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A project study submitted in the partial fulfillment of the requirements for the subject “ADVANCED SYSTEM MANAGEMENT”
Submitted By SIDDHARTH SHRIVASTAV (ROLL NO. 52) SUNIL SETHIA (ROLL NO. 61) HARMINDER SINGH (ROLL NO. 19) WASEEM AKRAM (ROLL NO. 70) PRASAD BHASKHAR (ROLL NO. 74)
Under the guidance of PROF. G.N. JAYANTHY
THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENT HYDERABAD
This is to certify that this is a project report on “COST ESTIMATION TECHNIQUES FOR CONSTRUCTION INDUSTRY” submitted by Mr. Sunil Sethia, Mr. Siddharth Shrivastav, Mr. Harminder Singh, Mr. Waseem Akram, and Mr. Prasad Bhaskar (PGP/SS/2007-09) as a part of the curriculum for the third trimester. The work has been undertaken and completed under the guidance of Prof. G.N. Jayanthy and is satisfactory.
It gives us great pleasure in presenting our project work on “COST ESTIMATION TECHNIQUES FOR CONSTRUCTION INDUSTRY”. We, the students of PGP/SS/200709, IIPM-HYDERABAD successfully completed our project and would like to thank Prof. G.N. Jayanthy for his timely encouragement, guidance and support.
We, as co-workers are also grateful to each other for the team work without which this study could not have been completed successfully.
The primary objective of this report is to provide the readers the insight into the COST ESTIMATION TECHNIQUES FOR CONSTRUCTION INDUSTRY.
We hope that the report has made the text interesting and lucid. In writing this report, we have benefited immensely by referring to many publications and articles. We express our gratitude to all such authors and publishers.
Any suggestions to improve this report in contents or in style are always welcome and will be appreciated and acknowledged.
We hereby declare that all the information that has been collected, analyzed and documented for the project is authentic possession of us.
We would like to categorically mention that the work here has neither been purchased nor acquired by any other unfair means. However, for the purpose of the project, information already compiled in many sources has been utilized.
TYPES OF CONSTRUCTION CONTRACTS
PROJECT MANAGEMENT IN CONSTRUCTION BUSINESS
COST ESTIMATOR & COMMON PRACTISES
LEVELS OF ESTIMATES
Managing a business is not an easy job, especially construction business. Keeping a track of everything manually is very difficult and many times searching for particular information can take lots of your time to get the required details. Estimation is an important part of planning and is an important determinant in effort and time required to do the job. The accuracy of estimate will greatly affect the ability to deliver on time and within the constraints of the budget. It has been observed that most accurate estimate leads to lowest cost development. Knowing the future is something every company dreams of. Not only would it help them operate at maximum potential, but it would also ensure that they did not put a foot wrong. However, it is impossible for anybody, or anything, to predict the future accurately. It is, however, not very difficult to predict a ‘very near’ outcome based on previous and current scenarios.
The building and construction industry does not always run smoothly and has lots of ups and down. Many factors contribute to the unpredictability of this sector and it is therefore very important to operate as safely as possible. An accurate estimate plays a vital role in preparing solid groundwork for the construction projects.
In any business, risk identification and risk analysis are crucial for successful implementation of business strategies. This enables to identify the likelihood of success in a project to be undertaken, along with measures that help to minimize the risk elements. The objective of risk management is to identify and then measure the degree of the risk associated with different courses of action on a project. The whole process of risk analysis helps in the overall decision-making process.
TYPES OF CONSTRUCTION CONTRACTS:
Stipulated sum. Lump sum unit price. Cost plus a fee. Design-build. Bridging. Cost plus a fee with a guaranteed maximum price (GMP). Turn Key.
PROJECT MANAGEMENT IN CONSTRUCTION BUSINESS
Companies’ always feels that there construction projects are running smoothly. As they walk from office to office asking there project managers how things are going, their responses include some of the following:
"EVERYTHING'S OK." "99 percent complete, just a few little things left." "I think we'll finish on time." "I'm getting all the signatures tomorrow." "The paperwork is almost done." "We're coming in close to budget." "Only a few issues left to resolve." "No problems I can't get handled." But, are things going as well as you were told? A few days later, you get a call from an angry customer screaming his project is three weeks late. Another is upset he isn't getting the quality and service for which he contracted. Another client demands you drop everything and fix his problem now. Your accounting manager tells you some project managers are not doing their required paperwork timely and several change orders have not been approved in advance by the owner. An irate subcontractor calls threatening to pull off a job unless they get paid for work completed two months ago. On an important job, the concrete
cylinder tests for the footings are not coming up to the design mix requirements. You find out a building inspector has not approved a major installation your foreman changed in the field. And then, it gets even worse. Your accounts receivable aging report is not good, and payments are being received slower on most projects. Four customers still owe your company final retention payment on projects completed over three months ago. The city will not release your offsite improvement bonds as there are still outstanding items left to complete from over a year ago. There are six outstanding change orders a customer refuses to pay. The month-end job cost reports show the estimated final profit on five projects has slipped again without notice.
NO PROJECT PROBLEMS?
These problems are symptomatic of companies run by owners who haven't taken the time to make installing pro-active project management systems a priority. These owners struggle and fail as they let project managers continually tell them what they want to hear instead of the truth, avoiding conflict until it's too late. Typical project management problems are encountered when companies don't have standardized systems in place that guarantee everyone does business the same way. You want consistent performance and results. You want everyone to do business in a similar manner. You don't want to rely on your constant reminding, checking and confronting to make sure everything is performed exactly the way you want it done. You want your project managers to be accountable and keep you informed of the real situation on every project. Even if you have great managers, they will do things differently unless you have written systems in place for all to follow. Six good project managers will do things six different ways, late or not at all. This creates chaos, disorganization, stress and lost profits. Your customers, subcontractors and suppliers can't deal with a company that doesn't have consistent business standards and systems in place.
Could you imagine doing business with a bank that let each loan officer lend based on their own personal standards? It wouldn't work. Can you imagine a construction company where each project manager could decide if and when lien releases or signed change orders were required or if the subcontract terms had to be followed? It wouldn't work either. Typical re-occurring problems are a result of the company owner not requiring everyone to follow the company project management systems. Most companies have general rules to follow, but don't have them written down. The owner then tries to keep project managers herded like cats to follow the company rules. But busy owners, over time, let their people slip from following written company procedures, if they even have them. It's hard to keep people accountable to systems that aren't written, reviewed, trained, tracked, followed and adhered to.
GET PROJECT DRIVEN!
Construction companies are project driven. Successful projects lead to profitable growing companies. Owning and managing a successful general contracting company for over twenty-nine years has taught me a simple truth: to build an excellent company, you must get your project management systems installed, pro-active and permanent. Excellent companies consistently hit their overall goals and project management targets in the areas of time, budget, customer satisfaction, quality and safety. They are focused on more than getting the jobs done as efficiently as possible. They focus on being organized and have a systemized pro-active approach to project management, so they can:
1. 2. 3. 4. 5.
Consistently measure success. Start and finish projects quickly. Be on time and budget. Meet their commitments. Keep customers happy.
6. Create a great place to work. 7. Build teamwork. 8. Identify problems early. 9. Train and improve people. 10.Maximize and allocate resources. 11.Grow. 12.Make above-average profits.
WHAT ARE PRO-ACTIVE SYSTEMS?
Pro-active project management systems are repeatable and standardized written organizational methods, procedures and guidelines that achieve project goals and optimize resources of time, energy, money, people, equipment and materials within a specific deadline. Project management is composed of several different types of activities such as planning, assessing risk, estimating resources, organizing work, assigning tasks, directing activities, monitoring, tracking, reporting progress and finally analyzing results. Pro-active project management systems control all project activities and deliver the desired and targeted results on time and on budget, per the contracted scope of work, while minimizing risk.
FOUR STAGES OF "PRO-ACTIVE" PROJECT MANAGEMENT SYSTEMS
1. PROJECT GOALS AND OBJECTIVES Consistent performance and success is more than getting organized and training project managers to do business the same way. Most projects are started without a plan and with hope that something good will happen. Successful projects start with clear objectives and measurable results to achieve. Just trying to do your best or trying to bring it in on budget and schedule will not guarantee the bottom-line results you want at the completion of every job. Without clear
targets, you can't make project managers accountable or responsible for their results. Before every project, sit down with the project team and lay out the goals and objectives, including:
A. Overall Project Objectives. B. Budget and Financial. i. ii. iii. Job cost. Productivity. Profit.
C. Time and Schedule i. ii. iii. iv. D. Quality. E. Service. F. Safety. G. Customer satisfaction. H. Training. Start Milestones Completion Punch-list
2. PROJECT PLANNING Successful projects have written plans to insure they stay on track and hit their goals. You wouldn't start a construction project without a detailed set of working drawings or building plans. Project management is no different. There are certain steps every project must follow that guarantee on-time and on-budget completion and success. These steps must be identified and perfected as part of your project management system. These systems can include pre-project start-up meetings, procurement procedures, change order systems and shop drawing standards. The objective should be more than keeping the job moving. The intent is to hit the goals and project milestones. Systems will make this happen. Project managers must breakdown the project into small incremental steps that will insure accomplishing the end results. By creating and following a project plan, the manager can assign tasks and hold people accountable. In order to draft a successful project plan, include the following:
A. Project specifications B. Project requirements C. Materials D. Resources E. Equipment F. Labor G. Cash-flow H. Tasks I. Schedule J. Accountability K. Responsibility
3. PROJECT PRODUCTION AND IMPLEMENTATION The next step is to build the project. Ongoing organizational systems will keep your project headed and tracking toward the desired end result. Each project team member must know what is expected and what systems must be followed before starting work. By establishing clear measurements and procedures for project implementation, team members can get started on track and monitored on an ongoing basis as to their progress. Consider which project management systems will guarantee that every project will meet its goals:
A. Project control systems B. Procurement systems C. Installation systems D. Tracking systems E. Cost control systems F. Quality control systems G. Productivity systems H. Training systems I. Safety systems J. Customer systems
4. PROJECT MONITORING AND EVALUATION As you build each project, constant monitoring becomes easy for the owner or upper management when systems are in place and being followed. When project management systems are installed and used effectively, monthly evaluation meetings become a simple check of what has been done properly and what needs attention. When systems are used, problems become quick to identify, hard to overlook or hide and can be addressed before it's too late.
PROJECT MANAGEMENT SYSTEMS ARE "PRO-ACTIVE"
A key success factor to owning and managing an organized and systemized company is to select the systems that will insure the success of your operation. To create pro-active project management systems, start by selecting the top ten systems and procedures you feel, if implemented and followed, will guarantee successful projects 90 percent of the time. Then you must be "pro-active" and stay focused on these systems as "musts" for your managers to implement, maintain, track and perform. It will be your job to monitor these priority systems and force your project management team to adhere to these without exception. For example, when ordering something with a credit card, they always insist on getting your expiration date, no exceptions.
On-going safety program. On-going training program. Change order management. Procurement procedures. General contract checklist. Subcontract checklists. Purchase order checklist. Required approval list. Insurance requirements. Submittal and shop drawing steps. Project scheduling and monitoring. Request for information systems. Scope of work standards. Specification review.
Customer service standards. Customer satisfaction review. Job cost reporting and review. Progress payment procedures. Project paperwork standards. Contract documentation. Contract administration. Contract management. Project communication. Project management meetings.
PROJECT SUCCESS SYSTEM
Project goals targets. Jobsite photos. Updated schedule. Proposed change order log. Executed change order log. Subcontract tracking log. Accounts receivables. Accounts payables. Shop drawing and submittal log. Job cost update. Budget variance report.
COMPANY SUCCESS SYSTEM
Current project milestone tracking. Sales and proposals. Estimates and bids. Pre-construction. Procurement. Project start-up. Construction. Completion. Payment. Overall strategy.
SYSTEMS THAT WORK
The following are a few of the top priority project management systems, recommend to keep projects on track: Project Start-Up System 1. Review bid/estimate/proposal. 2. Read complete contract. 3. Review complete plans. 4. Review complete specifications. 5. Visit jobsite.
6. Project goals and objectives. 7. Set-up project master budget. 8. Complete project checklist: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. Insurance requirements Bonding requirements Billing and payment requirements Cash-flow needs Discounts available Shop drawings and submittals Schedule and deadlines Long lead items Special tools and equipment Meetings Signature of authority designated City and permit requirements Site accessibility Loading and unloading needs Project close-out requirements
9. Execute contract
1. Always award to the lowest responsible bidder
BEFORE AWARDING CONTRACTS, REVIEW:
1. Bid scope of work 2. References 3. Financial capacity 4. Ability to meet schedule 5. Adequate manpower 6. Similar project experience 7. Quality workmanship 8. Professional 9. Training program 10.Safety program
REVIEW CONTRACT TERMS: 1. Final scope of work 2. Schedule 3. Delay clauses 4. Mandatory meetings 5. Clean-up and punch-list 6. Supervision 7. Change order procedures 8. Notice requirements 9. Payment procedures
EXECUTE ALL SUBCONTRACTS PRIOR TO STARTING JOB
COST ESTIMATOR & COMMON PRACTICE TRAITS
Cost estimators develop the cost information that business owners or managers, professional design team members, and construction contractors need to make budgetary and feasibility determinations. From an Owner's perspective the cost estimate may be used to determine the project scope or whether the project should proceed. The construction contractor's cost estimate will determine the construction bid or whether the company will bid on the construction contract.
1. Awareness: The estimator should firstly consider the project scope and the level of effort and resources needed to complete the task ahead; the organization's financial capability, staff, and plant capacity (if working as an estimator for a construction company) to complete the project. Consider the time allotted for the construction of the project in coordination with the owner's schedule needs. Examine the general and special conditions of the contract and determine the effect these requirements have on indirect costs. Consider alternate methods of construction for the projects. Review all sections of the drawings and division specifications to ascertain an accurate perspective of the total project scope, level of design discipline coordination, adequacy of details, and project constructability. Make other members of the project team aware of any problems with the project documents. Communicate and coordinate information to other project team members in a timely manner.
2. Uniformity: The estimator should develop a good system of estimating forms and procedures that exactly meet the requirements of the project, and that is understood and accessible by all team members. This system should provide the ability to define material, labor hour and equipment hour quantities required for the project. Material, labor, and equipment unit costs are then applied to the quantities as developed in the quantity survey. Apply amounts for overhead and profit, escalation, and contingency in the final summary. 3. Consistency: Use methods for quantity surveys that are in logical order and consistent with industry standard classification systems. These methods should also meet the specific need of the company or client. Use of consistent methods allows several estimators to complete various parts of the quantity survey, or be continued later by another estimator. Consistency also aids the identification of cost increases and decreases in certain areas as the project progresses through the design stages. Combine these surveys into the final account summaries. 4. Verification: The method and logic employed in the quantity survey must be in a form, which can provide independent method of proof of the accuracy of any portion of the survey. 5. Documentation: Document all portions of the estimate in a logical, consistent, and legible manner. Estimators and other personnel may need to review the original estimate when the specific details are vague. The documentation must be clear and logical or it will be of little value to the reader. Such instances may occur in change order preparation, settlements of claims, and review of past estimates as preparation for new estimates on similar projects.
6. Evaluation: When the estimate involves the use of bids from subcontractors, check the bids for scope and responsiveness to the project. Investigate the past performance records of subcontractors submitting bids. Determine the level of competence and quality of performance. 7. Labor Hours: The detailed application of labor hours to a quantity is primary in governing the accuracy and sufficiency of an estimate. The accuracy of the project's schedule and work force requirements are dependent on the evaluation and definition of the hours. The combined costs for worker's compensation, unemployment insurance and social security taxes are significant factors in the project costs. The most accurate method for including these costs is to define labor hours and wage rates; then apply percentages to the labor costs. 8. Value Engineering: Structure the estimate to aid in researching and developing alternative methods that will result in cost optimization. These alternative methods can include different construction methodology, replacement materials, etc. Using the same level of detail in both the value engineering studies and the base estimate is extremely important. This provides a more precise comparison of costs for proposed alternate methods. 9. Final Summaries: Provide methods for listing and calculating indirect costs. Project scope governs the costs of overhead items such as insurance, home office plant, and administrative personnel. Determine these costs in a manner consistent with quantity survey applications. Consider other work in progress, and/or owner occupancy of existing space that may have a bearing on projected overhead costs. Determine amounts for performance bonding, profits, escalation, and contingencies.
Develop methods for analyzing completed estimates to ascertain if they are reasonable. When the estimate is beyond the normal range of costs for similar projects, research the detail causes for possible errors.
Develop methods of analysis of post-bid estimates to find the reasons for the lack of success in the bidding process.
Calculate the variation of the estimate from the low bid and low average bids.
Determine from an outside source if there were subcontract or material bids provided only to certain bidders.
Determine if bids were submitted by a representative number of contractors for the level of construction quality expected.
Determine if the low bidder may have made omissions in the estimate. Properly document this information for future use and guidance.
11. Conversion: Show estimating procedures that allow conversion of the estimate to field cost systems so management can monitor and control field activities. These procedures include methods of reporting field costs for problem areas. Make reports daily or weekly rather than at some point in time after the project is complete. Field cost reporting, when consistent with estimating procedures, enables estimators to apply the knowledge gained from these historical costs to future estimates, and help train field personnel in labor hour and cost reporting that provide the level of accuracy required.
12. Change Orders: Apply the highest level of detail from information provided or available to the estimator. State quantities and costs for all material, labor, equipment, and subcontract items of work. Define amount for overhead, profit, taxes, and bond. Specific itemization of change order proposals is essential in allowing the client to determine acceptability. Upon approval, use the estimate detail as the definition of scope of the change order.
LEVELS OF ESTIMATE
As a project is proposed and then developed, the estimate preparation and information will change based on the needs of the Owner/Client/Designer. These changes will require estimates to be prepared at different levels during the design process with increasing degrees of information provided. It should also be noted that within each level of estimate preparation, not all portions of the design would be at the same level of completeness. For example, the architectural design may be at 80% complete while the mechanical design is only 50% complete. This is common through the design process, but should always be noted in the estimate narrative. In addition to construction costs, estimates for process or manufacturing areas require information related to the involved processes such as product line capacity, process layout, handling requirements, utility requirements, materials and storage required, service requirements, flow diagrams, and raw materials access. The following descriptions constitute the different levels of an estimate. Estimates within each of these levels may be prepared multiple times during the design process as more information becomes available or changes are made to the scope. As the level of the estimate increases it will become more detailed as more information is provided; "unknowns" are eliminated; fewer assumptions are made; and the pricing of the quantities become more detailed. Contingencies for the aforementioned will be reduced as more design documentation is produced. The levels of the construction cost estimate correspond to the typical phases of the building design and development process and are considered standards within the industry. These levels are as follows:
LEVEL 1 - ORDER OF MAGNITUDE The purpose of the Level 1 estimate is to facilitate budgetary and feasibility determinations. It is prepared to develop a project budget and is based on historical information with adjustments made for specific project conditions. Estimates are based on costs per square foot, number of cars/rooms/seats, etc. Project information required for estimates at this level usually might include a general functional description, schematic layout, geographic location; size expressed as building area, numbers of people, seats, cars, etc., and intended use.
LEVEL 2 - CONCEPTUAL/SCHEMATIC DESIGN The purpose of the Level 2 estimate level is to provide a more comprehensive cost estimate to compare to the budgetary and feasibility determinations made at Level 1 and will be typically based on a better definition of the scope of work. An estimate at this level may be used to price various design schemes in order to see which scheme best fits the budget, or it may be used to price various design alternatives, or construction materials and methods for comparison. The goal at the end of schematic design is to have a design scheme, program, and estimate that can be contained within budget. The Level 2 estimate is based on the previous level of information available at Level 1, in addition to more developed schematic design criteria such as a detailed building program, schematic drawings, sketches, renderings, diagrams, conceptual plans, elevations, sections and preliminary specifications. Information is typically supplemented with descriptions of soil and geotechnical conditions, utility requirements, foundation requirements, construction type/size determinations, and any other information that may have an impact on the estimated construction cost.
LEVEL 3 - DESIGN DEVELOPMENT Estimates prepared at Level 3 are used to verify budget conformance as the scope and design are finalized and final materials are selected. Information required for this level typically includes not less than 25% complete drawings showing floor plans, elevations, sections, typical details, preliminary schedules (finishes, partitions, doors, and hardware etc.), engineering design criteria, system single line diagrams, equipment layouts, and outline specifications. The Level 3 estimate provides a greater amount of accuracy, made possible by better defined and detailed design documentation. Estimates at this phase may be used for value engineering applications before the completion of specifications and design drawings.
LEVEL 4 - CONSTRUCTION DOCUMENTS Level 4 estimates are used to confirm funding allocations, to again verify the construction cost as design is being completed, for assessment of potential value engineering opportunities before publication of the final project design documentation for bids, and to identify any possible "design creep" items, and their costs, caused by modifications during the completion of the construction documents. This final construction document cost estimate will be used to evaluate the subcontract pricing during the bid phase. Level 4 estimates are typically based on construction documents not less than 90% complete.
LEVEL 5 - BID PHASE The purpose of this level estimate is to develop probable costs in the preparation and submittal of bids for contract with an Owner. In the traditional "design-bidbuild" delivery system, this would be with 100% completed and coordinated
documents. The Level 5 estimate will be used to evaluate sub-contractor bids and change orders during the construction process. In other delivery systems, becoming more widely used, such as design-build or guaranteed maximum price, the bid could actually be prepared at an earlier level, often Level 3 or Level 4. In such an instance estimates are prepared as previously described along with progressive estimates as the design is completed. It should be stressed that when preparing a bid at a prior estimate level, it is very important to include a complete and thorough "Scope of Estimate" statement that would state clearly such items assumptions, allowances, documents used for the estimate, and contingency amounts included.
ELEMENTS OF A COST ESTIMATE
Quantity Takeoff: The foundation for a successful estimate relies upon reliable identification (takeoff) of the quantities of the various materials involved in the project. Labor Hours: Labor hour amounts can be developed by crew analysis or applied on a unit man-hour basis. The use of a labor pay per unit of work (ex: Rs. 150 per cubic yard for grade beams or Rs.200 per cubic yard for walls) is only applicable when the cost history supports the data being used. The estimator must make allowance for the varying production capability that will occur based upon the complexity of a project.
Labor Rates: The labor rate is the cost per hour for the craftsmen on the project. To determine any craft rate, whether union or open shop, the estimator starts with the basic wages and fringe benefits.
Material Prices: Material prices, especially in today's current market, fluctuate up and down. The estimator must both understand and anticipate the frequency and extent of the price variations and the timing of the buying cycle. Material prices may be affected by: Purchase at a peak or slack time of the year for the manufacturer. Material availability. Size of the order. Delivery timeframe requirement. Physical requirements for delivery, such as distance, road size, or site access. Payment terms and history on previous purchases Sole-source items. Exchange rates (if the material will be imported into the country).
Equipment Costs: Equipment rates depend on the project conditions to determine the correct size or capacity of equipment required to perform the work. When interfacing with other equipment, cycle times and equipment capacity control the costs on the project. Costs will also differ if the equipment is owned by the contractor as opposed to rent.
Subcontractor Quotes: A subcontractor quote, like the general estimate, contains labor, material, equipment, indirect costs, and profit. It is dependent upon having the quantities, labor hours, hourly rate, etc., prepared in a reliable manner just like any other part of an estimate. The amount of the subcontractor quote is also dependent upon the payment terms of the contract, and previous payment history between the subcontractor and general contractor. Bonding costs should also be considered.
Indirect Costs: Indirect costs consist of labor, material, and equipment items required to support the overall project. For the owner: design fees, permits, land acquisition costs, legal fees, administration costs, etc. For the contractor and subcontractor: mobilization, staffing, on-site job office, temporary construction, temporary heat/cooling, and temporary utilities, equipment, small tools and consumables, etc.
Profit Amount: Apply appropriate or contracted profit rate uniformly to all contractors and to original bid and change orders.
The transfer of the estimate information to the field cost control system provides management the opportunity to closely monitor and control construction costs as they occur. It should be noted that it is always good cost control practice to review and evaluate the final cost estimate vs. the actual bid. This exercise is not another level of estimate, but is a cost control mechanism and important data for estimating future projects.
(SMALL, SHORT-TERM JOBS)
(SMALL, IDENTICAL UNITS)
CONTRACT COSTING (LARGE, LONG-TERM)
OUTPUT COSTING (ONLY ONE PRODUCT)
(PRODUCT IS A SERVICE)
(PRODUCED IN STAGES)
Cost studies of building seek to ensure the efficient use of available resources to the industry, and to increase the rate of growth of construction work in the most efficient manner. Cost studies are then followed by a process of cost analysis, cost planning and cost control, which must be monitored and managed in such a way that deviations from the plan are detected and corrected in time so that objectives can be met and met on time and within budget. The construction project consists of the physical components: the structure, the mechanical and electrical systems, and the architectural finishes. To guide him, the construction manager must know the estimate of costs, the plans and specifications defining the materials to be used, and the proper assembly of the materials. The task of cost estimates is essential and important in project management since through cost estimates budget forecasting and cost control, etc. can be carried out. Estimating costs is of prime importance both in the preliminary and the realization phase of a project. The preparation of an accurate preliminary estimate is one of the most complicated subjects for designers and estimators. The purpose of producing a pre-tender estimate can be classified into the following three categories: Budgeting – this decides whether the project should proceed as envisaged. Controlling – this uses the estimate as a control mechanism throughout the design process. Comparing – this uses the estimate as a basis for the evaluation of different design solutions.
Pre-tender price estimating methods may also be classified as single price-rate, measured analysis or cost models.
Table 1 Estimate Types
Stage Activity Plan of Work Estimating Types Cost Planning Process
STAGE 1. 2. 3. 4. 5. 6. ACTIVITY Project Identification Project Definition Project Execution PLAN OF WORK Consultation Brief Investigation Constructional Detail Working Drawing Construction ESTIMATING TYPES Preliminary Feasibility Viability Authorization Final budget Control COST PLANNING PROCESS Initial estimate Firm estimate Preliminary Cost Plan Final cost plan Cost check -
The degree of accuracy will very much depend on the type of information provided to the quantity surveyor in addition to the quality of his pricing information. Literature survey has elicited the following estimating methods:
FUNCTIONAL UNIT CUBE METHOD SUPERFICIAL AREA SUPERFICIAL-PERIMETER
ELEMENTAL ANALYSIS INTERPOLATION
RESOURCE ANALYSIS COST ENGINEERING
Table 2 Methods for Pre – Tender
CONFERENCE FINANCIAL METHODS UNIT SUPERFICIAL SUPERFICIAL PERIMETER CUBE STOREY ENCLOSURE APPROXIMATE QUANTITIES ELEMENTAL ESTIMATING RESOURCE ANALYSIS COST ENGIN EERIN G COST MODELS Based on a consensus viewpoint
Used to determine cost limits or the building costs in a developer’s budget Applicable to projects having standard units of accommodation. Often used to fix cost limits for public sector building projects. Still widely used, and the most popular method of approximate estimating. Can be applied to virtually all types of buildings. Never used in practice Used to be a popular method amongst architects, but now in disuse. Largely unused in practice Still a popular method on difficult and awkward contracts and where time permits. Not strictly a method of approximate estimating, but more associated with cost planning; used widely in both the public and private sectors for controlling costs. Used mainly by contractors for contract estimating and tendering and tendering purposes. Mainly used for petrochemical engineering projects. Still in the course of development. These methods may eventually prove to be superior to the existing methods .
CONFERENCE ESTIMATE This is a technique that can be used for the preparation of the earliest price estimate given to the client. It is based on a collective view of a group of individuals, and may at this stage not be quantified in any particular way. As for the result, it has been shown that the group concerned must have relevant experience of estimating the costs of similar projects. It is used in circumstances where historical cost data may not be appropriate, as in the case of a prototype
project. It also offers a qualitative viewpoint to reinforce or otherwise a measured estimate.
FINANCIAL METHOD These are methods that fix a cost limit on the building design, based on either unit of accommodation or rental values. The estimated cost of a project may be fixed in relation to the number of pupils who are likely to attend a completed school. The architect must then ensure that the design can be constructed within such a cost limit. In the private sector, projects are often evaluated in terms of their selling price or rental value. For example, in connection with a speculative housing development a market research survey would determine the possible selling price of dwellings on a new estate. The builder would then deduct other development costs and profit from the total selling price, and the remainder would represent the amount to be spent on building. Alternatively, building and other development costs (excluding land) and profit could be calculated and deducted from the total selling price in order to determine a maximum price to be paid for the land. This method is used to avoid or reduce the risk or embarking on a profitless venture. The assessment will take place at the outset, and certainly before payment of the site purchase.
UNIT METHOD The unit method of approximate estimating consists of choosing a standard unit of accommodation and multiplying this by an approximate cost per unit. The standard units may represent, for example: • Schools – costs per pupil enplace • Hospitals – costs per bed enplace • Car parks – cost per car space
The technique is based on the fact that there is usually some close relationship between the cost of a construction project and the number of functional units it accommodates. Functional units are those factors which express the intended use of the building better than any other. This method is extremely useful on occasions where the building’s client requires a preliminary estimate based on little more information than the basic units of accommodation. The method of counting the number of units is extremely simple, but considerable experience is necessary in order to select an appropriate rate. This rate can be obtained by the careful analysis of a number of recently completed projects of a similar type, size and construction. However, adjustments based on professional judgment will always need to be made to take into account the various site conditions, specification changes, market conditions regional changes and inflation. It is one of the simplest and quickest methods to implement, but it must be used with care. It suffers from the major disadvantage of lack of precision, and should only be used for establishing general guidelines. It is advisable, therefore, to express cost within a range of prices that can be useful for budgetary estimating.
SUPERFICIAL AREA METHOD This is still the most common method in use for early price estimating purposes. The estimate of cost is easy to calculate and thus is expressed in a way that is fairly and readily understood by those in the industry and the average construction industry clients. The area of each of the floors is measured and then multiplied by the cost per square meter. In order to provide comparability between various schemes, the floor areas are calculated from the internal dimensions of the building. It is largely a post-1945 method, and became appropriate for projects such as schools and housing where storey heights were similar. Storey heights, plan shape and methods of construction are particularly important when deciding on the rate to be used. Another consideration which favor the use of this method is that rates are readily available from many different
sources already operating, alternatively, they can be calculated very easily from existing scheme cost data.
SUPERFICIAL PERIMETER METHOD This method of approximate estimating is a variation on the superficial floor area method. Realizing that the floor area has the greatest single variable-correlated price produces a formula that showed an increase in the accuracy of early price prediction. The formula combined floor area with the length of the building’s perimeter. This is the second most important variable, and attempts to take into account plan shape when linked with floor area. The wall/floor area ratio is known to be an important factor in the economic design buildings. Tests have indicated that more accurate results can be obtained than when using floor area alone. Due to the reluctance of surveyors to change to this method of approach and of cost data sources to publish appropriate rates, this method has not been used in practice.
CUBE METHOD The cube method of approximate estimating was used extensively at the beginning of this century, but has since been superseded because of its inherent disadvantages. It was a method extensively used by architects. All architects’ offices used to keep a ‘cube book’ for future estimating purposes. Once the contract was signed its costs would be divided by the cubic content and entered into office price book. The cost of a new job could then be determined by calculating its volume and selecting an appropriate rate from the book. Even with such a primitive method it was necessary to provide some rule for comparable quantification of purposes.
STOREY-ENCLOSURE METHOD In an attempt to overcome the many disadvantages of the other single-price methods of estimating, a new method was devised using the following rules of calculation. i. ii. iii. Twice the area of the lowest floor. The area of the roof measured on plan. Twice the area of the upper floors, plus an addition of 15% for the first floor, 30% for the second floor, 45% for the third floor, etc. iv. The area of the external walls.
The Method Attempted to Take Into Account: a. Plan shape (by measuring each floor) b. Total floor area (by measuring the external wall area) c. Vertical position of the floors (by using different multipliers for each floor) d. Storey heights (ratio of floor and roof area to external wall area) e. Overall building height (ratio of roof area to external wall area) f. Extra costs of providing usable floor areas below ground (by using multipliers)
APPROXIMATE QUANTITIES Approximate quantities provide a more detailed approximate estimate than any of the methods described above. They represent composite items which are measured by combining or grouping together typical bill-measured items. Whereas the methods described above estimate costs on the basis of measurement and some cost relationship, this method relates to the importance of measurement. This method does provide a more detailed and reliable method
of approximate estimating, but involves more time and effort than any of the methods (1)-(7). No particular rules of measurement exist, and the composite items resulted from the experience of each individual surveyor. Also, considerably more information is required from the designer if the method is to be applied in practice. The method is therefore suited to a more advanced design stage. It is, however, more reliable when one is attempting to estimate the costs of major refurbishment projects. Approximate quantities should not be confused with the bill of approximate quantities. The latter would be based on an agreed method of measurement. The former, which is used for approximate estimating purposes, would be much briefer because several of the bill items would be grouped together within a single description. Contractors favor this method when they have to prepare tenders on the basis of a drawing and specification projects.
ELEMENTAL ESTIMATING The first stages of cost planning can be used to determine the approximate cost of a construction project. This method analyses the cost of the project on an elemental basis, attempting to make use of the cost analyses from other similar projects. Cost planning, however, also seeks to do much more. It provides cost advice during the design process, offering the client better value for money. It keeps the designer fully informed of all the cost implications of the design in relation to an approved approximate estimate and is likely to be accepted as the tender sum. Full cost planning services today would also incorporate the attributes of life-cycle costing and value engineering. Two alternative forms of cost planning have been developed, although in practice a combination of both is now generally used. The first form is known as elemental cost planning, where the project must be designed within an overall framework of a cost limit. It is often referred to as ‘designing to a cost’. In practice it is more appropriate to public sector projects, which often incorporate some form of cost limit. The other alternative form is comparative cost planning, where alternative designs can be examined within an economic context. This method is referred to as ‘costing a design’.
RESOURCE ANALYSIS This is a method that is traditionally adopted by contractors’ estimators to determine their individual rates for measured items in bills of quantities. Each individual measured item is analyzed into its constituent parts such as labor, materials and plant. Each part is then cost’d on the basis of output, gang size, material quantities, plant hours, etc. Particular emphasis is placed on such project features as type, size, location, shape and height as important factors affecting the contractor’s costs. In theory the contractor will make extensive use of feedback, although some evidence suggests that the whole process is largely determined by value judgments on the basis of previous experience. Alternative analytical methods can be calculated based on resource costs on the basis of operations rather than individual bill items. Resource estimating is not strictly a pre-tender method of price prediction, because of the amount of time and the type of data required. It can, however, be applied in circumstances where, for example, a new material or construction process is envisaged. In these circumstances, where existing cost data are not available the design team may have few alternatives available other than to refer to resource-based estimating.
COST ENGINEERING METHODS There are three methods used for capital cost estimating in the process-plant industry. These are: 1. Functional Approach The average cost of a functional unit in a process is the function of the various process parameters. The estimated cost may therefore be represented in the following way: Cost = F (Q, T, P, M, CCI) Where Q = capacity throughout
T = temperature P = pressure M = materials of construction, and CCI = construction cost index
2. Factor Estimating This method relies on costing from only a portion of the scheme and then multiplying this by a factor to obtain the total cost. Zimmerman (1965) has called these ratio-cost factors. Thus the total cost of a building project may be estimated by multiplying the cost of the shell by, say, 1.6. A range of factors have been derived empirically for different sorts of fixed capital equipment.
3. Exponent Estimating The costs of similar plants or pieces of equipment of different sizes vary with the size raised to some power. C2 = ( Q2 )x C1 Q1 Where C2 is the cost of the desired capacity Q2 and C1 is the cost of the known capacity Q1. A frequent value of x is 0.6, and so relationship is often referred to as the six-length rule. The exponent x can be determined by plotting actual historical costs for the equipment or plant. These methods can also be used for estimating the costs of building and civil engineering works.
COST MODELING METHOD Cost modeling is a more modern method that can be used for forecasting the estimated cost of a proposed construction project. Although they were first suggested during the early 1970s, there is still only scant evidence of their use in practice. However, considerable research has been undertaken in an attempt to convert the theories into practice. The uncertainties about calculating project costs have been discussed in several papers. It assumes a normal distribution for various cost items and uses the probability estimating method with a 95% confidence level as the estimation limit. It also discusses various probability estimating methods and explains their applicability. It emphasizes that the correlation between cost items must be considered in the probability estimating methods when this correlation is significant. The use of the computer has allowed more numerical methods such as statistical and operational research techniques to be applied to the forecasting of construction costs. Without computer facilities such applications would not be possible. These models attempt to formulate a better representation of construction costs than do their predecessors, by trying to discover the true determinants of construction costs. There is, however, little evidence at the present time that cost models offer any superiority over the traditional methods in terms of forecasting performance. Computer application became stronger with the fast development of mini and micro computers and especially with the availability of software packages like spreadsheets and statistical packages, such as SPSS, SAS, BMB and others. During the early phase of their development it was assumed that estimating generally was solely a numerical process. This assumption is now believed to be erroneous, and the models, to have any chance of future practical application, must consider the input and expertise of the surveyor or estimator. Cost models are developed to advance five major aspects of cost information a) Provide cost information quicker; b) Provide more information for a more informed decision;
c) Provide more reliable cost information; d) Provide information at an earlier stage in the design process; and e) Provide information in a more understandable form Causal or empirical models, regression models, simulation, heuristics, and expert systems are example of tools used for cost modeling. Causal or empirical models are symbolic models which are based on relationships between the design variables and cost, and which have been derived from observation, experiment and intuition. Application of these models can be conducted manually or by using computer aided system. This method is easy to understand and can be related quickly to the construction projects. One good example of causal or empirical models is bills of quantities. Regression analysis is a technique that uses the best fitted mathematical equation to express the relationship between the variables studied. In any statistical analysis of relationship, exact relationships are not generally observed. The simplest form of regression analysis involve only one independent variable and one dependent variable, this is called linear regression analysis. In the actual practice, one dependent variable is affected by more than one independent variables. Therefore in describing their relationship, a multiple regression analysis would be applied. The equations developed are used for the purpose of estimating. A simulation model seeks to duplicate the behavior of the system under investigation by studying the interactions among its components. Simulation is done to avoid direct experiment error and it contains more variability if compared to other research methods. The advantages using the simulation model is when problems occur it can be resolved quickly is not possible if it is done analytically. Secondly, it is easier to understand, and the assumptions to be made are fewer Heuristic are rule-of-thumb procedures which enable a near-optimum solution to be produced once the model has been built. It involves trial and errors based on the knowledge from experiences and skills of those involved. In other words,
heuristic method of solution relies on intuitive or empirical rules that have the potential to determine an improved solution relative to the current one. But unfortunately, there was too little attention given on these rules of thumb in recent years. Expert systems are computer programs that embody human expertise. It can acts as intelligent assistants to human expert, the expert’s ruleof-thumb are stored in the computer to help others to solve problems.
FORMULATE THE PROBLEM
COLLECTION OF DATA
ANALYSIS OF DATA
EVALUATION OF MODEL
The present study is focused on the cost estimation in construction industry. The main purpose is to establish the method of cost estimating for building construction. A scale for rating the popularity of practicing the estimating methods is used in this study.
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