Introduction to Project Cost Estimation and

Property Valuation
 Definition of Project Cost Estimation

• An approximation of the probable cost of a product, or

project, computed on the basis of available information.
• Four common types of cost estimates are:
• (1) Planning estimate: a rough approximation of cost within a
reasonable range of values, prepared for information
purposes only.
• (2) Budget estimate: an approximation based on well-defined
(but preliminary) cost data and established ground rules.
Cont….
• (3) Firm estimate: a figure based on cost data
sound enough for entering into a
binding contract.
• (4) Not-to-exceed /Not-less-than estimate: the
maximum or minimum amount required to
accomplish a given task, based on a firm cost
estimate.
 Definition of Property Valuation
• The property value is often referred to as the fair
market value. Fair market value is the estimated
price a buyer and seller could agree on if both
were interested in making a deal. The definition
assumes that both parties have sufficient
information about the market and the property,
and that the property has been on the market
for a reasonable period of time.
 Significance of Property Valuation
• It may be necessary to know the value of a property for several
reasons.
• Property value is the basis for assessing property taxes, and for
calculating whether the sale of an investment property is a profit or a
tax write-off.
• Lenders wants to know the appraised value of a home to make sure
it's good collateral for the size of a mortgage or a home-equity loan.
• The other objective of Property Valuation is to register the Fixed
Investment Capital of the Project to the concerned Government Body
and other activities where required.
Cont….
• Construction cost - the total cost to construct a
project. This value usually does not include the
preplanning, site or right of way acquisition, or design
costs, and may not include start-up and
commissioning costs. This total or subtotal is usually
identified as such in an estimate report. Also known
as Total Estimated Contract Cost (TECC) which is
usually considered as a base for the Valuation of Civil
Property.
Cont…..
• Bill of quantities (BOQ) - a document used in tendering
in the construction industry in which materials, parts,
and labor (and their costs) are itemized. It also (ideally)
details the terms and conditions of the construction or
repair contract and itemizes all work to enable a
contractor to price the work for which he or she is
bidding. where one can know the cost of construction
after prevailing rates are set on it.
 Methodology of Civil Valuation
• The following are the stapes followed to get the final output
i.e Valuation.
• Actual site measurement of the Factory building and its
facilities.
• Identification of types of construction materials used and
their condition using check list and visual observation.
• Photographing.
• Interview.
• Assessment of current cost of construction materials and
ancillary inputs.
Cont…
• There comes analysis of collected data through the
check list.
• Followed by preparation of Building specific
Specification and Bill of Quantity (BoQ).
• Applying the calculated measurement figure to the
BoQ to get the prevailing cost of construction.
• Followed by calculation of Depreciation - Appreciation
using Prevailing cost, facts collected with regard to the
Building and Site.
Cont
• Valuation of Fixed Assets other than Civil
Entities,
• Calculation of Good Will of the Company
followed by grand summery of the Valuation.
 METHODS OF VALUATION:

• Valuation based on Cost

• This method only considers cost incurred in
constructing the building or in processing the property
is taken as bases to determine the value of a property.
• For towns far apart from Addis Ababa usually the
market value is closer to the construction cost, this
method gives fair and reasonable value of a property.
Cont….
• However, for those areas in the inner and
outskirt of Addis Ababa the value of the building
is usually affected by the Location, Accessibility
and Suitability besides the direct construction
cost incurred on the process of construction.
• For this reason usually Depreciation and
Appreciation Valuation Method is employed for
a better and acceptable result.
Depreciation- Appreciation Method of Valuation
• In this method of valuation, first the prevailing value of
the building is determined, and then the depreciated
value shall be appreciated by certain factors so as to get
fair value of a property.
• Depreciation: It is the gradual exhaustion of the
usefulness of a property due to Structural Deterioration,
Use, Life, Wear, Tear, Rust, Decay and Obsolescence.
• DV = P (100 – rd) n
100
Cont…
Where: D = Depreciation Value
P = Prime cost of Building (Prevailing Cost)
rd = Rate of Depreciation
n = Number of years since the building had been constructed.

Life Year of a 100 75 50 40 20

Structure (N)
rd 1.0 1.3 2.0 2.5 5.0

Note: rd = 100
N
Cont…
• Appreciation: Is a technique of upgrading the depreciated value by a
certain factor due to the various advantages of a property with regard
to the present market value.
• The following factors are considered for appreciation:-
• Location
• Accessibility
• Suitability
Cont…
• Location: This refers to weather the property is located in
the inner city, peripheral area, developed or less developed
area. In the case of industries it is appreciated to be in the
outskirt or peripheral area, with main high ways linking to
region or translation high ways.
• But the Location factor may be affected based on the
Land use of the area for manufacturing units and their
access to main high way which leads to sea and airport
and other facilities.
Appreciation factor for Location

Class Inner City Intermediate Outskirt

Factor 0.8 0.4 0.1
Cont….
• Accessibility: Based on the accessibility of the
property from the main high way;
• 1st Class: Along the main high way (Asphalt Road)
up to 50m from the side of the Asphalt.
• 2nd Class: Along the secondary feeder road up to
50 m.
• 3rd Class: Along local gravel route.
Appreciation factor for Accessibility.

Class 1st 2nd 3rd

Factor 0.4 0.3 0.1

Cont…….
• Suitability: Weather the property or building is suitability for
the intended purpose in the located area.
• Appreciation factor for Suitability.

Class 1st 2nd 3rd

Factor 0.3 0.2 0.1

 BUILDING TYPE AND LIFE

TYPE DESCRIPTION LIFE OF STRUCTURE

IN YEARS

Housing Unit  Concrete Foundation 100

 Wall; HCB/Brick Plastered and Pointed
 Roof; R.C Slab and EGA Roofing
Cont…….
• Appreciated Value of a Building:
• AV = DV (AF + 1)
• Where: AV = Appreciated Value
DV = Depreciated Value
AF = Sum of Appreciation Factors
Calculation of Appreciation and Depreciation for a property in Alemgena Area.

N = 100 years
n = 11 year
rd = 1.0
P = 10,850,943.91 Birr
 DV = 10,850,934.91*(100 – 1.0)11
100
DV = 10,850,934.91*0.895
DV = 9,715,257.12 Birr
Cont….
• The Appreciation value for Sebeta- Hawas Area (The Factory)
shall be;
• Location = 1st Class for the Purpose = 0.8
• Accessibility = 1st Class = 0.4
• Suitability = 1st Class = 0.3
• The total sum of Appreciation factor shall be = 1.5
• AV = DV* (1.5+ 1.0)
• AV = 11,458,956.39 * (2.5)
• AV = 28,647,390.97 Birr