Cost Eng

HU- IoT- SoPDC, Construction Technology & Management Program: Cost Engineering handout
HAWASSA UNIVERSITY
INSTITUTE OF TECHNOLOGY
SCHOOL OF PLANNING, DESIGN & CONSTRUCTION

PROGRAM: BSc. in CONSTRUCTION TECHNOLOGY
and MANAGEMENT
COST ENGINEERING HANDOUT
Compiled by: Ins. Tadewos A.

i & Demeke S. March, 2016
Acknowledgement
This handout was prepared not just based on the course instructor‟s inputs but also due to
commitment and support of several peoples. Therefore, we would like to sincerely thank them
for their contribution to our work.
First of all, we would like to take this opportunity to express our sincere appreciation to Ins.
Adane Teressa, head of School of Planning, Design and Construction, for his strong moral
support and encouragement. His contribution and inspirations guided us throughout the process
of compiling this handout.
Our special credit goes to Ins. Desalegn Girma, for his guidance and excellent comments on the
contents of this handout. His valuable and precise feedback combined with providing many
reference materials paved the way for this invaluable handbook. We would like to extend our
deepest gratitude to Inst. Leul H/Mariam, Module coordinator for this course, who sacrificed
time for approval and comments.
We are also deeply grateful to Inst. Biruk Solomon and Ins. Yasin Yakob, for lending us the
necessary books and materials in the fields of study, and for their comments on the contents.
It gives us great pleasure to thank all instructors, who teach in the Construction Technology and
Management program, since their inputs are worthwhile.
Finally we thank and appreciate authors who built up the knowledge of Cost Engineering.
i
Abbreviations/ Acronyms
AC Actual Cost
ACWP Actual Cost of Work Performed
ALE Acquisition Logistics Engineering
BCWP Budgeted Cost of Work Performed
BCWS Budgeted Cost of Work Scheduled
BoQ Bill of Quantity
CE Cost Engineering
CCTV Closed Circuit Tele-Vision
CERs Cost Engineers Relationships
CSVA Canadian Society of Value Analysis
CV Cost Variance
EAC Estimate at Completion
ETB Ethiopian Birr
EV Earned Value
FAST Functional Analysis System Technique
GE General Electric
JOOH Job Office Overhead
LCC Life Cycle Cost
MS Micro- Soft
OH Overhead
PA Price Adjustment
ii
PV Planned Value
ROCE Return on Capital Employed
SAVE Int. Society of American Value Engineering International
SV Schedule Variance
UC Unit Cost
UF Utilization Factor
VA Value Analysis
VAT Value Added Tax
VE Value Engineering
VM Value Management
WBS Work Breakdown Structure
iii
Table of Contents
Contents Pages
Acknowledgement ........................................................................................................................... i
Abbreviations/ Acronyms ............................................................................................................... ii
Table of Contents ........................................................................................................................... iv
List of Tables ................................................................................................................................ vii
List of Figures .............................................................................................................................. viii
Semester Schedule ......................................................................................................................... ix
Chapter One .................................................................................................................................... 1

1. Introduction to Cost Engineering ................................................................................................ 1
1.1 Definitions and Terminologies .............................................................................................. 1
1.2 General .................................................................................................................................. 2
1.3 Cost Engineering Traits......................................................................................................... 4
1.4 The Function of Cost Engineering in Construction............................................................... 5
1.5 Consideration in Costing ....................................................................................................... 6
Chapter Two.................................................................................................................................. 10
2. Pre- Tender Cost Estimation ..................................................................................................... 10
2.1 Introduction ......................................................................................................................... 10
2.2 The Construction Project ..................................................................................................... 11
2.3 Project Life-Cycle ............................................................................................................... 11
2.4 Estimating............................................................................................................................ 13
2.6 An Estimator ....................................................................................................................... 15
2.7 Purpose of Estimating ......................................................................................................... 15
2.8 Types of Cost Estimating .................................................................................................... 16
2.8.1 Conceptual Cost Estimating ......................................................................................... 17
2.8.2 Conceptual Estimating Techniques .............................................................................. 24
2.8.3 Semi-Detailed Estimate ................................................................................................ 29
2.8.4 Detailed Estimate .......................................................................................................... 29
iv
2.9. Quantity Takeoff ................................................................................................................ 31

2.10 Production Rates ............................................................................................................... 34
Chapter Three................................................................................................................................ 35
3. Contractor‟s Cost Estimation .................................................................................................... 35
3.1 Estimating Work Items Cost ............................................................................................... 35
3.1.1 Material Unit Cost Estimation ...................................................................................... 35
3.1.2 Direct Labor Hourly Cost Estimation ........................................................................... 38
3.1.3 Direct Equipment Hourly Cost Estimation ................................................................... 41
3.2 Estimating Indirect Cost ...................................................................................................... 50
3.2.1 Site overheads ............................................................................................................... 50
3.2.2 General overheads ........................................................................................................ 56
3.2.3 Construction contingencies........................................................................................... 61
3.2.4 Contractor Profit ........................................................................................................... 63
3.3 Determining Mark-Up Cost ................................................................................................ 64
3.4 Finalizing a Tender Price .................................................................................................... 65
3.5 Price Adjustments ............................................................................................................... 65
3.6 Determining Optimum Bid Price ........................................................................................ 68
Chapter Four ................................................................................................................................. 72

4. Project Cost Management ......................................................................................................... 72
4.1 Definitions and Details ........................................................................................................ 72
4.2 Introduction ......................................................................................................................... 75
4.3 Resource Planning ............................................................................................................... 77
4.3.1 Preparing Work Breakdown Structure ......................................................................... 77
4.3.2 Determine Method of Work and Durations of Activities ............................................. 77
4.3.3 Production Rates or Productivities ............................................................................... 78
4.4 Cost Planning ...................................................................................................................... 79
4.5 Cost Budgeting .................................................................................................................... 86
4.5.1 Project Budgeting Process ............................................................................................ 87
4.5.2 Project Cash Flow ......................................................................................................... 88
v
4.6 Cost Control ........................................................................................................................ 90

4.6.1 Direct Cost Method of Control ..................................................................................... 91
4.6.2 Earned Value Method of Control ................................................................................. 93
4.7 Cost Overrun and Measures to Control Construction Costs ............................................... 96
4.7.1 Causes of Cost Overrun ................................................................................................ 96
Chapter Five ................................................................................................................................ 105

5. Value Engineering .................................................................................................................. 105
5.1 Historical Background....................................................................................................... 105
5.2 Definition of Value Engineering ....................................................................................... 105
5.3 Terminologies and Definitions .......................................................................................... 107
5.4 Objectives of Value Engineering ...................................................................................... 110
5.6 When Value Engineering is used? .................................................................................... 111
5.7 How to apply Value Engineering ...................................................................................... 112
5.7.1 SAVE Int .................................................................................................................... 112
5.7.2 Australian Department of Housing and Works .......................................................... 113
5.7.3 Acquisition Logistics Engineering ............................................................................. 114
5.7.4 Caldwell ...................................................................................................................... 115
References ................................................................................................................................... 116
vi
List of Tables
Table 1.1: Project Size………………………………………………………………………...8

Table 2.1: Accuracy of different types of Cost Estimates………………………………….....16
Table 2.2: Previous projects cost data…………………………….…………………………..21
Table 2.3: Unit cost per car…………………………………………………………………...21
Table 2.4: Construction Economy trends…………………………………………………….22
Table 2.5: Locations cost indices…………………………………………………………….23
Table 2.6: Steps for preparing a detailed Cost Estimate……………………………………..31
Table 3.1: Direct material unit cost………………………………………………………….37
Table 3.2: Direct labor hourly cost summary………………………………………………..40
Table 3.3: Operator‟s annual salary and benefits cost breakdown…………………………..47
Table 4.1: Primary factors in preparing estimates…………………………………………...79
Table 4.2: Benefits of Team Alignment……………………………………………………..81
Table 4.3: Critical questions for preparing early estimates…………….……………………81
vii
List of Figures
Figure 1.1: Feedback loop of cost vs. performance………………………………………………4

Figure 1.2: Factors that affect costing accuracy………………………………………………….5
Figure 1.3: Learning curve……………………………………………………………………….7
Figure 1.4: Area conversion scale………………………………………………………………..7
Figure 2.1: Project life cycle………………………………………………………………..……12
Figure 2.2: Cost estimate stages………………………………………………………………… 14
Figure 2.3: Level of accuracy of cost estimates………………………………………………... 17
Figure 2.4: Conceptual cost estimates preparations……………………………………………. 20
Figure 2.5: Plan and cross-section of example 2.8…………………………………………….. 27
Figure 2.6: Schematic diagram of the structure of tender price……………………………….. 29
Figure 4.1: Resource planning process………………………………………………………... 75
Figure 4.2: Cost estimating process…………………………………………………………… 76
Figure 4.3: Budgeting process………………………………………………………………… 76
Figure 4.4: Cost control process………………………………………………………………. 76
Figure 5.1: VE as a functional balance between cost, quality and performance……………… 106
Figure 5.2: Potential influence of VE during project phases………………………………… 111
Figure 5.3: Potential saving from VE application…………………………………………… 112
Figure 5.4: Worth versus cost graph…………………………………………………………..114
viii
Semester Schedule
Week Date Lecture Topic Instructor Assessment

1 March 1 ,2016 Course Introduction Demeke S. Assignment on types of
Costs.
2 March 8 ,2016 Introduction to CE Demeke S.
3 March 15 ,2016 Pre –Tender Cost Estimation Tadewos A. Students will be sent to
Consulting offices.
4 March 22 ,2016 Students Presentation on Tadewos A&
Client‟s cost estimation Demeke S. It worth 10/5%
5 March 29 ,2016 Students Presentation on Tadewos A&
Client‟s cost estimation. Demeke S.
6 April 5 ,2016 Contractor‟s Cost Estimation Demeke S.
7 April 12 ,2016 Contractor‟s Cost Estimation Demeke S.
8 April 19 ,2016 Introduction to Project Cost Tadewos A.
Management
9 April 26,2016 Resource Planning & Schedule Tadewos A. Assignment on cost
Cost Planning overrun 5/10%
10 May 3,2016 Cost Budgeting Tadewos A. Semester Project will
Cost Control be given in this week.
11 May 10,2016 Value Engineering Tadewos A.
May 12,2016 Tutorials on Chapter 1&2 Tadewos A &
Demeke S
12 May 17,2016 Tutorials for female Students Test I from chapter
1&2 (7/10%)
13 May 24,2016 Tutorials on Chapter 3,4 &5 Tadewos A. Submission date for
May 26,2016 Demeke S. first the draft of
semester project.
Test II from Chapter
May 27,2016 3&4 (8/10%)
14 May 31,2016 Submission date for the final Tadewos A.

Semester project. Demeke S. It worth 25/ 30%
June 1, 2016 Guest
June 2,2016 Presentation Instructors
June 3,2016 Examiners
June 6- 17, 2016 Final exam period Final Exam – 50%

From all chapters.
ix
Cotm 3212:- Cost Engineerig Course Outline
Hawassa University
Institute of Technology
School of Planning, Design and Construction
Program: Construction Technology and Management
Acc. Year: 2015/16 (2008 E.C) Program: Regular
Course Description
Cost Engineering is one of the areas of engineering practices where engineering judgment and
experience are utilized in the application of scientific principles and techniques to the problems of
cost estimation, cost control and profitability. It encompasses a wide range of cost-related aspects of
engineering and program management. One key objective of cost engineering is to arrive at accurate
cost estimates and schedules and to avoid cost overruns and schedule slips. The broad array of cost
engineering topics represents the intersection of the fields of projectmanagement, business
management, and engineering.
Intended learning outcomes

Assessable outcomes:
On completion of this course the student will:
 understand the micro economic operation of construction development and will be able to see
through from start to finish
 have an understanding of, and facility in, the techniques of management accounting in property
development and construction operation cost engineering
 Be capable of analyzing design alternatives and construction operations and programmes for cost
effectiveness and value maximization.
Additional outcomes:
 Students will be able to make informed decisions about risk apportionment, procurement
methods and contract strategies.
 The course will also offer students with an opportunity to apply critical thinking and enjoy
problem solving while balancing details with the 'big picture'.
Instructors: Tadewos A.& Demeke S. Academic year 2015/16 (Semester II)

Academic year 2015/16 (Semester II 1
Cotm 3212:- Cost Engineerig Course Outline
COURSE OUTLINE
1. Introduction to Cost Engineering 3.3 Determining Mark-Up Cost
1.1 Definitions and Terminologies 3.4 Finalizing a Tender Price
1.2 General about Cost Engineering 3.5 Price Adjustments
1.3 Cost Engineering Traits 3.6 Determining Optimum Bid Price
1.4 The Functions of Cost Engineering
in Construction 4. Project Cost Management
1.5 Considerations in Costing
4.1 Definitions and Details
2. Pre- Tender Cost Estimation
4.2 Introduction
2.1 Introduction 4.3 Resource Planning
2.2 The Construction Project 4.4 Cost Planning
2.3 Project Life-Cycle 4.5 Cost Budgeting
2.4 Estimating 4.6 Cost Control
2.6 An Estimator 4.7 Cost Overrun
2.7 Purpose of Estimating 5. Value Engineering
2.8 Types of Cost Estimating
2.9. Quantity Takeoff 5.1 Historical Background
2.10 Production Rates 5.2 Definitions of VE
5.3 Terminologies
3. Contractors Cost Estimation
5.4 Objectives of VE
3.1 Estimating Work Items Cost 5.5 When VE is used?
3.2 Estimating Indirect Cost 5.6 How to apply VE?
References
Tadewos A.& Demeke S. (2016), Cost Engineering Handout, Hawassa University, Hawassa
Kumar Neeraj JHA. Construction Project Management Theory and Practice, Delhi
Knultson, Construction Management Fundamentals,Tata Mc Grill
Ritz, George, J., & Sidney M. Levi (2013), Total Construction Project Management, McGraw-Hill Education, NY
Shublaq, Emad,(2003), 40 hrs Approved Value Methodology Training Workshop, MOD-I, Sydney, Australia.
Dr. Emad Elbeltagi, Cost Estimating, Egypt
Gemechis Tamiru& Getaneh Gezahegn, Cost Engineering Lecture Notes, Addis Ababa University ,AA
Taddese Yemane (2006) , Construction Cost Estimation Guideline For Local Contractors In Ethiopia, Msc Thesis,
Adddis Ababa University
Melaku Tadesse (2013), Project Managers’ Competency Enhancement Training,ERA, AA
Fetene Nega(2008), Causes And Effects of Cost Overrun on Public Building Construction Projects In Ethiopia,
Msc Thesis, Addis Ababa University
A Guide to the Project Management Body of Knowledge (2004), (Soft Copy), Project Management Institute
Instructors: Tadewos A.& Demeke S. Academic year 2015/16 (Semester II)

Academic year 2015/16 (Semester II 1
Chapter One
1. Introduction to Cost Engineering
1.1 Definitions and Terminologies
Construction Costs: valued consumption of goods /material/ and performance /labor work/ of
different kind and amount for the purpose of the production.
Depreciation/ Depletion Costs: Costs of goods/equipment/ or plant distributed for the whole
useful life to compensate its deterioration to the work. Although a nonlinear relationship exists, a
linear or a straight line method is often preferred.
Residual Value: refers to current value of goods determined by reducing the depletion cost from
the original value.
Interest Value/Rate: Value of goods foregone by not using resources at their best allocation. E.g.
Opportunity Cost. An interest rate is accounted for cash deposited in any bank being a
compensation granted for not using the money at its best allocation. (e.g. Investment)
All-in Material Rate: A rate which includes the cost of material delivered to site, waste,
unloading, handling, storage and preparing for use.
Basic Material Price/Index: Unit price of the material including transportation, unloading,
waste, handling, storage and preparing for use.
All-in Labor Rate: A compounded rate which includes payment to operatives and the costs
which arise directly from the employment of labor.
All-in Plant Rate: A compounded rate which includes the costs originating from the ownership
or hire of plant together with operating costs.
Direct Costs: Costs directly rendered to the production of the work. It includes, all-in material
costs, all-in labor costs and all-in plant costs.
Overhead Costs: Costs incurred not to the direct itemized works but indirectly to the overall
production and performance of the work. E.g.
 Secretarial services,
 Transportation facilities,
 Administrative works,
 Utility provisions: energy, water, communication, sanitation
Compiled by Ins.Tadewos Awugchew & Ins.Demeke Seferia, March 2016 Page 1

General Overhead Costs: The cost of administering a company and providing off-site services.
The apportionment of head office overheads to projects and to the company as a whole is
decided by management as part of management policy.
Site Overhead Costs: The cost of administering a project and providing general plant, site staff,
facilities and site based services and other items not included in all-in rates.
Mark-up Costs: the sum added to an estimate in respect of the general overhead costs including
profit and risk.
Production Costs: Costs representing the sum of direct costs (all-in costs) and site overhead
costs. Costs required for production of the works on site.
1.2 General
Before taking up any construction work for its execution, the owner or builder should have a
thorough knowledge about the volume of work that can be completed within the limits of his
fund or the probable cost that may be required to complete the contemplated work. It is therefore
necessary to prepare the probable cost or estimate for the intended work from its design plan and
specifications. Otherwise it may so happen that the work has to be stopped before its completion
due to shortage of funds and or materials.
There are many costs associated with construction projects. Some are not directly associated with
the construction itself but are important to quantify because they can be a significant factor in
whether or not the project goes forward and feasible. These include the initial capital cost and the
subsequent operation and maintenance costs. Each of these major cost categories consists of a
number of cost components:
 Land acquisition, including assembly, holding and improvement
 Planning and feasibility studies
 Architectural and engineering design
 Construction, including materials, equipment and labor
 Field supervision of construction
 Construction financing including overhead costs
 Insurance and taxes during construction
 Owner's general office overhead
 Equipment and furnishings not included in construction
 Inspection and testing

The operation and maintenance cost in subsequent years over the project life cycle includes the
following expenses:
 Land rent, if applicable
 Operating staff
 Labor and material for maintenance and repairs
 Periodic renovations
 Insurance and taxes
 Financing costs
 Utilities
 Owner's other expenses
It is important for design professionals and construction managers to realize that while the
construction cost may be the single largest component of the capital cost, other cost components
are not insignificant. Early on, the owner wants to understand the nature of these costs as well as
have some indication of what the construction itself will cost in order to analyze the life cycle
costs and determine the worthy fullness of the investment. The Cost-Benefit Analysis can serve
as a decision making tool to address all the costs and the corresponding associated benefits worth
to the owner.
Cost Engineering is a dynamic process that begins in the very early stages of a project and ends
when the project is turned over to the owner. As a project moves along time, the amount of
information generated increases. The information improves an estimate‟s accuracy but also costs
more to develop and takes more time. Cost estimating is critical in the development of the
project because it informs the owner of costs, which in turn guide design decisions.
Cost Engineers consider past projects while anticipating new factors. Some of these factors
include:
 Current technologies ,
 Market demand and supply of material and labor,
 Quantities of materials,
 Collective bargaining agreements of suppliers and buyers,
 Level of quality,
 Requirements for completion.
A good data base of actual costs from past project experiences facilitates the preparation of a
quick and accurate cost estimate. Cost Engineers spent considerable time and resources
developing and protecting this data base. Each new project provides a clearer picture of the
actual cost of construction and adds to the value of the data. Larger design and construction
companies maintain their own data bases. Smaller companies may rely on the data developed
from independent cost consultants and cost data suppliers.

1.3 Cost Engineering Traits

Cost Engineering shares common traits of the following:
Conflicting Issues of quality, size, performance and cost: As projects develop, there is
continual competition among issues of quality, size, performance and cost. Owners want
to have the biggest facility with the best finishes and systems that will perform over time
with least possible amount of money. With these criteria, it is likely that conflicts are
bound to arise.
Owner
Need
Decision on
quality & Cost
Designer/
Constructor
Cost Information
Project Information
Cost Engineers
Fig 1.1: Feedback loop of cost vs. performance& flow of information

The design and construction team uses estimates to ensure that good cost information developed
and a feedback loop established so that these conflicts can be addressed as quickly as possible.
As project information becomes available, it is passed through a costing exercise. The owner can
then decide to proceed based on this information or ask for some alteration in the design. The
designer can then devise ways to meet the cost targets. Through this feedback loop, conflicting
demands of cost versus performance can be resolved.
Cost Engineering combines both science and art: Cost estimates are a product of
information supplied by the designer, the owner and the suppliers. Experienced Cost
Engineers use much judgment in interpreting and configuring this information.
Cost Engineering does not offer guarantees of costs: Used properly, however, can be
important tool in bringing a project under or at budget. The costs developed during
design and even at the bidding stage are almost never the final and complete costs of the
project.

Costing can only be as accurate as the information upon which it is based: Cost accuracy
depends on many factors. Document completeness, data base accuracy, the skill and
judgment of the Cost Engineer.
Cost estimate accuracy increases as the design becomes more precisely defined: A
normal feature of the design process is that earlier stages of design are less precise than
later stages. Cost information provided at schematic and preliminary design will by
nature be less accurate than the ones provided at design developments.
Inputs
 Scope
Definition
Costing
 Time to Accuracy
Prepare
 Quality of
Cost Data
 Cost
Fig 1.2: Factors that affect costing accuracy

Cost estimate is based on previous estimates: A good, accurate estimate does not
stand alone. It is the product of lessons learned from previous estimates.
Costing requires standard computing methodology and procedures: As the design
proceeds, the level of details increases. Costing as a consequence becomes more
complex reflecting the many different factors that go into each unit of work.
Calculations increase in number and the potential to leave something out becomes
greater. Only through adherence to strict methods and procedures that mistakes can
be minimized.
1.4 The Function of Cost Engineering in Construction

From an owner‟s perspective, ascertain the necessary amount required to complete the
proposed work for his decision and arranging finance for the same. For public
construction works, cost estimates are required to obtain administrative approval,
allotment of fund and technical sanction.
It can guide the decision among two or three possible options. Identifying costs early
facilitates sound decision making, but such estimates will have little hard design
information.
Cost Engineering helps to justify investments from cost-benefit analysis.

Cost Engineering offers guidelines to the designer, who selects materials and sizes the
project to fall within the owner‟s budget. As the project proceeds, the design must be
continually compared to this budget. If it begins to exceed the budget, the designer must
determine the best alternatives for cost reduction.
At the end of the design process, estimates are prepared to figure the bid prices of
individual contractors under the competitive bidding.
Cost estimates form the base core for negotiation between the signing parties in a contract
agreement. The project management team often prepares a detailed estimate at this point
to verify the accuracy of the bid prices and to negotiate with the trade contractors.
Cost engineering can be used by the project manager to define the scope of the work for
each subcontractor as well as determine fair pricing. Because each estimate is broken
down by units of work, the project manager can extract information regarding quantity
and cost for the particular situation. Cost Engineering can also be used as a planning tool.
Procurement specialists use to define how much of a given item will need to be
purchased. In the field, superintendents consult the estimate to determine the total
quantity of work to be built in a particular location, the total number of hours needed to
do the work, and the materials required.
Cost Engineering can also help to fix up completion period from the volume of works
involved in the estimate.
Estimate is required to invite tenders and prepare bills for payment.
Cost Engineering helps for valuation of existing property which itself is for a number of
purposes.
1.5 Consideration in Costing

Project price is affected by the size of the project, the quality of the project, the location,
construction time, and other general market conditions. The accuracy of costing is directly
affected by the ability of the Cost Engineer to properly analyze these basic issues.
Project Size:
The size of the project is a factor of the owner‟s needs. At the conceptual stage, size is an issue
of basic capacity, such as apartment units for a real estate developer or kilometers of roadway for
highway engineering. As the project becomes better defined, its size begins to be quantified more
accurately. The principle of economy of scale is an important factor when addressing project
size. Essentially as projects get bigger, they get more expensive but at a less rapid rate. This
occurs because the larger the project, the more efficiently people and equipment can be used.
Also a people repeat task, they get better and faster, reducing the cost of labor. On large
commercial building and heavy engineering projects, worker productivity is plotted into learning
curves. Cost Engineers treat project size by establishing tables that recognize the typical size of a
project and a respective price and then adjust up or down from this norm.

Average time required per unit

Learning Curve
Number of Units
Fig 1.3: Learning curve

As operations continue, crews learn so that the time required to complete the next like unit is
less.
In general for buildings built to the same specification in the same locality, the larger building
will have the lower unit area cost. This is mainly to the decreasing contribution of the exterior
walls plus the economy of scale usually achievable in larger buildings. As an example, the area
conversion scale shown below will give a factor to convert costs for the typical size building to
an adjusted cost for the particular project.
.8 .85 .90 .95 1.0 1.05 1.1 1.15 1.2
Cost Multiplier Curve

Cost Multiplier Index
0.5 0.6 0.7 0.8 0.9 1.0 2.0 3.0
Fig 1.4: Area conversion scale

Table 1.1: Project size
Building Type Median Cost per m2 (USD) Typical Size Gross m2

Apartments 550 1890
Banks 1233 378
Colleges 1074 4,500
Gymnasiums 770 1728
Example1.1: Determine the cost per m2 of 3780 m2 apartment building.

Area Conversion Scale = Proposed Area/ Typical Size
= 3780/1890 = 2.0
From the conversion curve, one can get a cost multiplier index of 0.95
Adjusted Cost per m2 = 0.95 x 550 = 522.5 USD
Project Quality:
An owner may require a high quality project to create a specific image or may need facilities for
a specific use. Whatever the reason, the consequences are always the same: an increase in costs.
Early in the project, the Cost Engineer must discuss expectations of quality with the users, the
designers and applicable government agencies.
Project Location:
Constructing a facility in a locality is very different from constructing one on other areas. The
differences are in labor costs, the availability of materials and equipment, delivery logistics, local
regulations, and climate conditions. Material costs are a factor of availability, competition, and
access to efficient methods of transportation. Labor costs, particularly unionized labor, are a
factor of the strength of the local bargaining unit. The cost of labor is also a factor the degree of
sophistication and level of training found at the project location. On some projects the numbers
and the skill levels of workers required are not available locally and must be imported.
Understanding the need for such importation adds significantly to the accuracy of an estimate.
Local conditions can influence the costs of the project. The need for citizen involvement, local
taxes or fees, and government requirements all can cost the project money. Extreme climatic
conditions, political instability, and earthquake zones all add to the cost in ways that may not be
entirely obvious without some investigation.
The cost of labor and material in different locations can be predicted by establishing location
indices for different cities and parts of the country. An index is created for a particular city by
comparing the cost of labor, equipment and material for that city to the national average. This
allows an estimator using national average costs to adjust the estimate to a particular location.
Most design and construction companies have developed an accurate record of location indices,
which they use for their pricing, or they buy this cost data from national pricing suppliers.

To predict the costs of other local factors, such as political instability, a company either uses its
own experience in the locale or teams up with a local partner who knows how the local
atmosphere can affect project costs.
Construction Time:
A project is estimated at a given point in time, but usually the actual procurement and field
construction occur at some point in the future. Sometimes this future can be years away,
especially in the case of a very large or phased project. The estimate, then, must take into
consideration when the actual project will be built. Labor and material costs usually escalate in
time; so by examining past and current trends, the estimator can predict where these costs will be
at the time of actual construction.
Other:
An estimator who accurately incorporates project size, project quality, location, and time has an
estimate that reflects the fair value for the project. In a normal market without any unusual
circumstances, this estimate should reflect the price that is paid.
Market conditions, however, shift; and owners, designers, and contractors all look at a given
project from different perspectives. In a market without much work, contractors may bid a
project at cost or with little profit to cover their overhead and keep their staff employed. On
complicated projects, contractors may bid the work low in hopes of making significant profit on
future changes. Conversely, they may bid a work high to cover the increased risks of a complex
project. It is not unusual for contractors to offer very competitive prices when they hope to enter
a new market or establish a relationship with a new owner. Such issues are very difficult to
quantify but should be considered in the preparation of the estimate. They are usually treated as a
percentage applied at the end of the estimate, included in either overhead or profit or in a final
contingency.

Chapter Two
2. Pre- Tender Cost Estimation

2.1 Introduction
Construction is a major capital expenditure, which clients do not commence until they are certain
that there is a benefit. This benefit may be for society in the case of public projects, with
justification based on a cost–benefit analysis, or purely based on financial considerations in the
case of private projects. Most clients are working within tight pre-defined budgets, which are
often part of a larger overall scheme. If the budget is exceeded or the quality not met the scheme
could fail. Pre- contract estimating sets the original budget – forecasting the likely expenditure to
the client. This budget should be used positively to ensure that the design stays within the scope
of the original scheme. Ahuja, (1994), states that estimating is the primary function of the
construction industry; the accuracy of cost estimates starting from early phase of a project
through the tender estimate can affect the success or failure of a construction project [Ahuja
1994]. He also states that many failures of construction projects are due to the result of
inaccurate estimates. Cost is a major factor in most decisions regarding construction; since
construction cost estimate is prepared before the actual construction of the project, much study
and thought must be put into the construction documents. However, estimates made in the early
phases of a project are particularly important because they affect the most basic decisions about a
project: whether it will be undertaken at all; how large it will be; how elaborate, sophisticated
and durable it will be.
As projects develop, there is continual competition among issues of quality, size, performance
and cost. Owners want the biggest building with the best finishes and systems that will perform
over time for the least amount of money. With these criteria, conflicts are bound to arise. The
design and construction team uses estimates to insure that good cost information is developed
and a feedback loop established so that these conflicts can be addressed as quickly as possible.
Estimates are products of information supplied by the designer, the owner, and the suppliers.
Estimates are not guarantees of costs; used properly, however, they can be important tools in
bringing a project under or at budget with the appropriate features for the owner. The costs
developed during design stage and even at the bidding stage are almost never the final and
complete costs of a construction project. In theory, the unknowns (i.e. the risks associated with a
construction project) can be shown to decrease as the project progresses to completion. The
question of accuracy is often raised; the best possible estimate will always contain a number of
key risks. The goal of the estimator is a practicable level of accuracy. An estimate can only be as
accurate as the information upon which it is based. All projects begin with an idea and end by
filling a need. As a project is proposed and then developed, through time the estimate
preparation and information will change based on the needs of the owner or the designer.
Generally, cost estimating is a dynamic process that begins in the early stages of a project and
ends when the project is completed and turned over to the owner.

2.2 The Construction Project
A project is defined, whether it is in construction or not, by the following characteristics:

 A defined goal or objective.
 Specific tasks to be performed.
 A defined beginning and end.
 Resources being consumed.
The goal of construction project is to build something. What differentiate the construction
industry from other industries is that its projects are large, built on-site, and generally
unique. Time, money, labor, equipment, and, materials are all examples of the kinds of
resources that are consumed by the project.
Projects begin with a stated goal established by the owner and accomplished by the project team.
As the team begins to design, estimate, and plan out the project, the members learn more
about the project than was known when the goal was first established. This often leads to a
redefinition of the stated project goals.
2.3 Project Life-Cycle
The acquisition of a constructed facility usually represents a major capital investment, whether
its owner happens to be an individual, a private corporation or a public agency. Since the
commitment of resources for such an investment is motivated by market demands or
perceived needs, the facility is expected to satisfy certain objectives within the constraints
specified by the owner and relevant regulations.
From the perspective of an owner, the project life cycle for a constructed facility may be
illustrated schematically in Figure 2.1. A project is expected to meet market demands or needs in
a timely fashion. Various possibilities may be considered in the conceptual planning stage, and
the technological and economic feasibility of each alternative will be assessed and compared in
order to select the best possible project. The financing schemes for the proposed alternatives
must also be examined, and the project will be programmed with respect to the timing for its
completion and for available cash flows.
After the scope of the project is clearly defined, detailed engineering design will provide the
blueprint for construction, and the definitive cost estimate will serve as the baseline for cost
control. In the procurement and construction stage, the delivery of materials and the erection of
the project on site must be carefully planned and controlled. After the construction is completed,
there is usually a brief period of start-up of the constructed facility when it is first occupied.
Finally, the management of the facility is turned over to the owner for full occupancy until the
facility lives out its useful life and is designated for demolition or conversion.

Of course, the stages of development in Figure 2.1 may not be strictly sequential. Some of the
stages require iteration, and others may be carried out in parallel or with overlapping
time frames, depending on the nature, size and urgency of the project.
Furthermore, an owner may have in-house capacities to handle the work in every stage of the
entire process. By examining the project life cycle from an owner's perspective we can focus on
the proper roles of various activities and participants in all stages regardless of the contractual
arrangements for different types of work.
Figure 2.1: Project life cycle

The project life cycle may be viewed as a process through which a project is
implemented from beginning to end. This process is often very complex; however, it can be
decomposed into several stages as indicated by the general outline in Figure 2.1. The solutions at
various stages are then integrated to obtain the final outcome. Although each stage requires
different expertise, it usually includes both technical and managerial activities in the knowledge
domain of the specialist. The owner may choose to decompose the entire process into more or
less stages based on the size and nature of the project. Very often, the owner retains direct
control of work in the planning stages, but increasingly outside planners and financial experts are
used as consultants because of the complexities of projects.

Since operation and maintenance of a facility will go on long after the completion and
acceptance of a project, it is usually treated as a separate problem except in the
consideration of the life cycle cost of a facility. All stages from conceptual planning and
feasibility studies to the acceptance of a facility for occupancy may be broadly lumped together
and referred to as the Design/Construct process, while the procurement and construction alone
are traditionally regarded as the province of the construction industry.
There is no single best approach in organizing project management throughout a project's life
cycle. All organizational approaches have advantages and disadvantages, depending on the
knowledge of the owner in construction management as well as the type, size and location of the
project. It is important for the owner to be aware of the approach which is most appropriate and
beneficial for a particular project. In making choices, owners should be concerned with the life
cycle costs of constructed facilities rather than simply the initial construction costs. Saving small
amounts of money during construction may not be worthwhile if the result is much larger
operating costs or not meeting the functional requirements for the new facility satisfactorily.
Thus, owners must be very concerned with the quality of the finished product as well as the cost
of construction itself. Since facility operation and maintenance is a part of the project life
cycle, the owners' expectation to satisfy investment objectives during the project life cycle
will require consideration of the cost of operation and maintenance. Therefore, the facility's
operating management should also be considered as early as possible, just as the construction
process should be kept in mind at the early stages of planning and programming.
2.4 Estimating
Estimating is not an exact science. Knowledge of construction, common sense and judgment are
required. Estimating material costs can be accomplished with a relatively high degree of
accuracy. However, accurate estimating of labor and equipment costs is considerably more
difficult to accomplish. Estimating material costs is a relatively simple and easy task. The
quantity of materials for a particular job can be accurately calculated from the dimensions on the
drawings for that particular job. After the quantity of material is calculated and knowing the unit
prices, the cost could be estimated by multiplying the quantity by the unit prices. Estimating
labor and equipment costs is more difficult than estimating material costs. The cost of labor and
material depends on productivity rates, which can vary substantially from one job to another.
The skill of the labor, job conditions and many other factors affect the productivity of labor.
Estimating plays important roles in forecasting future events in construction process. It consists
of two distinct tasks: determining the probable cost and determining the probable time to build a
project.

Cost estimate has been defined in different ways. For example: Estimating is the compilation of
all the costs of the elements of a project or effort included within an agreed upon project scope.
To a contractor, this is the cost that will most likely be incurred to complete the project as
defined in the contract documents and to turn it over to the owner.
In another definition, it is the production of a statement of the approximate quantity of materials,
time and costs to perform construction decisions. Cost estimating is, also defined as, the process
of analyzing a specific scope of work and predicting the cost of performing the work. The basic
challenges the construction contractor faces are to estimate the cost of constructing a project,
schedule the specific construction activities, and then build the project within the estimated cost
and schedule.
Cost estimating is the process of analyzing a specific scope of work and predicting the cost of
performing the work. The basic challenges the construction contractor faces are to estimate the
cost of constructing a project, schedule the specific construction activities, and then build the
project within the estimated cost and schedule.
The objective of cost estimate is to produce an accurate, cost effective prediction of what a
project will most likely cost and it needs to be done in different manners at different
stages. Cost Estimating is a complex process involving collection of available and
pertinent Information relating to the scope of a project, expected resource consumption and
future changes in resource costs.
At the beginning of a project, the estimate cannot be expected to carry a high degree of accuracy
since little information is known. As the design progresses more information is known and
accuracy should improve (Figure 2.2).
Required information: Detailed plans, specifications, available site data, available resource data
(labor, material, & equipment), contract documents, resource cost information, pertinent
government regulations, applicable owner requirements.
Figure 2.2: Cost estimate stages

2.6 An Estimator
The estimator (or quantity surveyor, or cost engineer) is the person who prepares
estimates in the planning, design, and perhaps construction stages. An estimator is always
involved for studies requiring thorough understanding of the principles and methods of
engineering economics. He or she must often work closely with managers, accountants, financial
analysts, and engineers to forecast the cash or borrowing needs for the project. As major decision
is made from information contained in the conceptual or preliminary estimate, this places a
responsibility and liability on the estimator. He or she will risk reputation when insufficiently
accurate estimate is prepared for a bid but the owner or the contractor will risk money.
A good estimator must conceptualize the complete building before it is fully designed. He or she
must be able to think, and perceive the details of the project. The estimator must also have the
ability to anticipate design decisions and communicate those assumptions made during the
conceptual estimating process.
He or she must also be knowledgeable of the expected life of construction materials, accounting,
taxation, law, economics, and awareness of engineering design. Qualifications for a good
estimator include: patience of detail; technical knowledge; good memory; knowledge of
construction process; able to plan the works; have an idea of relative costs and good judgment.
An estimator must not spend so much time and effort to analyze unnecessary details in
determining the costs of insignificant items as the estimating will take time and be
expensive.
2.7 Purpose of Estimating
The purpose of estimating is to determine the forecast costs required to complete a project in
accordance with the contract plans and specifications. For any given project, the estimator can
determine with reasonable accuracy the direct costs for materials, labor, and equipment. The bid
price can then be determined by adding to the direct cost the costs for overhead (indirect costs
required to build the project), contingencies (costs for any potential unforeseen work), and profit
(cost for compensation for performing the work). The bid price of a project should be high
enough to enable the contractor to complete the project with a reasonable profit, yet low enough
to be within the owner's budget.
There are two distinct tasks in estimating: determining the probable cost and determining the
probable time to build a project. With an increased emphasis on project planning and scheduling,
the estimator is often requested to provide production rates, crew sizes, equipment spreads, and
the estimated time required to perform individual work items. This information, combined with
costs, allows an integration of the estimating and scheduling functions of construction project
management. Because construction estimates are prepared before a project is constructed, the
estimate is, at best, a dose approximation of the actual costs. The true cost of the project will not
be known until the project has been completed and all costs have been recorded.

2.8 Types of Cost Estimating
There are many types of cost estimates that can be performed on a project, each type having
different levels of accuracy. The estimating process becomes increasingly more expensive as
more detailed and accurate techniques are applied. Estimating can be categorized into several
classes according to purposes, budget, limitation, time, and accuracy.
Generally, the nature and characteristics of estimating can be summarized as follow: accuracy
improves with the development of the project such that the distribution of errors narrows from
feasibility to settlement; underestimates are more likely than overestimates and the final cost of a
project cannot be established until the settlement of project accounts.
For example, cost estimates is divided into seven types: 1- Preliminary or rough cost or
approximate estimate is prepared to decide the financial aspect and accompanied by detailed
report, brief specifications, layout plan showing the proposal in hand; and brief idea of rates for
different items; 2- Detailed estimate, is prepared in detail prior to inviting of tenders; 3- Quantity
estimate, is a complete estimate of quantities for all items of work required to complete a project;
4- Revised estimate is also a detailed estimate and is prepared afresh, when the original
sanctioned detailed estimate exceeds by 5% or more; 5- Annual repair or maintenance prepared
in order to keep the structures in proper condition;
6- Supplementary estimate, when some additions are done in the original work; and 7- Extension
estimate, when some changes and extensions are required to be made in old work.
Typically, cost estimates are divided into three major types: 1- Conceptual cost estimates are
developed using incomplete project documentation; 2- Semi-detailed cost estimates are prepared
when parts of the project have been completely designed; and 3- Detailed cost estimates are
prepared based on fully developed construction drawings and specifications. The accuracy
of the estimate depends on the completeness of the contract documents and the experience of an
estimator. The typical accuracy of the various types of cost estimates is shown in Table 2.1.
Table 2.1: Accuracy of different types of cost estimates
Type of Estimate Construction Document Development Expected

Percent Error*
Schematic Design
Conceptual ± 10-20 %
0-30% Construction Documents
Design Development
Semi-Detailed ± 5-10 %
30-90% Construction Documents
Detailed 90-100% Plans and Specifications ± 2-4 %
* Percent error means the expected variation between cost estimate and actual cost

There are many types of cost estimates and re-estimates for a project based on the stage of
project development. Estimates are performed throughout the life of a project, beginning with
the first estimate and extending through the various phases of design and into construction.
Initial cost estimates form the basis to which all future estimates are compared. Future estimates
are often expected to agree with (i.e., be equal to or less than) the initial estimates. However, too
often the final project costs exceed the initial estimates.
Estimates are performed throughout the life of a project, beginning with the first estimate and
extending through the various phases of design and into construction, as shown in Figure 2.3.
Traditionally, the different classifications of estimates conclude that there are three main types of
estimates:
1. Conceptual cost estimates.
2. Semi-detailed cost estimates.
3. Detailed cost estimates.
Figure 2.3: Level of accuracy of cost estimates
2.8.1 Conceptual Cost Estimating

At the beginning of a project by the owner, prior to any design, only limited information is
known about a project. However, the owner must know the approximate to evaluate the
economic feasibility of proceeding with the project. Thus, there is a need to determine the
approximate cost of a project during its conceptual phase.
A conceptual estimate is also known as a top-down, order of magnitude, feasibility, analogous,
or preliminary estimate. It is the first serious effort made to predict the cost of the project.
A conceptual estimate is usually performed as part of the project feasibility analysis at the
beginning of the project. In this way, the estimate is made with limited information on project
scope, and is usually made without detailed design and engineering data. The conceptual
estimate is also defined as approximate estimate and used to know the budget for a project.
Considerable experience and judgment are required to obtain a dependable approximate estimate
for the cost.

Definition
A “conceptual estimate” is an estimate prepared by using engineering concepts and avoiding the
counting of individual pieces. As the name implies, conceptual estimates are generally made in
the early phases of a project, before construction drawings are completed, often before they are
hardly begin. The first function of a conceptual estimate is to tell the owner about the anticipated
cost, thus presenting useful information for the owner in contemplating the project feasibility and
further development. A conceptual estimate is also used to set a preliminary construction budget,
and to control construction costs at the most critical stage, during the design. Conceptual cost
estimating is defined as the forecast of project costs that is performed before any
significant amount of information is available from detailed design and with incomplete work
scope definition, with the purpose of using it as the basis for important project decisions like
go/no-go and the appropriation of funds decisions.
Characteristics
The first recognized characteristic of conceptual estimating, like all other estimating, is the
inexactness in the process. With the absence of data and with shortage of time, there may be no
other way to evaluate designs but to use opinion. Conceptual estimating is a mixture of art and
science; the science of estimating tells the cost of past work. The art is in visualizing a project
and the construction of each detail, selecting comparative costs from past projects and adjusting
them to new conditions.
The second characteristic of conceptual estimating is that its accuracy and validity are highly
related to the level of information provided by the project scope. The availability of a good,
complete scope definition is considered the most crucial factor for conceptual estimating.
The third characteristic of conceptual estimating is that it is a resource restricted activity. The
main resources for conceptual estimating are information, time, and cost. Due to the fact that
conceptual estimating is performed in the early stages of the project, the scope information
available is usually restricted in detail as well as in precision. In addition, the time and cost
available for making the estimate is restricted. Conceptual estimating is used to determine the
feasibility of a project quickly or screen several alternative designs. Therefore, the estimate,
although important, cannot be given much time and resources.
Importance
Preliminary estimate assists the overall cost-control program by serving as the first check against
the budget. It will indicate the cost overruns early enough for the project team to review the
design for possible alternates. Since preliminary estimate is made prior to the completion of
detailed design, the margin of error will be relatively large. Then, the larger contingency should
be applied. The contingency varies with the amount of design information available and the
extent of cost information obtainable from similar projects.

Preparation
A generic conceptual cost estimating preparations is shown in Figure 2.4, the preparations
begins with a request made by management to estimate the cost of a new project. The most
important part of the request is the project scope. The first task for the estimator is to study and
interpret the project scope and produce an estimating plan. The next task is to collect historical
data related to similar past projects. The selection and usage of these data is crucial for the
estimating preparations because inappropriate information will negatively affect the estimate.
The outputs from this stage are the project conceptual cost estimate and a documented estimating
basis used to develop this cost.
It is very important to describe in detail all the information, assumptions, adjustments, and
procedures considered in the estimate. The resulting conceptual cost estimate is then submitted to
management for decision-making.
To prepare an elemental cost plan the following information should be assembled:
 A cost analysis of a previous similar building
 Sketch plans and elevations of the proposed project
 Outline specification/levels of services installation, etc. for the proposed project.
Output
The primary output of the cost estimating effort is the cost estimate. The estimate is typically
expressed in unit cost. Alternative units can be work quantities, material quantities, or staff work
hours. However, for majority of the highway construction projects, the unit cost are mostly
applicable; therefore, they are frequently used.

Fig. 2.4: Conceptual cost estimating preparations
Broad Scope
Prior the design of a project, cost estimate could be prepared based on the cost
information based on previously completed projects similar to the proposed project. The number
of units or size of the project is the only available information. Although the range of costs varies
among projects, the estimator can develop unit costs to forecast the cost of future projects.
The unit cost should be developed from weighting the data that emphasizes the average value,
yet it should account for the extreme maximum and minimum values. In that regard Eq. (2.1) can
be used for weighting cost data from previous projects.
UC = (A + 4B + C) / 6 (2.1)
Where: UC = forecast unit cost
A = minimum unit cost of previous projects
B = average unit cost of previous project
C = maximum unit cost of previous projects
Example 2.1
Use the weighted unit cost to determine the conceptual cost estimate for a proposed parking that
is to contain 135 parked cars. Previous projects data are given in Table 2.2.

Table 2.2: Previous projects cost data
Project No. Cost (ETB) No. of cars

1 466,580 150
2 290,304 80
3 525,096 120
4 349,920 90
5 259,290 60
6 657,206 220
7 291,718 70
8 711,414 180
Solution
The unit cost per car can be calculated as given in Table 2.3.
Table 2.3: Unit cost per car
Project No. Unit cost (ETB/car)

1 3,110.4
2 3,628.8
3 4,375.8
4 3,888.0
5 4,321.5
6 2,978.3
7 4,167.4
8 3,952.3
Then, the average unit cost = 30,431.5 / 8 = 3,803.94 ETB/ car

Using Eq. 2.1, the forecast unit cost = (2,987.3 + 4 × 3,803.94 + 4,375.8) / 6 =3,763.14
Accordingly, the cost estimate for 135-cars parking = 135 × 3,763.14 = 508,023 ETB
Adjustment
It is necessary for the estimator to adjust the cost information from previously completed
projects for use in the preparation of a conceptual cost estimate for a proposed project. There
should be adjustment for time, location, and size.

Adjustment for Time

The use of cost information from a previous project to forecast the cost of a proposed project will
not be reliable unless an adjustment is made proportional to the difference in time between the
two projects. The adjustment should represent the relative inflation or deflation of costs with
respect to time due to factors such as labor rates, material costs, interest rates, etc.
Measures of changes in items such as location, building costs or tender prices are performed
using index numbers. Index numbers are a means of expressing data relative to a base year. For
example, in the case of a building cost index, a selection of building materials is identified,
recorded and given the index number 100. Let us say for the sake of argument that the cost of the
materials included in the base index is 70.00 ETB in January 2005. Every 3 months the costs are
recorded for exactly the same materials and any increase or decrease in cost is reflected in the
index as follows: Building cost index January 2005 = 100; Building cost index January 2009 =
135. This, therefore, represents an increase of 35% in the cost of the selected materials and this
information can be used if, for example, data from a 2005 cost analysis was being used as the
basis for calculating costs for an estimate in January 2009.
Various organizations publish indices that show the economic trends of the construction industry
with respect to time. The estimator can use the change of value of an index between any two
years to adjust past cost records and to forecast future project costs.
Example 2.2
Suppose the indices for building construction projects show these economic trends (Table 2.4).
It is required to use the cost of a 843, 500 ETB projects completed last year to prepare a
conceptual estimate for a project proposed for construction 3 years from now.
Table 2.4: Construction economic trends
Year Index
3 years ago 358
2 years ago 359
1 year ago 367
Current year 378
Solution
The equivalent interest rate can be calculated based on the change in the cost index during the
3-year period as follow: (378/358) = (1 + i) 3, then i = 1.83%
Accordingly, the cost of the project should be adjusted for time as follows: Cost = 843, 500 ×
(1 + 0.0183)4 = 906, 960 ETB

Adjustment for Location

Tender price levels vary according to the region of the country where the work is carried out.
Similarly, as stated in the above section, the use of cost information from a previous project to
forecast the cost of a proposed project will not be reliable unless an adjustment is made
proportional that represents the difference in cost between the locations of the two projects. The
adjustment should represent the relative difference in costs material, equipment and labor of the
two locations. Indices that show the relative difference in construction costs with respect to
geographical location is usually published by many organizations.
Example 2.3
Suppose the indices for different location of construction costs are shown in Table 2.5.
Suppose that the construction cost of a project completed at city A is 387,200 ETB, it is
required to prepare a conceptual estimate for a similar project proposed in city D.
Table 2.5: Locations cost indices
Location Index
City A 1.025
City B 1.170
City C 1.260
City D 1.105
City E 1.240
Solution
The cost of the proposed project could be adjusted for location as follows: Cost
= 387, 200 × (1.105 / 1.025) = 417, 420 ETB
Adjustment for Size
The use of cost information from a previous project to forecast the cost of a future project will
not be reliable unless an adjustment is made that represents the difference in size of the two
projects. In general, the cost of a project is directly proportional to its size. The adjustment is
generally a simple ratio of the size of the proposed project to the size of the previous project
from which the cost data are obtained.

Combined Adjustment
The conceptual cost estimate for a proposed project is prepared from cost records of a project
completed at a different time and at a different location with a different size. The estimator must
adjust the previous cost information for the combination of time, location and size.
Example 2.4
Use the time and location indices presented in Tables 2.4 and 2.5 to prepare the conceptual
cost estimate for a building with 62,700 m2 of floor area. The building is to be constructed 3
years from now in city B. A similar type of building that cost 2,197,540 ETB and contained
38,500 m2 completed 2 years ago in city E. Estimate the probable cost of the proposed
building.
Solution
Proposed cost
= Previous cost × Time adjustment × Location adjustment × Size adjustment
= 2,179,540 ETB × (1 + 0.0183)5 × (1.17 / 1.24) × (62,700 / 38,500)
= 3,700,360 ETB
2.8.2 Conceptual Estimating Techniques
Interpolation
Interpolation is a technique used in the early stages of the design sequence when information on
the proposed project is in short supply. It requires a good deal of skill and experience and is the
process of adding in or deducting from the cost analysis to arrive at a budget for a new project.
Therefore in preparing a budget for a new project assume a cost analysis has been chosen as the
basis for the estimate. However, the cost analysis will contain items that are not required for the
new project and these must be deducted. For example, in the new project the client wishes to
exclude the installation of air conditioning from the estimate and this will have to be deducted
from the budget; but on the other hand the client wishes to include CCTV throughout and the
cost of providing this must be calculated and added in. It is important, as described later, to
adjust costs to take account of differences in price levels. The process continues until all
identified differences have been accounted for.

Other credible approaches to approximate estimating that are available to the quantity surveyor
are:
 The unit and square meter methods, generally used for preliminary estimates when firm
information is scarce.
 Approximate quantities and elemental cost planning for later stage estimates.
 Other approaches are often cited, most notably cubic meter and storey enclosure
methods, but the accuracy of these approaches are somewhat dubious and they
are seldom used in practice and are not considered here.
Unit Method
The unit method is a single price rate method based upon the cost per functional unit of the
building, a functional unit being, for example, a hotel bedroom. This method is often regarded as
a way of making a comparison between buildings in order to satisfy the design team that the
costs are reasonable in relation to other buildings of a similar nature. It is not possible to adjust
the single rate price and therefore is very much a ball park approach. It is suitable for clients who
specialize in one type of project; for example, hotel or supermarket chains, where it can be
surprisingly accurate. Other examples where unit costs may apply are:
 Schools – cost per pupil
 Hospitals – cost per bed space.
Example 2.5
Assume that the current cost for a 120-pupil school constructed of wood frame for a city is
1,200,000 ETB. We are asked to develop an estimate for a 90-pupil school.
Solution
The first step is to separate the per-pupil cost = 1,200,000/120 = 10,000 ETB/pupil
Apply the unit cost to the new school = 10,000/pupil X 90 pupils = 900,000 ETB
Example 2.6
The current cost for a 100-bed hospital constructed is 1,250,000 ETB. We are asked to estimate
a 125-bed hospital
Solution
Cost per-bed = 1,250,000/100 = 12,500 ETB /bed
New hospital cost = 12,500/bed X 125 bed = 1,562,500 ETB

Example 2.7
For a multistory garage spaced for 500 cars the construction cost was 3,000,000 ETB. What is
the estimate of 450-car garage?
Solution
Cost per-car = 3,000,000/500 = 6,000 ETB/car
New Garage cost = 6,000/car X 450 car = 2,270,000 ETB
Superficial Method
The superficial method is a single price rate method based on the cost per square meter of the
building. The use of this method should be restricted to the early stages of the design sequence
and is probably the most frequently used method of approximate estimating. Its major
advantage is that most published cost data is expressed in this form. The method is quick and
simple to use though, as in the case of the unit method, it is imperative to use data from
similarly designed projects. Another advantage of the superficial method is that the unit of
measurement is meaningful to both the client and the design team.
Although the area for this method is relatively easy to calculate, it does require skill in assessing
the price rate. The rules for calculating the area are:
 All measurements are taken from the face of external walls. No deduction is made for
internal walls, lift shafts, stairwells, etc. – gross internal floor area.
 Where different parts of the building vary in function, then the areas are
calculated separately.
 External works and non-standard items such as piling are calculated separately and then
added into the estimate. Figures for specialist works may be available from sub-
contractors and specialist contractors.
Example 2.8
Gross floor area for office block shown in Figure 2.5 = 10.0 x 25.0 = 250.0 m2
- 2 x 3.0 x 7.50 = 205.0 m2
Area of 5 floors 205.0 x 5 = 1025.0 m2 x 1100 ETB /m2 = 1,127,500.0 ETB
Basement 7.00 x 25.0 = 175.0 m2 x LE1300 /m2 = 227,500.0 ETB
Estimate for block 1,355,000.0 ETB

Fig. 2.5: Plan and cross section of Example 2.8

Approximate Quantities
Approximated quantities are regarded as the most reliable and accurate method of estimating,
provided that there is sufficient information to work on. Depending on the experience of the
surveyor, measurement can be carried out fairly quickly using composite rates to save
time. The rules of measurement are simple although it must be said they are not standardized
and tend to vary slightly from one surveyor to another.
 One approach involves grouping together items corresponding to a sequence of
operations and relating them to a common unit of measurement; unlike the measurement
for a bill of quantities, where items are measured separately.
 Composite rates are then built up from the data available in the office for that sequence
of operations.
 All measurements are taken as gross over all but the very large openings.
 Initially, the composite rates require time to build up, but once calculated they may be
used on a variety of estimating needs

Parametric Cost Estimate Models

The parametric model uses historical data as the basis of the model's predictive features.
However, the characteristics that are input into the process are primarily based on performance
indicators such as speed, accuracy, tolerance, reliability, friendliness, error rate, and complexity
of the environment of the deliverables. Parametric estimating is used primarily in software
development and system development projects. The output of parametric models includes the
cost of major phases, duration of project major phases, total project cost, and resource
requirements.
Parametric models calculate the dependent variables of cost and duration based on one or more
independent variables. These independent variables are quantitative indices of performance
and/or physical attributes. More sophisticated models provide a multitude of levels of estimates.
If, during the early stages, a small array of data regarding the project is available, a rough
estimate is provided. However, if a large array of project data is available later in the project's
life; more accurate estimates are calculated using the same model.
A parametric model, for a construction project, would use the data provided by the user on any
or all of the following characteristics: project type, frame material, exterior material,
ground conditions, desired floor space, and roof type. Then, using the general relationships
developed between these input and output variables, the model provides an estimate of some or
all of the output variables. The output variables include cost of the design process, cost of the
structure, size of major equipment, optimum size of construction crew, size of the parking lot,
and duration of structure construction, duration of equipment installation, and overall project
duration.
Parametric estimate models are refined and fine-tuned for specific projects within specific
industries. Many organizations have developed parametric models for projects of their own
specialty. Depending on the organizational environment and on the nature of targeted projects,
these models use different statistically derived algorithms, which in turn would use different sets
of input and output data in calculating the output variables based on the input variables. These
models are, or should be, regularly evaluated, validated, calibrated, and customized for accuracy
and appropriateness. The estimates of cost and duration developed by the parametric model
usually establish a preliminary budget for the project that will compare its financial desirability
with other projects of the enterprise.
Exercise 2.1
Estimate the cost of 250,000 m2 warehouse building. Several similar buildings have been
constructed in the last several years. The first one, built 6 years ago, cost $2,250,000 and had
150,000 m2 of floor space. Two years ago, a small 80,000 m2 ware house was completed for $
1,680,000, and just last year a 200,000 m2 structure was completed for $3,400,000.

Exercise 2.2
Assume that the current cost for a 120-pupil school constructed of wood frame for a city is LE
1,200,000. We are asked to develop an estimate for a 90-pupil school to be constructed this year
in City A. The 120-pupil school was constructed in 2008 in City E. the inflation rate was
assumed to be 2.3% annually.
2.8.3 Semi-Detailed Estimate

Semi-detailed cost estimates are developed while basic design decisions are being made to verify
that the project can be constructed at its intended scope within the owner's budget. Some aspects
of the project may be completely designed. Detailed estimating methods can be used to estimate
the cost of project components that have been designed, and conceptual estimating methods are
used to estimate the cost of those components that remain to be designed. This means that
databases are used to estimate the cost of components for which the design is not complete, and
project data are used to estimate the cost of components for which the design is complete.
Therefore, these estimates are known as semi-detailed cost estimates.
2.8.4 Detailed Estimate

A detailed estimate is also known as a bottom-up, fair-cost, or bid estimate. Detailed estimates
are prepared once the design has been completed and all construction documents prepared.
The estimator divides the project into individual elements of work and estimates the quantities of
work for each element. Next, the individual elements of work are priced to determine an
estimated cost for each one. The estimated costs are summed, and overhead costs are added to
cover the contractor's cost of managing the work. The breakdown of tender price is illustrated in
Figure 2.6. The tender price consists of two components, the construction cost estimate and
mark-up (margin). The direct cost is the combined costs of labor, equipment, material, and
subcontractor‟s costs. The addition of site overheads and office overheads to the direct cost
produces the construction cost estimates. The second component of the tender price is the mark-
up (margin) which consists of the profit margin, risk allowance, and financial charge.
Figure 2.6: Schematic diagram of the structure of tender price

The various estimates discussed above are carried out in sequence, the previous cost estimate
being the input to the next one. The estimates are successively refined, incorporating new
information and thus keeping a continuously updated estimate that becomes the budget, available
for control process. As the project progresses, the amount of unknowns and uncertainties
decreases, while the level of details and the project information increases. In this way, the
accuracy of the estimate improves as it moves from conceptual to detailed estimate.
A detailed estimate is prepared by determining the costs of materials, labor, equipment and
subcontractor work. Detailed estimate is prepared from a complete set of contract documents
before the submission of a bid. It follows a systematic procedure begins with a thorough review
of the complete set of contract documents, drawing and technical specification. A site visit
should be done to observe factors that can influence the cost of construction such as: available
space for material storing, security, control of traffic and existing underground utilities.
The estimator prepares a material quantity take-off of all materials from the drawings. The
quantity of material multiplied by the unit cost of the materials yields the material cost. The
quantity of work required of equipment is divided by the equipment production rate and then
multiplied by the unit cost of equipment to obtain the total cost of equipment and
similarly, the cost of labor are calculated.
The direct cost of a project includes material, labor, equipment, and subcontractor costs. Upon
the completion of the estimate of direct costs, the estimator must determine the indirect costs of
taxes, bonds, insurance and overhead required to complete the project. A risk analysis of
uncertainties is required to determine an appropriate contingency to be added to the base estimate
to account for the unforeseen work that develops during construction. Upon calculation of the
direct and indirect costs, analysis of risk and assignment of contingency, a profit is added to the
estimate to establish the bid price. The amount of profit can vary considerably, depending on
numerous factors such as the size and complexity of the project, amount of work in progress by
the contractor, accuracy and completeness of the bid documents, competition for work. The steps
for preparing a detailed estimate are listed in Table 2.6

Table 2.6: Steps for preparing a detailed cost estimate
Review the scope of project. Consider the effect of location, security, traffic,
1
available storage space, underground utilities, etc. on costs.
2 Determine quantities. Perform a material quantity takeoff for all work items.
3 Obtain suppliers‟ bids.
4 Price material. Material cost = quantity x unit price.
5 Price labor based on their probable production rate.
6 Price equipment based on their probable production rates.
7 Obtain specialty contractors‟ bids.
8 Calculate taxes, bonds, insurance and overhead.
9 Contingency and markup. Add costs for potential unforeseen work.
10 Profit. Add costs for compensation for performing the work.
2.9. Quantity Takeoff
To prepare an estimate, the estimator reviews the plans and specifications and performs a
quantity takeoff to determine the type and amount of work required to build the project. The
quantity of material in a project can be accurately determined from the drawings. The estimator
must review each sheet of the drawings, calculate the quantity of material and record the amount
and unit of measure. The unit cost of different materials should be obtained from material
suppliers and used as the basis of estimating the costs of materials for the project. If the costs of
the materials do not include delivery, the estimator must include appropriate costs for
transporting materials to the project.
Each estimator must develop a system of quantity takeoff that ensures that a quantity is not
omitted or calculated twice. A well-organized check-list of work will help reduce the chances of
omitting an item. The estimator must, also, add an appropriate percentage for waste for those
items where waste is likely to occur during construction. The material quantity takeoff is
extremely important for cost estimating because it often establishes the quantity and unit of
measure for the costs of labor and contractor‟s equipment.
Quantity take-off: Why?
Owner perspective:
 Initial (preliminary) estimate of the project costs at the different stages of the project.
 Preparing the BOQ as a requirement of the contract documents.
 Estimating the work done for issuing the contractor payments.

Contractor perspective:
 Pricing different work items.
 Identifying the needed resources (Labor, Equipment, etc.).
 Project schedule.
 Preparing invoices for work done.
 Subcontractors‟ payments.
 Review and control of crews‟ production rates.
Quantity Development
After the scope has been analyzed and broken down into construction tasks, each task must be
quantified prior to pricing. Equal emphasis should be placed on both accurate quantity
calculation and accurate pricing. Quantities should be shown in standard units of measure and
should be consistent with design units.
Assistance for preparing “takeoffs” may be provided by others within the organization in support
of cost engineering; however, the responsibility for the accuracy of the quantities remains with
the cost engineer. Distinction should be made between “net” quantities without waste versus
quantities that include waste or loss. This is necessary to ensure duplication does not occur
within the estimate.
The detail to which the quantities are prepared for each task is dependent on the level of design
detail. Quantity calculations beyond design details are often necessary to determine a reasonable
price to complete the overall scope of work for the cost estimate. A simple example would be
fabrication waste material that is a material cost to the project. Project notes will be added at the
appropriate level in the estimate to explain the basis for the quantity calculations, to clearly show
assumed quantity allowances or quantity contingencies, and to record quantities determined by
cost engineering judgment that will be reconciled upon design refinement. Use the following
recommended guidelines in quantity development:
 Coordinate the quantity takeoff process and plan with the estimator.
 Ensure full project scope is reflected within the estimate.
 Include a list of materials in quantity takeoffs.
 Utilize a process that easily records the quantity development, i.e., document source
and date, estimator name and date, location within the project, demonstrated
calculations and additions such as waste or loss.
 Use a systematic approach similar to the construction methodology required.
 Check scales and dimensions on each drawing sheet.
 Highlight or mark drawing areas where quantities have been determined to ensure all
scope is captured but not double counted.
 Consider items that have no material but still require cost, e.g., job office
overhead (JOOH), task setup, training and certifications, and labor preparation.

 Develop quantities within a reasonable range for the work using decimals where critical.
 Add a certain amount of waste, loss, drop off, or length related to the material purchases
for a bulk order. Ensure this addition is separate from the original quantity measured.
 Select a natural stopping point during work interruptions.
 Coordinate with designers if the design appears in error, if a better approach is
discovered, or a value engineering process is warranted.
Bill of Quantities
The Bill of Quantities (BOQ) is defined as a list of brief descriptions and estimated quantities.
The quantities are defined as estimated because they are subject to admeasurement and are not
expected to be totally accurate due to the unknown factors which occur in civil engineering
work.
The objective of preparing the Bill of Quantities is to assist estimators to produce an accurate
tender efficiently and to assist the post- contract administration to be carried out in an efficient
and cost-effective manner. It should be noted that the quality of the drawings plays a major part
in achieving theses aims by enabling the taker-off to produce an accurate bill and also by
allowing the estimator to make sound engineering judgments on methods of working.
The bill of quantities, when completed, is traditionally presented in trade format; that is, in a
given order, for example:
 Demolition and alteration
 Groundwork
 Concrete work
 Masonry
 Etc.
Also, the bill of quantities is classified into the following work groups:
 Civil works which includes: Earth works (leveling, excavation, backfilling,
transportation of excavated soil); Foundation works (plain and reinforced concrete,
piling foundations); Brick works (internal and external); Skelton reinforce concrete
(columns, beams, slabs and stairs); Water proofing; Staircases; Plastering, Flooring;
Painting; Metal works (windows, doors, accessories); etc.
 Sanitary works which includes: Water feeding systems; Internal and external plumbing
works; Finishes of plumbing works; etc.
 Electrical works which includes: Electrical cables; Wiring; Accessories; Internal
connections; etc.
 Mechanical works which includes: Air conditioning systems; Elevators; etc.

2.10 Production Rates
To determine the time required to perform a given quantity of work, it is necessary to estimate
the probable rates of production of the equipment or labor. These rates are subject considerable
variation, depending on the difficulty of the work, skill of the labor, management conditions and
the condition of the equipment.
A production rate is the number of units of work produced by a unit of equipment or a person in
a specified unit of time. The time is usually one hour or one day. The rate could be determined
during an interval when production is processing at the maximum possible speed. However,
delays or interruptions may hinder the work at any time and reduce the average production rate
to less than the ideal rates. So, the production rate is always lowered by a factor to account for
such interruptions.
For example, a backhoe with 1 m3 bucket may be capable of handling 3 bucket-loads per minute
under ideal conditions. However, on a given job, the average volume per bucket may be only 0.8
m3 and the backhoe may be actually operating only 45 min/hr. for these operating conditions, the
average output can be calculated as follows:
The ideal output: 3 m3/min x 60 min/hr = 180 m3/hr
The bucket factor = 0.8
The efficiency factor = 45/60 = 0.75
The combined operating factor = 0.8 x 0.75 = 0.6
The average output = 0.6 x 180 = 108 m3/hr
The average output should be used in computing the time required to complete a job.

Chapter Three
3. Contractor’s Cost Estimation

The cost of labor, material and equipment expended on the items that were measured in the
quantity takeoffs is usually referred to as the direct costs of the work. The general expenses of a
project comprise all of the additional, indirect costs that are also necessary to facilitate the
construction of the project. These indirect costs are sometimes titled general requirements of the
project or project overheads. This chapter is devoted for the estimating of different items
represents the overheads of a project and also discusses the pricing of the project items after
defining both the direct costs and markup values.
3.1 Estimating Work Items Cost
Estimating the cost of any work items include estimating the cost of labor, equipment and
material.
3.1.1 Material Unit Cost Estimation

Material unit cost is the total unit cost of a construction material at the project site required to
execute a specific activity in the project. In estimating the material unit cost, the contractor shall
obtain the quantity and quality of materials required to produce the specific unit of activity from
his construction method statements. Construction materials required for the execution of
construction projects are normally purchased either from the local market or international market
depending on the availability and material prices. In order to have a better material cost
estimation, contractors shall develop their own material price database and the database should
contain, but not limited to, the following information:
 Material price at place of delivery
 Supplier‟s address such as telephone, fax and mail address
 Supplier‟s contact person
 Supplier‟s email address and web site
 Supplier‟s credit facility
 Country of origin
 Material delivery time
 Place of delivery such as at the supplier‟s shop, project site, Addis Ababa airport or
Djibouti port
 Transportation charges usually per ton-km as well as transporters address such as
telephone, fax, mail and email addresses as well as web sites
Generally, whether the construction materials are purchased from the local market or the
international market, the material price shall include the supplier‟s price at place of delivery,
transportation cost to the project site and the cost of all relevant taxations.

When construction materials are purchased from the local market, the material supplier‟s price
obviously includes all relevant taxations and there is no need for the contractor to consider any
inclusion of taxes. However, the contractor shall add the following costs to the material
supplier‟s price to get the material unit cost at the project site:
 Loading expenses at the supplier‟s place of delivery
 Transportation costs to the project site
 Insurance charges during transportation to the project site
 Unloading expenses at the project site
Example 3.1: - calculate the material unit costs of concrete materials required for a residential
building to be constructed by VAT registered Building Contractor Grade 4 at CMC in Addis
Ababa. Based on the actual material price in Addis during the month of March 2006, the
concrete material unit costs are calculated at the project site as follows:
Coarse Aggregate (20mm):
A. Material source……………………………………………...Legehar
B. Material price at Legehar……………………………………140.00 Birr/m3
C. Loading cost……………………………………..…..………8.00 Birr/ m3
D. Transportation cost with dump truck………………………. 50.00 Birr/ m3
 Coarse aggregate unit cost = B + C + D
 Coarse aggregate unit cost = 140 + 8 + 50
 Coarse aggregate unit cost = 198.00 Birr/m3
Fine Aggregate (Natural sand):

A. Material source……………………………………..……..…....Legahar
B. Material price at Legahar………………………………..….… 140.00 Birr/m3
C. Loading cost………………………………..……………..……5.00 Birr/ m3
D. Transportation cost with dump truck…………………………. 50.00 Birr/ m3
 Fine aggregate unit cost = B + C + D
 Fine aggregate unit cost =140 + 5 + 50
 Fine aggregate unit cost = 195.00 Birr/m3
Cement (Portland Pozzolana Cement):
A. Material source………………………………………………….Muger Cement Factory

B. Material price at the factory without VAT…………………...……70.84 Birr/Quintal
C. Transportation cost ……………………………………………..….12.00 Birr/Quintal
D. Unloading cost at the site………………………………………..…1.00 Birr/Quintal

 Portland Pozzolana Cement unit cost = B + C + D

 Portland Pozzolana Cement unit cost = 70.84 + 12 + 1
 Portland Pozzolana Cement unit cost = 83.84 Birr/Quintal
Water:
A. Material source………………………..……Addis Ababa Water and Sewerage Authority

B. Material price…………………………………...3.75 Birr/m3
C. Environmental protection (5% of C)…..………. 0.19 Birr/m3
 Water unit cost = B + C

 Water unit cost = 3.75 + 0.19
 Water unit cost = 3.94 Birr/m3
Table 3.1: Direct material unit cost
Type of Unit Qty. Rate Cost / Unit

material (Birr) (Birr)
Cement qtl. 3.6 83.84 301.82
Sand m3 0.5 195 97.5
Gravel m3 0.75 198 148.5
Water m3 0.3 3.94 1.18
SUM 549
Loss 5% 27.45
Total 576.45 Birr/m3

3.1.2 Direct Labor Hourly Cost Estimation

The direct labor hourly cost is the total cost of labor per hour at the project site required to
execute a specific construction activity in a project, which mainly refers to the skilled and
unskilled workers. The direct labor hourly cost widely varies from company to company based
on the contractors‟ salary and other benefits scale such as food allowance, insurance, hardship
allowance, project allowance, severance pay, provident fund, annual leave, bonuses, per diem
and any other benefits specially based on collective agreements in between the contractor and the
workers.
In calculating the direct labor cost, contractors need to calculate the direct labor hourly cost
which is the total hourly cost of labor crew required to execute a specific activity in the project.
In estimating the direct labor hourly cost, the contractor shall obtain the following inputs:
 Number of labor;
 Skill and labor utilization factor (UF);
 Labor basic salary; and
 Labor index from his previous records and the labor market.
Labor Index: is a multiplying factor of the basic salary which represents the additional benefits
whereby a worker gets from the contractor such as:
 Severance pay;  Benefits resulting from collective
 Annual leave; agreements
 Overtime pay;  Occupational accident expenses;
 Occupational safety, health and  Occupational disease expenses;
working environment; and
Example 3.2: let‟s see how to estimate the direct labor hourly cost for a carpenter, mason, bar
bender and unskilled labor working at a high rise building project located in Addis Ababa based
on the following assumptions:
 Project location……………………………..Addis Ababa
 Project working hours………………………10hrs per day
 Rest days…………………………………….Every Sunday
 Employment………………………………….On daily basis
 Bonuses………………………………………One month salary per year
 Medical insurance……………………………1.5% of annual salary
 Annual leave…………………………………..14 working days for the first year
 Moreover, as construction workers are highly mobile for different reasons mainly of
other better job opportunities, assume a worker will work on average for one year
on the project.
Let‟s demonstrate the carpenter hourly cost calculation and with similar manner the hourly cost
for mason, bar bender and unskilled labor are also calculated and summarized under Table 3.2.

Basic salary:
A. Basic daily salary……………….30.00 Birr/day (Market labor price)
B. Working hours per day…………8 hours
 Basic hourly salary = A/B

 Basic hourly salary = 30/8
 Basic hourly salary = 3.75 Birr
Overtime pay:
A. Normal overtime hours per day……………….2 hours
B. Working hours per day…………………………8 hours
C. Working days per month……………………….26 days (30 – 4 Sundays)
In this case, the additional cost to be considered is the difference between the ordinary pay and
overtime pay for the overtime work performed. As a result, the additional multiplying factor is
0.25 for normal overtime working hours.
 Overtime hourly pay = A*(0.25*3.75)/B
 Overtime hourly pay = 2*(0.25*3.75)/8
 Overtime hourly pay = 0.23 Birr
Bonus:
A. Annual bonus……………………..…...one month salary per year
B. Working days per year……………….313 days (365 – 52 Sundays)
C. Amount of bonus per year……….…..780.00 Birr (26 days * 30 Birr/day)
 Hourly bonus = C/(B*8)

 Hourly bonus = 780/(313*8)
 Hourly bonus = 0.31 Birr
Medical insurance:
A. Medical insurance……………………....1.5% of annual salary
B. Annual salary…..……………………….10,950 Birr (30 Birr/day*365days)

 Hourly medical insurance = 0.015*B/(313*8)

 Hourly medical insurance = 0.015*10950/(313*8)
 Hourly medical insurance = 0.07 Birr
Severance pay:
A. Severance pay…………….30 days salary for one year service
B. Amount of severance pay…………...900 Birr (30 days * 30 Birr/day))
 Hourly severance pay = B/(313*8)

 Hourly severance pay = 900/(313*8)
 Hourly severance pay = 0.36 Birr
Annual leave:
A. Annual leave…………………………....14 working days for one year service
B. Amount of annual leave pay………....420 Birr (14 days * 30 Birr/day))
 Hourly annual leave pay = B/(313*8)

 Hourly annual leave pay = 420/(313*8)
 Hourly annual leave pay = 0.17 Birr
The hourly labor cost summary for carpenter, mason, bar bender and unskilled labor are
summarized under Table 3.2, which indicates the contractor shall increase the basic salary of his
direct labor by 30% based on the given assumptions to get the total hourly direct labor cost.
Table 3.2 – Direct labor hourly cost summary
TYPE OF LABOR BY SKILL

SALARY AND
Carpenter Mason Bar Bender Unskilled
BENEFITS
Labor
1 Basic salary 3.75 3.75 3.13 1.25
2 Overtime pay 0.23 0.23 0.20 0.08
3 Bonus 0.31 0.31 0.26 0.10
4 Medical Insurance 0.07 0.07 0.05 0.02
5 Severance pay 0.36 0.36 0.30 0.12
6 Annual leave 0.17 0.17 0.14 0.06

A = BASIC SALARY 3.75 3.75 3.13 1.25
B = OTHER BENFITS 1.14 1.14 0.95 0.38
C = B/A (Other benefits/Basic 0.30 0.30 0.30 0.30

salary)
D = Labor Index 1.30 1.30 1.30 1.30
3.1.3 Direct Equipment Hourly Cost Estimation

In order to calculate the direct equipment cost, contractors need to calculate the direct
equipment hourly cost which is the total hourly cost of equipment crew required to execute a
specific activity in a project.
In estimating the direct equipment hourly cost, the contractor shall obtain:
 The number of equipment,
 Capacity and equipment utilization factor (UF), and
 The equipment hourly cost.
A contractor must develop the hourly equipment costs for each of his own equipment based on
the associated costs during the economic life of the equipment. These associated equipment costs
are mainly classified into three categories as follows:
 Equipment owning costs
 Equipment operating costs
 Operator‟s salary and benefits
Equipment Owning Costs
Equipment owning costs are all these costs in which the owner of the equipment expends
throughout the economic life of the equipment whether the equipment is working or not. These
costs include mainly the depreciation cost of the equipment with the consideration of its
salvage value, Erection and installation costs, major repairs and overhauling costs, property
taxes and insurance charges.
Depreciation cost: Costs of goods/equipment/ or plant distributed for the whole useful life to
compensate its deterioration to the work. Although a nonlinear relationship exists, a linear or a
straight-line method is often preferred.

Example 3.3: Assume a contractor has purchased a new Caterpillar 950G Wheel loader with a
delivered duty paid price of birr 1,785,478.26 without VAT at his premises. Moreover, the price
of tires is birr 14,115.22 per tire without VAT, which is birr 56,460.88 for 4 tires. Calculate the
hourly owning cost of the specified wheel loader.
Depreciation cost:
A. Delivered price …………………………..…..…. Birr 1,785,478.26
B. Cost of tires………………………….……...…….Birr 56,460.88
C. Delivered price less cost of tires (P)……………Birr 1,729,017.38

D. Assume the Wheel loader will be engaged mostly in continuous loading from
stock pile
Estimated economic life = Assume 8 Years
E. Estimated annual utilization……….. 1250 Hrs
F. Estimated salvage value.………….(S = 10% delivered price)

S = 0.1 * 1,785,478.26 = Birr 178,547.83
G. Estimated cost of capital…………………………… (I = 7.5%)
H. Equivalent annual equipment cost of delivered price less cost of tires
A1 = P * [ I (1+I)n] / [(1+I)n – 1]
A1 = 1,729,017.38 * [0.075(1+0.075)8] / [(1+0.075) 8 – 1]
A1 = 295,189.99 Birr/Year
I. Equivalent annual salvage value
A2 = S * I / [(1+I)n – 1]
A2 = 178,547.83 * 0.075 / [(1+0.075) 8 – 1]
A2 = 17,091.85 Birr/Year
J. Loader Depreciation Cost per hour (LDC)

LDC = (A1 – A2)/E
LDC = (295,189.99 – 17,091.85)/1250
LDC = 222.48 Birr/Hr

Insurance charge
A. Delivered price……..………………………….Birr 1,785,478.26
B.Annual insurance charges……………..………1% of delivered price
C.Estimated annual utilization……………..…….1250 Hrs
D.Loader Insurance Cost per hour (LIC) = B/C
LIC = 0.01*1,785,478.26/1250
LIC = 14.28 Birr/Hrs
Property Tax:
A. Registration fee per two years.…………………….……….Birr 1,700.00

B. Estimated annual utilization……………..…………………1250 Hrs
C. Loader Property Tax per hour (LPT) = A/(2*B)
LPT = 1700/(2*1250)
LPT = 0.68 Birr/Hr
Erection and Installation costs:
Loader Erection and Installation Costs per hour (LEIC)…………...0.00 Birr/Hr
Major repairs and Overhauls:
As the equipment is new, Loader Major Repair and Overhaul Costs per hour
(LMROC)….....0.00 Birr/Hr
Summary:
Hourly owning costs ………….. LDC + LIC + LPT + LEIC + LMROC
Hourly owning costs = 222.48 + 14.28 + 0.68 + 0.00 + 0.00
Hourly owning costs = 237.44 Birr/Hr
Equipment Operating Costs

Equipment operating costs are costs in which the owner of the equipment expends throughout the
economic life of the equipment when it is working. These costs include mainly the costs of fuel,
lube oils, filters, grease, normal repairs, tires, undercarriage and special high wear items.
Based on the estimated data provided by, the operating cost of the equipment in Example 3.3 is
computed as follows:
Fuel cost: (WHEEL LOADER 950G)
A. Assumed Load factor ………………….Medium
B. Estimated fuel consumption…………...19 Ltr/Hr
C. Fuel cost …………………………………4.31 Birr/Ltr
D. Loader Fuel Cost per hour (LFC) = B * C… LFC = 81.89 Birr/Hr

Cost of lube oils:
A. Estimated consumption of Engine oil……………….…..…..0.120 Ltr/Hr

B. Price of Engine oil……………………………………… ….13.50 Birr/Ltr
C. Estimated consumption of Transmission oil………….… ..0.034 Ltr/Hr
D. Price of Transmission oil…………………………...…. …...16.54 Birr/Ltr
E. Estimated consumption of Final drives oil…………..… ...0.036 Ltr/Hr
F. Price of Final drives oil….………………………………….14.81 Birr/Ltr
G. Estimated consumption of Hydraulic oil……………… ….0.076 Ltr/Hr
H. Price of Hydraulic oil……………………………...………...12.34 Birr/Ltr
I. Loader Lube Oils Cost per hour (LLOC) = A*B + C*D + E*F + G*H
LLOC = 3.65 Birr/Hr

Cost of filters:
A. Scheduled Engine oil filter changes ………………………....every 250 Hrs

B. Price of Engine oil filter…………………………………………149.01 Birr/Pc
C. Scheduled Transmission oil filter changes ………………….every 500 Hrs
D. Price of Transmission oil filter…………………………………449.92 Birr/Pc
E. Scheduled Hydraulic oil filter changes ……………………….every 500 Hrs
F. Price of Hydraulic oil filter………………………………………1,260.65 Birr/Pc
G. Scheduled Primary fuel filter change …………………………every 2000 Hrs
H. Price of Primary fuel filter………………………………………208.13 Birr/Pc
I. Scheduled Final fuel filter change …………………………….every 500 Hrs
J. Price of Final fuel filter………………………………………….165.25 Birr/Pc
K. Scheduled Primary air filter change ……………………….…every 2000 Hrs
L. Price of Primary air filter…………………………………….….809.54 Birr/Pc
M. Scheduled Secondary air filter change …………………….…every 1000 Hrs
N. Price of Secondary air filter……………………………………..658.32 Birr/Pc
O. Loader Cost of Filter per hour (LCF) = B/A + D/C + F/E + H/G + J/I + L/K + N/M
LCF = 5.51 Birr/Hr
Cost of grease:
A. Estimated grease consumption……………………………..……….0.004 Kg/Hr
B. Price of grease………………………………………………………..21.83 Birr/Kg
C. Loader Grease Cost per hour (LGC) = A*B
LGC = 0.09 Birr/Hr

Cost of tires:
A. Cost of tire ……………………………………….14,115.22 Birr/Pc
B. Number of tires required for one set…………..4
C. Estimated economic life………………………..2,200 Hrs
D. Loader Tire Cost per hour (LTC) = (A*B)/C
LTC = 25.66 Birr/Hr

Cost of undercarriage:
Undercarriage maintenance cost is one of the major operating costs for crawler mounted
equipment. The undercarriage can be employed in an extremely abrasive and high-wear
environment while the basic equipment may be in an easy application and vice versa.
Due to this reason it is recommended to calculate the cost of undercarriage maintenance
separately from the normal equipment repair costs.
(LOADER 950G)
A. Loader Undercarriage Cost per hour (LUC) ………Zero (wheel mounted)
LUC = 0.00 Birr/Hr
Cost of normal repairs:
A. Work application……..………………………Zone B (Average)

B. Basic repair factor…………………………….4.5 USD/Hr
C. Estimated economic life………………………10,000 Hrs
D. Extended life multiplier…………………………1.0
E. Hourly normal repair cost of parts = 0.6*B*D
F. Hourly normal repair cost of labor = 0.25*0.4*B*D
G. Loader Normal Repair Cost per hour (LNRC) = E + F
LNRC = 3.15 USD/Hr
LNRC = 27.88 Birr/Hr
Cost of high wear items:

High wear items are these items having very short economic life as compared to the basic
equipment. These items are usually called ground engaging tools which are different in size and
economic life depending on the type of equipment and work application. Some of these items
include cutting edges, ripper tips, bucket teeth, body liners, cables, router bits and so on.

Loader High Wear Items Cost per hour (DHWIC) = 0.60 USD/Hr
LHWIC = 0.60*8.8506
LHWIC = 5.31 Birr/Hr
Summary:
Hourly operating costs = LFC + LLOC + LCF + LGC + LTC + LUC + LNRC + LHWIC
Hourly operating costs = 81.89 + 3.65 + 5.51 + 0.09 + 25.66 + 0.00 + 27.88 + 5.31
Hourly operating costs = 149.99 Birr/Hr
OPERATOR’S SALARY AND BENEFITS
In determining the annual operator‟s salary and benefits, the following costs, but not limited to,
shall be assessed properly.
Basic salary Hardship allowance
Project allowance Food allowance
Overtime pay Insurance
Bonus Provident fund
Severance pay Annual leave pay
Collective agreements
As an example, let‟s see how to estimate the hourly cost o f loader operators based on
the following assumptions as summarized under Table 3.3.
Project location…………………………….…..Humera
Project type………………………………….….Road
Project duration…………………………………2 years
Project daily working hours………………......10hr per day
Working days in a year………………………..313 days
Rest days…………………………………….…Sundays
Loader operator‟s basic salary……………….1500 Birr/month
Project allowance………………………………40% of monthly salary
Hardship allowance……………………………30% of monthly salary
Food allowance…………………………………120 Birr/month
Bonuses………………………………………...Two month salary per year
Provident fund………………………………….10% monthly salary
Medical insurance…………………………..…1.5% of annual salary
Annual leave…………………………………...20 working days for the first year

Table 3.3 – Operator’s annual salary and benefits cost breakdown
Amount
SALARY AND BENEFITS CLARIFICATIONS AND
(Birr)
REMARKS
A Basic salary 18,000.00 12 x Monthly basic salary
B Overtime pay 5,625.00 313 x 2 = 626 hours/year
C Project allowance 7,200.00 40% (A)
D Hardship allowance 5,400.00 30% (A)
E Food allowance 1,440.00 120 x Twelve months
F Medical insurance 270.00 1.5% (A)
G Bonus 3,000.00 2 x Monthly basic salary
H Provident fund 1,800.00 10% (A)
I Annual leave 2,357.83 20 + 21 = 41 working days
J Severance pay 2,000.00 (1 + 1/3) months
Total annual salary and benefits 47,092.83 A+B+C+D+E+F+G+H+I+J

A. Total annual cost of operator‟s wage and benefits…………. 47,092.83 Birr

B. Annual equipment utilization……………………………………1,250 Hrs
C. Hourly operator‟s costs = A/B
Hourly operator’s costs = 37.67 Birr/Hr
The equipment hourly cost for owned equipment‟s is then the sum of the equipment owning
costs, equipment operating costs and the operator‟s salary and benefits.
A. Hourly owning costs…………………….………. 237.44 Birr

B. Hourly operating costs……………………………149.99 Birr
C. Hourly operator‟s cost…………………………….37.67 Birr
D. Hourly Loader cost = A + B + C= 425.10 Birr
Overhead Costs
In addition to the Equipment owning and operating costs as well as cost of operators, the
equipment owner‟s overhead costs shall be included in determining the overall
equipment hourly costs. Let‟s assume the equipment owner has an overhead cost amounting 15%
of the sum of Equipment owning costs, operating costs and operator‟s costs.
A. Hourly owning costs = 237.44 Birr
B. Hourly operating costs = 149.99 Birr
C. Hourly operator‟s cost = 37.67 Birr
D. Hourly overhead costs = 0.15*(A+B+C)
Hourly overhead costs = 63.77 Birr
Equipment Breakeven Cost

Equipment breakeven cost is the sum of equipment owning costs, operating costs, operator‟s
costs and overhead costs.
B. Hourly operating costs = 149.99 Birr
C. Hourly operator‟s cost = 37.67 Birr
D. Hourly overhead costs = 63.77 Birr
E. Hourly breakeven costs = A + B + C + D
Hourly breakeven costs = 488.87 Birr

Income Tax
Obviously equipment owners are investing their capital to get maximum possible profit from the
contracts to be performed. The profit margin depends entirely on the market competitiveness and
company strategies. Moreover, any equipment leasing company operating a profitable business
in Ethiopia shall pay 30% of its gross profit as income tax as per the Income tax proclamation.
Assume the net profit margin to be 10% of the equipment breakeven cost:
Let C be the equipment breakeven cost

Gross Profit = X% * C
Net Profit = 10% * C
Income tax = 0.3 * Gross profit
Gross Profit = Net Profit + Income tax
X% * C = 10% * C + 0.3 * X% * C
X% = 10% + 0.3 * X%
X% = 14.29%
A. Hourly breakeven costs = 488.87 Birr

B. Hourly gross profit = 0.1429*A
Hourly gross profit = 69.86 Birr
Equipment Rental Rates
Loader Idle Rental Rate per hour

B. Hourly operator‟s costs = 37.67 Birr
C. Hourly overhead costs = 63.77 Birr
Hourly idle loader rental rate = 338.88 Birr
Loader Running Rental Rate per hour
A. Hourly breakeven costs = 488.87 Birr

B. Hourly gross profit = 69.86 Birr
Hourly running loader rental rate = 558.73 Birr

3.2 Estimating Indirect Cost

The indirect costs comprises both site and head office (general) overheads.
3.2.1 Site overheads

To accommodate various site situations, it is a good idea for a construction company to develop
comprehensive checklists for general jobsite requirements regarding its specialized line of
business. Such a list would aid the estimator, ensuring that no important cost items are forgotten
under the time pressure of finalizing the bid. Visits to the jobsite by an experienced estimator
and a principal of the firm are a must after a preliminary review of drawings and
specifications. A site investigation report can be used to collect needed information useful for
organizing the future jobsite and, above all, to determine prior bidding costs. Certainly not all
items are relevant for each report. If the project is in a remote area or in a harsh environment,
more items will be checked and questions answered during the site visit. Later, they will be
converted to line items with an estimated cost toward job site overhead. Any missing items will
reduce overall profit. A prudent contractor and subcontractor will not be satisfied applying a fee
to the direct estimated costs, a fee that is supposed to cover jobsite overhead and markup. The
estimated total jobsite overhead costs will become the baseline budget for jobsite overhead
expenditure control. These items might include:
 Jobsite personnel wages and fringe benefits;
 Jobsite personnel project-related travel expenses;
 Outside contracted engineering support (surveying, materials testing, etc.);
 General use equipment for the benefit of the general contractors and subcontractors
(cranes, hoists);
 Field buildings;
 Site utilities for the job duration;
 Horizontal structures (roads, parking, fences, and gates);
 Temporary environmental controls requirements;
 Winter and summer protection of completed works or works in progress;
 Related camp facilities for remote jobs;
 Jobsite production facilities (concrete batching plants, quarry, various shops);
 Protective aids for workers (gloves, hard hats, etc.) during construction and final cleanup
of the project; and - Bonds, insurance, permits, and taxes required in the contract general
conditions;
 Utilities needed for material storage;
 Cost of temporary site utilities.
Example 3.4: Let‟s assume the following site overhead cost components and establish the site
overhead costs of a specific project for a local contractor.

INDIRECT SITE COST
SUPERVISOR STAFF
MONTHLY COMPLETIO TOTAL COST
MONTHLY MONTHL
NO POSITION Number UF INDEXED N TIME IN IN PROJECT
SALARY Y COST
SALARY MONTHS COST
1 Project Engineer 1.00 1.00 3,000.00 1.42 4,260.00 12.00 51,120.00
2 Office Engineer 1.00 1.00 2,500.00 1.42 3,550.00 12.00 42,600.00
3 General Forman 1.00 1.00 1,500.00 1.42 2,130.00 12.00 25,560.00
4 Surveyor 1.00 0.20 1,000.00 1.42 284.00 12.00 3,408.00
Chain and Road

5 men 3.00 0.20 360.00 1.42 306.72 12.00 3,680.64
Total 126,368.64
ADMINISTRATION
TOTAL
MONTHLY COMPLETIO
Num MONTHLY MONTHL COST IN
NO POSITION UF INDEXED N TIME IN
ber SALARY Y COST PROJECT
SALARY MONTHS
COST
1 Personnel 1.00 1.00 3,000.00 1.42 4,260.00 12.00 51,120.00
2 Account Clerk 1.00 1.00 2,500.00 1.42 3,550.00 12.00 42,600.00
3 Casher 1.00 1.00 1,500.00 1.42 2,130.00 12.00 25,560.00

4 Store keeper 1.00 1.00 1,000.00 1.42 1,420.00 12.00 17,040.00
5 Time keeper 3.00 1.00 360.00 1.42 1,533.60 12.00 18,403.20
6 Light Vickie driver 1.00 1.00 600.00 1.42 852.00 12.00 10,224.00
7 Cleaner 1.00 1.00 210.00 1.42 298.20 12.00 3,578.40
8 Guard 4.00 1.00 300.00 1.42 1,704.00 12.00 20,448.00
Total 188,973.60
COMMONLY USED PLANT AND TOOLS
Nu Completion
TYPE OF Rent per MONTHLY Total cost in project
NO mbe UF time in
EQUIPMENT month COST cost
r months
1 Light Vickie 1.00 0.50 4,500.00 2,250.00 12.00 27,000.00
2 Pick up 1.00 0.75 8,500.00 6,375.00 12.00 76,500.00
3 Welding Machine 1.00 0.25 950.00 237.50 12.00 2,850.00
4 Water pump 1.00 0.25 800.00 200.00 12.00 2,400.00
Surveying
5 instrument 3.00 0.25 1,200.00 900.00 12.00 10,800.00
6 Water tank 1.00 1.00 600.00 600.00 12.00 7,200.00
7 Plastic hose (200m) 1.00 1.00 60.00 60.00 12.00 720.00

Total 127,470.00

OFFICE FURNITURE, EQUIPMENT AND MATERIAL
Cost Completion
Total cost in
No Description No per time in
project cost
month months
Computer with
1 printer 1.00 300.00 12.00 3,600.00
2 Table 5.00 10.00 12.00 600.00
3 Chair 10.00 5.00 12.00 600.00
4 Shelf 4.00 10.00 12.00 480.00
6 Safe box 1.00 10.00 12.00 120.00
Adding
7 machine 3.00 2.00 12.00 72.00
8 Filing cabinet 2.00 5.00 12.00 120.00
9 Stationery Ls 250.00 12.00 3,000.00
10 Utilities Ls 400.00 12.00 4,800.00
11 Medicine Ls 200.00 12.00 2,400.00

Total 15,792.00
Where: Ls = Lump Sum

PROVISIONAL FACILITIES
Salvage Net total
No Description Unit Qty. Unit cost Total cost
value (30%) cost
1 Office m2 40.00 500.00 20,000.00 6,000.00 14,000.00
2 Store m2 75.00 200.00 15,000.00 4,500.00 10,500.00
Rebar cutting
3 shade m2 75.00 150.00 11,250.00 3,375.00 7,875.00
H.C.B.
4 production shed m2 75.00 150.00 11,250.00 3,375.00 7,875.00
5 Guard house m2 4.00 300.00 1,200.00 360.00 840.00
6 Pit latrin m2 4.00 400.00 1,600.00 480.00 1,120.00
7 Staff toilet m2 4.00 400.00 1,600.00 480.00 1,120.00
8 Tea room m2 9.00 300.00 2,700.00 810.00 1,890.00
9 Fence Ml 200.00 10.00 2,000.00 600.00 1,400.00
Distribution
10 pipe Ml 50.00 50.00 2,500.00 750.00 1,750.00
11 Electrical wires Ml 200.00 10.00 2,000.00 600.00 1,400.00
12 Scaffolding Pcs 1,200.0 12.00 14,400.00 4,320.00 10,080.00
Total 59,850.00

MOVE IN MOVE OUT COST

Cost
No. of
No Description per Total cost
Trips
trip
1 Truck 12.00 300.00 3,600.00
2 Pick up 4.00 150.00 600.00
Total 4,200.00
FINANCIAL COSTS
No Description Amount
1.00 Performance bond = (1.4% of 15% project cost) = .014 x 0.15 x
8000000
16,800.00
2.00 Interest on Retention amount =3% of 5%) = 0.03 x 0.05 x
8,000,000
12,000.00
3.00 Interest on unpaid sum = (for average delay of certificate= 15days)
= 0.03 x 8000000 x 1/ 24
10,000.00
4.00 Guarantee for mobilization advance x 2.4% of mobilization
advance 38,400.00
5.00 Bid bond guarantee 1,120.00
78,320.00
Project cost= 8,000,000.00

SUMMARY OF INDIRECT
SITE COST
No Description Amount
1.00 Supervision 126,368.64
2.00 Administration 188,973.60
3.00 Plant and tools 127,470.00
Office furniture,
Equipment and
4.00 materials 15,792.00
5.00 Provision facilities 59,850.00
6.00 Move in Move out 4,200.00
7.00 Financial 78,320.00
Total indirect site

cost 600,974.24
3.2.2 General overheads

The company home office expenses cannot be chargeable most of the time to a single project.
General overhead represents contractor fixed expenses. A general contractor‟s or subcontractor‟s
main office expense consists of many items.
A summary of the major categories is presented below:
 Non reimbursable salaries  Total office non reimbursable

 President salaries
 Vice president  Benefits
 Estimating group  Office/shops rent
 Human resource personnel  Depreciation of capital
 Secretaries expenditures
 Payroll clerk  Office utilities and communication
 Accounts payable clerks  Office supplies

 Office equipment (rented, if owned  Company sponsored training

depreciated) programs
 Office maintenance  Accounting services
 Advertising/jobs  Legal services
procurement/public relations  Estimating and project
 Associations and clubs dues management (not salaries)
 Licenses and fees  Consulting fees (legal, etc.)
 Donations/sponsored research  Home office vehicles, depreciation,
 Trade journals subscriptions and operation expenses
books  Insurance expenses
 Travel  Total anticipated home office
 Entertainment expense
The expense list presented above is not appropriate for all contractors. For smaller contractors
who operate from a truck, the list would contain considerably fewer items and for a large
contractor, the list could fill pages, but the concept is the same. The expenses should be
estimated, and all efforts must be made to stay in the budget and to generate the planned business
volume. In general, main office expense ranges from 2.5 to 10% of annual construction billings.
Example 3.5: Let‟s assume the following general overhead cost components and establish the
general overhead costs of a specific project for a local contractor.

HEAD OFFICE CONTRIBUTION
MANAGING STAFF
MONTHL TOTAL
MONTH MONTH COMPLETI
Y COST IN
NO POSITION Number UF LY LY ON TIME IN
INDEXED PROJECT
SALARY COST MONTHS
SALARY COST
1 General Manager 1.00 0.33 6,000.00 1.42 2,811.60 12.00 33,739.20
2 Technical Head 1.00 0.33 5,000.00 1.42 2,343.00 12.00 28,116.00
Admin. and
3 finance Head 1.00 0.33 3,500.00 1.42 1,640.10 12.00 19,681.20
Executive
4 Secretary 1.00 0.33 1,500.00 1.42 702.90 12.00 8,434.80
5 Secretaries 3.00 0.33 1,000.00 1.42 1,405.80 12.00 16,869.60
6 Office Engineer 1.00 0.33 4,000.00 1.42 1,874.40 12.00 22,492.80
Quantity
7 Surveyor 1.00 0.33 2,500.00 1.42 1,171.50 12.00 14,058.00
8 Accountant 2.00 0.33 1,500.00 1.42 1,405.80 12.00 16,869.60
9 Casher 1.00 0.33 1,000.00 1.42 468.60 12.00 5,623.20
10 Auditor 1.00 0.33 1,500.00 1.42 702.90 12.00 8,434.80
11 Purchaser 2.00 0.33 1,200.00 1.42 1,124.64 12.00 13,495.68

12 Store Clerk 2.00 0.33 800.00 1.42 749.76 12.00 8,997.12
13 Guards 6.00 0.33 350.00 1.42 984.06 12.00 11,808.72
14 Office 1.00 0.33 10,000.00 1.00 3,300.00 12.00 39,600.00
15 Store 1.00 0.33 3,000.00 1.00 990.00 12.00 11,880.00
Total 260,100.72
TRANSPORT FACILITIES (HEAD OFFICE)
TYPE OF Rent per MONTHLY Completion Total cost in

NO Number UF
EQUIPMENT month COST time in months project cost
1 Light Vehicle 4.00 0.33 4,500.00 5,940.00 12.00 71,280.00
2 Pick up 2.00 0.33 8,500.00 5,610.00 12.00 67,320.00
Total 138,600.00

OFFICE FURNITURE, EQUIPMENT AND MATERIAL (HEAD OFFICE)
Cost per Completion Total cost in

No Description No UF
month time in months project cost
1 Computer with printer 5.00 0.33 300.00 12.00 5,940.00
2 Table 17.00 0.33 10.00 12.00 673.20
3 Chair 10.00 0.33 5.00 12.00 198.00
4 Shelf 17.00 0.33 10.00 12.00 673.20
6 Safe box 1.00 0.33 10.00 12.00 39.60
7 Adding machine 17.00 0.33 2.00 12.00 134.64
8 Filing cabinet 10.00 0.33 5.00 12.00 198.00
9 Stationery Ls 0.33 1,500.00 12.00 5,940.00
10 Utilities Ls 0.33 5,000.00 12.00 19,800.00
11 Medicine Ls 0.33 1,500.00 12.00 5,940.00
16 Insurance Ls 0.33 2,000.00 12.00 7,920.00
17 Purchase of bid documents

and bid security expense 10.00 0.33 200.00 12.00 7,920.00
Total 55,376.64

SUMMARY OF HEAD OFFICE CONTRIBUTION
No Project expense for Amount
1 Managing Staff 260,100.72
2 Transport Facilities 138,600.00
Office, Furniture and

3 Others 55,376.64
Total O. H. Contribution 454,077.36
Project cost 8,000,000.00
No Activities Percentage
1 Indirect site cost 7.51
2 Head office contribution 5.68
3 Risk Margin 7.00
4 Profit 8.00
Total over head & profit

cost 28.19
3.2.3 Construction contingencies

Contingency is that amount of money added to an estimate to cover the unforeseen needs of the
project, construction difficulties, or estimating accuracy. Many chief estimators or contractor
executives add a contingency to the estimate to cover one or possibly more of the following:
 Unpredictable price escalation for materials, labor, and installed equipment for projects
with an estimated duration greater than 12 months;
 Project complexity;
 Incomplete working drawings at the time detail estimate are performed;
 Incomplete design in the fast-track or design-build contracting approach;
 Soft spots in the detail estimate due to possible estimating errors, to balance an estimate
that is biased low;

 Abnormal construction methods and startup requirements;

 Estimator personal concerns regarding project, unusual construction risk, and difficulties
to build;
 Unforeseen safety and environmental requirements;
 To provide a form of insurance that the contractor will stay within bid price Estimator
personal concerns regarding project, unusual construction risk, and difficulties to
build;
 Unforeseen safety and environmental requirements;
 To provide a form of insurance that the contractor will stay within bid price
Most often, if for any reason an accurate estimate is not made (95 to 100% accuracy), an
estimator never knows how much money to allow for these “forgotten” items. Many times
added contingencies are an excuse for using poor estimating practices such as not enough time,
subcontractors not reporting, no time to visit the job site, and so on. Contingency for these
reasons is difficult to sell to management and can hurt the credibility of the estimating team. On
the other hand compounding building projects‟ bidding complexity justifies the need to add
contingency as part of the markup. This construction risk compensation is added to the final direct
and jobsite overhead cost. The magnitude depends on the type of contract agreement, type of
construction, and certainly project location.
Contingency is not potential profit. It includes risk and uncertainty but explicitly excludes
changes in the project scope (change orders). The contingency should absolutely not be treated as
an allowance. Allowances are costs that are foreseen to be spent, and need to be included in the
detail estimate in the proper construction category of work and not as a total for the project. There
are many factors that affect the amount of contingency to be included in the estimate. In general,
contingency reflects the contracting organization‟s judgment decision to avoid bid cost overrun.
On the other hand, too much contingency will create a “fat” estimate if management is not
willing to accept some construction risks.
To management, contingency is money it hopes will not be expended, but instead returned
as profit at project completion. If the amount of contingency added to the bid is too large the
contractor risks not getting the project and recording an additional expense for doing the estimate
and bidding.

3.2.4 Contractor Profit
The last item to be included in the bid and representing contractor‟s return on investment is the
profit. The magnitude of desired profit must be decided by the owner for each individual
bid, depending on local market conditions, competition, and the contractors‟ need for new work.
In the construction industry, markup is defined as “the amount added to the estimated direct cost
and estimated job into site overhead cost” to recover the firm‟s main office allocated overhead
(general overhead) and desired profit. The less profit added to a bid, the greater the chance is of
being the successful bidder. Bidding a job with a high profit added does not mean the contactor
will get the job. Bidding a job below cost with no planned profit or a minimum profit only to get
the work is also no guarantee of being a successful contractor. A contractor can go broke by not
obtaining enough profitable work.
To be competitive, a construction company‟s general overhead and profit should be close to

industry norms. The concept of percentage of return on indirect cost investment must also be
considered. The return on indirect cost is calculated by dividing the corporation‟s annual net
profit before taxes by the general overhead cost. General overhead and profit recovery factors are
developed from the annual general overhead budget. After bid opening, contractors occasionally
ask close competitors what percent they added for profit. Surprisingly, competitors are
refreshingly candid in revealing the amount added for profit. This natural curiosity is related to
the many kinds of profit. Contractors are intuitively trying to ascertain why competitor A, who
lost the job, marked up 2%, and competitor B, who marked up 4%, was awarded the bid.
Different kinds of profits are related to several considerations, including the following:
- The firm must recoup sufficient profit for return on equity.

- The profit must be commensurate with industry averages.
- The profit must consider competitive bidding strategies.
- The profit must be as high as possible or what the competitive market will bear, while
commensurate with the contractor‟s risk.

3.3 Determining Mark-Up Cost

It is the sum added to an estimate in respect of the general overhead costs including profit and
risk.
In a construction firm the financial turnover will be mainly derived from carrying out individual
construction projects in competition with other contractors. It is necessary, therefore, that a policy
be established in tendering so that each project contributes to the firm. This will entail the setting
up of a mark-up target, over the production costs, for all contracts to be undertaken. To determine
firm‟s mark-up, it is required establish:
i) Return on Capital Employed (ROCE), which is made to account the following costs:
 The average weighted cost of capital ( Interest of capital employed)

 Profit margin (dividends, capital reserves...)
 Corporate obligations such as taxations and deprecation costs.
 Contingencies to cover uncertainties ( Risks)
ii) Annual Turnover on contracts. This can be obtained from the firm‟s short term plan
committed or planned for execution in the current year.
iii) General overhead costs (off-site administration): can be identified within a company‟s
accounts by items such as rent, telephone charges, electric bills, office equipment hire
charges, payment to staff directors etc. Often it is established in relation with the total
turnover planned in the trading year.
Example 3.6: determination of firm‟s mark-up based on the given assumption:
Assumptions
Capital Employed: Birr 2,000,000
Turnover on contracts for year: Birr 4,000,000
General overheads: Birr 160,000
Return on Capital Employed 17%
Target: Contracts must contribute (Head office Mark-up)
General overheads Birr 160,000
Return (ROCE) 17% (2,000,000) Birr 340,000
Head office Mark-up = Birr 500,000

Production Costs = 4,000,000 – 500,000 = Birr 3,500,000
Mark-up on contracts = (500,000 / 3,500,000) x 100 = 14.3%
3.4 Finalizing a Tender Price
The total price of a tender comprises the cost and the markup. The cost includes direct and
indirect (site overhead) costs. The markup, on the other hand, includes general overhead costs,
profit margin, financial charges (cost of borrowing), and a risk allowance margin.
3.5 Price Adjustments
The need of contract price adjustment is to provide protection against increase in the market
prices of labor and materials.
To determine the adjustment on each item any such price variation shall be calculated in
accordance with the following formula by applying the combination of above said criteria:

PA   NV  A
MLI  BLI   B MMI  BMI   C MEI  BEI   D MFI  BFI BC Q
 BLI BMI BEI BFI 
Where:
 PA = The amount of the Price adjustment to be paid to, or recovered from, the Contractor,
in currency specified in SCC;
 NV= The fraction which represents Non Variable element of the Contract Price that is
free of contract price adjustment, as specified in the Contractor's Bid;
 A = The fraction of the Contract Price subject to adjustment in accordance with
movements of the selected Average Labor Category Earnings Index;
 MLI = The most recently available selected Average Labor Category Earnings Index on
the date on which the Public Body received notification of the proposed increased price
from the Contractor;
 BLI = Benchmark Average Labor Category Earnings Index applicable to the Works
either:
(a) at the bid closing date, or
(b) if the Contract Price has been adjusted previously, the date on which the
Public Body received notification from the Contractor in respect of the last
adjustment to effect the current Contract Price;

 B = The fraction of the Contract Price subject to adjustment in accordance with

movements of the selected Material Price Index
 MMI = The most recently available selected Material Price Index on the date on which
the Public Body received notification of the proposed increased price from the Contractor;
 BMI = Benchmark selected Material Price Index applicable to the Works either:
(c) at the bid closing date, or
(d) if the Contract Price has been adjusted previously, the date on which the
 C = The fraction of the Contract Price subject to adjustment in accordance with
movements of the selected Equipment Price Index
 MEI = The most recently available selected Equipment Price Index on the date on which
the Public Body received notification of the proposed increased price from the Contractor;
 BEI = Benchmark selected Equipment Price Index applicable to the Works either:
(b) if the Contract Price has been adjusted previously, the date on which the
 D = The fraction of the Contract Price subject to adjustment in accordance with movements
of the Average Fuel Price Index
 MFI = The most recently available Average Fuel Price Index on the date on which the
Public Body received notification of the proposed increased price from the Contractor;
 BFI = Benchmark Average Fuel Price Index applicable to the Works either:
(b) if the Contract Price has been adjusted previously, the date on which the Public
Body received notification from the Contractor in respect of the last adjustment
to effect the current Contract Price;
 BC = Current Contract Price applicable to the Works
 Q = Quantity;
And where:
(a) NV+A+B+C+D are equal to 1.00

Example 3.7:
PA = 0.5244 + 14.8*(Cn/Co)/100 + 1.3*(Sn/So)/100 + 1.4*(STn/STo)/100 + 1.6*(EGA

400n/EGA 400o)/100 + 0.3*(GMSn/GMSo)/100 + 3.5*(SSn/SSo)/100 + 0.1*(BIn/BIo)/100 +
0.3*(BIRn/BIRo)/100 + 1.5*(LTZn/LTZo)/100 + 0.9*(CWTn/CWTo)/100 +
0.6*(CWCn/CWCo)/100 + 0.2*(CG 4n/CG 4o)/100 + 0.7*(PPn/PPo)/100 + 0.2*(CPn/CPo)/100
+ 1.2*(SPn/SPo)/100 + 1.0*(W 2.5n/W 2.5o)/100 + 0.01*(W 4n/W4o)/100 + 0.03*(PC 56n/PC
56o)/100 + 0.01*(PC 510n/PC 510o)/100 + 0.09*(GS 15n/GS 15o)/100 + 0.08*(GS 20n/GS
20o)/100 + 0.06*(GS 25n/GS 25o)/100 + 0.04*(GS 32n/GS 32o)/100 + 0.04*(GS
50n/GS50o)/100 + 10.08*(Dn/Do)/100 + 0.24*(Rn/Ro)/100 + 1.3*(CAn/CAo)/100 +
1.3*(Mn/Mo)/100 + 4.6*(DLn/DLo)/100
Where:
n = New C = Cement CA = Carpenter ST = Stone
O = Old S = Sand M = Mason R = Regular
EGA 400 = EGA 400, 0.4 mm Thick Roof Cover GMS = G-28 Galvanized Metal Sheet
SS = Steel Structures D = Diesel
B.I.= Black Iron Sheet B.I.R= Black Iron Ribbed Sheet
LTZ= 38MM LTZ 1.5mm Thick
CWT = Ceramic Wall Tiles PP = Plastic Paint
CWC = Chip Wood Ceiling CP = Ceiling Paint
CG 4 = 4mm Clear Glass SP = Synthetic Paint

2 2
W 2.5 = 1 x 2.5mm Electric Wire W 4 = 1 x 4mm Electric Wire
PC 56 = 5x6 Power Cable PC 510 = 5x10 Power Cable
GS 15 = Diam. 15 mm Galvanized Steel Pipe GS 20 = Diam. 20 mm Galvanized Steel Pipe
GS 25 = Diam. 25 mm Galvanized Steel Pipe
GS 32= Diam. 32 mm Galvanized Steel Pipe

DL = Daily Labor
GS 50 = Diam. 50 mm Galvanized Steel Pipe

3.6 Determining Optimum Bid Price

If the contractor were able to identify the competition, an optimum bid could be ascertained by
combining the probability curves (the Z-distribution) and developing a bidding curve using a
linear regression line for this situation. The following steps shall be followed by a competing firm
to assume a bidding strategy.
i. Preparation of a database of price quotations offered by competing bidders. One has to
collect and record the tender sum of each competitor from the tender opening sessions. At
least the winning price and the tender sum of the contractor under consideration have to be
recorded and put in a database file for further undertakings.
Example 3.8:
Contract No. Contractor‟s Quotation Least Bidder‟s Quotation
(Birr) (Birr)
1 500,000 450,000
2 750,000 750,000
3 1,000,000 800,000
4 625,000 600,000
5 850,000 800,000
6 250,000 250,000
7 400,000 350,000
8 1,200,000 1,000,000
9 900,000 875,000
10 1,100,000 950,000

ii. After having sufficient records of the respective bid prices, one could plot the information
on a scattered diagram.
X-axis: Contractor‟s own tender prices
Y-axis: The least bidder and most responsive bidder‟s price
For the example, the scattered diagram looks the following:
1,200,000
1,000,000
800,000
600,000 Series1
Scattered Diagram
Winner‟ Price
400,000
200,000
0
0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000
Contractor‟s Own Price

iii. Draw the most likely curve referred as a regression line. The simplest to draw is a linear
regression line that can be represented by:
Y = mX + b
Where: Y: refers to the most likely winning price,
X: refers to contractor‟s tender prices
m & b are coefficients of the regression line.
m: The slope of the line
b: The intercept of the line.
n : number of samples.
m
n xy    x  y 
b
 y  x    x  xy 
2
  
n  x 2   x 
2
n x    x 
2 2
Furthermore, one has to determine the standard deviations, to define the probable region
of winning a tender.
n 1 2
VARIANCE 
n2

s y  m2 sx2 
Alternatively, Using the Microsoft Excel:
m= INDEX (LINEST(Y values, X values), 1)

b= INDEX (LINEST(Y values, X values), 2)
Sy = STDEVA (Y values)
Sx = STDEVA (X values)
For the example in (i),
m= 0.813, b= 66476.91, Standard deviation = 55509.2

iv) The final step is to decide the probability of winning a tender using the normal distribution.
The chance of winning the tender by offering the most likely price is 50%. A contractor can
increase or decrease the probability of winning the tender using the Z-normal distribution theory
of statistics.
For the example, suppose the contractor‟s tender sum amounts to 675,000 Birr. Determine the
rebate to be improvised with 95 % probability of winning the tender.
The most likely winning price, Y = 0.813(675,000) + 66476.91 = Birr 615,251.91:- taken as the
mean value (µ) with a winning chance of 50%.
The Z-values of 95% probability, from the table = 1.645. The relation between Z, and probability
in this case is inverse. Higher probability is achieved by reducing the bid price and hence we need
to use the negative value of what we read from the table.
Yi  
Z

Z= -1.645, µ = 615,251.91 and δ = 55509.2,
Yi = Birr 523,939.28
Rebate (R) = 100% -- (523,939.28/675,000) x100%
= 22.38 % (95% probability of wining)
= 8.9% (50% probability of winning)

Chapter Four
4. Project Cost Management
4.1 Definitions and Details
Work Breakdown Structure (WBS); It identifies the project elements that will need resources
and thus is the primary input of Resource Planning. Any relevant outputs from other planning
processes should be provided through the WBS to ensure proper control.
Historical information; It is basically inquiring the type and amount of resource that was
required for a previous project or work of similar magnitude. Information on the cost of
many categories of resources is often available from one or more of the following source:
 Project files
 Commercial cost estimating database
 Project team knowledge
Activity Duration Estimates; Amount of time each item on the WBS is going to take to
plan for resources like labor and equipment should be known. Activity duration estimates will
affect cost estimates on any project where the project budget includes an allowance for the
cost of finance.
Expert judgment; It will often be required to assess the input to this process. Such
expertise may be provided by any group or individual with specialized knowledge or
training and is available from many sources including:
 Other units within the performing organization.
 Consultants.
 Professional and technical association
Alternatives identification; in trying to match up resources with tasks and keep costs in line, the
planners will have to look at alternatives in timing and choosing resources.
Resource requirements; It is a description of what types of resources are required and in what
quantities for each element of the WBS. These resources will be obtained either through staff
acquisition or procurement.
Resource rates; The individual or group preparing the estimates must know the unit rates
for all resources in order to calculate project costs. If actual rates are not known, the rates
themselves may have to be estimated.

Chart of accounts; A chart of accounts describing the coding structure used by the
performing organization to report financial information in its general ledger. Project cost
estimates must be assigned to the correct accounting category.
Risks; The amount of tolerable risk will be used as an input.
Organizational policies; Policies of the performing organization regarding staffing and
rental or purchase of supplies and equipment must be considered.
Scope statement; The scope statement contains the project justification and the project
objective, both of which should be explicitly defined during resource planning.
Resource pool description; It means to know what types of potential resources are
available, in relation to what is required by the project.
Project schedule; the project schedule includes planned start and expected finish dates for
the project elements that costs will be allocated to. This information is needed in order to assign
costs to the time period when the cost will be incurred.
Additional planning; Few projects run exactly according to plan. Prospective changes may
require new or revised cost estimates or analysis.
Bottom-Up Estimating; Bottom up estimating consists of examining each individual work
package or activity and estimating its costs for labor, material, facilities, equipment, etc.
this method usually results in accurate estimates if well prepared and detailed input
documents are used.
Cost estimates; cost estimates are quantitative assessments of the likely cost of the
resources required to complete project activities. They may be presented in summary or in detail.
Analogous Estimating; Analogous estimating, also known as top-down estimating. Uses
historical cost data form similar projects or activities to estimate the overall project cost. It is
often used where information about the project is limited, especially in the early phases of
the project. Analogous estimating is less costly than other methods but it requires expert
judgment and true similarity between the current and previous projects to obtain acceptable
accuracy.
Parametric Estimating; Parametric estimating uses mathematical models. Rules of thumb, or
cost estimating relationships (CERs) to estimate project element costs. CERs are relationships
between cost and measurements of work, such as the cost per line of code. Parametric estimating
is usually faster and easier to perform than bottom-up method but it is only accurate if the correct
model or CER is used in the appropriate manner.

Design-to Cost estimating; Design-to-Cost estimating method is based on cost unit goals as
input to the estimating process. Tradeoffs are made in performance and other system design
parameters to achieve lower overall system costs. A variation of this method considers cost as the
independent variable. Where the estimators start with a fixed system-level budget and work
backwards, prioritizing and selecting requirements to bring the project scope within budget
constraint.
Resource available; knowing what types of potential resources are available, in relation to what
is required by the project.
Funding profile; being able to understand the following questions. How much funding will be
provided? At what intervals? How sure is the funding?
Cost baseline; Cost baseline is a time-phased budget that will be used to measure and
monitor cost performance on the project. It is developed by summing the estimated costs by
period and usually displayed in the form of an S- curve.
Performance report; it provides information on cost performance such as which budgets have
been met and which have not. Performance reports may also alert the project team to issues which
may cause problems in the future.
Change requests; Change request may occur in many forms; oral or written, direct or
indirect…etc. Changes may require increasing or may allow the decreasing of the budget.
Cost management plan; It describes how cost variances will be managed by different
responses. A cost management plan maybe formal or informal and/or highly detailed or
broadly based. It is a subsidiary element of the overall project plan.
Cost change control system; A cost change control system defines the procedures by
which the cost baseline may be changed.
Performance measurement; It helps to assess the magnitude of any variations which do occur
like Earned Value Management.
Computer tools and Project management software; Computer tools are used extensively
to assist in cost estimation. These range from spreadsheets and project management
software to specialized simulation and estimating tools. Computer tools reduce the
incidence of calculation errors, speed up the estimation process, and allow consideration of
multiple costing alternatives. Different software like: primavera and MS project should be used
to accurately calculate all resource needs and to track the planned cost vs. actual cost, and forecast
the effects of change.

4.2 Introduction
Cost management is the process of planning, estimating, budgeting, and controlling costs so that
the project can be completed within or under the approved budget. In order to achieve this goal,
effective and efficient cost management with cutting-edge innovations and design
improvements is a critical success factor for any construction company that has undertaken a
project.
Construction Cost management is the process which ensures that the projects stay within
the approved budget to ensure the company‟s profitability. Cost is one of the three factors
controlling the success or failure of a project, the other two being scheduling and quality.
Projects that go significantly “over budget” are often prolonged or terminated and don‟t
achieve their goal because stake holders just simply run out of money or perceive additional
expenditure as “throwing good money after a bad project”. It is said that “A project manager who
can control cost while achieving performance and schedule goals should be viewed as a Hero”.
This is because cost, performance and schedule are all very much related.
The project cost management can be taken up in four broad steps.
Resource
Cost Estimating Budgeting Cost Control
Planning
Inputs
Tools Products
Historical Information
Expert Judgement Resource
WBS
Alternative identification Requirement
Project scope statement
Project management
Resource pool description softwares
Activity duration
Figure 4.1 Resource Planning process

Inputs
Tools Products
Resource Requirement
Bottom-up Estimating Cost estimate
WBS
Analogues Estimating Supporting detail
Resource rating
Parametric Estimating Cost
Funding profile
management
Activity duration estimate Design to cost plan
Historical information Estimating
Chart of account Estimating Computer tools
publications
Figure 4.2 Cost estimating process
Tools Products
Inputs
Bottom-up Estimating Cost Baseline
Cost estimate
Cost management plan Analogues Estimating
WBS Parametric Estimating
Design to cost
Project Schedule Estimating
Resource Available Computer tools
Figure 4.3 Budgeting process
Inputs Tools Products

Cost baseline Cost change Revised Cost estimates
control system
Performance reports Budget updates
Performance
Change requests measurements Corrective action
Cost management Earned value Project closeout
plan management Estimate at completion
Computer tools Lesson learned
Figure 4.4 Cost control process

The above processes are all interdependent with each other and other fields. Each process
occurs in each phase of the project (In the project's Concept Phase, in the project's
Development or Definition Phase, Construction phase). While the first three processes are static
with the exception of updates, cost control is dynamic and ongoing throughout the remainder of
the project.

4.3 Resource Planning

Cost management is initiated by planning the resources that are needed to execute the project (i.e.
people, equipment and material). All the tasks needed to achieve the project goals are identified
by analyzing the deliverables described in the work breakdown structure (WBS). The planners
use this along with historical information from previous similar projects. It is important to
get experienced people involved with this activity because it can require deep background
knowledge of local building codes.
4.3.1 Preparing Work Breakdown Structure

Planning begins from preparing works breakdown structure (WBS) of the project. The main
purpose is to know the types and details of the works through identifying the activities and
operations required to be executed. The breakdown can be structured into appropriate hierarchical
divisions and subdivisions down to the desired smallest reasonable levels are reached at. The
bases of the division may be project size, location or proximity of work and/or resource spots;
complexity or contractual say if partial delivery is required. The resulting divisions may include
sub project, activity or operations.
4.3.2 Determine Method of Work and Durations of Activities

Time is one of the constraining parameters of project objective. It dictates a contractor‟s project
execution plan which in turn influences method of work to be used. To meet a given deadline of a
project the methods of executions of the activities or operations of the works must first be worked
out by trying various combinations of resources (human and equipment) with their corresponding
estimated outputs (productivities) per unit of time or work. These combinations may be
individuals or standard crews that made to comprise individuals having the required skill grades
rated using the equipment and tools planned to be used for the options. This is because
productivity is affected both by individual skill and attitude; and equipment or tool type and
condition to be used, provided, of course, other factors remain same.
The alternative proposals of crew combinations with their corresponding productivities are made
based upon the experiences of the planning team, available company past performance records or
industry norms. The other available option is to conduct work study (method and time study) for
selected operations. It is a process of observing and recording of output versus time taken for an
operation whose performance is desired to be benchmarked. However, since it may not be
convenient to carry out before project execution begins the optimum of the first three, i.e.
experiences of estimator(s) and company; as well as industry norms can be taken for start-up. In
principle the method of work to be adapted should be the one that optimizes time and cost.
Nevertheless since project duration or total time is already fixed by the owner with respect to total
time a contractor may not have much option than first satisfy this time and find alternatives based
on it. Mathematically, this is to mean that time is the fixed term while resources is the variable.

While determining method work in a time fixed-resource variable approach there is still that
optimizes cost and time while meeting product quality requirement is to be decided based on team
experience. In doing so it is much preferable to decide by considering standard crew sizes and
their corresponding productivities instead of focusing only on individual person and equipment.
This is because usually individual output in a crew is affected by the contributions of other
members of a crew as well. To hit the nail on the head what dictates method of work and hence,
the type and quantity of resources to be required are basically type and quantity of work; and
productivities of the basic inputs, namely human, equipment and materials.
Quantities of Works: in an activity schedule contract detailed working out of corresponding
quantities is required than in a BoQ contract which already states. However in this too it is useful
to check the quantities of major works since there may be errors.
4.3.3 Production Rates or Productivities

Since utilization of manpower commonly referred as labor, equipment and material depends up
on the type of work item and method of work to be followed in executing a given construction
operation it needs to establish or agree on the performance rate of each per type of work. As
mentioned before in most cases the decision regarding the productivities of different resources
comes from records of prior experiences and/or from performance manuals and factored or
optimized to fit to the work and situation under consideration. This is because productivities in
general and particularly that of human and equipment are affected by various human and non-
human factors other than the work itself.
The output of resource planning is resource requirements;
Resource requirements; is description of what types of resources are required and in what
quantities for each element of the WBS. These resources will be obtained either through staff
acquisition or procurement.
In trying to match up resources with tasks and keep costs in line, the planners will have to look at
alternatives in timing and choosing resources. They will need to refer back to the project scope
and organizational policies to ensure plans meet with these guidelines. The output of this
process is a description of the resource needed, when they are needed, and for how long.
This will include all types of resources, people, facilities, equipment, and materials. Once there is
a resource plan the process of estimating begins.
N.B: Except for very small projects, trying to plan without good project management software is
tedious and subject to errors.

4.4 Cost Planning

Since cost is one of the three objectives of project managing it needs to make appropriate
assessment of the inputs themselves to arrive at realistic estimates. It involves two important
parameters: productivity and unit rate/price/ of the item for which the estimation is being done.
The estimates need to be done to activities having significant value contribution to the total
project cost.
Importance of Early Estimates
For engineering and construction projects, accurate early cost estimates are extremely
important to the sponsoring organization and the engineering team. For the sponsoring
organization, early cost estimates are often a basis for business unit decisions, including asset
development strategies, screening of potential projects, and committing resources for further
project development. Inaccurate early estimates can lead to lost opportunities, wasted
development effort, and lower than expected returns.
An early estimate is also important to the project team because it becomes one of the key project
parameters. It helps formulate execution strategies and provides a basis to plan engineering and
construction. The early estimate often serves as a baseline for identifying changes as the project
progresses from design to construction. In addition, the performance of the project team and
overall project success is often measured by how well the final cost compares to the early cost
estimate.
Estimating Work Process
Estimating is a process, just like any endeavor that requires an end product. Information must be
assembled, evaluated, documented, and managed in an organized manner. For a process to work
effectively key information must be defined and accumulated at critical times. The primary
factors in preparing estimates are shown in Table 4-1.
Table 4.1: Primary factors in preparing estimates
1. Standardization of cost estimation process
2. Alignment of objectives between the customer and team
3. Selection of estimate methodology commensurate with the desired level of accuracy
4. Collection of project data and confirmation of historical cost information
5. Organizing the estimate into the desired format
6. Review and checking of estimate
7. Documentation and Communication of estimate basis, accuracy, etc.
8. Feed-back from project implementation

Prior to starting the estimate, a work plan for preparing the estimate should be developed. The
work plan can be developed after alignment and scope definition. The estimate work plan
identifies the work that is needed to prepare the estimate including who is going to do, when it is
to be done, and the budget for preparing the estimate. The plan also includes the tools and
techniques that are appropriate for the level of scope definition and the expected accuracy of the
estimate. The leader of the estimating team is responsible for developing the estimate work plan.
While preparing an estimate, there must be two-way communications between the estimating
team and the party that requested the estimate. The estimating team must keep the requesting
party informed of the work being performed, and the requesting party must respond to questions
that may arise from the estimating team. The estimating process can assist the requesting party in
identifying areas of uncertainty and additional information that may be needed or assumptions
that must be made in lieu of definitive information about the project.
After the estimate is completed, a document should be prepared that defines the basis of the
estimate. Estimate documentation is essential for presentation, review, and future use of the
estimate. The documentation for an estimate improves communications among project
participants, establishes a mechanism for estimate reviews, and forms a basis for early project
cost control. The estimating team should develop a standard cost estimate presentation format that
is easily understood by internal business and engineering management.
Contingency is the amount of money that must be added to the base estimate to account for risk
and uncertainty. Contingency is a real and necessary component of an estimate. Assessing risk
and assigning contingency to the base estimate is one of the most important tasks in preparing
early estimates. Typically, risk analysis is a prerequisite to assigning contingency. Based on the
acceptable risks and the expected confidence level, a contingency is established for a given
estimate. The lead estimator for a project must assess the uniqueness of each project and select the
technique of risk analysis that is deemed most appropriate.
No estimating process is complete without the continuous feed-back loops. To improve early
estimates, the estimating process must be a continuous cycle. Actual cost information from
completed projects must be captured in a feed-back system that can be integrated into the cost
database for use in preparing future estimates. Lessons learned during project execution must also
be documented and incorporated into estimating standards and procedures. The lessons learned
during construction must be communicated back to the estimating team, to enable them to
establish better standards for preparing future project estimates.
Importance of Team Alignment in Preparing Early Estimates
Early communication between the team and the customer is essential to the success of any
estimate, particularly early estimates. This early communication is necessary to ensure a clear
understanding of the customer‟s expectations and the team‟s ability to meet those expectations.

Table 4.2: Benefits of Team Alignment

1. Establishes a clear understanding between the customer and the team of the project's
parameters
2. Assists in determining the level of effort required of the estimating team to deliver the
estimate
3. Enables the estimating team to establish a work process and staffing plan to provide the
deliverables required to meet customers expectation
4. Highlights issues that might not otherwise have been considered in the development of the
estimate
5. Improves and documents the level of scope definition and the information that is known about
the project
6. Assists the customer's understanding of what is included in the estimate and what is not
included in the estimate
7. Establishes the responsibility of all project team members and the customer in the preparation
of the estimate
8. Serves to establish a cohesiveness between the project team and the customer
Table 4.3: Critical questions for preparing early estimates

1. How thorough is the scope definition of the project?
2. What level of accuracy and detail is the customer expecting?
3. What deliverables are required from this effort?
4. What decisions will be made based on this estimate?
Cost estimates must be assessed by the people involved with the objective of improving future
estimating processes. This analysis may include a reflection on the cost variance causes, for
example inadequate cost database, uncertainties, estimating mistakes…etc. At this stage the
interest is to answer the question at what cost the activities can be done to enable the contracting
company earn its profit target while meeting the specifications. By approaching the estimate
realistically first it needs to see if it is possible to make the intended profit and if not what the
amount that can be secured. Since specification is a project objective which depicts minimum
conformance requirement there is no possibility to compromise it downward. But since cost is a
performance item it is subject to reduction or excess as long as the specification related to the
item under consideration is satisfied. So, therefore, irrespective of the estimates made in the bid
proposal or contract it is necessary to fix costs of items and then the total of the project up to
completion. While doing this some items may become less while others get higher than the one in
the contract. Whichever the situation may be the project will benefit so long as it plans the costs
of the major activities well ahead of their executions since this gives it sufficient time to devise
ways of averting or mitigating corresponding loss, or maximizing gains.

Planning Manpower Costs

Planning manpower related costs requires planning the manpower need in type and number first.
This is done during planning of the works or any part of it particularly while answering the
question “how to do?” within the constraints of meeting stated quality and stipulated project time.
In the interest of the production work the project direct and indirect manpower need can be
decided on the bases of the work and organization breakdown structures of the project.
Completing the challenging task of determining the productivities of individuals and crews
corresponding to production the type and number can be decided. Once the number is know the
planned manpower cost can be obtained using the prevailing estimated daily or monthly pay. The
manpower of the support function can be decided from the organization structure and staffing
plan of the project. These structure based approaches and a detailed scrutiny into the roles and
weights of crews and individuals to the major production activities or pay items of the project
have to be used to classify the costs in to direct and indirect.
Direct Labor Cost: in construction direct labor cost comprises all wages (salaries) and other
costs and expenses incurred for the maintenance of workers including foremen and skilled and
unskilled laborers for the execution of the contract works. These costs also include:
 Basic wages/salaries
 Overtime, transportation, accommodation,
 employment expenses: recruitment, selection, induction, training
 benefits, bonus (incentive), entertainment,
 Statutory payments: insurance, social security, annual leave, medical, social leaves
(mourning and others), severance pay
Indirect Manpower Costs: these include costs incurred for manpower working for the project
from within or outside of the project site. Included in this group are the following.
 all remunerations of project supervisory staffs above foreman level: salaries,
allowances, benefits, and other payments,
 expenses made for all support staff members of the projects: Administration and
personnel, Finance and accounting, purchasing, supplies and warehouse;
Equipment Management.
 any individual or group not considered under direct are to be included here.

Planning Equipment Costs

Particularly in most road construction projects equipment is the major cost component. The type
and number of equipment required is decided while planning the works considering quality
assurance, quantity, and project duration. Once the type, number and the duration of each is
known the cost involved can be determined using the applicable rate. An organization may have
its own internal rental rate or may use depreciation for owned equipment while current market
rate is used for those to be acquired on hire/rent. Whether for own or rental there are two
approaches used in calculating the cost of a given equipment
The first which is referred as unit rate method considers an equipment to be actually operational
every working hours of a day for the whole duration that it remains on site and calculates the cost
accordingly. For instance equipment such as Dozer, grader and dump trucks assigned on
embankment construction can be considered
The second referred as operational considers an equipment as operation like in the first while
actually it can‟t be used for the whole hours of every working day for the period that it remains
under the possession of the project. The reason is that it can‟t be practical or less costly to
mobilize when needed and demobilize when not, may be in short time intervals, until the need for
is finished. As a result it needs to take its cost for the minimum working hour of every working
day for the period until the work it is required for is completed. In this equipment such as
roller/compactor, water truck and others working on embankment may not be used for full hours
that a grader may be used. They may have 2-3 idle hours but they have to be there to partake with
the work of the grader and hence charged for the standard working hours of the working days.
Using Rental (whether internal or external) method of costing saves for the trouble of calculating
all sorts of operating expenses of own equipment. Moreover, this approach enhances efficiencies
of both maintenance and construction crews. The maintenance crew will strive to minimize down
time while the construction crew (user side) tries to reduce idle times!
One other important aspect worth noting is when deciding to rent complimentary equipment from
different suppliers. The challenge in this is that if one of the dependent equipment is either down
or idle expense is to be incurred for the working one. So, whenever possible it is recommended to
rent as fleet instead of pulling from various sources.
For both in-house and external rent fuel consumption is considered separately while lubrication is
included in the rental rate.
The other cost that should be considered is the mobilization and demobilization expenses for both
transported and driven equipment.

Planning Materials Costs

First it needs to define what to include under material using the policy of the organization through
discussion with its accounting unit. This is because there may be items that the construction team
may classify as equipment while the accounting units acknowledges same as material.
Material comprises significant share (above 50%) of values of building projects while in road
equipment takes the lead. Further breakdown of the value chain of each reveals that cement and
reinforcing steel to be the highest while fuel assumes more in road (particularly gravel) projects.
Knowledge of this helps project managers (in fact head office as well) where to spend effort and
time during planning and control of material costs.
Materials costs are planned in more or less similar process followed for human and equipment.
Determining types and quantities, including allowance for wastage, of material for the major and
critical works and multiplying by the applicable purchase prices gives the cost of material to be
anticipated in total and ,of course, periodically according to their schedules. When considering
purchase it needs to classify where to get which meaning, to identify where to get each and what
the corresponding rate is. From purchase point of view materials can be grouped into local,
domestic (within the country), and foreign; and from authority aspect into centralized and
decentralized purchases.
Planning Costs of Subcontract
If due to contractual requirement or preference of the contracting company itself subcontractor(s)
is (are) to be involved for part of the project work the costs to be anticipated should be calculated
and included in the plan. This too comes from planning the execution of works
Planning Overhead Costs
Project Overhead
Any overhead expenditure not included with any of the above input resources has to be identified
valued and planned. The main ones not considered so far include site establishment and
management; health and safety; community participation, and any other project specific costs
identified.
Head Office Overhead
Depending on the number and value of projects the company has or using any other rational
estimate approach a portion of the overhead of the head office is anticipated to be loaded on to a
project or projects the company is managing at the time under consideration.

The outputs of cost estimating process are:

Cost estimates; cost estimates are quantitative assessments of the likely cost of the resources
required to complete project activities. They may be presented in summary or in detail.
Cost estimates must be done for all resources that will be charged to the project. This includes,
but is not limited to, labor, material, supplies, and special categories such as an inflation
allowance or cost reserve.
Cost estimates are generally expressed in units of currency in order to facilitate compression both
across projects and resources. Other units such as staff hours will be used unless doing so causes a
mistake by failing to differentiate among resource costs.
Supporting detail; supporting detail for the cost estimates should include:
 A description of the scope of work estimated (provided by referring to WBS)
 Documentation of any assumptions made.
 Documentation of the range of possible results.
Cost management plan; it describes how cost variances will be managed by different responses.
A cost management plan maybe formal or informal highly detailed or broadly based. It is a
subsidiary element of the overall project plan.
Cost estimating uses the resource requirements, resources cost rates, and the activity duration
estimate to calculate cost estimates for each activity. Estimating publications, historical
information, and risk information are used to help determine which strategies and methods would
yield the most accurate estimates. A chart of accounts may be needed to assign costs to different
accounting categories. A final but very important, input to the estimating process is the work
breakdown structure. Carefully comparing activity estimating to the activities listed in work
breakdown structure will serve as a reality check and discover tasks which may have been
overlooked or forgotten.
The outputs of the estimating process include the project cost estimates. Along with the details
used to derive those estimates. The details usually define the tasks by making references to the
work breakdown structure. They also include a description as to how cost was derived, any
assumptions made, and a range for estimation. The other output is the cost management plan,
which describes how cost variances will be managed, and may be formal or informal. The
following information may be considered for inclusion in the plan
Cost and cost related data; this is data that is gained from previous similar projects kept as a
historical data pool of the company‟s projects.
Frequency of data collection and analysis; this relates to the data being used being up-to-date and
current.
Sources of cost related data; if the company doesn‟t have cost information on the project that it‟s
about to undertake, it must use reliable consultants that can provide it with proper and adequate
data.

Methods of analysis; different estimators use different methods of estimating that fits their
experience and the level of data they have.
Entities involved in the process, along with their responsibilities and duties; developing the
right estimate requires the right combination of people with the right back ground and the right
experience.
Limits of acceptable variance between actual cost control process with the change process;
this is set by the contract, the company‟s policy, and the skill of the estimating team.
Procedures and responsibilities for dealing with unacceptable cost variances.
4.5 Cost Budgeting

Definition: Budget is a monetary expression of plan. So, project budget represents financial plan
of the works of a project. In another way it can be defined as the summations of the estimated
costs of individual activities or work packages to establish a cost base line.
Once costs have been estimated for the work breakdown structure (WBS) and all this has been put
together for an overall project cost, a project budget or a cost baseline is prepared. The budget is a
spending plan; detailing how and at what rate the project‟s funding will be spent. It embodies a
comprehensive plan and schedule of resources which are determined based on the plans and
schedules of the works of a project in question.
Organization wise a project budget may be set for different purposes. Accordingly, for a project
owner budget may refer to an investment/capital budget/ while for a contractor it indicates cost
plus profit. If properly done and adhered to owners can use budget to guide their timing for
settlement of contractors‟ partial payments timely which in a way enhances progress. For a
contractor preparing appropriate budget and respecting it helps him/her to supply project required
inputs timely thereby avoiding delay and motivating project workforce towards better
performance. In order to prepare a budget plan these realities must be understood.
 All project activities are not performed at once.
 Resources are finite.
 Funding will probably be spread out over time

4.5.1 Project Budgeting Process

To make budget a reality and motivating it is recommended that budgeting process to be
participatory. Because planning, if done with the active participation of the implementers
themselves will be more successful than that done alone. In fact budgeting is not a Bose‟s
allocation of money to subordinates. Rather it is part of a project‟s cost planning process which in
some way or the other should involve both project and head office functional units, particularly
materials, equipment, and finance besides of course engineering and construction. To make the
process participatory and create ownership at the implementation stage it is recommended that a
construction organization to follow the following process during budgeting.
 The project manager with his team prepares work execution plans and schedules; and
determines schedules of inputs based on the schedule of the works. Convert the inputs to
costs and show them monthly.
 Simultaneous to the expenditure plans and schedules show partial payment amounts and
schedules to indicate the values of works planned and scheduled to meet contractual
commitments. The differences of the anticipated partial payment amounts to the
expenditures may be positive or negative. From this the profit and loss can be calculated.
 The head office planning and construction functions (if organized separately) have to
agree with the project‟s plans and schedules of works and resources and may be get a first
round go-ahead from the General Manager. Since time is limited by contract, resources
requirement is what needs to be defined at this stage.
 The resources type, quantity and desired delivery schedules are given to the work units to
provide purchasing unit prices and also prepare its respective budget need for the purchase
and supply as scheduled.
 The purchasing and supplies work unit places the project‟s input need to the Finance and
Accounting functional unit showing both the cash and credit purchase possibilities.
 The finance and accounting work unit will evaluate and try to sort out with the General
Manager to decide on the cash flow sources. If the finance requirement is found
acceptable by the top management then implementation will be started by the project and
the functional support units at head office.

In summary what is basically desired to be done in this process is: set a budget that comprises
direct cost plus project overhead determined using current market input rates not the price in the
BOQ of the contract in question. The head office overhead and the profit/loss can be worked out
at head office level.
The project team comprising the planning engineer, the construction manager and the project
manager does this. Functional units particularly purchasing and supplies; Equipment
management, human resources and Finance and Accounting have to participate in this process by
preparing their respective activities and costs required for the execution of the project plan. In fact
on the budgeting part it is recommended that the Finance and Accounting unit to take the team
leadership role. This will make the unit responsible for the sourcing and controlling of financial
movement of the project. .
To track the costs of major inputs it is useful to prepare a chart of account that both the
engineering and the accounting work units agree on. For instance, if major inputs such as sub
base, base course and crushed aggregate are not given a separate account number the cost
accountant in the finance and accounting work unit may record all the three under the name
“gravel” while the planning engineer in the engineering unit or at the project site records each
separately then it will be difficult for finance and engineering to talk the same language while
working on check and balance. In fact, since this is beyond a project manager‟s authority the
mention of this here is to advise project managers to push the head office to act as suggested
above. Another key advantage of budgeting is its use as a project control tool.
4.5.2 Project Cash Flow

Cash flow is usually referred as the life blood of a business. In construction projects the normal
phenomenon is that outflow takes place almost every day while inflow happens well above a
month, mostly around 90 days! It is thus a very critical job to keep a project operating in line to
the plan and schedule prepared for its execution. As the project team being right on site facing
the everyday event it cannot afford to overlook the cash inflow and outflow role of the project.
Evidently after advance the main source of inflow is partial payment which is periodically
generated from the execution of the project activities. Hence, it is essential that the plan and
schedule of the work should be prepared by considering the cash flow aspect as well.
Nevertheless care should be taken not to plan in a way that result in starving the project at later
stage by what is usually referred as frontloading with the pretext of current constraint. The plan
should consider the reality and interest of the project not presumptive would-be desires. Realistic
can-dos not willful can-dos should be entertained.
The level of liquidity or working capital required can be measured using ratios as may be
recommended or based on the policy of the company. The common ones are current and quick
ratios which indicate current assets with current liabilities.
In the latter the relative ease of convertibility of the different assets is considered and the ones that
can be changed faster will be used for the calculation. The results each will be compared to
industry standard or similar company or with previous company practices if available.

100%
Profit
90%
80% Receipt
70%
Working capital
Partial Payments
60%
50%
40%
work completed
30%
20%
10%
0%
2 4 6 8 10 12 14 16 18 20 22
Time (months)
The output of a cost budgeting is a cost baseline.
Cost baseline; is a time-phased budget that will be used to measure and monitor cost
performance on the project. It is developed by summing the estimated costs by period and usually
displayed in the form of an S- curve.
The spending plan will form a cost base line which is the primary measure of project health and
performance and deviation from the cost base line is a major warning sign requiring management
intervention to bring project back on track.
N.B: Most of the tools for budgeting are computer software.

4.6 Cost Control

Definition: influencing the factors that cause cost variances and controlling changes to the project
budget. Cost control is the final step of cost management process but it continues through to the
end of the project. Cost control is a major element of project success, it is a process that must be
proactive instead of reactive and must be undertaken in real time. It consists of efforts to track
spending and ensure it stays within the cost baseline.
Planning is intimately linked with control. Planning sets controls in advance, using past and
present data and information; while control feeds planning back with varying or confirming inputs
to that considered during planning. Deming‟s Plan-Do-Check-Act model depicts this very well.
This means as project manager has to plan the costs of major activities, implement the plan,
check, i.e. monitor whether implementation is consistent with the plans and then Act! This means
to control the process by taking appropriate action on any deviation from the plan (standard).
Project cost plan which is divided in to direct and indirect is based on the types and quantities of
resources planned to be used for the execution of the works of the project. The expenditure made
for the acquisition and management of human, material and equipment are the bases of both types
of costs. As already discussed the method of work selected determines the type of resource to be
deployed on site while the quantity of work and performance rate determines the quantity and/or
duration of the selected resources. Consequently the number and hours of human and/or machines
and the quantities of materials are bases of the direct costs. The indirect costs are mainly related to
management responsibility centers‟ supervisory activities and site establishment and operations.
Since direct cost is a major component of a construction project cost and since it is basically
influenced by the productivities and unit prices of resources in use it is legitimate that the
monitoring and controlling activities focus on these two basic factors. In most road construction
projects equipment cost appears to take the major share of a project cost. However, since their
performances are not devoid of human role the costs are highly influenced by the level of skill
and behavior of the people who are operating them and, in fact, by those who are involved in the
management of them as well.
In order to properly follow up the prices and productivities of resources during execution it needs
to first plan the monitoring and controlling process itself. Meaning, the process requires
answering questions such as what needs to be done, how it will be done and who will be
responsible for each process have to be specified and prepared for with appropriate commitment
for implementing them. This is because the monitoring and controlling processes themselves
require committing time and resource. If they are not taken seriously and considered to be done
when convenient then there will be no proper commitment to collect and collate data; and
generate up-to-date information to compare with the ones used for planning. Using these
information the relevant responsible unit /individual can be able to make timely decisions.

An appropriate prerequisite for this is to have effective and efficient data collection and
information dissemination system to different relevant responsibility units of the project. One of
the information delivery methods is periodic say, daily, weekly and monthly reports. But it is
essential to note that unless there is timely feedback from the information receiving unit the
desired communication cannot be created and eventually the system will be neglected. Thus
periodic feedback should be included in the monitoring and control system.
Once this system is made in place depending on the specific project situation the next task is
collecting data on the productivities of the various resources, processing them to generate
information and disseminate to the concerned units and individual. Monitoring the hourly outputs
of labor and equipment and comparing them with the corresponding values anticipated at the start
of the production process enables to control direct costs or costs for which payment is going to be
received.
4.6.1 Direct Cost Method of Control
Just before the commencement of the project time and cost plans are made based on estimated
productivities of would-be deployed types and quantities of equipment, labor and materials. As
discussed before the estimates may be based on the estimator‟s personal experience, company
practice records or customary industry standards. During execution these have to be checked and
adjusted accordingly. The checking is done by recoding the individual or crew output with the
corresponding time taken. If the method of execution is different from the one considered at the
planning phase then this too should be recorded to compare with the merit or demerit of the
planned. The latter may be done as work study to make decision for large scale application.
Equipment Productivity: expressed in terms of output/hours spent
Equipment cost may be expressed in terms of rent/lease if obtained from rental source; or owning
and operating costs if owned. In our domestic practice there are companies that prefer to use their
own internally developed rental rates instead of depreciation. However, the use of internal rental
rate is only for management efficiency control purposes and not applicable for financial
accounting. So for project cost control purpose as long as the comparison is made on same basis
there is no problem whether rental or depreciation method of costing is considered. Since
comparing the actual output or productivity of equipment with the planned is one method of direct
cost control following up the factors influencing productivities is fundamental. Productivity may
be affected by the capacity of the machine itself, the skill and attitude of operator; and working
environment and other factors. Planned productivity may be affected due to work itself, say if
changed from the anticipated, availability and utilization efficiency of the machine. Availability is
compared with down time thereby helping to evaluate how much of the time the machine is
expected to be functional utilization efficiency helps to compare the operational hours of the
machine against its idle time. Both require project manager‟s effective and efficient management
of his maintenance, construction and other support units.

Following up the operational, idle and down time on one hand; and recoding the hourly/daily
performances including the working environment on the other are the necessary inputs for making
analysis and decisions on cost related matters. Changes in productivity affect planned costs
negatively or positively.
In this regard performances of excavating, hauling and placing equipment may be considered as
the common major equipment components requiring follow up for controlling costs. Quantities of
material produced, transported or spread and compacted against the time spent determine the
productivities of each work type. However since productivities can be affected by various factors
it requires to continuously work to improve the skills and attitudes of operators and the rest of the
crew; and facilitate the physical and other work environments the production, hauling and placing
operations. For instance performances of trucks can be affected by the quality and slope of service
road; maneuvering space at loading and tipping sites; and by the people involved.
Thus for direct cost control of equipment and labor it requires setting standards under the existing
work environment in terms of physical and monetary values before or at the beginning of the
production process. If there is no prior data on the equipment or labor assigned to a specific
operation a five minutes observation at the start is sufficient to establish a standard which can be
improved with subsequent records. Standard prices of labor or equipment compared with the
current may result in negative or positive outcomes. The net effect of output and price then give
labor or equipment direct cost variance.
Materials Productivity: expressed in terms of output/consumption.
The main fact that affects productivity of materials is wastage and change in rate of consumption
resulting from various factors. For instance fuel consumption of a machine may change due to
handling of fuel and changes in the condition of the machine. Since fuel is one of the main
components in the value chain of road construction project monitoring the consumption rate of
machines and the management of the supply chain (particularly the internal including the
interface with the external) may help to save substantial cost of fuel.
Fuel consumption rates of machines depend on the machine itself, type of work and working
condition and even operator‟s skill. Thus the physical situations have to be similar for comparing
outputs of the current with the one taken as standard.
Material usage = Standard rate – Actual quantity may be favorable or unfavorable.
Material base price less current price may also give positive or negative results. The net effect of
consumption rate and price gives the direct cost variance.

Negative direct cost variances may result from one or a combination of the following or others
that are not stated here.
 Changes in the prices of major inputs: materials purchase and transport prices;
equipment rental and mobilization expenses; and labor employment costs
 wrongly set standards or variance in the uses of the inputs
 mismanagement of resources: materials wastage and thefts; equipment idle
and labor idle or assignment
 substandard input and performances (quality nonconformance costs)
 unforeseen contractually non-compensable expenditures
Consistent and persistent application of direct cost control helps the project/company to prevent
all reasonably avoidable costs while on much more positive efforts reduction in cost may be
achieved through developing creative thoughts and innovative practices. Among the ways of
reducing costs some may include:
 developing options of value engineering through questioning and analyzing
previously set standards; conducting continuous work studies, on major
operations,
 through building quality management practices, i. e. no rework meaning every
bit of work done the first time complies to the specification
 assure satisfaction and enhance motivation of employees at all levels of the
whole supply chain till the end customer
 other project specific factors
4.6.2 Earned Value Method of Control

This is another commonly used method of controlling costs. While the productivity based direct
cost control is done by comparing planned or “standard” performance rates with the ones
observed during implementation the earned value compares budget which is planned with earned
value and actual costs. Unit prices of inputs against actual prices; and types and quantities of
works executed with corresponding expenditures have to be tracked. Using these as input the
actual cost can be determined and compared with the planned or the budgeted cost. The variance
in cost may be positive or negative indicating saving and overrun respectively.
The physical accomplishment of the works to that of the planned gives the degree of execution in
physical terms using the applicable units of measurements. When the budget of this same quantity
of work is compared with the actual spending it demonstrates variation in cost.

Thus earned value method helps to:

 monetarily compare cost and time overruns or under-runs to enable management take
timely appropriate actions, say adjusting cash flow, and updating financial forecasts and
project gain or loss expectations.
 to update relevant responsibility centers for them to take appropriate changes to identify
ways of minimizing losses or improving benefits.
Parameters in Earned value methods of Measuring Variances
Earned value method of variance measurement uses three budget based terms.
 The planned work expressed as budget which is expressed as: Budgeted Cost
of Works Scheduled(BCWS) or simply Planned Value (PV)
 Quantity of work executed from the planned expressed in the same unit rates
as that of the planned value: Budgeted Cost of Works Performed (BCWP) or
simply Earned Value (EV)
 The actual cost of the quantities of the works executed (ACWP) or simply
Actual Cost (AC).
The variance of each can be worked out through direct calculation or plotting each on cost versus
time graph.
Cost Variance (CV) = BCWP – ACWP, variance > 1 is what is desired; because it shows that
the work is accomplished at a lesser expenditure than anticipated.
The ration BCWP/ACWP gives the cost performance index of the reporting period showing level
of spending efficiency
Schedule Variance (SV) = BCWP– BCWS, variance > 1 is what is desired; because it shows
that the work accomplished is greater than the planned which means saving in time.
The ration (ACWP/BCWS) gives the schedule performance index of the reporting period showing
schedule efficiency.
These can be plotted on cost-time graph for the desired period to evaluate correct or incorrect
actual spending for the budgeted works performed.
The challenge (if it can be said so) in the application of earned value control system is getting
actual cost data. It requires having a structured and committed data collection and analysis system
besides appropriate standards for the budget itself. What appears to be a common practice is
manipulating the same contract price itself by deducting a portion from it for overhead and profit.

Generally, the following activities make up the cost control process.

1. Monitor project spending to ensure it stays within baseline plan for spending rate.
2. When spending varies from the plan determine the cause of variance.
3. Prevent unapproved changes to the project and cost baseline.
4. Manage the change in the baseline to allow for the new realities of the project.
5. Accurately record authorized changes in cost base line.
6. Inform stakeholders of changes.
The outputs of cost control are as follows:

A. Revised cost estimates; Revised cost estimates are modifications to
the cost information used to manage the project.
B. Budget updates; These are a special category of revised cost
estimates. Budget updates are changes to an approved cost baseline. These
numbers are generally revised only in response to scope changes.
C. Corrective action; This is done to bring expected future project
performance in line with the project plan.
D. Estimates at completion (EAC); This is a forecast of total project
cost based on project performance.
E. Lessons learned; The causes of variances, the reasoning behind the
corrective action and other types of lessons learned from cost control should
be documented as a historical data source.
The cost control process compares cost performance reports with the cost baseline to
detect variances. Guidance on what constitutes unacceptable variance and how to deal
with variance can be found in the cost management plan developed during the
estimation activities.
Cost control uses different techniques but the most powerful technique
with considerable success in projects is Earned Value Management if used
appropriately.

4.7 Cost Overrun and Measures to Control Construction Costs

The sad truth about construction cost overrun is that they have been a fact of life since Biblical
times “For which of you, intending to build a tower, sitteth not down first, and counteth the cost,
whether he have sufficient to finish it?” Luke, 14:28; quoted by L. Powers, (2006). The problem
of cost overrun, especially in the construction industry, is a worldwide phenomenon, and its
ripples are normally a source of friction among clients, consultants and contractors on the issue of
project cost variation. Project cost overruns create a significant financial risk to clients. However,
in spite of the risks involved, the history of the construction industry is full of projects that were
completed with significant cost overruns [Garry, 2005].
Definition of Cost Overrun
a) Costs overrun: An instance in which the provision of contracted goods or services are
claimed to require more financial resources than was originally agreed between a project
sponsor and a contractor [User Guide, 2005].
b) Cost overrun: The amount by which actual costs exceed the baseline or approved costs
[Wideman, 2002].
c) Cost overrun: The difference between the original cost and the actual cost when the
project is completed [Avots, 1983]. Actually, Avots, (1983) used the word cost growth
instead of cost overrun.
For the purpose of this course cost overrun is defined as the difference between the final actual
cost of a construction project at completion and the contract amount, agreed by and between the
client (the project owner) and the contractor during signing of the contract.
4.7.1 Causes of Cost Overrun

Angelo and Reina, (2002), stated that cost overrun is a major problem in both developed and
developing countries. Several studies of major projects show that cost overruns are common. The
causes of cost overrun in construction projects are varied, some are not only hard to predict but
also difficult to manage [Morris and Hough, 1991]. According to a study made in Turkey by
Arditi, et al, (1985), the important sources for cost overruns were found to be inflationary
pressures, increases in material prices and workmen's wages, difficulties in obtaining
construction materials, construction delays, deficiencies in cost estimates prepared by public
agencies and unexpected sub soil conditions were the most important sources for cost overruns.
Kaming, et al, (1997), studied the factors influencing construction time and cost overruns for
high-rise projects in Indonesia, and pointed out that the major factors influencing cost overrun
were material cost increase due to inflation, inaccurate material estimating and the degree of
project complexity. Mansfield, Ugwu, and Doran, (1994), found that cost overrun is attributed to
problems in finance and payment arrangements, poor contract management, material shortages,
changes in site conditions, design changes, mistakes and discrepancies in contract documents,
mistakes during constructions, price fluctuations, inaccurate estimating, delays, additional work,
shortening of contract periods, and fraudulent practices and kickbacks.

Stewart, (1982), attributes cost overruns to several factors that are either not controllable or that to
a varying degree are unmanageable. They include the accuracy of original cost estimate, degree of
government regulation and control, construction completion delays, number of design changes,
and labor related matters such as their availability, skills, and increases in fringe benefits.
According to Robert F. Cox, (2007), project owners identified five reasons for project cost
overruns: these reasons were, incomplete drawings, poor pre-planning process, escalating cost of
materials, lack of timely decisions and excessive change orders.
According to User‟s Guide, (2005), the following are the factors that change the cost of the
construction projects through time: poor project management, design changes, unexpected ground
conditions, inflation, shortages of materials, change in exchange rates, inappropriate
contractors, funding problems and force majeure.
In developing countries the lack of proper phasing of construction projects can contribute to the
economy to become „overheated‟. This leads to shortage of construction materials as the demand
will exceed the supply, this in turn leads to a climb in the cost of construction materials; this
inevitably gives rise to project cost overruns, with consequential effects on inflation and a decline
on efficient activity in the construction industry [Mansfield, Ugwu and Doran, 1994].
According to Jahren, et al, (1990), on their research on predictors of cost overrun rates they found
the following factors to influence the cost overrun rates; the size of the project, the difference
between lowest bid and engineer‟s cost estimate, the type of delivery method, the level of
competition, quality of contract documents, and the nature of interpersonal relations on the
project.
Studies have shown that the size of a construction project influences the rate of cost overrun.
Large projects are generally more complex, and in complex projects some items are fraught to be
missed out or may be forgotten during planning and design stages hence the complexity may
increase the rate of cost overrun. However, since the stakes are higher on larger projects, more
care may be exercised from conception of the project until completion. Review of some literatures
indicates support for both of these conflicting views. Randolph, et al, (1987), found that cost
overrun rates decreased as the contract amount increased, while Rowland, (1981), found that cost
overrun rates increased with increase in the contract amount of construction projects.
Factors that could influence construction costs are numerous. Chan and Park, (2005), stated that
the cost of a construction project is affected by a large number of factors because of the fact that
construction is a multidisciplinary industry and its work involve many parties such as the project
owner and various professionals, contractors and suppliers. Thus, a construction project cost not
only depends on a single factor but a cluster of variables that are related to the characteristics of
the project and to the construction team as well as the market conditions.

In the following sections, factors which affect the cost of a construction project will be dealt in
detail.
Poor Project Management
The role of the project manager or project management team is probably the most
important element in controlling and/or managing the costs of a construction project. It is often
true that a good project, if combined with poor project management, will usually face serious
difficulties.
According to User‟s Guide, (2005), a poor project management structure will have an impact at
all stages of the construction process leading to:
 Lack of planning and coordination;
 Poor communication between members of the project team and the project sponsor;
 Failure to identify problems and institute necessary and timely design and
programming changes;
 Lack of control over time and cost inputs;
 Lack of end user involvement
Good project management manages costs by estimating, scheduling, accumulating and analyzing
cost data, and finally implementing measures to correct problems related to cost.
Unexpected Ground Conditions
Ground conditions can be assessed by the use of trial pits and borehole sampling onsite or by
using hi-tech equipment. However, the actual site conditions for the full extent of a project are not
usually determined until excavation is completed. It is sometimes possible that those difficult
conditions are overlooked by the initial review or conditions have changed due to adverse
weather conditions or changes in sub-soil conditions. Unexpected sub surface conditions can, at
times, require fundamental redesign of projects at great expense. Changes in surface ground
conditions can lead to problems for moving machinery and supplies around the site, and in
undertaking excavations and laying foundations. This can also increase costs and add to the
construction time required.
Shortage of Construction Materials
During periods of high development where the level of construction activity is unusually high in a
particular region, there may be shortages of some construction materials. Sometimes the local
market may not be able to supply the full demand of these construction materials; hence, a need
may arise to import these construction materials from abroad. If this was not anticipated in the
original cost estimate, delays may occur and/or the prices of these elements may increase which
consequentially lead to delay and cost overrun for the project.

Change in Foreign Exchange Rates

The change in foreign exchange rate is particularly relevant if materials or other elements of the
construction project are being purchased from foreign countries. If the foreign exchange rates
change beyond the expected level; then the cost of the project may increase which automatically
leads to cost overrun.
Inappropriate/Inexperienced Contractors
Contractors are selected on the basis of price, experience in undertaking particular types of
construction project and their reputation or track record in producing high quality work within
budget and on time. In most cases there is a trade-off between price, experience and track record
but the desire to accept the lowest tender does not always lead to a project that is completed
within time and budget. According to Yates et al, (2003), in contracts where the Engineer‟s
estimate is at least 15% greater than the contractor‟s bid amount there is a strong likelihood of
cost overruns. Therefore, these projects need to be carefully tracked and documented.
There are cases where the prime contractor and sub-contractors go into bankruptcy during the
construction period. This can lead to significant delays and extra costs arising as the project
owner has to re-tender the remaining work to be undertaken by another contractor.
Force Majeure
This term covers a range of events which are also commonly referred to as “Acts of God”. They
include revolution, war, riot, earthquake, landslide, fire, political and economic instability,
projectile missile, hostilities, contamination and other such risks. Where they do occur, they will
normally lead to significant delays and cost overrun to construction projects.
Construction Cost Underestimation
A more serious situation can confront an owner when there has been deliberate underestimating
of costs in order to obtain project approval or for fraudulent practices. According to studies made
by Flyvbjerg, (2003), large projects have been intentionally underestimated in order to obtain
voter support for the financing approvals. He stated that whatever the cause, almost all large
public projects contain initial cost estimating errors that result in the need for increased funding to
complete the projects.
Construction cost increases seem to materialize after the commencement of the
construction but the problem is deep-rooted during contract cost estimation and tendering stage
[Abukar Warsame, 2006].
According to Flyvbjerg, (2003), explanations of cost underestimation come in four types:
 Technical
 Economic
 Psychological, and
 Political

 Technical Explanations
Most studies that compare actual cost at completion and estimated costs at the beginning
of bid award of construction projects explain what they call “forecasting errors” in technical
terms, such as imperfect techniques, inadequate data, honest mistakes, inherent problems in
predicting the future, lack of experience on the part of forecasters, etc. [Wachs, 1990].
 Economical Explanations
Economic explanations consider cost underestimation in terms of economic rationality. According
to Flyvbjerg, (2003), two types of economic explanations exist; the first explained in terms of
economic self-interest, the other in terms of the public interest. As regards self-interest, when a
project goes forward, it creates work for engineers and construction firms, and many stakeholders
make money. If stakeholders are involved in or indirectly influence the forecasting process, then
this may influence the outcomes.
As regards the public interest, project promoters and forecasters may deliberately underestimate
costs in order to provide public officials with an incentive to cut costs and thereby to save the
public‟s money. Empirical studies by Wachs, (1990), have identified promoters and forecasters
who say they underestimate costs in order to save public money. The argument has also been
adopted by scholars, for instance Merewitz (1973), who explicitly concludes that “keeping costs
low is more important than estimating costs correctly”.
Both types of economic explanation account well for the systematic underestimation of costs.
Both depict such underestimation as deliberate, and as economically rational.
 Psychological Explanations
Psychological explanations attempt to explain biases in forecasts by a bias in the mental makeup
of project promoters and forecasters. Politicians may want a monument complex or
museums, and transportation officials sometimes have the mentality of building roads and
bridges. The most common psychological explanation is probably “appraisal optimism.”
According to this explanation, promoters and forecasters are held to be overly optimistic about
project outcomes in the appraisal phase, when projects are planned and decided [Fouracre et al.,
1990]. An optimistic cost estimate is a low one. The existence of appraisal optimism in promoters
and forecasters would result in actual construction costs being higher than estimated costs.
 Political Explanations
Political explanations interpret cost underestimation in terms of interests and power [Flyvbjerg
1998]. A key question for political explanations is whether forecasts are intentionally biased to
serve the interests of project promoters in getting projects started. For legal, economic,
moral, and other reasons, if promoters and forecasters have intentionally fabricated a deceptive
cost estimate for a project to get it started, they are unlikely to tell researchers.
Change Orders or Variations Orders

Change orders are common in all types of construction projects [O‟Brien, 1998; Ibbs et al,2001].
Changes in construction projects can cause substantial adjustment to the contract duration and
construction cost [Ibbs et al, 1998]. Changes can be deleterious in any project and can cause cost
overrun, if not considered collectively by all project participants [Ibbs et al, 2001].
The most common effect of change orders, during the construction phase, is the increase in
project cost [Construction Industry Institute, 1990]. Change orders have been found to be a major
contributor to time and cost overruns [Jahren and Ashe, 1990].
Changes and variations are inevitable in any construction project [Ibbs et al, 2001]. In an ideal
world, changes will be confined to the planning stages. However, late changes often occur during
construction, and frequently cause serious disruption to the project. Project variations were
identified as a major source of conflicts and disputes in the construction industries of many
countries [Yates and Hardcastle, 2003]. The need to make changes in a construction project is a
matter of practical reality. Even the most thoughtfully planned project may necessitate changes
due to various factors [O‟Brien, 1998]. Needs of the owner may change in the course of design or
construction, market conditions may impose changes to the project, and technological
developments may alter the design and the choice of the engineer. Furthermore, errors, additions
and omissions during construction may force a change.
Changes can be originated from numerous factors pertinent to the construction projects.
According to O‟Brien, (1998), causes of change orders include the following:
 Additions and/or enhancement required by owners
 Accident or damage
 Force Majeure
 Unforeseen conditions
 Change in Plans and/or specifications
 Value engineering
 Acceleration
Changes in designs and contract documents usually lead to a change in contract price or contract
schedule. Typically, change orders and variations present problems to all parties involved in the
construction process. Usually, these design changes require additional time and cost inputs which
ultimately lead to time overrun and cost overrun. The impact of change orders or variations varies
from one project to another. However, it is generally accepted that change orders or variations can
affect construction projects with unpalatable consequences in time and cost [Ibbs et al, 1998; Ibbs
et al, 2001]. Change orders that are imposed when construction is underway, usually lead to
reworks, cost overrun and delays in project completion [Construction Industry Institute, 1990].
Rework and demolition are potential effects of changes in construction, depending on the timing
of the occurrence of the changes, which ultimately lead to time and cost overrun.
Researches in construction projects in some developing countries indicate that by the time a
construction project is completed change orders or variations result in an 8.3 % cost overrun [Al-
Momani, A., 1996]. According to Michel Gibeault, (2007), change orders typically average
between 2-5 % of construction costs, but can easily soar to more than 10% depending up on the
degree of changes.
Inflation
Adamson (1996) defines inflation as the rate of increase in general price level in an
economy. Generally, inflation is the term used when paper money loses value, or the buying
power of money becomes less. Inflation can act to increase the construction costs. If the rate of
inflation increases above the predicted level during the construction period, then the original cost
estimate will be exceeded. Obviously any factor that delays a construction project will expose the
project to the risk of further inflationary cost increases.
Due to the nature of the process and the rate of return for work undertaken on construction
projects, the effects of inflation can cause loss of profit to contractors and higher cost overrun to
project owners.Cost estimates for construction work are produced at a specific point in time and
the prices used therein are relevant only for that time and for short near future. This is because
prices for items supplied and work undertaken are continually subject to market forces. In a study
carried out by Pohl and Mihaljek (1992) in which they surveyed 1,015 World Bank projects, it
was found that the nominal cost overruns were primarily due to unexpected inflation.
Acceleration Costs
Acceleration occurs when a project has been delayed, yet the owner demands that the contractor
completes the contracted work before the contract completion date, or agreed- upon changed
completion date, or when the contractor wants to complete early.
When acceleration occur the contractor typically will incur additional direct and indirect costs.
While direct costs are relatively easy to quantify, indirect costs are difficult to identify and
quantify [William C. Last, 2002]. If the contractor establishes a valid acceleration claim, it
is entitled to recover the costs incurred. These costs may include increased mobilization and
demobilization costs due to the need to commit additional resources in terms of labor, equipment
and supervision at the project than originally contemplated by the original schedule; specifically,
direct labor costs include such items as increased wage costs for additional workers, overtime pay
and rental costs for additional equipment. Further, the contractor may incur additional costs for
inefficiencies in labor. These inefficiencies may include congestion or fatigue from extensive
overtime work. Labor inefficiencies are a hidden but very expensive cost of an acceleration.
Nevertheless, while labor inefficiencies are a very real part of an acceleration cost, they are
extremely difficult to quantify.
Delay on completion Time and Delay on Payments

Delays defer income, while interest and interest of interest, keep accumulating. Long delays
may result in projects ending up in the so-called „interest trap‟ [Flyvberg, et al2004], where a
combination of escalating construction costs, delays and increasing interest payments result in
cost overrun. According to Arditi et al, (1985), lengthy delays in inflationary environments
increase cost overruns tremendously. The overall lack of finance to complete a project, or delays
in the payments for services by the project owners or clients can lead to significant problems. If
the costs of a project have increased significantly beyond the original estimate, then work on the
project may have to be stopped or be delayed until additional funds can be found. Delays on
payment may sometimes provoke the contractor to claim for interest rates. If the payment by a
project owner is slow, the contractor may begin to commit fewer resources to a project, and may
even cease work if cash flow becomes a problem.
Late Site Hand Over or Change of Location of Construction site
Late hand over of construction sites, sometimes may happen and substantially increase the cost of
construction projects. In most international projects in Ethiopia late site hand over is a common
form of claim source for compensation for contractors [Girmay, 2003]. For example, the Addis
Ababa Bole International Airport Project has suffered an additional cost of about $1,000,000.00
USD due to late site hand over [Girmay, 2003]. Fortunately, domestic contractors do not ask for
compensation due to late site hand over. Sometimes the owner may decide to change the location
of the project after the award to the winning contractor. This is a rare phenomenon but it does
happen due to sudden and unavoidable circumstances. The change of location of a project might
extensively change the entire character of the work that was initially required under the (awarded)
contract or the new location of the construction site may have different sub surface condition that
may necessitate the structure to be redesigned. In such cases it is rightly alleged that the changes
do alter the “general scope of work” and therefore, the final cost of the project might exceed the
original contract amount.
There are some measures that are found from the researchers‟ study to control the construction
costs or to overcome the problems of cost overruns. The researchers have their own opinion on
how to solve the problems. The measures are as follows:
1. Proper Project Costing and Financing
The delays of schedule may occur caused by delays in payments due to complex financial
processes in client organizations. Delay in payment would cause financial difficulties to
contractors and subsequently delay the schedule to complete the activities on site. Interest could
be charged on delayed payments hence inducing cost overruns in the project. Kaliba et al. (2009)
2. Competent Personnel
Contractors, consultants, and clients should ensure that they have the right personnel with
appropriate qualifications to manage their projects efficiently. It is better if constructionmanagers
have experience and qualifications in project or construction management. Kaliba et al. (2009)
3. Appropriate Scope Definition

The only concern should be on works required to complete the project successfully. Guard against
incomplete identification of scope is important to avoid frequent changes. Out-of scope
activities should also be avoided to focus on relevant processes. Nega (2008)
4. Increase Supply of Materials
There should be adequate allowance for any emergency case in order to cover increase in material
cost due to inflation. Frimpong et al. (2003)
5. Proper Cost Control
One of the client‟s requirements in respect to construction project is assessment of its expected
cost. Proper cost control is important as it is the general trend towards greater cost- effectiveness
and ensures construction costs not solely in the context of initial costs, but in terms of life-cycle
costs or total cost appraisal. Ashworth (1994)
6. Risk Management during Project Execution
In any development project, there must be contained a certain amount of risks. Therefore, a risk
management function needs to be performed by project managers to determine and reduce the
risks of the particular project. The aim of risk management is to minimize any risk that might
result in failure to meet the project requirements. Peeters and Madauss (2008)
7. Appropriate Contractual Framework
Once the objective of cost has been estimated, it is followed by choosing an appropriate contract
model where there are techniques to make a relationship between the initial estimate and
final price. Peeters and Madauss (2008)
8. Realistic Cost Estimation
The initial cost estimates should be as accurate as possible. Accuracy of cost estimation allows
clients to check and determine that the required funds for executing the project are made available
when required (Kaliba et al., 2009)
9. Efficient Management
Efficient management is important to produce a productive and cost efficient site. Scope may
change due to inadequate planning and feasibility studies. In order to control the project
effectively, the project manager must follow up the schedule to avoid additional costs and ensure
the project can be completed on time as planned. Gould (2002)
Chapter Five
5. Value Engineering
5.1 Historical Background
During the World War II, General Electric Company (GE) faced the problem of scarcity of
critical materials to fulfill the demand of the war equipment. To overcome that problem, GE had
to use substitute materials for those in shortage. Many of the substitutes were less expensive and
better in performance. In 1947, Lawrence D. Miles, a staff engineer for GE developed a number
of ideas and techniques to select alternative materials that could be used internationally. His
main attitude was to search for value in a product and he developed a function-based
methodology that was successfully proven. The new methodology was so successful that it was
possible to produce goods at greater production and operational efficiency and at lower costs. As
a result of its success, GE formed a special group headed by Larry Miles to refine the
methodology. Due to its success, private industry in the United States used the new methodology
as well.
In 1954, the U.S Navy Bureau of Ships used the Value Analysis process to cost
improvement during design. They called it "Value Engineering". The Value Engineering was used
formally in the U.S Department of Defense in 1961. (U.S ARMY PEO STRI)
In the 1960's, Mr. Charles Bytheway developed an additional component to the basic
method. During his work for Sperry UNIVAC, he created a functional critical path analysis
procedure that highlighted the logic of the activity under value study. A diagramming
procedure called the "Functional Analysis System Technique" (FAST) was adopted as anstandard
component of the Value Method.
In 1985, the Value Engineering process had gained world-wide acceptance. It spawned an
international organization, Society of American Value Engineers International (SAVE Int.),
dedicated to its practice, and the certification of competent practitioners. Further, it had saved
billions of dollars, (SKY MARK). In 1997, SAVE approved a standard for Value Engineering
Methodology.
5.2 Definition of Value Engineering

Despite its recent evolution; Value Engineering has a lot of definitions that are very closed.
Shublaq (2003) defines the general term Value Engineering Methodology as a function oriented
systematic team approach to eliminate or prevent unnecessary costs.
He introduced the definition of the USA and Europe as follows:

1st: In USA: SAVE int. glossary of terms contained three terms:
a) Value Analysis (VA): is defined as a method for enhancing product value by
improving the relationship of work to cost through the study of function.
b) Value Engineering: the same as Value Analysis except with emphasis on application
during product development and/or design.
c) Value Management (VM): The same as Value Analysis with emphasis on application as a
management technique.
2nd: In Europe: The Institute of Value Management defines Value Management as a style of
management particularly dedicated to motivating people, developing skills and promoting
synergies and innovation, with the aim of maximizing the overall performance of an organization.
Shublaq (2003) defines Value Engineering as " A specialized cost control technique, performed
by a group of experienced professionals. The technique involves an intensive, systematic and
creative study to reduce cost while enhancing reliability and performance. The technique is used
to achieve the best functional balance between cost, quality and performance of a product, system
or facility". Shublaq presents Figure No. 5.1 to clarify that VE is a functional balance between
cost, quality and performance.
Figure 5.1: VE as a functional balance between cost, quality and performance
Al Asheesh (1997) defines it as " An analytical systematic study performed by a multi-

disciplinary team on a product, project or facility in order to identify the functions it
performs to achieve such functions in a better way or a less cost or both through setting creative
alternative without affecting the basic requirements". Dell'Isola (1982) and Zimmerman et al.
(1982) (cited by Elzarkah, Suckarieh and Dorsey, 1998) defined VE as "A creative systematized
approach whose objective is to seek out the best functional balance between the cost, reliability,
and performance of a project.
5.3 Terminologies and Definitions

The basic elements of VE are function, quality, worth and cost. They are defined as
follows:
Function
Function has various definitions by experts and foundations of VE. Following are the most
common definitions of function. Function was defined by Shublaq (2003, S-3 Page 5) as the
specific work that a design item must perform. Shublaq described types of functions as follows:
1. Basic Function: the function that is essential to the performance of a user function.It may
also be defined as the function describing the primary utilitarian characteristics
of a product or design to fulfill a user requirements (Shublaq 2003, S-3 Page 5). An
example of basic function is "process data" for a computer.
2. Required Secondary Function: Shublaq (2003) agrees with the definition of Dell'isola
(1997) that required secondary function is that must be achieved to meet codes, standards
or mandatory owner requirements. An example for required secondary function is power
to computer as computer does not work without power.
3. Secondary Function: Shublaq (2003, S-3 Page 5) defined it as that which can be removed
from the design while realizing the basic and the required secondary functions. An
example of secondary function is the color of the computer.
Al Asheesh (1997, page 112) used different classification as follows:
Basic Function: that there is no possibility to remove it. He added that sometimes basic function
may not be the most important to the user and it may not form a major part of the cost.
1. Secondary Function: he defined it as supporting function to the basic and classified it into
three types:
Required Secondary: is the function that enables the Basic Function to be achieved.
For instance power to the computer.
Secondary Desired: is the function that is preferred to be included in a project or a
product but it is not essential to the basic function to perform; like quiet to air condition.
Secondary Undesired Function: is that function that causes inconvenience; like noise
or heat.
2. Beauty Function: that adds beauty or comfort. This function is directed to sight or taste or
touch. It may be basic if it is a basic requirement to the client. In addition; it usually forms
the most important factor to the user and forms the highest share of the cost.
Lawrence D. Miles Value Foundation classified function into two types:
1. Basic function: that which is essential to the performance of a work or sell functions. It is
also defined as the function describing the primary utilitarian characteristics of a product
or service.
2. Secondary function: the manner in which the basic function implements. It is also
defined as a function indicating quality, dependability, performance, convenience,
attractiveness and general satisfaction beyond that need to satisfy the end user.
Value
Mandelbaum (2006) defines value as the relationship between the worth or utility of an item
(expressed in monetary terms) and the actual monetary cost of the item. The highest value is
represented by an item with the essential quality available at the lowest possible overall cost that
will reliably perform the required function at the desired time and place.
The Canadian Society of Value Analysis (CSVA) defined value as the personal perspective of
your willingness to pay for the performance delivered by a product, process or project. It also
stated that good value is achieved when the necessary performance can be accurately defined at
the lowest life cycle cost.
Shublaq (2003, S-1 page 10) defines value as the most cost-effective way to reliably
accomplish a function that meet the user's need, desires and expectations. He used
Dell'Isola, (1998) expression for value as follows:
Value = Function + Quality ........... (Eq. 5.1)

Cost
Where:
Function: The specific work that a design/ item must perform. Quality: The owners' / user's
need, desire and expectation. Cost: Life cycle cost (LCC).
Al Asheesh (1997, pages 28-30) defined value as the relationship between the function or the
performance with the cost. He classified value into four types:
1. Use Value: that is the benefit resulted from owing or using a thing through the capabilities
it provides or the functions it performs to the owner or the user. For example the calculator
to an accountant.
2. Cost Value: is the total amount of money paid to have a product or a service including
direct and indirect costs paid during the period of owing it.
3. Esteem Value: is the special characteristic of a thing, like scarcity or beauty that makes
others willing to have it.
4. Replacement or trade-off value: is the value resulted from containment of the
product of properties and functions that makes it benefiting others so that it can be traded-
off with another product or money.
Cost
Cost is defined by the majority of the authors as previously defined by Al Asheesh 1997. To
consolidate the definition it is the total amount of money paid to have a product or a service
including direct and indirect costs paid during the period of owing it. Even when it is not defined;
the same meaning can be implicitly understood.
Worth
Worth was defined by Lawrence D. Miles Value Foundation as the lowest cost to achieve a
function. It is determined by comparison, historical data and personal experience. Mandelbaum
(2006, page 4) defines the worth in approximately the same manner as Miles where he defines it
as the lowest cost to reliably achieve the required function. Worth is established by comparing
various alternatives to accomplish that function and selecting the lowest cost alternative. The
same definition is very closed to the two definitions above was found by other authors.
Value index
The concept of value index is defined by many authors. Kirk and Spreckelmeyer (1998)
cited on Shublaq (2003, S-3 Page 2) use the expression:
Value Index = Cost .................... (Eq. 5.2)

Worth
AL-Khuwaiter (2002) cited on Shublaq (2003, S-3 Page 2) uses the expression:
Value Index = Function Cost .................... (Eq. 5.3)

Function Worth
The best value according to the above mentioned definitions is achieved when the cost of a
building, system or component approaches the worth; i.e. the value index equals one. For value
index is greater than 1, then the function is of poor value ( Shublaq, 2003).
5.4 Objectives of Value Engineering

SAVE Int. describes the objectives of VE in construction sector in identifying cost-saving
alternatives, using resources more effectively, decreasing project operation and
maintenance costs, improving safety programs for major governmental installations. It also assists
in reducing paperwork and simplifying procedures and improving project schedule. Furthermore,
it has impact on streamlining an agencies organizational structure and cutting down on waste.
Shublaq (2003, S-1 Page 10) mentioned that VE techniques can be used to achieve saving in
money, reducing time and improving quality. In addition, it can be used to improve
maintainability and performance. Other achievements of VE are improve in human factors,
attitude, creativity and team work as well as improving decision making.
Value Management Guideline published by Department of Housing and Works-
Government of Western Australia, (pages 2-3, August 2005) defines the aims of VE as to produce
results creatively and economically by identifying unnecessary expenditure, challenging
assumptions, generating alternative ideas, promoting innovation and optimizing resources,
time, money, energy and consideration of whole of life cycle costs. VE aims also to simplify
methods and procedures, eliminating redundant features, updating standards, criteria and
objectives and improve team performance and other synergies. Other benefits that showcase the
evolving nature of Value Management as something more than a sophisticated cost reduction tool
like improving communication, teamwork and cooperation as well as increasing awareness and
ownership by stakeholders. It forms aid to the briefing and approvals process and increasing
quality. Enhancing risk management measures, improving sustainability and promoting
innovative service delivery processes are also achievements of VE.
Value Engineering Fields of Application
a. According to SAVE Int., value engineering is widely used in the following fields:
Transportation: where there is increasing demands for services and finite budgets. VE
provides innovative and cost-effective solutions for the construction, operation and
maintenance of improved transportation systems.
b. Health care: since health care spending is escalating at a rapid pace. Quality and
effectiveness of health-care services are improved by VE application.
c. Construction: VE assists in overcoming many challenges like budget constraints,

safety issues, and environmental impact.
d. Manufacturing: VE (or value methodology) is a powerful tool for solving problems and
improving value in terms of cost, quality and performance for any item or activity.
e. Environment: industrial and governmental organizations face increasing pressures due to

strict environmental laws. They must deliver safe, effective solutions that are cost-
effective as well.
f. Government: due to its potential for yielding a large return on investment, the value
methodology has rapidly spread to all levels of government in the United States. The U.S.
Federal Highway Administration, in particular, has used the value methodology to great
effect and with ongoing success.
5.6 When Value Engineering is used?

VE application is of greatest benefits early in the development of a project with
improvement in value gained. Department of Housing and Works in the Government of West
Australia Value Management Guideline 2005, presented the potential influence of Value
Management according to Figure 5.2.
Figure 5.2: Potential influence of VE during project phases
Dell'Isola (cited on Shublaq, 2003) suggests that when VE is intended to be performed, it should
be performed in the early stages of the design. When VE is applied later, the investment
required to implement VE increase and the resistance to change increases as well. Figure 5.3
presents potential saving from VE application.
Figure 5.3 : Potential saving from VE application
5.7 How to apply Value Engineering

To apply VE effectively, various institutions, authors and specialists developed VE
methodologies for application of VE.
5.7.1 SAVE Int

SAVE Int. is the most famous association involved with value engineering. It has its own standard
VE methodology that was intended to assure maximum benefits while offering greater flexibility
once it had been adhered to. SAVE Int., Value Methodology Standard was published in 1997 and
it may be summarized as follows:
A: Pre- study
1. Collect user/customer attitudes: like the prime buying influence of the product or project,
the features, perceived complains and the competition to other projects.
2. Complete data file: this comes through primary sources of information, like people and
documentation, and secondary sources, like engineering standards, regulations, test
results, failure reports or similar project quantitative data.
3. Determine evaluation factors: the VE determines the criteria for evaluation of ideas and
relative importance of each idea.
4. Scope the study: the VE team develops the scope statement of the study.
5. Build models: the team may develop models for further understanding of a project.
6. Such models include cost, time, energy and flow charts.
B: Value study
1. Information phase: in this phase, data package is completed and the scope statement is
reviewed.
2. Function analysis phase: this phase aims to identify functions, classify functions, and
develop function models, function hierarchy or FAST model, cost functions, establishment
of function worth and value index. Functions for study are selected at this phase.
3. Creative phase: in this phase, plenty of ideas by function are created.
4. Evaluation phase: alternative ideas are ranked and rated and ideas for development are
selected.
5. Development phase: this phase includes conducing benefit analysis, completing technical
data package, creating implementation plan and preparing final proposals.
6. Presentation phase: oral repot is presented as well as written report.
C: Post study
Following the study, changes are completed, implemented and monitored.
5.7.2 Australian Department of Housing and Works

The Department of Housing and Works in Western Australia developed value management
guidelines. It almost has the same steps for VE methodology as SAVE Int. methodology. The
steps of Value Management process are:
1. Information Phase: essentially preparatory work for the study, including items such as the
development of objectives, key issues and concerns, background information, key
assumptions, cost overview and study scope.
2. Analysis Phase: includes functional analysis, establishing system links, testing parameters
and rationalizing data.
3. Creative Phase: is predominantly concerned with encouraging divergent ideas,
lateral thinking and brainstorming, and generating alternatives for better value
alternatives.
4. Evaluation Phase: ideas are assessed, culled and prioritized to identify viable
alternatives.
5. Development and Reporting Phase: options and rationale are refined and
documented into action plans for recommendation to the project decision maker.
5.7.3 Acquisition Logistics Engineering

Acquisition Logistics Engineering (ALE) presented the Value Engineering six phases job plan as
The Department of Housing and Works in Western Australia did with addition of Implementation
Phase and with some differences. ALE methodology steps are:
1. Information Phase: in addition to gathering information, ALE added that VE team
establishes the areas that will allow for the most improvement and isolates the major cost
items.
2. Function Analysis Phase: sometimes it is performed within information phase. FAST
model is developed as well as cost and cost worth models. An initial assessment is done to
find mismatch between cost and value. This can be shown graphically by plotting each
item's worth versus cost percentage as shown in Figure 5.4 below where the numbers in
the circles represents the value index of functions
Figure 5.4: Worth versus Cost Graph
3. Creative Phase: in this phase, team brainstorming identifies many alternative ways of
performing the functions of the candidate items having the greatest worth/cost mismatch.
4. Evaluation Phase: a first cut through alternatives should eliminate impractical or
unfeasible alternatives. Advantages and disadvantages of each alternative in addition
to cost is concluded. If every alternative is eliminated during this phase, the team must
return to the creative phase.
5. Development Phase: the remaining alternatives are refined and developed into a value
engineering proposals including detailed description of the alternatives including benefits
in terms of cost and performance.
6. Implementation Phase: it is sometimes broken into two parts, one for presentation, and
approval and the other for formal implementation.
5.7.4 Caldwell
Caldwell (2006) methodology is composed of the following phases:
1. Information Phase: presentation is made to the VE team to explain the main
concepts of the design. This includes project objectives, design constrains,
drawings, specifications, the special conditions and the estimated cost. Caldwell prefers
that those who present the information should not be part of the VE team.
2. Function Analysis: in this phase major project components are identified as well as their
functions and estimated cost.
3. Speculation: during the speculation phase, the VE team considers each design
component and suggests alternative means of accomplishing the function of the
component. Brainstorming is the most suitable technique.
4. Alternative Comparison: this phase is done to define comparison criteria so that
alternatives can be compared. This phase is preferred to be performed using brainstorming
initially and then through a detailed definitions of each criteria. Weights of criteria
are developed by VE Team.
5. Analysis: analyzing alternatives involves comparing them to the criteria. Each team
participant numerically evaluate each alternative against a specific criterion. Scores may
vary from 1 to 5 with 1 identified as poor and 5 is very good.
6. Concept Development: during the concept development phase, the concept selected by
the VE team is organized and refined before presentation to the owner. Sketches may be
prepared or a narrative report compiled. Cost estimates may be refined.
7. Presentation and Implementation: in the presentation/implementation phase, VE
recommendations are presented to the client, owner, or project manager who is
sponsoring the project. The project manager decides whether the VE
recommendations should be incorporated into remedial action.
8. Report: depending on the budget, topic, and significance of the VE workshop, a formal
report may be prepared. Generally the most cost-effective method is to have the flipcharts
photo-reproduced, copied, collated, and distributed. This provides a full record of
deliberations, scores, recommendations, etc.
Caldwell elaborates the criteria for both the facilitator of the job plan and the participants as
follows:
a. The Facilitator- the facilitator should be chosen with care. He is not required to
have specific knowledge of the project or even of the technologies involved. His role is
simply to act as a neutral presence and to make certain that the workshop is conducted in
accordance with standard VE procedures.
b. Participants- The number of participants is between five and twelve. Never let the number
of participants rise above twelve. There should be a balance of senior and mid-level
experience. The majority should be well versed in the technology being examined.
References
A Guide to the Project Management Body of Knowledge (2004). (Soft Copy), Project
Management Institute
Dr. Emad Elbeltagi. Cost Estimating. Egypt
Fetene Nega(2008), Causes And Effects of Cost Overrun on Public Building Construction
Projects In Ethiopia, Msc Thesis, Addis Ababa University
Gemechis Tamiru& Getaneh Gezahegn(2004) . Cost Engineering Lecture Notes. Ethiopian
Institute of Architecture, Building Construction and City Development, Addis Ababa University
Kumar Neeraj JHA. Construction Project Management Theory and Practice, Delhi
Lawrence D. Miles Value Foundation(2006).
Melaku Tadesse (2013). Project Managers‟ Competency Enhancement Training. Ethiopian Road
Authority, Addis Ababa
PPA (2006). User‟s Guide for Standard Bidding Document for the procurement of works. Public
Procurement Agency, MoFED , Addis Ababa.
Ritz, George, J., & Sidney M. Levi (2013), Total Construction Project Management, McGraw-
Hill Education, NY
SAVE International Association, Value Methodology Standard, 1997,
SKY MARK, Larry Miles and Value Engineering(2006).
Shublaq, Emad,(2003), 40 hrs Approved Value Methodology Training Workshop, MOD-I,

Sydney, Australia
Taddese Yemane (2006). Construction Cost Estimation Guideline for Local Contractors In
Ethiopia. Msc Thesis, Addis Ababa University
U.S ARMY PEO STRI (2007).
Zimmerman, L. W. and Hart, G. D. (1982) Value Engineering: a Practical Approach for Owners,
Designers and Contractors. (Cited by Elzarkah Hazem, Suckarieh George and Dorsey Robert,
Teaching Value Engineering Effectively: An Interdisciplinary Approach),
Dell'isola A. J. (1982) Value Engineering in the Construction Industry. Third Edition ( Cited by
Elzarkah Hazem, Suckarieh George and Dorsey Robert, Teaching Value Engineering Effectively:
An Interdisciplinary Approach),

Cost Eng

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cost Eng

Uploaded by

Copyright:

Available Formats

HU- IoT- SoPDC, Construction Technology & Management Program: Cost Engineering handout

SCHOOL OF PLANNING, DESIGN & CONSTRUCTION

COST ENGINEERING HANDOUT

Compiled by: Ins. Tadewos A.

ACWP Actual Cost of Work Performed

ALE Acquisition Logistics Engineering

BCWP Budgeted Cost of Work Performed

BCWS Budgeted Cost of Work Scheduled

BoQ Bill of Quantity

CCTV Closed Circuit Tele-Vision

CERs Cost Engineers Relationships

CSVA Canadian Society of Value Analysis

EAC Estimate at Completion

ETB Ethiopian Birr

FAST Functional Analysis System Technique

JOOH Job Office Overhead

LCC Life Cycle Cost

ROCE Return on Capital Employed

SAVE Int. Society of American Value Engineering International

VAT Value Added Tax

WBS Work Breakdown Structure

Chapter One .................................................................................................................................... 1

2.9. Quantity Takeoff ................................................................................................................ 31

Chapter Four ................................................................................................................................. 72

4.6 Cost Control ........................................................................................................................ 90

Chapter Five ................................................................................................................................ 105

Table 1.1: Project Size………………………………………………………………………...8

Figure 1.1: Feedback loop of cost vs. performance………………………………………………4

Week Date Lecture Topic Instructor Assessment

14 May 31,2016 Submission date for the final Tadewos A.

June 6- 17, 2016 Final exam period Final Exam – 50%

Acc. Year: 2015/16 (2008 E.C) Program: Regular

Intended learning outcomes

Instructors: Tadewos A.& Demeke S. Academic year 2015/16 (Semester II)

Instructors: Tadewos A.& Demeke S. Academic year 2015/16 (Semester II)

Compiled by Ins.Tadewos Awugchew & Ins.Demeke Seferia, March 2016 Page 1

Compiled by Ins.Tadewos Awugchew & Ins.Demeke Seferia, March 2016 Page 2

Compiled by Ins.Tadewos Awugchew & Ins.Demeke Seferia, March 2016 Page 3

1.3 Cost Engineering Traits

Fig 1.1: Feedback loop of cost vs. performance& flow of information

Compiled by Ins.Tadewos Awugchew & Ins.Demeke Seferia, March 2016 Page 4

Fig 1.2: Factors that affect costing accuracy

1.4 The Function of Cost Engineering in Construction

Compiled by Ins.Tadewos Awugchew & Ins.Demeke Seferia, March 2016 Page 5

1.5 Consideration in Costing

Compiled by Ins.Tadewos Awugchew & Ins.Demeke Seferia, March 2016 Page 6

Average time required per unit

Fig 1.3: Learning curve

Cost Multiplier Curve

0.5 0.6 0.7 0.8 0.9 1.0 2.0 3.0

Fig 1.4: Area conversion scale

Compiled by Ins.Tadewos Awugchew & Ins.Demeke Seferia, March 2016 Page 7

Table 1.1: Project size

Building Type Median Cost per m2 (USD) Typical Size Gross m2

Example1.1: Determine the cost per m2 of 3780 m2 apartment building.

Compiled by Ins.Tadewos Awugchew & Ins.Demeke Seferia, March 2016 Page 8

Compiled by Ins.Tadewos Awugchew & Ins.Demeke Seferia, March 2016 Page 9

2. Pre- Tender Cost Estimation

Compiled by Ins.Tadewos Awugchew & Ins.Demeke Seferia, March 2016 Page 10

2.2 The Construction Project

A project is defined, whether it is in construction or not, by the following characteristics:

2.3 Project Life-Cycle

Compiled by Ins.Tadewos Awugchew & Ins.Demeke Seferia, March 2016 Page 11

 Hourly medical insurance = 0.015B/(3138)