PREPARATION OF

COST ESTIMATES
 I Introduction

II Elements of a Good Cost Estimate

III Causes of Inaccurate Cost Estimates

IV Essential Factors to Consider
V Cost Estimating Process
VI Major Cost Estimating Techniques

VII Project Cost Components

VIII Life Cycle Costing
INTRODUCTION
Increase probability of a program’s success.
An accurate cost estimate is the basis of sound project
management and planning.
WHAT IS PROJECT COSTING?

⬜ The practice of forecasting the cost of completing a

project with a defined scope.

⬜ The summation of individual cost elements, using

established methods and valid data, to estimate the
future costs of a project/contract, based on what is
known today. (US-GAO)

⬜ Prediction of quantities, cost, and/or price of resources

required by the scope of an asset investment option,
activity, or project
COST ESTIMATE

⬜ Determined using experience and calculating, and

forecasting the future cost of resources, methods, and
management within a scheduled time frame.

⬜ Critical for:

Deciding whether to take on a project;

Determining a project’s eventual scope;
Establish a project cost baseline; and
Ensuring that projects remain financially feasible and
avoid cost overruns.
COST ESTIMATE

⬜ Used primarily as inputs for budgeting;

cost or value analysis; decision
making in business; asset and project
planning; or for project cost and
schedule control processes.

⬜ Cost estimate is used to authorize a

project’s budget and manage its costs.
In the Philippine context, this
essentially becomes the Approved
Budget for the Contract (ABC).
NECESSITY OF COST ESTIMATES

⬜ Cost estimates are necessary for government acquisition

programs for many reasons:

To support decisions about funding one program over another

To develop annual budget requests

To evaluate resource requirements at key decision points

To develop performance measurement baselines

To increase the probability of a program’s success

WHEN ARE COST ESTIMATES PREPARED?

2 3
Assess Procure

▪ Review feasibility/ ▪ Post/Advertise opportunity

market studies
▪ Consolidate into APP
▪ Decide procurement
method
▪ Approve APP
▪ Determine readiness
▪ Open and evaluate bids
▪ Post-qualify
▪ Award and enter into
contract

1 ▪ Cost-benefit analysis ▪ Oversee 4

Identify ▪ Feasibility study implementation
Implement
▪ Market study ▪ Inspect and accept
▪ PPMP deliveries
▪ Release payment
NEEDS SATISFACTION

Government Procurement Policy Board – Technical Support Office

WHEN ARE COST ESTIMATES PREPARED?

❑ As early as the Budget Preparation through the issuance of a

Budget Call, government agencies are required to prepare cost
estimates for its procurement activities for the succeeding year

❑ PPMPs of various divisions/units/offices are required to

support budget proposal of government agencies
ELEMENTS OF A GOOD COST
ESTIMATE
ELEMENTS OF A GOOD COST ESTIMATE

Accuracy
Revise estimates as more project details are obtained

Confidence Level
Communicate the amount of potential variability in any estimate

Credibility
Incorporate expert judgement and use set values for variables

Documentation
Identify and record assumptions underlying the estimates

Precision
Compare and corroborate estimates
ELEMENTS OF A GOOD COST ESTIMATE

Reliability
Backed-up by historical cost estimates

Risk Detailing
Build allowances into cost estimates

Uniformity
Maintain consistency across projects

Validity
Rely on established cost literature

Verification
Check that mathematical operations are correct
NECESSITY OF COST ESTIMATES AND
SPECIFICATIONS DRAFTING
CAUSES OF INACCURATE
COST ESTIMATES
CAUSES OF INACCURATE COST ESTIMATE

Failing to identify
“Underestimating Not updating
the risks and to
cost estimating” cost estimates
prepare adequate
❑ Lack of experience contingency
after project
with similar projects. scope changes
plans
❑ Size and expertise of
human resources
❑ Expecting that
Stating
resources will work
estimates as Making a project
at maximum
productivity fixed sums fit a fixed budget
rather than amount
❑ Length of planning
ranges
ESSENTIAL FACTORS TO
CONSIDER
ESSENTIAL FACTORS TO CONSIDER

Ownership Local Currency Basis and Use of

Government Accounting System

❑ Prepared from the perspective of the ❑ Prepared in local currency units

project owner.
❑ This will also facilitate project
❑ Cost estimates should be sufficiently monitoring and supervision as project
detailed and constructed to facilitate accounting systems and financial
project financing and enable effective reports are likely to be maintained in
implementation local currency.
ESSENTIAL FACTORS TO CONSIDER

Foreign Exchange and Local Currency Cost

Component prices are

likely to vary between
local and international
markets
ESSENTIAL FACTORS TO CONSIDER

Timeliness
❑ If the date of the cost estimates is:
Less than 6 months – Cost estimates may still be
acceptable.
6-12 months - Cost estimates should be revised by
simple escalation factor, reflecting actual price changes
since the date of cost estimates. Unless, the project
team concludes that the base cost has not changed
materially.
More than 12 months – Cost estimates should be
reappraised, unless the project team concludes that the
base cost has not changed materially.
ESSENTIAL FACTORS TO CONSIDER

Project Cost Estimates

Cost estimates are comprised of:

Base Cost

Contingencies

Financial Charges during Implementation

COMPONENTS OF PROJECT COST ESTIMATES

Prepared for each project

component/output by expenditure
category.

Base Cost Expressed in local currency at prices

in effect at the date of estimation.

It should include all project-related

costs irrespective of financing source.
COMPONENTS OF PROJECT COST ESTIMATES

Base Cost
COMPONENTS:
Cost of Project Management,
Incremental recurrent
costs (Direct Cost)
Audit costs Capacity Development and
Consulting Services

❑ Salaries, purchase of
textbooks/ soft wares, office
administrative costs. Estimated costs Cost of airfare and per
and financing diems/honoraria,
❑ it should be itemized, arrangements of supplies/training
estimated on the price and the audits of project materials and
quantity, and presented as
financial statements equipment
separate line item in the
detailed cost estimate
COMPONENTS OF PROJECT COST ESTIMATES

Base Cost
COMPONENTS:
Retroactive In-kind Safeguards-Relat
Taxes and Duties Financing of Project
Contributions
Costs ed Costs
• Costs proposed • Environmental
• Include excise taxes, sales for retroactive
taxes, value-added taxes, Some management plans
financing are to
import and custom duties.
be included in
expenditures eg impact
are provided in mitigation
• Taxes and duties are the cost measures
estimated by applying estimates kind, eg labor
prevailing tax rates to the costs • Monitoring
related tax categories • Applies to certain
projects only measures
COMPONENTS OF PROJECT COST ESTIMATES

Contingencies
Uncertainties throughout a project’s life
Physical Contingency Price Contingency
❑ Associated with quantities and
❑ Provision for price
categories of expenditures. The
increases over the project
greater the uncertainty, the greater the
implementation period,
physical contingency allowance.
due to either inflation,
foreign exchange
❑ NOTE: As the design is refined,
movements or expected
uncertainty regarding the quantities of
real price increases
inputs should decline.
COMPONENTS OF PROJECT COST ESTIMATES

Financial Charges During

Implementation
Comprise all financial charges
during the project
implementation period.
COST ESTIMATING PROCESS
FOUR CRITICAL ELEMENTS RELATED TO
CONDUCTING COST ESTIMATES
Data
• What data do you need? • Are the data readily
available? • If the data are not readily available, what
are your alternatives? • Are the organizations you
need to collect the data from cooperative &
accessible? • Are non-disclosure agreements
required?
• How many people are required to conduct the
estimate? • How many people are available to
conduct the estimate? • What is the budget
required to conduct the estimate? • What is the
available budget to conduct the estimate?
Resources
Expectations
• What is your expectation of the estimate? • What is
the expected outcome or usage of the estimate?
(based on estimate type) • What is the customer’s
expectation of the estimate? • What is the team
expectation of the estimate? • What are the
Agency-wide expectations of the estimate outcome
and usage?
• How long have you been given to complete the
estimate? • How long do you need to complete
the estimate, given the available resources and
data? • Do you have the resources needed to
conduct the estimate with the allotted schedule?
• Do you have the time to collect the required
data and analyze the data?
Schedule
COST ESTIMATING PROCESS
COST ESTIMATING PROCESS

(1) Define (2) Develop

(3) Define Program
Estimate’s Estimating
Characteristics
Purpose Plan
❑ Provide overall ❑ Develop timeline ❑ Identify the program’s
scope. ❑ Determine the purpose, its system and
❑ Determine who approach performance characteristics
will receive the ❑ Program procurement
estimate schedule and methodology
❑ Support and security needs
❑ System quantities for
development, test and
production
❑ Deployment and
maintenance plans
COST ESTIMATING PROCESS

(4) Determine (5) Identify

Estimating Ground Rules and (6) Obtain Data
Structure Assumptions
❑ Develop a cost ❑ Clearly define what the ❑ Create a data collection plan with
estimating estimates includes emphasis on collecting current and
and excludes relevant technical, cost, and risk data
checklist
❑ Investigate possible data sources and
❑ Define a work ❑ Identify document all pertinent information
breakdown program-specific including an assessment of data
structure and assumptions reliability and accuracy
describe each ❑ Identify any schedule ❑ Collect data and normalize them for
work element or budget constraints, cost accounting, inflation, learning
❑ Choose the best inflation assumptions, and quantity adjustments
and travel costs ❑ Analyze data and compare against
estimating
standard factors derived from
method for each ❑ Specify equipment the historical data
work element government will ❑ Store data for future estimates
provide
COST ESTIMATING PROCESS

(7) Develop Point Estimate and Compare (8) Conduct

It to an Independent Cost Estimate Sensitivity Analysis

❑ Develop a cost model, estimating each work ❑ Test the sensitivity of

element using the best methodology from the data cost elements to
collected, and including all estimating assumptions changes in estimating
❑ Time-phase the results by spreading costs in the input values and key
years they are expected to occur, based on the assumptions
program schedule ❑ Identify affects on the
❑ Sum the work breakdown structure elements to overall estimate of
develop the overall point estimate changing the program
❑ Validate the estimate by looking for errors schedule or quantities
❑ Compare estimate against the independent cost ❑ Determine which cost
estimate and examine where and why there are elements are affected
differences most by changes
❑ Update the model as more data become available
COST ESTIMATING PROCESS

(10) (11) (12) Update the

(9) Conduct Risk and Present Estimate to Reflect
Document the
Uncertainty Analysis Estimate Actual Costs and
Estimate
to Changes
❑ Determine the technical ❑ Document all Managem
risk associated with each ❑ Keep the
steps used to ent for
work breakdown element estimate current
develop the Approval
and discuss it with experts, as the program
estimate, for
if necessary progresses
❑ future reference
Analyze severity and ❑ Document all
probability of each risk changes to the
❑ Identify the amount of
program and
contingency funding and
add this to the point how they affect
estimate to determine the cost
risk-adjusted cost estimate estimate
❑ Develop a risk
management plan to track
and mitigate risks
MAJOR COST ESTIMATING
TECHNIQUES
COST ESTIMATING TECHNIQUES

Analogous Bottom-Up Parametric

Estimating Estimating Estimating
ANALOGOUS ESTIMATING

Also called “top-down”

estimating or “historical
costing”
ANALOGOUS ESTIMATING

Strengths Weaknesses Applications

▪ Based on actual ▪ Relies on single
historical data In historical data point
some cases ▪ Can be difficult to identify
▪ Quick appropriate analog
▪ Readily understood ▪ Requires "normalization"
▪ Accurate for minor to ensure accuracy
deviations from the ▪ Relies on extrapolation
analog and/or expert judgment
for "adjustment factors
▪ Early in the design
process
▪ When less data are
available
▪ Cross-checking
▪ In rough order-of
magnitude estimate
▪ Architectural studies
▪ Long-range planning
BOTTOM-UP (ANALYTICAL) ESTIMATING

• Provides the “most accurate”

estimating technique if a complete
Work Breakdown Structure
(WBS) is available
• Most versatile estimating technique
and you can use it for many types of
projects

• But it can also be time-consuming

COST ESTIMATING TECHNIQUES

Work Breakdown Structure

Work Breakdown Structure is a decomposition of the project scope into
smaller, manageable components described in terms of tangible deliverables,
from the final project output level down to the lowest level called work package

OPPCIS

Functional Project Operations

GUI Infrastructure Integration
Modules Management Manual
BOTTOM-UP (ANALYTICAL) ESTIMATING
Strengths Weaknesses Applications
❑ Intuitive ❑ Costly; significant effort (time and money) 1. Production
❑ Defensible required to create a build-up estimate estimating
❑ Credibility provided by visibility ❑ Susceptible to errors of omission/double counting 2. Negotiations
into each cost element ❑ Not readily responsive to "what if" requirements 3. Mature
❑ Severable; the entire estimate is ❑ New estimates must be "built up" for each projects
not compromised by the alternative scenario 4. Resource
miscalculation of an individual ❑ Cannot by itself provide "statistical" confidence allocation
cost element level
❑ Provides excellent insight into ❑ Does not provide good insight into cost drivers
major cost contributors (e.g., high (i.e., parameters that, when increased, cause
dollar items). significant increases in cost)
❑ Reusable; easily transferable for ❑ Relationships/links among cost elements must be
use and insight into individual "programmed" by the analyst
project budgets and performer
schedules
PARAMETRIC ESTIMATING

A method of estimating
the cost of a project (or
part of a project) based
on one or more
project-based cost
factors.
PARAMETRIC ESTIMATING

Strengths Weaknesses Applications

❑ Once developed, Cost Estimating ❑ Often difficult for others to understand the 1. Design-to-cost trade
Relations are an excellent tool to statistics associated with the Cost studies
answer many "what if" questions Estimation Relations 2. Long-range planning
rapidly ❑ Must fully describe and document the 3. Architectural/Eng’g
❑ Statistically sound predictors that selection of raw data, adjustments to studies
provide information about the data, development of equations, 4. Sensitivity analysis
estimator’s confidence of their statistical findings, and conclusions for 5. Data-driven risk analysis
predictive ability validation and acceptance 6. Software development
❑ Eliminates reliance on opinion through ❑ Collecting appropriate data and
the use of actual observations generating statistically correct data is
❑ Defensibility rests on logical typically difficult, time consuming, and
correlation, thorough and disciplined expensive
research, defensible data, and ❑ Loses predictive ability/credibility outside
scientific method its relevant data range
PARAMETRIC ESTIMATING

https://simplicable.com/new/parametric-estimate
COST ESTIMATING TECHNIQUES
Method Strength
Analogous • Requires little data
• Based on actual data
• Reasonably quick
• Good audit trail
Bottom-up • Easily audited
• Sensitive to labor rates
• Tracks vendor quotes
• Time honored
Parametric • Reasonably quick
• Encourages discipline
• Good audit trail
• Objective, little bias
• Cost driver visibility
• Incorporates real-world effects
(funding, technical, and risk)
Weakness
• Subjective adjustments
• Accuracy depends on
similarity of items
• Difficult to assess effect of
design change
• Blind to cost drivers
• Requires detailed design
• Slow and laborious
• Cumbersome
• Lacks detail
• Model investment
• Cultural barriers
• Need to understand model’s
behavior
Application
1. When little data is
available
2. Rough order of magnitude
estimate
3. Cross-check
1. Production estimating
2. Software development
3. Negotiations
1. Budgetary estimates
2. Design-to-cost trade
studies
3. Cross-check
4. Baseline estimate
5. Cost goal allocations
COST ESTIMATING TECHNIQUES
Feasibility Studies Design Concept

❑ Analogous (if similar projects ❑ Analogous or Parametric

were undertaken recently) or may be used
Parametric may be used
❑ Accuracy level: -15% to
❑ Accuracy level: -25% to +50% +25%

❑ Engineering estimate ❑ Bottom-up and Definitive

(bottom-up based on WBS) estimate
for completed parts
❑ Accuracy level: -5% to +10%
❑ Accuracy level: -10% to +15%
Preliminary Design Detailed Design
PROJECT COST
COMPONENTS
PROJECT COST COMPONENTS

For Goods

Direct Cost Indirect Cost

❑ Expenses for hauling to

❑ Cost of Materials project site
Cost at source ❑ Delivery/Handling/Storage
expenses
❑ Installation expenses
❑ Allowance for waste and/or
losses, not to exceed 5% of
materials requirement
PROJECT COST COMPONENTS

For Civil
Goods Works

Direct Cost

Cost of Materials Cost of Labor

Cost at source Salaries and wages,
Expenses for hauling to project site as authorized by the
Handling expenses Department of Labor
Storage expenses and Employment
Allowance for waste and/or losses, not Fringe benefits
to exceed 5% of materials requirement

DPWH Department Order No. 197 s. 2016 dated October 7, 2016

Revised Guidelines in the Preparation of Approved Budget for the Contract (ABC)
PROJECT COST COMPONENTS

Direct Cost
Equipment Expenses Cost for Permits,
Rental rates of equipment shall be based on Clearances and other
the prevailing Association of Carriers and Government Taxes
Equipment Lessors, Inc. approved for use by Shall be included in the
the DPWH. cost under Part B –
Mobilization and demobilization shall be Other General
treated as a separate pay item. Mobilization Requirements of the
and demobilization shall not exceed 1% of the Program of Works
Estimated Direct Cost (EDC) of the civil work (POW) and Estimate/
items ABC

DPWH Department Order No. 197 s. 2016 dated October 7, 2016

Revised Guidelines in the Preparation of Approved Budget for the Contract (ABC)
PROJECT COST COMPONENTS

For Civil Works

Indirect Cost

Overhead Expenses (Ranges from 7 – 11% of the EDC)

Engineering and Administrative Supervision
Transportation allowances
Office expenses
Premium on Contractor’s All Risk Insurance (CARI)
Finance Cost (Premium on Bid Security, Premium on
Performance Security and Premium on Surety for Advance
Payment)
DPWH Department Order No. 197 s. 2016 dated October 7, 2016
Revised Guidelines in the Preparation of Approved Budget for the Contract (ABC)
PROJECT COST COMPONENTS

For Civil Works

Indirect Cost

Contingencies Miscellaneous Contractor’s

Ranges from 0.5% - Expenses Profit Margin
3% of the EDC Ranges from 0.5% - 8% of the EDC
3% of the EDC for projects above
VAT Laboratory tests P5Million; and
5% of the sum of the for quality control 10% for projects
EDC, OCM and Profit. and plan P5Million and
preparation below
DPWH Department Order No. 197 s. 2016 dated October 7, 2016
Revised Guidelines in the Preparation of Approved Budget for the Contract (ABC)
PROJECT COST COMPONENTS

For Consulting Services

Direct Cost Indirect Cost

❑ Rate X Man-hours ❑ Facilities and materials

❑ Transportation and
communication
COA CIRCULAR NO. 2012-003
Updated Guidelines for the Prevention and Disallowance of Irregular,
Unnecessary, Excessive, Extravagant and Unconscionable Expenditures

DEFINITION OF EXCESSIVE EXPENDITURES

Unreasonable expenses – immoderate quantity and
exorbitant price

❑ Expenses exceeding what is usual or proper

❑ Unreasonably high expenses and beyond just
measure or amount
❑ Expenses in excess of reasonable limits
COA CIRCULAR NO. 2012-003
Updated Guidelines for the Prevention and Disallowance of Irregular,
Unnecessary, Excessive, Extravagant and Unconscionable Expenditures

PENALTIES
Disallowance
❑ The disapproval in audit of a
transaction, either in whole or
in part
❑ Miralles vs. COA
LIFE CYCLE COSTING
LIFE CYCLE COST (LCC) ESTIMATE

A life-cycle cost estimate provides

a structured accounting of
resources and associated cost
elements required to develop,
produce, deploy and sustain a
particular program.
LIFE CYCLE COSTING

The LCC is a tool which evaluates the costs of an asset

throughout its life cycle starting from its purchase to
disposal

Initial purchasing costs

+ Operating costs
+ Maintenance/service
costs
+ Disposal costs
LIFE CYCLE COSTING

Acquisition costs are only

the tip of the iceberg
LIFE CYCLE COSTING

Typical costs for a system may include:

Acquisition Costs (or design and development cost)

Operating Costs (cost of failures, repairs, pares,

downtime costs, loss of production)

Maintenance Costs (Corrective, preventive and

predictive maintenance)

Disposal Costs
 Contact us:

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