WALLAGA UNIVERSITY, SHAMBU CAMPUS

FACULTY OF TECHNOLOGY
DEPARTEMENT OF WATER
RESOURCES AND IRRIGATION
ENGINEERING

CONTRACT, SPECIFICATION AND QUANTITY SURVEY

CHAPTER-5
PROJECT COST ESTIMATION AND VALUATION

BY: muleta e. filate

5.1. Introduction
Project Cost estimation is the process of valuing on monetary expression,
including the cost of all possible entrants necessary for the planning,
implementing and monitoring stages of the proposed project under
consideration.
Cost estimation is the determination of the probable cost of a project.
Project Cost includes:
Preliminary investigation (project appraisal costs)
Design and supervision (consultancy cost)
Construction works (contractor’s cost)
Land owning cost, and
Monitoring costs
 Over all the main purpose of cost estimation can be summarized as
follow:
know the volume of work in reference to the fund available
determine actual cost per unit of item
identifying engineering estimate of the work for bidding purpose
work out economical use of materials, labor and equipment’s
in cases of variations to determine the extra cost to be incurred
when there is escalation, to work out the escalation in cost
5.2. Information required for cost estimation
The following information is required to define cost per unit of work
Correct information of the market price of the materials at the time of
need to be used as a basic price
Correct information of the rates of various categories of skilled and
unskilled laborers as wage rates to be used for daily work rate
Output of laborers per day for various types of items
(productivity)
Correct information of the rates of various categories of
equipment’s and tools as rental rates to be used for major items of
rates Up-to-date knowledge of the construction methods.
5.3. Knowledge and managerial skills for cost estimation
The following knowledge, managerial talents, and degree of
construction experience make a good estimator.
Ability to read and understand contract documents, with special skills in
reading construction drawings for all specialties and related
specifications.
Ability to accurately take off the quantities of construction work for
which he or she is preparing the detail estimate.
Ability to visualize the future building from drawings, which usually
requires some years of construction site experience.
Knowledge of arithmetic, basic geometry, and statistics.
5.4. Factors Affecting Cost Estimation
Factors which affect the cost estimation are summarized as follow:
Type and documentation of the project
Construction scheduling
Bidding environment
Quality and availability of material and labor (given in
specification)
Construction facilities /tools and method of construction
Location of the site: Transportation charges
Proper management
Land charges (lease)
Nature of subsurface condition
5.5. Types of Costing or Estimation
Estimation can be broadly classified as preliminary (approximate)
and detailed.
Preliminary /approximate costing
This type of cost estimation is required to know the financial position
of the client before costly detailed designs are carried out.
uch estimates are based on practical knowledge and cost of similar
previous works. Examples of approximate cost estimations are as follows:
A. Cost per functional unit
ospital =cost per bed, Dormitory = cost per student, Cinema or theatre
= cost per seat, residential buildings = cost per area, road works = cost per
kilometer length, culverts or bridges = cost per meter span, water supply or
sewerage projects = cost per head of population.
B. Plinth area method – cost per m2
Based on Plinth Area- roof area or external dimensions at the plinth level
(Courtyard & open area shall not be included)
The rate per meter square is deduced from the cost of similar
building projects in the locality.
C. Cubical Content method – cost per m3
Based on cubical contents of various buildings, i.e., Plinth area of the
building x height x cubic content rate.
Height should be taken from the top of flat roof (or halfway of the
sloped roof) to the top of concrete in foundation.
Detailed Cost Estimate (Based on Item Rate)
This is the most reliable and accurate type of estimate.
The quantities of items are carefully prepared from the drawings and the
total cost worked out from up-to-date market rates.
detail cost estimate thus requires:
Quantity surveying and
Analysis of the different rates for the quantities prepared.
5.6. Fundamental approach to construction cost Estimation
Efficient construction cost estimates shall address properly the required
project quality, time for completion of works and of course the construction
cost of the project.
In deciding to participate in the intended project tender, the contractor
shall carefully assess the impact of the following key factors:
Type of project
Method of tendering
Type of construction contract
Number and progress of contracts already at hand
Resource availability i.e., skilled manpower, plants and
machineries
Financial position
nce decision is made to participate in the intended tender, the contractor
shall give due attention to the following major items listed below
General a n d particular conditions of contract contained in the
bidding documents
Technical specifications
Drawings
Estimated bill of quantities
Method of measurement
Supporting documents such as information regarding geological
formations and hydrological data
Site visits
Construction method statements
A. General and particular conditions of contract
roper understanding of the general and particular conditions of contract is
mainly important for construction cost estimation in identifying the
responsibilities and cost implications on the project
mount and type of performance security
Amount of advance payment and type of advance repayment
guarantee
Time for completion of the whole project
Limit of liquidated damages
Retention money
Claims and disputes settlement

Price escalation
Tax exemptions
Insurance of the works
Owner’s risks
Applicable laws
B. Technical Specification
Technical specifications specify the following crucial information to the
contractor and it is the sole basis both for the construction methods to be
adapted and the construction cost of the project.
Quality of materials
Quality of machineries and plants
Quality of workmanship
Erection and installation methods
Test and inspection requirements and methods
Technical specifications basically have restricted applications, which usually
define specific work items. Therefore, for a better understanding and cost
estimation of the project, the contractor must check the given specifications
for:
Technical accuracy and adequacy
Define and clear stipulations
Fair and equitable requirements
Formats which can be easily used during bidding and
construction
Legal enforceability
C. Drawings
The contractor mainly understands from the drawings what type of
construction methods to be adapted during cost estimation as well as
construction of the project.
Some of the construction methods which need to be addressed during cost
estimation of this building project are:
Concrete production
Concrete transportation and placement
Transportation of construction materials to different floors
Methods and type of scaffolding
Types and methods of shuttering works
Erection and installation of glazing works
Temporary access for manpower working at different floors
Skilled manpower requirement
D. Estimated Bill Quantities
Estimated quantities of work are also the basis to determine the type and
number of resources to be deployed during construction of the project.
Moreover, construction methods shall be selected in such a way the given
quantity of works can be executed during the completion time of the
project.
Based on the estimated quantity of works, the contractor shall decide the
method of construction to be adapted during executing of the project such
as:
Type and size of crushing plants
Type and size of mechanical mixers or batching plants
Type, size and number of machineries such as dozers, graders,
loaders, rollers, dump trucks and so on.
Skill and number of manpower requirement
Type and quantity of construction materials
and so on
E. Supporting Documents
Supporting documents such as geological formations, hydrological data and
other technical reports like socio-economic studies are usually provided by
the owner to contractors for their own interpretations for heavy construction
projects.
Therefore, the contractor shall have the technical ability and experience in
interpreting the technical data provided to determine construction methods
to be adapted which directly affects the construction cost estimates.
F. Site Visit
In order to prepare competent and reasonable construction cost estimates,
the contractor must visit the project site unless the site is familiar to the
contractor with previous reliable site information.
visits are critically important especially when the contractor is working
with heavy construction project cost estimates such as road works and
hydropower projects.
The contractor shall prepare his own checklists during the site visit which
shall address, but not limited to, the following issues which have direct
impact on the construction costs of the intended project.
i. Location of the site:
It helps to determine the mobilization and demobilization costs.
It also helps to determine the transportation cost of materials from main
material suppliers.
Availability and expected wages of daily labors can be fairly
estimated based on the location of the site.
 Site location also helps to determine the type of camp facilities required to be
constructed such as project offices, living areas, food accommodations and
so on.
Having proper understanding of site location and local weather condition
helps the contractor to determine salaries and benefits of staffs, skilled
manpower and daily laborers.
ii. Location of local construction material
The contractor shall identify the location and quality of local construction
materials such as quarry area for gravel production, sand, selected material,
water as well as sub base and base course materials in the case of road
projects.
Moreover, the contractor shall have the general understanding of the site
layout for different plants such as batching and crushing plants.
iii. Access Roads
Site access roads to the main works, quarry areas, water supply, sand, and
the like shall be identified which incurs additional construction and
maintenance costs. These costs are extremely high, in case of heavy
construction sites such as road works, hydropower projects and so on.
iv. Water and power supply
v. Communication facilities
vi. Environmental protection
vii. Existing facilities

F. Method of measurement
Contractors shall thoroughly understand the method of measurement
incorporated within the bidding documents before starting any cost
breakdown calculations.
BaTCoDA Technical specification and method of measurement
ERA standard specifications
Civil Engineering Standard Method of Measurement (CESMM)
G. Construction Method Statements
Construction method statements give the clear picture of each project
activity execution during the construction phase of the project.
The required quality of works as per the specifications, estimated quantity of
works, safety standards, as well as time for completion are the sole basis in
determining the construction method statements of a project.
Construction method statements shall clearly indicate the following
crucial construction issues:
Skill and number of manpower required
Type and specification of equipment’s
required Quantity and quality of materials
required Proposed working crews
Estimated crew productivity
Estimated duration for completion
Expected defects and remedial measure
5.7. Basic Cost Components of a construction project
Basically, the cost of any construction project comprises
Direct costs, which include the direct cost of materials, labor as well
as equipment’s and
Indirect costs, which include but not limited to head office and site
overhead costs.

A. Direct Construction Cost

Direct construction costs are all costs that can be specifically booked with
an activity in a project.
The current trend is to assign as much as possible costs to direct costs as
these costs can be budgeted, monitored and controlled far more effectively
than the indirect costs.
The direct costs mainly include material, labor, equipment and
subcontract costs as described below.
Direct material costs – These costs referring to the cost of materials,
consumables and components used for executing an activity including the
allowances for scrap and wastages.
Direct labor costs – All costs related to the workers working on a specific
activity such as carpenters, masons, erectors, painters, plumbers and so on.
Direct equipment costs – These costs referring to the costs of
machineries and plants used in executing a specific activity.
Subcontract costs – In case some specific activities are subcontracted, the
subcontract price will be considered as the direct cost of the activities to
be executed by the subcontractor.
B. Indirect Construction Cost
Indirect construction costs are all costs, which cannot be directly booked
under a specific activity in a construction project but required to keep the
whole project operational.
These costs are also called overhead costs, which mainly include the head
office and site overhead costs.
5.8. Unit Rate Analysis
Rate Analysis is the process of fixing cost per unit of measurement for
the different item of works.
Total cost per unit of work (TC): Direct cost (DC) + Indirect cost
(IC)
Direct Cost (DC) includes cost due to material (MC), cost due to labor
(LC), cost due to equipment (EC)
Indirect Cost (IC) covers overhead costs, and contractor’s profit.
In order to facilitate estimation Material, break down is essential
Different formats, Excel sheets and software are used for rate analysis.
It is advisable that contractors shall adapt suitable construction cost
estimation formats which enables to see all the detailed cost breakdowns of
the required:
Direct materials,
Labor and equipment
Head office and site overhead costs,
Risk allowances,
Profit,
Income tax and
Value Added Tax (VAT) or Turnover tax (TOT).
I. Direct Material Unit Cost (E)
Direct material cost is the total cost of construction materials required to
execute a unit of specific activity in a project.
In estimating the direct material cost, the contractor shall obtain the quantity
and quality of materials required to produce the specific unit of an activity
In order to have a better material cost estimation, contractors shall
develop their own material price database and the database should contain,
but not limited to, the following information:
Material price at place of delivery
Supplier’s address such as telephone, fax and mail address
Supplier’s contact person
Supplier’s email address and web site
Supplier’s credit facility
Country of origin
Material delivery time
Place of delivery such as at the supplier’s shop, project site
Transportation charges usually per ton-km as well as transporters
The contractor shall add the following costs to the material supplier’s price
to get the material unit cost at the project site:
Loading expenses at the supplier’s place of delivery
Transportation costs to the project site
Insurance charges during transportation to the project site
Unloading expenses at the project site
II. Direct Labor Unit Cost (F)
In calculating the direct labor cost, contractors need to calculate the direct
labor hourly cost which is the total hourly cost of labor crew required to
execute a specific activity in the project.
In estimating the direct labor hourly cost, the contractor shall obtain the:
Number of labor,
Skill and labor utilization factor (UF)
Labor basic salary and
Labor index from his previous records and the labor market.
 Labor index is a multiplying factor of the basic salary which represents
the additional benefits whereby a worker gets from the contractor such as:
Severance pay
Annual leave
Occupational accident expenses
Occupational disease expenses
Overtime pay
Occupational safety, health and working environment
Benefits resulting from collective agreements
III. Direct Equipment Cost (G)
In order to calculate the direct equipment, cost, contractors need to calculate
the direct equipment hourly cost which is the total hourly cost of equipment
crew required to execute a specific activity in a project.
In estimating the direct equipment hourly cost, the contractor shall obtain
The number of equipment’s,
Capacity and equipment utilization factor (UF), and
the equipment hourly cost.
5.9. ProjectValuation
Introduction
Individual universally exercise daily the art of valuation without realizing
that, each exchange of property, of what so ever nature and character, involves
an appraisal which at least is an elementary valuation.
Each exchange of property involves an estimate of the relative worth of the
item exchanged.
Valuation in general is defined as the art of estimating the fair monetary
measures of the desirability of ownership of specific property for specific
purpose.
Valuation is altogether different from costing, because value is an assessed
worth of an asset in context of specific purpose and at particular period of time.
Valuation is purposing oriented and time frame related exercise.
Costing is qualitative; it is an exact science; where most of the parameters
are well defined viz. material cost, transportation cost, labor cost, administration
etc.
 Value dependent factors: Property value differs according to the
following factors:
Value depends on place, time, circumstances and purpose
Economic solicitations such as depressions and boom
Supply and demand

Essential qualification for value: In order that a commodity can have

value, it must possess three essential qualifications:
It must possess utility
It must be scarce
It must be transferable or marketable
Various definition of value
Market Value. Market value is the value established in a public market
by exchanges between willing sellers and willing buyers.
Replacement Value. Replacement value refers to that of a property
determined on the basis of what it would cost usually at the current price level
to replace the property or its service with at least equally satisfactory and
comparable property and service.
Real value or value to the owner. It envisages the intrinsic value to the
owners as long term investment rather than the immediate realization which is
characteristic of market value.
Liquidated value. It is an estimate of the sum, which the holder of the
shares would be expected to receive in the event of the company being
voluntarily wound up.
Speculation value. Some properties have future secret prospects, if one
visualize it. This is referred as speculative value.
 Forced sale Value. When the owner is forced to sell the property due to
the urgent and absolute necessity, this value is called forced sale value.
Reversionary Value. It is the value of an asset to the owner after the expiry
of lease period.
Book Value. It is value of an asset as shown in accounts book. This is value
on that particular day arrived by deducting total depreciation till date from its
value on the date of its purchase.
Depreciated value. This is equal to the book value theoretically as for
accounting is concerned. However, it is used to arrive at efficient economic
value.
Face value. It is price paid to purchase it.

Insurance value. It is the net replacement cost, keeping in mind

depreciated condition of the asset.
 Potential Value. It is the value of an asset could fetch if sold in open market
at a later date due to potentiality.
Assessed Value. Value of machinery realized on sale when its useful span of
life is over, but has not become useless.
Scrap or Junk Value. Vale of any asset particularly that of a
machine, realized when it becomes absolutely useless except for sale as junk.
Earning value. It is the present value of a property, which will start
yielding an income in the future.
Distress value. When a property is sold at a lower price than that
which can be obtained for it in an open market.
Essential Requirements for valuer
The essential requirements for a genuine valuer are:
o He must have thorough knowledge of estimation of cost and
materials
o He must have knowledge of latest know how of construction
materials and construction techniques.
o He must have knowledge of various laws and acts such as lease
policy, land acquisition, and town planning etc.
o He must be able to make on organized study of the best
available information on the subject of valuation.
o He must accept the responsibility as valuer and must adhere to
the standard of excellence.
o He must not be biased and at the same time must have ethical
sense.
o Valuation work demands a professional skill.
Object of valuation
The main objects of valuation are:
o When a seller wants to sell his property or when a purchaser
wishes to purchase property.
o When a property is to be rented; its valuation is required.
o It becomes essential to valuate the property for fixation of
different types of taxes.
o For insurance property; the premium depends on its value.
o When a government acquires a private property in the interest of
public; its compensation is given to the owner
o When a person wants a loan against the security of his asset, it is
called a mortgage loan.
o Reinstatement- In case property owner wishes to reinstate his
property, the valuation of asset becomes essential
o Some time a property has future secret prospects;
Factors affecting value of an asset
The value of an asset depends on many factors:
Price Index: present market rate of various material, labor, machinery
etc. must be known to a valuer.
Location of property affects a lot on value of that property.
Demand and supply also affect the value of property.
Return that can be fetched from the property.
Useful remaining life of that asset
Functional use value, flexibility utility i.e. possibility of alterations
of its occupancy also affect its value.
Neighborhood conditions.
Local bylaws restricting addition, alteration of building
Outlook and elevation of building
Space utilization and service.
Types of Valuation
There are various types of valuation;
1. Ordinary valuation
In ordinary exchange of property; the value is determined by the
judgment of the seller and the buyer, each taking into account the
knowledge of the property, the prevailing exchange conditions, etc.
2. Formal Valuation
In formal valuation of property, the value is determined by judgment of
specially qualified valuators.
Such valuation may be for sue in property sell or for many other
purposes, such as taxing property, securing loans, determining rents and
establishing fair commodity prices.
3. Engineering valuation
It is the art of estimating the value of specific properties where
professional engineering knowledge on and judgment are essential
Method of Valuation
A valuer prior to valuing any property must examine and collect the
following details:
Location of property with reference to road width, its frontage etc.
Shape and size of property.
Whether lease hold free hold.
Restrictions of local byelaws for leasehold converted to free hold.
Permissible maximum construction thereon.
Whether commercial, residential or industrial.
Restriction of sale or lease deed if any.
Land rates fixed by authorities.
Whether earlier registered documents contain provision for grant of sale permissible
prior to sale.
Sale transactions for that particular type of land during the years to arrive to some
realistic value.
Probable future development of that locality under consideration.
Any other information available regarding the land such as filled up land, logged land etc.
regarding the building its year of construction, future expected life, etc.
Whether all the taxes are paid till the date of valuation.
The methods available to evaluate many properties are given below.
1. Valuation from life
This method is generally used for equipment’s but also used for
buildings in general.
In this method depreciated value of asset is calculated assuming that the cost
of the building consists of both building and land.
Depreciation. Whenever any machine, equipment or a building performs
useful work its wear and tear is bound to occur. This can be minimized up to
some extent by proper care and maintenance but can’t be totally prevented.
Obsolescence. is the depreciation of existing machinery or asset due to new
and better invention, design of equipment of processes etc.
2. Rental Method of Valuation (Capitalized Income Method)
This method is used for big premises like flats, hotels, and hostels,
offices from which income can be produced or likely to be produced
from the property.
This method consists of ascertaining net rent per annum from the asset
and multiplying this to years purchase.

3. Land and Building Method of valuation.

In this method the valuation of land and part building constructed over
it are made separately and the value of that asset is made by adding them.
If building does not exist then only land is evaluated.
In this method the valuation of land and part building constructed over
it are made separately and the value of that asset is made by adding them.
If building does not exist then only land is evaluated.