Project Cost Engineering

CB 712 – E

By
Dr. Emad Fayez Gaid
 Lecture 2

Detailed Cost Estimating

and
Cost estimating methods

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 Cost Estimating

 Cost Estimating predicts the quantity and cost of resources needed to

accomplish an activity or create an asset.

 Estimating activity / project work item costs “involves developing an

approximation of the costs of the resources needed to complete each
schedule activity. In approximating costs, the estimator considers the
possible causes of variation of the cost estimates, including risks.

 In small scope projects cost estimating and budgeting are very closely
linked and considered as a single process that can be performed by a single
person.
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 Cost Estimating

 The building blocks of a cost estimate are

 A well-defined scope (what we are trying to estimate),

 A cost element structure (how we organize the information), and

 Historical cost data (data from cost accounting records/Cost Control

Reports and/or “experience” of knowledgeable people).

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 Cost Estimating

Key questions to ask regarding a cost estimate always include

 What cost data was used?

 How can we reduce the cost of element.

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 Cost Estimating

Accuracy of cost estimating improves as the project progresses. In the

initiation phase of the project Rough Order of Magnitude (ROM)

estimates are used with low accuracy. As more information is available

and during the preparation of the cost baseline detailed estimates are used.

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 Cost Estimating

In detailed estimating. Each work element in the WBS is broken down

into its resource requirements, costs of each resource estimated and

summed to estimate the cost of the WBS work element. Costs are then

usually rolled up to estimate the total project cost in a manner like bottom-

up estimating. Enough resource information is required for costs to be

estimated and rolled up, thus this method provides higher accuracy as

resource estimates are better known in the planning phase.

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 Cost Estimating

Pre-tendering Stage

Estimates in the pre-tendering stage are usually conducted for the owner

by owner’s staff and/or the consultant. With the initial stages of the

project, the owner needs to conduct a feasibility study and set a budget for

the project, even before any schematic designs are prepared. Conceptual

estimating methods are used, such as Rough-Order-of-Magnitude (ROM)

or Cost Indices methods.

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 Cost Estimating

Tendering Stage

Estimates in the tendering stage are usually conducted by the contractor to

complete and submit a bid for the project, where a Detailed estimate

prepared.

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 Cost Estimating

Construction Stage

Once the contract is awarded the contract a contractor’s budget is prepared

for reasons of cost control, and in case of a lump sum contract, a

breakdown of the lump sum should be submitted in a schedule of values.

Finally, change order and claim estimates are prepared during

construction.

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 Cost Estimating

The output of the estimating process, may be used for many purposes such
as:

 Determining the economic feasibility of a project

 Evaluating between project alternatives.

 Establishing the project budget.

 Providing a basis for project cost and schedule control.

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 Cost Estimating

The basic estimating steps are:

 Understand the scope of the activity to quantify the resources required,

 Apply costs to the resources,

 Apply pricing adjustments, and

 Organize the output in a structured way that supports decision-making.

Additional steps involve the assessment of risk associated with the

estimate, and review and validation of the estimate.

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 Cost Estimating

 Association for the Advancement of Cost Engineering (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.

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 Cost Estimating
project owners are concerned with Class 5 through Class 3 estimates. Most
capital projects base their final funding decisions on estimates Class 3 level
of project definition. In general, most Class 3 estimates are not prepared by
the owner organization because of the resources required for preparation of
these more detailed estimates; and these will typically be prepared by their
engineering or other contractors. The owner organization needs to accept
final responsibility for these estimates thorough review and validation
process (including the identification and assessment of cost risks associated
with the estimate). In the end, the owner is responsible for project funding.

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 Estimating Methodologies
Estimating methodologies commonly fall into two categories: conceptual
and deterministic.

With increase the level of project definition, the estimating methodology

tends to progress from conceptual methods to deterministic methods.

With conceptual estimating methods, the independent variables used in the

estimating are generally something other than a direct measure of the units of
the item being measured. They usually involve modeling, based on inferred
or statistical relationships between costs and other parameters.

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 Estimating Methodologies
 For deterministic estimating methods, the independent variables used in
the estimating are a direct measure of the item being estimated, such as
straightforward counts or measures of items multiplied by known unit
costs. Deterministic estimating methods require a high degree of
accuracy in the determination of quantities, pricing, and the
completeness of scope definition. Any specific estimate may involve a
combination of conceptual and deterministic methods.

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 Estimating Methodologies
 Conceptual estimating methods require significant effort in data-gathering
and methods development before estimate preparation ever begins. There
is a significant effort in historical cost analysis to develop accurate factors
and estimating algorithms to support conceptual estimating. Preparing the
conceptual estimate itself takes relatively little time.

 In contrast, a deterministic (or detailed) estimate requires a large effort

during the actual preparation of the estimate. The evaluation and
quantification of the project scope can take a substantial amount of time,
sometimes weeks or even months for extremely large projects.

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 Conceptual Estimating Methods

 End-Product Units Method

 Physical Dimensions Method

 Capacity Factor Method

 Ratio or Factor Methods

 Parametric Method

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 Costing Vs. Pricing

 Costing is the process of applying unit costs to the individual quantities of

items associated with the estimate.
 usually in the form of labor hours, wage rates, material costs, and subcontract

costs.

 Labor hours may require productivity adjustments for a variety of conditions

such as weather, amount of overtime, interferences from production, material

logistics, the experience of the labor crews.

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 Costing Vs. Pricing

 Pricing, on the other hand, is adjusting the costs that have been applied for
specific project conditions, and commercial terms. Pricing includes
adjustments to cost to allow for overhead and profit, to improve cash flow.
 The price reflected by a bid will include not only direct costs, but also an

allowance for overhead and profit.

 pricing also includes adjustments costs for specific project conditions.

depending on the specific cost information used in preparing the estimate

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 Estimate Accuracy

 By its nature, an estimate is associated with uncertainty, probability of

over-running or under-running the predicted cost. Given the probabilistic
nature of an estimate, it should not be regarded as a single point number or
cost. Instead, an estimate reflects a range of potential cost outcomes, with
each value within this range associated with a probability of occurrence..

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 Estimate Accuracy

 Accuracy is traditionally represented as a +/- percentage range around the

point estimate; with a stated confidence level that the actual cost outcome
will fall within this range. This common +/- percent measure associated
with an estimate is merely a useful simplification, given the reality that
each individual estimate will be associated with a different probability
distribution explaining its unique level of uncertainty.

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 Estimate Accuracy

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