2016 Alaska Western

Workshop Cost Estimating

101
 Agenda
– Introduction
– Estimate Terminology
– Estimate Classifications
– Estimate Methodology
– Application of Estimate Methodology
– Understanding Direct & Indirect Costs
– Questions
 Estimating – What does this mean?
 Cost estimating is the predictive process used to quantify, cost, and price the
resources required by the scope.

 Cost estimating may be used to quantify, cost and price any investment
activity, such as building an office building or process power plant, developing
a software program, or producing a stage play. The basic estimating steps are
the same: Understand the scope of the activity to quantify the resources and
material required, then apply costs to those resources and materials
 Estimate Terminology
1. Predictive process used to quantify, cost, and price the resources
required by the scope of an investment option, activity, or project.
Cost Estimating

2. A compilation of all the probable costs of the elements of a

project or effort included within an agreed upon scope.
Basis of Estimate
3. Costs of completing work that are directly attributable to its
performance and are necessary for its completion.
Direct Costs

1. Direct Costs 2. Basis of Estimate 3. Cost Estimating

 Estimate Terminology
1. Costs not directly attributable to the completion of an activity,
which are typically allocated or spread across all activities on a
predetermined basis.
In-Direct Costs

2. A specific type of quantification that is a measurement and listing of

quantities of materials from drawings in order to support the estimate
costing process
Take-off
3. An amount added to an estimate to allow for items, conditions, or events
for which the state, occurrence, or effect is uncertain and that experience
shows will likely result, in aggregate, in additional costs
Contingency

1. In-Direct Costs 2. Contingency 3. Take-off

 Estimate Terminology
1. Resources included in estimates to cover the cost of known but
undefined requirements for an individual activity, work item, account or
sub‐account.
Allowances

2. A provision in costs or prices for uncertain changes in technical,

economic, and market conditions over time.
Escalation
3. A measurement and analysis process that compares practices, processes,
and relevant measures to those of a selected basis of comparison with
the goal of improving performance.

Benchmarking

1. Escalation 2. Allowances 3. Benchmarking

 Estimate Classifications
AACE identifies five classes of estimates, which it simply designates as Class 1,
2, 3, 4, and 5. A Class 5 estimate is associated with the lowest level of project
definition (or project maturity), and a Class 1 estimate is associated with the
highest level of project definition. For each class of estimate, five characteristics
are used to distinguish one class of estimate from another. The five characteristics
used in the AACE Recommended Practice are:
– degree of project definition
– end usage of the estimate
– estimating methodology
– estimating accuracy
– effort required to produce the estimate
 Estimate Classifications
EXPECTED ACCURACY
MATURITY LEVEL OF RANGE PREPARATION EFFORT
PROJECT DEFINITION Typical +/- range Typical degree
DELIVERABLES Expressed as END USAGE Typical METHODOLOGY Typical relative to index of 1 of effort relative to least
ESTIMATE CLASS purpose of estimate estimating method (i.e. Class 1 estimate) cost index of 1 [b]
% of complete definition
[a]

Capacity factored,
Screening or feasibility parametric models,

Class 5 0% to 2% judgment, or analogy 4 to 20 1

Concept study or Equipment factored or

1% to 15% feasibility parametric models 3 to 12 2 to 4

Class 4
Budget authorization or Semi-detailed unit costs
with assembly level line
10% to 40% 2 to 6 3 to 10
Class 3 control items

Control or bid/tender Detailed unit cost with

30% to 75% forced detailed take-off 1 to 3 5 to 20
Class 2
Check estimate or
65% to 100% bid/tender Detailed unit cost with 1 10 to 100
detailed take-off

Class 1
 Estimate Methodology
 In general, estimating methodologies commonly fall into two
broad categories: conceptual and deterministic.

 Conceptual estimating methods usually involve modeling (or

factoring), similar projects.

 Deterministic estimating methods are more or less a direct

measure of the item being estimated.
 Estimate Methodology
 Conceptual Estimating Methodologies
– End-Product Units Method
 Used when the estimator has enough historical data available from similar projects to re late
the end-product units (capacity units) of a project to its construction costs. Example would be
the construction cost of a hotel and the number of patient beds.

– Physical Dimensions Method

 Uses the physical dimensions (length, area, volume, etc.) of the item being estimated as the
driving factor. For example, a building estimate may be based on square feet/meters or cubic
volume of the building.

– Capacity Factor Method

 A capacity factored estimate is one in which the cost of a new facility is derived from the cost
of a similar facility of a known (but usually different) capacity. It relies on the (typical) non-
linear relationship between capacity and cost.
 Estimate Methodology
 Conceptual Estimating Methodologies
– Ratio or Factor Method
 Ratio or factored estimating methods are used in situations where the total cost of an item
or facility can be reliably estimated from the cost of a primary component. For example,
this method is commonly used in estimating the cost of process and chemical plants where
the cost of the specialized process equipment makes up a significant portion of the total
project cost. This is often referred to as “Equipment Factor” estimating.

– Parametric Method
 A parametric model is a mathematical representation of cost relationships that provide a
logical and predictable correlation between the physical or functional characteristics of a
plant. For example Total Installed Cost/Dim in mile for pipelines.
 Estimate Methodology
 Deterministic Estimating Methodologies
– A detailed estimate is one in which each component comprising a project scope definition is
quantitatively surveyed and priced using the most realistic unit prices available. Detailed
estimates are typically prepared to support final budget authorization, contractor bid tenders,
cost control during project execution, and change orders (Class 3 through Class 1 estimates).

 The following steps comprise the activities undertaken during

preparation of a detailed estimate:
 Prepare project estimate basis and schedule
 Prepare Direct Field Cost (DFC) estimate
 Prepare Indirect Field Cost (IFC) estimate
 Prepare Home Office Cost (HOC) estimate
 Prepare escalation estimates
 Prepare project fee estimate (for contractors)
 Prepare cost risk analysis/contingency determination
 Preview/validate estimate
 Application of Estimate
Methodology
 End Product Estimating Methodology

–If the construction costs for a 25 guest room hotel was $8,000,000
what would a 95 guest room hotel cost be utilizing the end product
methodology?
$30,400,000

– If the construction costs for a 100 patient bed hospital was

$18,000,000 what would a 185 patient bed hospital cost be
utilizing the end product methodology?

$33,300,000
 Application of Estimate
Methodology
 End Product Estimating Methodology

–If the construction costs for a 100 parking space garage was
$13,000,000 what would a 30 parking space garage cost be utilizing
the end product methodology?
$3,900,000

– If the construction costs for a 100 room storage complex was

$1,800,000 what would a 150 room storage complex cost be
utilizing the end product methodology?

$2,700,000
 Application of Estimate
Methodology
 Physical Dimensions Estimating Methodology

–If the construction cost of a 2000 sf warehouse was recently built

down the road for $600,000 what will your approximate construction
cost be for a 3000 sf warehouse?
$900,000

– If the house next door which is 50’ wide x 100’ long cost
$400,000 to build last week, what would your approximate cost be
for your 5000 square foot house?

$400,000
 Application of Estimate
Methodology
 Ratio or Factor Estimating Methodology
– In 1947, Hans Lang first published an article in Chemical Engineering introducing
the concept of using the total cost of equipment to factor the total estimated cost of
plant.

 Total Plant $ = Total Equipment $ X Equipment Factor

– Lang proposed three separate factors based on the type of process plant (see table
below). Lang’s factors were meant to cover all the costs associated with the total
installed cost of a plant.
Lang Factor

Type of Plant Factor

Solid Process Plant 3.10

Solid-Fluid Process Plant 3.63

Fluid Process Plant 4.74

 Application of Estimate
Methodology
 Ratio or Factor Estimating Methodology
– If the total equipment cost for a gas liquid plant was $1,500,00
what would the Total Plant Cost be?
– Total Plant Cost = $1,500,000 x 4.74
– Total Plant Cost = $7,110,000

– If the total equipment cost for a wood pellet solid process plant
was $5,000,000 what would the Total Plant Cost be?
– Total Plant Cost = $5,000,000 x 3.1
– Total Plant Cost = $15,500,000
 Deterministic Estimating
Methodologies – Understanding
Direct & Indirect costs
–The installation hours associated with a worker installing piping
inside of a module would be considered a Direct or Indirect Man-
hour?
Direct

–The travel time between hotel and the module where the worker is
installing the pipe would be considered a Direct or Indirect Man-
hour?
In-Direct

1. Direct 2. In-Direct
 Deterministic Estimating
Methodologies – Understanding
Direct & Indirect costs
–Snow removal man-hours and equipment needed to get access to the
module where the workers are installing piping inside of the module
would be considered a Direct or Indirect cost?
In-Direct

–The installation hours and material costs associated with the

structural crew who attaches lifting lugs to the module so that
module can be set on truck with a crane would be considered a Direct
or Indirect cost?
Direct
1. Direct 2. In-Direct
 Deterministic Estimating
Methodologies – Direct Examples
–Mechanical Man-hours
–Piping Man-hours
–Electrical & Instrumentation Man-hours
–Structural Man-hours
–Civil Man-hours
–Insulation Man-hours
–Painting & Coating Man-hours
–Architectural Man-hours
–Permanently Installed Material
 Deterministic Estimating
Methodologies – In-Direct
Examples
–Fire watch
–Snow Removal
–Mobilization/Demobilization
–Construction Equipment
–Training
–Site Clean-up
–Small Tools and Consumables
–Travel to/from Job Site
–Safety Meetings
Questions ??