Construction Cost Analysis and Estimating (0401448

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1 - Introduction
Dr. Khaled Hyari Department of Civil Engineering The Hashemite University Zarqa, Jordan

Syllabus

• • • •

Instructor: Dr. Khaled Hyari Office: E 3003 Phone: Ext. 4768 Office Hours: Sunday, Tuesday, Thursday: 10:00 a.m. – 12:00 a.m. or by appointment

Introduction

1-2

Syllabus II

Course Outline 1. Introduction 2. Engineering economic analysis 3. Risk and uncertainty 4. Cost fundamentals 5. Cost estimating 6. Estimating construction labor costs 7. Cost of concrete structures 8. Estimating project costs
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Introduction

Syllabus III

Course Outline 1. Estimating Equipment Costs 2. Time/cost trade-off 3. Bid strategies 4. Financial accounting and financial statement analysis 5. Cash flow analysis 6. Project cost control 7. Value engineering and life-cycle costing

Introduction

1-4

Syllabus III

Textbook
– Ostwald, P (2001) “Construction Cost Analysis and Estimating” Prentice Hall.

References
– Holm, L.; Schaufelberger, J.; Griffin, D.; and Cole, T (2005) “Construction Cost Estimating: Process and Practices” Pearson Prentice Hall. – Gould, F. (2005) “Managing the Construction Process: Estimating, Scheduling, and Project Control” Third Edition, Pearson Prentice Hall.

Introduction

1-5

Syllabus IV

• Grading
– – – – First exam Second Exam Final Exam Attendance and Participation 20% 20% 50% 10%

Introduction

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Syllabus V

Exam Dates:
– First Exam: 12:00 – 1:00 p.m., Tuesday, November 1, 2005 – Second Exam: 12:00 – 1:00 p.m., Tuesday, December 6, 2005

Introduction

1-7

Construction

• Construction is the process that sets up a portable plant, bring material to the site, and on completion of the work moves the plant away, leaving its output standing • Output: all immobile structures (airports, buildings, dams, roads and tunnels, power plants, municipal treatment plants, pipelines …etc) Introduction

1-8

Characteristics of the Construction Industry

• The physical nature of the product:
– Large, heavy and expensive – Required over a wide geographical area – Customer tailored – A large part of components manufactured elsewhere

• The ultimate use of the product is:
– As a mean to further production – As an addition to or improvement of the infrastructure of the economy (e.g., roads) – As a social investment (e.g., hospitals)
– As an investment for direct enjoyment (e.g., Introduction housing)
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Characteristics of the Construction Industry II

• The demand for the product is:
– Determined differently for different types of products – Largely dependent on governmental policy – Largely dependent on economy cycles

• Unique Industry:
– Incorporates small remodeling to giant international, multibillion-dollar contractors. – Highly competitive. – Low profit margins.
Introduction 1 - 10

Characteristics of the Construction Industry III

• The price determination is a discrete process for each project and for each piece of work subcontracted (bidding or negotiations) • Human resources: Growing shortage of skilled workers and experienced managers due to:
– 4D Industry Perception (dull, dirty, demanding, and dangerous) – Aging workforce – Absence of apparent technology – Requirement to travel
Introduction 1 - 11

Characteristics of the Construction Industry IV

• Safety: – Construction accounted for 19.5% of all workplace fatalities in 2000 in the United States (about 5% of the total U.S. workforce) • Quality control: – In this competitive age, if you do not provide quality services, someone else will
Introduction 1 - 12

Jordanian Construction Industry • 2004 Data
– Estimated volume of construction work in 2004 is 1.766 Billion JD including both the public works and the private sector works
• 166 million JD in the public sector • 1600 million JD in the private sector

– 10 million square meters were licensed by the Jordanian Engineering Association in 2004 – Number of registered contractors is 997 contractor – Number of Engineering offices and Consultant firms is 1060 – More than 500 registered speculative builders
Introduction 1 - 13

Some Data About Construction III

• Most common reasons for failure: – Inadequate sales (35%) – Competitive weakness (25%) – Receivables difficulties (16%) – Large operation expenses (11%)

Introduction

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Construction Projects

• Industrial, heavy engineering and infrastructure, commercial buildings, residential • Industrial
– Examples: automobile plants, petroleum refineries, petrochemical plants, steel mills, nuclear plants …etc) – Dominated by very large engineering and construction firms – The most technical projects of the construction projects – Few design firms and constructors are qualified to undertake them – Privately funded
Introduction

1 - 15

Construction Projects

• Heavy Engineering and infrastructure
– Examples (airports, bridges, dams, tunnels, highways, water treatment and distribution, urban rapid transit systems …etc) – Activities in this category are primarily the domain of civil engineers, but other engineering disciplines have roles – Equipment intensive and characterized by fleets of large earth movers, heavy trucks, etc) – Working with massive quantities of basic materials (earth, rock, concrete, steel, pipe) – Many of those projects are publicly funded – Projects tend to be long in duration
Introduction 1 - 16

Construction Projects

• Commercial Building
– Examples (Mosques, churches, government buildings, hospitals, shopping malls, small retail stores, warehouses…etc) – Labor and materials intensive – Interact closely with people – Private economy finances these structures, with some exceptions – Design coordinated by architects, who work with engineering specialists (structural, mechanical, electrical)
Introduction 1 - 17

Construction Projects

• Residential
– Examples (single-family homes, apartments, condominiums, town houses) – Largely financed by private investment – Large number of contractors and subcontractors – High rate of business failure if demand falls – Low capital and labor intensive – Design is done by architects, drafting people, builders, or the home owner (USA)
Introduction 1 - 18

Construction Projects

• Public vs. Private Projects – A private party can award a contract in any way they choose to anyone they choose. – Private party can make one contract or multiple – Public party is limited by laws and regulations – Public party commonly awards bids by competitive bidding.
Introduction 1 - 19

Delivery Approaches to Design and Construction

• Traditional
Owner Designer General Contractor

Subcontractors

Own Work Force
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Introduction

Traditional Delivery Approach • Advantages
– Fixed price for the project before any work commences – Price competition between contractors

• Disadvantages
– Contractors/subcontractors have little opportunities to suggest improvements until after the award is announced – Difficult to phase or fast-track the project – Less opportunity for interaction between the significant parties – Misinterpretation of the drawings and specifications can be difficult to eliminate
Introduction

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Delivery Approaches to Design and Construction

• Design-Build
Owner Engineer-Contractor Designer General Contractor

Subcontractors
Introduction

Own Work Force

1 - 22

Design-Build Delivery Approach • Advantages
– Seamless communication within the single firm encompassing both design and construction – Contractor is able to improve constructability – Scheduling is more effective, and fast-tracking is possible – Design changes are simpler

• Disadvantages
– Owner may not have a firm fixed price in hand early – Owner’ knowledge and awareness of the project is less (Crucial Decision making) – Less checks on contractors’ performance (More vulnerable)
Introduction

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Delivery Approaches to Design and Construction

• Construction Management
Owner Construction Manager Contractors Subcontractors
Introduction 1 - 24

Designer

Construction Management Delivery Approach

• Advantages
– Effective communication between the three parties – Allow simultaneously phasing various tasks in the project in coordinated effort – Owner is able to benefit from competitive bidding by contractors and subcontractors

• Disadvantages
– Possible communication problems between parties involved – Owner must have advanced, professional expertise and abilities
Introduction 1 - 25

Delivery Approaches to Design and Construction

• Owner-Builder
Owner Design Department Construction Department Contractors Subcontractors
Introduction 1 - 26

Own Work Force

Contract Types

• Two fundamental contract families – Fixed price • Lump sum • Unit price – Cost reimbursable • Cost plus • Guaranteed Maximum Price

Introduction

1 - 27

Contract Types

• Lump-sum Contracts – Total price fixed in advance – Risk is on the contractor but he can make money by finishing faster – Benefits owner because they know exactly what they have to pay – Scope must be fully defined – Generally competitive bid contracts
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Introduction

Lump-sum Contracts

Introduction

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Contract Types

• Unit Price Contracts
• Used when the amount of units is unknown or risk is high

– Accommodates quantity adjustments – Disadvantage: estimate vs. actual quantities
– Very common with earthwork

• Fixed price with incentives
• Target cost and profit • Sharing formula for savings

Introduction

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Contract Types

• Cost-“plus” contract
– – • • • • – – –
Introduction

Cost plus a percentage fee Cost plus a fixed fee Sometimes referred to as “time and materials” contract Used for projects of experimental design, new materials or an unusual site that is hard to predict. Can be bad for the owner if the contractor takes longer than he should Often noncompetitive bids Advantage: start before scope fully defined Risk is on the owner Disadvantage: lack of upper boundary, open-book
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Cost-“plus” contract

Introduction

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Contract Types

• Guaranteed maximum price GMP

– Cost plus fee with guaranteed maximum price – Can start before scope fully defined, upper boundary – Difficulty in establishing GMP

Introduction

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Guaranteed maximum price GMP

Introduction

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Laws of Project Management

• No major project is ever installed on time, within budget, or with the same staff that started it. Yours will not be the first. • Projects progress quickly until they become 90% complete, then they remain at 90% complete forever • When things are going well, something will go wrong
– When things just cannot get any worse, they will – When things appear to be going better, you have overlooked something
Introduction 1 - 35

Laws of Project Management II

• If project content is allowed to change freely, the rate of change will exceed the rate of progress

Introduction

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Managing Trade-offs

Managing Trade-Offs: The Primary Task of Project Management

Introduction

1 - 37

The Project Life Cycle

Introduction

• Slow-rapid-slow progress • Minimal effort is required at the beginning but increasing effort in the early stages of the life cycle will improve the chances of project success

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The Project Life Cycle II
• Goals????
– Performance early in the life cycle – Cost during the periods of high activity – Schedule during the final stages

Introduction

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Estimates of Project Costs I

Estimate of Project Cost at Project Start: Uncertainty associated with project
cost

Introduction

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Estimates of Project Costs II

Estimates made at times t0, t1 and t2

Introduction

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Phases of a Project I

• • • • • • • •

Business Planning Conceptual Design Detailed Design Procurement Construction Testing, Start-up & Implementation Operations & Utilization Decommissioning
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Introduction

Phases of a Project II
Owner’s Need for Projects Request for Engineering Study Conceptual configurations and alternatives for technical feasibility, Development of cost and schedule for each alternative Review by Owner: Economic analysis for rate of return, Pay back period, Capital recovery or Benefit/Cost ratios Owner Request for Further Study of Project Owner Abandons Project

Owner Authorizes Project

Final Design of Project: Detailed drawings, Written specifications, and Preparation of contract documents Procurement of Bulk Materials, Special Equipment, Construction Contracts Construction Contractors Administration of Contracts for Physical Work in place
Introduction Project Close Out: System Testing, Final Inspection, As-built Drawings 1 - 43

Phases of a Project III

• The cost of each phase depends on specifics, but usually the majority of the budget is spent during the production phase • Most of the budget is committed during the design phase before the actual work takes place • Pressures to start the “real-work” may lead to high cost due to commitment of resources without adequate planning
Introduction 1 - 44

The Level of Influence Concept

Introduction

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The Level of Influence Concept

Introduction

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Life Cycle Strategic and Tactical Issues

Introduction

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Perceptions of Project Cost

• Project Manager:
– Charged with on-time, on-cost, on-spec execution. – Views “on-cost” as a requirement to stay within the allocated budget, while satisfying a given set of specified conditions (scope), within a required time frame (schedule) – Commitment to project funds in accordance with a prescribed plan (time based budget)

Introduction

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Perceptions of Project Cost II

• Accounting department:
– Address expenses recognition related to a project or an organization profit and loss statement. – Ultimate goal is reporting profitability, while positively influencing the firm’s tax liability

Introduction

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Perceptions of Project Cost III

• Finance department:
– Concerned with the organization’s cash flow – Responsibility to provide the funds for paying the bills, and putting the unused or available money to work for the company

Introduction

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Commitments x Expenses x Cash Flow

Introduction

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Perceptions of Project Cost IV • Project Manager must be aware of the different cost perceptions and the manner in which they are reported, and also realize that the timing of cost identification can affect both the project and corporate finance • Project Manager can influence the timing of cost to improve cash flow and the cost of financing the work, in addition to affecting the revenue and expense in the P&L statement
Introduction 1 - 52

The S-Curve and the 3 Perceptions of Cost

Introduction

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The S-Curve and the 3 Perceptions of Cost

• Actual shape and the degree of lag/lead between curves are a function of:
– Project’s labor, material, and subcontractor mix – Firm’s invoice payment policy – Delivery period of major equipment items – Subcontractor performance period and the schedule of its work – Project schedule (when and how labor will be expended in relation to equipment procurement)
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Introduction

Putting Your Understanding of Cost to Work

• Project Cost:
– Evaluation of alternative design concepts during the development phase of the project – Excessive safety factors employed to ensure “on spec” performance should be avoided – Execution of project work must be controlled – Project manager should control the project contingency fund – In the procurement of equipment, material, and subcontract services, the specified requirements should be identified and the lowest priced, qualified supplier found
Introduction 1 - 55

Putting Your Understanding of Cost to Work

• Project Cost:
– Procurement of material and services based on partially completed drawings should be avoided – Project schedule (when and how labor will be expended in relation to equipment procurement) – Changes should not be incorporated in the project scope without client/management approval

Introduction

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Putting Your Understanding of Cost to Work

• Financial Cost:
– Interest expense can be minimized through the timing of order placement (use activity floats) – Negotiate purchases with venders to get extended payment terms – Negotiate progress payments to get early cash inflows which offset cash outflows – Invoices to the client should be processed quickly to minimize the lost interest resulting from a delay in receiving payment – Negotiate retentions to obtain reduction in retention as the project nears completion 1 - 57

Introduction

Putting Your Understanding of Cost to Work

• Tax Expense and Profit:
– Management may demand project completion by a given date to ensure inclusion of the project’s revenue and profit within a particular accounting period. Delayed project completion by only a few days could shift the project’s entire revenue and profit from one accounting period to the next – The need to shift revenue, expenses and profit from one tax period to the next often exists in managing the corporate profit & loss statement
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Introduction

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