COST ESTIMATION TECHNIQUES FOR CONSTRUCTION INDUSTRY

A project study submitted in the partial fulfillment of the requirements for the subject
“ADVANCED SYSTEM MANAGEMENT”

Submitted By

SIDDHARTH SHRIVASTAV (ROLL NO. 52)

SUNIL SETHIA (ROLL NO. 61)

HARMINDER SINGH (ROLL NO. 19)

WASEEM AKRAM (ROLL NO. 70)

PRASAD BHASKHAR (ROLL NO. 74)

Under the guidance of

PROF. G.N. JAYANTHY

THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENT

HYDERABAD
 CERTIFICATE

This is to certify that this is a project report on “COST ESTIMATION TECHNIQUES

FOR CONSTRUCTION INDUSTRY” submitted by Mr. Sunil Sethia, Mr. Siddharth
Shrivastav, Mr. Harminder Singh, Mr. Waseem Akram, and Mr. Prasad Bhaskar
(PGP/SS/2007-09) as a part of the curriculum for the third trimester. The work has
been undertaken and completed under the guidance of Prof. G.N. Jayanthy and is
satisfactory.

Prof:

Date:
 ACKNOWLEDGEMENT

It gives us great pleasure in presenting our project work on “COST ESTIMATION

TECHNIQUES FOR CONSTRUCTION INDUSTRY”. We, the students of PGP/SS/2007-
09, IIPM-HYDERABAD successfully completed our project and would like to thank
Prof. G.N. Jayanthy for his timely encouragement, guidance and support.

We, as co-workers are also grateful to each other for the team work without
which this study could not have been completed successfully.
 PREFACE

The primary objective of this report is to provide the readers the insight into the
COST ESTIMATION TECHNIQUES FOR CONSTRUCTION INDUSTRY.

We hope that the report has made the text interesting and lucid. In writing this
report, we have benefited immensely by referring to many publications and
articles. We express our gratitude to all such authors and publishers.

Any suggestions to improve this report in contents or in style are always welcome
and will be appreciated and acknowledged.
 DECLARATION

We hereby declare that all the information that has been collected, analyzed and
documented for the project is authentic possession of us.

We would like to categorically mention that the work here has neither been
purchased nor acquired by any other unfair means. However, for the purpose of
the project, information already compiled in many sources has been utilized.

(Sunil Sethia) (Siddharth Shrivastav)

(Waseem Akram) (Harminder Singh)

(Prasad Bhaskar)
 CONTENTS

INTRODUCTION

TYPES OF CONSTRUCTION CONTRACTS

PROJECT MANAGEMENT IN CONSTRUCTION BUSINESS

COST ESTIMATOR & COMMON PRACTISES

LEVELS OF ESTIMATES

COSTING METHODS

BIBLIOGRAPHY
INTRODUCTION

Managing a business is not an easy job, especially construction business. Keeping

a track of everything manually is very difficult and many times searching for
particular information can take lots of your time to get the required details.
Estimation is an important part of planning and is an important determinant in
effort and time required to do the job. The accuracy of estimate will greatly affect
the ability to deliver on time and within the constraints of the budget. It has been
observed that most accurate estimate leads to lowest cost development.

Knowing the future is something every company dreams of. Not only would it
help them operate at maximum potential, but it would also ensure that they did
not put a foot wrong. However, it is impossible for anybody, or anything, to
predict the future accurately. It is, however, not very difficult to predict a ‘very
near’ outcome based on previous and current scenarios.

The building and construction industry does not always run smoothly and has lots
of ups and down. Many factors contribute to the unpredictability of this sector
and it is therefore very important to operate as safely as possible. An accurate
estimate plays a vital role in preparing solid groundwork for the construction
projects.

In any business, risk identification and risk analysis are crucial for successful
implementation of business strategies. This enables to identify the likelihood of
success in a project to be undertaken, along with measures that help to minimize
the risk elements. The objective of risk management is to identify and then
measure the degree of the risk associated with different courses of action on a
project. The whole process of risk analysis helps in the overall decision-making
process.
TYPES OF CONSTRUCTION CONTRACTS:

Stipulated sum.

Lump sum unit price.

Cost plus a fee.

Design-build.

Bridging.

Cost plus a fee with a guaranteed maximum price (GMP).

Turn Key.
PROJECT MANAGEMENT IN CONSTRUCTION BUSINESS

Companies’ always feels that there construction projects are running smoothly.
As they walk from office to office asking there project managers how things are
going, their responses include some of the following:

"EVERYTHING'S OK."

"99 percent complete, just a few little things left."

"I think we'll finish on time."

"I'm getting all the signatures tomorrow."

"The paperwork is almost done."

"We're coming in close to budget."

"Only a few issues left to resolve."

"No problems I can't get handled."

But, are things going as well as you were told? A few days later, you get a call
from an angry customer screaming his project is three weeks late. Another is
upset he isn't getting the quality and service for which he contracted. Another
client demands you drop everything and fix his problem now. Your accounting
manager tells you some project managers are not doing their required paperwork
timely and several change orders have not been approved in advance by the
owner. An irate subcontractor calls threatening to pull off a job unless they get
paid for work completed two months ago. On an important job, the concrete
cylinder tests for the footings are not coming up to the design mix requirements.
You find out a building inspector has not approved a major installation your
foreman changed in the field.

And then, it gets even worse. Your accounts receivable aging report is not good,
and payments are being received slower on most projects. Four customers still
owe your company final retention payment on projects completed over three
months ago. The city will not release your offsite improvement bonds as there are
still outstanding items left to complete from over a year ago. There are six
outstanding change orders a customer refuses to pay. The month-end job cost
reports show the estimated final profit on five projects has slipped again without
notice.

NO PROJECT PROBLEMS?
These problems are symptomatic of companies run by owners who haven't taken
the time to make installing pro-active project management systems a priority.
These owners struggle and fail as they let project managers continually tell them
what they want to hear instead of the truth, avoiding conflict until it's too late.
Typical project management problems are encountered when companies don't
have standardized systems in place that guarantee everyone does business the
same way. You want consistent performance and results. You want everyone to
do business in a similar manner. You don't want to rely on your constant
reminding, checking and confronting to make sure everything is performed
exactly the way you want it done. You want your project managers to be
accountable and keep you informed of the real situation on every project.

Even if you have great managers, they will do things differently unless you have
written systems in place for all to follow. Six good project managers will do things
six different ways, late or not at all. This creates chaos, disorganization, stress and
lost profits. Your customers, subcontractors and suppliers can't deal with a
company that doesn't have consistent business standards and systems in place.
Could you imagine doing business with a bank that let each loan officer lend
based on their own personal standards? It wouldn't work. Can you imagine a
construction company where each project manager could decide if and when lien
releases or signed change orders were required or if the subcontract terms had to
be followed? It wouldn't work either.

Typical re-occurring problems are a result of the company owner not requiring
everyone to follow the company project management systems. Most companies
have general rules to follow, but don't have them written down. The owner then
tries to keep project managers herded like cats to follow the company rules. But
busy owners, over time, let their people slip from following written company
procedures, if they even have them. It's hard to keep people accountable to
systems that aren't written, reviewed, trained, tracked, followed and adhered to.

GET PROJECT DRIVEN!

Construction companies are project driven. Successful projects lead to profitable
growing companies. Owning and managing a successful general contracting
company for over twenty-nine years has taught me a simple truth: to build an
excellent company, you must get your project management systems installed,
pro-active and permanent. Excellent companies consistently hit their overall goals
and project management targets in the areas of time, budget, customer
satisfaction, quality and safety. They are focused on more than getting the jobs
done as efficiently as possible. They focus on being organized and have a
systemized pro-active approach to project management, so they can:

1. Consistently measure success.

2. Start and finish projects quickly.
3. Be on time and budget.
4. Meet their commitments.
5. Keep customers happy.
 6. Create a great place to work.
7. Build teamwork.
8. Identify problems early.
9. Train and improve people.
10.Maximize and allocate resources.
11.Grow.
12.Make above-average profits.

WHAT ARE PRO-ACTIVE SYSTEMS?

Pro-active project management systems are repeatable and standardized written

organizational methods, procedures and guidelines that achieve project goals and
optimize resources of time, energy, money, people, equipment and materials
within a specific deadline. Project management is composed of several different
types of activities such as planning, assessing risk, estimating resources,
organizing work, assigning tasks, directing activities, monitoring, tracking,
reporting progress and finally analyzing results. Pro-active project management
systems control all project activities and deliver the desired and targeted results
on time and on budget, per the contracted scope of work, while minimizing risk.

FOUR STAGES OF "PRO-ACTIVE" PROJECT MANAGEMENT SYSTEMS

1. PROJECT GOALS AND OBJECTIVES

Consistent performance and success is more than getting organized and

training project managers to do business the same way. Most projects are started
without a plan and with hope that something good will happen. Successful
projects start with clear objectives and measurable results to achieve. Just trying
to do your best or trying to bring it in on budget and schedule will not guarantee
the bottom-line results you want at the completion of every job. Without clear
targets, you can't make project managers accountable or responsible for their
results. Before every project, sit down with the project team and lay out the goals
and objectives, including:

A. Overall Project Objectives.

B. Budget and Financial.

i. Job cost.
ii. Productivity.
iii. Profit.

C. Time and Schedule

i. Start
ii. Milestones
iii. Completion
iv. Punch-list

D. Quality.

E. Service.

F. Safety.

G. Customer satisfaction.

H. Training.
 2. PROJECT PLANNING

Successful projects have written plans to insure they stay on track and hit their
goals. You wouldn't start a construction project without a detailed set of working
drawings or building plans. Project management is no different. There are certain
steps every project must follow that guarantee on-time and on-budget
completion and success. These steps must be identified and perfected as part of
your project management system. These systems can include pre-project start-up
meetings, procurement procedures, change order systems and shop drawing
standards.

The objective should be more than keeping the job moving. The intent is to hit the
goals and project milestones. Systems will make this happen. Project managers
must breakdown the project into small incremental steps that will insure
accomplishing the end results. By creating and following a project plan, the
manager can assign tasks and hold people accountable. In order to draft a
successful project plan, include the following:

A. Project specifications
B. Project requirements
C. Materials
D. Resources
E. Equipment
F. Labor
G. Cash-flow
H. Tasks
I. Schedule
J. Accountability
K. Responsibility
 3. PROJECT PRODUCTION AND IMPLEMENTATION

The next step is to build the project. Ongoing organizational systems will keep
your project headed and tracking toward the desired end result. Each project
team member must know what is expected and what systems must be followed
before starting work. By establishing clear measurements and procedures for
project implementation, team members can get started on track and monitored
on an ongoing basis as to their progress. Consider which project management
systems will guarantee that every project will meet its goals:

A. Project control systems

B. Procurement systems
C. Installation systems
D. Tracking systems
E. Cost control systems
F. Quality control systems
G. Productivity systems
H. Training systems
I. Safety systems
J. Customer systems

4. PROJECT MONITORING AND EVALUATION

As you build each project, constant monitoring becomes easy for the owner or
upper management when systems are in place and being followed. When project
management systems are installed and used effectively, monthly evaluation
meetings become a simple check of what has been done properly and what needs
attention. When systems are used, problems become quick to identify, hard to
overlook or hide and can be addressed before it's too late.
PROJECT MANAGEMENT SYSTEMS ARE "PRO-ACTIVE"

A key success factor to owning and managing an organized and systemized

company is to select the systems that will insure the success of your operation. To
create pro-active project management systems, start by selecting the top ten
systems and procedures you feel, if implemented and followed, will guarantee
successful projects 90 percent of the time. Then you must be "pro-active" and
stay focused on these systems as "musts" for your managers to implement,
maintain, track and perform. It will be your job to monitor these priority systems
and force your project management team to adhere to these without exception.
For example, when ordering something with a credit card, they always insist on
getting your expiration date, no exceptions.

On-going safety program.

On-going training program.
Change order management.
Procurement procedures.
General contract checklist.
Subcontract checklists.
Purchase order checklist.
Required approval list.
Insurance requirements.
Submittal and shop drawing steps.
Project scheduling and monitoring.
Request for information systems.
Scope of work standards.
Specification review.
 Customer service standards.
Customer satisfaction review.
Job cost reporting and review.
Progress payment procedures.
Project paperwork standards.
Contract documentation.
Contract administration.
Contract management.
Project communication.
Project management meetings.

PROJECT SUCCESS SYSTEM

Project goals targets.

Jobsite photos.
Updated schedule.
Proposed change order log.
Executed change order log.
Subcontract tracking log.
Accounts receivables.
Accounts payables.
Shop drawing and submittal log.
Job cost update.
Budget variance report.
COMPANY SUCCESS SYSTEM

Current project milestone tracking.

Sales and proposals.
Estimates and bids.
Pre-construction.
Procurement.
Project start-up.
Construction.
Completion.
Payment.
Overall strategy.

SYSTEMS THAT WORK

The following are a few of the top priority project management systems,
recommend to keep projects on track:

Project Start-Up System

1. Review bid/estimate/proposal.

2. Read complete contract.

3. Review complete plans.

4. Review complete specifications.

5. Visit jobsite.
 6. Project goals and objectives.

7. Set-up project master budget.

8. Complete project checklist:

i. Insurance requirements
ii. Bonding requirements
iii. Billing and payment requirements
iv. Cash-flow needs
v. Discounts available
vi. Shop drawings and submittals
vii. Schedule and deadlines
viii. Long lead items
ix. Special tools and equipment
x. Meetings
xi. Signature of authority designated
xii. City and permit requirements
xiii. Site accessibility
xiv. Loading and unloading needs
xv. Project close-out requirements
9. Execute contract

PROCUREMENT SYSTEM

1. Always award to the lowest responsible bidder

BEFORE AWARDING CONTRACTS, REVIEW:
1. Bid scope of work
2. References
3. Financial capacity
4. Ability to meet schedule
5. Adequate manpower
6. Similar project experience
7. Quality workmanship
8. Professional
9. Training program
10.Safety program

REVIEW CONTRACT TERMS:

1. Final scope of work

2. Schedule
3. Delay clauses
4. Mandatory meetings
5. Clean-up and punch-list
6. Supervision
7. Change order procedures
8. Notice requirements
9. Payment procedures

EXECUTE ALL SUBCONTRACTS PRIOR TO STARTING JOB

COST ESTIMATOR & COMMON PRACTICE TRAITS

Cost estimators develop the cost information that business owners or managers,
professional design team members, and construction contractors need to make
budgetary and feasibility determinations. From an Owner's perspective the cost
estimate may be used to determine the project scope or whether the project
should proceed. The construction contractor's cost estimate will determine the
construction bid or whether the company will bid on the construction contract.

PRACTICES:

1. Awareness: The estimator should firstly consider the project scope and the
level of effort and resources needed to complete the task ahead; the
organization's financial capability, staff, and plant capacity (if working as an
estimator for a construction company) to complete the project.
 Consider the time allotted for the construction of the project in
coordination with the owner's schedule needs.
 Examine the general and special conditions of the contract and determine
the effect these requirements have on indirect costs.
 Consider alternate methods of construction for the projects.
 Review all sections of the drawings and division specifications to ascertain
an accurate perspective of the total project scope, level of design
discipline coordination, adequacy of details, and project constructability.
 Make other members of the project team aware of any problems with the
project documents.
 Communicate and coordinate information to other project team
members in a timely manner.
2. Uniformity: The estimator should develop a good system of estimating
forms and procedures that exactly meet the requirements of the project,
and that is understood and accessible by all team members. This system
should provide the ability to define material, labor hour and equipment
hour quantities required for the project. Material, labor, and equipment
unit costs are then applied to the quantities as developed in the quantity
survey. Apply amounts for overhead and profit, escalation, and contingency
in the final summary.

3. Consistency: Use methods for quantity surveys that are in logical order and
consistent with industry standard classification systems. These methods
should also meet the specific need of the company or client. Use of
consistent methods allows several estimators to complete various parts of
the quantity survey, or be continued later by another estimator.
Consistency also aids the identification of cost increases and decreases in
certain areas as the project progresses through the design stages. Combine
these surveys into the final account summaries.

4. Verification: The method and logic employed in the quantity survey must
be in a form, which can provide independent method of proof of the
accuracy of any portion of the survey.

5. Documentation: Document all portions of the estimate in a logical,

consistent, and legible manner. Estimators and other personnel may need
to review the original estimate when the specific details are vague. The
documentation must be clear and logical or it will be of little value to the
reader. Such instances may occur in change order preparation, settlements
of claims, and review of past estimates as preparation for new estimates on
similar projects.
6. Evaluation: When the estimate involves the use of bids from
subcontractors, check the bids for scope and responsiveness to the project.
Investigate the past performance records of subcontractors submitting
bids. Determine the level of competence and quality of performance.

7. Labor Hours: The detailed application of labor hours to a quantity is

primary in governing the accuracy and sufficiency of an estimate. The
accuracy of the project's schedule and work force requirements are
dependent on the evaluation and definition of the hours. The combined
costs for worker's compensation, unemployment insurance and social
security taxes are significant factors in the project costs. The most accurate
method for including these costs is to define labor hours and wage rates;
then apply percentages to the labor costs.

8. Value Engineering: Structure the estimate to aid in researching and

developing alternative methods that will result in cost optimization. These
alternative methods can include different construction methodology,
replacement materials, etc. Using the same level of detail in both the value
engineering studies and the base estimate is extremely important. This
provides a more precise comparison of costs for proposed alternate
methods.

9. Final Summaries: Provide methods for listing and calculating indirect costs.
Project scope governs the costs of overhead items such as insurance, home
office plant, and administrative personnel. Determine these costs in a
manner consistent with quantity survey applications. Consider other work
in progress, and/or owner occupancy of existing space that may have a
bearing on projected overhead costs. Determine amounts for performance
bonding, profits, escalation, and contingencies.
10. Analysis:

 Develop methods for analyzing completed estimates to ascertain if they are

reasonable. When the estimate is beyond the normal range of costs for
similar projects, research the detail causes for possible errors.
 Develop methods of analysis of post-bid estimates to find the reasons for
the lack of success in the bidding process.
 Calculate the variation of the estimate from the low bid and low average
bids.
 Determine from an outside source if there were subcontract or material
bids provided only to certain bidders.
 Determine if bids were submitted by a representative number of
contractors for the level of construction quality expected.
 Determine if the low bidder may have made omissions in the estimate.
 Properly document this information for future use and guidance.

11. Conversion: Show estimating procedures that allow conversion of the

estimate to field cost systems so management can monitor and control
field activities. These procedures include methods of reporting field costs
for problem areas. Make reports daily or weekly rather than at some point
in time after the project is complete. Field cost reporting, when consistent
with estimating procedures, enables estimators to apply the knowledge
gained from these historical costs to future estimates, and help train field
personnel in labor hour and cost reporting that provide the level of
accuracy required.
12. Change Orders: Apply the highest level of detail from information provided
or available to the estimator. State quantities and costs for all material,
labor, equipment, and subcontract items of work. Define amount for
overhead, profit, taxes, and bond. Specific itemization of change order
proposals is essential in allowing the client to determine acceptability.
Upon approval, use the estimate detail as the definition of scope of the
change order.
LEVELS OF ESTIMATE

As a project is proposed and then developed, the estimate preparation and

information will change based on the needs of the Owner/Client/Designer. These
changes will require estimates to be prepared at different levels during the design
process with increasing degrees of information provided. It should also be noted
that within each level of estimate preparation, not all portions of the design
would be at the same level of completeness. For example, the architectural
design may be at 80% complete while the mechanical design is only 50%
complete. This is common through the design process, but should always be
noted in the estimate narrative.

In addition to construction costs, estimates for process or manufacturing areas

require information related to the involved processes such as product line
capacity, process layout, handling requirements, utility requirements, materials
and storage required, service requirements, flow diagrams, and raw materials
access.

The following descriptions constitute the different levels of an estimate. Estimates

within each of these levels may be prepared multiple times during the design
process as more information becomes available or changes are made to the
scope. As the level of the estimate increases it will become more detailed as more
information is provided; "unknowns" are eliminated; fewer assumptions are
made; and the pricing of the quantities become more detailed. Contingencies for
the aforementioned will be reduced as more design documentation is produced.

The levels of the construction cost estimate correspond to the typical phases of
the building design and development process and are considered standards
within the industry. These levels are as follows:
LEVEL 1 - ORDER OF MAGNITUDE

The purpose of the Level 1 estimate is to facilitate budgetary and feasibility

determinations. It is prepared to develop a project budget and is based on
historical information with adjustments made for specific project conditions.
Estimates are based on costs per square foot, number of cars/rooms/seats, etc.

Project information required for estimates at this level usually might include a
general functional description, schematic layout, geographic location; size
expressed as building area, numbers of people, seats, cars, etc., and intended use.

LEVEL 2 - CONCEPTUAL/SCHEMATIC DESIGN

The purpose of the Level 2 estimate level is to provide a more comprehensive

cost estimate to compare to the budgetary and feasibility determinations made at
Level 1 and will be typically based on a better definition of the scope of work. An
estimate at this level may be used to price various design schemes in order to see
which scheme best fits the budget, or it may be used to price various design
alternatives, or construction materials and methods for comparison. The goal at
the end of schematic design is to have a design scheme, program, and estimate
that can be contained within budget. The Level 2 estimate is based on the
previous level of information available at Level 1, in addition to more developed
schematic design criteria such as a detailed building program, schematic
drawings, sketches, renderings, diagrams, conceptual plans, elevations, sections
and preliminary specifications. Information is typically supplemented with
descriptions of soil and geotechnical conditions, utility requirements, foundation
requirements, construction type/size determinations, and any other information
that may have an impact on the estimated construction cost.
LEVEL 3 - DESIGN DEVELOPMENT

Estimates prepared at Level 3 are used to verify budget conformance as the scope
and design are finalized and final materials are selected. Information required for
this level typically includes not less than 25% complete drawings showing floor
plans, elevations, sections, typical details, preliminary schedules (finishes,
partitions, doors, and hardware etc.), engineering design criteria, system single
line diagrams, equipment layouts, and outline specifications.

The Level 3 estimate provides a greater amount of accuracy, made possible by

better defined and detailed design documentation. Estimates at this phase may
be used for value engineering applications before the completion of specifications
and design drawings.

LEVEL 4 - CONSTRUCTION DOCUMENTS

Level 4 estimates are used to confirm funding allocations, to again verify the
construction cost as design is being completed, for assessment of potential value
engineering opportunities before publication of the final project design
documentation for bids, and to identify any possible "design creep" items, and
their costs, caused by modifications during the completion of the construction
documents. This final construction document cost estimate will be used to
evaluate the subcontract pricing during the bid phase. Level 4 estimates are
typically based on construction documents not less than 90% complete.

LEVEL 5 - BID PHASE

The purpose of this level estimate is to develop probable costs in the preparation
and submittal of bids for contract with an Owner. In the traditional "design-bid-
build" delivery system, this would be with 100% completed and coordinated
documents. The Level 5 estimate will be used to evaluate sub-contractor bids and
change orders during the construction process.

In other delivery systems, becoming more widely used, such as design-build or

guaranteed maximum price, the bid could actually be prepared at an earlier level,
often Level 3 or Level 4. In such an instance estimates are prepared as previously
described along with progressive estimates as the design is completed. It should
be stressed that when preparing a bid at a prior estimate level, it is very
important to include a complete and thorough "Scope of Estimate" statement
that would state clearly such items assumptions, allowances, documents used for
the estimate, and contingency amounts included.

ELEMENTS OF A COST ESTIMATE

Quantity Takeoff: The foundation for a successful estimate relies upon reliable
identification (takeoff) of the quantities of the various materials involved in the
project.

Labor Hours: Labor hour amounts can be developed by crew analysis or applied
on a unit man-hour basis. The use of a labor pay per unit of work (ex: Rs. 150 per
cubic yard for grade beams or Rs.200 per cubic yard for walls) is only applicable
when the cost history supports the data being used. The estimator must make
allowance for the varying production capability that will occur based upon the
complexity of a project.

Labor Rates: The labor rate is the cost per hour for the craftsmen on the project.
To determine any craft rate, whether union or open shop, the estimator starts
with the basic wages and fringe benefits.
Material Prices: Material prices, especially in today's current market, fluctuate up
and down. The estimator must both understand and anticipate the frequency and
extent of the price variations and the timing of the buying cycle. Material prices
may be affected by:

Purchase at a peak or slack time of the year for the manufacturer.

Material availability.
Size of the order.
Delivery timeframe requirement.
Physical requirements for delivery, such as distance, road size, or site
access.
Payment terms and history on previous purchases
Sole-source items.
Exchange rates (if the material will be imported into the country).

Equipment Costs: Equipment rates depend on the project conditions to

determine the correct size or capacity of equipment required to perform the
work. When interfacing with other equipment, cycle times and equipment
capacity control the costs on the project. Costs will also differ if the equipment is
owned by the contractor as opposed to rent.

Subcontractor Quotes: A subcontractor quote, like the general estimate, contains

labor, material, equipment, indirect costs, and profit. It is dependent upon having
the quantities, labor hours, hourly rate, etc., prepared in a reliable manner just
like any other part of an estimate. The amount of the subcontractor quote is also
dependent upon the payment terms of the contract, and previous payment
history between the subcontractor and general contractor. Bonding costs should
also be considered.
Indirect Costs: Indirect costs consist of labor, material, and equipment items
required to support the overall project.

For the owner: design fees, permits, land acquisition costs, legal fees,
administration costs, etc.

For the contractor and subcontractor: mobilization, staffing, on-site job

office, temporary construction, temporary heat/cooling, and temporary
utilities, equipment, small tools and consumables, etc.

Profit Amount: Apply appropriate or contracted profit rate uniformly to all

contractors and to original bid and change orders.

The transfer of the estimate information to the field cost control system provides
management the opportunity to closely monitor and control construction costs as
they occur.

It should be noted that it is always good cost control practice to review and
evaluate the final cost estimate vs. the actual bid. This exercise is not another
level of estimate, but is a cost control mechanism and important data for
estimating future projects.
COSTING METHODS

JOB COSTING
(SMALL, SHORT-TERM
JOBS)

BATCH COSTING
SPECIFIC ORDERS (SMALL, IDENTICAL
UNITS)

CONTRACT COSTING
(LARGE, LONG-TERM)
COSTING
METHODS
OUTPUT COSTING
(ONLY ONE PRODUCT)

CONTINUOUS SERVICE COSTING

(PRODUCT IS A
OPERATIONS SERVICE)

PROCESS COSTING
(PRODUCED IN
STAGES)
Cost studies of building seek to ensure the efficient use of available resources to
the industry, and to increase the rate of growth of construction work in the most
efficient manner. Cost studies are then followed by a process of cost analysis, cost
planning and cost control, which must be monitored and managed in such a way
that deviations from the plan are detected and corrected in time so that
objectives can be met and met on time and within budget. The construction
project consists of the physical components: the structure, the mechanical and
electrical systems, and the architectural finishes. To guide him, the construction
manager must know the estimate of costs, the plans and specifications defining
the materials to be used, and the proper assembly of the materials. The task of
cost estimates is essential and important in project management since through
cost estimates budget forecasting and cost control, etc. can be carried out.
Estimating costs is of prime importance both in the preliminary and the
realization phase of a project. The preparation of an accurate preliminary
estimate is one of the most complicated subjects for designers and estimators.

The purpose of producing a pre-tender estimate can be classified into the

following three categories:

Budgeting – this decides whether the project should proceed as envisaged.

Controlling – this uses the estimate as a control mechanism throughout the
design process.
Comparing – this uses the estimate as a basis for the evaluation of different
design solutions.
ESTIMATING METHODS

Pre-tender price estimating methods may also be classified as single price-rate,

measured analysis or cost models.

Table 1
Estimate Types

Stage Activity Plan of Work Estimating Types Cost Planning Process

STAGE ACTIVITY PLAN OF WORK ESTIMATING TYPES COST PLANNING

PROCESS
1. Project Consultation Preliminary Initial estimate
Identification
2. - Brief Feasibility Firm estimate
3. - Investigation Viability Preliminary Cost
Plan
4. Project Definition Constructional Detail Authorization Final cost plan
5. - Working Drawing Final budget Cost check
6. Project Execution Construction Control -

The degree of accuracy will very much depend on the type of information
provided to the quantity surveyor in addition to the quality of his pricing
information. Literature survey has elicited the following estimating methods:

FUNCTIONAL UNIT SUPERFICIAL AREA

CUBE METHOD SUPERFICIAL-PERIMETER

STOREY-ENCLOSURE
STOREY-ENCLOSURE

ELEMENTAL ANALYSIS RESOURCE ANALYSIS

INTERPOLATION COST ENGINEERING

 Table 2
Methods for Pre – Tender

METHODS NOTES
Based on a consensus viewpoint
CONFERENCE

Used to determine cost limits or the building costs in a developer’s budget

FINANCIAL METHODS

Applicable to projects having standard units of accommodation. Often used to fix

UNIT
cost limits for public sector building projects.
Still widely used, and the most popular method of approximate estimating. Can
SUPERFICIAL
be applied to virtually all types of buildings.
Never used in practice
SUPERFICIAL PERIMETER

Used to be a popular method amongst architects, but now in disuse.

CUBE

Largely unused in practice

STOREY ENCLOSURE

Still a popular method on difficult and awkward contracts and where time
APPROXIMATE QUANTITIES
permits.
Not strictly a method of approximate estimating, but more associated with cost
ELEMENTAL ESTIMATING
planning; used widely in both the public and private sectors for controlling costs.
Used mainly by contractors for contract estimating and tendering and tendering
RESOURCE ANALYSIS
purposes.
Mainly used for petrochemical engineering projects.
COST ENGIN EERIN G

Still in the course of development. These methods may eventually prove to be

COST MODELS
superior to the existing methods .

CONFERENCE ESTIMATE

This is a technique that can be used for the preparation of the earliest price
estimate given to the client. It is based on a collective view of a group of
individuals, and may at this stage not be quantified in any particular way. As for
the result, it has been shown that the group concerned must have relevant
experience of estimating the costs of similar projects. It is used in circumstances
where historical cost data may not be appropriate, as in the case of a prototype
project. It also offers a qualitative viewpoint to reinforce or otherwise a measured
estimate.

FINANCIAL METHOD

These are methods that fix a cost limit on the building design, based on either unit
of accommodation or rental values. The estimated cost of a project may be fixed
in relation to the number of pupils who are likely to attend a completed school.
The architect must then ensure that the design can be constructed within such a
cost limit. In the private sector, projects are often evaluated in terms of their
selling price or rental value. For example, in connection with a speculative
housing development a market research survey would determine the possible
selling price of dwellings on a new estate. The builder would then deduct other
development costs and profit from the total selling price, and the remainder
would represent the amount to be spent on building. Alternatively, building and
other development costs (excluding land) and profit could be calculated and
deducted from the total selling price in order to determine a maximum price to
be paid for the land. This method is used to avoid or reduce the risk or embarking
on a profitless venture. The assessment will take place at the outset, and certainly
before payment of the site purchase.

UNIT METHOD

The unit method of approximate estimating consists of choosing a standard unit

of accommodation and multiplying this by an approximate cost per unit. The
standard units may represent, for example:

• Schools – costs per pupil enplace

• Hospitals – costs per bed enplace

• Car parks – cost per car space

The technique is based on the fact that there is usually some close relationship
between the cost of a construction project and the number of functional units it
accommodates. Functional units are those factors which express the intended use
of the building better than any other. This method is extremely useful on
occasions where the building’s client requires a preliminary estimate based on
little more information than the basic units of accommodation.

The method of counting the number of units is extremely simple, but

considerable experience is necessary in order to select an appropriate rate. This
rate can be obtained by the careful analysis of a number of recently completed
projects of a similar type, size and construction. However, adjustments based on
professional judgment will always need to be made to take into account the
various site conditions, specification changes, market conditions regional changes
and inflation. It is one of the simplest and quickest methods to implement, but it
must be used with care. It suffers from the major disadvantage of lack of
precision, and should only be used for establishing general guidelines. It is
advisable, therefore, to express cost within a range of prices that can be useful for
budgetary estimating.

SUPERFICIAL AREA METHOD

This is still the most common method in use for early price estimating purposes.
The estimate of cost is easy to calculate and thus is expressed in a way that is
fairly and readily understood by those in the industry and the average
construction industry clients. The area of each of the floors is measured and then
multiplied by the cost per square meter. In order to provide comparability
between various schemes, the floor areas are calculated from the internal
dimensions of the building. It is largely a post-1945 method, and became
appropriate for projects such as schools and housing where storey heights were
similar. Storey heights, plan shape and methods of construction are particularly
important when deciding on the rate to be used. Another consideration which
favor the use of this method is that rates are readily available from many different
sources already operating, alternatively, they can be calculated very easily from
existing scheme cost data.

SUPERFICIAL PERIMETER METHOD

This method of approximate estimating is a variation on the superficial floor area

method. Realizing that the floor area has the greatest single variable-correlated
price produces a formula that showed an increase in the accuracy of early price
prediction. The formula combined floor area with the length of the building’s
perimeter. This is the second most important variable, and attempts to take into
account plan shape when linked with floor area. The wall/floor area ratio is
known to be an important factor in the economic design buildings. Tests have
indicated that more accurate results can be obtained than when using floor area
alone. Due to the reluctance of surveyors to change to this method of approach
and of cost data sources to publish appropriate rates, this method has not been
used in practice.

CUBE METHOD

The cube method of approximate estimating was used extensively at the

beginning of this century, but has since been superseded because of its inherent
disadvantages. It was a method extensively used by architects. All architects’
offices used to keep a ‘cube book’ for future estimating purposes. Once the
contract was signed its costs would be divided by the cubic content and entered
into office price book. The cost of a new job could then be determined by
calculating its volume and selecting an appropriate rate from the book. Even with
such a primitive method it was necessary to provide some rule for comparable
quantification of purposes.
STOREY-ENCLOSURE METHOD

In an attempt to overcome the many disadvantages of the other single-price

methods of estimating, a new method was devised using the following rules of
calculation.

i. Twice the area of the lowest floor.

ii. The area of the roof measured on plan.
iii. Twice the area of the upper floors, plus an addition of 15% for the first
floor, 30% for the second floor, 45% for the third floor, etc.
iv. The area of the external walls.

The Method Attempted to Take Into Account:

a. Plan shape (by measuring each floor)

b. Total floor area (by measuring the external wall area)

c. Vertical position of the floors (by using different multipliers for each floor)

d. Storey heights (ratio of floor and roof area to external wall area)

e. Overall building height (ratio of roof area to external wall area)

f. Extra costs of providing usable floor areas below ground (by using multipliers)

APPROXIMATE QUANTITIES

Approximate quantities provide a more detailed approximate estimate than any

of the methods described above. They represent composite items which are
measured by combining or grouping together typical bill-measured items.
Whereas the methods described above estimate costs on the basis of
measurement and some cost relationship, this method relates to the importance
of measurement. This method does provide a more detailed and reliable method
of approximate estimating, but involves more time and effort than any of the
methods (1)-(7). No particular rules of measurement exist, and the composite
items resulted from the experience of each individual surveyor. Also, considerably
more information is required from the designer if the method is to be applied in
practice. The method is therefore suited to a more advanced design stage. It is,
however, more reliable when one is attempting to estimate the costs of major
refurbishment projects. Approximate quantities should not be confused with the
bill of approximate quantities. The latter would be based on an agreed method of
measurement. The former, which is used for approximate estimating purposes,
would be much briefer because several of the bill items would be grouped
together within a single description. Contractors favor this method when they
have to prepare tenders on the basis of a drawing and specification projects.

ELEMENTAL ESTIMATING

The first stages of cost planning can be used to determine the approximate cost of
a construction project. This method analyses the cost of the project on an
elemental basis, attempting to make use of the cost analyses from other similar
projects. Cost planning, however, also seeks to do much more. It provides cost
advice during the design process, offering the client better value for money. It
keeps the designer fully informed of all the cost implications of the design in
relation to an approved approximate estimate and is likely to be accepted as the
tender sum. Full cost planning services today would also incorporate the
attributes of life-cycle costing and value engineering. Two alternative forms of
cost planning have been developed, although in practice a combination of both is
now generally used. The first form is known as elemental cost planning, where
the project must be designed within an overall framework of a cost limit. It is
often referred to as ‘designing to a cost’. In practice it is more appropriate to
public sector projects, which often incorporate some form of cost limit. The other
alternative form is comparative cost planning, where alternative designs can be
examined within an economic context. This method is referred to as ‘costing a
design’.
RESOURCE ANALYSIS

This is a method that is traditionally adopted by contractors’ estimators to

determine their individual rates for measured items in bills of quantities. Each
individual measured item is analyzed into its constituent parts such as labor,
materials and plant. Each part is then cost’d on the basis of output, gang size,
material quantities, plant hours, etc. Particular emphasis is placed on such project
features as type, size, location, shape and height as important factors affecting
the contractor’s costs. In theory the contractor will make extensive use of
feedback, although some evidence suggests that the whole process is largely
determined by value judgments on the basis of previous experience. Alternative
analytical methods can be calculated based on resource costs on the basis of
operations rather than individual bill items.

Resource estimating is not strictly a pre-tender method of price prediction,

because of the amount of time and the type of data required. It can, however, be
applied in circumstances where, for example, a new material or construction
process is envisaged. In these circumstances, where existing cost data are not
available the design team may have few alternatives available other than to refer
to resource-based estimating.

COST ENGINEERING METHODS

There are three methods used for capital cost estimating in the process-plant
industry. These are:

1. Functional Approach

The average cost of a functional unit in a process is the function of the various
process parameters. The estimated cost may therefore be represented in the
following way:

Cost = F (Q, T, P, M, CCI)

Where Q = capacity throughout

T = temperature

P = pressure

M = materials of construction, and

CCI = construction cost index

2. Factor Estimating

This method relies on costing from only a portion of the scheme and then
multiplying this by a factor to obtain the total cost. Zimmerman (1965) has called
these ratio-cost factors. Thus the total cost of a building project may be estimated
by multiplying the cost of the shell by, say, 1.6. A range of factors have been
derived empirically for different sorts of fixed capital equipment.

3. Exponent Estimating

The costs of similar plants or pieces of equipment of different sizes vary with the
size raised to some power.

C2 = ( Q2 )x

C1 Q1

Where C2 is the cost of the desired capacity Q2 and C1 is the cost of the known
capacity Q1. A frequent value of x is 0.6, and so relationship is often referred to as
the six-length rule. The exponent x can be determined by plotting actual historical
costs for the equipment or plant. These methods can also be used for estimating
the costs of building and civil engineering works.
COST MODELING METHOD

Cost modeling is a more modern method that can be used for forecasting the
estimated cost of a proposed construction project. Although they were first
suggested during the early 1970s, there is still only scant evidence of their use in
practice. However, considerable research has been undertaken in an attempt to
convert the theories into practice. The uncertainties about calculating project
costs have been discussed in several papers. It assumes a normal distribution for
various cost items and uses the probability estimating method with a 95%
confidence level as the estimation limit. It also discusses various probability
estimating methods and explains their applicability. It emphasizes that the
correlation between cost items must be considered in the probability estimating
methods when this correlation is significant.

The use of the computer has allowed more numerical methods such as statistical
and operational research techniques to be applied to the forecasting of
construction costs. Without computer facilities such applications would not be
possible. These models attempt to formulate a better representation of
construction costs than do their predecessors, by trying to discover the true
determinants of construction costs. There is, however, little evidence at the
present time that cost models offer any superiority over the traditional methods
in terms of forecasting performance. Computer application became stronger with
the fast development of mini and micro computers and especially with the
availability of software packages like spreadsheets and statistical packages, such
as SPSS, SAS, BMB and others. During the early phase of their development it was
assumed that estimating generally was solely a numerical process. This
assumption is now believed to be erroneous, and the models, to have any chance
of future practical application, must consider the input and expertise of the
surveyor or estimator. Cost models are developed to advance five major aspects
of cost information

a) Provide cost information quicker;

b) Provide more information for a more informed decision;

 c) Provide more reliable cost information;

d) Provide information at an earlier stage in the design process; and

e) Provide information in a more understandable form

Causal or empirical models, regression models, simulation, heuristics, and expert

systems are example of tools used for cost modeling. Causal or empirical models
are symbolic models which are based on relationships between the design
variables and cost, and which have been derived from observation, experiment
and intuition. Application of these models can be conducted manually or by using
computer aided system. This method is easy to understand and can be related
quickly to the construction projects. One good example of causal or empirical
models is bills of quantities.

Regression analysis is a technique that uses the best fitted mathematical equation
to express the relationship between the variables studied. In any statistical
analysis of relationship, exact relationships are not generally observed. The
simplest form of regression analysis involve only one independent variable and
one dependent variable, this is called linear regression analysis. In the actual
practice, one dependent variable is affected by more than one independent
variables. Therefore in describing their relationship, a multiple regression analysis
would be applied. The equations developed are used for the purpose of
estimating.

A simulation model seeks to duplicate the behavior of the system under

investigation by studying the interactions among its components. Simulation is
done to avoid direct experiment error and it contains more variability if compared
to other research methods. The advantages using the simulation model is when
problems occur it can be resolved quickly is not possible if it is done analytically.

Secondly, it is easier to understand, and the assumptions to be made are fewer

Heuristic are rule-of-thumb procedures which enable a near-optimum solution to
be produced once the model has been built. It involves trial and errors based on
the knowledge from experiences and skills of those involved. In other words,
heuristic method of solution relies on intuitive or empirical rules that have the
potential to determine an improved solution relative to the current one. But
unfortunately, there was too little attention given on these rules of thumb in
recent years. Expert systems are computer programs that embody human
expertise. It can acts as intelligent assistants to human expert, the expert’s rule-
of-thumb are stored in the computer to help others to solve problems.

FORMULATE THE COLLECTION OF ANALYSIS OF

PROBLEM DATA DATA

EVALUATION OF OPTIMUM MODEL

MODEL MODEL BUILDING

TESTING APPLICATION
CONCLUSION

The present study is focused on the cost estimation in construction industry. The
main purpose is to establish the method of cost estimating for building
construction. A scale for rating the popularity of practicing the estimating
methods is used in this study.
BIBLIOGRAPHY

www.google.com

www.constructionbusinessowner.com

Malaysia Construction Industry

US Labor Articles

Kingston Business School