Project management chapter 5

Project Management for Construction
Fundamental Concepts for Owners, Engineers, Architects and Builders

Cost Estimation
5.1 Costs Associated with Constructed Facilities

5.1 Costs Associated with
Constructed Facilities
The costs of a constructed facility to the owner include both the
initial capital cost and the subsequent operation and
maintenance costs. Each of these major cost categories
consists of a number of cost components.

The capital cost for a construction project includes the
expenses related to the inital establishment of the facility:
• 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
• 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

The magnitude of each of these cost components depends on
the nature, size and location of the project as well as the
management organization, among many considerations. The
owner is interested in achieving the lowest possible overall
project cost that is consistent with its investment objectives.

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. For example, land acquisition
costs are a major expenditure for building construction in high-
density urban areas, and construction financing costs can reach
the same order of magnitude as the construction cost in large
projects such as the construction of nuclear power plants.

From the owner's perspective, it is equally important to estimate
the corresponding operation and maintenance cost of each
alternative for a proposed facility in order to analyze the life
cycle costs. The large expenditures needed for facility
maintenance, especially for publicly owned infrastructure, are
reminders of the neglect in the past to consider fully the
implications of operation and maintenance cost in the design
stage.

In most construction budgets, there is an allowance for
contingencies or unexpected costs occuring during
construction. This contingency amount may be included within
each cost item or be included in a single category of
construction contingency. The amount of contingency is based
on historical experience and the expected difficulty of a
particular construction project. For example, one construction
firm makes estimates of the expected cost in five different
areas:

• Design development changes,
• Schedule adjustments,
• General administration changes (such as wage rates),
• Differing site conditions for those expected, and
• Third party requirements imposed during construction,
such as new permits.

Contingent amounts not spent for construction can be released
near the end of construction to the owner or to add additional
project elements.

In this chapter, we shall focus on the estimation of construction
cost, with only occasional reference to other cost components.
In Chapter 6, we shall deal with the economic evaluation of a
constructed facility on the basis of both the capital cost and the
operation and maintenance cost in the life cycle of the facility. It
is at this stage that tradeoffs between operating and capital
costs can be analyzed

Example 5-1: Energy project resource demands [1]

Example 5-1: Energy project
resource demands
The resources demands for three types of major energy
projects investigated during the energy crisis in the 1970's are
shown in Table 5-1. These projects are: (1) an oil shale project
with a capacity of 50,000 barrels of oil product per day; (2) a
coal gasification project that makes gas with a heating value of
320 billions of British thermal units per day, or equivalent to
about 50,000 barrels of oil product per day; and (3) a tar sand
project with a capacity of 150,000 barrels of oil product per day.

resource demands
For each project, the cost in billions of dollars, the engineering
manpower requirement for basic design in thousands of hours,
the engineering manpower requirement for detailed engineering
in millions of hours, the skilled labor requirement for
construction in millions of hours and the material requirement in
billions of dollars are shown in Table 5-1. To build several
projects of such an order of magnitude concurrently could drive
up the costs and strain the availability of all resources required
to complete the projects. Consequently, cost estimation often
represents an exercise in professional judgment instead of
merely compiling a bill of quantities and collecting cost data to
reach a total estimate mechanically.

resource demands
Oil shale
(50,000 barrels/day)
Coal gasification
(320 billions BTU/day)
Tar Sands
(150,000 barrels/day)
Cost ($ billion) 2.5 4 8 to 10
Basic design
(Thousands of hours)
80 200 100
Detailed engineering
(Millions of hours)
3 to 4 4 to 5 6 to 8
Construction
(Millions of hours)
20 30 40
Materials
($ billion)
1 2 2.5
TABLE 5-1 Resource Requirements of Some Major Energy Projects

Cost Estimation
5.2 Approaches to Cost Estimation

5.2 Approaches to Cost
Estimation
Cost estimating is one of the most important steps in project
management. A cost estimate establishes the base line of the
project cost at different stages of development of the project. A
cost estimate at a given stage of project development
represents a prediction provided by the cost engineer or
estimator on the basis of available data. According to the
American Association of Cost Engineers, cost engineering is
defined as that area of engineering practice where engineering
judgment and experience are utilized in the application of
scientific principles and techniques to the problem of cost
estimation, cost control and profitability.

Estimation
Virtually all cost estimation is performed according to one or
some combination of the following basic approaches:

Estimation
Production function. In microeconomics, the relationship
between the output of a process and the necessary resources is
referred to as the production function. In construction, the
production function may be expressed by the relationship
between the volume of construction and a factor of production
such as labor or capital. A production function relates the
amount or volume of output to the various inputs of labor,
material and equipment. For example, the amount of output Q
may be derived as a function of various input factors x1, x2, ...,
xn by means of mathematical and/or statistical methods.

Estimation
Thus, for a specified level of output, we may attempt to find a
set of values for the input factors so as to minimize the
production cost. The relationship between the size of a building
project (expressed in square feet) to the input labor (expressed
in labor hours per square foot) is an example of a production
function for construction. Several such production functions are
shown in Figure 3-3 of Chapter 3.

Estimation
Empirical cost inference. Empirical estimation of cost
functions requires statistical techniques which relate the cost of
constructing or operating a facility to a few important
characteristics or attributes of the system. The role of statistical
inference is to estimate the best parameter values or constants
in an assumed cost function. Usually, this is accomplished by
means of regression analysis techniques.

Estimation
Unit costs for bill of quantities. A unit cost is assigned to
each of the facility components or tasks as represented by the
bill of quantities. The total cost is the summation of the products
of the quantities multiplied by the corresponding unit costs. The
unit cost method is straightforward in principle but quite
laborious in application. The initial step is to break down or
disaggregate a process into a number of tasks. Collectively,
these tasks must be completed for the construction of a facility.
Once these tasks are defined and quantities representing these
tasks are assessed, a unit cost is assigned to each and then the
total cost is determined by summing the costs incurred in each
task. The level of detail in decomposing into tasks will vary
considerably from one estimate to another.

Estimation
Allocation of joint costs. Allocations of cost from existing
accounts may be used to develop a cost function of an
operation. The basic idea in this method is that each
expenditure item can be assigned to particular characteristics of
the operation. Ideally, the allocation of joint costs should be
causally related to the category of basic costs in an allocation
process. In many instances, however, a causal relationship
between the allocation factor and the cost item cannot be
identified or may not exist.

Estimation
For example, in construction projects, the accounts for basic
costs may be classified according to (1) labor, (2) material, (3)
construction equipment, (4) construction supervision, and (5)
general office overhead. These basic costs may then be
allocated proportionally to various tasks which are subdivisions
of a project.

Cost Estimation
5.3 Types of Construction Cost Estimates

5.3 Types of Construction
Cost Estimates
Construction cost constitutes only a fraction, though a
substantial fraction, of the total project cost. However, it is the
part of the cost under the control of the construction project
manager. The required levels of accuracy of construction cost
estimates vary at different stages of project development,
ranging from ball park figures in the early stage to fairly reliable
figures for budget control prior to construction. Since design
decisions made at the beginning stage of a project life cycle are
more tentative than those made at a later stage, the cost
estimates made at the earlier stage are expected to be less
accurate. Generally, the accuracy of a cost estimate will reflect
the information available at the time of estimation.

Cost Estimates
Construction cost estimates may be viewed from different
perspectives because of different institutional requirements. In
spite of the many types of cost estimates used at different
stages of a project, cost estimates can best be classified into
three major categories according to their functions. A
construction cost estimate serves one of the three basic
functions: design, bid and control. For establishing the financing
of a project, either a design estimate or a bid estimate is used.

Cost Estimates
1. Design Estimates. For the owner or its designated design
professionals, the types of cost estimates encountered run
parallel with the planning and design as follows:
• Screening estimates (or order of magnitude
estimates)
• Preliminary estimates (or conceptual estimates)
• Detailed estimates (or definitive estimates)
• Engineer's estimates based on plans and
specifications
For each of these different estimates, the amount of
design information available typically increases.

Cost Estimates
2. Bid Estimates. For the contractor, a bid estimate submitted
to the owner either for competitive bidding or negotiation
consists of direct construction cost including field
supervision, plus a markup to cover general overhead and
profits. The direct cost of construction for bid estimates is
usually derived from a combination of the following
approaches.
• Subcontractor quotations
• Quantity takeoffs
• Construction procedures.

Cost Estimates
3. Control Estimates. For monitoring the project during
construction, a control estimate is derived from available
information to establish:
• Budget estimate for financing
• Budgeted cost after contracting but prior to construction
• Estimated cost to completion during the progress of
construction.

Cost Estimates
Design Estimates

Design Estimates
In the planning and design stages of a project, various design
estimates reflect the progress of the design. At the very early
stage, the screening estimate or order of magnitude estimate is
usually made before the facility is designed, and must therefore
rely on the cost data of similar facilities built in the past.
A preliminary estimate or conceptual estimate is based on the
conceptual design of the facility at the state when the basic
technologies for the design are known.

Design Estimates
The detailed estimate or definitive estimate is made when the
scope of work is clearly defined and the detailed design is in
progress so that the essential features of the facility are
identifiable. The engineer's estimate is based on the completed
plans and specifications when they are ready for the owner to
solicit bids from construction contractors. In preparing these
estimates, the design professional will include expected
amounts for contractors' overhead and profits.

Design Estimates
The costs associated with a facility may be decomposed into a
hierarchy of levels that are appropriate for the purpose of cost
estimation. The level of detail in decomposing the facility into
tasks depends on the type of cost estimate to be prepared. For
conceptual estimates, for example, the level of detail in defining
tasks is quite coarse; for detailed estimates, the level of detail
can be quite fine.

Cost Estimates
Bid Estimates

Bid Estimates
The contractor's bid estimates often reflect the desire of the
contractor to secure the job as well as the estimating tools at its
disposal. Some contractors have well established cost
estimating procedures while others do not. Since only the
lowest bidder will be the winner of the contract in most bidding
contests, any effort devoted to cost estimating is a loss to the
contractor who is not a successful bidder. Consequently, the
contractor may put in the least amount of possible effort for
making a cost estimate if it believes that its chance of success
is not high.

Bid Estimates
If a general contractor intends to use subcontractors in the
construction of a facility, it may solicit price quotations for
various tasks to be subcontracted to specialty subcontractors.
Thus, the general subcontractor will shift the burden of cost
estimating to subcontractors. If all or part of the construction is
to be undertaken by the general contractor, a bid estimate may
be prepared on the basis of the quantity takeoffs from the plans
provided by the owner or on the basis of the construction
procedures devised by the contractor for implementing the
project.

Bid Estimates
For example, the cost of a footing of a certain type and size
may be found in commercial publications on cost data which
can be used to facilitate cost estimates from quantity takeoffs.
However, the contractor may want to assess the actual cost of
construction by considering the actual construction procedures
to be used and the associated costs if the project is deemed to
be different from typical designs. Hence, items such as labor,
material and equipment needed to perform various tasks may
be used as parameters for the cost estimates.

Control Estimates
Both the owner and the contractor must adopt some base line
for cost control during the construction. For the owner, a budget
estimatemust be adopted early enough for planning long term
financing of the facility. Consequently, the detailed estimate is
often used as the budget estimate since it is sufficient definitive
to reflect the project scope and is available long before the
engineer's estimate. As the work progresses, the budgeted cost
must be revised periodically to reflect the estimated cost to
completion. A revised estimated cost is necessary either
because of change orders initiated by the owner or due to
unexpected cost overruns or savings.

Control Estimates
For the contractor, the bid estimate is usually regarded as the
budget estimate, which will be used for control purposes as well
as for planning construction financing. The budgeted cost
should also be updated periodically to reflect the estimated cost
to completion as well as to insure adequate cash flows for the
completion of the project.

Control Estimates
Example 5-2: Screening estimate of a grouting seal beneath
a landfill [2]

Example 5-2: Screening estimate of
a grouting seal beneath a landfill
One of the methods of isolating a landfill from groundwater is to
create a bowl-shaped bottom seal beneath the site as shown in
Figure 5-0. The seal is constructed by pumping or pressure-
injecting grout under the existing landfill. Holes are bored at
regular intervals throughout the landfill for this purpose and the
grout tubes are extended from the surface to the bottom of the
landfill. A layer of soil at a minimum of 5 ft. thick is left between
the grouted material and the landfill contents to allow for
irregularities in the bottom of the landfill. The grout liner can be
between 4 and 6 feet thick. A typical material would be Portland
cement grout pumped under pressure through tubes to fill voids
in the soil. This grout would then harden into a permanent,
impermeable liner.

Figure 5-1: Grout Bottom Seal Liner at a Landfill

The work items in this project include (1) drilling exploratory
bore holes at 50 ft intervals for grout tubes, and (2) pumping
grout into the voids of a soil layer between 4 and 6 ft thick. The
quantities for these two items are estimated on the basis of the
landfill area:
8 acres = (8)(43,560 ft2/acre) = 348,480 ft2
(As an approximation, use 360,000 ft2 to account for the bowl
shape)

The number of bore holes in a 50 ft by 50 ft grid pattern
covering 360,000 ft2 is given by:

The average depth of the bore holes is estimated to be 20 ft.
Hence, the total amount of drilling is (144)(20) = 2,880 ft.The
volume of the soil layer for grouting is estimated to be:
for a 4 ft layer, volume = (4 ft)(360,000 ft2) = 1,440,000 ft3
for a 6 ft layer, volume = (6 ft)(360,000 ft2) = 2,160,000 ft3

It is estimated from soil tests that the voids in the soil layer are
between 20% and 30% of the total volume. Thus, for a 4 ft soil
layer:
grouting in 20% voids = (20%)(1,440,000) = 288,000 ft3
grouting in 30 % voids = (30%)(1,440,000) = 432,000 ft3

and for a 6 ft soil layer:

The unit cost for drilling exploratory bore holes is estimated to
be between $3 and $10 per foot (in 1978 dollars) including all
expenses. Thus, the total cost of boring will be between
(2,880)(3) = $ 8,640 and (2,880)(10) = $28,800. The unit cost of
Portland cement grout pumped into place is between $4 and
$10 per cubic foot including overhead and profit. In addition to
the variation in the unit cost, the total cost of the bottom seal will
depend upon the thickness of the soil layer grouted and the
proportion of voids in the soil. That is:

• for a 4 ft layer with 20% voids, grouting cost = $1,152,000 to
$2,880,000
$4,320,000
$4,320,000
$6,480,000

The total cost of drilling bore holes is so small in comparison
with the cost of grouting that the former can be omitted in the
screening estimate. Furthermore, the range of unit cost varies
greatly with soil characteristics, and the engineer must exercise
judgment in narrowing the range of the total cost. Alternatively,
additional soil tests can be used to better estimate the unit cost
of pumping grout and the proportion of voids in the soil.
Suppose that, in addition to ignoring the cost of bore holes, an
average value of a 5 ft soil layer with 25% voids is used
together with a unit cost of $ 7 per cubic foot of Portland cement
grouting. In this case, the total project cost is estimated to be:
(5 ft)(360,000 ft2)(25%)($7/ft3) = $3,150,000

An important point to note is that this screening estimate is
based to a large degree on engineering judgment of the soil
characteristics, and the range of the actual cost may vary from
$ 1,152,000 to $ 6,480,000 even though the probabilities of
having actual costs at the extremes are not very high.

Example 5-3: Example of engineer's estimate and
contractors' bids[3]

Example 5-3: Example of engineer's
estimate and contractors' bids
The engineer's estimate for a project involving 14 miles of
Interstate 70 roadway in Utah was $20,950,859. Bids were
submitted on March 10, 1987, for completing the project within
320 working days. The three low bidders were:
1. Ball, Ball & Brosame, Inc., Danville CA $14,129,798
2. National Projects, Inc., Phoenix, AR $15,381,789
3. Kiewit Western Co., Murray, Utah $18,146,714

It was astounding that the winning bid was 32% below the
engineer's estimate. Even the third lowest bidder was 13%
below the engineer's estimate for this project. The disparity in
pricing can be attributed either to the very conservative estimate
of the engineer in the Utah Department of Transportation or to
area contractors who are hungrier than usual to win jobs.

The unit prices for different items of work submitted for this
project by (1) Ball, Ball & Brosame, Inc. and (2) National
Projects, Inc. are shown in Table 5-2. The similarity of their unit
prices for some items and the disparity in others submitted by
the two contractors can be noted.

Items Unit Quantity
Unit price
1 2
Mobilization ls 1 115,000 569,554
Removal, berm lf 8,020 1.00 1.50
Finish subgrade sy 1,207,500 0.50 0.30
Surface ditches lf 525 2.00 1.00
Excavation structures cy 7,000 3.00 5.00
Base course, untreated, 3/4'' ton 362,200 4.50 5.00
Lean concrete, 4'' thick sy 820,310 3.10 3.00
PCC, pavement, 10'' thick sy 76,010 10.90 12.00

Items Unit Quantity
Unit price
1 2
Concrete, ci AA (AE) ls 1 200,000 190,000
Small structure cy 50 500 475
Barrier, precast lf 7,920 15.00 16.00
Flatwork, 4'' thick sy 7,410 10.00 8.00
10'' thick sy 4,241 20.00 27.00
Slope protection sy 2,104 25.00 30.00

Items Unit Quantity
Unit price
1 2
Salvage and relay
pipe
lf 1,680 5.00 12.00
Loose riprap cy 32 40.00 30.00
Braced posts ea 54 100 110
Delineators, type I lb 1,330 12.00 12.00
type II ea 140 15.00 12.00
Constructive signs
fixed
sf 52,600 0.10 0.40

Items Unit Quantity
Unit price
1 2
Warning lights day 6,300 0.10 0.50
Pavement marking,
epoxy material
Black gal 475 90.00 100
Yellow gal 740 90.00 80.00
White gal 985 90.00 70.00
Plowable, one-way
white
ea 342 50.00 20.00

Cost Estimation
5.4 Effects of Scale on Construction Cost

5.4 Effects of Scale on
Construction Cost
Screening cost estimates are often based on a single variable
representing the capacity or some physical measure of the
design such as floor area in buildings, length of highways,
volume of storage bins and production volumes of processing
plants. Costs do not always vary linearly with respect to
different facility sizes. Typically, scale economies or
diseconomies exist. If the average cost per unit of capacity is
declining, then scale economies exist. Conversely, scale
diseconomies exist if average costs increase with greater size.
Empirical data are sought to establish the economies of scale
for various types of facility, if they exist, in order to take
advantage of lower costs per unit of capacity.

Construction Cost
Let x be a variable representing the facility capacity, and y be
the resulting construction cost. Then, a linear cost relationship
can be expressed in the form:

Construction Cost
where a and b are positive constants to be determined on the
basis of historical data. Note that in Equation (5.1), a fixed cost
of y = a at x = 0 is implied as shown in Figure 5-2. In general,
this relationship is applicable only in a certain range of the
variable x, such as between x = c and x = d. If the values of y
corresponding to x = c and x = d are known, then the cost of a
facility corresponding to any x within the specified range may be
obtained by linear interpolation. For example, the construction
cost of a school building can be estimated on the basis of a
linear relationship between cost and floor area if the unit cost
per square foot of floor area is known for school buildings within
certain limits of size.

Construction Cost
Figure 5-2: Linear Cost Relationship with
Economies of Scale

Construction Cost
A nonlinear cost relationship between the facility capacity x and
construction cost y can often be represented in the form:

Construction Cost
where a and b are positive constants to be determined on the
basis of historical data. For 0 < b < 1, Equation (5.2) represents
the case of increasing returns to scale, and for b ;gt 1, the
relationship becomes the case of decreasing returns to scale,
as shown in Figure 5-3. Taking the logarithm of both sides this
equation, a linear relationship can be obtained as follows:

Construction Cost
Figure 5-3: Nonlinear Cost Relationship with increasing or Decreasing
Economies of Scale

Construction Cost

Construction Cost
Although no fixed cost is implied in Eq.(5.2), the equation is
usually applicable only for a certain range of x. The same
limitation applies to Eq.(5.3). A nonlinear cost relationship often
used in estimating the cost of a new industrial processing plant
from the known cost of an existing facility of a different size is
known as the exponential rule. Let yn be the known cost of an
existing facility with capacity Qn, and y be the estimated cost of
the new facility which has a capacity Q. Then, from the
empirical data, it can be assumed that

Construction Cost
where m usually varies from 0.5 to 0.9, depending on a specific
type of facility. A value of m = 0.6 is often used for chemical
processing plants. The exponential rule can be reduced to a
linear relationship if the logarithm of Equation (5.4) is used:

Construction Cost
The exponential rule can be applied to estimate the total cost of a
complete facility or the cost of some particular component of a facility.

Construction Cost
Example 5-4: Determination of m for the exponential rule

Example 5-4: Determination
of m for the exponential rule
Figure 5-4: Log-Log Scale Graph of Exponential Rule
Example

The empirical cost data from a number of sewage treatment
plants are plotted on a log-log scale for ln(Q/Qn) and ln(y/yn)
and a linear relationship between these logarithmic ratios is
shown in Figure 5-4. For (Q/Qn) = 1 or ln(Q/Qn) = 0, ln(y/yn) = 0;
and for Q/Qn = 2 or ln(Q/Qn) = 0.301, ln(y/yn) = 0.1765. Since m
is the slope of the line in the figure, it can be determined from
the geometric relation as follows:

For ln(y/yn) = 0.1765, y/yn = 1.5, while the corresponding value
of Q/Qn is 2. In words, for m = 0.585, the cost of a plant
increases only 1.5 times when the capacity is doubled.

Construction Cost
Example 5-5: Cost exponents for water and wastewater
treatment plants[4]

Example 5-5: Cost exponents for water
and wastewater treatment plants
The magnitude of the cost exponent m in the exponential rule
provides a simple measure of the economy of scale associated
with building extra capacity for future growth and system
reliability for the present in the design of treatment plants. When
m is small, there is considerable incentive to provide extra
capacity since scale economies exist as illustrated in Figure 5-
3. When m is close to 1, the cost is directly proportional to the
design capacity. The value of m tends to increase as the
number of duplicate units in a system increases. The values of
m for several types of treatment plants with different plant
components derived from statistical correlation of actual
construction costs are shown in Table 5-3.

Example 5-5: Cost exponents for water
and wastewater treatment plants
Treatment plant
type
Exponent
m
Capacity range
(millions of gallons per
day)
1. Water treatment 0.67 1-100
2. Waste treatment
Primary with digestion (small) 0.55 0.1-10
Primary with digestion (large) 0.75 0.7-100
Trickling filter 0.60 0.1-20
Activated sludge 0.77 0.1-100
Stabilization ponds 0.57 0.1-100
TABLE 5-3 Estimated Values of
Cost Exponents for Water
Treatment Plants
Source: Data are collected from various
sources by P.M. Berthouex. See the
references in his article for the primary
sources.

5.4 Effects of Scale on Construction
Cost
Example 5-6: Some Historical Cost Data for the Exponential
Rule

Example 5-6: Some Historical Cost
Data for the Exponential Rule
The exponential rule as represented by Equation (5.4) can be
expressed in a different form as:
where

If m and K are known for a given type of facility, then the cost y
for a proposed new facility of specified capacity Q can be
readily computed.

Processing
unit
Unit of
capacity
K Value
(1968 $)
m
value
1. Liquid processing
Oil separation mgd 58,000 0.84
Hydroclone degritter mgd 3,820 0.35
Primary sedimentation ft2 399 0.60
Furial clarifier ft2 700 0.57
Sludge aeration basin mil. gal. 170,000 0.50
Tickling filter ft2 21,000 0.71
Aerated lagoon basin mil. gal. 46,000 0.67
Equalization mil. gal. 72,000 0.52
Neutralization mgd 60,000 0.70
2. Sludge handling
Digestion ft3 67,500 0.59
Vacuum filter ft2 9,360 0.84
Centrifuge lb dry solids/hr 318 0.81

The estimated values of K and m for various water and sewage
treatment plant components are shown in Table 5-4. The K
values are based on 1968 dollars. The range of data from which
the K and m values are derived in the primary sources should
be observed in order to use them in making cost estimates.

As an example, take K = $399 and m = 0.60 for a primary
sedimentation component in Table 5-4. For a proposed new
plant with the primary sedimentation process having a capacity
of 15,000 sq. ft., the estimated cost (in 1968 dollars) is:
y = ($399)(15,000)0.60 = $128,000.

Cost Estimation
5.5 Unit Cost Method of Estimation

5.5 Unit Cost Method of
Estimation
If the design technology for a facility has been specified, the
project can be decomposed into elements at various levels of
detail for the purpose of cost estimation. The unit cost for each
element in the bill of quantities must be assessed in order to
compute the total construction cost. This concept is applicable
to both design estimates and bid estimates, although different
elements may be selected in the decomposition.

Estimation
For design estimates, the unit cost method is commonly used
when the project is decomposed into elements at various levels
of a hierarchy as follows:
– Preliminary Estimates. The project is decomposed into
major structural systems or production equipment items,
e.g. the entire floor of a building or a cooling system for a
processing plant.
– Detailed Estimates. The project is decomposed into
components of various major systems, i.e., a single floor
panel for a building or a heat exchanger for a cooling
system.

Estimation
– Engineer's Estimates. The project is decomposed into
detailed items of various components as warranted by the
available cost data. Examples of detailed items are slabs
and beams in a floor panel, or the piping and connections
for a heat exchanger.

Estimation
For bid estimates, the unit cost method can also be applied
even though the contractor may choose to decompose the
project into different levels in a hierarchy as follows:
1. Subcontractor Quotations. The decomposition of a project
into subcontractor items for quotation involves a minimum
amount of work for the general contractor. However, the
accuracy of the resulting estimate depends on the reliability
of the subcontractors since the general contractor selects
one among several contractor quotations submitted for each
item of subcontracted work.

Estimation
2. Quantity Takeoffs. The decomposition of a project into
items of quantities that are measured (or taken off) from the
engineer's plan will result in a procedure similar to that
adopted for a detailed estimate or an engineer's estimate by
the design professional. The levels of detail may vary
according to the desire of the general contractor and the
availability of cost data.
3. Construction Procedures. If the construction procedure of
a proposed project is used as the basis of a cost estimate,
the project may be decomposed into items such as labor,
material and equipment needed to perform various tasks in
the projects.

Estimation
Simple Unit Cost Formula

Suppose that a project is decomposed into n elements for cost
estimation. Let Qi be the quantity of the ith element and ui be the
corresponding unit cost. Then, the total cost of the project is
given by:

where n is the number of units. Based on characteristics of the
construction site, the technology employed, or the management
of the construction process, the estimated unit cost, ui for each
element may be adjusted.

Estimation
Factored Estimate Formula

A special application of the unit cost method is the "factored
estimate" commonly used in process industries. Usually, an
industrial process requires several major equipment
components such as furnaces, towers drums and pump in a
chemical processing plant, plus ancillary items such as piping,
valves and electrical elements. The total cost of a project is
dominated by the costs of purchasing and installing the major
equipment components and their ancillary items. Let Ci be the
purchase cost of a major equipment component i and fi be a
factor accounting for the cost of ancillary items needed for the
installation of this equipment component i. Then, the total cost
of a project is estimated by:

where n is the number of major equipment components
included in the project. The factored method is essentially
based on the principle of computing the cost of ancillary items
such as piping and valves as a fraction or a multiple of the costs
of the major equipment items. The value of Ci may be obtained
by applying the exponential rule so the use of Equation (5.8)
may involve a combination of cost estimation methods.

Estimation
Formula Based on Labor, Material and Equipment

Formula Based on Labor,
Material and Equipment
Consider the simple case for which costs of labor, material and
equipment are assigned to all tasks. Suppose that a project is
decomposed into n tasks. Let Qi be the quantity of work for task
i, Mi be the unit material cost of task i, Ei be the unit equipment
rate for task i, Li be the units of labor required per unit of Qi, and
Wi be the wage rate associated with Li. In this case, the total
cost y is:

Formula Based on Labor,
Material and Equipment
Note that WiLi yields the labor cost per unit of Qi, or the labor
unit cost of task i. Consequently, the units for all terms in
Equation (5.9) are consistent.

Estimation
Example 5-7: Decomposition of a building foundation into
design and construction elements.

Example 5-7: Decomposition of a building
foundation into design and construction elements.
The concept of decomposition is illustrated by the example of
estimating the costs of a building foundation excluding
excavation as shown in Table 5-5 in which the decomposed
design elements are shown on horizontal lines and the
decomposed contract elements are shown in vertical columns.
For a design estimate, the decomposition of the project into
footings, foundation walls and elevator pit is preferred since the
designer can easily keep track of these design elements;
however, for a bid estimate, the decomposition of the project
into formwork, reinforcing bars and concrete may be preferred
since the contractor can get quotations of such contract items
more conveniently from specialty subcontractors.

Example 5-7: Decomposition of a building
foundation into design and construction elements.
Design
elements
Contract elements
Formwork Rebars Concrete Total cost
Footings $5,000 $10,000 $13,000 $28,000
Foundation
walls
15,000 18,000 28,000 61,000
Elevator pit 9,000 15,000 16,000 40,000
Total cost $29,000 $43,000 $57,000 $129,000
TABLE 5-5 Illustrative Decomposition of Building Foundation Costs

Estimation
Example 5-8: Cost estimate using labor, material and
equipment rates.

Example 5-8: Cost estimate using labor,
material and equipment rates.
For the given quantities of work Qi for the concrete foundation
of a building and the labor, material and equipment rates in
Table 5-6, the cost estimate is computed on the basis of
Equation (5.9). The result is tabulated in the last column of the
same table.

Example 5-8: Cost estimate using labor,
material and equipment rates.
Description
Quantity
Qi
Material
unit
cost
Mi
Equipme
nt
unit cost
Ei
Wage
rate
Wi
Labor
input
Li
Labor
unit cost
WiLi
Direct
cost
Yi
Formwork
12,000
ft2 $0.4/ft2 $0.8/ft2 $15/hr 0.2 hr/ft2 $3.0/ft2 $50,400
Rebars 4,000 lb 0.2/lb 0.3/lb 15/hr 0.04 hr/lb 0.6/lb 4,440
Concrete 500 yd3 5.0/yd3 50/yd3 15/hr 0.8 hr/yd3 12.0/yd3 33,500
Total $88,300

Cost Estimation
5.6 Methods for Allocation of Joint Costs

5.6 Methods for Allocation of
Joint Costs
The principle of allocating joint costs to various elements in a
project is often used in cost estimating. Because of the difficulty
in establishing casual relationship between each element and
its associated cost, the joint costs are often prorated in
proportion to the basic costs for various elements.

Joint Costs
One common application is found in the allocation of field
supervision cost among the basic costs of various elements
based on labor, material and equipment costs, and the
allocation of the general overhead cost to various elements
according to the basic and field supervision cost. Suppose that
a project is decomposed into n tasks. Let y be the total basic
cost for the project and yi be the total basic cost for task i. If F is
the total field supervision cost and Fi is the proration of that cost
to task i, then a typical proportional allocation is:

Joint Costs
Similarly, let z be the total direct field cost which includes the
total basic cost and the field supervision cost of the project, and
zi be the direct field cost for task i. If G is the general office
overhead for proration to all tasks, and Gi is the share for task i,
then

Joint Costs
Finally, let w be the grand total cost of the project which
includes the direct field cost and the general office overhead
cost charged to the project and wi be that attributable task i.
Then,
And

Joint Costs
Example 5-9: Prorated costs for field supervision and office
overhead

Example 5-9: Prorated costs for field
supervision and office overhead
If the field supervision cost is $13,245 for the project in Table 5-
6 (Example 5-8) with a total direct cost of $88,300, find the
prorated field supervision costs for various elements of the
project. Furthermore, if the general office overhead charged to
the project is 4% of the direct field cost which is the sum of
basic costs and field supervision cost, find the prorated general
office overhead costs for various elements of the project.

For the project, y = $88,300 and F = $13,245. Hence:
z = 13,245 + 88,300 = $101,545
G = (0.04)(101,545) = $4,062
w = 101,545 + 4,062 = $105,607
The results of the proration of costs to various elements are
shown in Table 5-7.

Description
Basic cost
yi
Allocated
field
supervision
cost
Fi
Total
field cost
zi
Allocated
overhead
cost
Gi
Total cost
Li
Formwork $50,400 $7,560 $57,960 $2,319 $60,279
Rebars 4,400 660 5,060 202 5,262
Concrete 33,500 5,025 38,525 1,541 40,066
Total $88,300 $13,245 $101,545 $4,062 $105,607

Joint Costs
Example 5-10: A standard cost report for allocating
overhead

Example 5-10: A standard cost
report for allocating overhead
The reliance on labor expenses as a means of allocating
overhead burdens in typical management accounting systems
can be illustrated by the example of a particular product's
standard cost sheet. [5] Table 5-8 is an actual product's
standard cost sheet of a company following the procedure of
using overhead burden rates assessed per direct labor hour.
The material and labor costs for manufacturing a type of valve
were estimated from engineering studies and from current
material and labor prices. These amounts are summarized in
Columns 2 and 3 of Table 5-8.

The overhead costs shown in Column 4 of Table 5-8 were
obtained by allocating the expenses of several departments to
the various products manufactured in these departments in
proportion to the labor cost. As shown in the last line of the
table, the material cost represents 29% of the total cost, while
labor costs are 11% of the total cost. The allocated overhead
cost constitutes 60% of the total cost. Even though material
costs exceed labor costs, only the labor costs are used in
allocating overhead.

Although this type of allocation method is common in industry,
the arbitrary allocation of joint costs introduces unintended
cross subsidies among products and may produce adverse
consequences on sales and profits. For example, a particular
type of part may incur few overhead expenses in practice, but
this phenomenon would not be reflected in the standard cost
report.

TABLE 5-8 Standard Cost
Report for a Type of Valve
(1) Material cost (2) Labor cost (3) Overhead cost (4) Total cost
Purchased part $1.1980 $1.1980
Operation
Drill, face, tap (2) $0.0438 $0.2404 $0.2842
Degrease 0.0031 0.0337 0.0368
Remove burs 0.0577 0.3241 0.3818
Total cost, this
item
1.1980 0.1046 0.5982 1.9008
Other
subassemblies
0.3523 0.2994 1.8519 2.4766
Total cost,
subassemblies
1.5233 0.4040 2.4501 4.3773
Assemble and
test
0.1469 0.4987 0.6456
Pack without
paper
0.0234 0.1349 0.1583
Total cost, this
item
$1.5233 $0.5743 $3.0837 $5.1813
Cost component,
%
29% 11% 60% 100%

Cost Estimation
5.7 Historical Cost Data

Preparing cost estimates normally requires the use of historical
data on construction costs. Historical cost data will be useful for
cost estimation only if they are collected and organized in a way
that is compatible with future applications. Organizations which
are engaged in cost estimation continually should keep a file for
their own use. The information must be updated with respect to
changes that will inevitably occur. The format of cost data, such
as unit costs for various items, should be organized according
to the current standard of usage in the organization.

Construction cost data are published in various forms by a
number of organizations. These publications are useful as
references for comparison. Basically, the following types of
information are available:
• Catalogs of vendors' data on important features and
specifications relating to their products for which cost
quotations are either published or can be obtained. A
major source of vendors' information for building products
is Sweets' Catalog published by McGraw-Hill Information
Systems Company.

• Periodicals containing construction cost data and indices.
One source of such information is ENR, the McGraw-Hill
Construction Weekly, which contains extensive cost data
including quarterly cost reports. Cost Engineering, a journal
of the American Society of Cost Engineers, also publishes
useful cost data periodically.
• Commercial cost reference manuals for estimating guides.
An example is the Building Construction Cost Data published
annually by R.S. Means Company, Inc., which contains unit
prices on building construction items. Dodge Manual for
Building Construction, published by McGraw-Hill, provides
similar information.

• Digests of actual project costs. The Dodge Digest of Building
Costs and Specifications provides descriptions of design
features and costs of actual projects by building type. Once a
week, ENR publishes the bid prices of a project chosen from
all types of construction projects.

Historical cost data must be used cautiously. Changes in
relative prices may have substantial impacts on construction
costs which have increased in relative price. Unfortunately,
systematic changes over a long period of time for such factors
are difficult to predict. Errors in analysis also serve to introduce
uncertainty into cost estimates. It is difficult, of course, to
foresee all the problems which may occur in construction and
operation of facilities. There is some evidence that estimates of
construction and operating costs have tended to persistently
understate the actual costs. This is due to the effects of greater
than anticipated increases in costs, changes in design during
the construction process, or overoptimism.

Since the future prices of constructed facilities are influenced by
many uncertain factors, it is important to recognize that this risk
must be borne to some degree by all parties involved, i.e., the
owner, the design professionals, the construction contractors,
and the financing institution. It is to the best interest of all
parties that the risk sharing scheme implicit in the
design/construct process adopted by the owner is fully
understood by all. When inflation adjustment provisions have
very different risk implications to various parties, the price level
changes will also be treated differently for various situations

Cost Estimation
5.8 Cost Indices

5.8 Cost Indices
Since historical cost data are often used in making cost
estimates, it is important to note the price level changes over
time. Trends in price changes can also serve as a basis for
forecasting future costs. The input price indices of labor and/or
material reflect the price level changes of such input
components of construction; the output price indices, where
available, reflect the price level changes of the completed
facilities, thus to some degree also measuring the productivity
of construction.

5.8 Cost Indices
A price index is a weighted aggregate measure of constant
quantities of goods and services selected for the package. The
price index at a subsequent year represents a proportionate
change in the same weighted aggregate measure because of
changes in prices. Let lt be the price index in year t, and lt+1 be
the price index in the following year t+1. Then, the percent
change in price index for year t+1 is:

5.8 Cost Indices
If the price index at the base year t=0 is set at a value of 100,
then the price indices l1, l2...ln for the subsequent years t=1,2...n
can be computed successively from changes in the total price
charged for the package of goods measured in the index.

5.8 Cost Indices
The best-known indicators of general price changes are the
Gross Domestic Product (GDP) deflators compiled periodically
by the U.S. Department of Commerce, and the consumer price
index (CPI) compiled periodically by the U.S. Department of
Labor. They are widely used as broad gauges of the changes in
production costs and in consumer prices for essential goods
and services. Special price indices related to construction are
also collected by industry sources since some input factors for
construction and the outputs from construction may
disproportionately outpace or fall behind the general price
indices. Examples of special price indices for construction input
factors are the wholesale Building Material Price and Building
Trades Union Wages, both compiled by the U.S.

5.8 Cost Indices
Department of Labor. In addition, the construction cost index
and the building cost index are reported periodically in
the Engineering News-Record (ENR). Both ENR cost indices
measure the effects of wage rate and material price trends, but
they are not adjusted for productivity, efficiency, competitive
conditions, or technology changes. Consequently, all these
indices measure only the price changes of respective
construction input factors as represented by constant quantities
of material and/or labor.

5.8 Cost Indices
On the other hand, the price indices of various types of
completed facilities reflect the price changes of construction
output including all pertinent factors in the construction process.
The building construction output indices compiled by Turner
Construction Company and Handy-Whitman Utilities are
compiled in the U.S. Statistical Abstracts published each year.

5.8 Cost Indices
Table 5-9 show a variety of United States indices, including the
Gross Domestic Product (GDP) price deflator, the ENR building
index, and the Turner Construction Company Building Cost
Index from 1996 to 2007, using 2000 as the base year with an
index of 100.

5.8 Cost Indices
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Turner Construction
- Buildings 84.9 88.2 92.3 95.8 100.0 103.0 104.0 104.4 110.1 120.5 133.3 143.5
ENR - Buildings 90.5 95.0 95.8 97.6 100.0 101.0 102.4 104.4 112.6 118.8 123.5 126.7
GDP Deflator 94.0 95.6 96.8 98.0 100.0 102.3 104.2 105.9 107.2 108.6 110.2 112.0
Note: Index = 100 in base year of 2000.

5.8 Cost Indices
Figure 5-8 Price and cost indices for construction.

5.8 Cost Indices
Since construction costs vary in different regions of the United
States and in all parts of the world, locational indices showing
the construction cost at a specific location relative to the
national trend are useful for cost estimation. ENR publishes
periodically the indices of local construction costs at the major
cities in different regions of the United States as percentages of
local to national costs.

5.8 Cost Indices
When the inflation rate is relatively small, i.e., less than 10%, it
is convenient to select a single price index to measure the
inflationary conditions in construction and thus to deal only with
a single set of price change rates in forecasting. Let jt be the
price change rate in year t+1 over the price in year t. If the base
year is denoted as year 0 (t=0), then the price change rates at
years 1,2,...t are j1,j2,...jt, respectively. Let At be the cost in year t
expressed in base-year dollars and At' be the cost in year t
expressed in then-current dollars.

5.8 Cost Indices
If the prices of certain key items affecting the estimates of future
benefits and costs are expected to escalate faster than the
general price levels, it may become necessary to consider the
differential price changes over and above the general inflation
rate. For example, during the period between 1973 through
1979, it was customary to assume that fuel costs would
escalate faster than the general price levels. With hindsight in
1983, the assumption for estimating costs over many years
would have been different. Because of the uncertainty in the
future, the use of differential inflation rates for special items
should be judicious.

5.8 Cost Indices
Future forecasts of costs will be uncertain: the actual expenses
may be much lower or much higher than those forecasted. This
uncertainty arises from technological changes, changes in
relative prices, inaccurate forecasts of underlying
socioeconomic conditions, analytical errors, and other factors.
For the purpose of forecasting, it is often sufficient to project the
trend of future prices by using a constant rate j for price
changes in each year over a period of t years, then

5.8 Cost Indices
Estimation of the future rate increase j is not at all
straightforward. A simple expedient is to assume that future
inflation will continue at the rate of the previous period:
More sophisticated forecasting models to predict future cost
increases include corrections for items such as economic cycles
and technology changes.

5.8 Cost Indices
Example 5-12: Changes in highway and building costs

Example 5-12: Changes in
highway and building costs
Figure 5-9 shows the change of standard highway costs from
1992 to 2002, and Table 5-10 shows the change of residential
building costs from 1970 to 1990. In each case, the rate of cost
increase was substantially above the rate of inflation in the
decade of the 1970s.. Indeed, the real cost increase between
1970 and 1980 was in excess of three percent per year in both
cases. However, these data also show some cause for
optimism. For the case of the standard highway, real
cost decreasestook place in the period from l970 to l990.
Unfortunately, comparable indices of outputs are not being
compiled on a nationwide basis for other types of construction.

Figure 5-
9 Producer
Prices of
Highway and
Street
Construction
(Producer Price
Index: Highways
and Streets-
monthly data).

year
Standard
residence
cost
(1972=100)
Price deflator
(1972=100)
Standard
residence
real cost
(1972=100)
Percentage
change
per year
1970 77 92 74
1980 203 179 99 +3.4%
1990 287 247 116 +1.7%

Cost Estimation
5.9 Applications of Cost Indices to Estimating

5.9 Applications of Cost
Indices to Estimating
In the screening estimate of a new facility, a single parameter is
often used to describe a cost function. For example, the cost of
a power plant is a function of electricity generating capacity
expressed in megawatts, or the cost of a sewage treatment
plant as a function of waste flow expressed in million gallons
per day.

The general conditions for the application of the single
parameter cost function for screening estimates are:
1. Exclude special local conditions in historical data
2. Determine new facility cost on basis of specified size
or capacity (using the methods described in Sections
5.3 to 5.6)
3. Adjust for inflation index
4. Adjust for local index of construction costs
5. Adjust for different regulatory constraints
6. Adjust for local factors for the new facility

Some of these adjustments may be done using compiled
indices, whereas others may require field investigation and
considerable professional judgment to reflect differences
between a given project and standard projects performed in the
past.

Example 5-13: Screening estimate for a refinery

Example 5-13: Screening
estimate for a refinery
The total construction cost of a refinery with a production
capacity of 200,000 bbl/day in Gary, Indiana, completed in 2001
was $100 million. It is proposed that a similar refinery with a
production capacity of 300,000 bbl/day be built in Los Angeles,
California, for completion in 2003. For the additional information
given below, make an order of magnitude estimate of the cost
of the proposed plant.

1. In the total construction cost for the Gary, Indiana, plant,
there was an item of $5 million for site preparation which is
not typical for other plants.
2. The variation of sizes of the refineries can be approximated
by the exponential rule, Equation (5.4), with m = 0.6.
3. The inflation rate is expected to be 8% per year from 1999 to
2003.

4. The location index was 0.92 for Gary, Indiana and 1.14 for
Los Angeles in 1999. These indices are deemed to be
appropriate for adjusting the costs between these two cities.
5. New air pollution equipment for the LA plant costs $7 million
in 2003 dollars (not required in the Gary plant).
6. The contingency cost due to inclement weather delay will be
reduced by the amount of 1% of total construction cost
because of the favorable climate in LA (compared to Gary).

On the basis of the above conditions, the estimate for the new
project may be obtained as follows:
1.Typical cost excluding special item at Gary, IN is
$100 million - $5 million = $ 95 million
2. Adjustment for capacity based on the exponential law yields
($95)(300,000/200,000)0.6 = (95)(1.5)0.6 = $121.2 million

3. Adjustment for inflation leads to the cost in 2003 dollars
as
($121.2)(1.08)4 = $164.6 million
4. Adjustment for location index gives
($164.6)(1.14/0.92) = $204.6 million
5. Adjustment for new pollution equipment at the LA plant
gives $204.6 + $7 = $211.6 million

6. Reduction in contingency cost yields
($211.6)(1-0.01) = $209.5 million
Since there is no adjustment for the cost of construction
financing, the order of magnitude estimate for the new project is
$209.5 million.

Example 5-14: Conceptual estimate for a chemical
processing plant

Example 5-14: Conceptual estimate
for a chemical processing plant
In making a preliminary estimate of a chemical processing
plant, several major types of equipment are the most significant
parameters in affecting the installation cost. The cost of piping
and other ancillary items for each type of equipment can often
be expressed as a percentage of that type of equipment for a
given capacity. The standard costs for the major equipment
types for two plants with different daily production capacities are
as shown in Table 5-11. It has been established that the
installation cost of all equipment for a plant with daily production
capacity between 100,000 bbl and 400,000 bbl can best be
estimated by using linear interpolation of the standard data.

Equipment
type
Equipment Cost ($1000)
Cost of ancillary items
as % of equipment cost
($1000)
100,000 bbl 400,000 bbl 100,000 bbl 400,000 bbl
Furnace 3,000 10,000 40% 30%
Tower 2,000 6,000 45% 35%
Drum 1,500 5,000 50% 40%
Pump, etc. 1,000 4,000 60% 50%
TABLE 5-11 Cost Data for Equipment and
Ancillary Items

A new chemical processing plant with a daily production
capacity of 200,000 bbl is to be constructed in Memphis, TN in
four years. Determine the total preliminary cost estimate of the
plant including the building and the equipment on the following
basis:
1. The installation cost for equipment was based on linear
interpolation from Table 5-11, and adjusted for inflation for
the intervening four years. We expect inflation in the four
years to be similar to the period 1990-1994 and we will use
the GNP Deflator index.

2. The location index for equipment installation is 0.95 for
Memphis, TN, in comparison with the standard cost.
3. An additional cost of $500,000 was required for the local
conditions in Memphis, TN.

The solution of this problem can be carried out according to the
steps as outlined in the problem statement:
1. The costs of the equipment and ancillary items for a plant
with a capacity of 200,000 bbl can be estimated by linear
interpolation of the data in Table 5-11 and the results are
shown in Table 5-12.

Equipment
type
Equipment Cost
(in $1,000)
Percentage for
ancillary items
Furnace
$3,000 + (1/3)($10,000-$3,000) =
$5,333
40% - (1/3)(40%-30%)
= 37%
Tower
$2,000 + (1/3)($6,000-$2,000) =
$3,333
45% - (1/3)(45%-35%)
= 42%
Drum
$1,500 + (1/3)($5,000-$1,500) =
$2,667
50% - (1/3)(50%-40%)
= 47%
Pumps, etc.
$1,000 + (1/3)($4,000-$1,000) =
$2,000
60% - (1/3)(60%-50%)
= 57%
TABLE 5-12 Results of Linear Interpolation for an Estimation Example

Hence, the total project cost in thousands of current dollars is
given by Equation (5.8) as:
($5,333)(1.37) + ($3,333)(1.42) +($2,667)(1.47) +
($2,000)(1.57) = $2,307 + $4,733 + $3,920 + $3,140 =
$ 19,000

2. The corresponding cost in thousands of four year in the
future dollars using Equation (5.16) and Table 5-9
is:($19,100)(105/94) = $21,335
3. The total cost of the project after adjustment for location
is(0.95)($21,335,000) + $500,000 $20,800,000

Cost Estimation
5.10 Estimate Based on Engineer's List of Quantities

5.10 Estimate Based on
Engineer's List of Quantities
The engineer's estimate is based on a list of items and the
associated quantities from which the total construction cost is
derived. This same list is also made available to the bidders if
unit prices of the items on the list are also solicited from the
bidders. Thus, the itemized costs submitted by the winning
contractor may be used as the starting point for budget control.

In general, the progress payments to the contractor are based
on the units of work completed and the corresponding unit
prices of the work items on the list. Hence, the estimate based
on the engineers' list of quanitities for various work items
essentially defines the level of detail to which subsequent
measures of progress for the project will be made.

Example 5-15: Bid estimate based on engineer's list of
quantities

Example 5-15: Bid estimate based
on engineer's list of quantities
Using the unit prices in the bid of contractor 1 for the quantitites
specified by the engineer in Table 5-2 (Example 5-3), we can
compute the total bid price of contractor 1 for the roadway
project. The itemized costs for various work items as well as the
total bid price are shown in Table 5-13.

Items Unit Quantity Unit price Item cost
Mobilization ls 1 115,000 115,000
Removal, berm lf 8,020 1.00 8.020
Finish subgrade sy 1,207,500 0.50 603,750
Surface ditches lf 525 2.00 1,050
Excavation structures cy 7,000 3.00 21,000
Base course, untreated,
3/4''
ton 362,200 4.50 1,629,900
Lean concrete, 4'' thick sy 820,310 3.10 2,542,961
PCC, pavement, 10''
thick
sy 76,010 10.90 7,695,509
Concrete, ci AA (AE) ls 1 200,000 200,000
Small structure cy 50 500 25,000

on engineer's list of quantitie
Barrier, precast lf 7,920 15.00 118,800
Flatwork, 4'' thick sy 7,410 10.00 74,100
10'' thick sy 4,241 20.00 84,820
Slope protection sy 2,104 25.00 52,600
Metal, end section, 15'' ea 39 100 3,900
18'' ea 3 150 450
Post, right-of-way,
modification
lf 4,700 3.00 14,100
Salvage and relay pipe lf 1,680 5.00 8,400
Loose riprap cy 32 40.00 1,280
Braced posts ea 54 100 5,400

Delineators, type I lb 1,330 12.00 15,960
type II ea 140 15.00 2,100
Constructive signs
fixed
sf 52,600 0.10 5,260
Barricades, type III lf 29,500 0.20 5,900
Warning lights day 6,300 0.10 630
Pavement marking,
epoxy material
Black gal 475 90.00 42,750
Yellow gal 740 90.00 66,600
White gal 985 90.00 88,650
Plowable, one-way
white
ea 342 50.00 17,100

Topsoil, contractor
furnished
cy 260 10.00 2,600
Seedling, method A acr 103 150 15,450
Excelsior blanket sy 500 2.00 1,000
Corrugated, metal
pipe, 18''
lf 580 20.00 11,600
Polyethylene pipe, 12'' lf 2,250 15.00 33,750
Catch basin grate and
frame
ea 35 350 12,250
Equal opportunity
training
hr 18,000 0.80 14,400
Granular backfill
borrow
cy 274 10.00 2,740
Drill caisson, 2'x6'' lf 722 100 72,200
Flagging hr 20,000 8.25 165,000

Prestressed concrete
member
type IV, 141'x4'' ea 7 12,000 84,000
132'x4'' ea 6 11,000 66,000
Reinforced steel lb 6,300 0.60 3,780
Epoxy coated lb 122,241 0.55 67,232.55
Structural steel ls 1 5,000 5,000
Sign, covering sf 16 10.00 160
type C-2 wood post sf 98 15.00 1,470
24'' ea 3 100 300
30'' ea 2 100 200

48'' ea 11 200 2,200
Auxiliary sf 61 15.00 915
Steel post, 48''x60'' ea 11 500 5,500
type 3, wood post sf 669 15.00 10,035
24'' ea 23 100 2,300
30'' ea 1 100 100
36'' ea 12 150 1,800
42''x60'' ea 8 150 1,200
48'' ea 7 200 1,400
Auxiliary sf 135 15.00 2,025

Steel post sf 1,610 40.00 64,400
12''x36'' ea 28 100 2,800
Foundation, concrete ea 60 300 18,000
Barricade, 48''x42'' ea 40 100 4,000
Wood post, road
closed
lf 100 30.00 3,000
Total $14,129,797.55
TABLE 5-13: Bid Price of Contractor 1 in a Highway Project

Cost Estimation
5.11 Allocation of Construction Costs Over Time

5.11 Allocation of
Construction Costs Over Time
Since construction costs are incurred over the entire
construction phase of a project, it is often necessary to
determine the amounts to be spent in various periods to derive
the cash flow profile, especially for large projects with long
durations. Consequently, it is important to examine the
percentage of work expected to be completed at various time
periods to which the costs would be charged. More accurate
estimates may be accomplished once the project is scheduled
as described in Chapter 10, but some rough estimate of the
cash flow may be required prior to this time.

5.11 Allocation of
Consider the basic problem in determining the percentage of
work completed during construction. One common method of
estimating percentage of completion is based on the amount of
money spent relative to the total amount budgeted for the entire
project. This method has the obvious drawback in assuming
that the amount of money spent has been used efficiently for
production. A more reliable method is based on the concept
of value of work completed which is defined as the product of
the budgeted labor hours per unit of production and the actual
number of production units completed, and is expressed in
budgeted labor hours for the work completed.

5.11 Allocation of
Then, the percentage of completion at any stage is the ratio of
the value of work completed to date and the value of work to be
completed for the entire project. Regardless of the method of
measurement, it is informative to understand the trend of work
progress during construction for evaluation and control.

5.11 Allocation of
In general, the work on a construction project progresses
gradually from the time of mobilization until it reaches a plateau;
then the work slows down gradually and finally stops at the time
of completion. The rate of work done during various time
periods (expressed in the percentage of project cost per unit
time) is shown schematically in Figure 5-10 in which ten time
periods have been assumed. The solid line A represents the
case in which the rate of work is zero at time t = 0 and
increases linearly to 12.5% of project cost at t = 2, while the rate
begins to decrease from 12.5% at t = 8 to 0% at t = 10.

5.11 Allocation of
The dotted line B represents the case of rapid mobilization by
reaching 12.5% of project cost at t = 1 while beginning to
decrease from 12.5% at t = 7 to 0% at t = 10. The dash line C
represents the case of slow mobilization by reaching 12.5% of
project cost at t = 3 while beginning to decrease from 12.5% at t
= 9 to 0% at t = 10.

5.11 Allocation of
Figure 5-10: Rate of Work Progress over
Project Time

5.11 Allocation of
The value of work completed at a given time (expressed as a
cumulative percentage of project cost) is shown schematically
in Figure 5-11. In each case (A, B or C), the value of work
completed can be represented by an "S-shaped" curve. The
effects of rapid mobilization and slow mobilization are indicated
by the positions of curves B and C relative to curve A,
respectively.

5.11 Allocation of
Figure 5-11: Value of Work Completed
over Project Time

5.11 Allocation of
While the curves shown in Figures 5-10 and 5-11 represent
highly idealized cases, they do suggest the latitude for adjusting
the schedules for various activities in a project. While the rate of
work progress may be changed quite drastically within a single
period, such as the change from rapid mobilization to a slow
mobilization in periods 1, 2 and 3 in Figure 5-10, the effect on
the value of work completed over time will diminish in
significance as indicated by the cumulative percentages for later
periods in Figure 5-11. Thus, adjustment of the scheduling of
some activities may improve the utilization of labor, material and
equipment, and any delay caused by such adjustments for
individual activities is not likely to cause problems for the
eventual progress toward the completion of a project.

5.11 Allocation of
In addition to the speed of resource mobilization, another
important consideration is the overall duration of a project and
the amount of resources applied. Various strategies may be
applied to shorten the overall duration of a project such as
overlapping design and construction activities (as described in
Chapter 2) or increasing the peak amounts of labor and
equipment working on a site. However, spatial, managerial and
technical factors will typically place a minimum limit on the
project duration or cause costs to escalate with shorter
durations.

5.11 Allocation of
Example 5-16: Calculation of Value of Work Completed

Example 5-16: Calculation of
Value of Work Completed
From the area of work progress in Figure 5-10, the value of
work completed at any point in Figure 5-11 can be derived by
noting the area under the curve up to that point in Figure 5-10.
The result for t = 0 through t = 10 is shown in Table 5-14 and
plotted in Figure 5-11.

Example 5-16: Calculation of
Value of Work Completed
Time Case A Case B Case C
0 0 0 0
1 3.1% 6.2% 2.1%
2 12.5 18.7 8.3
3 25.0 31.2 18.8
4 37.5 43.7 31.3
5 50.0 56.2 43.8
6 62.5 68.7 56.3
7 75.0 81.2 68.8
8 87.5 91.7 81.9
9 96.9 97.9 93.8
10 100.0 100.0 100.0
TABLE 5-14 Calculation of Value of Work Completed

Cost Estimation
5.12 Computer Aided Cost Estimation

5.12 Computer Aided Cost
Estimation
Numerous computer aided cost estimation software systems
are now available. These range in sophistication from simple
spreadsheet calculation software to integrated systems
involving design and price negotiation over the Internet. While
this software involves costs for purchase, maintenance, training
and computer hardware, some significant efficiencies often
result. In particular, cost estimates may be prepared more
rapidly and with less effort.

Estimation
Some of the common features of computer aided cost
estimation software include:
• Databases for unit cost items such as worker wage rates,
equipment rental or material prices. These databases can be
used for any cost estimate required. If these rates change,
cost estimates can be rapidly re-computed after the
databases are updated.
• Databases of expected productivity for different components
types, equiptment and construction processes.

Estimation
• Import utilities from computer aided design software for
automatic quantity-take-off of components. Alternatively,
special user interfaces may exist to enter geometric
descriptions of components to allow automatic quantity-take-
off.
• Export utilities to send estimates to cost control and
scheduling software. This is very helpful to begin the
management of costs during construction.
• Version control to allow simulation of different construction
processes or design changes for the purpose of tracking
changes in expected costs.

Estimation
• Provisions for manual review, over-ride and editing of any
cost element resulting from the cost estimation system
• Flexible reporting formats, including provisions for electronic
reporting rather than simply printing cost estimates on paper.
• Archives of past projects to allow rapid cost-estimate
updating or modification for similar designs.

Estimation
A typical process for developing a cost estimate using one of
these systems would include:
1. If a similar design has already been estimated or exists in
the company archive, the old project information is retreived.
2. A cost engineer modifies, add or deletes components in the
project information set. If a similar project exists, many of the
components may have few or no updates, thereby saving
time.

Estimation
3. A cost estimate is calculated using the unit cost method of
estimation. Productivities and unit prices are retrieved from
the system databases. Thus, the latest price information is
used for the cost estimate.
4. The cost estimation is summarized and reviewed for any
errors.

Cost Estimation
5.13 Estimation of Operating Costs

5.13 Estimation of Operating
Costs
In order to analyze the life cycle costs of a proposed facility, it is
necessary to estimate the operation and maintenance costs
over time after the start up of the facility. The stream of
operating costs over the life of the facility depends upon
subsequent maintenance policies and facility use. In particular,
the magnitude of routine maintenance costs will be reduced if
the facility undergoes periodic repairs and rehabilitation at
periodic intervals.

Costs
Since the tradeoff between the capital cost and the operating
cost is an essential part of the economic evaluation of a facility,
the operating cost is viewed not as a separate entity, but as a
part of the larger parcel of life cycle cost at the planning and
design stage. The techniques of estimating life cycle costs are
similar to those used for estimating capital costs, including
empirical cost functions and the unit cost method of estimating
the labor, material and equipment costs. However, it is the
interaction of the operating and capital costs which deserve
special attention.

Costs
As suggested earlier in the discussion of the exponential rule for
estimating, the value of the cost exponent may influence the
decision whether extra capacity should be built to accommodate
future growth. Similarly, the economy of scale may also
influence the decision on rehabilitation at a given time. As the
rehabilitation work becomes extensive, it becomes a capital
project with all the implications of its own life cycle. Hence, the
cost estimation of a rehabilitation project may also involve
capital and operating costs.

Costs
While deferring the discussion of the economic evaluation of
constructed facilities to Chapter 6, it is sufficient to point out that
the stream of operating costs over time represents a series of
costs at different time periods which have different values with
respect to the present. Consequently, the cost data at different
time periods must be converted to a common base line if
meaningful comparison is desired.

Costs
Example 5-17: Maintenance cost on a roadway [6]

Example 5-17: Maintenance
cost on a roadway
Maintenance costs for constructed roadways tend to increase
with both age and use of the facility. As an example, the
following empirical model was estimated for maintenance
expenditures on sections of the Ohio Turnpike:
C = 596 + 0.0019 V + 21.7 A

cost on a roadway
where C is the annual cost of routine maintenance per lane-mile
(in 1967 dollars), V is the volume of traffic on the roadway
(measured in equivalent standard axle loads, ESAL, so that a
heavy truck is represented as equivalent to many automobiles),
and A is the age of the pavement in years since the last
resurfacing. According to this model, routine maintenance costs
will increase each year as the pavement service deteriorates. In
addition, maintenance costs increase with additional pavement
stress due to increased traffic or to heavier axle loads, as
reflected in the variable V.

cost on a roadway
For example, for V = 500,300 ESAL and A = 5 years, the annual
cost of routine maintenance per lane-mile is estimated to be:
C = 596 + (0.0019)(500,300) + (21.7)(5)
= 596 + 950.5 + 108.5 = 1,655 (in 1967 dollars)

Costs
Example 5-18: Time stream of costs over the life of a
roadway [7]

Example 5-18: Time stream of
costs over the life of a roadway
The time stream of costs over the life of a roadway depends
upon the intervals at which rehabilitation is carried out. If the
rehabilitation strategy and the traffic are known, the time stream
of costs can be estimated.

Using a life cycle model which predicts the economic life of
highway pavement on the basis of the effects of traffic and other
factors, an optimal schedule for rehabilitation can be developed.
For example, a time stream of costs and resurfacing projects for
one pavement section is shown in Figure 5-11. As described in
the previous example, the routine maintenance costs increase
as the pavement ages, but decline after each new resurfacing.
As the pavement continues to age, resurfacing becomes more
frequent until the roadway is completely reconstructed at the
end of 35 years.

Figure 5-11: Time Stream of Costs over the Life of a
Highway Pavement

Cost Estimation
5.14 References

5.14 References
1. Ahuja, H.N. and W.J. Campbell, Estimating: From Concept
to Completion, Prentice-Hall, Inc., Englewood Cliffs, NJ,
1987.
2. Clark, F.D., and A.B. Lorenzoni, Applied Cost Engineering,
Marcel Dekker, Inc., New York, 1978.
3. Clark, J.E., Structural Concrete Cost Estimating, McGraw-
Hill, Inc., New York, 1983.
4. Diekmann, J.R., "Probabilistic Estimating: Mathematics and
Applications," ASCE Journal of Construction Engineering
and Management, Vol. 109, 1983, pp. 297-308.

5.14 References
5. Humphreys, K.K. (ed.) Project and Cost Engineers'
Handbook (sponsored by American Association of Cost
Engineers), 2nd Ed., Marcel Dekker, Inc., New York, 1984.
6. Maevis, A.C., "Construction Cost Control by the
Owners," ASCE Journal of the Construction Division, Vol.
106, 1980, pp. 435-446.
7. Wohl, M. and C. Hendrickson, Transportation Investment
and Pricing Principles, John Wiley & Sons, New York, 1984.

Cost Estimation
5.16 Footnotes

5.16 Footnotes
1. This example was adapted with permission from a paper,
"Forecasting Industry Resources," presented by A.R. Crosby
at the Institution of Chemical Engineers in London,
November 4, 1981.
2. This example is adapted from a cost estimate in A.L.
Tolman, A.P. Ballestero, W.W. Beck and G.H.
Emrich, Guidance Manual for Minimizing Pollution from
Waste Disposal Sites, Municipal Environmental Research
Laboratory, U.S. Environmental Protection Agency,
Cincinatti, Ohio, 1978.

5.16 Footnotes
3. See "Utah Interstate Forges On," ENR, July 2, 1987, p. 39
4. This and the next example have been adapted from P.M.
Berthouex, "Evaluating Economy of Scale," Journal of the
Water Pollution Control Federation, Vol. 44, No. 11,
November 1972, pp. 2111-2118.
5. See H.T. Johnson and R.S. Kaplan, Relevance Lost: The
Rise and Fall of Management Accounting, Harvard Business
School Press, Boston, MA 1987, p. 185.

5.16 Footnotes
6. This example is adapted from McNeil, S. and C.
Hendrickson, "A Statistical Model of Pavement Maintenance
Expenditure," Transportation Research Record No. 846,
1982, pp. 71-76. (Back)
7. This example is adapted from S. McNeil, Three Statistical
Models of Road Management Based on Turnpike Data, M.S.
Thesis, Carnegie-Mellon University, Pittsburgh, PA, 1981.

Project management chapter 5

More Related Content

What's hot (19)

Similar to Project management chapter 5 (20)

More from VancityInstitute (20)

Recently uploaded (20)

Project management chapter 5