Estimation and Costing

Cost Estimating 1 Dr.
Emad Elbeltagi

CHAPTER 1

INTRODUCTION

Cost is a major factor in most decisions regarding construction, and cost estimates are
prepared throughout the planning, design, and construction phases of a construction
project, different types of cost estimating from preliminary to detailed are conducted for
different purposes. All of these estimates are important because they invariably influence
the expenditure of major sums. However, estimates made in the early phases of a project
are particularly important because they affect the most basic decisions about a project. In
most cases, the final cost (or cost projections during construction) has been significantly
higher than the cost estimates prepared and released during initial planning, preliminary
engineering, final design, or even at the start of construction.

1.1 The Construction Project
A project is defined, whether it is in construction or not, by the following characteristics:
- A defined goal or objective.
- Specific tasks to be performed.
- A defined beginning and end.
- Resources being consumed.

The goal of construction project is to build something. What differentiate the construction
industry from other industries is that its projects are large, built on-site, and generally
unique. Time, money, labor, equipment, and, materials are all examples of the kinds of
resources that are consumed by the project.

Cost Estimating 2 Dr. Emad Elbeltagi
Projects begin with a stated goal established by the owner and accomplished by the
project team. As the team begins to design, estimate, and plan out the project, the
members learn more about the project than was known when the goal was first
established. This often leads to a redefinition of the stated project goals.

1.2 Project Life-Cycle
The acquisition of a constructed facility usually represents a major capital investment,
whether its owner happens to be an individual, a private corporation or a public agency.
Since the commitment of resources for such an investment is motivated by market
demands or perceived needs, the facility is expected to satisfy certain objectives within
the constraints specified by the owner and relevant regulations.

From the perspective of an owner, the project life cycle for a constructed facility may be
illustrated schematically in Figure 1.1. A project is expected to meet market demands or
needs in a timely fashion. Various possibilities may be considered in the conceptual
planning stage, and the technological and economic feasibility of each alternative will be
assessed and compared in order to select the best possible project. The financing schemes
for the proposed alternatives must also be examined, and the project will be programmed
with respect to the timing for its completion and for available cash flows. After the scope
of the project is clearly defined, detailed engineering design will provide the blueprint for
construction, and the definitive cost estimate will serve as the baseline for cost control. In
the procurement and construction stage, the delivery of materials and the erection of the
project on site must be carefully planned and controlled. After the construction is
completed, there is usually a brief period of start-up of the constructed facility when it is
first occupied. Finally, the management of the facility is turned over to the owner for full
occupancy until the facility lives out its useful life and is designated for demolition or
conversion.

Of course, the stages of development in Figure 1.1 may not be strictly sequential. Some
of the stages require iteration, and others may be carried out in parallel or with
overlapping time frames, depending on the nature, size and urgency of the project.
Furthermore, an owner may have in-house capacities to handle the work in every stage of
the entire process. By examining the project life cycle from an owner's perspective we
can focus on the proper roles of various activities and participants in all stages regardless
of the contractual arrangements for different types of work.

Figure 1.1: Project life cycle

The project life cycle may be viewed as a process through which a project is
implemented from beginning to end. This process is often very complex; however, it can
be decomposed into several stages as indicated by the general outline in Figure 1.1. The
solutions at various stages are then integrated to obtain the final outcome. Although each
stage requires different expertise, it usually includes both technical and managerial
activities in the knowledge domain of the specialist. The owner may choose to
decompose the entire process into more or less stages based on the size and nature of the
project. Very often, the owner retains direct control of work in the planning stages, but
increasingly outside planners and financial experts are used as consultants because of the
complexities of projects. Since operation and maintenance of a facility will go on long
after the completion and acceptance of a project, it is usually treated as a separate
problem except in the consideration of the life cycle cost of a facility. All stages from
conceptual planning and feasibility studies to the acceptance of a facility for occupancy
may be broadly lumped together and referred to as the Design/Construct process, while
the procurement and construction alone are traditionally regarded as the province of the
construction industry.

There is no single best approach in organizing project management throughout a project's
life cycle. All organizational approaches have advantages and disadvantages, depending
on the knowledge of the owner in construction management as well as the type, size and
location of the project. It is important for the owner to be aware of the approach which is
most appropriate and beneficial for a particular project. In making choices, owners should
be concerned with the life cycle costs of constructed facilities rather than simply the
initial construction costs. Saving small amounts of money during construction may not be
worthwhile if the result is much larger operating costs or not meeting the functional
requirements for the new facility satisfactorily. Thus, owners must be very concerned
with the quality of the finished product as well as the cost of construction itself. Since
facility operation and maintenance is a part of the project life cycle, the owners'
expectation to satisfy investment objectives during the project life cycle will require
consideration of the cost of operation and maintenance. Therefore, the facility's operating
management should also be considered as early as possible, just as the construction
process should be kept in mind at the early stages of planning and programming.

1.3 Types of Contracts
There are many types of contracts that may be used in the construction industry.
Construction contracts are classified according to different aspects. They may be
classified according to the method of payment to the contractor. When payment is based
on prices which submitted by the contractor in his tender, they are called cost-based
contracts. Examples are cost-reimbursable and target cost contracts. Contracts may be
classified in the point of view of the risk involved. The range of risk runs from a fixed-
price contract to a totally non-risk cost-reimbursable contract at the other end (Figure
1.2).

Figure 1.2: Contracts classification

1.2.1 Lump-sum contract
A single tendered price is given for the completion of specified work to the satisfaction of
the client by a certain date. Payment may be staged at intervals on the completion. The
contract has a very limited flexibility for design changes. The tendered price may include
high level of financing and high risk contingency. Where considerable risk has been
places with the contractor, this contract may lead to cost cutting, trivia claims, or
bankruptcy. Contract final price is known at tender. A lump-sum contract would seem to
prevent risks for the client where in fact it just changes them. An important risk to the
client is that of not receiving competitive bids from desirable contractors who may avoid
a high-risk lump-sum contract. This contract may be used for a turnkey construction. It is
appropriate when work is defined in detail, limited variations are expected, level of risk is
low and quantifiable, and client does not wish to be involved in the management of his
project.

1.2.2 Admeasurement contract
In this type of contracting, items of work are specified in Bills of Quantities or Schedule
of Rates. The contractor then specifies rates against each item. The rates include risk
contingency. Payment is paid monthly for all work completed during the month. The
contract offers a facility for the client to introduce changes in the work defined in the
tender documents. The contractor can claim additional payment for any changes in the
work content of the contract. Claims resolution is very difficult because the client has no
knowledge of actual cost or hidden contingency. Tender price is usually increased by
variations and claims. Two forms of admeasurement contract are usually used: bill of
quantities and schedule of rates.

The admeasurement contract is well understood and widely used. It can be used when
little or no changes are expected, level of risk is low and quantifiable, and when design
and construction need to be overlapped.

1.2.3 Cost-reimbursable contract (cost-plus contract)
The contractor is reimbursed for actual cost plus a special fee for head office overheads
and profit, no special payment for risk. Payment may be made monthly in advance. The
contract involves a high level of flexibility for design changes. Final price depends on
changes and extent to which risks materialize. The contractor must make all his records
and accounts available for inspection by the client or by some agreed third party. The fee
may be a fixed amount or a percentage of actual costs. This contract has no direct
financial incentives for the contractor to perform efficiently. It may be used when it is
desirable for design to proceed concurrently with construction and when the client wishes
to be involved in contract management.

1.2.4 Target cost contract
Cost targets may be introduced into cost-reimbursable contracts. In addition to the
reimbursement of actual cost plus percentage fee, the contractor will be paid a share for
any saving between target and actual cost, while the fee will be reduced if actual cost
exceeds the target. The target figure should be realistic and the incentive must be
sufficient to generate the desired motivation. Specified risk' can be excluded from the
tendered target cost. When these occur, the target cost is adjusted accordingly and the
client pays the actual cost incurred by the contractor. The target may also b' adjusted for
major changes in work and cost inflation. This contract can be used in the same
circumstances as the cost-plus contract.

1.4 Estimating
Estimating is not an exact science. Knowledge of construction, common sense and
judgment are required. Estimating material costs can be accomplished with a relatively
high degree of accuracy. However, accurate estimating of labor and equipment costs is
considerably more difficult to accomplish. Estimating material costs is a relatively simple
and easy task. The quantity of materials for a particular job can be accurately calculated
from the dimensions on the drawings for that particular job. After the quantity of material
is calculated and knowing the unit prices, the cost could be estimated by multiplying the
quantity by the unit prices. Estimating labor and equipment costs is more difficult than
estimating material costs. The cost of labor and material depends on productivity rates,
which can vary substantially from one job to another. The skill of the labor, job
conditions and many other factors affect the productivity of labor.

Estimating plays important roles in forecasting future events in construction process. It
consists of two distinct tasks: determining the probable cost and determining the probable
time to build a project

Cost estimate has been defined in different ways. For example:
Estimating is the compilation of all the costs of the elements of a project or effort
included within an agreed upon project scope. To a contractor, this is the cost that
will most likely be incurred to complete the project as defined in the contract
documents and to turn it over to the owner. In another definition, it is the production
of a statement of the approximate quantity of materials, time and costs to perform
construction decisions. Cost estimating is, also defined as, the process of analyzing a
specific scope of work and predicting the cost of performing the work. The basic
challenges the construction contractor faces are to estimate the cost of constructing a
project, schedule the specific construction activities, and then build the project within
the estimated cost and schedule.

Cost estimating is the process of analyzing a specific scope of work and predicting the
cost of performing the work. The basic challenges the construction contractor faces are to
estimate the cost of constructing a project, schedule the specific construction activities,
and then build the project within the estimated cost and schedule. The objective of cost
estimate is to produce an accurate, cost effective prediction of what a project will most
likely cost and it needs to be done in different manners at different stages. Cost
Estimating is a complex process involving collection of available and pertinent
Information relating to the scope of a project, expected resource consumption and future
changes in resource costs. At the beginning of a project, the estimate cannot be expected
to carry a high degree of accuracy since little information is known. As the design
progresses more information is known and accuracy should improve (Figure 1.3).

Required information: Detailed plans, specifications, available site data, available
resource data (labor, material, & equipment), contract documents, resource cost
information, pertinent government regulations, applicable owner requirements. Various
names have been given to estimates by several organizations. However, there is no
industry standard that has been established for defining estimates.

Figure 1.3: Cost estimate stages
1.5 An Estimator
The estimator (or quantity surveyor, or cost engineer) is the person who prepares
estimates in the planning, design, and perhaps construction stages. An estimator is always
involved for studies requiring thorough understanding of the principles and methods of
engineering economics. He or she must often work closely with managers, accountants,
financial analysts, and engineers to forecast the cash or borrowing needs for the project.
As major decision is made from information contained in the conceptual or preliminary
estimate, this places a responsibility and liability on the estimator. He or she will risk
reputation when insufficiently accurate estimate is prepared for a bid but the owner or the
contractor will risk money.

A good estimator must conceptualize the complete building before it is fully designed. He
or she must be able to think, and perceive the details of the project. The estimator must
also have the ability to anticipate design decisions and communicate those assumptions
made during the conceptual estimating process. He or she must also be knowledgeable of
the expected life of construction materials, accounting, taxation, law, economics, and
awareness of engineering design. Qualifications for a good estimator include: patience of
detail; technical knowledge; good memory; knowledge of construction process; able to
plan the works; have an idea of relative costs and good judgment. An estimator must not
spend so much time and effort to analyze unnecessary details in determining the costs of
insignificant items as the estimating will take time and be expensive. In a bill of
quantities for civil engineering project, 80% of the costs can be attributed to 20% of the
items, and vice versa.

1.6 Purpose of Estimating
The purpose of estimating is to determine the forecast costs required to complete a
project in accordance with the contract plans and specifications. For any given project,
the estimator can determine with reasonable accuracy the direct costs for materials, labor,
and equipment. The bid price can then be determined by adding to the direct cost the
costs for overhead (indirect costs required to build the project), contingencies (costs for
any potential unforeseen work), and profit (cost for compensation for performing the
work). The bid price of a project should be high enough to enable the contractor to
complete the project with a reasonable profit, yet low enough to be within the owner's
budget.

There are two distinct tasks in estimating: determining the probable cost and determining
the probable time to build a project. With an increased emphasis on project planning and
scheduling, the estimator is often requested to provide production rates, crew sizes,
equipment spreads, and the estimated time required to perform individual work items.
This information, combined with costs, allows an integration of the estimating and
scheduling functions of construction project management. Because construction estimates
are prepared before a project is constructed, the estimate is, at best, a dose approximation
of the actual costs. The true cost of the project will not be known until the project has
been completed and all costs have been recorded.

1.7 Construction Project Costs
The principal components of a contractor's costs and expenses result from the use of
labors, materials, equipment, and subcontractors. Additional general overhead cost
components include taxes, premiums on bonds and insurance, and interest on loans. The
sum of a project's direct costs and its allocated indirect costs is termed the project cost.

The costs that spent on a specific activity or project can be classified as;
- Fixed cost: costs that spent once at specific point of time (e.g., the cost of
purchasing equipment, etc.)
- Time-related cost: costs spent along the activity duration (e.g., labor wages,
equipment rental costs, etc.)
- Quantity-proportional cost: costs changes with the quantities (e.g., material cost)

Project direct costs
The costs and expenses that are incurred for a specific activity are termed direct costs.
These costs are estimates based on detailed analysis of contract activities, the site
conditions, resources productivity data, and the method of construction being used for
each activity. A breakdown of direct costs includes labor costs, material costs, equipment
costs, and subcontractor costs.

Project indirect costs
Other costs such as the overhead costs are termed indirect costs. Part of the companys
indirect costs is allocated to each of the company's projects. The indirect costs always
classified to: project (site) overhead; and General (head-office) overhead.

Project overhead
Project overhead are site-related costs and includes the cost of items that cannot be
directly charged to a specific work element and it can be a fixed or time-related
costs. These include the costs of site utilities, supervisors, housing and feeding of
project staff, parking facilities, offices, workshops, stores, and first aid facility. Also,
it includes plants required to support working crews in different activities.
A detailed analysis of the particular elements of site-related costs is required to
arrive at an accurate estimate of these costs. However, companies used to develop
their own forms and checklists for estimating these costs. Sit overhead costs are
estimated to be between 5% - 15% of project total direct cost.

General overhead
The costs that cannot be directly attributed a specific project called general
overhead. These are the costs that used to support the overall company activities.
They represent the cost of the head-office expenses, mangers, directors, design
engineers, schedulers, etc. Continuous observations of the company expenses will
give a good idea of estimating reasonable values for the general overhead expenses.
Generally, the general overhead for a specific contract can be estimated to be
between 2% - 5% of the contract direct cost. The amount of the general overhead
that should be allocated to a specific project equals:

Project direct cost x general overhead of the company in a year
Expected sum of direct costs of all projects during the year

Having defined the direct costs, indirect costs, then the project total cost equals the sum
of both direct and indirect costs.

1.8 Types of Cost Estimating
There are many types of cost estimates that can be performed on a project, each type
having different levels of accuracy. The estimating process becomes increasingly more
expensive as more detailed and accurate techniques are applied. Estimating can be
categorized into several classes according to purposes, budget, limitation, time, and
accuracy. Generally, the nature and characteristics of estimating can be summarized as
follow: accuracy improves with the development of the project such that the distribution
of errors narrows from feasibility to settlement; underestimates are more likely than
overestimates and the final cost of a project cannot be established until the settlement of
project accounts.

For example, cost estimates is divided into seven types: 1- Preliminary or rough cost or
approximate estimate is prepared to decide the financial aspect and accompanied by
detailed report, brief specifications, layout plan showing the proposal in hand; and brief
idea of rates for different items; 2- Detailed estimate, is prepared in detail prior to inviting
of tenders; 3- Quantity estimate, is a complete estimate of quantities for all items of work
required to complete a project; 4- Revised estimate is also a detailed estimate and is
prepared afresh, when the original sanctioned detailed estimate exceeds by 5% or more;
5- Annual repair or maintenance prepared in order to keep the structures in proper
condition; 6- Supplementary estimate, when some additions are done in the original
work; and 7- Extension estimate, when some changes and extensions are required to be
made in old work.

Typically, cost estimates are divided into three major types: 1- Conceptual cost estimates
are developed using incomplete project documentation; 2- Semi-detailed cost estimates
are prepared when parts of the project have been completely designed; and 3- Detailed
cost estimates are prepared based on fully developed construction drawings and
specifications. The accuracy of the estimate depends on the completeness of the contract
documents and the experience of an estimator. The typical accuracy of the various types
of cost estimates is shown in Table 1.1.

Table 1.1: Accuracy of different types of cost estimates
Type of Estimate Construction Document Development
Expected
Percent Error*
Conceptual
Schematic Design
0-30% Construction Documents
10-20 %
Semi-Detailed
Design Development
30-90% Construction Documents
5-10 %
Detailed 90-100% Plans and Specifications 2-4 %
* Percent error means the expected variation between cost estimate and actual cost

There are many types of cost estimates and re-estimates for a project based on the stage
of project development. Estimates are performed throughout the life of a project,
beginning with the first estimate and extending through the various phases of design and
into construction. Initial cost estimates form the basis to which all future estimates are
compared. Future estimates are often expected to agree with (i.e., be equal to or less than)
the initial estimates. However, too often the final project costs exceed the initial
estimates. Estimates are performed throughout the life of a project, beginning with the
first estimate and extending through the various phases of design and into construction, as
shown in Figure 1.4.

Traditionally, the different classifications of estimates conclude that there are three main
types of estimates:
1. Conceptual cost estimates.
2. Semi-detailed cost estimates.
3. Detailed cost estimates.


Figure 1.4: Level of accuracy of cost estimates

1.8.1 Conceptual estimate
A conceptual estimate is also known as a top-down, order of magnitude, feasibility,
analogous, or preliminary estimate. It is the first serious effort made at attempting to
predict the cost of the project. A conceptual estimate is usually performed as part of the
project feasibility analysis at the beginning of the project. In this way, the estimate is
made with limited information on project scope, and is usually made without detailed
design and engineering data.

The conceptual estimate is also defined as approximate estimate and used to know the
budget for a project. Considerable experience and judgment are required to obtain a
dependable approximate estimate for the cost.

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

1.8.3 Detailed estimate
A detailed estimate is also known as a bottom-up, fair-cost, or bid estimate. Detailed
estimates are prepared once the design has been completed and all construction
documents prepared. The estimator divides the project into individual elements of work
and estimates the quantities of work for each element. Next, the individual elements of
work are priced to determine an estimated cost for each one. The estimated costs are
summed, and overhead costs are added to cover the contractor's cost of managing the
work.

The breakdown of tender price is illustrated in Figure 1.5. The tender price consists of
two components, the construction cost estimate and mark-up (margin). The direct cost is
the combined costs of labor, equipment, material, and subcontractors costs. The addition
of site overheads and office overheads to the direct cost produces the construction cost
estimates. The second component of the tender price is the mark-up (margin) which
consists of the profit margin, risk allowance, and financial charge.

Figure 1.5: Schematic diagram of the structure of tender price

The various estimates discussed above are carried out in sequence, the previous cost
estimate being the input to the next one. The estimates are successively refined,
incorporating new information and thus keeping a continuously updated estimate that
becomes the budget, available for control process. As the project progresses, the amount
of unknowns and uncertainties decreases, while the level of details and the project
information increases. In this way, the accuracy of the estimate improves as it moves
from conceptual to detailed estimate.

A detailed estimate is prepared by determining the costs of materials, labor, equipment
and subcontractor work. Detailed estimate is prepared from a complete set of contract
documents before the submission of a bid. It follows a systematic procedure begins with
a thorough review of the complete set of contract documents, drawing and technical
specification. A site visit should be done to observe factors that can influence the cost of
construction such as: available space for material storing, security, control of traffic and
existing underground utilities.

The estimator prepares a material quantity take-off of all materials from the drawings.
The quantity of material multiplied by the unit cost of the materials yields the material
cost. The quantity of work required of equipment is divided by the equipment production
rate and then multiplied by the unit cost of equipment to obtain the total cost of
equipment and similarly, the cost of labor are calculated.

The direct cost of a project includes material, labor, equipment, and subcontractor costs.
Upon the completion of the estimate of direct costs, the estimator must determine the
indirect costs of taxes, bonds, insurance and overhead required to complete the project. A
risk analysis of uncertainties is required to determine an appropriate contingency to be
added to the base estimate to account for the unforeseen work that develops during
construction. Upon calculation of the direct and indirect costs, analysis of risk and
assignment of contingency, a profit is added to the estimate to establish the bid price. The
amount of profit can vary considerably, depending on numerous factors such as the size
and complexity of the project, amount of work in progress by the contractor, accuracy
and completeness of the bid documents, competition for work. The steps for preparing a
detailed estimate are listed in Table 1.2.

Table 1.2: Steps for preparing a detailed cost estimate
1
Review the scope of project. Consider the effect of location, security, traffic,
available storage space, underground utilities, etc. on costs.
2 Determine quantities. Perform a material quantity takeoff for all work items.
3 Obtain suppliers bids.
4 Price material. Material cost = quantity x unit price.
5 Price labor based on their probable production rate.
6 Price equipment based on their probable production rates.
7 Obtain specialty contractors bids.
8 Calculate taxes, bonds, insurance and overhead.
9 Contingency and markup. Add costs for potential unforeseen work.
10 Profit. Add costs for compensation for performing the work.

1.9 Quantity Takeoff
To prepare an estimate, the estimator reviews the plans and specifications and performs a
quantity takeoff to determine the type and amount of work required to build the project.
The quantity of material in a project can be accurately determined from the drawings.
The estimator must review each sheet of the drawings, calculate the quantity of material
and record the amount and unit of measure. The unit cost of different materials should be
obtained from material suppliers and used as the basis of estimating the costs of materials
for the project. If the costs of the materials do not include delivery, the estimator must
include appropriate costs for transporting materials to the project.

Each estimator must develop a system of quantity takeoff that ensures that a quantity is
not omitted or calculated twice. A well-organized check-list of work will help reduce the
chances of omitting an item. The estimator must, also, add an appropriate percentage for
waste for those items where waste is likely to occur during construction. The material
quantity takeoff is extremely important for cost estimating because it often establishes the
quantity and unit of measure for the costs of labor and contractors equipment.

1.10 Production Rates
To determine the time required to perform a given quantity of work, it is necessary to
estimate the probable rates of production of the equipment or labor. These rates are
subject considerable variation, depending on the difficulty of the work, skill of the labor,
management conditions and the condition of the equipment.

A production rate is the number of units of work produced by a unit of equipment or a
person in a specified unit of time. The time is usually one hour or one day. The rate could
be determined during an interval when production is processing at the maximum possible
speed. However, delays or interruptions may hinder the work at any time and reduce the
average production rate to less than the ideal rates. So, the production rate is always
lowered by a factor to account for such interruptions.

For example, a backhoe with 1 m
3
bucket may be capable of handling 3 bucket-loads per
minute under ideal conditions. However, on a given job, the average volume per bucket
may be only 0.8 m
3
and the backhoe may be actually operating only 45 min/hr. for these
operating conditions, the average output can be calculated as follows:

The ideal output: 3 m
3
/min x 60 min/hr = 180 m
3
/hr
The bucket factor = 0.8
The efficiency factor = 45/60 = 0.75
The combined operating factor = 0.8 x 0.75 = 0.6
The average output = 0.6 x 180 = 108 m
3
/hr

The average output should be used in computing the time required to complete a job.

1.11 Exercises
1. State if True (T) or False (F):
a. Contract changes are more likely to occur on a single fixed price contract than
on a cost plus a fee contract.
b. In lump sum contracts, it is allowed to change in the quantity of work
performed within a limit of 25%.
c. In the admeasurement contracts, the item description, quantity, unit of
measure, unit cost and the total cost in the B.O.Q should be cleared.
d. The owner has the ability to know the contractor profit in the unit price
contracts.
e. The direct costs are the summation of the cost of the labor, equipment,
materials, and subcontractors.
f. Overheads include the cost of items which cannot be directly charged to a
specific work element.
g. The construction project must have a defined goal or objective.
h. The construction project must have a defined beginning and end.
2. What are the main types of construction contracts?
3. Explain what is meant by the two terms: Price-based Contracts and Cost-based
Contracts.
4. Compare the following types of contracts from the point of view of flexibility for
design changes and variations:
- Lump Sum.
- Admeasurement.
- Target cost.
5. Compare the lump sum, admeasurements, and cost plus contracts from the
following point of view:
- Early start to construction.
- Risk sharing.
6. Select the right answer:
I. Site selection and financing would be the responsibility of which project
member.
a. Owner b. Designer
c. Construction project manager d. Subcontractor
II. Which of the following is not a characteristic of a project?
a. Having a specific goal b. Having a defined beginning and end
c. Resources being consumed d. usually being performed only once
e. Never being found outside the construction field
III. The advertising for contractors and review of contractors bids occurs during
which project phase.
a. Procurement b. Design
c. Construction d. Conceptual planning
IV. As-built drawings, warranties, and operation manuals are all provided to the
owner during which project phase.
a. Design b. Conceptual planning
c. Construction d. Project closeout
V. As project moves on in time, the ability to change the project
becomesdifficult andexpensive.
a. more, less b. less, less
c. more, more d. less, more
7. Briefly describe the project life cycle.
8. Explain how the cost could be transferred to a tender price?
9. Give three examples of direct and indirect costs.
10. The cost spent of a given activity could be classified into ., .. and
11. What are the different types of cost estimate and when each one is used?

CHAPTER 2
QUANTITY TAKE-OFF
The quantity takeoff is an important part of the cost estimate. It must be as accurate as
possible and should be based on all available engineering and design data. Use of
appropriate automation tools is highly recommended. Accuracy and completeness are
critical factors in all cost estimates. An accurate and complete estimate establishes
accountability and credibility of the cost engineer, therefore, providing greater confidence
in the cost estimate. The estimate contingencies for programming purposes reflect the
estimate confidence.
2.1 Importance of Quantity Takeoff and Required Documents
The quantity of material in a project can be accurately determined from the drawings.
The estimator must review each sheet of the drawings, calculate the quantity of material
and record the amount and unit of measure. Each estimator must develop a system of
quantity takeoff that ensures that a quantity is not omitted or calculated twice. A well-
organized check-list of work will help reduce the chances of omitting an item. The
estimator must, also, add an appropriate percentage for waste for those items where waste
is likely to occur during construction. The material quantity takeoff is extremely
important for cost estimating because it often establishes the quantity and unit of measure
for the costs of labor and contractors equipment.
2.1.1 Contract documents
The contract is defined by the contract documents, which are developed from the tender
documents. In a logical order, these documents refer to the following subjects:
Input from the client (task description).
Output of the contract (specifications, results to be achieved).
Prices for the contractor's contribution.
Responsibilities and procedures (liability, resources provided, time schedule,
payment conditions, changes procedures, etc).
Contract documents are usually arranged according to the following sequence:
General (for any project).
Special (for a specialty area of the project).
Supplementary (unique to a given project).
Additional (during bidding or negotiation).
Agreement form (for singing very important and particular clauses).
Modifications (during contract fulfillment).
The complete contract agreement usually consists of the following documents:
Conditions (general, special, supplementary).
Drawing and specifications.
Addenda.
Agreement form.
Modifications.
The most important document from the legal point of view is the agreement. It is
sometimes called the contract. Since so many documents are included as contract
documents, the agreement is the better term for this particular one. The form of the
agreement can be standardized and used for many projects, or a unique document can be
prepared for each project. The standard form of agreement prescribed by the American
Institute of Architects has proved to be satisfactory and has been used on many building
projects with good results. The form followed for non-building projects is often more
varied. Man: agencies have own standard forms, which are used on all their projects.
Information usually included in the agreement of three parts. The first part is a short
introductory paragraph which defines the parties, gives the date of the agreement, and
state that each party agrees to what follows. The second part contains the elements of
contract and defines the work to be undertaken. The final paragraph confirms the
agreement and provides space for signatures of the parties. Thus, the agreement usually
composed of the following articles:
1. A short introductory paragraph.
2. Scope of the work.
3. Time of completion.
4. Contract documents.
5. Performance bond.
6. Contractor's insurance.
7. Owner's insurance.
8. Laws, regulations and permits.
9. Payments.
10. Extensions of time.
11. Changes in the work.
12. Owner's right to terminate the work.
13. Contractor's right to terminate the work.
14. Confirmation and signatures.
2.1.2 Quantity take-off: Why?
Owner perspective:
- Initial (preliminary) estimate of the project costs at the different stages of the
project.
- Preparing the BOQ as a requirement of the contract documents.
- Estimating the work done for issuing the contractor payments.
Contractor perspective:
- Pricing different work items.
- Identifying the needed resources (Labor, Equipment, etc.).
- Project schedule.
- Preparing invoices for work done.
- Subcontractors payments.
- Review and control of crews production rates.
2.2 Quantity Development
After the scope has been analyzed and broken down into construction tasks, each task
must be quantified prior to pricing. Equal emphasis should be placed on both accurate
quantity calculation and accurate pricing. Quantities should be shown in standard units
of measure and should be consistent with design units. Assistance for preparing
takeoffs may be provided by others within the organization in support of cost
engineering; however, the responsibility for the accuracy of the quantities remains with
the cost engineer. Distinction should be made between net quantities without waste
versus quantities that include waste or loss. This is necessary to ensure duplication does
not occur within the estimate.
The detail to which the quantities are prepared for each task is dependent on the level of
design detail. Quantity calculations beyond design details are often necessary to
determine a reasonable price to complete the overall scope of work for the cost estimate.
A simple example would be fabrication waste material that is a material cost to the
project. Project notes will be added at the appropriate level in the estimate to explain the
basis for the quantity calculations, to clearly show assumed quantity allowances or
quantity contingencies, and to record quantities determined by cost engineering judgment
that will be reconciled upon design refinement. Use the following recommended
guidelines in quantity development:
- Coordinate the quantity takeoff process and plan with the estimator.
- Ensure full project scope is reflected within the estimate.
- Include a list of materials in quantity takeoffs.
- Utilize a process that easily records the quantity development, i.e., document
source and date, estimator name and date, location within the project,
demonstrated calculations and additions such as waste or loss.
- Use a systematic approach similar to the construction methodology required.
- Check scales and dimensions on each drawing sheet.
- Highlight or mark drawing areas where quantities have been determined to ensure
all scope is captured but not double counted.
- Consider items that have no material but still require cost, e.g., job office
overhead (JOOH), task setup, training and certifications, and labor preparation.
- Develop quantities within a reasonable range for the work using decimals where
critical.
- Add a certain amount of waste, loss, drop off, or length related to the material
purchases for a bulk order. Ensure this addition is separate from the original
quantity measured.
- Select a natural stopping point during work interruptions.
- Coordinate with designers if the design appears in error, if a better approach is
discovered, or a value engineering process is warranted.
2.3 Bill of Quantities
The Bill of Quantities (BOQ) is defined as a list of brief descriptions and estimated
quantities. The quantities are defined as estimated because they are subject to
admeasurement and are not expected to be totally accurate due to the unknown factors
which occur in civil engineering work. The objective of preparing the Bill of Quantities is
to assist estimators to produce an accurate tender efficiently and to assist the post-
contract administration to be carried out in an efficient and cost-effective manner. It
should be noted that the quality of the drawings plays a major part in achieving theses
aims by enabling the taker-off to produce an accurate bill and also by allowing the
estimator to make sound engineering judgments on methods of working. Figure 2.1
shows a sample of a bill of quantities.
Fig. 2.1: Bill of quantities sample
The bill of quantities, when completed, is traditionally presented in trade format; that is,
in a given order, for example:
- Demolition and alteration
- Groundwork
- Concrete work
- Masonry
- Etc.
Also, the bill of quantities is classified into the following work groups:
- Civil works which includes: Earth works (leveling, excavation, backfilling,
transportation of excavated soil); Foundation works (plain and reinforced
concrete, piling foundations); Brick works (internal and external); Skelton
reinforce concrete (columns, beans, slabs and stairs); Water proofing; Staircases;
Plastering, Flooring; Painting; Metal works (windows, doors, accessories); etc.
- Sanitary works which includes: Water feeding systems; Internal and external
plumbing works; Finishes of plumbing works; etc.
- Electrical works which includes: Electrical cables; Wiring; Accessories; Internal
connections; etc.
- Mechanical works which includes: Air conditioning systems; Elevators; etc.
2.4 Measurement Practice
It is vitally important that measurement practice applied to buildings is both accurate and
consistent. There are a number of situations that require a quantity surveyor to measure
and record dimensions from both drawings as well as on site, depending on the stage of
the project. In order to standardize measurement rules and conventions, there are a
number of standard codes and methods of measurement that are available. These are
outlined below.
There are various approaches to measurement for bills of quantities and these are as
follows:
- Each (numbers): Piles, doors, Windows, Precast concrete, etc.
- Length (meter): Windows sills, Pipes, Skirts, stair steps, etc.
- Area (Square meter): Flooring, painting, plastering, Brick walls (12 cm or less),
etc.
- Volume (Cubic meter): Brick walls (>12 cm thick), Excavation, Backfilling,
Reinforced Concrete, etc.
- Weight (Ton): Metallic works, Reinforcement steel, etc.
- Lump Sum: Some electrical and plumbing works, Manholes, etc.
- Effort (Man-day): Renting of equipment or labor, etc.
Figure 2.2 shows a sample of the quantity surveying table for quantity take-off.
Fig. 2.2: Quantity take-off table
2.4.1 Earth works
Earth works comprises site level, excavation, backfilling and transportation of excavated
materials.
Excavation:
- Quantities are calculated based on the dimensions of the foundation in plans from
the owner perspective.
- Contractors should consider the excess of material excavated to all for safe
operations.
- Prices differ based on the soil type, deep of excavation, ground water level, site
location, shoring system, Equipment used, etc.
- Unit of measurement is cubic meter (volume).
- Consider the following example (Figure 2.3).
Fig. 2.3: Plan and cross section of building foundation
The length of excavation = 5.4 2 + (4.4 2) 2 = 15.6 m
Depth of excavation = 1.8 m
Width of excavation = width of plain concrete footing = 1.0 m
Volume = 15.6 1.8 1.0 = 18.8 m
3
- Consider another example (Figure 2.4). Plain concrete dimensions (1.2 2.0 0.2
m), reinforced concrete footings dimensions (0.8 1.6 0.4 m); depth of
excavation 1.2 m and ground beams cross section is (0.25 0.4 m). Find the
volume of the excavated material (see Figure 2.4). Distance between centerlines is
5 m.
Fig. 2.4: Footing foundation plan and cross section
Excavation for footings = 2 1.2 2.0 1.2 = 5.76 m
3
Excavation for smell = (5 2 1) 0.6 0.25 = 0.45 m
3
Volume = 5.76 + 0.45 = 6.21 m
3
Backfilling:
- Unit of measurement is cubic meter (volume)
- Backfilling = Excavation volume of all works inside the excavated pit (footings,
smells, column necks, brickwork, etc.) + amount above GL (or amount below
GL) as shown in Figure 2.5.
Fig. 2.5: Backfilling quantities calculations
- Consider the example shown in Figure 2.4, the volume of backfilling could be
calculated as follow:
Volume of backfilling = excavation concrete brick
Volume of concrete = 15.6 1 0.4 = 6.24 m
3
Volume of brick = 15.6 0.4 1.4 = 8.736 m
3
Volume of backfilling = 18.8 (6.24 + 8.736) = 3.824 m
3
Site leveling:
- Measured in m
2
(area) if thickness less than 30 cm.
- Measured in m
3
(volume) if thickness more than 30 cm.
Soil transportation:
- Transported soil = vol. of exc. vol. of backfilling + additional soil at site
- Add swelling factor based on the soil type: 5% sandy soil. 15% clayey soil and
25% for demolition material. (owner or contractor)
2.4.2 Concrete works:
Concrete works comprises of both plain concrete (PC) and reinforced concrete (RC).
Plain concrete (PC):
- Measured in m
2
(area) if thickness < 20 cm.
- Measured in m
3
(volume) if thickness 20 cm.
- Average thickness should be mentioned when measurement is done by area.
Reinforced concrete (RC):
- All RC elements measured by volume (m3) except hollow block slabs measured
by area (m
2
).
- Domes, cylindrical roofs and shells measured by area in the horizontal projection.
2.4.3 Brick works:
The rules and precautions that should be followed when measuring brick works are
(Figure 2.6):
- Measured in m
2
(by area) if thickness <25 cm.
- Measured m
3
(by volume) if thickness 25cm.
- Deduct all openings.
- Deduct half the area (volume) of arches.
- Deduct all Concrete elements.
- Facades are measured by area.
- Separate item for each brick type
Fig. 2.6: Cross section of brick walls
2.4.4 Plastering:
Plaster works are measured according to its location of being internal or external works.
Internal plaster work measured as it is (engineering measurement).
Internal Plaster:
- Engineering measurement by area (m
2
).
- All openings are deducted.
- All openings sides are added.
- Inclined slabs are calculated based on their horizontal projection.
External plaster:
- Measured by area (m
2
).
- Openings with areas < 4 m2 are kept with deduction.
- Deduct half the area of the openings 4 m
2
.
- Openings with areas < 4 m
2
are kept with deduction.
- Cantilever slabs < 1 m projection not added.
- Add half the area of cantilever slabs 1 m.
2.5 Example Application: Substructure
As with most measurement exercises it is good practice to start with a taking-off list
containing all the items that have to be included on a Substructure taking-off list:
Site preparation Removing trees and shrubs
Lifting turf
Top soil/removing/preserving
Excavation Reduce levels/disposal of excavated material
Excavating trenches/disposal of excavated material
/filling/surface treatments
Earthwork support to sides of reduced level/sides of trenches
Concrete Foundations
Beds/formwork/damp-proof membrane
Masonry Brick walls/facings
Forming cavities
Filling to cavities
Damp-proof courses
Site levels
Virgin sites will almost certainly be covered with a layer of vegetation that has to be
removed prior to excavation and stored separately or removed from site. Top soil cannot
be used for backfilling as it would, over time, cause damage to the substructure. The
usual default depth for topsoil is 150 mm although it could be more than this and a test pit
may be dug to accurately determine the actual depth. Figure 2.7 shows a 5 m grid of a
survey of levels taken on a proposed site.
Fig. 2.7: Grid survey of the proposed site
The site is required to be reduced to a level of 35.62 and in order to calculate the volume
of excavation required the average level of the site must be determined. This can be quite
easily done by calculating the average level:
Average site level = (35.90 5 + 35.86 3 + 35.89 2 + 35.92 + 35.84 2 +
35.88 2 + 35.85 + 35.87 2) / 18 = 35.87 m
Reduced site level = 35.62 m
Average excavation depth = 0.25 m
Total excavation volume = 0.25 25 10 = 62.5 m
3
Figure 2.7 shows the ground floor plan of the building with the external and internal
walls.
Fig. 2.7: Ground floor plan showing external and internal walls
Figure 2.8 shows a cross-section through the trench and reduced level excavation
required for the external wall in the Example application. Note that the levels have been
reduced internally by 150 mm to allow for a 150 mm thick bed of hardcore. The top of
the hardcore bed when compacted will be covered or blinded with sand to prevent the
damp proof membrane, a layer of polythene sheet with a minimum thickness of 0.30 mm,
being perforated by the hardcore. It is important that the material used as hardcore is inert
and free from chemicals, vegetable or other deleterious matter. It is a requirement of the
Building Regulations that insulation is incorporated into the floor construction and in this
case 50 mm thick rigid insulation board has been used. The bottom of the trench
excavation when completed will be compacted prior to the concrete being poured, this is
to prevent the soil being incorporated into the concrete and weakening the mix. This is
particularly important when reinforced concrete is being used, where it is common to
blind the bottom of the excavation with a weak mix concrete before the reinforcement is
placed in position.
Fig. 2.8: Cross sections of external and internal walls
Working space
Working space is to be measured in circumstances where workmen have to operate in
situations that require them to work in trenches below ground level, for example when
working with formwork, rendering, tanking or protection. It is measurable as a superficial
item where there is less than 600 mm between the face of the excavation and the work;
all additional earthwork support, disposal, backfilling and breaking out are deemed to be
included with the working space item. This is another contractors risk item as he must
decide and price what space he thinks is required as illustrated in Figure 2.9.
Fig. 2.9: Work space allowance
The different quantities take-off is shown as presented below.
2.6 Exercises
1. Consider the following figure, it is required to prepare a quantity take-off for the
following types of work to be included on the bill of quantities:
a. Excavation.
b. . Backfilling
c. Plain concrete footing
d. Reinforced concrete footings and smells and column necks till the ground
level.
e. Insulation.
2. Consider the following figure; find the same requirements as above.
3. Perform quantity surveying for the different work items of the building shown
below.
4. Consider the following figure; find the same requirements as above.
CHAPTER 3
CONCEPTUAL COST ESTIMATING
At the beginning of a project by the owner, prior to any design, only limited information
is known about a project. However, the owner must know the approximate to evaluate the
economic feasibility of proceeding with the project. Thus, there is a need to determine the
approximate cost of a project during its conceptual phase.
A conceptual estimate is also known as a top-down, order of magnitude, feasibility,
analogous, or preliminary estimate. It is the first serious effort made to predict the cost of
the project. A conceptual estimate is usually performed as part of the project feasibility
analysis at the beginning of the project. In this way, the estimate is made with limited
information on project scope, and is usually made without detailed design and
engineering data. The conceptual estimate is also defined as approximate estimate and
used to know the budget for a project. Considerable experience and judgment are
required to obtain a dependable approximate estimate for the cost.
3.1 Conceptual Cost Estimating Basics
Conceptual cost estimating is an important pre-design planning process. The following
subsections present the conceptual cost estimating definitions, characteristics,
importance, preparation, process, and outputs.
3.1.1 Conceptual cost estimating definition
A conceptual estimate is an estimate prepared by using engineering concepts and
avoiding the counting of individual pieces. As the name implies, conceptual estimates are
generally made in the early phases of a project, before construction drawings are
completed, often before they are hardly begin. The first function of a conceptual estimate
is to tell the owner about the anticipated cost, thus presenting useful information for the
owner in contemplating the project feasibility and further development. A conceptual
estimate is also used to set a preliminary construction budget, and to control construction
costs at the most critical stage, during the design. Conceptual cost estimating is defined as
the forecast of project costs that is performed before any significant amount of
information is available from detailed design and with incomplete work scope definition,
with the purpose of using it as the basis for important project decisions like go/no-go and
the appropriation of funds decisions.
3.1.2 Conceptual cost estimating characteristics
The first recognized characteristic of conceptual estimating, like all other estimating, is
the inexactness in the process. With the absence of data and with shortage of time, there
may be no other way to evaluate designs but to use opinion. Conceptual estimating is a
mixture of art and science; the science of estimating tells the cost of past work. The art is
in visualizing a project and the construction of each detail, selecting comparative costs
from past projects and adjusting them to new conditions.
The second characteristic of conceptual estimating is that its accuracy and validity are
highly related to the level of information provided by the project scope. The availability
of a good, complete scope definition is considered the most crucial factor for conceptual
estimating.
The third characteristic of conceptual estimating is that it is a resource restricted activity.
The main resources for conceptual estimating are information, time, and cost. Due to the
fact that conceptual estimating is performed in the early stages of the project, the scope
information available is usually restricted in detail as well as in precision. In addition, the
time and cost available for making the estimate is restricted. Conceptual estimating is
used to determine the feasibility of a project quickly or screen several alternative designs.
Therefore, the estimate, although important, cannot be given much time and resources.
3.1.3 Importance of conceptual cost estimates
Preliminary estimate assists the overall cost-control program by serving as the first check
against the budget. It will indicate the cost overruns early enough for the project team to
review the design for possible alternates. Since preliminary estimate is made prior to the
completion of detailed design, the margin of error will be relatively large. Then, the
larger contingency should be applied. The contingency varies with the amount of design
information available and the extent of cost information obtainable from similar projects.
3.1.4 Preparation of conceptual cost estimates
A generic conceptual cost estimating preparations is shown in Figure 3.1, the
preparations begins with a request made by management to estimate the cost of a new
project. The most important part of the request is the project scope. The first task for the
estimator is to study and interpret the project scope and produce an estimating plan. The
next task is to collect historical data related to similar past projects. The selection and
usage of these data is crucial for the estimating preparations because inappropriate
information will negatively affect the estimate. The outputs from this stage are the project
conceptual cost estimate and a documented estimating basis used to develop this cost. It
is very important to describe in detail all the information, assumptions, adjustments, and
procedures considered in the estimate. The resulting conceptual cost estimate is then
submitted to management for decision-making.
To prepare an elemental cost plan the following information should be assembled:
A cost analysis of a previous similar building
Sketch plans and elevations of the proposed project
Outline specification/levels of services installation, etc. for the proposed project.
3.1.5 Conceptual Cost Estimating Output
The primary output of the cost estimating effort is the cost estimate. The estimate is
typically expressed in unit cost. Alternative units can be work quantities, material
quantities, or staff work hours. However, for majority of the highway construction
projects, the unit cost are mostly applicable; therefore, they are frequently used.
Fig. 3.1: Conceptual cost estimating preparations
3.2 Broad Scope of Conceptual Estimates
Prior the design of a project, cost estimate could be prepared based on the cost
information based on previously completed projects similar to the proposed project. The
number of units or size of the project is the only available information. Although the
range of costs varies among projects, the estimator can develop unit costs to forecast the
cost of future projects.
The unit cost should be developed from weighting the data that emphasizes the average
value, yet it should account for the extreme maximum and minimum values. In that
regard Eq. (3.1) can be used for weighting cost data from previous projects.
UC = (A + 4B + C) / 6 (3.1)
Where: UC = forecast unit cost
A = minimum unit cost of previous projects
Request for Estimate
Report to Management
Study & Interpretation
of Information
Collect Additional Information
Conceptual Cost Estimating
Decision
Making
Not Approved
Approved
Preliminary
Budget
B = average unit cost of previous project
C = maximum unit cost of previous projects
Example 3.1
Use the weighted unit cost to determine the conceptual cost estimate for a proposed
parking that is to contain 135 parked cars. Previous projects data are given in Table
3.1.
Table 3.1: Previous projects cost data
Project No. Cost (LE) No. of cars
1
2
3
4
5
6
7
8
466,580
290,304
525,096
349,920
259,290
657,206
291,718
711,414
150
80
120
90
60
220
70
180
Solution
The unit cost per car can be calculated as given in Table 3.2.
Table 3.2: Unit cost per car
Project No. Unit cost (LE/car)
1
2
3
4
5
6
7
8
3,110.4
3,628.8
4,375.8
3,888.0
4,321.5
2,978.3
4,167.4
3,952.3
Then, the average unit cost = 30,431.5 / 8 = LE3,803.94 / car
Using Eq. 3.1, the forecast unit cost = (2,987.3 + 4 3,803.94 + 4,375.8) / 6 =
3,763.14.
Accordingly, the cost estimate for 135-cars parking = 135 3,763.14 = LE508,023
3.3 Conceptual Estimate Adjustment
It is necessary for the estimator to adjust the cost information from previously completed
projects for use in the preparation of a conceptual cost estimate for a proposed project.
There should be adjustment for time, location, and size.
3.3.1 Adjustment for time
The use of cost information from a previous project to forecast the cost of a proposed
project will not be reliable unless an adjustment is made proportional to the difference in
tine between the two projects. The adjustment should represent the relative inflation or
deflation of costs with respect to time due to factors such as labor rates, material costs,
interest rates, etc.
Measures of changes in items such as location, building costs or tender prices are
performed using index numbers. Index numbers are a means of expressing data relative to
a base year. For example, in the case of a building cost index, a selection of building
materials is identified, recorded and given the index number 100. Let us say for the sake
of argument that the cost of the materials included in the base index is LE70.00 in
January 2005. Every 3 months the costs are recorded for exactly the same materials and
any increase or decrease in cost is reflected in the index as follows: Building cost index
January 2005 = 100; Building cost index January 2009 = 135. This, therefore, represents
an increase of 35% in the cost of the selected materials and this information can be used
if, for example, data from a 2005 cost analysis was being used as the basis for calculating
costs for an estimate in January 2009.
Various organizations publish indices that show the economic trends of the construction
industry with respect to time. The estimator can use the change of value of an index
between any two years to adjust past cost records and to forecast future project costs.
Example 3.2
Suppose the indices for building construction projects show these economic trends
(Table 3.3). It is required to use the cost of a LE843,500 project completed last year
to prepare a conceptual estimate for a project proposed for construction 3 years from
now.
Table 3.3: Construction economic trends
Year Index
3 years ago
2 years ago
1 year ago
Current year
358
359
367
378
Solution
The equivalent interest rate can be calculated based on the change in the cost index
during the 3-year period as follow:
(378/358) = (1 + i)
3
, then i = 1.83%
Accordingly, the cost of the project should be adjusted for time as follows:
Cost = LE843,500 (1 + 0.0183)
4
= LE906,960
3.3.2 Adjustment for location
Tender price levels vary according to the region of the country where the work is carried
out. Similarly, as stated previously in section 3.3.1, the use of cost information from a
previous project to forecast the cost of a proposed project will not be reliable unless an
adjustment is made proportional that represents the difference in cost between the
locations of the two projects. The adjustment should represent the relative difference in
costs material, equipment and labor of the two locations. Indices that show the relative
difference in construction costs with respect to geographical location is usually published
by many organizations.
Example 3.3
Suppose the indices for different location of construction costs are shown in Table
3.4. Suppose that the construction cost of a project completed at city A is LE387,200,
it is required to prepare a conceptual estimate for a similar project proposed in city D.
Table 3.4: Locations cost indices
Location Index
City A
City B
City C
City D
City E
1.025
1.170
1.260
1.105
1.240
Solution
The cost of the proposed project could be adjusted for location as follows:
Cost = LE387,200 (1.105 / 1.025) = LE417,420
3.3.3 Adjustment for size
The use of cost information from a previous project to forecast the cost of a future project
will not be reliable unless an adjustment is made that represents the difference in size of
the two projects. In general, the cost of a project is directly proportional to its size. The
adjustment is generally a simple ratio of the size of the proposed project to the size of the
previous project from which the cost data are obtained.
3.3.4 Combined adjustment
The conceptual cost estimate for a proposed project is prepared from cost records of a
project completed at a different time and at a different location with a different size. The
estimator must adjust the previous cost information for the combination of time, location
and size.
Example 3.4
Use the time and location indices presented in Tables 3.3 and 3.4 to prepare the
conceptual cost estimate for a building with 62,700 m
2
of floor area. The building is
to be constructed 3 years from now in city B. A similar type of building that cost
LE2,197,540 and contained 38,500 m
2
completed 2 years ago in city E. Estimate the
probable cost of the proposed building.
Solution
Proposed cost
= Previous cost Time adjustment Location adjustment Size adjustment
= LE2,179,540 (1 + 0.0183)
5
(1.17 / 1.24) (62,700 / 38,500)
= LE3,700,360
3.3.5 Unit-cost adjustment
Although the total cost of a project will increase with size, the cost per unit may decrease.
For example, the cost of an 1800 m
2
house may be LE535/m
2
where as the cost of a 2200
m
2
house of comparable construction maybe only LE487/m
2
. This is because certain
items such as furniture, garage, etc., are independent of the size of the project. Size
adjustment for a project is unique to the type of project. The estimator must obtain cost
records from previous projects and develop appropriate adjustments for his/her particular
project.
Example 3.5
Cost records from previous projects show this information (Table 3.5). Find the unit
cost as a function of the number of units.
.
Table 3.5: Previous projects cost data
Project No. Cost (LE) Size, no. of units
1
2
3
4
5
2,250
1,485
2,467
2,730
3,401
100
60
120
150
190
Solution
The unit costs are calculated as given in Table 3.6.
Table 3.2: Unit cost
Project No. Unit cost (LE)
1
2
3
4
5
22.5
24.75
20.56
18.20
17.90
A plot of these points is shown in Figure 3.2. For the first order relationship, the
general equation for a straight line is: y = ax + b. The equation of the straight line can
be determined as:
y = [(17.9 24.75) / (190 60)] x + 24.75 = - 0.0526 x + 24.75
where 60 < x < 190, then y = 24.75 0.0526 (S 60)
where S the number if units in the proposed project.
Or by adding a trend line of linear type, thus yields the equation shown in Figure 3.1:
y = - 0.056 x + 27.81
Obtaining the unit cost for 170 units project size = - 0.056 170 + 27.81 = LE18.29
Fig. 3.2: Comparison of size and cost per unit
As illustrated in the Example 3.5, the adjustment of unit costs based on the size of a
project is unique and can be obtained only from previous cost records. The cost data for
some types of projects could be nonlinear. Accordingly, a second order equation may
better fit the data for some types of projects. The estimator must evaluate his/her own
particular cost records and develop a unit cost-size relationship.
3.4 Conceptual Estimating Techniques
3.4.1 Interpolation
Interpolation is a technique used in the early stages of the design sequence when
information on the proposed project is in short supply. It requires a good deal of skill and
experience and is the process of adding in or deducting from the cost analysis to arrive at
a budget for a new project. Therefore in preparing a budget for a new project assume a
cost analysis has been chosen as the basis for the estimate. However, the cost analysis
will contain items that are not required for the new project and these must be deducted.
For example, in the new project the client wishes to exclude the installation of air
conditioning from the estimate and this will have to be deducted from the budget; but on
the other hand the client wishes to include CCTV throughout and the cost of providing
this must be calculated and added in. It is important, as described later, to adjust costs to
take account of differences in price levels. The process continues until all identified
differences have been accounted for. Other credible approaches to approximate
estimating that are available to the quantity surveyor are:
The unit and square meter methods, generally used for preliminary estimates when firm
information is scarce.
Approximate quantities and elemental cost planning for later stage estimates.
Other approaches are often cited, most notably cubic meter and storey enclosure
methods, but the accuracy of these approaches are somewhat dubious and they are
seldom used in practice and are not considered here.
3.4.2 Unit method
The unit method is a single price rate method based upon the cost per functional unit of
the building, a functional unit being, for example, a hotel bedroom. This method is often
regarded as a way of making a comparison between buildings in order to satisfy the
design team that the costs are reasonable in relation to other buildings of a similar nature.
It is not possible to adjust the single rate price and therefore is very much a ball park
approach. It is suitable for clients who specialize in one type of project; for example,
hotel or supermarket chains, where it can be surprisingly accurate. Other examples where
unit costs may apply are:
Schools cost per pupil
Hospitals cost per bed space.
Example 3.6
Assume that the current cost for a 120-pupil school constructed of wood frame for a
city is LE1,200,000. We are asked to develop an estimate for a 90-pupil school.
Solution
The first step is to separate the per-pupil cost = LE1,200,000/120 = LE10,000/pupil
Apply the unit cost to the new school = LE10,000/pupil X 90 pupils = LE900,000
Example 3.7
The current cost for a 100-bed hospital constructed is LE1,250,000. We are asked to
estimate a 125-bed hospital.
Solution
Cost per-bed = LE1,250,000/100 = LE12,500/bed
New hospital cost = LE12,500/bed X 125 bed = LE1,562,500
Example 3.8
For a multistory garage spaced for 500 cars the construction cost was LE3,000,000.
What is the estimate of 450-car garage?
Solution
Cost per-car = LE3,000,000/500 = LE6,000/car
New Garage cost = LE6,000/car X 450 car = LE2,270,000
3.4.3 Superficial method
The superficial method is a single price rate method based on the cost per square meter of
the building. The use of this method should be restricted to the early stages of the design
sequence and is probably the most frequently used method of approximate estimating. Its
major advantage is that most published cost data is expressed in this form. The method is
quick and simple to use though, as in the case of the unit method, it is imperative to use
data from similarly designed projects. Another advantage of the superficial method is that
the unit of measurement is meaningful to both the client and the design team. Although
the area for this method is relatively easy to calculate, it does require skill in assessing the
price rate. The rules for calculating the area are:
- All measurements are taken from the face of external walls. No deduction is made
for internal walls, lift shafts, stairwells, etc. gross internal floor area.
- Where different parts of the building vary in function, then the areas are
calculated separately.
- External works and non-standard items such as piling are calculated separately
and then added into the estimate. Figures for specialist works may be available
from sub-contractors and specialist contractors.
Example 3.9
Gross floor area for office block shown in Figure 3.3 = 10.0 x 25.0 = 250.0 m
2
- 2 x 3.0 x 7.50 = 205.0 m
2
Area of 5 floors 205.0 x 5 = 1025.0 m
2
x LE1100 /m
2
= LE1,127,500.0
Basement 7.00 x 25.0 = 175.0 m
2
x LE1300 /m
2
= LE227,500.0
Estimate for block LE1,355,000.0
Fig. 3.3: Plan and cross section of Example 3.9
3.4.4 Approximate quantities
Approximated quantities are regarded as the most reliable and accurate method of
estimating, provided that there is sufficient information to work on. Depending on the
experience of the surveyor, measurement can be carried out fairly quickly using
composite rates to save time. The rules of measurement are simple although it must be
said they are not standardized and tend to vary slightly from one surveyor to another.
- One approach involves grouping together items corresponding to a sequence of
operations and relating them to a common unit of measurement; unlike the
measurement for a bill of quantities, where items are measured separately.
- Composite rates are then built up from the data available in the office for that
sequence of operations.
- All measurements are taken as gross over all but the very large openings.
- Initially, the composite rates require time to build up, but once calculated they
may be used on a variety of estimating needs.
3.5 Parametric Cost Estimate Models
The parametric model uses historical data as the basis of the model's predictive features.
However, the characteristics that are input into the process are primarily based on
performance indicators such as speed, accuracy, tolerance, reliability, friendliness, error
rate, and complexity of the environment of the deliverables. Parametric estimating is used
primarily in software development and system development projects. The output of
parametric models includes the cost of major phases, duration of project major phases,
total project cost, and resource requirements.
Parametric models calculate the dependent variables of cost and duration based on one or
more independent variables. These independent variables are quantitative indices of
performance and/or physical attributes. More sophisticated models provide a multitude of
levels of estimates. If, during the early stages, a small array of data regarding the project
is available, a rough estimate is provided. However, if a large array of project data is
available later in the project's life; more accurate estimates are calculated using the same
model.
A parametric model, for a construction project, would use the data provided by the user
on any or all of the following characteristics: project type, frame material, exterior
material, ground conditions, desired floor space, and roof type. Then, using the general
relationships developed between these input and output variables, the model provides an
estimate of some or all of the output variables. The output variables include cost of the
design process, cost of the structure, size of major equipment, optimum size of
construction crew, size of the parking lot, and duration of structure construction, duration
of equipment installation, and overall project duration.
Parametric estimate models are refined and fine-tuned for specific projects within
specific industries. Many organizations have developed parametric models for projects of
their own specialty. Depending on the organizational environment and on the nature of
targeted projects, these models use different statistically derived algorithms, which in
turn would use different sets of input and output data in calculating the output variables
based on the input variables. These models are, or should be, regularly evaluated,
validated, calibrated, and customized for accuracy and appropriateness. The estimates of
cost and duration developed by the parametric model usually establish a preliminary
budget for the project that will compare its financial desirability with other projects of the
enterprise.
3.6 Exercises
1. Use the time and location indices shown below to estimate the cost of a building
that contains 32500 m
2
of floor area. The building is to be constructed 2 years
from now in City A. The cost of a similar type of building that contained 48300
m
2
was completed last year in City C for a cost of LE3,308,500.
Construction economic trends Locations cost indices
2. Find the weighted unit cost per square meter for the project data shown and
determine the cost of a 2700-m
2
project.
Project No. Total cost (LE) Size, m
2
1
2
3
4
5
147,300
153,700
128,100
118,400
135,700
2580
2900
2100
1850
2300
3. Determine the relationship between unit cost and size for the project data shown
in Problem 2 to estimate the cost of a 2200-m
2
project.
Location Index
City A
City B
City C
City D
City E
1.025
1.170
1.260
1.105
1.240
Year Index
3 years ago
2 years ago
1 year ago
Current year
358
359
367
378
4. Complete the following sentences:
a. Conceptual cost estimate is also known as: , ..,
b. The conceptual estimate is defined as
c. The important project decision based on the conceptual estimate is ...
d. The most important piece of information in conceptual estimate is .
e. When using historical data to predict the cost of a new project, these data
should be adjusted for ., . and
f. The time adjustment should account for the . and ..
g. The parametric models calculate .. based on .
h. In parametric model, some of the input independent variables are .,
., . and .
5. Assume that the current cost for a 120-pupil school constructed of wood frame for
a city is LE1,200,000. We are asked to develop an estimate for a 90-pupil school
to be constructed this year in City A. The 120-pupil school was constructed in
2008 in City E. the inflation rate was assumed to be 2.3% annually.
.
CHAPTER 4
COST OF CONSTRUCTION LABOR AND EQUIPMENT
Construction labors influence every part of a project. They operate equipment and fabricate and
install materials. Detailed estimate requires the breakdown of project costs into the labor, material
and equipment costs. Thus type of estimate need to have a design available to get such required
details. This chapter introduces the details of estimating labor, equipment and material costs as
the basis for detailed cost estimate of construction projects.
4.1 Preparing the Detailed Estimate
If a contractor chooses a project he or she can professionally and financially handle, it is
worthwhile to expend all efforts to win the bid. In addition, the contractor must
successfully pass a qualification screening. After the decision to bid, arrangements need
to be made to pick up the contract document and prepare a detailed cost estimate. The
steps listed below, in logical order, are the road map for developing a detailed estimate.
One: Review the bidding documents. Check for general conditions, specifications and all
the drawings. If any discrepancies exist, record them and check with the architect or
engineer. The general conditions and specifications are generally organized into the
following sections: the bid, the owner/contractor agreement, bonds, alternates,
general conditions, specifications, and addenda.
The bid section includes the invitation to bid, instructions to bidders, and bid forms.
The invitation to bid contains a description of the nature, extent, and location of the
project as well as contact information for the owner. The documents should also
contain date, time and place that bids will be received; general contractor and
subcontractors prequalification requirements; date, time, and location of any pre-
bid conference; availability of bidding documents with their dates, locations, and
procurement costs; and bond requirements.
The owner/contractor agreement section is most often a standard document that
formalizes the construction contract price and construction duration. It should also
list progress payments retained, percentage of completed work value, acceptance
conditions, and final payment constraints.
The bond section should include bid bond and performance bond forms and
requirements. Bonds are written documents that describe the conditions and
obligations related to the owner/contractor agreement. A bid bond certifies that if a
contractor is awarded the bid within the time specified in the invitation to bid, the
contractor will enter into the contract and will provide all other required bonds in a
timely manner. A performance bond guarantees the owner that within agreement
limits the contractor will perform all work in accordance with the contracting
document. Labor and material bonds guarantee to the owner that the contractor will
pay in a timely fashion for supplied materials used by all the subcontractors related
to the project.
Two: Review the drawings to visualize the building size, height, shape, function,
basements, and so on. Start with floor plans, cross-sections, exterior finish system,
and the roof. Note all unusual construction procedures, building systems, and
materials that have been specified.
Three: Review structural drawings to get acquainted with specified systems: reinforced
concrete, structural steel, masonry, wood, or combinations. Find out which pieces
of heavy construction equipment will be needed for erection and for how long. Pay
attention to various wall sections, materials and prefabricated assemblies.
Four: Review mechanical, electrical, fire extinguisher, and security drawings. Record any
possible interference with substructure and superstructure erection.
Five: Start identifying work to be done by general contractor and work to be done by
subcontractors.
Six: Read and study thoroughly the specifications for the work to be done by the general
contractor and those related to any subcontracted work. Also, review general
conditions and note the items that will affect project costs.
Seven: Visit the project site and have with you the project manager or field engineer.
Eight: Call a meeting with the personnel who will hold the key supervisory positions.
Establish with them the general guidelines for quantities take off and pricing.
Nine: Develop a list of subcontractors. Notify subcontractors and suppliers that the
company is preparing a proposal and ask if they intend to submit bids.
Ten: Following the site visit and staff consultation, develop a list of items to be
considered for jobsite overhead and general overhead that need to be priced later.
Eleven: Start the quantities takeoff for the category of construction work selected to be
done in house (most often site work, foundations, and concrete work). When taking
off quantities, break each item down by size, type of material, and workmanship.
Also list the type of construction equipment needed for each phase.
Twelve: Condense quantities from the work up sheet by work category and transfer them
to a summary sheet for pricing. Pricing means the cost of materials, labor, and
construction equipment. The prices used are from company available cost files
adjusted to a particular location, or from quotes from suppliers and subcontractors.
4.2 Sources of Cost Information
Not all cost information has the same reputation for accuracy and reliability and care
should be exercised when choosing cost data for a new estimate. Cost information
required for pricing different work items may be gathered or compiled from different
sources.
- Cost information from published price books such as US Means. Price books are
published annually and contain a range of prices for standard bills of quantities
items.
- Priced bills of quantities from previous projects. A useful source of information as
the cost information tends to be current. As with other forms of cost data, there is a
need to adjust for differences in location, etc.
- Cost analysis and cost models produced in-house. Depending on the size of an
organization, perhaps the most reliable source of cost information, partly due to the
fact that it is easier to ensure good quality control on the data. Also data presented
in this format will be easily understood and interpreted. A disadvantage is the time
and cost taken to prepare and store the information.
4.3 Construction Labor
In todays fast-paced industrialized age, where many of the products we see are
increasingly being mass produced in factories by machines, a building still remains as
one of the few handcrafted products put together piece by piece by craftsmen. The
construction industry, to which these craftsmen belong, is one of the most labor-intensive
industries in the world. The labor cost component of a building project often ranges from
30 to 50%, and can be as high as 60% of the overall project cost. Therefore, it is clear that
construction labor is a vital component of a construction project.
A building is a very complex product, made up of many different systems, such as the
structural system, exterior enclosure system, and HVAC system. These systems can be
broken down into many more subsystems and sub-subsystems. In this way, a building
construction project is divided into numerous work packages. These work packages can
then be assigned to and completed by an individual worker or a crew. A crew is a team of
workers, which can be of the same trade or a composite of many different trades. Due to
the diverse nature of the different tasks associated with all the building systems, many
types of craftsmen from many different trades are required in a building construction
project.
4.3.1 Labor s production rates (Productivity)
A production rate is defined as the number of units of work produced by a person in a
specified time. Production rates may also specify the time in man-hours or man-days
required to produce a specified number of units of work. The time that a labor will
consume in performing a unit of work varies between labors and between projects and
with climatic conditions, job supervision, complexities of the operation and other factors.
It requires more time for erect shutters for stairs than for foundations.
Sometimes, the production rate is replaced by the term productivity. In the most general
sense, productivity is the ratio of input versus the respective output. In construction, the
input is often the work hours of a worker or a crew, such as the 8 hours of a bricklayer.
The output is the amount of work produced, such as laying 500 bricks. Thus construction
productivity is defined as the quantity of work produced in a given amount of time by a
worker or a specific crew, that is, the quantity of construction output units produced in a
given amount of time or a unit time. The formula for productivity is presented in Eq. 4.1.
Construction productivity = quantity of work produced / time duration (4.1)
Example 4.1
If a bricklayer can lay 500 bricks in 8 hours, then, the associated construction
productivity is 500 bricks divided by 8 hours, which is 62 bricks per bricklayer hour.
Although most items associated with the monetary factor remain relatively constant over
a short period of time, such as during the construction phase, productivity, on the other
hand, can fluctuate wildly. To accurately estimate productivity, an estimator not only
needs a good historical record, but a lot of experience.
4.3.2 Productivity sources
Productivity rates can be determined from published sources such as Means Building
Construction Cost Data and Walkers Building Estimators Reference Book. Figure 4.1
illustrates an excerpt from Means.
Fig. 4.1: Excerpt form Means Building Construction Cost Data
For a line item, Means provides the crew types associated with that line as well as two
forms of productivity rate: the daily output (unit/day) and labor hours (hr/unit). For
example, referring to Figure 4.1, for line 09210-100-0900, the daily output is 72.74 m2
and the labor hours required for one m
2
is 0.550 hours. The bare labor cost for the line
item is $13.70/m
2
. Also, the crew type for this work is Crew J-1. With reference to Figure
4.2, the excerpt from Means crew listing shows Crew J-1 as consisting of 3 plasterers, 2
plasterer helpers, and 1 mixing machine.
Fig. 4.2: Excerpt form Means Building Construction Cost Data: Crew J-1
The labor hours per unit production are determined by dividing the total labor hours of
the crew by the daily output. With reference to line 09210-100-0900 in Fig. 4.1 and Crew
J-1 in Fig. 4.2, Figure 4.3 shows the computation involved in determining the weighted
wage rate for the crew and bare unit labor cost for the line item.
Fig. 4.3: Calculating crew rate
It is important to note the presentation of productivity in labor hours. By keeping the
productivity record in labor hours, the record is essentially normalized and is not
subjected to the variability in project locations and prevailing wage rates. In this way,
unit labor costs for the contractors own operating region can be easily developed by
multiplying local wage rates including burden and fringe benefits by the productivity
rate.
Example 4.2
A contractor determines that the unit productivity for painting a wall is 0.55 hour per
m
2
. If the local wage rate including burden and fringe benefits is LE30 per hour, the
unit labor cost becomes LE16.50 per m
2
. If the wage rate is LE20 per hour, the unit
labor cost becomes LE11 per m
2
. In addition, productivity performance between
projects can also be easily compared if contractors keep cost accounting records in
man-hours.
4.3.3 Estimating work duration
Determining the total work duration for a task involves knowledge of the quantity of
work required for the task and the production rate for the specific crew that will be
performing the work. The quantity of work associated with the material quantity is
determined by the quantity take off discussed in Chapter 2. A straight forward approach
to the estimation of activity durations is to keep historical records of particular activities
and rely on the average durations from this experience in making new duration estimates.
Since the scope of activities is unlikely to be identical between different projects, unit
production rates are typically employed for this purpose. The duration of an activity may
be estimated as given in Eq. 4.2.
Work duration = quantity of work / number of crews production rate (4.2)
Example 4.3
Find the duration of an interior and exterior painting activities with quantities of 440
m
2
and 378 m
2
respectively, using crews of 11 m
2
/hours and 14 m
2
/hours for the
interior and exterior painting activities respectively.
Solution
Interior painting duration = 440 / 11 = 40 hours
Exterior painting duration = 378 / 14 = 27 hours
Total work hours = 67 hours
Typically, the quantity of work is determined from engineering drawings of a specific
project. The number of crews working is decided by the planner. In many cases, the
number or amount of resources applied to particular activities may be modified in light of
the resulting project plan and schedule. Some estimate of the expected work productivity
must be provided. Historical records in a firm can also provide data for estimation of
productivities.
Having defined a duration of a given work, it means that the planner have already defined
the number of resources that will be employed in a particular work. Knowing duration
and resources employed, it is simple to estimate the activity direct cost. Then, the three
elements of an activity: duration, cost, and resources form what is called construction
method. Some activities can be performed using different construction methods. Where,
its method will have its own resources, cost and duration.
4.3.4 Basic principle for estimating labor costs
Labor costs in construction are determined by two factors: monetary and productivity.
The monetary factor is related to hourly wage rates, wage premiums, insurance and taxes.
Estimating the components of the monetary factor is more difficult in construction than in
other industries. This is due to the variety of work involved in construction, as well as the
many types of trades involved. The problem is further complicated by the presence of the
unions with their craft structures and collective bargaining processes. Although the
computational process of this component seems complex and tedious, it is only a matter
of accounting as the needed numbers (such as wage rates, fringe benefits, and insurance)
are readily available.
The formula for computing the total cost of labor is quite simple. It requires the
knowledge of the total work hours or labor hours needed to perform all the tasks and then
applying the corresponding wage rates. The formula for calculating the total cost of labor
is shown in Eq. (4.3).
Total cost of labor = total work hour wage rate (4.3)
Example 4.4
An ironworker works 10hr/day, 6 days/week. A base wage of LE20.97/hr is paid for
all straight-time work, 8 hr/day, 5 day/week. An overtime rate of one time and one-
half is paid for all hours over 8 hr/day, Saturday through Wednesday, and double time
is paid for all Thursday work. The social security tax is 7.65% and the unemployment
tax is 3% of actual wages. The rate for workers compensation insurance is LE12.5
per LE100 of base wage. Calculate the average hourly cost to hire the ironworker.
Solution
Actual hours = 10 6 = 60 hr
Pay hours = weekly straight time + weekly overtime + Thursday overtime
= 5 8 1 + 5 2 1.5 + 10 2 = 75 hr
Taxes are paid on actual wage and insurance is paid on base wage
Average hourly pay = (75/60) LE20.97 = LE 26.21/hr
Social security tax = 26.21 0.0765 = 2.01
Unemployment tax = 26.21 0.03 = 0.79
Compensation = 12.5/100 20.97 = 2.62
Then, the average hourly cost = LE 31.63/hr
Example 4.5
Assume that a crew for a work item includes three bricklayers and two helpers. The
crew works for three days (8-hr/day) to complete the work package. The wage rate
for each bricklayer is LE28.55 and each helper is LE22.40. Find the total cost of the
crew.
Solution
In this instance, the total cost of crew is calculated as follows:
Total cost = 3 3 8 28.55 + 2 3 8 22.4 = LE3131
Example 4.6
If the daily production rate for a crew that works in an activity is 175 units/day and
the total crew cost per day is LE 1800. The material needed for daily work is 4.5 units
at LE 100/unit.
a. Calculate the time and cost it takes the crew to finish 1400 units
b. Calculate the total unit cost. Consider an eight hour work day.
Solution
a. Duration (units of time) = Quantity / Production per unit of time x number of crews
= 1400 / 175 1 = 8 days
Cost (labor cost) = Duration (units of time) x crew cost per unit of time
= 8 days LE 1800 / day = LE 14400
Total direct cost = Le 14400 + 4.5 units of material LE 100 / day 8 days
= LE 18000
b. Unit cost = total cost / quantity
= LE 18000 / 1400 = LE 12.86 / unit
Sometimes the productivity of a specific crew expressed in man-hours/unit not units/day.
For example, if the productivity is said to be 0.5 Man-hour/cubic meters, this means how
long it will take one labor to construct one unit. This way applied to any crew formation
and work hours.
Example 4.7
What is the duration in days to install 6000 square feet of walls shuttering if:
a. Crew of 2 carpenters is used with output of 2000 square feet/day
b. Productivity is measured as 0.008 man-hour/square feet. Number of
carpenters =3, and number of working hours/day = 8 hours
Solution
a. Duration = 6000 / 200 = 3 days
b. Total man-hours needed = 6000 0.008 = 48 man-hours (if one man used)
Duration = 48 / 8 = 6 days (if one man used)
Duration using 3 men = 6 / 3 = 2 days
Example 4.8: (use of several resources)
What is the duration of an exaction activity with a quantity of 3000 m
3
using an
excavation crew consists of an excavator with a production rate of 200 m
3
/day, a
loader of 250 m
3
/day and 3-trucks of 150 m
3
/day? Comment on this crew formation.
Solution
- Using the excavator: Duration = 3000 / 200 = 15 days
- using the loader: duration = 3000 / 250 = 12 days
- using the 3-trucks: duration = 3000 / 150 = 20 days
- then, the activity duration is governed by the lowest production rate = 20 days.
This is unbalanced crew where the loader is not working with full capacity; the
production rate of this crew could be adjusted by increasing the number of trucks to 4
of 5 trucks. Then, for a balanced mix of resources, use 1 loader, 1 excavator and 4-
trucks. Accordingly, the activity duration = 3000 / 200 = 15 days.
4.4 Construction Equipment
Modern construction is characterized by the increasing utilization of equipment to
accomplish numerous construction activities. Equipment refers to all the equipment,
tools, and apparatus necessary for the proper construction and acceptable completion of a
project. In a construction project, equipment costs are typically divided into portions. The
first and bigger portion covers the cost of equipment and is often referred to as equipment
cost. It represents the cost of acquiring the equipment and the cost of operating that
equipment during the construction processes. The second and smaller portion covers the
cost of hand tools. This represents a smaller portion of the project cost and is often
calculated as a percentage of payroll costs. It is added to the indirect cost under the
jobsite overhead.
4.4.1 Construction equipment classification
Equipment could be classified based on their use as specific use or general use.
4.4.1.1 Specific use equipment
Specific use equipment is for a specific work item or items on the job. Units are
assignable to jobs and are not shared by other subcontractors. This equipment is only for
specific construction operations and is removed from the job site soon after the task is
completed. Its usage is shorter term when compared to general use equipment. The most
equipment-intensive operations are: site work, concrete and metal works. Some typical
equipment used for site work includes: tractors, scrapers, front shovels, hoes, loaders and
backhoe loaders, hauling units, and compactors.
Tractors are self-contained units designed for heavy pushing and pulling work. Tractors
can be crawler or wheel type. Crawler or track type units are designed for work requiring
high tractive forces, whereas wheel type units sacrifice some of the tractive power while
being designed for greater mobility and an ability to travel up to an excess of 50 km/hr.
Tractors are one of the most versatile pieces of equipment since they can be modified for
different uses by changing the blades and attachments of the units. Typical applications
of tractors are land clearing, bulldozing, and ripping earth. In addition, tractors are also
often used together with other construction equipment, such as in pushing a scraper
during excavation or in pulling a roller compactor during compacting operations.
Scrapers are units designed to load, haul, and dump loose material. Scrapers represent an
alternative to using two different pieces of equipment, one for loading and another for
hauling. Scrapers are ideal for short hauls of less than a mile and for off-highway work
conditions. In addition, the ability to deposit their loads in layers of uniform thickness
also facilitates subsequent compaction operations. Front shovels are excavation units
used for digging above the surface of the ground on which the piece of equipment rests.
A shovel is especially suited for hard digging conditions. On the other hand, hoes,
backhoes, or back shovels are excavation units used for digging below the surface of the
ground on which the piece of equipment rests. Hoes develop excavation force by pulling
the bucket downward and inward towards the unit, and curling the bucket. Apart from pit
excavation, hoes are also used for excavating trenches and for the handling and laying of
pipes.
Loaders are one of the most common pieces of construction equipment and are used
extensively to handle and transport materials, excavate earth, backfill, and as a loading or
hauling unit. Backhoe loader units are loaders that have a backhoe attachment on the
back of the unit. Hauling units or trucks serve only one purpose, which is to efficiently
transport material from one point to another. The longer the distance, the more the
justification and advantage is in using trucks rather than other pieces of equipment. This
is because trucks are the fastest moving construction unit and they generally cost the least
to operate for the moving of material.
Compactors are pieces of equipment used to perform soil compaction. There are many
types of compactors available to suit the varieties of soil that can be encountered on a
construction site, as well as a required compaction methodology and the desired specified
compaction. The above list is not exhaustive and new equipment is continually being
developed to handle other specialized tasks in construction.
4.4.1.2 General use equipment
General use equipment has shared utilization by all subcontractors on the construction
site and is not associated with any particular work item or items. These pieces of
equipment are kept on the site over a longer period of time, throughout almost the entire
construction phase. Some examples of general use equipment include: cranes, air
compressors, light towers, forklifts and pumps.
Cranes are usually used on building projects. Many types of cranes have been developed
to accommodate the variety of construction needs. Cranes can be static, like the tower
crane, or they can be movable, as in a wheel- or track-mounted mobile unit. Tower cranes
are general use equipment, whereas the mobile type may be specific task equipment.
Cranes are used for lifting and moving loads, assisting in the construction installation
processes, such as the erecting of precast concrete panels. Air compressors generate
pressurized air that is used to power hand tools, such as vibrators and jackhammers. Light
towers provide illumination for a work area that lacks sufficient light or when work is
carried out beyond daylight. Forklifts are used for the loading and unloading of heavy
bulk loads from trucks, the movement of materials to a storage area, and the distribution
of the materials to work areas onsite. Pumps are necessary for moving water from a
source to a needed area on the site and supply the water pressure needed in some
construction activities. Submersible pumps may also be required in the dewatering or
draining of water collected in the work area.
4.4.2 Factors influencing equipment selection
Many factors can influence the selection of equipment on a construction site. These
factors can be group into three categories: site conditions, the nature of the work, and
equipment characteristics.
4.4.2.1 Site conditions
Primary site conditions are: types of material to be handled, onsite physical constraints,
and hauling distances. An example that can influence equipment selection is the type of
soil encountered. The compaction of clayey soil is done best with a sheeps foot roller,
whereas more sandy soil is best compacted with a vibratory roller. Physical constraints
onsite refer to site area and layout, surface condition, topography, and adjacent
neighborhood. The smaller the site area, the more constraints it has on the mobility of
equipment. Smaller equipment may be needed to maintain mobility or bigger units may
be required to minimize equipment traffic and site congestion. Selection of cranes is also
affected by the shape and layout of the site. Static cranes must have access to all the area
around a site to be efficient as they have high mobilization cost. On the other hand,
mobile cranes can be more easily relocated but require more workspace and have higher
operating costs. The primary surface condition of concern is the bearing capacity of the
soil. Low bearing capacity soil may dictate the selection of track-type instead of wheel-
type equipment. The neighborhood of the construction site must be considered, such as
other buildings and traffic in the area, as it can also offer obstacles to equipment
movement or certain construction operations.
Hauling distances can affect the selection of equipment. For short hauls, a loader can pick
up the load and move it to a dump area by itself. However, for longer hauling distances,
the loader can be just used loading and a dump truck can be used for hauling and
dumping. The longer the hauling distance, the more advantage is in using higher capacity
hauling units since they can be more cost effective.
4.4.2.2 The nature of the work
Some factors relating to the nature of the work include payload, the total quantity of
work, and the construction schedule. Payload has a direct relation to the capacity of the
equipment selected. For example, the particular crane selected must be able to lift the
maximum load the work may require. A higher quantity of work can influence and justify
the selection of higher capacity equipment. Although higher capacity equipment has
higher mobilization and rental costs, the per-unit production costs are lower. Therefore,
given a higher quantity of work, the savings in unit production costs could be high
enough to offset higher mobilization and rental costs, and thus result in lower total costs.
On some projects, costs may not be the governing constraint; instead, the construction
schedule might be. A tighter schedule often requires higher productivity units, such as
those with higher power, bigger capacity, more mobility, and faster deployment.
4.4.2.3 Equipment characteristics
Equipment characteristics are related to equipment capabilities (capacities and versatility)
and costs. Capacity can be in the form of maximum allowable payload and maximum
volume that can be handled. It can also relate to the power, mobility, or maneuverability
of a piece of equipment. Versatility refers to the degree of applicability of a unit to
perform many different operations. For example, a dozer can be adapted to perform many
tasks by simply changing a blade or adding additional attachments. Versatility can make
a piece of equipment more useful on a site, thus replacing the need for more specialized
units. Cost is certainly an important consideration in equipment selection.
All the above factors can be related and they all must be considered together in
equipment selection. Equipment planning can yield many solutions. Many decisions
involve trade-offs that must be properly analyzed to identify the best solution. For
example, choosing two smaller pieces of equipment instead of one larger unit may mean
higher unit production costs, but there is a redundancy in the system that can be good
insurance if one unit should break down and work can be kept moving. Considering the
above factors that can influence equipment selection, the outcome of equipment planning
should yield a solution that satisfies the following three underlying objectives in
equipment selection: feasibility, efficiency, and economy.
The feasibility refers to the selection of equipment that can carry out the tasks in a
satisfactory manner. This is determined by the nature of the work that the equipment will
perform and the condition in which the equipment will do the work. Efficiency refers to
the selection methods that maximize efficiency of the construction operation such as
those decisions that can reduce the number of equipment pieces through selecting higher
capacity units. Efficiency in operation may not have a direct effect on the direct cost of
the project but may have an indirect effect on other aspects of the construction project,
such as minimizing site congestion leading to higher productivity, while decreasing the
likelihood of accidents and promoting communication and coordination. Finally, the
selected pieces of equipment and methods that produce the lowest cost are ideal for the
project as they directly contribute to lower construction costs, which is one of the goals of
every construction project.
4.4.3 Renting versus purchasing equipment
The purchase of equipment represents a capital investment by the construction contractor.
The contractor must recover sufficient money to pay the ownership and operating costs of
the equipment during its useful life, and at the same time make a profit on the investment.
Any estimate must include the cost of equipment used on the project. Construction
equipment could be purchased or rented. The choice between purchase and rental usually
depends on the amount of time the equipment will be used in the contractors operations.
If extensive use of the equipment is required, the equipment is always purchased. If the
equipment is to be used a limited amount of time, it is typically rented.
A contractor does not necessarily have to own any construction equipment in order to
carry on business. There can be distinct advantages to renting equipment, including:
- No need to maintain a large inventory of specialized equipment.
- Continuous access to the newest and most efficient items of available equipment.
- No need for equipment warehouse and storage facilities.
- Reduced need to employ maintenance staff and operate facilities for their use.
- Equipment cost accounting is simpler when equipment is rented.
Contractors may purchase equipment when factors pertaining to ownership and
economics make this alternative more favorable than renting. When the construction
operations of a contractor need the steady use for certain equipment, owing such
equipment may be financially better. There can be, also, a marketing advantage to the
contractors who own their equipment which shows that they are more financially stable
than others who do not own their equipment. Some owners ask contractors who bid on
their projects to list on the bid the company-owned equipment they propose to use in the
work. This information is used in the owners assessment of the bidder. Also, the
advantage of purchasing equipment is that it allows a contractor to have absolute control
on the use and disposition of equipment. He/she can use the equipment in any manner fits
the required job. Decisions on maintenance and servicing can be easily made, thus
ensuring the desired operational performance.
4.4.4 Time-value of money
The value of money is dependent on the time at which it is received. A sum of money on
hand today is worth more than the same sum of money to be received in the future
because the money on hand today can be invested to earn interest to gain more than the
same money in the future. Thus, studying the present value of money (or the discounted
value) that will be received in the future is very important. This concept will be
demonstrated in the following subsections.
4.4.4.1 Single payment
The Future Value of a given present value of money represents the amount, at some time
in the future, that an investment made today will grow to if it is invested to earn a specific
interest rate. For example, if you were to deposit LE100 today in a bank account to earn
an interest rate of 10% compounded annually, this investment will grow to LE110 in one
year. The investment earned LE10. At the end of year two, the current balance LE110
will be invested and this investment will grow to LE121 [110 x (1 + 0.1)]. Accordingly,
investing a current amount of money, P, for one year, with interest rate (i) will result in a
future amount, F using the following equation.
F = P (1 + i) (4.4)
If P is invested for n years then the future amount F will equals:
F = P (1 + i)
n
(4.5)
In contrary to the Equation 4.4, the present value (the discounted value), P, of a future
some of money, F, that will be received after n years if the discount rate is i is
calculated as follow:
P = F / (1 + i)
n
(4.6)
For example, the present value of LE100 to be received three years from now is LE75.13
if the discount rate is 10% compounded annually.
4.4.4.2 Uniform series of payment
The Future Value, F, of a uniform annual payment, C, is calculated at the end of the
period, n, in which the last payment occurs with an investment rate i. Thus, the future
value of a five year annual payment is computed at the end of year five. The Future Value
of the uniform annual payments is equal to the sum of the future values of the individual
payments at that time. This can be found in one step through the use of the following
equation:
The term within the brackets of Eq. 4.7 is called the uniform series compound factor.
Consider the annual payment of LE100 per year for five years given. If the discount rate
is equal to 10%, then the Future Value of this annual payment at the end of period five
can be found as follows:
F = 100 [((1+0.1)5-1)/0.1] = LE610.51
Accordingly, the annual uniform amount, C, to be invested at the end of each period in
order to produce a fixed amount, F, at the end of n periods with interest rate i could be
calculated as follow from Eq. 4.7.
Equation 4.8 could be used to convert a future amount of money, F, will be received after
n years into equal annual payments, C. The term between the brackets in Eq. 4.8 is called
the sinking fund factor.
Now, the present value, P, of a future amount of money, F, from a uniform series
payments, C, could be calculated from Eq. 4.7 as follow:
) 7 4 (
1 ) 1 (
.
i
i
C F
n
(
]
1
+
=
) 8 4 (
1 ) 1 (
.
i
i
F C
n (
]
1
+
=
Equation 4.9 is called the uniform series present worth formula and the term in brackets
is called the uniform series present worth factor. Using the uniform series present worth
formula (Eq. 4.9), the value of a uniform series payment, C, when the present sum, P, is
known could be determined as follow:
The value between the brackets in Eq. 4.10 is called uniform series capital recovery
factor.
Example 4.9
On January 1, a man deposits LE5000 in a bank that pays 8% interest, compounded
annually. He wishes to withdraw all the money in five equal end-of-year sums
beginning December 31
st
of the first year. How much should he withdraw each year?
Solution
P = 5000; n = 5; i = 8%; C = unknown
C = 5000[(0.08 1.08
5
) / (1.08
5
1)] = LE1252
Example 4.10
A man deposits LE500 in a bank at the end of each year for five years. The bank pays
5% interest, compounded annually. At the end of five years, immediately following
his fifth deposit, how much will he have in his account?
Solution
C = 500; n = 5; i = 5%; F = unknown
F = 500[(1.08
5
1) / 0.05] = LE2763
) 9 4 (
) 1 (
1 ) 1 (
.
i i
i
C P
n
n
(
]
1
+
+
=
) 10 4 (
1 ) 1 (
) 1 (
.
i
i i
P C
n
n
(
]
1
+
+
=
4.4.5 Equipment costs
The cost per unit of time of owning an item of equipment has to be determined. Costs
associated with owing equipment called the ownership costs. Estimating equipment cost
involves identifying the ownership and operating costs. Ownership costs include: initial
cost, financing (investment) costs, depreciation costs and taxes and insurance costs. The
operating costs include: maintenance and repair costs, storage costs and fuel and
lubrication costs.
4.4.5.1 Initial cost
The initial cost is the total cost required to purchase a piece of equipment. This initial
cost is the basis for determining other costs related to ownership as well as operating
costs. Generally, initial cost is made up of: price at the factory or used equipment price,
extra options and accessories, sales tax, freight and assembly or setup charges. The initial
cost is very straight forward, whereas the other costs require more analysis and
computation.
4.4.5.2 Investment cost
The purchase of construction equipment requires a significant investment of money. This
money either be borrowed from a lender, or it will be taken from reserve fund of the
contractor. Either the lender will charge an interest rate for the borrowed money, or the
contractor will lose any interest money that could be gained if the contractor invest that
amount of money used to purchase a piece of equipment.
In order to calculate the cost of finance (or investment cost) of an equipment, both the
purchase price, P, and the salvage value, F, should be converted into uniform annual
values using Eqs. 4.10 and 4.8 respectively. In this situation, the purchase price is
considered as a present value invested for n yeas as a series of uniform payments
(equipment useful life) and the salvage value is considered as a future sum of money to
be discounted for n years as a series of uniform payments.
Example 4.11
An excavator purchase price is LE460,000 and its salvage value is LE40,000 after 10
years of useful life. Find the annual cost of finance of this excavator if the annual
interest rate is 15%.
Solution
P = 460,000; F = 40,000; n = 10; i = 15%
Annual cost of finance = LE47,684/year
4.4.5.3 Depreciation
The depreciation in defined as the decrease in market value of an asset. A machine may
depreciate (decline in value) because it is wearing out and no longer performing its
function as well as when it was new. Many kinds of machinery require increased
maintenance as they age, reflecting a slow but continuing failure of individual parts.
Also, the quality of outputs may decline due to wear in components. Another aspect of
depreciation is that caused by obsolescence. A machine is described as obsolete when the
function it performs can be done in some better manner. A machine may be in excellent
working condition, yet may still be obsolete. For example, electronic machines,
computers, etc.
As asset always has different values: initial value, book value, salvage value and market
value. The initial value represents the purchase price of an asset. Salvage value represents
the expected price for selling the asset at the end of its useful life. The book value
represents the current value in the accounting systems. The book value equals the initial
) 11 4 (
1 ) 1 ( 1 ) 1 (
) 1 (
.
n
F
i
i
F
n
P
i
i i
P finance of t cos Annual
n n
n
(
]
1
|
|
.
|
\
|
+
(
]
1
|
|
.
|
\
|
+
+
=
(
]
1
|
|
.
|
\
|
(
]
1
|
|
.
|
\
|
=
10
40000
1 ) 15 1 (
15 0
40000
10
460000
1 ) 15 1 (
) 15 1 ( 15 0
460000
10 10
10
.
.
.
. .
finance of t cos Annual
value of the asset minus all the depreciation costs till given time. The book value is
always calculated at the end of each year. The market value, on the other hand, represents
the value of the asset if it is sold in the free market. It is not necessary that the book value
equals the market value.
Depreciation is an accounting charge that allows for the recuperation of capital that was
used to procure equipment or other physical assets. There are three common methods for
calculating depreciation expense for financial accounting purposes: straight-line, sum-of-
years digits and the sinking fund method. Each method involves the spreading of the
amount to be depreciated over the recovery life of an asset in a systematic manner.
Each depreciation method selected produces different patterns of depreciation expense
per period. The straight-line method assumes linear depreciation or the depreciation cost
is allocated equally over the asset useful life. The sum-of-years digits assumes high rate
of depreciation at the early age of an asset and decreasing rate at its aged life. The Third
method assumes lower rate at the early ages and faster rate at the late age.
Straight-Line method
The simplest and best known of the various depreciation methods is the straight-line
depreciation method. In this method a constant depreciation charge is made. To obtain
the annual depreciation charge at any year, D
n
, the total amount to be depreciated (initial
value, P salvage value, F) is divided by the useful life in years, N.
(Annual depreciation charge) D
n
= (P F) / N (4.12)
Example 4.12
If the purchase price of an equipment is LE60,000 and its salvage value after 8 years
is LE6,000, calculate the annual depreciation and the book value of the equipment
each year.
Solution
P = 60,000; F = 6,000; N = 8;
Total depreciation = 60000 6000 = LE54,000
Annual depreciation = 54000 / 8 = LE6,750
Notice that the book value of the equipment equals its salvage value at the end of its
useful life as shown in Table 4.1.
Table 4.1: Straight-line depreciation of Example 4.12
Year Annual depreciation Book value
0 0 60,000
1 6,750 53,250
2 6,750 46,500
3 6,750 39,750
4 6,750 33,000
5 6,750 26,250
6 6,750 19,500
7 6,750 12,750
8 6,750 6,000
Sum-of-years digits method
Another method for allocating the cost of an asset minus its salvage value over its useful
life is called sum-of-years digits depreciation method. This method results in faster
depreciation at the early life of an asset. Larger depreciation charges than straight-line
depreciation during the early years of an asset and smaller charges as the asset nears the
end of its estimated life. Each year, the depreciation charge is computed as the remaining
useful life at the beginning of the year divided by the sum of the years digits for the total
useful life, with this ratio multiplied by the total amount of depreciation (P F). Thus
means that the depreciation is calculated as the percentage of the remaining life to the
original life.
For an asset with useful life N, to obtain the annual depreciation charge, D
n
, at any year n,
can be calculated as follows:
D
n
= (Remaining useful life at beginning of a year / Sum of years digits) (P F)
Example 4.13
Resolve Example 4.12 using the straight-line depreciation method.
Solution
P = 60,000; F = 6,000; N = 8
Sum-of-years digits = 8 (8 + 1) / 2 = 36 years
The calculations are shown in the following table (Table 4.2).
Table 4.2: Sum-of-years depreciation of Example 4.13
Year
Remaining life /
sum-of-years
Annual
depreciation
Book value
0 0 0 60,000
1 8/36 12,000 48,000
2 7/36 10,500 37,500
3 6/36 9,000 28,500
4 5/36 7,500 21,000
5 4/36 6,000 15,000
6 3/36 4,500 10,500
7 2/36 3,000 7,500
8 1/36 1,500 6,000
Sinking fund method
This method assumes that a uniform series of end-of-payments are deposited into an
imaginary sinking fund at a given interest rate i. The amount of the annual deposit is
calculated so that the accumulated sum at the end of the asset life, and at the stated
) 13 4 (
1)/2 (
1 -
. ) F p (
N N
n
D
n

(
]
1
+
+
=
interest rate, will just equal the value of the asset depreciated (i.e., P F). The amount of
yearly depreciation is invested in a compound manner for the remaining period as a
uniform series of payments using Eq. 4.10 as follows:
Then the depreciation value, D
n
, at any year n is calculates using the following equation.
D
n
= C (1 + i)
n-1
; n = 1, 2, 3, .. ., N (4.15)
Example 4.14
Resolve Example 4.12 using the sinking fund depreciation method, assuming that the
interest rate is 10%.
Solution
P = 60,000; F = 6,000; N = 8; i =10%
C = (60000 6000) [(0.1 1.1
10
) / (1.1
10
1)] = LE4,722
Accordingly, the annual depreciation could be calculated as follows:
At the first year: D
1
= LE4,722
At the second year: D
2
= 4722 (1.1) = LE5,194
At the third year: D
3
= 4722 (1.1)
2
= LE5,714
..
At the eighth year: D
8
= 4722 (1.1)
7
= LE9,202
The results of the depreciation calculations are summarized in Table 4.3.
After studying depreciation calculations from the previous listed three methods,
Figure 4.3 illustrates the difference between the three methods. The figure shows that
the sum-of-year digits method gives an accelerated depreciation compared to the
straight-line method. On the other hand, the sinking fund is a decelerated method
compared with the straight-line method. However, the straight-line method is the
commonly used for calculating asset depreciation.
) 14 4 (
1 ) 1 (
) 1 (
.
i
i i
) F P ( C
n
n
(
]
1
+
+
=
Table 4.3: Sinking fund depreciation of Example 4.14
Year
Annual
depreciation
Book value
0 0 60,000
1 4,722 55,278
2 5,194 50,084
3 5,714 44,370
4 6,285 38,085
5 6,913 31,172
6 7,605 23,567
7 8,365 15,202
8 9,202 9,202
Figure 4.3: Comparison among the three depreciation methods
Age
B
o
o
k

v
a
l
u
e
Salvage
value
Initial
value
Sinking
fund
Sum-of
years
Straight-
line
4.4.5.4 Operating costs
Operating cost accrue only when the unit of equipment is used, whereas ownership costs
accrue whether or not the equipment is used. Operating costs include maintenance and
repairs, fuel, oil and lubricants. The amounts consumed by a piece of equipment vary
with the type and size of equipment, the conditions under which it is operated. An
equipment is seldom used its total horse power and also it is seldom to work for 60
minute/hour. Thus, the fuel consumed should be based on the actual operating conditions.
Perhaps the average demand on an engine might be 50 percent of its maximum power for
an average 45 minutes/hour.
Maintenance and repair costs
The cost for maintenance and repairs include the expenditures for replacement parts and
the labor required to keep the equipment in good working condition. Historical cost
records of maintaining and servicing equipment are the most reliable guide in estimating
maintenance and repair cost. The manufacturers of construction equipment provide
information showing recommended costs for maintenance and repairs for the equipment
they manufacture. The annual cost of maintenance and repairs is often expressed as a
percentage of purchase prices or as a percentage of the straight-line depreciation costs.
Fuel consumption
When operating under standard conditions, a gasoline engine will consume
approximately 0.06 gallon of fuel for each horsepower-hour developed. A diesel engine
will consume approximately 0.04 gallon of fuel for each horsepower-hour developed.
Lubricating oil consumption
The quantity of lubricating oil consumed by an engine varies with the size of the engine,
the capacity, the equipment condition and the number of hours between oil changes.
Cost of rubber tires
Many types of construction equipment use rubber tires, whose life usually will not be the
same as the equipment on which they are used. For example, a unit of equipment may
have an expected useful life of six years, but the tires on the equipment may last only for
two years. Therefore, a new set of tires must be placed on the equipment every two years,
which would require three sets of tires during the six years the equipment will be used.
Thus, the cost of depreciation and repairs for tires should be estimated separately from
the equipment.
Example 4.15
Calculate the ownership cost per hour for an excavator powered by a 250-hp engine
based on the following data:
- Purchase price (P) = LE420,000
- Salvage value (F) = LE250,000
- Operation factor = 50%
- Useful life (N) = 6 years
- Working hours per year = 2000
- Maintenance and repair costs = 110% of annual depreciation
- Diesel fuel price = 3.8/gallon
- Fuel consumption = 0.04 gallon/hp/hr
- Lube oil cost = 10% of fuel
- Interest rate (i) = 10%
Solution
Depreciation (assume straight-line) = (420000 250000) / 6 = LE28333.33/year
Investment annual cost is calculated as follows:
Annual investment = (420000 0.2296 70000) (250000 0.1296 41666.67)
= 26432 (- 9264.82) = LE35696.82/year
Maintenance and repair cost = 1.1 28333.33 = LE31166.67/year
Then, the total yearly costs = 28333.33 + 35696.82 + 31166.67 = LE95196.81/year
(
]
1
|
|
.
|
\
|
(
]
1
|
|
.
|
\
|
=
6
250000
1 ) 1 1 (
1 0
250000
6
420000
1 ) 1 1 (
) 1 1 ( 1 0
420000
6 6
6
.
.
.
. .
investment Annual
Accordingly, the hourly cost = 95196.81 / 2000 = LE47.6/hr
Fuel consumption = 250 0.04 0.5 = 5 gallon/hr
Fuel cost = 5 3.8 = LE19/hr
Lubricate oil cost = 19 0.1 = LE1.9/hr
Finally, the total hourly cost = 47.6 + 19 + 1.9 = LE68.5/hr
Example 4.16
Calculate the hourly arte of equipment based on the following data:
- Purchase price (P) = LE460,000
- Salvage value (F) = LE40,000
- Useful life (N) = 10 years
- Working hours per year = 2000 years
- Annual maintenance costs = 10% of purchase price
- Annual operating costs = LE47,000
Solution
Depreciation (assume straight-line) = (460000 40000) / 10 = LE42000/year
Investment annual cost is calculated as follows:
Annual investment = LE47684/year
Maintenance and repair cost = 0.1 460000 = LE46000/year
Operating costs = LE47000/year
Then, the total annual costs = 42000 + 47684 + 46000 + 47000 = LE182684/year
Accordingly, the hourly cost = 182684/ 2000 = LE91.34/hr
(
]
1
|
|
.
|
\
|
(
]
1
|
|
.
|
\
|
=
10
40000
1 ) 15 1 (
15 0
40000
10
460000
1 ) 15 1 (
) 15 1 ( 5 1 0
460000
10 10
10
.
.
.
. .
investment Annual
4.5 Exercises
1. The construction of RC wall involves placing 660 m
3
concrete, 50 t of steel, and
790 m
2
of formwork. Calculate the duration of the activity using a balanced mix
of the resources if:
- A 6 man concrete gang can place 16 m
3
of concrete / day.
- One steelfixer and one assistant can fix 0.5 t of steel / day.
- One carpenter and one assistant can fix and strike 16 m
2
/ day.
2. Estimate the labor cost for the formwork of a continuous wall footing that has a
quantity of 500 SF. The activity is constructed by crew that has a daily output of
485 SF/day, and consists of: 3 carpenters at rate LE 21.60/hr & 1 building labor at
rate LE 17.15/hr.
3. A crew of four carpenters and two labors is used to build the formwork for a
concrete structure. Work is scheduled for 9 hr/day on Saturday through
Wednesday and 8 hr on Thursday. Overtime at a rate of one and one-half will be
paid for all hours over 8 hr/day during the week and double time for all Thursday
work. The base wage, taxes and insurance rates are given in the table below.
Calculate the hourly and weekly cost of the crew.
Item Carpenters Labors Notes
Base wage
Workers compensation
Social security
Unemployment insurance
Benefits
LE21/hr
LE19/LE100
7.%
3%
LE3.5/hr
LE15/hr
LE16/LE100
7%
3%
LE2.5/hr
of base wage
of actual wage
of actual wage
4. A small concreting subcontractor keeps track of his resources (L1, L2, E1, E2,
C1, M1) and also keeps information related to his frequently used concreting
methods (Md1, Md2). The subcontractor is currently preparing an estimate for a
new concreting job in which he has to pour 600 m3 of concrete. A normal
working day is eight hours.
- The rate for labor overtime per hour is considered to be 1.5 normal rates. The
crew production during an overtime hour is 90% of their production in a
regular hour.
- If the subcontractor is free to use either of the two methods of construction,
Md1 and Md2. It is required to calculate the total cost and time required to
finish the job in both cases taking into consideration the following information:
- Labor L1 rate is 20 LE/hr & labor L2 rate is 30 LE/hr.
- Equipment E1 cost (rental and operational) is 80 LE/hr & Equipment
E2 (rental and operational) cost is 160 LE/hr.
- The material M1 (ready mix concrete) unit cost is 250 LE/m
3
.
- Crew C1 formation is (2 L1 + 3 L2 + 1 E1 + 1 E2).
- Required resources for Md1 (Concreting by pump 8 hrs/day) are
C1+M1 and its production rate is 100 m
3
/day (Normal hours).
- Required resources for Md2 (Concreting by pump 14 hrs/day) are
C1+M1 (6 Over time hrs/day).
5. An investor holds a time payment purchase contract on some machine tools. The
contract calls for the payment of LE140 at the end of each month for a five years
period. The first payment is due in one month. He offers to sell you the contract
for LE6,800 cash today. If you otherwise can make 1% per month on your money,
would you accept or reject the investors offer.
6. A company purchased a piece of equipment 3 years ago with an initial value of
LE15,000, salvage value of LE3,000, annual operating cost of LE2,000, and
estimated life of 10 years. Calculate the book value of the machine now using the
straight-line, sum-of years digits and sinking fund depreciation method. Assume
interest rate 10%.
7. Calculate the ownership cost per hour for a dump truck powered by a 120-hp
gasoline engine based on the following data:
- Purchase price = LE175,000
- Freight charges = LE2,000
- Estimated salvage value = LE57,500
- Operation factor = 40%
- Useful life = 5 years
- Hours used per year = 1800
- Maintenance and repair = 130% of annual depreciation
- Tire cost = LE5,000
- Tire life = 4,000 hours
- Maintenance and repairs (tires) = 15% of tire depreciation
- Gasoline fuel price =LE4.0/gallon
- Fuel consumption = 0.06 gallon/hp/hr
- Lube oil cost = 10% of fuel
8. A backhoe will be purchased for a cost of LE109,750. After a useful life of 5
years, it is assumed the equipment will be sold for LE35,000. Assume interest of
8% for borrowing money, 4% for risk and 2% for taxes, insurance and storage.
Calculate the annual ownership cost and the cost per hour assuming the
equipment will be used 1800 hr/year.
CHAPTER 5
ESTIMATING WORK ITEMS COSTS, IDIRECT COSTS, MARKUP
AND CONTRACT PRICING
The cost of labor, material and equipment expended on the items that were measured in
the quantity takeoffs is usually referred to as the direct costs of the work. The general
expenses of a project comprise all of the additional, indirect costs that are also necessary
to facilitate the construction of the project. These indirect costs are sometimes titled
general requirements of the project or project overheads. This chapter is devoted for the
estimating of different items represents the overheads of a project and also discusses the
pricing of the project items after defining both the direct costs and markup values.
5.1 Estimating Work Items Cost
Estimating the cost of any work items include estimating the cost of labor, equipment and
material. The analysis of a given job requires a thorough review of the plans and
specifications of the bid documents, an evaluation of the soil investigation report and a
visit to the jobsite where the project is to be constructed. For earthwork estimates, the bid
documents usually contain a soil report that provides geotechnical information about the
soil and subsurface conditions. The estimator can use other sources that help in
developing an accurate estimate.
5.1.1 Swell and compaction factors
To estimate the cost of excavating and hauling earth, it is necessary to know the physical
properties of earth because the volume changes during construction operations. For an
earth work operation, the soil is excavated from its natural state, placed in a hauling unit
and transported to the disposal area, where it is distributed and compacted. For example,
one cubic meter of soil that is excavated from the ground may occupy 1.25 cubic meters
after it is loosened and placed in the hauling unit. After the soil is compacted in place it
may occupy 0.9 cubic meter. The soil to be excavated is called bank measure, in its
undisturbed condition, prior to excavating or after being compacted in place. Also, any
additional requirements to support the excavation operation should be also added to the
cost estimating of an excavation operation. For example, excavation support, dewatering,
etc.
5.1.2 Calculating truck requirements
The estimator has to determine the optimum number of trucks required to transport
excavated materials. A simple formula can be used for this calculation based on the
premise that it is desirable to have sufficient trucking capacity to ensure that the
excavation equipment is able to operate continuously and not have to waste time waiting
for trucks. Obviously, three trucks will be required if it takes 10 minutes to load a truck
and 20 minutes for that truck to unload and return for another load, because while the
first truck is away, two other trucks can be loaded. Thus, the number of trucks can be
calculated as:
Number of required trucks = truck cycle time / loading time (5.1)
Truck cycle time = loading time + going time + return time + dumping time (5.2)
Loading time = truck capacity / production rate of loader (5.3)
Truck capacity (bank measure) = truck capacity (loose) / (1+swelling factor) (5.4)
Note that the number of trucks obtained from Eq. 5.1 should always be rounded up no
matter how small the decimal. Most estimators consider it better to have more rather than
less capacity so that the excavator is kept occupied.
5.1.3 Waste factors
When estimating the material required for any job, it is necessary to add a portion for the
wastage of material used. The quantities of material taken off are the unadjusted net
amounts calculated from the drawings. Allowance for waste and spillage of this material
can be made by increasing the takeoff quantities or by raising the price by the percentage
factor considered necessary. The values of waste factors usually lie between one and 10
percent for different materials.
Example 5.1
Calculate the equipment and labor prices per m
3
to excavate 3000 m
3
of trench
using 0.75 m
3
backhoe costing LE670/day (day = 8 hrs), plus LE4000 for
transportation and set up charges. Expected output is 60 m
3
/day with an operator
and 0.5 labor at wages of LE40 and LE30 respectively.
Solution
Operator unit price = LE40/hr; Labor unit price = 0.5 30 = LE15/hr
Backhoe unit price = 670 / 8 = LE83.75/hr
This crew produces 60 m
3
/day,
Labor price/m
3
= 55 / 60 = LE0.92/m
3
Equipment price/m3 = 83.75 / 60 = LE1.4/m
3
Transportation price = 4000 / 3000 = LE1.33/m
3
Then price/m
3
= LE3.65/m
3
Example 5.2
Calculate the price of obtaining a gravel form a pit located 16 km from the work
site, where unit price is LE2.5/m
3
, using a loader with a rate of 50 m
3
/hr (bank
measure) and 12 m
3
trucks to transport the gravel. The loader and trucks are priced
at rates of LE450/day and LE300/day respectively. The labor crew consists of one
equipment operator at LE40/hr, two labors at LE30/hr and truck driver at LE30/hr.
the dump truck travel at an average speed of 20 km/hr. the gravel has swell factor of
12% and 5 minute required to off-load the truck.
Solution
First: calculate the number of trucks required to have a balanced crew
Number of required trucks = truck cycle time / loading time
Truck cycle time = loading time + going time + return time + dumping time
Loading time = truck capacity / production rate of loader
Truck capacity = 12 (loose material) / 1.12 = 10.71 m
3
(bank measure)
Loading time = 10.71 60 / 50 = 12.85 min
Travel time = 16 2 60 / 20 = 96 min
Cycle time = 12.85 + 96 + 5 = 113.85 min
No. of trucks = 113.85 / 12.85 = 8.86 = 9 trucks
Second: calculate the gravel supply price
Loader = 450 / 8 = LE56.25/hr
Trucks = 9 300 / 8 = LE337.5/hr
Operator = LE40/hr
Labors = 2 30 = LE60/hr
Drivers = 9 30 = LE270/hr
Crew hourly cost = 56.25 + 337.5 + 40 + 60 + 270 = LE763.76/hr
Crew unit price = 763.76 / 50 = LE15.28/m
3
Then, gravel unit price = crew price + gravel cost = 15.28 + 2.5 = LE15.78/m
3
Example 5.3
It is required to determine the unit price for plain concrete given the following
information:
Plain concrete (PC) quantity = 1080 m
3
.
One cubic meter of PC comprises of 250 kg cement; 0.8 m
3
gravel and 0.4 m
3
sand.
The prices of these materials are LE500/ton; LE80/m
3
and LE40/m
3
for cement,
gravel and sand respectively. Assume 10% wastage for all these materials.
The details of the crew used are shown in the table below.
Assume overheads and markup 20%.
Crew item No Production Price rate
Pump 1 30 m3/hr LE450/day
Truck mixer 3 9 m
3
/hr/one LE350/day/one
Vibrator 2 - LE100/day/one
Labor 5 - LE15/day/one
Foreman 1 - LE30/day/one
Solution
Assume 8-working hours/day
Pump production rate = 30 m
3
/hr = 30 8 = 240 m
3
/day
Truck mixers production rate = 3 9 8 = 216 m
3
/day
The crew production rate equals the production rate of the critical resources (the
lowest) = 216 m
3
/day
Then, duration = 1080 / 216 = 5 days
Material cost:
Cost per/m
3
= 1.1 (0.25 500 + 0.8 80 + 0.4 40) = LE225.5/m
3
Total material cost = 225.5 1080 = LE243,540
Equipment cost:
Equipment cost/day = 450 + 3 350 + 2 100 = LE1700/day
Equipment cost = 1700 5 = LE8,500
Labor cost:
Labor crew cost/day = 15 5 + 1 30 = LE105/day
Labor cost = 105 5 = LE525
Item price:
Item cost = 243540 + 8500 + 525 = LE252,565
Item price = 252565 1.2 = LE303,078
Then, the item unit price = 303078 / 1080 = LE280.63/m
3
5.2 Estimating Indirect Cost
The indirect costs comprises both site and head office (general) overheads.
5.2.1 Site overheads
To accommodate various site situations, it is a good idea for a construction company to
develop comprehensive checklists for general jobsite requirements regarding its
specialized line of business. Such a list would aid the estimator, ensuring that no
important cost items are forgotten under the time pressure of finalizing the bid. Visits to
the jobsite by an experienced estimator and a principal of the firm are a must after a
preliminary review of drawings and specifications. A site investigation report can be used
to collect needed information useful for organizing the future jobsite and, above all, to
determine prior bidding costs. Certainly not all items are relevant for each report. If the
project is in a remote area or in a harsh environment, more items will be checked and
questions answered during the site visit. Later, they will be converted to line items with
an estimated cost toward job site overhead. Any missing items will reduce overall profit.
A prudent contractor and subcontractor will not be satisfied applying a fee to the direct
estimated costs, a fee that is supposed to cover jobsite overhead and markup.
The estimated total jobsite overhead costs will become the baseline budget for jobsite
overhead expenditure control. These items might include:
- Jobsite personnel wages and fringe benefits;
- Jobsite personnel project-related travel expenses;
- Outside contracted engineering support (surveying, materials testing, etc.);
- General use equipment for the benefit of the general contractors and
subcontractors (cranes, hoists);
- Field buildings;
- Site utilities for the job duration;
- Horizontal structures (roads, parking, fences, and gates);
- Temporary environmental controls requirements;
- Winter and summer protection of completed works or works in progress;
- Related camp facilities for remote jobs;
- Jobsite production facilities (concrete batching plants, quarry, various shops);
- Protective aids for workers (gloves, hard hats, etc.) during construction and final
cleanup of the project; and
- Bonds, insurance, permits, and taxes required in the contract general conditions;
- Utilities needed for material storage;
- Cost of temporary site utilities.
5.2.2 General overheads
The company home office expenses cannot be chargeable most of the time to a single
project. General overhead represents contractor fixed expenses. A general contractors or
subcontractors main office expense consists of many items.
A summary of the major categories is presented below:
- Non reimbursable salaries
- President
- Vice president
- Estimating group
- Human resource personnel
- Secretaries
- Payroll clerk
- Accounts payable clerks
- Total office non reimbursable salaries
- Benefits
- Office/shops rent
- Depreciation of capital expenditures
- Office utilities and communication
- Office supplies
- Office equipment (rented, if owned depreciated)
- Office maintenance
- Advertising/jobs procurement/public relations
- Associations and clubs dues
- Licenses and fees
- Donations/sponsored research
- Trade journals subscriptions and books
- Travel
- Entertainment
- Company sponsored training programs
- Accounting services
- Legal services
- Estimating and project management (not salaries)
- Consulting fees (legal, etc.)
- Home office vehicles, depreciation, operation expenses
- Insurance expenses
- Total anticipated home office expense
The expense list presented above is not appropriate for all contractors. For smaller
contractors who operate from a truck, the list would contain considerably fewer items and
for a large contractor, the list could fill pages, but the concept is the same. The expenses
should be estimated, and all efforts must be made to stay in the budget and to generate the
planned business volume. In general, main office expense ranges from 2.5 to 10% of
annual construction billings.
5.2.3 Construction contingencies
Contingency is that amount of money added to an estimate to cover the unforeseen needs
of the project, construction difficulties, or estimating accuracy. Many chief estimators or
contractor executives add a contingency to the estimate to cover one or possibly more of
the following:
- Unpredictable price escalation for materials, labor, and installed equipment for
projects with an estimated duration greater than 12 months;
- Project complexity;
- Incomplete working drawings at the time detail estimate is performed;
- Incomplete design in the fast-track or design-build contracting approach;
- Soft spots in the detail estimate due to possible estimating errors, to balance an
estimate that is biased low;
- Abnormal construction methods and startup requirements;
- Estimator personal concerns regarding project, unusual construction risk, and
difficulties to build;
- Unforeseen safety and environmental requirements;
- To provide a form of insurance that the contractor will stay within bid price.
Most often, if for any reason an accurate estimate is not made (95 to 100% accuracy), an
estimator never knows how much money to allow for these forgotten items. Many
times added contingencies are an excuse for using poor estimating practices such as not
enough time, subcontractors not reporting, no time to visit the job site, and so on.
Contingency for these reasons is difficult to sell to management and can hurt the
credibility of the estimating team. On the other hand compounding building projects
bidding complexity justifies the need to add contingency as part of the markup. This
construction risk compensation is added to the final direct and jobsite overhead cost. The
magnitude depends on the type of contract agreement, type of construction, and certainly
project location.
Contingency is not potential profit. It includes risk and uncertainty but explicitly excludes
changes in the project scope (change orders). The contingency should absolutely not be
treated as an allowance. Allowances are costs that are foreseen to be spent, and need to be
included in the detail estimate in the proper construction category of work and not as a
total for the project. There are many factors that affect the amount of contingency to be
included in the estimate. General contingency guidelines also apply to different types of
construction. For underground work the contingencies should be increased by 2 to 5% for
each design phase. For buildings, it is recommended to decrease the contingencies by 1 to
3% for each phase. In general, contingency reflects the contracting organizations
judgment decision to avoid bid cost overrun. On the other hand, too much contingency
will create a fat estimate if management is not willing to accept some construction
risks.
To management, contingency is money it hopes will not be expended, but instead
returned as profit at project completion. If the amount of contingency added to the bid is
too large the contractor risks not getting the project and recording an additional expense
for doing the estimate and bidding. This is the reason that a cost line item is usually not
included in the bid.
5.2.4 Contractor/Subcontractor profit
The last item to be included in the bid and representing contractors return on investment
is the profit. The magnitude of desired profit must be decided by the owner for each
individual bid, depending on local market conditions, competition, and the contractors
need for new work. In the construction industry, markup is defined as the amount added
to the estimated direct cost and estimated job into overhead cost to recover the firms
main office allocated overhead (general overhead) and desired profit. The less profit
added to a bid, the greater the chance is of being the successful bidder. Bidding a job with
a high profit added does not mean the contactor will get the job. Bidding a job below cost
with no planned profit or a minimum profit only to get the work is also no guarantee of
being a successful contractor. A contractor can go broke by not obtaining enough
profitable work.
To be competitive, a construction companys general overhead and profit should be close
to industry norms. The concept of percentage of return on indirect cost investment must
also be considered. The return on indirect cost is calculated by dividing the corporations
annual net profit before taxes by the general overhead cost. General overhead and profit
recovery factors are developed from the annual general overhead budget. After bid
opening, contractors occasionally ask close competitors what percent they added for
profit. Surprisingly, competitors are refreshingly candid in revealing the amount added
for profit. This natural curiosity is related to the many kinds of profit. Contractors are
intuitively trying to ascertain why competitor A, who lost the job, marked up 2%, and
competitor B, who marked up 4%, was awarded the bid. Different kinds of profits are
related to several considerations, including the following:
- The firm must recoup sufficient profit for return on equity.
- The profit must be commensurate with industry averages.
- The profit must consider competitive bidding strategies.
- The profit must be as high as possible or what the competitive market will bear,
while commensurate with the contractors risk.
5.3 Finalizing a Tender Price
The total price of a tender comprises the cost and the markup. The cost includes direct
and indirect costs. The markup, on the other hand, includes profit margin, financial
charges (cost of borrowing), and a risk allowance margin (Figure 5.1).
Figure 5.1: Components of a tender price
If you are much involved in the construction business, you must have experienced how
difficult it is to decide on a suitable margin to make your bid competitive against other
contractors. We need to decide on the markup percentage that makes the bid low enough
to win and, at the same time, high enough to make reasonable profit. Generally,
contractors often have to main methods of assessing a specific contract markup.
Estimating a single percentage markup to be added to the total cost. It is assumed that this
percentage will cover all the components of markup as shown in Figure 5.1; and Detailed
analysis of the risky components in the project and their impact on the project in terms of
increased time and cost. Also, cash flow analysis to estimate the financial charge and
estimating a reasonable profit margin. Calculations of the financial charges (cost of
borrowing) were, also, presented previously in this chapter based on the cash flow
Price
Cost Markup
Direct cost Indirect cost Profit Risk allowance Financial charge
analysis of the contract. Estimating profit and risk allowance margins will be presented in
the next subsection.
Having all contract costs (direct and indirect), and markup components (profit margin,
risk allowance and financial charge), it is time to finalize the bid price. While, the direct
cost are associated directly to the contract activities, indirect cost and markup are not
associated with specific activities but with the whole contract. Accordingly, pricing
policy is the method by which the indirect costs and markup will be distributed among
the items of the bill of quantities, so that the bid price is ready to be submitted to the
client.
5.3.1 Balanced bid (straight forward method)
In this method the indirect cost and the markup will be distributed among different items
based on their direct cost; i.e., the more the direct cost of an item, the more its share from
indirect cost and markup. The resulting bid price is called a balance d bid.
Direct cost of this item
Total contract direct cost
Example 5.4
Assume that the direct cost for an item (a) is LE 400,000 and that item is included
in a contract whose price is LE 3,500,000 and its total direct cost is LE 2,800,000.
Calculate the price for item (a) considering a balanced bid.
Solution
Bid price = direct cost + indirect cost + markup
Indirect cost + markup (for the whole contract)
= Bid price - direct cost = 3,500,000 - 2,800,000 = LE 700,000
Then, Indirect cost + markup for activity (a)
400,000
2,800,000
Then, price of activity a = its direct cost + indirect cost
= 400,000 + 100,000 = LE 500,000
x 700,000 = LE 100,000 =
x (total indirect cost + markup) The share of specific item =
5.3.2 Unbalanced bid (Loading of Rates)
The contract price is said to be unbalanced if the contractor raises the prices on certain
bid items (usually the early items on the bill of quantities) and decreases the prices on
other items so that the tender price remain the same. This process is also called the
loading of rates. The contractor usually loads the prices of the first items to ensure more
cash at the beginning of the contract and to reduce the negative cash flow and
accordingly reduces borrowing of money.
Loading of rates may be risky to both the contractor and the owner. If the contractor
raised the price for an item and the quantity of this item increased than that was estimated
in the bill of quantities then, this situation is more risky to the owner as it will cost the
owner more money. On the other hand, if the contractor reduced the price of a specific
item and the quantity of that item increased, thus situation will be more risky to the
contractor. So, it is better to follow a balanced way of distributing the indirect costs and
markup among contract items.
Example 5.5
Consider a small contract comprises of five sequential activities of equal duration.
The quantity of work in each activity, the direct cost rate, and total cost rate for
balanced and unbalanced bid are given in Table 5.1. Determine the effect of
unbalanced bid on the contractors profit if: Quantity of activity (B) is increased by
50%. Quantity of activity (C) is increased by 50%.
Table 5.1: Data for Example 5.5
Activity Quantity
Direct
cost
rate
Balanced bid Unbalanced bid
Rate Price Rate Price
A
B
C
D
E
100
100
100
100
100
4
8
16
16
8
5
10
20
20
10
500
1000
2000
2000
1000
6
14
18
18
9
600
1400
1800
1800
900
Tender price 6500 6500
Solution
- Contract total direct cost = 100 (4 + 8 + 16 + 16 + 8) = 5200
- Contract price = 6500
- Contract markup and profit = 6500 5200 = 1300 = 25% of direct cost
- Table 5.2 shows the effect of tender price if the quantity of activity B increased
by 50%.
- The price of the unbalanced bid (7200) is greater than that of the balanced bid
(7000) which means more profit to the contractor and more risk to the owner.
Table 5.2: Effect of change in quantity of activity B
Activity Quantity
Direct
cost
rate
A
B
C
D
E
100
150
100
100
100
4
8
16
16
8
5
10
20
20
10
500
1500
2000
2000
1000
6
14
18
18
9
600
2100
1800
1800
900
- Table 5.3 shows the effect of tender price if the quantity of activity C increased
by 50%.
- The price of the unbalanced bid (7400) is less than that of the balanced bid (7500)
which means less profit and more risk to the contractor.
This decrease means that the profit of the contractor has been decreased and thus
represents risk to the contractor.
Table 5.3: Effect of change in quantity of activity C
Activity Quantity
Direct
cost
rate
A
B
C
D
E
100
100
150
100
100
4
8
16
16
8
5
10
20
20
10
500
1000
3000
2000
1000
6
14
18
18
9
600
1400
2700
1800
900
5.4 Exercises
1. A crew comprising 3 labors and 0.5 foreman is deserved to take (16 hr) 2-days to
excavate 36 m
3
of soil. If the average rate of labor is LE21/hr and foreman is
LE24/hr. Find the unit cost of excavation.
2. A bill of quantity of a project includes 500m
2
of masonry work. The work will be
done by one crew with a production rate of 50 m
2
/day and consists of:
Crew member No All-in rate/day
Brick layer 2 50
Assistant 1 25
Labor 2 12
Vendor price of 1000 bricks = LE160. Each 55 bricks are estimated to make one
square meter of masonry. Each one cubic meter of mortar is used to join brick
area of 50 m
2
and consists of:
Quantity Material Primary quotation form vendor
One cubic meter Sand LE15/m
3
6 sacks (50 kg each) Cement LE240/ton
As a contractor, it is required to estimate the item price and the unit price. Assume
all material waste as 20% and assume overheads and markup as 20% of total cost.
3. Calculate the price of pit-run gravel delivered to the site per cubic meter (bank
measure) based on the following data:
- The pit is located 10 km from the site.
- Truck costs LE40/hr, including fuel and maintenance; they have 12 cubic
meter (loose material) capacity and travel at an average speed of 30 km/hr
empty and 20 km/hr loaded.
- The swell factor for this material is 20% and the compaction factor is 90%.
- Trucks take 5 minutes to unload at the site.
- The loader costs LE80/hr and loads material at the pit at the rate of 40 m
3
/hr.
- Truck drivers wage is LE32/hr and the equipment operators wage is
LE40/hr.
- Gravel price (loose) = LE40/m
3
.
- Quantity of gravel required to fill an excavated site with dimensions 30 30
1 m
3
.
- Assume overheads and markup of 10%.
4. Consider the following items of a given project.
Item Unit Quantity
Direct cost (LE)
Material Equipment Labor Subcontractor
1 m3 150 1000 11200 4000 -
2 m3 180 1800 1000 4000 -
3 m3 40 960 400 3200 -
4 m3 60 1200 600 4800 -
5 lump-sum Lump-sum - - - 2000
- Site overheads = 5% of Direct cost (i.e., LE10500).
- General overheads = 5% of Construction cost.
- Profit and risk = 10% of Total cost.
It is required to:
a. Develop a balanced tender price (balanced bid).
b. Develop an un-balanced tender price (unbalanced-bid).

Estimation and Costing

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Estimation and Costing

Încărcat de

Drepturi de autor:

Formate disponibile

Cost Estimating 1 Dr.

S-ar putea să vă placă și