shift; and owners, designers, and contractors all
look at a given project from different perspectives. In a market without much
work, contractors may bid a project at cost or with little profit to cover their
overhead and keep their staff employed. On complicated projects,
contractors may bid the work low in hopes of making significant profit on
future changes. Conversely, they may bid a work high to cover the increased
risks of a complex project. It is not unusual for contractors to offer very
competitive prices when they hope to enter a new market or establish a
relationship with a new owner. Such issues are very difficult to quantify but
should be considered in the preparation of the estimate. They are usually
treated as a percentage applied at the end of the estimate, included in either
overhead or profit or in a final contingency.

21
2. Construction Pricing and Contracting

2.1 Tendering Policy & Procedure

Because of the unique nature of construction projects, it is almost imperative
to have a separate price for each. The construction contract price includes
the direct project cost including field supervision expenses which are often
referred as site overhead costs plus the markup imposed by contractors for
general overhead expenses and profit. For any firm to operate its business in
a satisfactory manner, it is necessary for its policy directors to establish a
clear objectives or a strategy. In construction pricing, it is required for an
organization to have a continual process of determining the missions and
goals of an organization within the context of its external environment that
create opportunities and threats, and its internal environment which are
expressed as strengths and weaknesses. This strategy often depends upon
many factors which the management body of the contractor has to make a
thorough analysis of the situations at hand and take up appropriate
competitive advantage. Among the factors that one has to consider during
construction pricing include:
 Work at hand in reference to contractor’s assets deployed to the work,
 The geographical areas in which the firm will operate,
 Type of structure the organization seek to control,
 Type of services the organization is to deliver,
 Type of client the organization is to favor, ( private, local authority,
community services, )
 The ultimate goal of the financial manager (profit maximization or
wealth maximization),
 Projected risks and uncertainties of the project,
 Form of the bid: (open, short-listed, pre-qualification, etc) – please
refer the diagram in the next page.
It will then be the task of the executive management to make internal
analysis of its strength and weakness to hold the best advantage. Keep
organization’s strength to exploit the opportunities and minimize the
weakness, say employing the available resources of the firm, to overcome
external threats.
22
2.1.1 Bidding Strategy:
In a competitive tendering situation, the contracting firm is constantly facing
a tradeoff of submitting a high price for getting profit and the resulting
shortage of work, with that of a low price for winning the contracts, but
allow little profit margin. A bidding strategy may be evolved for
determining the optimum bid, which will be the relationship between
maximum profit and the probability of being the lowest tenderer.
As the basis for this, it is necessary to analyze the bidding pattern of
competitors, and apply statistics rule for comparing the result with the firm’s
own estimated costs over a number of contracts. A competitor’s bid could be
obtained from the list of tender results and a bidding pattern established.
Bid Qualification Procedure

Competitive Bid Negotiative Bid

 Financial Proposal

Short-Listed Bid Open Bid

Financial Pr.

One-Stage Procedure Two-Stage Procedure

Financial Proposal

Pre-Qualification Post Qualification

 Technical Proposal  Financial Proposal

 Financial Proposal  Technical Proposal

Fig: Forms of Bid

23
In practice, because of contractor’s marketing policies, a contractor will find
he is in competition with a limited number of firms for any project in the
locality. A bidding pattern could be worked out for his major competitors.
If the contractor were able to identify the competition, an optimum bid could
be ascertained by combining the probability curves (the Z-distribution) and
developing a bidding curve using a linear regression line for this situation.
The following steps shall be followed by a competing firm to assume a
bidding strategy.
i) Preparation of a database of price quotations offered by competing
bidders. One has to collect and record the tender sum of each competitor
from the tender opening sessions. At least the winning price and the tender
sum of the contractor under consideration have to be recorded and put in a
database file for further undertakings.
Example:
Contract Contractor’s Least Bidder’s
No. Quotation Quotation
(Birr) (Birr)
1 500,000 450,000
2 750,000 750,000
3 1,000,000 800,000
4 625,000 600,000
5 850,000 800,000
6 250,000 250,000
7 400,000 350,000
8 1,200,000 1,000,000
9 900,000 875,000
10 1,100,000 950,000

ii) After having sufficient records of the respective bid prices, one could
plot the information on a scattered diagram.
X-axis: Contractor’s own tender prices
Y-axis: The least bidder and most responsive bidder’s price
For the example in (i), the scattered diagram looks the following:

24
 1,200,000

1,000,000

800,000

600,000 Series1
Scattered Diagram
Winner’ Price

400,000

200,000

0
0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000

Contractor’s Own Price

iii) Draw the most likely curve referred as a regression line. The simplest to
draw is a linear regression line that can be represented by:
Y = mX + b
Where: Y: refers to the most likely winning price,
X: refers to contractor’s tender prices
m & b are coefficients of the regression line.
m: The slope of the line
b: The intercept of the line.
n : number of samples.

n xy   x  y 

m
   n  x 2   x 
2

b
 y  x    x  xy
2

n x    x  2 2

Furthermore, one has to determine the standard deviations, to define

the probable region of winning a tender.

n 1 2
VARIANCE 
n2

s y  m 2 sx2 
25
Alternatively, Using The Microsoft Excel:

m= INDEX (LINEST(Y values, X values), 1)

b= INDEX (LINEST(Y values, X values), 2)
Sy = STDEVA (Y values)
Sx = STDEVA (X values)

For the example in (i),

m= 0.813, b= 66476.91, Standard déviation = 55509.2

iv) The final step is to decide the probability of winning a tender using
the normal distribution. The chance of winning the tender by offering the
most likely price is 50%. A contractor can increase or decrease the
probability of winning the tender using the Z-normal distribution theory of
statistics.

Example: For the example in (i), suppose the contractor’s tender sum
amounts to 675,000 Birr. Determine the rebate to be improvised with 95 %
probability of winning the tender.
The most likely winning price, Y = 0.813(675,000) + 66476.91 = Birr
615,251,91 :- taken as the mean value (µ) with a winning chance of 50%.
The Z-values of 95% probability, from the table = 1.645. The relation
between Z, and probability in this case is inverse. Higher probability is
achieved by reducing the bid price and hence we need to use the negative
value of what we read from the table.
Yi  
Z

Z= -1.645, µ = 615,251.91 and δ = 55509.2,
Yi = Birr 523,939.28
Rebate (R) = 100% -- (523,939.28/675,000) x100%
= 22.38 % (95% probability of wining)
= 8.9% (50% probability of winning)

26
2.1.2 Tendering Procedure
In order that the tendering policy of the firm be maintained it is necessary
that a procedure for the preparation of all tenders be established. This will
vary with different contractors, depending on size and personnel, but a basis
could follow the stages set out by the Ministry of Infrastructure.
Decision to Tender:
A management decision based on the firm’s position at the time of invitation
in relation to:
 Production workload,
 Future commitments,
 Market,
 Capital,
 Associated risk,
 Prestige, reputation
 Estimating workload,
 Time for preparation of tender,
Collection of Information:
If management decides to tender for the project, the estimating staff should
assemble information about project costs. An accurate estimate can only be
produced when each element is broken down into its simplest terms and the
cost estimated on factual information.
Some of the factors required include:
 Time scale for tendering with key dates as mentioned in the invitation
to bid,
 Examination of contract documents, with preliminaries attached with
the tender,
 Assessment of client and design team,
 Enquiries to suppliers and sub-contractors with a time scale,
 Site and locality visit,
 Discussion with site management, plant and planning department,
 Evaluation of alternatives
 Preparation of detailed construction method statement and pre-tender
programme, developed to include production outputs, gang sizes,
plant details, etc.

27
Preparation of estimate:
Having assembled all the information, the next task of the estimating staff is
to build the cost of the unit rates. This requires the calculation of all-in rates
for labor, plant, materials and extending these, using the production details
from the pre-tender programme. The cost of any on site administration and
services, known as project overheads is also calculated. These net
production costs, together with a project appraisal report are then submitted
to management for adjudication.
The tender:
The management of the firm would consider the mark-up required on the
estimated production costs, to cover the firm’s overheads, profit and risk of
the tender. These additional costs included, the tender figure can then be
determined and submitted.
Action with tender results:
An analysis of tenders and a comparison of results should be completed for
each project to provide a basis for future bidding strategy. With a successful
tender, cost information during the progress of the work and a final
reconciliation of estimated and final account costs should be made.

2.1.3 Firm’s Mark-up target:

In a construction firm the financial turnover will be mainly derived from
carrying out individual construction projects in competition with other
contractors. It is necessary, therefore, that a policy be established in
tendering so that each project contributes to the firm. This will entail the
setting up of a mark-up target, over the production costs, for all contracts to
be undertaken. To determine firm’s mark-up, it is required establish:
i) Return on Capital Employed (ROCE), which is made to account the
following costs:
 The average weighted cost of capital ( Interest of capital
employed)
 Profit margin (dividends, capital reserves...)
 Corporate obligations such as taxations and deprecation costs.
 Contingencies to cover uncertainties ( Risks)

28
ii) Annual Turnover on contracts. This can be obtained from the firm’s
short term plan committed or planned for execution in the current
year.
iii) General overhead costs (off-site administration): can be identified
within a company’s accounts by items such as rent, telephone charges,
electric bills, office equipment hire charges, payment to staff directors
etc. Often it is established in relation with the total turnover planned
in the trading year.
Example for determination of firm’s mark-up:
Assumptions
Capital Employed: Birr 2,000,000
Turnover on contracts for year: Birr 4,000,000
General overheads: Birr 160,000
Return on Capital Employed 17%
Target: Contracts must contribute (Head office Mark-up)
General overheads Birr 160,000
Return ( ROCE) 17% ( 2,000,000 ) Birr 340,000
Head office Mark-up = Birr 500,000

Production Costs = 4,000,000 – 500,000 = Birr 3,500,000

Mark-up on contracts = (500,000 / 3,500,000) x 100 = 14.3%

2.1.4 General Overheads:

One of the items in the mark-up is general overheads. These are the costs
entailed in administering the company and providing off-site services. They
should not be confused with project overheads which are the costs of
administering a project and providing onsite services. The allocation of
general overhead costs to individual projects and the company as a whole is
decided by management as part of their policy.
The general overheads vary with individual firms, but a broad list may
include:
 Rent, rates on office and yard,
 Fees, salaries and wages for directors and office staff,
 Office equipment, stationary, postage, telephones, cars
 Office heating and lighting

29
  Insurances on office and staff
 Interest on capital borrowed
Each contract must contribute towards these costs; the usual method of
recovery is to express them in terms of a percentage of a previous year’s
turnover. For example, if last year’s turnover was Birr 2,000,000 and the
fixed costs Birr 160,000 then:
The general overhead cost used = 160000/ 2000000 = 8%

2.2 Contract Provisions for Risk Allocation:

One of the factors to be considered by management in assessing the mark-up
rate on individual contracts would be the provision and allocation of risks in
a contract. Provisions for the allocation of risk among parties to a contract
can appear in numerous areas in addition to the total construction price.
Typically, these provisions assign responsibility for covering the costs of
possible or unforeseen occurrences. A partial list of responsibilities with
concomitant risk that can be assigned to different parties would include:
 Force major (i.e., this provision absolves an owner or a contractor for
payment for costs due to "Acts of God" and other external events such
as war or labor strikes)
 Indemnification (i.e., this provision absolves the indemnified party
from any payment for losses and damages incurred by a third party
such as adjacent property owners.)
 Liens (i.e., assurances that third party claims are settled such as
"mechanics liens" for worker wages),
 Labor laws (i.e., payments for any violation of labor laws and
regulations on the job site),
 Differing site conditions (i.e., responsibility for extra costs due to
unexpected site conditions),
 Delays and extensions of time,
 Liquidated damages (i.e., payments for any facility defects with
payment amounts agreed to in advance)
 Consequential damages (i.e., payments for actual damage costs
assessed upon impact of facility defects),
 Occupational safety and health of workers,
 Permits, licenses, laws, and regulations,
 Equal employment opportunity regulations,
30
  Termination for default by contractor,
 Suspension of work,
 Warranties and guaranties
Standard forms for contracts can be obtained from numerous sources, such
as the International Conditions of Contract, FIDIC, Standard Conditions of
Contract by Ministry of Works and Urban Development. These standard
forms may include risk and responsibility allocations which are unacceptable
to one or more of the contracting parties. In particular, standard forms may
be biased to reduce the risk and responsibility of the originating organization
or group. Parties to a contract should read and review all contract documents
carefully.

Example from contract on risk allocation

All owners want quality construction with reasonable costs, but not all are
willing to share risks and/or provide incentives to enhance the quality of
construction. In recent years, more owners recognize that they do not get the
best quality of construction by squeezing the last cash of profit from the
contractor, and they accept the concept of risk sharing/risk assignment in
principle in letting construction contracts. However, the implementation of
such a concept in the past decade has received mixed results.
Those public and private owners have found that while initial bid prices may
have decreased somewhat, claims and disputes on contracts are more
frequent than before, and notably more so in public than in privately funded
construction. Some of these claims and disputes can no doubt be avoided by
improving the contract provisions.
Since most claims and disputes arise most frequently from lump sum and
unit price contracts for both public and private owners, the following factors
are particularly noteworthy:
 unbalanced bids in unit prices on which periodic payment estimates
are based.
 change orders subject to negotiated payments
 changes in design or construction technology
 incentives for early completion and penalties of damage for late
completion,
31
  Exceptional climatic condition or physical obstruction beyond the
capacity of an experienced contractor.
An unbalanced bid refers to raising the unit prices on items to be completed
in the early stage of the project and lowering the unit prices on items to be
completed in the later stages. The purpose of this practice on the part of the
contractor is to ease its burden of construction financing. It is better for
owners to offer explicit incentives to aid construction financing in exchange
for lower bid prices than to allow the use of hidden unbalanced bids.
Unbalanced bids may also occur if a contractor feels some item of work was
underestimated in amount, so that a high unit price on that item would
increase profits. Since lump sum contracts are awarded on the basis of low
bids, it is difficult to challenge the low bidders on the validity of their unit
prices except for flagrant violations. Consequently remedies should be
sought by requesting the contractor to submit pertinent records of financial
transactions to substantiate the expenditures associated with its monthly
billings for payments of work completed during the period.

One of the most contentious issues in contract provisions concerns the

payment for change orders. The owner and its engineer should have an
appreciation of the effects of changes for specific items of work and
negotiate with the contractor on the identifiable cost of such items. The
owner should require the contractor to submit the price quotation within a
certain period of time after the issuance of a change order and to assess
whether the change order may cause delay damages. If the contract does not
contain specific provisions on cost disclosures for evaluating change order
costs, it will be difficult to negotiate payments for change orders and claim
settlements later.

In some projects, the contract provisions may allow the contractor to provide
alternative design and/or construction technology. The owner may impose
different mechanisms for pricing these changes. For example, a contractor
may suggest a design or construction method change that fulfills the
performance requirements. Savings due to such changes may accrue to the
contractor or the owner, or may be divided in some fashion between the two.
The contract provisions must reflect the owner’s risk-reward objectives in
calling for alternate design and/or construction technology. While

32
innovations are often sought to save money and time, unsuccessful
innovations may require additional money and time to correct earlier
misjudgment. At worse, a failure could have serious consequences.

In spite of admonitions and good intentions for better planning before

initiating a construction project, most owners want a facility to be in
operation as soon as possible once a decision is made to proceed with its
construction. Many construction contracts contain provisions of penalties for
late completion beyond a specified deadline; however, unless such
provisions are accompanied by similar incentives for early completion, they
may be ruled unenforceable in court. Early completion may result in
significant savings, particularly in rehabilitation projects in which the
facility users are inconvenienced by the loss of the facility and the disruption
due to construction operations.

2.3 Construction Contracts

While construction contracts serve as a means of pricing construction, they
also structure the allocation of risk to the various parties involved. The
owner has the sole power to decide what type of contract should be used for
a specific facility to be constructed and to set forth the terms in a contractual
agreement. It is important to understand the risks of the contractors
associated with different types of construction contracts.

Lump Sum Contract

In a lump sum contract, the owner has essentially assigned all the risk to the
contractor, who in turn can be expected to ask for a higher markup in order
to take care of unforeseen contingencies. Beside the fixed lump sum price,
other commitments are often made by the contractor in the form of
submittals such as a specific schedule, the management reporting system or
a quality control program. If the actual cost of the project is underestimated,
the underestimated cost will reduce the contractor's profit by that amount.
An overestimate has an opposite effect, but may reduce the chance of being
a low bidder for the project.

Unit Price Contract

In a unit price contract, the risk of inaccurate estimation of uncertain
quantities for some key tasks has been removed from the contractor.
33
However, some contractors may submit an "unbalanced bid" when it
discovers large discrepancies between its estimates and the owner's
estimates of these quantities. Depending on the confidence of the contractor
on its own estimates and its propensity on risk, a contractor can slightly raise
the unit prices on the underestimated tasks while lowering the unit prices on
other tasks. If the contractor is correct in its assessment, it can increase its
profit substantially since the payment is made on the actual quantities of
tasks; and if the reverse is true, it can lose on this basis. Furthermore, the
owner may disqualify a contractor if the bid appears to be heavily
unbalanced. To the extent that an underestimate or overestimate is caused by
changes in the quantities of work, neither error will affect the contractor's
profit beyond the markup in the unit prices.
For example if the contractor feels that the masonry work for construction of
retaining wall for a project is not properly defined and underestimated in the
design, he can raise the unit prices, say from 250 Birr per m2 to 400 Birr per
m2 and lowering the unit prices on other tasks to take up competitive
advantage of the bid. The following table shows the effect of “unbalanced
bid” among competitors.

Price as per Tender:

Description Estimated Unit prices (Birr) Tender Amount (

Quantity Birr)
Contr. A
Contr. B Contr. A Contr.
B
Masonry 50 m3 250 400 12,500 20,000
Works
Re. Bars 5000 kg 8 6 40,000 30,000
52,500 50,000

Actual Price during Construction

Description Actual Unit prices (Birr) Actual Amount (
Quantity Birr)
Contr. A
Contr. B Contr. A Contr.
B
Masonry 200 m3 250 400 50,000 80,000
34
Works
Re. Bars 5100 kg 8 6 40,800 30,600
90,800 110,600
The table clearly shows the effect of inaccurate estimation in changing the
ranking positions of competitive contractors. Contractor B seems the lowest
bidder in table 1 by taking the advantage of the underestimated quantity of
masonry work. As construction progresses, the risks of the underestimation
will be transferred to the owner which is contrary to the lump sum contract
provision, where the contractor will be responsible to absorb all risks
associated with inaccurate estimation of works.

Cost plus Fixed Percentage Contract

For certain types of construction involving new technology or extremely
pressing needs, the owner is sometimes forced to assume all risks of cost
overruns. The contractor will receive the actual direct job cost plus a fixed
percentage, and have little incentive to reduce job cost. Furthermore, if there
are pressing needs to complete the project, overtime payments to workers
are common and will further increase the job cost. Unless there are
compelling reasons, such as the urgency in the construction of military
installations, the owner should not use this type of contract.

Cost plus Fixed Fee Contract

Under this type of contract, the contractor will receive the actual direct job
cost plus a fixed fee, and will have some incentive to complete the job
quickly since its fee is fixed regardless of the duration of the project.
However, the owner still assumes the risks of direct job cost overrun while
the contractor may risk the erosion of its profits if the project is dragged on
beyond the expected time.

Cost plus Variable Percentage Contract

For this type of contract, the contractor agrees to a penalty if the actual cost
exceeds the estimated job cost, or a reward if the actual cost is below the
estimated job cost. In return for taking the risk on its own estimate, the
contractor is allowed a variable percentage of the direct job-cost for its fee.
Furthermore, the project duration is usually specified and the contractor
must abide by the deadline for completion. This type of contract allocates
35
considerable risk for cost overruns to the owner, but also provides incentives
to contractors to reduce costs as much as possible.

Target Estimate Contract

This is another form of contract which specifies a penalty or reward to a
contractor, depending on whether the actual cost is greater than or less than
the contractor's estimated direct job cost. Usually, the percentages of savings
or overrun to be shared by the owner and the contractor are predetermined
and the project duration is specified in the contract. Bonuses or penalties
may be stipulated for different project completion dates.
Guaranteed Maximum Cost Contract
When the project scope is well defined, an owner may choose to ask the
contractor to take all the risks, both in terms of actual project cost and
project time. Any work change orders from the owner must be extremely
minor if at all, since performance specifications are provided to the owner at
the outset of construction. The owner and the contractor agree to a project
cost guaranteed by the contractor as maximum. There may be or may not be
additional provisions to share any savings if any in the contract. This type of
contract is particularly suitable for turnkey operation.

36
3. Cost Estimating Approach

3.1 Types and methods of Estimates

A) Approximate Estimate
Preliminary Estimates: Early in the planning stages, both building
owners and designers must agree on an anticipated cost of the project
at bid award. Preliminary Estimates are employed in the early
planning phases of a proposed project to match an owner's needs,
expressed as written programmatic requirements, with budget
constraints in order to establish its overall scope (size) and quality
expectations. Estimate comparisons at this stage are especially
valuable in evaluating the feasibility of strategic alternatives being
considered to satisfy current and projected space requirements (e.g.
new construction versus renovation, or lease space). As the design is
not fully developed at this stage, a contingency is typically included in
the order of 15%.
Intermediate Estimates: After proceeding with a preferred course of
action, Intermediate Estimates are employed at various stages of
project design development to maintain accountability for initial
budget projections and as a means of evaluating competing alternative
construction assemblies, systems, and materials. On large projects it is
common practice for an owner to employ a construction manager or
professional estimator to continually update project estimates and
provide feedback on budget impacts of decisions on major design
elements. As the design progresses, the contingency can be.

B) Detailed Estimate

Final Estimates: As the design is completed a detailed pre-bid

estimate can be prepared. At this stage the contingency would be
reduced to zero. The estimate should be organized in the same format
as required of the bidders, which typically is the unit price bill of
quantity format. This then allows for a comparison of the final
estimate with the bids received and can aid in negotiating with the
lowest bidder. In addition, having the final estimate and bids in the

37
 same format facilitates the development of a cost database for use in
planning future projects.

Estimating Methods
There are four primary methods used to estimate construction costs. Those
methods are known as:
 Project Comparison Estimating or Parametric Cost Estimating,
 Area & Volume Estimating,
 Assembly & System Estimating, and
 Unit Price & Schedule Estimating.
Each method of estimating offers a level of confidence that is directly
related to the amount of time required to prepare the estimate: fig A

Fig A: Relative Accuracy of Estimate Types

(Courtesy of From Concept to
Bid…Successful Estimating Methods by
John D. Bledsoe)

Graph of Relative Accuracy of Estimate Types – comparison of

relative accuracy and time spent in preparing the estimate. From least
accurate and shortest time spent to most accurate and longest time
spent: Preliminary or Project Comparison Estimate (hours), Square
Foot and Cubic Foot Estimate (hours-days), Assembly and System
Estimate (days), Unit Price and Schedule Estimate (weeks).

Project Comparison Estimating or Parametric Cost Estimating is often

used in early planning stages when little information is known about the
program other than overall project parameters. This method is sometimes
called a “ preliminary “ or "ballpark" estimate and has no better than 15% to
25% accuracy. Project comparison estimating uses historical information on
total costs from past projects of similar building type. For example, the
number of beds in a hospital, or number of spaces in a parking garage, or
38
number of courtrooms in a courthouse can form the basis of a project
comparison estimate by comparing them to similar scope projects recently
done in the same geographic region.
This estimating method requires the assumption of an approximate gross
area for the proposed work and a sufficient historical record of similar
building types. The greater the number of prior project combinations for
which scope and prices are known, the easier it is to perform Project
Comparison Estimating. Fig. B illustrates an example of regression analysis
used to develop a project comparison estimate. The scattered points in the
figure show the combinations of overall project size and cost. The line
shown is the "best fit" of a linear relationship between size and construction
cost and may serve to predict a preliminary budget. The distances between
the line and the points give a visual impression of the statistical confidence
of the estimate.

Fig. B: Project Relative Accuracy of Estimate Types

(Courtesy of From Concept to Bid…Successful
Estimating Methods by John D. Bledsoe)

Line graph of the Range of Costs compared to the approximate

gross area in thousands of square meters for similar building types-
graph begins roughly at a gross area of two thousand square meters
at a cost of under two million and increases at an incremental rate
twenty thousand square meters at a cost of ten million.

Square Foot & Cubic Foot Estimates are another method of developing
both preliminary and intermediate budgets based on historical data. This
method is effective in preparing fairly accurate estimates if the design is
developed enough to allow measurement and calculation of floor areas and
volumes of the proposed spaces. There are several historical databases
available to support this method of estimating providing unit costs that are
adjusted annually and many of the large estimating firms maintain their own
39
databases. 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. Further adjustments may be
made to account for other unique aspects of the design such as special site
conditions or design features being planned. In addition, the estimate can
develop overall "core and shell" costs along with build-out costs of different
space types, allowing for relative ease of determining the impact of changes
to the program. Estimates made with this method can be expected to be
within 5% to 15% of accurate.
Assembly & Systems Estimates are intermediate level estimates performed
when design drawings are between 50% and 75% complete. Assemblies or
systems group the work of several trades or disciplines and/or work items
into a single unit for estimating purposes. For example, a foundation usually
requires excavation, formwork, reinforcing, and concrete— including
placement and finish— and backfill. An Assembly & Systems estimate
prices all of these elements together by applying values available in
assemblies cost data guides. Estimates made with this method can be
expected to be within 10% of accurate.

Unit Price and Schedule Estimating, the work is divided into the smallest
possible work increments, and a "unit price" is established for each piece.
That unit price is then multiplied by the required quantity to find the cost for
the increment of work. This calculation is often called "extending". Finally,
all costs are summed to obtain the total estimated cost. For example, the cost
to erect a masonry wall can be accurately determined by finding the number
of bricks required and estimating all costs related to delivering, storing,
staging, cutting, installing, and cleaning the brick along with related units of
accessories such reinforcing ties, weep-holes, flashings and the like. This
method of estimating provides the most accurate means of projecting
construction costs, beyond which accuracy is more likely to be affected by
supply and demand forces in the current market.

3.2 Approximate Cost Estimate

This is made to find out an approximate cost in a short time and thus enable
the responsible authority concerned to consider the financial aspect of the
scheme for according sanction to the same. Such an estimate is prepared
40
adopting different methods for different types of works. During preparation
of the estimate detailed surveying, design, drawings etc., are not required.
This estimate is prepared after preliminary investigation, preliminary
surveying and a line sketch of the drawing according to the requirements.
Rates are determined either from practical knowledge or from records of
similar works.
The estimate is accompanied with a brief report stating the sources of
proposal, necessity and demand, provisions or accommodations made,
viability, basis of the estimate, rates and how the expenditure involved can
be met. Beside the report the estimate is provided with a line plan, site or
layout plan, soil testing by trial boring etc…
Purpose of approximate estimate:
Approximate estimate is worked out before preparation of detailed estimate
of a work or a project to serve mainly for the following purposes:
i) To investigate feasibility: An approximate estimate of a project gives an
idea for the probable expenditure in a short time. From the outline idea of
expenditure the practicability to take up such a project considering
availability to fund can be ascertained.
ii) To save time and money: Before having any rough idea of financial
implications if detailed drawings, specifications and detailed estimates are
prepared, spending much time, labor and money and finally the project is
rejected due to unexpected difference between the amount of the detailed
estimate and the availability of fund then the entire time and money are lost.
So it is a general procedure to prepare a preliminary estimate before drawing
up detailed estimate for a project.
iii) To investigate benefit and comparison of cost with utility: Where there
is no scarcity of fund but it is intended to know readily whether the
investment shall be ideal then approximate estimated cost of the project is
drawn up and compared with the income or benefits availed from such
expenditure. In case the preliminary studies from the preliminary estimate
show the investment returns more than the investment, then approval is
given for expenses to prepare the detailed estimate of the project.
iv) Adjustment of Planning: For unavoidable projects approximate
estimates for a number of alternatives for the original work after adjustment
of sketch of the intention along with sketch reports are required for study.

41
From these approximate comparative estimates, a decision is made to select
the sketch for preparation of its detailed design and estimate.
v) To obtain administrative approval: For government or public body
projects approximate estimate with a brief report and site plan has to be
submitted to obtain administrative approval to proceed with detailed with
detailed investigation and preparation of detailed estimate.
vi) For insurance and tax schedule: For insurance and tax schedule, the
value of a property or a project is drawn up from the approximated cost
estimate.

42
3.3 Detailed Cost Estimates

It is the task of the estimator to predict the cost of construction for the items
of finished works presented in the bill of quantities. An accurate cost
prediction can only take place when each item has been analyzed into its
simplest element and the cost methodology estimated on the basis of factual
information.
TENDER PRICE
INCLUDES

PRICED
PRELIMINARIES

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

43
The planning department of the firm does the analysis of the physical
resources required for the project and the deployment of these resources.
Pre-tender program will be prepared after consultation with other relevant
departments and evaluation of alternate construction methods and sequences.
The program would be presented as a network or bar chart to show
deployment of resources to constructional elements on a time scale. The
amount of detail developed would depend on the complexity of the project
and the time available for preparation. It should show the detailed labor and
plant requirements for each operation and the production outputs anticipated
for these resources. A schedule of labor and plant requirements is sometimes
prepared to amplify the program.

The task of the estimator is to evaluate the cost of the resources from the
program and to build up a unit rate for each finished work item. A
fundamental principle is that unit rates should be prepared net. A unit rate
prepared on this methodology will take into account methods of construction
and all circumstances which may affect the execution of work on the project.
It will consist of a prediction of the cost of the physical resources and mark-
up by management. These physical resources are: Labor, materials, and
plant.

1. Disposition of the Cost Calculation

I. Direct itemized costs
Costs that can be allocated directly to a product
a. Material costs
 Construction/Building material
 Operating supplies
 Loading, unloading and transportation costs
 Wastages
b. Labor costs
The real challenge in pricing construction work is the computation of

labor and equipment costs. These are the categories of construction expense

44
that are inherently variable and the most difficult to estimate accurately

because of human variance and external conditions. To do an acceptable job

of establishing these costs, the estimator must make a complete and

thorough job analysis, maintain a comprehensive library of costs and

production rates from past projects (historical data), and obtain advance

decisions about how construction operation will be conducted.

Labor costs include

-Standard wages
-Extra pay
-Supplementary pay
-Social Service payments
-Supplements
-Other payments
c. Equipment costs: - All costs for commissioning /holding and
operation of the equipment
- ownership of plant
- hire of plant
All items of mechanical plant should be estimated in terms of all-in
rate and a production output. In the case of hired plant, the standing
costs will be comparable to the hire charge.
The main factors in building up a rate will be:
- Standing Costs: includes capital sum based on
purchase price and operating cost, maintenance, tax and
insurance
- Operating Costs: operators cost, fuel, consumable
stores

45
The diagram below summarizes the components of unit rate build-ups.

46
47
 d. Costs for sub-constructor:- If the work is to be subletted to a
nominated sub-contractor, the cost shall be determined and separately
established as a sub-contractor fee.
Ex. –Marble cladding
-Supply and fix items (aluminum frames)
-Furniture etc.
II. Indirect Costs
The project overheads are the cost of administering a project and
providing the general plant, facilities and site based services. They
consist of the items that cannot be satisfactorily allocated to individual
unit rates of finished work. The cost of some of the project are time
related and will be estimated in terms of the contract period or length
of time on site and the all-in rate for a unit of time, the information on
time being obtained from the pre-tender program. Other project
overheads are value related and will not be able to be evaluated until
after the adjudication process by management.
a. Site over head costs
Time-independent costs
 Costs for site plant/ site installations
 Cost for site facilities
 Engineering and controlling
 Operation risks
 Special costs
Time-dependent costs
 Commissioning /holding costs
 Operating costs
 Costs for contractor’s agent
b. General overhead costs
48
 c. Risks and profit

Direct cost + Indirect cost = bid sum

+Value-added Tax (VAT)

Bid sum inclusive turnover tax /vat

Direct cost + Site overhead Cost = Production cost production

Production cost +General overhead cost = Self-costs
Self- costs + Risk& profit = Bid sum
Bid sum + Vat = Bid sum inclusive vat.

2. Execution of the Cost Calculation

a) Construction Material Costs
- Cost of all material which will be part of the building.
What is the required information:
 Quantity of material required to produce a unit amount of
itemized work
 Basic price (Prime cost) at the source of material
 Transport, loading and unloading to the site
 Waste/loss (e.g. Breaking, rupture, defective material, wastage
etc).
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.
Example
1) Calculation of the material costs of 1m3 concrete C-25 grade given.
-1Qtl of cement at Mugher -55 Birr
49
 -1truck of Sand (13 m2 ) 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%

Type of material Unit Qty Rate (Birr) Cost / Unit

(Birr)
Cement Qt1 3.6 62 223.2
Sand M3 0.5 115.38 57.69
Gravel M3 0.75 133.33 108.00
Water M3 0.3 1 0.30
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
- 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
50
  Health insurance
 Unemployment insurance
 Payment during sickness
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 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 0.86(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
51
 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 = 35/1.25= 28.78/m3

c) Equipment cost
Required information
 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
Assume 8 working hours per
Useful life = 3yrs day and 22 days per month
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
Hourly equipment cost
i) Mixer
Depreciation (d)
50,000 Birr = 7.89 Birr/hr
3x12(22x8) hr
52
 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

ii) Virbrator
Depreciation (d)
5000/(7x12x8x22) = 0.338 Birr/hr
Interest return (i)
1/7 [ (5000 (1+0.065)7 - 5000] = 395.7 Birr/hr
395.7/(12x8x22) = 0.187 Birr /hr
Repair cost
50/(8x22) = 0.284 Birr /hr
Hourly virbrator cost = 0.338+0.187+0.284= 0.81 Birr/hr

Type of Hourly
equipment No UF Hourly rental rate Cost
Mixer 1 1 1 13.51 13.51
Virbrator 1 1 0.81 0.81
Total hourly cost
(Birr) 14.32

Equipment cost for (1m3 concrete) 14.32/1.25 = 11.46 Birr/ m3

Example. Equipment cost using monthly rental changes
Mixer= 5000 Birr Month rental charge
Vibrator = 500 Birr month rental charge
Hourly cost
Mixer 5000/22x8 = 28.41 Birr/hr
Vibrator = 500/22x8 = 2.84 Birr /hr
53
 Total = 31.25 Birr/hr
equipment cost for 1 m3 of concrete = 31.25/1.25 = 25 Birr/ m3

Example
2) Costs For Formwork
Two methods of calculation to be accounted
i) With monthly rental charges
Ex. Steel form works
ii) With charges according to the number of uses

Ex. Timber formworks

1m2 formwork for floor slab made of zigba: - 300 birr & number of possible
uses 7
Type of Unit Qty Rate Cost per unit
material
Zigba m2 1 42.85 42.85
Batten m 1 2.0 2.00
Beams m 1 4.16 4.16
Eucalyptus m 1 2.5 2.5
posts
Mold oil 1t 0.1 1 0.1
Nail kg 0.22 8 1.78
Sum 53.37
Loss 5% 2.67
Total 56.04

54
 3. Two approaches for cost calculation
i/ Cost Calculation with predetermined charges

Direct itemized Indirect itemized

cost cost
-Material -site overhead costs
-Labour -General overhead
-Equipment cost
-Subcontractor risk and profit

Unit prices
(Rate)

Bid Sum

Procedure for the cost calculation with predetermined charges

The direct itemized cost will be established in accordance with the

methods and approach illustrated in the previous examples. However the
indirect itemized cost will be a product of the corresponding direct
itemized cost with some fixed charge to be established by the individual
contractors for the particular project. In our country high-class contractors
presume 30-40% of the direct itemized cost as an indirect cost for the
particular item of work. One can readily establish the corresponding unit
prices by just summing up the direct and indirect itemized costs . The
summation of the price of the whole item which results from the
multiplication/unit price x quantity/ would give the bid sum to the
particular project.
55
 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

In this approach, amounts for site overhead costs, general overhead costs,
risk and profit are to be ascertained separately for each project. Here from
surcharges on direct itemized costs result with different amount for each
project;
Four steps for this calculation method:
- Establishing the production costs
- Establishing the bid sum
- Establishing the surcharges on direct itemized costs
- Establishing the unit prices
Eg. Given the following detail for the construction of 5Om long fence
around a site.
1/ List of items quantities and direct itemized costs are as given in the table
No Items of work Unit Quantity Direct itemized
cost
1 Excavation to a depth of M3 40 6
1m
2 50 cm thick masonsy M3 25 185
wall

56
3 Concrete for tie beam M3 425
4 Dia 14 dc formed ban Kg 5
5 Dia 8 stirrups Kg 4.5
6 Formwork tie beam M2 45
7 20cm thick HCB wall M2 52
Direct cost 14,374 birr

2) Site overhead costs

 Site facilities (office, store---)------------------------------------2500 birr
 Electricity, water & telephone -----------------------------------800 birr
 Salary professionals ------------------------------------------------2000
birr
 Secretarial service ---------------------------------------------------300
birr
3) General overhead cost -----------------------------------------10 % direct
cost
4) Risk & profit--------------------------------------------------------7% of direct
cost

Question: Establish bid sum and unit prices for the itemized works.
Step 1: Establish production cost. (Direct cost + Site overhead cost)
Direct cost :- 14,374 birr
Site overhead cost:- 5,600 birr
Production cost 19,974 birr
Step 2: Establish bid sum [production cost + General overhead cost + risk &
profit]
Production cost -------------------------------- 19,974 birr
General overhead cost = 10%(14,374)= 1,437.40 birr
Risk & profit ---------------7 %(14374)= 1,006.18 birr
Bid sum without vat = 22417.58 birr
vat 15% = 3362.64
Bid sum with vat = 25780.22 birr
Step 3: Surcharge on direct itemized cost
Surcharge = Bid sum without vat
57
 Direct itemized cost
= 22417.58 = 1.5596 = 1.56
14374
Step 4: Establishing unit prices
Unit price = Surcharge x direct itemized cost
Item of work Unit Quantity Unit price Amount
1. Excavation m3 40 9.36 374.40
2. masonry wall m 3 25 288.53 7213.25
3. Concrete m3 5 662.83 3314.15
4. dia 4 bar kg 242 7.798 1887.116
5. dia 8 bar kg 132 7.018 926.376
2
6. formwork m 20 70.18 1403.6
2
7. HCB wall m 90 81.099 7298.91

Bid sum without vat 22417.8

Add 15 % vat 3362.67
Bid sum with vat 25780.47 birr

58
4.0 VALUE ENGINEERING
Value Engineering is a systematic and organized effort to identify the
functions of a product, system or procedure and to attain that function with
minimum cost without jeopardizing quality, aesthetics, appearance etc. It is
an organized creative approach which has for its purpose the efficient
identification of unnecessary cost without scarifying reliability, performance
or maintainability.

Value engineering studies may be performed by Consultants during design

development as a contractor performed pre-construction services, or by the
contractor during construction. The most effective time to conduct such
studies is during design development. Some construction contracts contain a
value engineering incentive provision that allows the contractor to share in
the savings that results from approved value engineering change proposals.
Value engineering change proposals submitted by the contractor are
reviewed by the consultant and owner for acceptability. If approved, up to
50% of the savings in construction cost may go to the contractor. The
percentage split between the owner and the contractor will be stated in the
value engineering provision of the contract.

The value of a component or system can be defined as its function plus

quality divided by its life-cycle cost.

Value of a component = ( Function + Quality ) - Worth benefit

Life Cycle-Cost

Life-Cycle Cost = Initial or Construction Cost + Operating Cost+

Maintenance Cost+ Depreciation Cost – any Salvage Value

Value Engineering seeks the highest value design components by Improving

utility with same cost or maintains same function with less cost. In general
Value engineering:
 Enhances value of money,
 Effects improvements in function, performance and quality,
 Enables people pin point areas that need attention and improvement,

59
  Provides a method of generating ideas and alternatives for possible
solution to a problem,
 Provides a vehicle for dialogue,
 Documents the rationale for decisions,
 Improves the value of goods and services.

Steps in Value Engineering

1) Information Gathering:
The information gathering phase involves studying the design to
identify potential components or systems for detailed study. The
essential functions of each component or system are studied to
estimate the potential for value improvement. The study team needs to
understand the rationale used by the designer in developing the plan
and the assumptions made in establishing design criteria and selecting
materials and equipment.
2) Speculation through Creative Thinking:
The purpose of the speculation or creative phase is to identify
alternative ways to accomplish the essential functions of the items
selected for the study. The intent is to develop a list of alternative
materials or components that might be used. No intent is made to
evaluate the identified alternatives, but rather to generate ideas that
will be evaluated in the next step of the study process.
3) Evaluation through preliminary Life-Cycle Costing:
The evaluation phase involves determining the most promising
alternatives from the set identified in the speculation phase.
Preliminary cost data is generated and functional comparisons are
made between the potential design components being studied. The
intent is to determine which alternatives will meet the owner’s

60
 functional requirements and provide more value to the completed
project.
4) Development of Technical Solutions:
The development phase involves creating design concepts for the
alternatives identified during the evaluation phase. This involves
developing detailed functional and economic data for each alternative.
Estimated Life-Cycle cost data is developed for each alternative and
compared with the estimated life-cycle cost of the components under
study. The advantages and disadvantages of each alternative are
identified. Alternatives are compared, and the ones representing the
best value are selected for presentation to the designer and the owner.
5) Presentation of Alternative Options:
The final step is the preparation of the value engineering proposals, in
which detailed technical and cost data are developed to support the
recommendations. The advantages and disadvantages of each
recommendation are described. The proposals are submitted to the
designer and the owner for proposal. If approved, the proposals are
incorporated into the design. If not approved, the design is not
changed.

61