Cost Estimate

Module 1
Dr. Ari Sandhyavitri
Engineering Faculty
UNRI, 2004

Purposes

A close approximation of actual costs

Determine the forecast costs required to complete
a project in accordance with the contract plans
and specifications.
Reasonable accuracy for estimating direct costs of
materials, equipment and labours.
Does not establish the cost of a project; establish
the amount of money, which contractor will
receive for constructing the project.
May assist in the decision making process (as
decision making tools)

Consideration

At a project inception, data are not always

available.
Most likely estimate.
Past experience has shown that cost and time
over-runs occurred.
Underestimate costs rather management failure.
Need to revise.
The realism of estimate
accuracy of
estimate.

Estimator
Determine a reasonable accuracy the direct
costs for Materials, Labours and Equipment,
and indirect costs.
Doest not establish the costs of a project.
Establishes the amount which the contractor
will received for constructing the project.

Definition

An approach to estimate cost for the

establishment, development or implementation
of a project (at the different time frame)
As a tool in the decision making process
Fundamental element for (i) bidding proposes
and; (ii) estimating implementation cost of the
project.
The bid price adds indirect costs, contingencies,
and profits.
Profits = enough to allow the contractor to
complete the work with a reasonable profit, yet
enough to be within the owners budget.

Time vs Cost

Time delays, cost increases.

Time emphasises on planning and
scheduling.
Time relates to production rates, crew
sizes, equipment spreads, material orders
and individual work items.
Combination of time and cost allow an
integration of scheduling and estimating
functions in the area of Project
Management.

Time vs Cost

Time is crucial for gathering information to

improve the accuracy of an estimate.
Torpedo diagram (Figure 1)
Accuracy of an estimate from AACE
(Module 2)

Cost Estimate is not an Actual

Cost

Cost estimate is prepared before a

project is constructed best a close
approximation of the actual cost
(more likely cost, not the actual cost
of a project)

Information vs Estimate

Unrealistic to expect an estimate to be accurate in

an accounting sense.
The degree of confidence depends on:
The level of definition of the works;
Available information provided; and
Risks and uncertainty.
The range can be plotted against time (Figure 1).
Estimate of cost and time are prepared and
revised at many stages.

Torpedo Diagram

Fig.1. Range of estimate over the project cycle (Barnes, 1974)

Time and Information

At FS information is minimum, range of

uncertainties max.
Information develop, range of risks may
be mitigated and controlled.
Estimated base cost + contingency maybe
close to most likely.
Most likely is close to cost max.

The Role of IT

Storage, transfer, retrieval of data.

Manipulation, analysis, calculation and
presentation of data.
Not necessary improve the accuracy of estimate
but make it is easy to up date data and improve
estimation process.
Errors maybe identified more easily.
Data availability and accuracy.
Human factors.
Assist decision making process.

References

Smith, N. J. (Editor), Engineering Project

Management, Blackwell Science, 1999,
UK.
Merna, A. and Smith, N. J. (1990), Project
Managers and the Use of Turnkey
Contracts, International Journal of Project
Mnagement, 8 (3), 183-189.