E s t i m a t i n g a n d C o s t i n g Q U S 2 0 2

1.0 Introduction to Cost Estimation

There are always two questions asked by a client considering an

investment in construction: “How much?” and “How long?”

Estimating responds to the first question. Very few projects can go

forward before the cost of the construction has been determined.

Estimating is a distinct function in the construction management

field, and unlike some other jobs in construction, the estimator’s

role is pretty specific. The estimator’s primary focus is costs. They

have the awesome responsibility of accurately determining the

price of the project while maintaining a competitive edge in the

marketplace. Projects are won or lost by the efforts of the

estimator. However, no matter what your job or position is in the

construction company, you need to understand the estimating

process as well.

Estimating project costs requires a methodical approach yet at the

same time demands a certain finesse. This chapter introduces you

to both aspects and walks you through the steps necessary to build

a construction estimate from the ground up.

1.1 Cost Estimate

Any considered prediction of future or final project costs.

1.2 Approximate Estimating

The process of determining what the cost of a project should be. It

occurs before the preparation of a cost plan and should be based

on the Client’s fundamental requirements.

As you can see, estimators have an awesome responsibility. First,

they must come up with an accurate but competitive estimate that

will win the job. Second, their planning and calculations set the

stage for the overall management targets for the entire project.

Once the estimator turns the project over to the project manager

and the on-site team, the estimator shifts to a support role and

really has no direct management duties associated with the day-to-

day operations.

Every time contractors estimate a job and submit a bid, they are

taking a risk. It is a high-stakes gamble, and many factors may

influence the outcome. The construction management team is on

the front lines of managing this risk to a successful outcome.

1.3 Elements of Cost

On receipt of the instructions, specifications, drawings, bills of

quantities and the standard form of contract from the client’s

representative, the contractor’s estimator’s task is to price the

project and produce an estimate. Initially the estimator will

subdivide the work into individual sections to be priced out. With

bills of quantities, the work will have been submitted to the

estimator in sections, if not, the estimator must prepare these

sections for pricing.

Sections or packages of the project, which are carried out by the

sub-contractor will be identified by the contractor’s estimator. To

ensure competition several sub-contractors will be invited to

tender for each of the work packages and will send to each a copy

of the relevant section of the bills of quantities. The successful

tenderer’s prices will, with an addition for the contractor’s

overheads and profits, be incorporated into the contractor’s offer.

The remainder of the work will be priced by the estimator based

on the sources of data from previous jobs, rates and experience. In

each work section rates for items of work will be built up by

calculations (in a manner which will be described in this course)

based on the key resources required, mainly labour, plant,

materials plus an allowance for overheads and profit.

It is important for the estimator to keep the direct and indirect

costs separate in an estimate. Keeping indirect costs separate

allows one to more accurately account for the unique conditions

that will be encountered in a new project as many estimates are

based on a historical database compiled from previous projects’

data.

1.3.1 Direct Costs

Those costs, which can be directly attributed to a particular item

of work or activity.

Direct costs are those items that actually go into building the

facility. An item is considered a direct cost if it can be linked to a

specific item of work on a project. Direct costs make up the bulk

of any construction estimate.

(i) Labour costs: The total of the actual amounts paid to the

field personnel who perform the actual work on the project such

as carpenters, labourers, masons, painters, etc. Labour costs can be

broken into two main groups:

a). The basic wage (the wage rate x the number of hours).

b). The labour burden - includes items such as taxes, insurance,

etc. which employers are required by law to pay as well as fringe

benefits negotiated between employers and employees either

individually or collectively.

The estimator will have to price the time it will take for an

operative or a gang to complete an item of work. Tables of labour

constants are available in estimating books which are normally

expressed as an output of work per hour. By totaling the hours

and multiplying by a cost per hour, the estimator can determine

the labour costs associated with the work item.

(ii) Material costs: Usually include the prices of materials

or parts incorporated into a project. The price of materials is

based on its purchase price with allowances for delivery, off-

loading, storage and placing in position. In addition, an allowance

must be made to cover wastage which may arise as follows:-

(a) Handling/breakages – brittle materials such as bricks, clay tiles

and precast concrete paving slabs, etc have high breakage rate

even for the advances in mechanized handling of material which is

wrapped and delivered to site on pallets.

(b) Site losses – an allowance has to be made for loose material

such as sand and aggregate which, when delivered and tipped on

site will, to some extent, be trampled into the ground, washed

away by rain, etc.

(c) Cutting losses – sheet materials are manufactured in standard

sizes, Therefore plaster-board, plywood, glass, carpet, etc must be

cut to fit. Where the material is patterned has to be cut to a

difficult shape, losses can be considerable.

Materials can be in any one of the categories below:-

(a). Permanent materials included in the final constructed product

or structure.

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(b) Expendable materials and supplies that are necessary for the

work to be accomplished, but will not be incorporated into the

final structure, or will otherwise be used up during the work, such

as lubricants and concrete forms.

(iii) Equipment costs: The cost of the equipment that a

contractor uses to perform a contract (such as cranes, bulldozers,

backhoes etc.) and not equipment that is to be installed

permanently as part of contract. Equipment costs are calculated as

follows:-

1. If owned by contractor - consists of owning costs (investment,

insurance, depreciation, etc.) and operating costs (fuel,

maintenance, repairs etc.).

2. If leased - consists of lease costs and fuel costs.

The cost of Operators for operating equipment is included by

most contractors in the direct labour costs. Alternatively the cost s

Generally, plant is priced on the same basis as labour, if plant is

used for a specific task. For example, an excavator digging a drain

trench will be priced on the basis of the amount of work that it

can do in one hour. Static plant, which cannot be associated solely

to one item of work, such as scaffolding, site hutting or even a

tower crane will be priced on the basis of time that it is required

on site. The cost is added to the tender as a lump sum and not

priced per unit of task.

(iv) Subcontract costs: The costs of services provided by

subcontractors for performing of specific portion of a given

project that the general contractor does not perform with us own

forces.

1.3.2 Indirect Costs

Defined as: (1) in construction, all costs which do not become a

final part of the installation, but are required for the orderly

completion of the installation and not limited to field

administration, direct supervision capital tools, start-up costs,

contractors fees, insurance, taxes, etc. (2) in manufacturing, costs

not directly assignable to the end product or process, such as

overhead and general purpose labour, or costs of outside

operations, such as transpiration and distribution.

Indirect costs are the expenses incurred in order to manage and

deliver the materials, labor, equipment, and subcontracts

employed on any given job. They are often referred to as job-

specific overhead or general conditions.

(i) Taxes: May vary from client to client due to say the tax-

exempt status of the owner. Therefore they are usually separated

to facilitate accounting.

(ii) Risk.

(a) Profit - Regarded as the amount of money included by a

contractor in his estimate as compensation for his risk, efforts, and

endeavour to undertake a project. It is usually the residue of

money left after a contractor has met all the costs, both direct and

indirect on a project. The amount of profit to be added is a very

subjective and individual matter. It however, usually depends on

some considerations such as competition, how badly one needs

the project, the job market, the local conditions, and the

economy.

(b) Contingency - In cost estimating, there is always an element of

uncertainty since estimates are based on assumed values of cost

and productivity, which actually are subject to variability. There

may be other risk items e.g. weather, labour problems,

transportation problems etc. Therefore, real costs can be either

higher or lower than the estimate. Unfortunately, in most cases,

they turn out to be higher. A contingency markup is added by

management in those cases using subjective reasoning and / or

structured risk analysis.

(iii) Overhead: A cost or expense inherent in the

performance of an operation, i.e. engineering, construction,

operating or manufacturing. It cannot be charged to or identified

with a part of the work, product or asset, and therefore, must be

allocated on some arbitrary basis believed to the equitable. This

consists of two major sub-components.

(a) Home office overhead - Includes the fixed costs and expenses

that are incurred in the course of doing business by a company,

regardless of the amount of work completed or contracts received.

Home office overheads includes the costs of items such as: Home

Office rent or lease, Utilities, Communications (phone, fax, net

etc), Advertising, Salaries of Home Office employees, Salaries of

Executive Personnel, Donations, Legal Costs, Accounting Expense

etc

(b)Job Site overhead - Includes the cost that one has to furnish in

order to perform contract. Include supervision, insurance,

signboard, hoarding, scaffolding, temporary facilities, site office,

temporary stores, water and power for works, security, toilets,

utilities, permits etc. This item is usually covered under the

Preliminaries section of the Bills of Quantities. In the event that the

employer requires the bidders to distribute these items in the

measured works section as opposed to lump sums in the

Preliminaries then the Estimator should compute the total jobsite

overheads and then distribute it in the rates for measured works.

The amount added for overheads and profit is normally given as a

percentage, the allowance generally being decided by the

contractor’s board of directors. The estimator will provide the cost

of labour, plant and materials, leaving the deciding factor in a

competitive tender of whether the contract will be won or lost

dependent upon the percentage addition for overheads and

profit. The contractor has four choices for the distribution of

overheads and profit.

1. Percentage addition to all individual rates: This has an

advantage where a variation to the work adds additional

quantity, since the contractor will recover additional

overheads and profit, but the converse is also true.

2. Add the total amount to one item in the preliminaries

section: Usually the supervision item. This has the advantage

that the amount cannot be reduced, and puts the contractor

in a strong negotiating position where a claim is made for

additional supervision owing to the contract period being

lengthened.

3. Addition to the summary total at the end of the bills of

quantities. This reveals the overheads and profits addition

and can prove to be a disadvantage if an overestimate of

provisional sums and provisional quantities is made in the

bills of quantities. Also a re-measurement of these items may

lead to a reduction in the contract sum and hence also in

the blanket addition.

4. Add the amount selectively to specific items in the bills of

quantities. This will improve cash flow. This has advantages,

but is also dangerous where work is subject to re-

measurement.

1.4 Characteristics of a good estimator

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The consequences of any errors or omissions in the estimate are

borne by the contractor, and the contractor will not actually

know what the true cost of the construction is until the project is

complete. If the estimated cost is equal to or greater than the

actual cost, the project makes money for the contractor. If the

estimated cost is less than the actual cost, the contractor loses

money on the project.

The estimator is probably one of the most important people in

construction management. Without the estimator, the rest of the

team wouldn’t have much to do because they wouldn’t have any

jobs. The following specific skills and characteristics are common

among estimators:

I. Reads contract documents well

II. Is knowledgeable about construction techniques

III. Is familiar with typical job conditions

IV. Is familiar with construction products

V. Has good visualisation skills

VI. Follows instructions explicitly

VII. Is creative, yet practical

VIII. Is detail-oriented and thorough

IX. Can meet deadlines and work under pressure

X. Is familiar with purchasing

XI. Is familiar with computer applications

XII. Works well with numbers and statistics

XIII. Is a perfectionist at the task level

XIV. Has very good organization skills

1.5 Qualities of a Good Estimate

Winning or losing depends upon the quality of the estimate—and

of course, a little luck. High-quality estimates display the same

characteristics:

I. Organization

II. Correct quantities

III. Accurate labor hours

IV. Correct pricing

V. Accurate calculations

VI. Completeness

VII. Proper overhead

VIII. Proper profit

If the estimator was successful, they will gather together all of the

documents and label or tag them as “original tender documents.”

It is very important that there is a clear paper trail detailing exactly

how the final tender was compiled. Eventually a clean set of

drawings and specs will be issued to the builder to formally

execute the contract.

The estimator will want to check these documents against the

original tender documents to make sure nothing has changed. All

of the calculations, price quotes, subcontractor tenders, and any

other pertinent documentation that could track the estimate logic

will be organized and bundled into a package that will be passed

on to the project manager charged with running the job. And

although the estimator’s primary job is complete once the tender

is finished, they will provide support to the project team as the

job moves forward, often clarifying information and pricing

change orders / Variation orders.