Construction Cost Variables 1

Running head: Construction Cost Variables

Construction Cost Variables

Argosy University

R7103 Solutions Orientated Business Research Methods

Professor: Dr. Alfredo Herrera

August 10, 2009

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Abstract

Project Management techniques are examined outlining preliminary considerations used to bid a
project. Linier regression is one of the possibilities discussed to evaluate labor, material,
equipment, and risk escalation calculation in the preparation of a construction bid.
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Construction Cost Variables

Problem Statement

Your company builds roads, bridges, schools, and other multi-million dollar public construction
projects. Competitive bids are invited for the contracts to undertake these projects. For each
project, there are three costs involved:

• Best estimate of what the project will cost the company

• Adjusted cost on which the company bases its bid

• Actual cost incurred towards completing the project

Find out whether the cost estimates that are made before the bidding process are accurate
predictors of the actual costs of completed projects

Assumptions

Based on the problem statement it is assumed: the project is large in scope and at least

one year in duration. The economic, political environment, and infrastructure is stable and will

not produce variations outside the normal escalation range for material, delays, and labor costs.

Access to past project data similar to the project in question is available and has no serious flaws

in documentation of past costs and problems encountered. The majority of the material, labor and

equipment will be procured locally, or is owned by the company. Equipment used in the

construction of the project will be in reasonable working order or suitable back-up equipment is

readily available.

Work Breakdown Schedule Assessment of Risk

Examination of past project data will provide an order of magnitude for the basis of the

initial estimate. The best estimate can only be produced by constructing a work breakdown

schedule of to the task level necessary to evaluate the hours required to complete each task, the

materials used, and the equipment necessary for that step. In this manner, a Project Manager will

be able to evaluate the ability to calculate the best distribution of resources, labor, material,
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equipment. In other words the project will not be overmanned, have too much material on site, or

suffer delays from equipment that is over utilized by the need to be at several task sites at one

time. Load leveling of manning, equipment requirements and evaluation of the materials needed

can be performed under the “perfect” scenario situation.

Assessment of Risk

The next step will be to consider the risks associated with labor or material interruptions,

equipment, malfunctions. Risk can be thought of in four possibilities: Unforeseeable, mitigation

of risk, transfer of risk, or acceptance of Risk. There are types of risk that can not be predicted

and have a very low probability of occurrence- unforeseen. Risk mitigation is accomplished by

the identification of the most likely of risks and taking steps to reduce the impact to the project.-

risk planning. This could include having extra equipment available, sub contracting portions of

the project. Risk transfer could be the purchase of insurance for fire flooding or theft of building

materials. And finally there is risk acceptance, things like storms or earthquakes that have an

increased possibility but still have a low probability of happening. Recover =y plans should still

be considered for these events and addressed in the bid contract- Force Majeure.

First Estimate

Using the labor, material, and equipment costs linier regression would be a method to

evaluate escalation costs of labor, material , and replacement of equipment during the length of

the project. Additional considerations would have to be given to the possibility of failure of one

or more of the areas, linier regression analysis, to create a parametric to establish an appropriate

contingency cost buffer. This completed the same steps would have to be taken with the

weighted average of the risks associated with the project. An initial bid can be constructed using
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the appropriate contract language. The contract would offer an initial price subject to conditions

that may be discovered by inspecting the site. These conditions may not be apparent to

preliminary inspection such as subterranean ground conditions, the proximity of water to the

surface, or other environmental conditions that would affect the cost of the project and would

require contract clauses to allow cost adjustments to compensate.

Actual Costs

Actual costs are the labor paid, the material used, and the equipment rental fees, or

equipment repairs and depreciation. Other indirect costs could be the loss of future projects if the

stakeholders are not satisfied and the project is not closed-out properly and met the full scope of

the contract-completed properly. This could result in rework or litigation that- very real costs.

Summary

Best estimate is based on ideal conditions but the contract should allow for contingencies

that may not be discovered, even with due diligence, during the bidding process. Appropriate

adjustments to the bid must be made to allow for escalation of labor, materials, equipment, risk

mitigation, and anticipated delays during the project.

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Reference

A GUIDE TO THE PROJECT MANAGEMENT BODY OF KNOWLEDGE (PMBOK

GUIDE), 4th ed, Project Management Institute