Design Cost Advice, Cost

2 Planning & Cost Engineering

Evaluating Cost Estimates

Version 1.1 March 2016

AIQS Academy
Copyright and Moral Rights

Copyright
All rights are reserved. The copyright in this website and the material included in the Australian Institute of Quantity
Surveyors Academy webpages (including without limitation the text, artwork, photographs, images, audio material,
video material and audio-visual material on this website) is owned by the Australian Institute of Quantity Surveyors.
The computer code and computer application delivering the material is owned by Pointsbuild Pty Ltd.
No part of this material may be reproduced, stored in or on a retrieval system, or transmitted in any means (electronic,
mechanical, photocopying, recording or otherwise), without the prior written permission of the Australian Institute of
Quantity Surveyors.

Moral Rights
Vincent Shaw asserts their right to be identified as the author of this topic in accordance with the Copyright
Amendment (Moral Rights) Act 2000. The author also asserts their right to not have the work treated in a derogatory
manner.

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Quantity Surveying Cost Planning & Page 2
Cost Engineering
Contents

Contents ............................................................................................................................................................................3
About the author ...............................................................................................................................................................4
1.1 Introduction.............................................................................................................................................................5
1. Introduction ...................................................................................................................................................................5
1.2 Learning outcomes .................................................................................................................................................6
2. Review of completed estimate ......................................................................................................................................7
2.1 Initial check of estimate accuracy ..........................................................................................................................7
2.2 Checking for completeness ..................................................................................................................................10
2.3 Evaluation of variables which impact on reliability and accuracy ........................................................................12
2.4 Evaluations of assumptions .................................................................................................................................14
2.5 Allowances for uncertainties, contingencies, and risk ..........................................................................................15
3. Review cost components ............................................................................................................................................17
3.1 Cost components' break down .............................................................................................................................17
4. Advice on the accuracy of estimates ..........................................................................................................................20
5. Bibliography ................................................................................................................................................................24

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Quantity Surveying Cost Planning & Page 3
Cost Engineering
 About the author

Vincent Shaw RFD. FRICS. FAIQS

Vincent recently retired from practicing as a quantity surveyor after twenty-two years as Principal Quantity Surveyor,
NSW Public Works. Prior to this Vincent held a number of senior positions with large and medium sized QS
consultancies and with a major engineering consultancy. For most of his career he has been engaged in cost
planning interspersed with contract administration and BOQ production. For a number of years, he was also a part
time lecturer in construction economics at undergraduate courses for quantity surveyors, construction managers, and
architects, at the University of Technology Sydney (UTS).
Vincent is a past president of the AIQS NSW Chapter and a former National Councilor. He chaired the NSW Current
Construction Cost and Education committees and was a member of the AIQS National Education and Continuing
Professional Development committees. He was chairman of the Construction Economics Program Advisory
Committee UTS, and a member of the Faculty Advisory Committee, Faculty of Design, Architecture and Building also
at UTS. In 2000 he retired from the Army Reserve after twenty years as a field officer in the Royal Australian
Engineers.
After commencing work in the UK, firstly with a builder then with a QS practice in Manchester, Vincent came to
Australia in 1974 on a three year contract with Rider Hunt Sydney. He stayed on after the contract expired! In the
days when there were no university courses for quantity surveyors his tertiary education was at the Royal College of
Advanced Technology, Salford (now Salford University), and he graduated through the external examinations set by
the Royal Institution of Chartered Surveyors.
As Principal Quantity Surveyor with NSW Public Works Vincent managed QS Services, a part of the NSW
Government Architect's Office, and was responsible for the delivery of budgeting and cost planning services
associated with the Education Department's annual programs of capital works for schools and TAFE colleges. He
also delivered services to Health, Corrections, Attorney General, Justice and Arts portfolios. Unique projects included
benchmark budgets for the Olympic 2000 Stadium and Tennis Centre, and the installation of spires on St Mary's
Cathedral.
Whilst working in the private sector some of the more interesting projects in which Vincent was involved included the
Sydney Airport Masterplan 1990, concept estimates for the then proposed third runway and Badgerys Creek second
airport, and the compilation of a national asset register and costings for buildings, civil works, plant and equipment for
the Department of Aviation.

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Quantity Surveying Cost Planning & Page 4
Cost Engineering
 1. Introduction

1.1 Introduction

As with other topics in the AIQS Academy’s "Cost Estimating" competency, this topic deals with cost estimating from
the viewpoint of a quantity surveyor working in a professional office and advising a client. The basic principles remain
the same for those working in a contracting or development environment but business considerations and tendering
strategies will form additional components which will need to be factored into the final estimate and/or tender.
However where considered appropriate, reference will be made to contractors' estimating processes to facilitate a
more complete understanding of the topic.
The paper is based on typical building projects, but wherever appropriate reference will be made to factors impacting
on civil engineering construction. Evaluation of tenders received is not covered in this topic.
The reader is referred to the AIQS Academy topic Preparing Estimates in the series for a basic introduction to the
subject which covers the following aspects:
 Types of estimates,
 The scope of work and ancillary items which may be included in the estimate,
 Information required to prepare and present an estimate,
 The influence of the project plan and project objectives on the estimate outcome,
 The estimating techniques that may be employed at the various project development stages,
 Detailed estimate preparation,
 Estimating accuracy,
 Dealing with design and scope changes,
 Cash flow to accompany the estimate,
and also the topic Developing Cost Components which looks at the breakdown of unit rates into their respective
components, also known as analysis of prices, and includes the following:
 Information and documentation required for the estimate,
 The requirement for a mandatory site visit,
 Production of an outline construction program,
 Developing a database for each of the cost components,
 Identification of project variables,
 Issues specific to individual trades,
 The development of unit rates,
 Productivity factors for labour and plant.

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Quantity Surveying Cost Planning & Page 5
Cost Engineering
The subject matter of this topic, 'Evaluating Cost Estimates', will be considered from the aspect of an estimate
prepared by a client's quantity surveyor following completion or near completion of the tender drawings and
specification. This estimate will in fact be a Pre-Tender Estimate (PTE) and will be a tool used by the client team to
confirm the adequacy of the project budget and to evaluate any tenders subsequently received. However the review
principles discussed will apply equally to earlier stage estimates albeit in lesser detail commensurate with the
respective project stage.

1.2 Learning outcomes

At the end of this topic the learner will be able to:

 Understand the process for checking a completed estimate for accuracy by reference to previous projects and
carrying out a detailed comparison of current and historical unit rates in the database.

 Check an estimate for completeness, having identified all relevant components for review.

 Identify and understand the variables that have an impact on the reliability and accuracy of historical data.

 Review assumptions made during estimate preparation and clarify the actions required for resolution thereof.

 Advise a client on contingency allowances and formulate a plan for dealing with risks and uncertainties.

 Understand the cost components within unit price rates for work items and how accuracy may be improved.

 Examine the indirect cost components of an estimate and understand how these are costed.

 Identify issues that may impact on the accuracy of an estimate and provide advice to a client on ways to
mitigate their effect.

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Quantity Surveying Cost Planning & Page 6
Cost Engineering
 2. Review of completed estimate

2.1 Initial check of estimate accuracy

A construction cost estimate is a forecast of the price a client/building owner will be required to pay for a specific
project, but it is not an exact science. In preparing such an estimate the estimator is making a prediction on a future
event with all the uncertainties that this entails The aim of the estimate is " to provide the most realistic prediction
possible of time and cost at any given stage in a project." (Project Cost Estimating, Nigel J Smith). From the initial
Global or Ball-Park estimate produced at project inception, through design development and up to the final tender and
construction stages' documentation, further estimates are produced which are based on more reliable design and
specification information so that cost and time uncertainties are minimised and the estimate accuracy is increased.
However, as noted in the above reference, a perfect estimate is not possible, not only because of the vagaries in
estimating but also in the tendering and construction processes. Even the final price paid by the client for the project
may not represent the true cost of the works. In producing for example, a Pre-Tender Estimate, the estimator's intent
is to achieve a practicable degree of accuracy in that the PTE is close to the lowest tenders received and preferably
within say 5 % of the project budget. The acceptable margin between the estimate and the tender figure will depend
on the following factors:
 The client, (e.g. private developer, owner Contractor, public agency, charity),
 Size of the project, (e.g. less than $1M, up to $10M, up to $50M, up to $100M, over $100M),
 Type of project, [e.g. new build, refurbishment, domestic scale or large scale residential, heavily serviced
health facility, civil infrastructure),
 The stage of project development, (e.g. feasibility, sketch design, developed design, tender documentation,
PTE).

It has been suggested that an acceptable margin should equal the percentage variation between the highest and
lowest tenders but this approach can be fraught with danger. Assuming a typical tender panel of 4 or 5 pre-qualified
tenderers, the range from highest to lowest may be as much as 25-30%, with a typical range being in the order of
15%. In the case of open tenders [often used in the public sector for small projects or equipment supply) the author
has seen tender ranges of up to 70%. Clearly in these cases even a margin of 15% is likely to be unacceptable
unless other factors exert an influence. The explanation for these wide differences in tender prices may be found
within the following factors:
 An error in formulating the tender,
 A failure to appreciate the project objectives [e.g. in functionality or quality),
 The submission of a 'cover price', i.e. a high tender submitted simply to maintain business relations with the
client group,
 Poor quality tender documentation leading to differing interpretations amongst the tenderers,

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Quantity Surveying Cost Planning & Page 7
Cost Engineering
  In the absence of a client supplied Bill of Quantities (BOQ), non-standard measurement procedures or rules,
leading to differing quantities on which the tender is based,
 A tender period that is realistically too short, leading to rushed tendering and use of shortcuts,
 Tendering during a significant holiday period with some head contractors using their own estimates in lieu of
obtaining them from sub-contractors.

A suggested alternative to quoting a single estimate figure is to indicate a tender range based on the calculated PTE.
For example, in a climate of relatively stable market conditions and with a reasonable industry demand, i.e. a less
than ideal competitive marketplace from the client's viewpoint, the range may be suggested at -2.5% and up to +
10%. In a competitive environment the range may be given as - 7.5% and + 5%.

However, at the end of the day the only true arbiter of what is an acceptable margin is the client.

Project cost estimating is heavily reliant on historical data from previous projects which sometimes may not always be
the most pertinent but is all that is available. This may be combined with uncertainties in the proposed construction
methodology, ground conditions, gaps in the design documentation etc. to further weigh against accuracy. As noted
by James Antill in Antill's Engineering Management, "one of the attributes of a good estimator is to know how
inaccurate one can afford to be." Accuracy in estimating is assisted by having a reliable database of costs and by the
estimator making reasoned assessment of future trends. Employment of the database and factors affecting pricing
will be discussed later in this section.

The first basic check to be carried out is an arithmetical one, confirming that unit rate extensions are correct, totals
are correctly summed and carried forward to the relevant summary page(s). The actual execution of this task will
depend on the software in use, which may be 'home-grown' or a commercial product.

Having arrived at a final total figure the estimator will then want to check this against earlier estimates of the project,
and against the equivalent project budget allowance. Obviously the format of the final estimate, the earlier estimates
and the budget, should be identical or at least very similar in order to facilitate comparison and evaluation. A time
line and log of variations should be kept by the estimator in order to identify and explain any significant changes in the
estimates at various project stages. This estimates focussed record needs to run parallel with a similar log of client
requested variations and their impact on the project budget. At the pre-tender stage the estimate and the equivalent
budget allowance should remain in sync otherwise time will inevitably be lost in attempting to bring the project back to
budget.

The other component of the estimate review process is to compare the current estimate with data from appropriate
historical projects. This data obviously should be updated to match the time period of the current estimate, including

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Quantity Surveying Cost Planning & Page 8
Cost Engineering
allowances for escalation if the tender is fixed price. Depending on the functionality of the reviewed project, the
projects identified in the database for comparison may not only be those used to obtain cost data but could include
others of perhaps a differing function but equivalent quality. A possible example, however unlikely this may seem,
could be to compare a prison block with say a 2 or 3-star hotel. The internal compartmentalisation would likely be
quite similar, as well as the building services, and due allowance would be made in the comparison for significant
differences, e.g. upgraded security. Depending on the size and type of project, and the time available, comparisons
would probably be effected using one or more of the following units:

 Overall project cost for projects of similar size, function and location,
 Cost per m2 of Gross Floor Area (GFA),
 Cost per functional unit, e.g. per student place, per hospital bed, per hotel room, per equivalent head of
population, per treated water flow rate, per kilometre of highway,
 Trade list comparison, although this may involve a degree of manipulation of data since similar work items
may be allocated to differing trades in the estimate, e.g. Glass block walling included in glazing or in masonry.

The reader is referred to topic – Developing Cost Components. This topic provides a guide as to the composition of a
cost database noting that not only labour, plant, and materials are to be included, but also indirect costs such as
preliminaries, head office overheads and charges. Particular attention should be paid to indirect costs since pricing
direct cost components is relatively straight forward, but indirect costs may vary considerably between projects and
locations, and with contemporary construction techniques, work safety requirements, and other industry regulations,
they are forming an increasing proportion of project costs, in some cases 30% or more.

In the case of a proposed fixed price contract the estimator should consider reviewing the allowances and/or
calculations that have been used to carry forward the estimate from the present day to the projected handover date.
Sub-contract and supply quotations may have been instructed to allow for escalation, but the prudent estimator would
need to be satisfied that these are realistic and achievable as the remaining components of the estimate. Escalation
may have been calculated on the basis of economic forecasts or in some detail such as planned wage award
increases or promulgated material price rises. Alternatively a Building Price Index may have been applied to the
present day estimate calculations. If the estimator has the relevant Indices available (they would probably need to
have been prepared in-house), the index calculation could be broken down into the principal elements of the estimate,
namely labour, materials and plant. The individual add-on percentages would then be applied to either the summary
cost of each of these elements, or as a factor applied on individual rate calculations. The computer software in use
for preparing the estimate will probably dictate which method is appropriate.

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Quantity Surveying Cost Planning & Page 9
Cost Engineering
2.2 Checking for completeness

Following the initial check on the accuracy of the completed estimate, the estimators will then need to satisfy
themselves that everything that should be included in the estimate has been. The approach to this review is arbitrary
as long as all aspects are covered. These comprise the following actions:
 Confirm that the drawings received and used for the estimate are the latest amended versions.
 Check transmittal sheets to confirm that all copies of drawings have been received, included in the
quantification (if no BOQ provided), and that relevant personnel (estimator, planner, project manager,
engineer, quantity surveyor) have perused same and signed off to this effect.
 Confirm that the latest version of the specification has been received and that relevant items have been noted
and lined through.
 Check that schedules in the specification (e.g. windows, doors, hardware, internal finishes) have been
examined, incorporated in the estimate as appropriate, and lined through
 Collate all query sheets, check for responses and follow up on any without answers.
 Check that query responses have been incorporated into the estimate and demonstrated by lining through.
 Check and confirm that all notified corrections have been made in the relevant section of the estimate.
 Collate any quotations received into a register indicating dates of request and subsequent response, name of
firm, contact person, subject matter, price(s) submitted, any qualifications to the price, note any exclusions,
note any Contractor's items required by sub-contractors e.g. handling and storage, indicate acceptance or
otherwise of quotation and confirm amount included in the estimate.
 Review the contract documentation for clauses that may have a cost implication, e.g. restricted on site
working times.

The project estimator then needs to identify any peripheral items that the client has indicated will be required in the
estimate and confirm that these have in fact been incorporated into the calculations. Typically, these items may
comprise:
 Loose furniture and equipment, (e.g. computers)

 Land or existing building purchase

 Site remediation

 Demolitions

 Augmentation or extension of infrastructure services, services diversions or removal.

 DA conditions

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 10
Cost Engineering
  Council contributions

 Staging the works

 Heritage or archaeological factors, including investigative fees

 Interior fit-out

 Professional fees

 Contingencies (design, contract, delays, client)

 Leasing temporary premises

 Client costs

Other factors that may need to be considered before the estimate is finally signed off comprise:
 Escalation from time of submission of the estimate to tender closing, and if a firm price contract, from tender
closing and acceptance to programmed handover

 Review of inflation forecasts employed in the escalation calculations (e.g. Building Price Index)

 Currency fluctuations if significant materials and equipment are sourced from overseas (e.g. lifts)

 Market and industrial conditions if either considered volatile during the construction period

 Location and regional or climatic factors (e.g. Locality Index)

 Hazardous or confined working environment

 A review of any margin or profit allowance made in the estimate to confirm that the rate or amount is still valid

 GST to be added covering all applicable items

The above procedure is quite lengthy and involved, and will probably be truncated for simple or small projects and
when time is short.

Note that an estimate review may also be carried out by someone not originally involved in the estimate preparation
and who will probably have been briefed to consider both accuracy and completeness. Such an individual should
have an understanding of the project objectives at least equal to that of the main estimating team in order not to be
involved in disruptive actions such as suggesting modifications through ignorance of the background situation. . The
"external" reviewer should also have access to all the data resources that the executing team employed.

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 11
Cost Engineering
2.3 Evaluation of variables which impact on reliability and accuracy

Reference has been made earlier to the need for a structured, comprehensive cost and time database of completed
projects. Such a database provides not only a resource for costing a current project, but may also be used as a
reference check once the estimate has been finalised. (Refer to section 2.1 for details of typical checks.) However
when consulting the database the estimator needs to be aware of the conditions under which the historical data was
produced and how closely, or otherwise, they relate to the current project. This is to avoid any mismatches that may
impact on the overall reliability and accuracy of the estimate. Typical variables for the estimator to consider may
include one or more of the following:

 The degree of project scope definition. The initial brief, (and possibly the only brief), may not be sufficiently
detailed or comprehensive enough to convey a clear picture of the project objectives in terms of functionality,
quality, appearance/aesthetics, inclusions, and time frame for completion handover. Comparisons with
projects in the database may therefore prove somewhat erroneous to a greater or lesser degree. If the true
intent of the project is not fully understood then estimate 'add-ons' such as the profit margin may not be
realistic.
 At PTE stage the documentation should be either complete or very near to completion (at 90-95% level).
However this may not always be the case, and certainly for earlier estimates not all design and specification
information will be available. In situations such as this it is beneficial if the estimator has had experience of
working with the Client and design team and understands what the project is about and can fill in any
information gaps.
 An understanding of the variations in site conditions between the database projects and the current project.
The proportion of project value represented by the substructure element varies according to the type and size
of a project, thus for a single storey warehouse it may represent around 15% whilst for a high-rise CBD office
building with a deep basement it may only represent 1-2%. Nonetheless in-ground works set the tone of a
project and sufficient attention should be paid to ensuring that all aspects connected with the site conditions,
(including items not forming part of the completed project such as site access) are fully considered.
 Market conditions and competitiveness at the time the data was relevant, compared with the present
situation. The database should contain valuable industry data pertaining to the embedded projects, such as
the availability of labour, specific materials which may have been in short supply or conversely in a glut,
industrial relations other than in the construction industry, (e.g. transport and its effect on deliveries.) Such
information is encapsulated in contemporary Building Price Indices (BPI) and in Australian Bureau of
Statistics (ABS) records and publications, and should be cross referenced in the database.
 Volume of work available and resulting competitiveness at the time the data was relevant. Again reference
can be made to relevant BPIs and ABS publications.
 Size and complexity of the projects from which the cost data was collated. This is basic project information
which should be readily available for comparison and verification.

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 12
Cost Engineering
  Size and nature of the contractors tendering for the works. This will assist in evaluation of the competition
applying at the time and used for determination of the level of profit that may be applied to the estimate.
 Experience of the firms tendering for the works at that time. A record of the historical tender returns will
indicate which contractors were best suited to the project, and this may influence current pricing levels and
margin assessment.
 Amount of repetition within the project, e.g. housing development, multi-storey office building. This aspect
should be straightforward, although in the example of a housing development the mix of different types might
be relevant, e.g. whether detached, town house, terraced, single or two storey.
 Overall contract period relating to the size of the contractors involved. This could have a bearing if the
construction program is long and contractors with limited capital find themselves stretched to fund the project
until it's in an advanced stage of completion. Pricing levels may need to reflect this situation.
 Project location, viz CBD, suburbs, country, remote area. The database should contain an indication of the
Locality Index (LI) which will aid comparison with the proposed project location.
 Industrial relations, either local, State-wide or national, which may impact on labour costs. Reference should
be made to relevant ABS publications for the evaluation of likely outcomes.
 Geography and climatic conditions. Bureau of Meteorology (BOM) statistics will provide valuable data for
evaluation.
 Footprint complexity e.g. square or rectangular compared with complex shape with high floor area to
perimeter wall ratio (aka Wall :Floor ratio). Broad-brush calculations to compare ratios will assist in evaluating
the relevance of the historical data and whether current pricing needs to reflect any differences.
 Requirements for staging of the works, particularly when one stage has to be completed before the next one
starts. This factor will probably extend the construction program with attendant cost implications, so if it's not
applicable to the current project then the costing should reflect this saving in preliminaries and overheads.
 Non-standard contract requirements which impose a financial risk on the contractor e.g. heavy penalties for
late completion. Some significant costs can be embedded in the contract conditions, and if such conditions
are not present in either the benchmark project but in the current one, or vice versa, then evaluation and price
adjustment should follow.

The time available for preparation of an estimate, especially a PTE, is likely to impact on the accuracy of the final
figure. Where the ideal time frame is not available short-cuts will inevitably occur, and these risk jeopardising the
estimate and could lead to additional reparation work thus negating any previous time savings. Of course additional
human resources could be allocated to the estimate, but the law of diminishing returns will quickly come into effect.
The danger of having too many estimators on a project is obviously one of co-ordination, ensuring that nothing is
missed and nothing duplicated. Then there is the issue of sharing the database resources and the application of data
varying according to individual interpretation. Unless the project is unambiguously defined there is also the danger of
differing quality or price perceptions amongst the estimating team.

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 13
Cost Engineering
If the time for estimate preparation is considered inadequate then strenuous efforts should be made to seek and
achieve a program extension. Determining the correct amount of time to prepare an estimate is governed by the
following factors :

 Size of the project.

 Complexity of the project.
 The extent and quality of the documentation including project definition.
 The relevance of database information to the current project, and how much "reinvention of the wheel" will be
needed.

Preliminary or ball-park estimates can be produced quite quickly, even for complex projects, but assumptions will
have to be made, contingencies established for "unknowns", and risks identified with cost allowances allocated
against them. Of course such an approach will require a detailed review as more information becomes available, but
if it doesn't then the allowances may need a fresh set of eyes to confirm whether or not they are realistic.

2.4 Evaluations of assumptions

The estimator should prepare a schedule of all assumptions that have been made in preparing the estimate, (i.e.
assumptions that have not been covered by answers to specific queries or other means of contract
documentation). It is useful to identify these as "Pricing Assumptions" as this will alert the client that there is cost
involved. The schedule should be submitted with the estimate proper. Prior to this the assumptions should be
reviewed for authenticity, and the issues that led to their identification re-examined to determine if they have
either been dealt with elsewhere or still need to be brought to the client's attention.

The estimator may also consider it prudent to include a schedule of inclusions with the estimate in order to
highlight to the client any significant 'non-standard' items, e.g. a dedicated goods lift, or art works for a boardroom
fit-out. This process should also include a confirmatory check that the items actually are in the estimate,
otherwise red faces all round ! The best means of doing this is to show the item value in the inclusion list.

A list of exclusions should also be presented to the client and it may also be useful (and on some occasions is
requested by the client), to provide an indicative estimate of the cost of the items. Ideally items that are included
in the project scope but which, for whatever reason have not been priced, should not be considered as
exclusions. This is disrespectful to the client and the project team, unless for example say, it has proved

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 14
Cost Engineering
 impossible to obtain a quotation for some imported equipment or materials. Attempts should be made to
calculate at least an indicative or provisional cost for inclusion. In the case of material supply the estimator could
include a PC Sum in the estimate to allow for this and price the labour component in the usual way. Care would
be needed however to ascertain that there aren't any special techniques or fixing components required which
would add unforeseen costs. The estimator should use his or her knowledge and relationship with the client to
determine whether the estimate should be as complete as possible or may contain excluded items.

2.5 Allowances for uncertainties, contingencies, and risk

Traditionally quantity surveyors and estimators have presented to clients a single figure estimate, knowing however
that the final price will inevitably be in a different amount. All construction projects are really prototypes and often
include untried designs and construction methods, a classic example being Sydney Opera House. Construction
projects therefore include risk and uncertainty to a greater or lesser degree. Risks may be classified as qualitative or
quantitative, the latter being measureable to some extent, the former requiring a more subjective approach including
simulations and scenario thinking. Therefore rather than a single price it would be desirable for the client to be
handed a price range assessed within agreed upper and lower limits which are determined following the project
team's review of the risks and uncertainties.
(Refer to Annexure A for the differences between qualitative and quantitative issues.)

There are two basic components to any estimate:

 The base estimate comprising the factual details and calculations based on measured quantities and price
rates,

 Allowances for uncertainties and other risks which may have potential or may be most likely to happen but
which cannot be quantified or the magnitude determined.

Annexure B is an example of the situation described by US Secretary of Defense Donald Rumsfeld when he referred
to "We don't know what we don't know."

However there may also be uncertainty in parts of the base estimate which go unnoticed and which may lead to
underestimating the full cost. It has been suggested that projects which are described as overrunning the budget

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 15
Cost Engineering
were in fact underestimated at the beginning. The estimator should discuss with the project team and the client any
suspected or potential risk items, especially those which may fall into one of the following categories:

 The design component itself and the supporting documentation,

 The client,
 Regulatory authorities such as national or local government, industry bodies,
 Finance,
 Local industry conditions,
 Specialist labour requirements
 Services utilities,
 Physical site conditions,
 Construction techniques, (especially untried ones)
 Climate and Weather,
 Hazardous materials,
 Slow decision making by key stakeholders or authorities,
 Delays caused by variations,
 Escalation,
 Currency exchange,

Following the discussions some of the above may be considered as not applicable or too unlikely to be considered
further, but those remaining should be dealt with under one of the following actions:

 Minimisation - through further research and information gathering leading to a part or whole solution.
 Transfer - to other parties through say, insurance.
 Absorption - recognising that there is a risk element, quantifying it as far as it is able, and then allocating a
realistic contingency sum based on probability and the magnitude of its occurrence.

Reference should also be made to completed projects in order to learn any lessons from them and incorporate these
into actions on current projects. This applies particularly to projects which have a significant cost overrun to avoid
history repeating itself.

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 16
Cost Engineering
 3. Review cost components

3.1 Cost components' break down

The cost components of any detailed estimate are divided into two parts:

 Direct costs - i.e. costs directly associated with any item of work forming part of the finished project, e.g.
masonry walling, structural steelwork, plumbing services. Note however that some construction activities that
contribute to the finished product are also classed as direct, e.g. excavation for footing and drainage trenches
or for a basement. The direct construction cost components are identified as Labour, Materials, and Plant,
and may also include nominated sub-contractors and suppliers who will supply or install specialist items or
services.

 Indirect costs - these are costs which are necessarily incurred during the construction process but which may
overlap several trades and/or activities. They are known as Preliminaries and include costs and activities
necessary for the management, programming and control of site operations such as temporary site
accommodation, cranage, scaffolding, together with non-tangible costs such as insurances and council fees.
The general expenses incurred in operating a construction business also contribute to indirect costs and are
usually referred to as Head Office overheads and charges.

The review and evaluation of the cost components should consider overall completeness and the reasonableness of
the constants, prices and rates used to make up unit price rates, preliminary items, and overhead charges. The basis
for any assumptions, provisional allowances, contingencies, risk and uncertainty should also be interrogated, together
with the validity of the allowance for profit in the light of the prevailing and forecast industry marketplace.

3.2 First principle review

The review should be conducted from a 'first principles' approach similar to the original estimate preparation, and as
outlined below:

 Labour: generally costed on an hourly basis for the various trades under their respective wage awards. Using
'labour constants' to identify the man-hours required to complete a specified task, these unit rates are applied
to each specified item recognising the method of quantification, i.e. m3, m2, m, or number. The constants are
found in published estimating guidebooks or may have been compiled over time by the estimator and
generally will not change much. However they do need to be reviewed periodically and updated for

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 17
Cost Engineering
 improvements in say hand/power-tool technology or materials handling techniques. The labour rates applied
to the constants are found in the various wage awards. These awards are grouped into building trades,
metalworking and mechanical services trades, and electrical trades. The common building trades are
bricklayer, carpenter & joiner, plasterer, glazier, painter and plumber/drainer. Labourers are separately
grouped according to their particular skills e.g. concreter, reinforcement fixer. Other specialists are structural
steelworkers and roofing installers. Various on-costs have then to be added to the base rate to provide an
'all-in" rate. These on-costs are quite numerous, but not all of them may be applicable (e.g. working in
confined spaces), therefore the review should include validation of the inclusions and checks that the correct
calculations have been made since there can be differing interpretations of the award terminology. Overtime
costs and incentive schemes are typically priced as a preliminaries item, but where the likelihood of either or
both may be extensive then the calculations may form part of the all-in labour rates. and the review should
note this. Although project managers, general foremen and the like are usually included with site
administration staff in the preliminaries section, direct supervision is carried out by trade foremen and leading
hands who may not be included in the preliminaries. The review should seek to identify if these costs need to
be included in the labour rate on-costs or whether that are included elsewhere.

 Materials: costs will be obtained from suppliers, either wholesalers or direct from the manufacturer.
Depending on the type of installed material component, materials for fixing could be a significant cost and
should be included. The total material component should be evaluated which may include reviewing some or
all of the following:

 basic price
 delivery
 unloading
 storing
 returning packaging
 handling on site
 fixing materials
 waste allowance on basic and fixing materials

In addition price discounts may be offered by suppliers depending on marketplace demand and relationships
with contractors and this factor should be part of the assessment. The review should also consider various
materials' availability and whether or not a substitute has been considered in lieu of a potential failure to
supply sufficient quantities of significant items.

 Plant: there can be two methods of calculating this item, either as a hire rate or assuming owned and
operated by the contractor. As with labour items, plant calculations are based on constants and again these
should be reviewed for currency in view of increased output from new and improved equipment models. In
addition to work output costs the review should also confirm that the operator's cost and plant transportation
to and from the site has been included as appropriate in the estimate. In a detailed estimate the type or
model of plant considered may have been identified and if so the review should consider the appropriateness
of the selection for the task at hand.

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 18
Cost Engineering
Note that the costing of materials is generally considered to be the more precise aspect of construction estimating as
there are fewer variables than with labour and plant where productivity and overall site conditions have a greater
impact. More attention should therefore be placed on the evaluation of these latter two components. However
considerable variances exist in the composition ratios of labour, plant and materials within individual trades and this
should be taken into account. A table of typical ratios for a range of trades is shown at Annexure C

 Nominated Sub-contractors and/or Suppliers: the documentation may include nominated sub-contracts and
suppliers and the review should confirm any quotations provided, and clarify what attendance items if any
may be required from the head contractor.

 Preliminaries: as noted previously this component covers items required for execution of the contract but
which are not actually part of the completed project, e.g. scaffolding, cranage, site sheds and amenities,
insurances etc. Preliminaries are categorised as either fixed charges or time related, examples of the former
being insurances, setting out the project, final cleaning and the like, whereas time based costs could be crane
and scaffold hire, security fencing, site staff salaries, and site accommodation rental. If costed as a
percentage of the construction works this preliminaries allowance should be validated by a review of the
proportion of the cost to the direct estimated project costs and giving due consideration to the size and
complexity of the project and the site conditions. If the preliminaries have been treated as a trade and have
been measured and priced, the review can be more comprehensive and provide greater assurance and
relative accuracy. This applies particularly for large and/or complex projects or those spanning a lengthy
construction period.

 Head Office Overheads: each individual project contributes to the cost of running a contracting business and
this needs to be included in the estimate. In the case of an estimator in private practice this will probably be in
the form of a percentage addition either based on personal experience, obtained through industry
intelligence, or provided by a co-operative contractor. Alternatively it may be a first principle calculation to
include rentals, motor vehicles, office salaries and wages, insurances etc. An estimator in a contracting
organisation may use this approach or it could be that the firm's management has a set template of costs for
inclusion in their projects. For all these situations the review should consider the information available and
make an evaluation based on experience and industry practice.

 Margin / profit: in a contracting organisation the allowance for profit will be a matter for management to
determine. For the professional office estimator a percentage based on experience and industry knowledge
will simply be applied to the net cost of the works. The review should consider the marketplace conditions
and the appropriateness of the margin allowance, especially if comparisons can be made with similar recent
projects.

 Risks and Contingencies: Section 2.5 above has previously discussed this issue and the review should
evaluate any costings identified and evaluate them against the degree of risk and the known allowances for
similar circumstances in recent comparable projects.

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 19
Cost Engineering
 4. Advice on the accuracy of estimates

4.1 The estimating environment

All construction projects whether large or small, simple or complex, have an inherent degree of difficulty arising from
the following issues:

 The prototype nature of each job,

 The construction difficulties in assembling a large number of components on site,
 Varying levels of productivity from site to site and within a single site,
 The temporary nature of the on-site construction establishment,
 The diversity of site conditions,
 The vagaries of weather and climate.

Recognising these factors one may wonder how any estimate can remotely match what a project should cost.
Reference to historical data and similar projects provides a guide, but this must be adjusted to suit the inevitable
differences which occur even between what may appear to be similar projects.
(The author was once involved in a new-build of a nine storey nurses accommodation block within the grounds of a
major hospital. The floor plate was H-shaped in plan, and construction consisted of flat plate reinforced concrete floor
slabs on loadbearing internal and external walls. As soon as the building was ready for handover, construction was
due to commence on an identical second block and the team was preparing to build to the same drawings and
specification. However, in the meantime building regulations underwent a revue and now the original design had to
be modified to accommodate reinforced concrete columns in both external and internal walls. This affected all the
dimensioning of the project and introduced a new construction element even though there was no change to the
accommodation provided. In addition there were differing weather and industrial conditions applying to the second
project so a direct comparison was not possible.)

4.2 Providing informed advice

In Section 2.5 above reference was made to providing the client with a price range for a project rather than a single
price, and this would seem to be appropriate for all but the simplest of projects. Even so there is still the need for a
reasonable degree of accuracy and the professional building consultant of whichever professional background is best
placed to provide considered, reasoned advice on estimate accuracy. Such advice should be formulated around the
following considerations:

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 20
Cost Engineering
  The quality of the drawings, specification and other contract documentation.
 The potential for design changes if the documentation is incomplete or if the client hasn't made needed
decisions for the project team to act upon.
 The degree of fairness or otherwise in specific contract conditions.
 The quantification of the works, i.e. is a BOQ available or does the estimator have to make his or her own
arrangements for this task.
 Changes to design codes and construction practices of which the client may have been unaware.
 Environmental impacts, not only deriving from the site conditions themselves, but also adjoining properties
and construction work practices.
 The regulations governing health and safety on site may impact on what can or cannot be accomplished, or
may extend the construction period, and will probably add to the overall construction cost.
 The degree of engineering services incorporated into the project will have an effect on design solutions, will
impact on the sequencing and activities of other trades and overall formulation of the construction program.
 Local climatic and weather conditions. The Bureau of Meteorology has historical records of weather patterns,
rainfall and temperature statistics which can be used to inform decisions on construction methods and project
planning to optimise the seasonal year(s).
 In the current industrial environment of workplace enterprise bargaining disruptive action by the unions and
labour force has been significantly mitigated, and strike action is relatively infrequent. However on-going
monitoring of the industrial climate is essential for major projects (especially in the public sector) and those
with a lengthy construction period.
 Professionals in the construction industry should make it a regular activity to monitor the marketplace and
seek industry intelligence on workload, competitiveness, and the availability of labour, particularly in key
trades such as concreters, steel fixers, bricklayers, carpenters, plumbers and electricians. Information should
also be sought on materials supply through contact with manufacturers and suppliers including obtaining
catalogues and price lists of major items on a regular basis. Market stability and competitiveness may be
assessed by reference to publications from industry bodies such as the Master Builders Association, The
Australian Constructors Association, The Property Council of Australia, Australian Construction Industry
Forum and others. It would also benefit an estimator to establish and maintain a Tender Level Index (TLI) to
track accepted tenders against a standard BOQ costed at going rates. This will record what is happening in
the marketplace and provide both a benchmark and a trend indicator showing the increase or decrease in
cost to clients during the current tendering market.

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 21
Cost Engineering
4.3 Detailed checking

Whether the estimating methods employed are manual or computerised they should include reliable measures to
ensure that the calculations are arithmetically correct. It is also important to develop a system that can identify
mistakes in extensions, collating to summaries and carrying forward to the final summary.

Other checks to be included are:

 Rates must relate to the unit of measurement, e.g. a m2 rate applied to a m3 quantity.
 All items in the estimate have a cost against them or are marked as "Not applicable" with a line-through in the
cash column.
 Major resource items should be reconciled with resource summary sheets** and broad brush checks made,
such as comparing labour and materials in a given trade, thus:
a) If formwork labour costs amount to approximately 60-70% of the trade, then this would appear to be
reasonable depending on the number of re-uses planned for and allowed in the estimating.
b) If 70,000 facing bricks may cost $66,500 to lay, and the estimate shows $36,000 then a closer look at the
calculations is called for.

 Waste allowances should be identified and assessed for reasonableness, especially for new materials with
which the estimator may not be familiar.
 A review of the construction program should be conducted so that the estimator can check whether resource
times in the program are commensurate with what has been allowed for in the estimate. For example the
planner may have calculated that an item of plant is required on site for twelve weeks, whereas the estimator
has only allowed for eight. An agreed reconciliation should be carried out between the estimator and the
planner.
 The program review will also contribute to an evaluation of the time based preliminary items.

**.. An example of a resource summary template is attached at Annexure D

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 22
Cost Engineering
Learning outcomes

Having completed this topic, the learner will be able to:

 Understand the process for checking a completed estimate for accuracy by reference to previous projects and
carrying out a detailed comparison of current and historical unit rates in the database.

 Check an estimate for completeness, having identified all relevant components for review.

 Identify and understand the variables that have an impact on the reliability and accuracy of historical data.

 Review assumptions made during estimate preparation and clarify the actions required for resolution thereof.

 Advise a client on contingency allowances and formulate a plan for dealing with risks and uncertainties.

 Understand the cost components within unit price rates for work items and how accuracy may be improved.

 Examine the indirect cost components of an estimate and understand how these are costed.

 Identify issues that may impact on the accuracy of an estimate and provide advice to a client on ways to
mitigate their effect.

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 23
Cost Engineering
 5. Bibliography

(1) Project cost estimating – Edited by Nigel J Smith, Thomas Telford, London, 1995

(2) Engineering Management, Third Edition - James Antill, Brian Farmer, McGraw-Hill, Sydney, 1991

(3) (Spencer Geddes) Estimating for Building and Civil Engineering Works, 9th Edition, John Williams (editor),
Butterworth Heinemann,1996

(4) Understanding Tendering & Estimating, A A Kwakye, Gower Publishing Ltd, 1994

(5) Estimating and Cost Control, James Nisbet, B. T. Batsford Ltd, 1961

(6) Estimating and Tendering for Construction Work, Fourth Edition, Martin Brook, Spon Press, 2008

(7) Practice and Procedure for the Quantity Surveyor Tenth Edition, Christopher J Willis, Allan Ashworth, J
Andrew Willis, Blackwell Scientific Publications,1994

(8) Estimating Checklist For Capital Projects, Second Edition, - The Association of Cost Engineers, E & FN Spon,
1991

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 24
Cost Engineering
 ANNEXURE A

The difference between Qualitative and Quantitative data :

Qualitative Data Quantitative Data

Deals with descriptions. Deals with numbers.

Data can be observed but not measured. Data which can be measured.

Colours, textures, smells, tastes, appearance, Length, height, area, volume, weight, speed, time,
beauty, etc. temperature, humidity, sound levels, cost, members,
ages,
Qualitative → Quality
Quantitative → Quantity

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 25
Cost Engineering
 ANNEXURE B

Unknown unknowns

Contemporary usage is largely consistent with the earliest known usages. For example, the term was used in
evidence given to the British Columbia Royal Commission of Inquiry into Uranium Mining in 1979:

"Site conditions always pose unknowns, or uncertainties, which may become known during construction or operation
to the detriment of the facility and possibly lead to damage of the environment or endanger public health and safety.
The risk posed by unknowns is somewhat dependent on the nature of the unknown relative to past experience. This
has led me classify unknowns into one of the following two types: 1. known unknowns (expected or foreseeable
conditions), which can be reasonably anticipated but not quantified based on past experience as exemplified by case
histories (in Appendix A and 2). Unknown unknowns (unexpected or unforeseeable conditions), which pose a
potentially greater risk simply because they cannot be anticipated based on past experience or investigation.”

Known unknowns result from phenomena which are recognized, but poorly understood. On the other hand, unknown
unknowns are phenomena which cannot be expected because there has been no prior experience or theoretical
basis for expecting the phenomena.

(my italics)

Source: via Wikipedia – Statement of Evidence of E. D’Appolonia, - D'Appolonia Consulting Engineers, Pittsburgh,
Pennsylvania. Proceedings of the British Columbia Royal Commission of Inquiry into Uranium Mining, Phase V:
Waste Disposal, ISBN 0-7718-8198-3

AIQS Certificate in 2 Design Cost Advice, Evaluating Cost Estimates

Page
Quantity Surveying Cost Planning & 26
Cost Engineering