A special publication of AACE International SKILLS & KNOWLEDGE OF COST ENGINEERING ‘Third Edition, Revised A project of the 1992 AACE Education Board Donald F, MeDonald Jr, Chair Jennifer Bates James A. Bent Vernon L. Hastings Frank J. Kelly Jr. Joseph J. Orczyk Charles P. Woodward Barry G. McMillan, AACE Staff Liaison Brian D. Dunfield, ExOfficio James M. Neil, Ex-Officio 1992ACKNOWLEDGMENT | AACE International wishes to thank all contributors to this publication | and to thank their employers for their support in making this most important project possible. Net proceeds from the sale of this book go to the AACE Education Fund and support scholarship grants at many colleges and universities Your tax-deductible donations to the AACE Education Fund are also welcome in any amount. Donations are tax deductible in both the * United States and Canada, Please make your checks payable to AACE: and mail them to: AACE Education Fund 209 Prairie Avenue Suite 100 Morgantown, WV 26505 USA SKILLS & KNOWLEDGE OF COST ENGINEERING, 31d edition, revised. Copyright © 1987, 1988, 1992, 1993, by AACE International 209 Prairie Avenue, Suite 100, Morgantown, WV 26505 USA Printed in the United States of America ISBN: 0-930284-50-XAACE 4 5 . 6 TABLE OF CONTENTS TAB) F CO. ase iwrRODUCTION . Sete COST ESTIMATING BASICS Introduction «4+. .+.+ Definition of a Cost Estimate’ - Basic Cost Estimating Terminology ‘Types of Estimates and Applications « Direct and Indirect Cost Items ... Bese of Egepmen, Labor, and Mate Cet oferences ... Sample Problems. ‘ORDER-OF-MAGNITUDE ESTIMATING Introduetion «sees esse : “Applications of Order-of;Magnitude Estimates Onlerct Mepitude Exiating Teciques Cost Indices eee eevee : Location Indies 2.0.22 References ‘Sample Problems «+. DEFINITIVE ESTIMATES Introduction » ‘Organizing the Estimate... ‘Work Breakiown Structure... fo Estimating Work Items 7 Suuple Problems ssrne : ‘Appendic A= Pre-id Site Investigation Checklist « MANUFACTURING & OPERATING COSTS Discrete Manufacturing. : 4d “Types of Operating Cost Eximates and Pstoating Fos « wer) Cost of Operations at Less Than Full Capacity «++. 4:8 ‘Annual Operating Cost Determination «+ 4-10 (COST ESTIMATING METHODS FOR MACHINING OPERATIONS Introduction «+eseeseseeeees 7 ‘Approaches For Estimating Machining Time «...- Primary Metal Cuting Vatiables i Components Of Machining Time = .s.cscssceces Summary And Conclusions : Bibliography PLANNING Introduction «++ “The Importance of Panning « Planning Tools ...... : Major Elements of Planning «+ Planning Within the Construction inde « Conclusion «+++ a‘TABLE OF CONTENTS 10 n 2 ‘SCHEDULING BASICS Intreduction Bar Chart Method 0.2.2 cco CGritical Path Method 200200020 Conclusion =. 7 References + SCHEDULING TECHNIQUES Introduction ss ee+++ Defining the Critical Constraints --..- PREFACE TO CHAPTERS 9, 10, AND 11 References PROGRESS AND COST CONTROL I Measuring Work Progress Earned Valve for Fixed Budgets Cost and Schedule Performance Productivity. Sample Problems. PROGRESS AND COST CONTROL It ‘Bamned Value - Variable Budgets Tusa etawatea tt SEIT ne2 ‘Analy, Trending, and Forecasting : [BASIC ENGINEERING ECONOMICS ‘Use of Interest Tables... Formulas for Calling Compound Interei Factors « Present Value Caleulations Future Worth Calculations Uniform Annual Coat « Intemal Rate of Return Capital Recovery with Salvage 1... fee IDS 112-6 APPLIED ENGINEERING ECONOMICS ‘Cash Flow Table ‘Tax Reform Act of 1986 Cost of Capital « Multiple Altematives..- Replacement Example’. Optimal Replacement «2226222 e te New Product Evaluation 20.0.0 00e Risk Analysis... : inAACE 14 13 ” ‘TABLE OF CONTENTS PRODUCTIVITY MANAGEMENT Introduction . Defining the Problem Programs for Productivity Improversent ‘Summary 7 Business Roundtable Study of Productivity =. Construction Industry Institute Productivity Research... +. Sample Problems .-......24. : ‘CONSTRUCTABILITY Introduction see ‘Value Engineering vs. Constrictat Organization... +. Sample Problem VALUE ENGINEERING Introduction «..4..++ ‘What is Value? . Wat are Life-Cycle Coste? - References ..eeesesesees Sample Problem .. ae Example of Value Analysis Report. . 20... ccs. MANAGING CONTRACTS. ‘General ‘What is a Contract? Why Have a Contract? Parties to the Contract Contract Respons we Contract Strategy. eeeesesecee Contracting Arrangements. Forms of Contract eieaiee Summary .....SKILLS & KNOWLEDGE of COST ENGINEERING Third Edition ‘Authors & Contributors “The success of the Skils dt Knowledge of Cost Engineering is due in targe part to the great diversity of authors ané contributors ‘who have made this large undertaking possible, The folowing are those who bave contributed to the development of all three editions. The Third Edition is unique in two respects. The Education Board teamed with the Technical Directorate to provide input and continuity with the Association's standard pracices and terms, In addition, we obtained the sorvces of an outside "Technical Editor to review the document in its entirety for coatinuity and to smooth the differences in writing style used by so ‘many authors and contributors. Introduction Scheduling Techniques Donald F. McDonald, Jr. PE CCE “ennifer Bates, CCR Brian D. Dungield, CCE Dr. James M. Neil, 9E CCE Dr. Brisbane H. Brown, J. Cost Estimating Basles David L. Freidl, PE CCE Charles P. Woodward, CCE Duane R. Meyer, PE CCE Progreas and Cost Control 1 Douald F. MeDosald, Jr. PE CCE ‘Dr. Joseph J, Orezyk, PE Dr. Kweis K Bent Dr. James M. Nell, BE CCE Franklin D. Postula, PE CCE Fred Rahbar ‘Raymon A. Cobb Progress and Cost Control I Order-Of- Magnitude Estimating ‘Dr. Joseph J. Orcayt, PE ‘Charies P. Woodward, CCE r Duane R. Meyer, PE Dr, James M, Nel, PE CCE ‘Donald F. Me Ir. PE CE Fred Rahbar Dr. Kwela K Beatil Franklin D. Postala, PE CCE. Progress and Catt Control It Raymon A. Cobb ‘De. Joseph J. Orezy, PE Dr. James M, Neil, FE CCE Definitive Hetimates Fred Rahbar ‘Charles P. Woodward, CCE Saal erence anger omni Ba AEE eon “eras cae ae ‘onaieeret ee pailisiepylec ty ne sue cenias oe EES reo peta Cot Gretng te in evn Sree eee ees Poh ae aaa ee 7 eee PET na meen Berea foe Petree Sathenes Pao te ssn gg eran Pi on Sn SRI eso Sees Sars Same Saat ‘David L. Freidl, PE CCE coming ei ite staat vine ag 86 Tia Gamny ‘Donald F. MeDonald, Jt. PE CCE ‘Dr. James M. Neil, PE CCEAACE, INTRODUCTION SKILLS & KNOWLEDGE of COST ENGINEERING THE ART AND SCIENCE OF TOTAL COST MANAGEMENT INTRODUCTION The AACE Education Board is pleased to present the ‘Third Eulition of Skills and Knowiedge of Cost Engineering - The Art ‘and Sclenee of Total Cost Management. Since its original introduction atthe 1987 Annual Meeting in AUanta, Georgia this, publication has been enhanced and expanded to incorporate both constructive criticism from its users and tbe most up-to-date information avaiable. For this latet edition, anew subtitle was added, This change was made in concert with and in support of ACE's visicn for the 24st century. The eighteen Coapters presented inthis text form the basis of a system for teaching the basic skills and knowledge any cost engineer shoulé possess. Its called a systembecause the text can be used fora variety of purposes. Some of those uses are: © Acself-study guide'for personal development and review © The basis for Seetion and Regional seroinars © A:study guide for the Certified Cost EngineeriConsultant exam © The Annual Meoting Skils & Knowledge tracks ‘The cost engineer’ function can be defined as managing future cost expenditures. Iti an iterative process. Further, a well= rounded cost analyst must learn and understand the basis and functions of all disciplines that make up the cost engineering field. Since the documents represent a system for learning and can be used in a variety of ways, the'chart contained in Figure 1 wae developed to provide an understanding of how all the elements work together, “The Skills & Knowledge series has been more successful than its originators imagined. All eredit for this success goes to the vision of the 1987 Edvestion Board, to the enthusiastic support of our mersbership, and to the other individuals who have been exposed to cost engineering by attending the Skills & Knowledge seminars. Populatity of the Skills & Knowledge documents has been a great benefit for AACE's Education Fund, which in tum has allowed AACE to expand its Competitive Scholarship program, For your enthusiastic response, we thank you. Merabers of Edueation Board and Technical Committees have puta lot of time and effort into the Third Edition. We want to thank the editors and contributors to this newest iteration, along with the authors and editors of previous editions. Is their generous contribution of time and talent that has made such an endeavor possible. We would also like to thank the companies that provided support for AACE members. “Tne AACE Education Board welcomes suggestions for improving this product. Please forward all comments to: Education Board, AACE, PO Box 1557, Morgantown, WV. 26507-1557, (308) 296-8444,INTRODUCTION AACE Figure 1 SKILLS & KNOWLEDGE OF COST ENGINEERING - DISCIPLINE RELATIONSHIP Cost Estimating V Basics ¥ Order-Of-Magnitude ¥ Definitive y Manufacturing v Operating Cost Analysis ¥ Engineering Economics ¥ Advanced Economics ¥ Manufacturing ¥ Process Plant ¥ Profitability Analysis 2 Cost & Schedule Control ¥ Planning ¥ Scheduling Basics ¥ Scheduling Techniques ¥ Progress Measurement ¥ Cost Control Cost & Value Improvement ¥ Value Engineering ¥ Constructability ¥ Productivity Mgmt. ¥ Managing ContractsAACE COST ESTIMATING BASICS : Chapter 1 COST ESTIMATING BASICS INTRODUCTION i Estimating isthe key to a successfully conceived, managed, and completed project. This i true whether the project involves constructing a high-rise office building complex, a scenic highway, manufacturing a product, organizing the world tour of @ symphony orchestra, or planning a vacation. Estimaling is nol limited to the construction industry but rather isa funetion cominion to a broad spectrum of projects in which cost and time must be managed. While this Chapter uses construction cast estimating asa vehicle for discussing estimating basics, many of the principles discussed are equally applicable to other sectors i of industry or government, ‘The estimate isthe yardstick a ‘cost performance on a project ie measured. Since time affects cost the estimate Of durations is also important and is usually considered concurrently with cost. This Chapter deals only with cost; planning, and scheduling are covered in Chapters 6, 7, and 8. ‘As its name implies, estimating is an approximation procedure, and the results have a significantly less than 100% probability of being correct. ‘Thus, understanding the accuracy limitations of the estimate and its potential variation is extremely irpportant. : ‘To develop a complete cost estimate propery, itis essential that the estimetor clearly understands the basic elements of cost cstimating. The following paragraphs give an overview of these fundamentals, which include: ‘Terminology Estimate types and applications Direct and indirect cost items Blements-of-cost, which inelude labor, equipment, and material costs DEFINITION OF A COST ESTIMATE, A cost estimate is defined as“a compilation ofall the costs of the clements of a project or effort included within an agreed- tupon scope"! To a contractor, this i the cost that will most likely be incurred in completing the project as defined in the contract doctnaents, The contractors cost includes its owm internal costs as Well as those ofits subeontractors, suppliers, end third parties, “The term "o-mer" is used in the construction industry to refer to the organization that specifies and pays for the project. ln other industries, this entity is sometimes called the "buyer" or ‘customer’. The owner's costs include its costs for administering the project, ‘he cost that its eontractor(s) charge for the work performed, and the fees of any consultants, engineers, and suppliers thet the owner hires. Also included in an owner's cost estimate must be the price of land. provisions for interim ‘and permanent financing, and the numerous elements of life-cycle costs associated with ownership, such as operating and ‘maintenance costs. Estimating is a process accomplished in steps: ‘Takeo: Measuring and cataloging the quantities of work derived from the seope documents Costing: ‘Using the take-off and the information presented in the scope documents to assign cast values to the elements of work previously cataloged.I COST ESTIMATING BASICS ‘AACE Prteing: Determining the arcount to be charged to the owmerflient so as to fully include direct and indirect cost items as well as contingency and profit. BASIC COST ESTIMATING TERMINOLOGY “The following, while not all-inclusive, are some of the basic terms encountered in the cost estimating process: ‘Addendum A.written change or grapbie instrument issued before the date bids are opened. An addendum ify the bidding documents by making additions, deletions clarifications, or i [Allowences Additional resources included in estimates to cover the cost ofknown but undefined requirements i for an individual activity, work iter, account, or subscoount, Alternate ‘A request from the owner for the cost of adding or deleting an item or work element from the | ‘basic bid. The cost of adding an item is usually known as an additive alternate, while the cost of deleting an item is known as a deductive alternate. i | bia Documents The atvertseent forbids instructions to bidders, infomation avaabe to bidders, bid form with iavachments and propored contract Gocuments (ecuding all addenda sued before the recip | of bids). : charge Order A document requesting a sope change of corection; a writen change made by the Ersiteclenginee to the conrea drawings endfor specications afer the contac avard ‘Genery, change onder must be approved by bot the omeriient and the contractor before i becomes o legal change 1 the coma Contingency An amount added to the estimate to allow for changes that experience shows wil likely be required. Thie may be derived either through statistical analysis of past-project costs or by applying experience gained on similar projects. Contingency usually does not include changes in scope or unforeseeable major events such as strikes or earthquakes. Contract ‘The contract forms, general and special conditions, drawings, specifications, and addenda Documents _deseribing the project scope and contract terms. 7 Cost “Te amount a contract item is known or estimated to cost the contractor. (See Price) Cost Index A nuraber that relates the cost of an item at a specific time to the corresponding cost at some arbitrary specified time in the past. A cost index is useful in taking known past costs for an item and relating them to the present, Direct Costs Costs that can be directly attributed to a particular item of work or activity. Distributable A cost item thal is spread over other cost items rather than managed as a separate account. Escalation Provision for an increase in the cdct of equipment, material, labor, etc, over the costs specified in the contract, due to continuing price-level changes over time, Field Costs Indirect costs of engineering and construction associated with the project's field site rather than with the home office. General ‘A specific portion of the contract documents. They state the responsibilities ard relationships Conditions ofall parties to the contract, as well as any conditions applicable to the contrat, Indirect Costs Inconstrvction, all costs that do not become a fina part of the installation. “They include, but are Tot limited (0, field adrainistration, direct supervision, capital tools, start-up ecz's, contractor's fees, insurance, and taxes,‘AACE (COST ESTIMATING BASICS ‘Tn manufacturing, costs not directly assignable to the end product or process (such as overhead fand general purpose labor) or costs of outside operations (such as transportation and distribution). Labor Burden Taxes and insurance costs based on labor payroll that the employer is legally required to pay on behalf of or forthe benefit of laborers. (In the United States, these include federal old age benefits, federal unemployment nsurance tax, state unemployment tar, and workers! compensation) Labor Cost definitely assigned to one item of work, produet, process ares, or cost center. Mark-Up ‘As variously used in construction estimating, such percentage applications as general overhead, Profit, and other indirect costs. When mark-up is applied to the bottom of a bid sheet for a particular item, system, of other construction prige, any or all ofthe above items (or more) may bbe included, depending on local practice. Overhead ‘Acost or expense inherent in performing an oper ering, ccnsinuction, operating, ‘or manufacturing, that eannot be charged to or identified with 2 part of the work, product. or asset and which, therefore, must either be allocated on some arbitrary basis believed 10 be ‘equitable, of handled as a business expense independent of the volume of production. Price “The ambunt of money asked or sven fora produet (ie. the exchange value). The chief funtion ‘of price is oration the exsing suppl among prospective buyers. Price incorporates direct cose, indieet costs, general overhead, profi, and contingency. Productivity A relative measure of labor efficiency, either good or bad, when corupared to an established base ‘or norm es determined from an area of great experience. Alternatively, productivity is defined ‘as the reciprocal of the labor factor. Scope ‘The equipment ant! materials to be provided, and the work to be done. Scope is documented by the contract parameters for a project to which the company is committed, ‘Special Modifications tothe general conditions. Special conditions are applicable and unique toa specific Conditions ——_ project. ‘Time-Sensitive A term applied to those elements of cost that will be expended or incurred on ¢ time-unit basis 4 (monthly, weekly, hourly, ete.) and that are a subset of indirect costs. A cost engineer's salary on " {project is time-sensitive cost as long as that engineer is on the project. Value ‘A practice function that is targeted at the design itself. The objective of value engineering is to Engineering develop or design a facility or item that will yield the least life-cycle costs or provide the greatest ‘Value while satisfying all performance and other eriteria established for it. (See Chapter 17) ‘TYPES OF ESTIMATES AND APPLICATIONS “The American Association of Cost Engineers defines three types of estimates. These may be known by various names and ‘have various applications. (2) Order-ofMagaltude Estimates - Estimates made without detailed engineering data. Examples include an estimate ‘made from cost capacity curves, an estimate using scale-up orseale-dowm factors, and an approximate ratio estimate. ‘An estimate of this type would normally be expected to be accurate within +50% or -30%. Order-of-magnitude estimates are sometimes referred to as"conceptual” or “ball park" estimates. They have a wide range of accuracy, and have important applications such as using them to detenine the fessibllty of a project Quickly or to screen several types of alternative designs.COST ESTIMATING BASICS MCE @ eo Orderof-magnitude estimates are generally prepared using only basic criteria such at desired output, total square feet, or numberof units. For buildings, the rst typical measure is square fet of floor area or cubic feet of voluoe. For process and power plants, the order of agnitode may be expressed in plant eapacity for input andfor output. ‘Order-of-magnitude estimates for roadways are usually defined by mile of a particular type of surface, ‘Dudget Estimates - (The word "budget" applies to the owner's budget and not to the budget as a project control document.) Budget estimates are prepared with the help of flow sheets, layouts, and equipment details. In other ‘words, enough preliminary engineering hus taken place to further define the project weope. An estimate of this type is normally expected 10 be accurate within +308 or -1S%. Budget estimates are also called “design development’, "semi-detailed", "appropriation, or “control” estimates. Since the budget estimate is more definite than the order-of-toagnitude estimate, it is beter suited for determining project feasibility and establishing definitive budgets. The accuracy and usefuiness of a budget estimate depends, to a large extent, on the amount and quality of information available, Definitive Estimate - As the name implies these are estimates prepared from very defined engineering data. This data includes, as a minimum, fairly complete plot plans and elevations, piping and instrument diagrams, single cleetrical diagrams, equipment data sheets and quotations, structural sketches, soil data and sketches of major foundations, building sketches, and a complete set of specifications. “The “definitive estimate” category includes all types of estimates, from the minimum order-of-magnitude type described above to the maximum definitive type, which would be rade from “Approved for Construction” drawings and specifications. Definitive estimates are also called “check’, urap sumo’, ender’, and "post-contract change” estimates. An estimate of this type is usually expected to be accurate within +15% or 5%. DIRECT AND INDIRECT COST ITEMS ' Estimates must segregate direct and indirect cosis. Many estimates are based on a historical database compiled from cost data derived from previous projects. ‘The less that direct cost data is encurnbered with indirect costs, the more reliable the direct cost data will be for use on the new project. Keeping indicts separate allows the unique conditions that will be fencountered in the new project to be more accurately reflected in the estimate. ‘Table 1.1 cont 2 list of Indirect Cost Items" normally seen on construction projects. ELEMENTS OF EQUIPMENT, LABOR, AND MATERIAL COSTS Figure 1.1 contains a hierarchical chart showing the components of a construction cost estimate. Other types of project cost ‘estimates will ake a similar form but may include more or less information then contained in the construction cost estimate.we COST ESTIMATING BASICS i ‘Office Furie Engineering Supplies Engineering Equlpaent Pralg/Reproduction Corser Terma! CPM senedung PhoneTelegrspVRecio Unites Portable Toilets Signe Safety Equipment Permits & Loemes Aaverisng Contributions Job Travel Expenses AACE Table tt CONSTRUCTION JOB INDIRECTS CHECKLIST . oiling and Major ‘Exvionet Projet Offce Warehouses rus Alley Change Howse {Carpenter Supein. Carpener Sop Rigging Soperit. Pipe Fabicatin Shop Welding Supe. ‘Welder Tet Facil Blecrcian Super. letra Shep (Chet Waretotneman Rigging Loft Few Ald Staion ‘Salain, aul eering ‘Tool Sheds Chet Engine Powder Hoe Office Engiveer ‘Cap Howe Coat Engineor ‘Resteel Fabriaton Schedule Engineer Mackie Shop Equipmeat & Mainteeance Shop (Concrete Batch Plant Field gicers Query Survey Pay Chita ‘Hoiing Equprcnt Inara Penton Tabsing Bldg SalaicgWanes, Ofer ‘Temmoruy Horzontal ‘OA Engineer ‘Constion Seley Engines Aoven Road 2 Mechaaict Corson Bridges Pian Operation Drainage States Firs Aig Workers Rall Spon Secretaries & Clerks Laysown Area i ‘Complter Opemion, Fencing and Gites Warchowsenen Parking Areas Gusede Eionentl Frotesion Runners ‘Support Seems ‘eer Sopa Astorotive Compresed Air “AvlomobleCare hectic Site Prkupe Ste Communication ‘Ambulances Inert Gan Tractor Tales ‘Oman Special Purpose Vehicles FoevLabe Trucks Figure Lt ‘ening & Laberntory Legal Fees ‘Audit Feee Medea Supptios Progres Photos Sanlary Fasites Building Rental Building & Grounds Meiateannce Exerior Uiphtig Deiekéng Water & foe Tasca Bond Insurance Payrol Burden Cons Backeharges frre Others Constants ‘Weather Protection General Otce (COMPONENTS OF A COST ESTIMATE INDIRECT COST : [Laver] [Material] [Equipment] [Subcontract Taxes| Gen. Cond| [Risk] [Overhead 1s‘COST ESTIMATING Basics AACE, Direct Costs Labor Costs, Labor costs are a total ofthe actual amounts paid to fleld personnel who perform actual'project work, e.g carpenters, common Inborers, masons, painters. ete. They can be divided into three main components: +The basic wage (the wage rate multiplied by the number of hours worked) © Fringe benefits negotiated between employers and employees, either individually or collectively ¢ Labor burden, including items such as taxes and insurance, that eraployers are required by law to poy “The labor burden portion ofthe tota! labor cost is not always treated as a direct cost element. Normally, the labor burden will be treated in accordance with company practice unless actual project conditions dictate otherwise. Material Costs. ‘The costs for everything of 2 substantial nature that is essential to constructing oF operating a facility, both direct and indirect. Manufactured equipment items generally comprise a large part of material costs. Equipment Costs, This refers to the cost of equipment that a contractor uses to perform a contract (such 25 backhoes, cranes, orbulldozers) and not to equipraent that is installed permanently as part ofa contract. Equipment costs may be calculated in various ways, depending on whether ihe contractor leases or owns the equipraent. 1fthe equipment is leased, the costs consist of the lease costs and the cost of fuel. Ifthe contractor owms the equipment, the costs include ownership costs (investment, maintenance and depreciation) and operating costs (such as Fuel or repairs). Mest contractors include the costs of equipment operators in direct labor costs, even though they are Actuslly par of the operating costs. Subcontract Costs. These are prices furnished by subeontractors for performing a specific portion of the work thet the general contractor will not perform with its own foress. Indirect Costs ‘Taxes. These vary significantly from location to location and by the tax status of the owners thus, they ate usually cataloged separately 10 facilitate accounting. General Conditions. Provisions conisined in a contract, purchase order, or specification that are not specific to the Particular transaction but which apply to all transactions. Usually, these items cannot be charged to a specific clement of the work. They include, for example, supervision, temporary failiies, office trailers, toilets, utilities, permits, photographs, small toots, and clean-up. Risk. Elements of risk may be considered in two categories: Profit . The amount of money included by a contractor in its price as compensation for risk, efforis, and endeavor in undertaking » project. Profit is actually the “residue” of money tefl after a contractor has met all costs (Ivuh direct and inditeet) on a projec. “The amiount of profit to be added is very subjective and depends on considerations such as competition, how badly the project is needed, tho job market, local market conditions, and the economy. Gontingengy - An amount added to an estimate to allow for changes or project cost growth that experience. shows wil key be required. Contingency may be derived either through statistical analysis of past-project ‘costs or by applying experience gained on sinitar projects. It usually does not include changes in scope or vnforesecable major events such as strikes or earthguakes. Risk Analysis. Where the estimators experiance leds to conventional contingency application bas:d on = history of project cost growth, risk anaes panies mtermp to quant this potential for ives cost clement. "Te rember ofthe project team then rview thete elements ad Went) the ikelinood of ineeases apd decease in the eos ofthe slement long with probailies of eevaton (om the estimate. or enampl, they may place 870% Tkeinoad of the earthwork con ineresing because sll Brings are not wvalble, ‘Ths he earthmoVk cost ight increase by a& much ax SICODD. ‘The cot ight allo be S200 ls than the estimate due to compive marke! ovationswe AACE COST ESTIMATING Basics ‘After the project team establishes the highest and lowest possible values for each clement in the estimate, these ‘numbers are entered into a computerized risk evaluation program that performs a "Monte Carlo” siraulation. In this process, a random sample value for each element i taken, and the resulting total estimates are arranged in order from highest to lowest. The deviations of each total valuc from the original estimate are presented ina table similar to Table 1.2 below. Tae certainy column eepresents the likelihood that the actual cost will not exceed the original ‘estimate after the indicated amount of eontingeney has been added, ‘Table 12 ‘Target Estimate = 51,225,000 Censinty Contingency 192,600 108,400 81,100 49,400 21,500 ‘900 28,900 54,200 200950 15 268,947 eS88SES3s8 “This information is provided to management to determine the risk they are willing to (ake on the project. For instance, in this exaraple, if management selects a 70% risk level, the estimate would be $1,306,100 ($1,225,000 + $81,100). Overhead Costs. These may also fall into 1wo categories: Home Office Overhead - The fied corts and expenses incurred in the course of doing business, regardless fof the amount of work completed or contracis received. Home office overhead includes items such as home office rent or leas, utilities, communications equipment (telephones and fax machines), advertising, salaries ofhome office employees (e.g. executives, estimators, and support staff) donations, legal costs, and accounting expense. In other words, home office overhead represents expenses that are not chargeable to any specifie project. ‘One method of calculating home office overhead is to use a percentage method in which the percentage {s the ratio of a specific project's total cost to the entire company/division’s total projects costs. Job Site Overhead - Expenses for items such as trailers, toilets, telephones, superintendent, transportation, temporary hea, testing, power, water, cleanup. and similar items. It may also include the eosts of bonds and insurance associated with the particular project. Escalation. Escalation was defined earlier in this Chapter as being an increase in the cost of goods and services overtime. Escalation has the same effect on project costs as interest does on the value of a savings account: each year becomes a new base for calculating escalation for the following year. ‘Thus, escalation is compounded, not added, for multiple years. For examples ifthe escalation rate is predicted to be 5% per year forthe next five years, an iter costing $1.00 today would cost $51.28 five years from now. $1.00 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 1.28 Ifa project will be completed within a given year, escalation calculation is relatively easy: simply escalate from the base year of the cost estimate to the year of construction, When a project is constructed over multiple years, however, the situation ‘becomes more complicated, since the materia!, equipment, and labor indifferent years wll be subject to different escalation rates, In such situations, the most aceurate method of applying escalation tothe project cost isto develop a project cash flow(COST ESTIMATING BASICS AACE, and calculate escalation for each year. For example, assume a project is estimated to cost $10,000,000 in 1991 dollars, The cash flow for the project may 1993 $1,00000 1994 $6,000000 1995 $3,000,000 ‘Assuming the escalation rate to be 5% per year, the escalation would be calculated as follows: 1993 + $1,000,000 x ((1.05 x 1.05)-1) = $102,500 1994 - $5,000,000 x ((L05 x 1.05 x 1.05)-1) = $945,750 1995 - $3,000,000 x ((1.05.x 1.05 x 105. 1.05)-1) = $546,519 ‘Total Escalation 51,694,769 Say $1,695,000, ‘As can be seen by the above example, escalation is frequently one of the largest elerments in a project cost estimate; yet it ‘often recoives much less attention than many smaller items, If time end detail permit, the project cost estimate should be analyzed for elements that are volatile in price. For example, in recent years copper, aluminum, and petroleum products have seen significant price swings. If possible, this information should be considered when preparing the project risk analysis Most companies develop their own escalation forecasts, but they can alo use commersal forecasting services that provide short and long-term escalation trends. In edition, Engineering News Record often predicts escalation trends ints quarterly est reports, Estimete Documentation, An estimate should always include written documentation on how it was developed, and what is included or excluded. Whether an estimate is order-of-magnitude, definiive, a bid, or a svudy, it almost always becomes 9 benchmark against which future estimates or costs are measured. If litigation should develop, a court ese can be won or lost based on the information that was used 10 develop an estimate; yet iti often difficult to know what information was used and whet assumptions were made when comparing against an estimate that was developed months or even years before, ‘To ‘void such situations the following should be included in all written documentation of an estimate's preparation: Estimate Purpose. Since estimates may be prepared to diferent standards depending on thelr intended purpose, clarify whether the estimate isto be used fora study, a bid, a budge, or other purpase ‘Scope. Provide 9 brief overview of what is included in the estimate. [ft isa study, emphasis should be placed « the fact that the estimate may only include certain parts of the overall system cost. Ifthe estimate is for only one ‘of many contracts within a larger project, this fact should be noted as well, ‘Assumptions and Exclusions. If design information is incomplete, identify the basis for the estimate, For example if the boring logs for the site are not available, and piling of a certain length was assumed, note the risk nf © significant change occurring when the soil reports are received. Anything in the project thal is excluded from the timate should be stressed, even if this seems redundant of the scope statement, TimelCostAsoxiton. Indicate the poet schedule tit was asurned when applying esalation tthe estate Identity the astroed eealation rates Contingency Development. Explain the method used to develop contingency and the rates that were applied. ‘Contingency can often be the largest single line item in an estimate, and it deserves special attention, ‘Significant Findings. Note any items of significant risk that were discovered either in developing the estimate oF in perforring a formal risk analysis, Ifeosts are available fora similar project, provide a comparison to those costs. Include any item that may help the project team improve the project or the estimate, or that wil to help sell the project, if this is the objective. Review Credits. Identify individuals who have and clients wed the estiniale and scope, especially project team membersCOST ESTIMATING BASICS REFERENCES “The folowing reference books and articles discuss the topic of Cost Estimating: 2 a 10, n 2 B 4 15, 16. (Cos: Bogiacer's Notebook, American Assocation of Cost Engineers. Morgantown, WV. ‘Nei, Construction Cos Ratmating for Project Contro}, Prentice-Hall, Ine, Englewood Cis, NI ‘elen and Black, Cost aod Optimization Engineering, McGraw-Hill Book Co. New York, NY. Humphrey, ed, Project and Cost Engineers’ Handbook, Maree! Dekker, nc. New York, NY. Vernon, Realistic Cost Estimating for Manufacturing, Sockty of Manufacturing Engineers Ostwald, Cast Estimating foc Basinesring and Management, Prentice-Hall, ne. Englewood Cis, NJ Guthrie, Process Plant Estimating, Bvalusting & Control, Craftsman Book Co. Solana Beach, CA. ‘orenzo}l and Clark, Apgled Com Enginecring, Marcel Dekker, Inc. New York, NY. iumptu2ys and Kate, Basie Cot Engineering, Marcel Dekker, le. New York, NY. Beat, pled Cost and Schedule Control, Marcel Deke, tne. New York, NY. ‘Bauman, Fundamentals of Cost Engineering in the Chemica! Industry, Reinhold Publishing Co. Rorence, KY. ‘The Bulling Estimators Reference Book, Frank R. Walker Co, Lisle, ILL. Page, Cost Estimating for Ppelines and Marne Structures, Gulf Publishing Co, Houston, TX, Popper, Modem Cast Enginering Techniques, McGraw-Hill Book Co, New York, NY. (Curran, M. W,, March. "Range Estimating: Measuring Uncertainty and Reasoning wth Rist", Cost Engineering AACE. Morgationn, WV. Golden, L. Lesming to Live with Probable Outcomes, AACE Transactions. Morgantown, WV. -Krumity, $J. and MeMabon. Ruls for Describing Estimates, AACE Traassctions, Morgantown, WV. SAMPLE PROBLEMS ‘True or False. Circle the Correct Answer. TF (@ —Onderotmagniude estimates can sometimes be called bid estates. TF @) _ Detntve catimates are accurate within @ range tron 10% 10 30%. TF @® Design development eames can also be called seated estimates. T F @ Direct cass inctde the com of lar, materi, and equipmect. TF (© Jobindkecs ere made up of ofce overhead and job overhead. Fil athe blanks, (©) Betimates scourste to within $% of the actual project costs are known as ;(COST ESTIMATING BASICS AACE, © (© Unknowns in an estimate are covered by the use of : are like change orders but they are issued before the bid date, 3. Distinguish betmeen job site overhead and home office overhead. 4. Describe the difference between costing and pricing. 5. You are an owner and desire to put a new line of pain-killer pls into production. A young engineer on your staff is given the responsibility of developing an estimste for the indirect costs associated with this endeavor. What elements of indirect cost would you expect that engineer to take into account? 6. Review the Construction Job Indirects Checklist, Are there times thet an estimate might treat some of the items 7 listed as direct costs? i I iawn may this oe? 1. Caner agtde,Daget ad Defi Exists cond whe esting hc ofp? | What would the combination of these estimates do to the overall accuracy of the estimate, Discuss when this situation might be appropriate, 8. OF the construction job indirects found in Table 1.1, which can be considered “Time-Sensitive™ and which are ‘considered “One-Time” costs? How could job conditions or contract requirements affect each of these cost elements when developing the estimate?AACE . ‘ORDER-OF- MAGNITUDE ESTIMATING Chapter 2 ORDER-OF-MAGNITUDE ESTIMATING INTRODUCTION In the process of preparing an estimate for either bidding or negotiation purposes, no substitute exists for using a detailed quantity take-off asa costing basis. Sti, specific situations may dictate a different approach, such as when the high cost of preparing the detailed estimate may outweigh the benefits recoived, or when time constraints do not allow a detailed estimate to be prepared. In those situations, order-of- magnitude estimating may be the solution, since it allows a project's oft range tobe obtained in a relately shor period of time and at minimal expense. Order-of-magnitude cos estimating may, therefore, i defn aque std ef cteniog an approriate probes ato prje hou We Dene ote ope definition. APPLICATIONS OF ORDER-OP-MAGNITUDE ESTIMATES ‘Order-of-magnitude estimates may be propared by or for owners, contractors, designers, developers, constriction managers, and lending instiutions. They may be used for: Establishing the probable costs of a programa budget Evaluating the general feasibility of a project Evaluating cost consequences of proposed design modifications Updating a previously prepared order-of-mugnitude estimate Establishing a preliminary budget for control purposes during the design phase ‘Screening 9 nuraber of altemative projects so one or niore can be given a more detailed exatnination ORDER.OF-MAGNITUDE ESTIMATING TECHNIQUES COrder-of- magnitude estimates sre based on limited information and are thus subject to considerable variation. Their accuracy also depends on the amount and quality of information available 2s well as the judgment and experience of the estimator. Users must recognize these liraitations and not *hang their hats* on the resultant estimates. “The order-of-magnitude estimate category encompasses a nuraber of methods. Several ofthe more coramonly used methods are End-Produet Units, Scale-of-Operations, various Ratio or Factor methods, Physical Dimensions, and Parametric. End-Product Units Method - This method is used when the estimator has enough historical data available from experience lat ype of projet to relate some end-product units to construction costs. This allows an estimate tobe prepared for a similar prejeet when the only major difference between the projects i their size. Examples ofthe relationship between © The exastrustion cost of an electric generating plant and the plant's eapacity in kilowatis © The construction cost of a hospital and the nuraber of beds © The construction cost of an apartment building and the number of apartments © The construction coets of a patking garage and the number of available parking spaces To illustrate, suppose a client is conterapating building a 1.500-room luxury hotel in @ resort area but needs an approximate cost of construction as part of feasibility studies. AAscorge that a lunury hotel has been recently corapleted at that resort and ble: club, The It isa 3,000-r00m hotel with a lobby, restaurants, meeting rooms, parking deck, swimming pool, and ni total construction cost was $67,500,000.ORDER-OF-MAGNITUDE ESTIMATING ‘AACE ‘From this information the cost per room may be derived: ‘Total Construction Cost = $67,500,000 = $67,500Roon: Nuraber of rooms 1,600 ‘Therefore, it may quickly be determined that a 1,500-room lurury hotel at the same location and of comparable design, specifications, fsclities, ané soil conditions will cost approximately $10,250,000 ($67,500 x 1,500). Nevertheless, while this may be a quick way of obtaining a rough figure, the results rust be used cautiously since the calculation does not consider ‘escalation or economy of scale. Also ignored sre comraon-cost facies such asthe lobby, pool, and laundry that may not vary directly withthe increase in the nuraber of hotel rooras. ‘Seale of Operations Method - This method uses historically derived empirical equations to obtain an estimate of approximate cost for different sizes ofthe same type industrial facility. This method is sometimes knowm asthe six-tenths rule. A coramen {orm of this equation is GEC" QQ)" where: C, = Cost of desired plant or pieee of equipment G; = Known cost of plant or piece of equipment Q, = Capacity of desired plant or iter Q, = Caparity of known plant or iters X- = Constant, usually in the range of 06 to 08 ‘his mathematical relationship reflects the non-linear increase in cost with size, and shows economy of seele where the ‘consiruction cost per unit of capacity decreases as the project size increases. For example, ifthe known cost of a 300 HP aeration tank blower is $50,000, then the approximate cost for a S¢OHP blower ‘would be: ©, = 850000 * (500;00)* = $75,000 ‘Ratlo or Factor Methods. Many specialized Ratio or Factor methods are available to the estimator. Several of those typically ‘used are described below. ‘Maltiple of Equipment Cost. This method is commonly used in constructing process and chemical plants where the cost of specialized equipment makes up 2 major portion of the total project cost. Approximate project costs may be estimated by totalling the cost of all major items of equipment and then roultiplying this sum by a single ratio ‘obtained from cither historical data or other reliable sources. The estimate should be accurate from +1596 to 30% For exarople, ifthe total cost ofall equipment for a chemical manufacturing plant is $10,000,000 and the plant cast ratio (developed from reliable historical data) is 5.0, then the estimated total cost will be: $10,000,000 x 5.0 = $50,000,000 ‘Lang Factors. Lang Factors! are simply standard multiplies (actors) for use in specific situations, Sample factors 3.10 For solid process plants 3.63 For solid fluid plants 474 For Dui process plants Hand Factors, Hand Factors expand on the Lang Factors approach by using the individual components of permanent equipment or systems. Each factor converts the cost of the equipment item to its share of total con struction cost (including bor, materials, const'uetion equipment, overhead, and disributables). When all line items are factored and added together, the estimator has a total estimated cost for the project. Some of the factors proposed for process plant equipment are: 85 Foreelectic motors 48° For instrumentsAACE ORDER-OF-MAGNITUDE ESTIMATING 4.0 For frsctionating columns, pressure vessels, pumps, and instruments 35 For heat exchangers 25 For compressors 20 For centrifuges ‘The Physical Dimensions Method. This type of estimate is based on physical dimensions such as length, area, or volume. For instanee, an estimate can be made for a building using the building's Door area or its volume; pipe lines, roadways and railroads may be estimated on a linear bas. “The physical dimensions method depende on historial data from comparable facilities, For example, to prepare an estimate using the square foot method, the total cost and square footage of one or more comparable structures raust be known. The ‘cost per square foot is obtained by dividing the total cost of the building by the number of square feet. ‘The cost of a new ‘comparable building is then estimated by multiplying the area of the proposed building by the eosi per square foot obtained fron! the completed building(s). Sample Problem: Existing Facility: Cornpletion Date: _ Shape: A Dimensions: No. of Floors: Volume: Floor Area: “Total Cost: Features: ‘Struct Exterior/interior Wall/Floor/Ceiling Finish: Roof cever: Heating & Cooling: ‘Vacaville, Calif, - Surgery, medica! building (from Engineering News Record) September, 1987 Irregular LIS" x 100" x 85° Two 372,120 eu 12,404 sq A $1,286,800 ‘Surgery, exam, physical therapy, dental offices Wood ‘Stuceo/Drywall aint & vinyl fabricearpet, polywiny! chloride &tile/T-ber and drywall Tile and buil-up roofing Split system Ascurae you are estimating the following similar project: Floor Area: Features: Structure: Exterios/interior: Wall/FlooriCeiling Finis Roof cover: Heating & Cooling: ctober, 1992 Rectangular 20 x 128" ‘Two 470,000 cu & 15,360 sq ft Day Surgery, exar, physical therapy Wood Stucco/Drywall Paint & vinyl fabricicarpet and drywall Built-up roofing Split system Using the Boor areas, the total cost would be estimated at $1,593,500 (15,360/12,404 x $1,286,800). Using volume ratio, the total cost would be estimated at $1,625,000. The figure actually used would be based on further review to determine which rel jonship is probably more accurate. Of course, time and area differences must be considered as well (eee later discussion of cost indices). In addition, a more accurate estimate could be obtained using parernetric estimating, which is described below.ORDER-OF MAGNITUDE ESTIMATING AACE, Parametric Estlmates, ‘This type of estimate, asthe name implies. is based on certain pararueters that reflect the size or scope of @ project. Paramettic estimates are commonly used in the building construction industry for preparing appreximate estimates. These estimates are usually prepared afler the preliminary design phase iscoraplete and the project's key features and dimensions have been defined. They can be more accurate than other order-of-magnitude estimates because the project can be broken down into more detail In this method of estimating, al project casts are related to pararoeter costs ofa reference (similar) project. ‘The process is iagraroaed in Figure 21 and explained in subsequent paragraphs. Data on the reference project is eaaloged in two phases - + Data Collection and Data Application. Figure 2.1 PARAMETRIC ESTIMATES PARAMETER ESTIMATE SELECTED GENERAL, DESIGN INFORMATION RATIOS ( DATA COLLECTION PHASE ‘SPECIFIC DESIGN STANDARD CHARACTERISTICS PARAMETERS % OF TOTAL TRADE BUILDING SECTIONS DATA APPLICATION PHASE TOTAL cope COST unrr_—— ASSIGNMENT cost aesAACE, ‘ORDER-OF-MAGNITUDE ESTIMATING . ‘Data Collection Phase. This phase consists of four main activities 1, Deseribing the project in general terras, including information such as: © Type of building (hospital, public housing, hotel) Location (city and state) Project duration starting and completion dases) ‘Type of owner (government, private) ‘Structural frame (structural steel and metal deck, reinforced concrete) ‘Type of exterior walls (lass, metal curtain wall, masonry) ‘Special site condition (rock excevation, dewatering) 2 Listing the standard parameters that can be measured, such a5 the ones shown below, which are used by Engineering News-Record in reporting parametric costs: Gross enclosed Noor area Gross area supported (excluding slab on grade) Total basement floor area (if applicable) Roof area Net finished area Number of foors ‘Area of face brick, ‘Area of other exterior wall ‘Area of curtain wall (including plass) Interior partitions HVAC Parking areas ceeeee eecee 3, Establishing specific design characteristics relating to the type of structure which become additional ‘Area of typical loor Story height, ypical Noor Lobby area Number of plumbing fistures Number of elevators ‘Number of rooms © Number of occupants eeeee 4, Determining selected design ratios become additional parameters. © Aston per building square foot © Parking square foot per building square foot Plumbing firtures per building square foot Data Application Phase. Tho data application phase consists of five main activities: 1, Listing trade sections or cost elements - the selected list must incorporate all cot elements in the project. General Conditions Overhead Risk - Mark-Up Risk - Contingency ‘Trades . Sitework Foundations Concrete Structural ‘Carpentry eocee‘ORDER-OF-MAGNITUDE ESTIMATING AACE 7 Glass : Studs & Drywall : Ceilings 7 Equipment : Plumbing - Mechanical & HVAC : Beetrical : Finish Work 2 Listing the total cost of each cost element from the reference project. 3 Relating each cost element to 2 parameter considered to affect its cost most closely. This consists of assigning each element a code number (or parameter title) that corresponds to one of the parameters selected. 4 Determining cost elernent unit prices (unit prices related to the selected parameters of the project). For ‘example, carpet costs may be considered most related to the square feet of net finished ares Of a sirueture;, the unit price is calculated by dividing actual costs of the reference projext by square feet ef that projects el finished area (eg. if total carpet cass = $24.00; net finished area = 12,000 SF; unt price = S2SF), 5. Determining the percentage of each cost eleraent expressed in terms of the entire project cost. This is ‘obtained by dividing the total amount for each trade by the total project cost and multiplyirg the result by 100. ‘The resulting percentages, while not normally used direcly in estimating a new project, are helpfu in analyzing cost trends of the various cost elements ernong multiple projects. ‘Once the above reference data is compiled, it can be used to estimate 2 comparable new project, The new project is classified by the same cost elements used in the reference project, and the unit prices of the reference project are multiplied by the ‘sctual number of units on the new project, For example, assuming the new project has 10,000 SF net finished area, its carpet costs would be estimated 10 be $20,000 (10,000 SF x S2SF). This process would be repeated for all cost elements and the resus totalled to generate a total estimated cost of the new project. SIil, the estimator should consider adjusting the final estimate to redlect area and time cost indices (see dseussion below), Sample Problem A.warehouse with dimensions of approsimately 150 ft x 150 ft is planned for construction in Madison, Wisconsin, It will be a relalively standard warehouse design, except that it will include & solar heating i ‘sytem. What isthe estimated cost in 1991 dollars? The sito has already been purchased for $50,000. i From the 1991 R.S. Means Construction Cost Dats, Square, Foot Costs table: UNIT 1 MEDIAN 34 Sitework SF 199431635 | Masonry SP 132-302 (5.40 | Equipment SFM Plumbing SF 701231 Heating & Ventilating SF 80209302. Blectrical SFoo1z7 233 3a | Location Multiplier for Madison, WI = Building Size Multiplier = 1.02AACE ‘ORDER-OF-MAGNITUDE ESTIMATING “The cost calculation is as follows: Sitework 2500 SFx431 = 96975 Masonry DS00SFx302= 67950 Equiproeat DSW SFx 9 = 15535 Plumbing 22500 SFx121= 27205 Heating & Ventiatiog DS00SFx302= 67950 ectrieal RSOSF23= SLO5 Subtotal 328,050 Location Multiplier 2921 Subtotal sonst Building Size Multiplier x1.02 ‘Total Construction Cost 3oa,t6 ‘Architectural Fee (2y 7%) 21572 Land Cot 50,000 “Total Project Costin 1991 Dollars 379.48 tn the problem defnion, the salen was made tha ths would be a “eavely standard warcbous with the exception that it wil include a solar heating system”. Therefore, the median cast was used fora cont encpt Hann & Venaing, where twas svcd tha the sla eating ser wold be better reflected by the "3/4" bigh cost. For more details, see the R. S, Means Construction Cost Data estimating manual. ‘Tho above problem used relatively fow paraimcters in doveloping the estimate. More detailed parameter estimating guides allow the application of different cost parameters for project elements such as structural frame type (eg., steel, precast ‘conerete), vatious lighting systems, beating systems, and many other variables. If design has progressed to the point where this information is available, a much more accurate estimate can be developed by using these estimating guides. cost INDICES ‘A-cest index relates the cost of an item at one time and place to its cost at another time and place. The four main types of cost indioes are: © General Purpose Cost Indices, such as those published by the Engineering News Record, the Department of ‘Commerce, and the Bureau of Reclamation © Contractor Price Indices, including those compiled by the Austin Compuny, Fruit-Colnon, Turner Construction Company, Smith Hinchioan & Grylls Associates Inc, and 11. F. Campbell © Valuation Indices, such as those compiled by the American Appraisal Company, Boeckh Company, Marshall and Swift Services, and Handy-Whitman © Spectil Purpose Indices, including those compiled ty Nelson Refinery, Port of New York Authority, the Envin. mental Protection Agency, the Bureau of Labor Statistics, and State Highway Departments Since the indies compiled by the Engineering News Record are probably among the most widely disseminated, they willbe discussed in the following paragraphs. ‘The Fagincering News Record compiles and publishes the following three kinds of indices (among others): Construction Cost Indices Duitding Cost indives © Wage and Materials Indices‘ORDER-OF-MAGNITUDE ESTIMATING AACE ‘These indices are compiled and published monthly, and reflect average costs from twenty cities in the United States and two cities in Canada, They are based on weighted skilled labor, structural stel, lumber, and cement, and use a base of 1913 ©. 100; other presentations, such as the ENR Quarterly Cost Roundup issue where use a base of 1967 = 100 i used, To iustrate the use of cost indices, assume that the following information is available: A prospective client contermplates building a warehouse in 1992 and wants an onder-of-magnitude estimate, ‘An estimate ison file for a ilar structure, corapleted in 1988 for $4,200,000, ‘The ENR index for 1988 building comts was 2600. ‘The projected index for 1992 is 2850. ‘The estimated cast of a project of similar size will bet (2850/2600) x $4,200,000 = $4,604,000 ‘The estimator must know and understand the lt costiva tions that may exist on using indices in preparing order-of-ruagnitude * A cost index is based on historical averages and docs not take into account changes in techoology that will naturally ‘occur, For example, concrete bridges and overpasses built twenty years ago are vastly different than those constructed today. * Short-term economic cycle swings, especially in small geographic areas, can be significant. Therefore, indices can lack serwitvity. * There can be s reporting time lag associated with the database, soa complex index containing meny factors may not be representative of actual conditions at the time stated. * Acost index database is a composite average and consequently has # range of Yacceplable" numbers associated with it. Even though most indices do not include that range, the estimator must be aware that it exists and accurately judge when to adjust the index numbers used. * The industry is awash with cost indies, but the estimator has litle if any, information and guidelines for thei use, ‘Thus the estimator must carefully document the use ofan index so that others may have the sarve understending Of its use in that particular application. LOCATION INDICES A Location Index oF City Cost Index relates the known cost of an item or project in one location to the same: type of item ‘Gr project in another location by using location indies such a shore avaiable through R.S, Means Construction Cost Dats and Engineering News-Record, Sample Problem If the cost of a K-Mart store in Chicago, Ulincis is $1,500,000, what would be the cast in Milwaukee, Wisconsin’? ‘The RLS. Means index shows the Chicago index at 103-7 and the Milwaukee index st 96.7. Therefore, the cost of building the K-Mart store in Milwaukee would be: {81,500,000 x 96.7/10.7 = $1,399,000 Tshould be aoted thatthe above example does not take into account the market conditions or productivity in Chicago when {the original store was built, nor does it consider market conditions or productivity adjustments for building the store in Miwaukee.