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University of Gondar
Institute of Technology
Department of Construction Technology and Management

Exit-Exam Module for Cost Engineering

By Getahun Fetene Dinku (M.Sc.)

January, 2015 E.C.

Gondar
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Table of Contents
Chapter One 4
1. Fundamental Principles of Cost Engineering 4
1.1 Introduction 4
1.2 Definitions and Terminology to Cost Engineers 5
1.3 Project Planning 7
1.4 Cost Engineering Traits 10
1.5 The Function of Cost Engineering in Construction 12
1.6 Considerations in Costing 13
1.6.1 Project Size 13
1.6.2 Project Quality 14
1.6.3 Project Location 14
1.6.4 Construction Time 18
Chapter Two 20
2. Construction Pricing and Contracting 20
2.1 Tendering Policy and Procedure 20
2.1.1 Bidding Strategy 20
2.1.2 Tendering Procedure 24
2.1.3 Firm’s Mark-up target 25
2.1.4 General Overheads 26
2.2 Contract Provisions for Risk Allocation 27
2.3 Construction Contracts 29
2.3.1 Lump Sum Contract 29
2.3.2 Unit Price Contract 30
2.3.3 Cost plus Fixed Percentage Contract 31
2.3.4 Cost plus Fixed Fee Contract 31
2.3.5 Cost plus Variable Percentage Contract 31
2.3.6 Target Estimate Contract 31
2.3.7 Guaranteed Maximum Cost Contract 31
Chapter Three 33
3. Cost Estimating Approach 33
3.1 Types and Methods of Estimates 33
3.1.1 Approximate Estimate 33
3.1.2 Detailed Estimate 34
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3.2 Pro-rata Rates 47

3.2.1 By Derivation 48
3.2.2 By Reconciliation of Analysis 49
3.2.3 By Analogy 50
Chapter Four 53
4. Progress and Cost Control 53
4.1 Earned Value Overview 53
4.2 Value Engineering 55
4.3 Asset Management 56
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Chapter One
1. Fundamental Principles of Cost Engineering
1.1 Introduction

Before taking up any construction work for its execution, the owner or builder should have a thorough
knowledge about the volume of work that can be completed within the limits of his fund or the
probable cost that may be required to complete the contemplated work. It is therefore necessary to
prepare the probable cost or estimate for the intended work from its design plan and specifications.
Otherwise it may so happen that the work has to be stopped before its completion due to shortage of
funds and or materials.
There are many costs associated with construction projects. Some are not directly associated with the
construction itself but are important to quantify because they can be a significant factor in whether or
not the project goes forward and feasible. These include the initial capital cost and the subsequent
operation and maintenance costs. Each of these major cost categories consists of a number of cost
components:
Land acquisition, including assembly, Construction financing including
holding and improvement overhead costs
Planning and feasibility studies Insurance and taxes during construction
Architectural and engineering design Owner's general office overhead
Construction, including materials, Equipment and furnishings not
equipment and labor included in construction
Field supervision of construction Inspection and testing
The operation and maintenance cost in subsequent years over the project life cycle includes the
following expenses:

Land rent, if applicable Insurance and taxes

Operating staff Financing costs
Labor and material for maintenance and Utilities
repairs Owner's other expenses
Periodic renovations
It is important for design professionals and construction managers to realize that while the construction
cost may be the single largest component of the capital cost, other cost components are not insignificant.
Early on, the owner wants to understand the nature of these costs as well as have some indication of
what the construction itself will cost in order to analyze the life cycle costs and determine the worthy
fullness of the investment. The Cost-Benefit Analysis can serve as a decision making tool to address all
the costs and the corresponding associated benefits worth to the owner.
Cost Engineering is a dynamic process that begins in the very early stages of a project and ends when
the project is turned over to the owner. As a project moves along time, the amount of information
generated increases. The information improves an estimate’s accuracy but also costs more to develop
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and takes more time. Cost estimating is critical in the development of the project because it informs the
owner of costs, which in turn guide design decisions.
Cost Engineers consider past projects while anticipating new factors. Some of these factors include:

Current technologies , Collective bargaining agreements of

Market demand and supply of material suppliers and buyers,
and labor, Level of quality,
Quantities of materials, Requirements for completion
A good database of actual costs from past project experiences facilitate the preparation of a quick and
accurate cost estimate. Cost Engineers spent considerable time and resources developing and
protecting this database. Each new project provides a clearer picture of the actual cost of construction
and adds to the value of the data. Larger design and construction companies maintain their own
databases. Smaller companies may rely on the data developed from independent cost consultants and
cost data suppliers.

1.2 Definitions and Terminology to Cost Engineers

Prior to the disposition of the overall concept of costing, it would be to the interest of Cost Engineers
to define the following terminology for an ease reference and common understanding as they are used
in the Construction Industry.

Construction Costs: valued Residual Value: refers to current value

consumption of goods or material and of goods determined by reducing the
performance or labor work of different depletion cost from the original value.
kind and amount for the purpose of the Interest Value/Rate: Value of goods
production. foregone by not using resources at their
Depreciation/Depletion Costs: Costs of best allocation. E.g. Opportunity Cost.
goods, equipment, or plant distributed An interest rate is accounted for cash
for the whole useful life to compensate deposited in any bank being a
its deterioration to the work. Although a compensation granted for not using the
nonlinear relationship exists, a linear or money at its best allocation. (e.g.
a straight-line method is often preferred. Investment)
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All-in Material Rate: A rate which and the costs which arise directly from
includes the cost of material delivered to the employment of labor.
site, waste, unloading, handling, storage All-in Plant Rate: A compounded rate
and preparing for use. which includes the costs originating
Basic Material Price/Index: Unit price from the ownership or hire of plant
of the material including transportation, together with operating costs.
unloading, waste, handling, storage and Direct Costs: Costs directly rendered to
preparing for use. the production of the work. It includes,
All-in Labor Rate: A compounded rate all-in material costs, all-in labor costs
which includes payment to operatives and all-in plant costs.

Overhead Costs: Costs incurred not to the direct itemized works but indirectly to the overall
production and performance of the work. E.g.
Secretarial services, Utility provisions: energy, water,
Transportation facilities, communication, sanitation,
Administrative works,

General Overhead Costs: The cost of off-site services. The apportionment of

administering a company and providing head office overheads to projects and to
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the company as a whole is decided by Mark-up Costs: the sum added to an

management as part of management estimate in respect of the general
policy. overhead costs including profit and risk.
Site Overhead Costs: The cost of Production Costs: Costs representing the
administering a project and providing sum of direct costs (all-in costs) and site
general plant, site staff, facilities and site overhead costs. Costs required for
based services and other items not production of the works on site.
included in all-in rates.

1.3 Project Planning

The goal of a project manager is to complete projects on time and within budget. The best way to
accomplish this goal is to plan for it, so the two key tasks in planning are costing and scheduling.
Therefore understanding the Cost Estimating and Cost Budgeting processes that develop the costing
documents will help obtain ones goal.
Cost Estimating is the process of developing an approximation of the cost of the resources needed to
complete project activities including the consideration of the possible fluctuations and other variances
such as risk. Throughout the Cost Estimating process various alternatives are considered to assure
accurate and effective estimates. This process is conjoined with the Activity Resource Estimating
process and is foundational work necessary for Cost Budgeting.
The inputs to the cost estimating process are outputs from the other planning processes. These
include the project scope statement, the project management plan, the work breakdown structure, staffing
management plan, and organizational process assets. The main outputs of the cost estimating process
are the Activity Cost Estimates and the Activity Cost Estimate Supporting Detail.
Activity Cost Estimates: These are assessments of the probable costs of the resources necessary to
complete project activities.
Activity Cost Estimate Supporting Detail: This provides a description of the activity's scope of
work, documentation about how the estimate was developed, known constraints, explanations
of any assumptions that were made, and a range of possible results.
Cost budgeting is the process of aggregating the estimated costs of individual activities or work
packages to establish a cost baseline. It requires having all cost estimating processes completed. The
difference between cost estimates and a cost budget is that the cost estimates portray costs by category,
versus a cost budget which displays costs across time. The inputs into the Cost Budgeting process are:
Activity Cost Estimates - These predict the cost for the project work.
Activity Cost Supporting Detail - This provides useful data on how the estimate came about.
Project Schedule and the Resource Calendar - Both dictate when project activities occur and
when associated budget monies will be spent.
The Contract This details purchasing requirements and associated cost.
The Cost Management Plan -This reflects how project costs will be controlled.
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The end result of the Cost Budgeting process is a Cost Baseline, which is a time-phased budget that
will be used to measure and monitor overall cost performance on the project—usually displayed in the
form of an S-curve. Additionally, the Cost Budgeting process will produce Project Funding
Requirements, including a management reserve amount that is included along with the cost baseline
to compensate for either early progress or cost overruns.

How does a cost engineer estimate the cost of a construction project?

Fig. The estimating objective: to hit the target.

The Figure illustrates subjective estimates attempting to hit the target, which is the actual cost. The
subjective value chosen by each estimator was considered to represent the resources required by each
firm to complete an example office-building project. We can see that the estimates are all scattered
around the target of actual cost. Hitting the target is not a common occurrence and is an inbuilt
problem of estimating.

Briefly, let us consider an estimator pricing a brickwork item. What are the difficulties presented? They
are as follows:

Choice of work method.

Output of crew (given the firm’s unique efficiency).
Cost of labor
Cost of material and selection of an appropriate wastage allowance.
Addition of overheads and profit

Choice of work Method:

There may be many or only a few work methods available. For instance, should the estimator assume
a three-man or a four-man crew, composed of two or three bricklayer with either one or two laborers?
Will there be central mortar mixing or individual mixers for each crew? How will the brickwork be
constructed? Will trestles or proper standing scaffolding be used? Where will work commence from?
What restrictions will the other trades impose on the masonry work? All possibilities must be
investigated, and the most economical possibility should be chosen.
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Output of Crew:

The output chosen will be based on past performance, since the estimator will assume that this
performance will be repeated in the future. As will be explained later, recording and properly
documenting job site performance is helpful to the estimator when he or she considers future projects.
Manipulation of these historical data may occur; for example, decreasing output to allow for restricted
working condition. Whatever manipulation occurs, the estimator is faced with the difficulty of trying
to assess what output will be achieved.
Cost of Labor:

How much will the contractor be required to pay for labor? The estimator must predict this cost. The
labor cost will vary depending on job location, availability of skilled labor, contract wage regulations,
union or open shop labor requirements, general market conditions, and so on.

Cost of Material:

This can be predicted with a fair degree of accuracy if the material in question is in ready supply and
is frequently purchased. The quantity of material required must be accurately measured from the
drawing and is not dependent on the crew performance or work method adopted. Although the
estimator must not only consider the finished in -place quantity of material, but also must allow for a
wastage factor, this factor can vary dramatically and is highly dependent on the performance and work
procedures adopted by the crew.

Addition for Overheads and Profit:

This amount will depend on company policy, market condition, and many other variables that will be
discussed later. It is, as you can imagine, very important to incorporate overhead and profit into the
final estimate.

Variances between estimates and actual costs do occur. The estimator, unfortunately, always appears
to be incorrect, since an estimate is an “estimate”, which is a forecast of the anticipated future cost.
Many forces can in reality cause the actual cost to vary from the estimated cost. It sometimes appears
to owners and management that, when the estimate does not equal the actual costs, a mistake has been
made. Because it is an estimate, it should always be expected that the actual cost will vary somewhat
from the estimated cost. It is the job of the estimator to minimize the extent of variance between
estimate and actual cost. Any data collection system must be able to recognize that variances exist.
Variability of Estimates:

The following are where cost variances between one estimate and another can occur:

Quantity take off. Labor productivity forecasts.

Material Costs. Work Methods.
Labor Costs. Construction equipment costs.
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Indirect Job costs. Staging and project startup costs.

Subcontractor quotations. Overheads.
Quotations from material suppliers. Profit element.
Unknown site conditions. Contingency and risk allocation.
Locational Factors. Errors in estimate formulation.
Cost associated with the time element of Basis of information used to formulate
the construction project and escalation estimate.
costs. Market forces.

The total cost estimate is made up of numerous smaller cost estimates for each activity required to
complete the overall project. The estimating equation is therefore composed of a series of calculations,
the estimator has to assess and propose a monetary solution. The total cost estimate is the total of all
the minor monetary solutions. Each assessment the estimator performs is based on:
Previously recorded data (historical data) Previous experience of others.
The estimators own past experience. Hunches/intuition.

The final assessment is subjective. The estimator will decide what productivity to allow, or what birr
allowance or unit price to use. This subjective act is the main reason why estimates vary. If you give
identical drawings and specifications to 100 estimators, you will get 100 different cost estimates. Figure
below indicates the factors influencing variance in an estimate.

Basic reasons for variances being introduced into cost estimates – the subjective assessment.

1.4 Cost Engineering Traits

Cost Engineering shares common traits of the following:

Conflicting Issues of quality, size, performance and cost: As projects develop, there is continual
competition among issues of quality, size, performance and cost. Owners want to have the
biggest facility with the best finishes and systems that will perform over time with least possible
amount of money. With these criteria, it is likely that conflicts are bound to arise.
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The design and construction team uses estimates to ensure that good cost information developed and
a feedback loop established so that these conflicts can be addressed as quickly as possible. As project
information becomes available, it is passed through a costing exercise. The owner can then decide to
proceed based on this information or ask for some alteration in the design. The designer can then devise
ways to meet the cost targets. Through this feedback loop, conflicting demands of cost versus
performance can be resolved.
Cost Engineering combines both science normal feature of the design process is that
and art: Cost estimates are a product of earlier stages of design are less precise than
information supplied by the designer, the later stages. Cost information provided at
owner and the suppliers. Experienced Cost schematic and preliminary design will by
Engineers use much judgment in nature be less accurate than the ones
interpreting and configuring this provided at design developments.
information. Cost estimate is based on previous
Cost Engineering does not offer guarantees estimates: A good, accurate estimate does
of costs: Used properly, however, can be not stand alone. It is the product of lessons
important tool in bringing a project under learned from previous estimates.
or at budget. The costs developed during Costing requires standard computing
design and even at the bidding stage are methodology and procedures: As the design
almost never the final and complete costs of proceeds, the level of details increases.
the project. Costing as a consequence becomes more
Costing can only be as accurate as the complex reflecting the many different
information upon which it is based: Cost factors that go into each unit of work.
accuracy depends on many factors. Calculations increase in number and the
Document completeness, data base potential to leave something out becomes
accuracy, the skill and judgment of the Cost greater. Only through adherence to strict
Engineer. methods and procedures that mistakes can
Cost estimate accuracy increases as the be minimize.
design becomes more precisely defined: A
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1.5 The Function of Cost Engineering in Construction

From an owner’s perspective, ascertain Cost estimates form the base core for
the necessary amount required to negotiation between the signing parties
complete the proposed work for his in a contract agreement. The project
decision and arranging finance for the management team often prepares a
same. For public construction works, detailed estimate at this point to verify
cost estimates are required to obtain the accuracy of the bid prices and to
administrative approval, allotment of negotiate with the trade contractors.
fund and technical sanction. Cost engineering can be used by the
It can guide the decision among two or project manager to define the scope of
three possible options. Identifying costs the work for each subcontractor as well
early facilitates sound decision making, as determine fair pricing. Because each
but such estimates will have little hard estimate is broken down by units of
design information. work, the project manager can extract
Cost Engineering offers guidelines to the information regarding quantity and cost
designer, who selects materials and sizes for the particular situation. Cost
the project to fall within the owner’s Engineering can also be used as a
budget. As the project proceeds, the planning tool. Procurement specialists
design must be continually compared to use to define how much of a given item
this budget. If it begins to exceed the will need to be purchased. In the field,
budget, the designer must determine the superintendents consult the estimate to
best alternatives for cost reduction. determine the total quantity of work to
At the end of the design process, be built in a particular location, the total
estimates are prepared to figure the bid number of hours needed to do the work,
prices of individual contractors under and the materials required.
the competitive bidding.
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Cost Engineering can also help to fix up Estimate is required to invite tenders and
completion period from the volume of prepare bills for payment.
works involved in the estimate. Cost Engineering helps for valuation of
Cost Engineering helps to justify existing property which itself is for a
investments from cost-benefit analysis. number of purposes.
1.6 Considerations in Costing
Project price is affected by the size of the project, the quality of the project, the location, construction
time, and other general market conditions. The accuracy of costing is directly affected by the ability of
the Cost Engineer to properly analyze these basic issues.
1.6.1 Project Size
The size of the project is a factor of the owner’s needs. At the conceptual stage, size is an issue of basic
capacity, such as apartment units for a real estate developer or kilometers of roadway for highway
engineering. As the project becomes better defined, its size begins to be quantified more accurately.

The principle of economy of scale is an important factor when addressing project size. Essentially as
projects get bigger, they get more expensive but at a less rapid rate. This occurs because the larger the
project, the more efficiently people and equipment can be used. Also as people repeat task, they get
better and faster, reducing the cost of labor. On large commercial building and heavy engineering
projects, worker productivity is plotted into learning curves. Cost Engineers treat project size by
establishing tables that recognize the typical size of a project and a respective price and then adjust up
or down from this norm.

As operations continue, crews learn so that the time required to complete the next like unit is less. In
general for buildings built to the same specification in the same locality, the larger building will have
the lower unit area cost. This is mainly to the decreasing contribution of the exterior walls plus the
economy of scale usually achievable in larger buildings. As an example, the area conversion scale
shown below will give a factor to convert costs for the typical size building to an adjusted cost for the
particular project.
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Fig: Typical project size and method for modifying for economy of scale.

Building Type Median Cost per M2 (USD) Typical Size Gross M2

Apartments 550 1890

Banks 1233 378
Colleges 1074 4,500
Gymnasiums 770 1728
Example:
Determine the cost per m2 of 3780 m2 apartment building.
Area Conversion Scale = Proposed Area/ Typical Size = 3780/1890 = 2.0
From the conversion curve, one can get a cost multiplier index of 0.95

Adjusted Cost per m2 = 0.95 x 550 = 522.5 USD

1.6.2 Project Quality

An owner may require a high quality project to create a specific image or may need facilities for a
specific use. Whatever the reason, the consequences are always the same: an increase in costs. Early in
the project, the Cost Engineer must discuss expectations of quality with the users, the designers and
applicable government agencies.
1.6.3 Project Location
Constructing a facility in a locality is very different from constructing one on other areas. The
differences are in labor costs, the availability of materials and equipment, delivery logistics, local
regulations, and climate conditions. Material costs are a factor of availability, competition, and access
to efficient methods of transportation. Labor costs, particularly unionized labor, are a factor of the
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strength of the local bargaining unit. The cost of labor is also a factor the degree of sophistication and
level of training found at the project location. On some projects the numbers and the skill levels of
workers required are not available locally and must be imported. Understanding the need for such
importation adds significantly to the accuracy of an estimate.
Local conditions can influence the costs of the project. The need for citizen involvement, local taxes or
fees, and government requirements all can cost the project money. Extreme climatic conditions,
political instability, and earthquake zones all add to the cost in ways that may not be entirely obvious
without some investigation.
The cost of labor and material in different locations can be predicted by establishing location indices
for different cities and parts of the country. An index is created for a particular city by comparing the
cost of labor, equipment and material for that city to the national average. This allows an estimator
using national average costs to adjust the estimate to a particular location. Most design and
construction companies have developed an accurate record of location indices, which they use for their
pricing, or they buy this cost data from national pricing suppliers. To predict the costs of other local
factors, such as political instability, a company either uses its own experience in the locale or teams up
with a local partner who knows how the local atmosphere can affect project costs. Various locational
difficulties are described:

Remoteness Design considerations (related to

Confined sites location).
Labor availability Vandalism and site security
Weather
Remoteness:

A remote construction site, for example, a project site located in valleys of Gibe River, poses a
contracting organization with a difficult set of problems to cope with.

Communication Problems: If adequate communications such as telephone are not available,

then a radio or cellular-type installation is required. A telephone is a requisite to any
construction project: lack of communication during the construction process can result in major,
costly errors. In addition, because the project location is further away from the head office,
additional long-distance telephone charges will be incurred.
Transportation Problems: All material and labor must be transported to the building site. If the
transport route is poor (if, indeed, any route exists at all), then delays in material deliveries may
occur; large vehicles may damage narrow bridges (case of Gilgel Gibe Hydro-power project) or
other items of property, whose replacements costs must be borne by the contractor. It may be
necessary for the contractor to widen the existing route or construct a bridge to allow material
trailers access into the job site. The route that is proposed should be studied carefully by the
estimator. Existing capacity of existing bridges on route should be established to verify if
equipment loads can be accommodated of if the bridge needs to be strengthened by the
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contractor. Finally, the cost of hauling items of equipment to the job site increases as the distance
increases. Given these considerations, the requirement for management to make the correct
equipment selections becomes very important.
Increased Material Cost: Increased material cost is primarily due to increased transport charges
such as when distance for haulage from the depot to a remote job site is longer than the haulage
associated with other construction projects the estimator has previously worked on. Avery4
found that if the material was fragile or hazardous, then transport costs fluctuated widely
depending on distance. He also discovered that the bulk materials with low initial cost, such as
sand and gravel, tend to be the most adversely affected by distance and difficult transport
conditions. Ferry crossing or bridges with tolls increase the basic cost of materials.
Power and Water: Power and water are a necessity for building construction. Water is needed
for materials such as concrete, for cleaning the building, and for many other uses. Salt water is
not acceptable in most specifications for concrete or mortar mixing, so remote projects without
a convenient domestic water supply, even if the site has access to thousands of gallon of
seawater; require water to be trucked to the job site. The cost of water depends on the hauling
costs. In some instances wells can be dug to pump water to the surface; of course, the costs
involved must be considered in the estimate. If no power source is available, then power must
be provided by generators.

Confined Sites

The problems associated with confined sites generally take the form of congestion resulting in restricted
working areas resulting in low productivity from labor and equipment. These difficulties are generally
associated with downtown sites, but this need not always be the case.

In extreme cases, congestion can limit the choice of work methods, types of equipment used, and size
of crew to be employed. Careful investigation of the problems likely to be associated with each
particular site will allow a realistic assessment of factors such as productivity to be made. Project
startup requires a careful utilization of resources in order to provide production outputs that maximize
profits. Confined sites create logistical problems. Material movement should be minimized: each time
an item of material is moved, its cost to install in place increases. When materials are delivered to a
confined site, the material should be used immediately. If this is not possible, a storage area should be
available to receive the material, or, if possible, the material should be offloaded directly at its intended
utilization point.
The estimator needs to consider the unique logistical problems associated with each job site. These
problems, including restricted access, restricted material lay down area, restricted equipment storage
areas, and restricted location for site trailers, affect the type of equipment that can be used, the effective
management of the job, the worker productivity, and the amount of labor involved in handling
material. Since confined sites nearly always pose logistical problems, the unit prices used by the
estimator must account for the increased costs.
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Labor Availability

Each location has varying amount of available skilled and unskilled labor, depending on the condition
of the local economy. If labor of any kind is not available locally (as may be the case in remote areas),
then labor must be imported from other location. In order to move labor from one area to another, a
financial incentive is usually required. The magnitude of this incentive will vary depending on the
state of the labor market. If labor is imported, accommodations may have to be provided. Labor camps
comprising full time kitchen staff, dormitories, leisure facilities, etc., have been set up on major
construction project to house the contractor’s labor force. The leisure facilities keep the labor force
relaxed and occupied during any rest periods. Living and working on a remote construction site can
be very demoralizing, after a while, and by keeping the morale level high, labor turnover is reduced.
Generally, the cost of importing labor will follow the laws of supply and demand.

Weather

Since the building process is highly weather dependent, extreme conditions can greatly affect
building costs. These extreme weather conditions include large amount of rain or snow, occurrences
of ice and frost, and high humidity and heat. Their effects on cost include the following situation.
Concrete pours in temperatures below 40 degrees Fahrenheit require special precaution. With cold
weather concreting, the cost of admixtures, insulation the formwork, removing ice from formwork,
and protecting the freshly placed concrete from dropping below the specified temperatures must be
taken in to account by the estimator. Not only does cold weather affect concrete, but hot weather
concreting has its associated problems as well. During periods when the temperature exceeds 80
degrees Fahrenheit, special precautions are required to reduce and maintain the concrete below this
temperature. For example, ingredients such as the water may be cooled or chopped ice can be
utilized. Another alternative is to use liquid nitrogen to cool the concrete. Admixtures and low heat
cement can be used to control the set and hardening times of the concrete to achieve the design
strength and quality. All these precautions and procedures increase the cost of pouring, placing, and
curing concrete.
Exposed sites may have problems associated with high winds, which affect crane and hoisting
operations, and the contractor’s dust control program. Additional temporary bracing to partly
completed structures may be required to prevent a collapse due to high wind gusts. In areas where
hurricanes occur, the estimator should consider the cost of temporary measures required to prevent
damage to a structure before, during, and after a hurricane. It would be prudent to allow for the costs
involved in bracing, tieing down structures providing sand banks, garaging equipment, and storing
particular materials such as doors and windows off the job site, unless safe, dry, and secure storage
exists on the project.
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Labor productivity is also associated with the weather. During poor weather when it is cold, damp,
and windy, the morale of workers exposed to adverse elements, drops, which in turn results in a decline
of productivity. During days when it may be impossible to work, such as during a torrential rain, the
productivity is zero.

Design Considerations (related to location)

The location of a project has certain aspects that must be considered by a designer. For example, in
historic sites all designs must harmonize with the existing historical buildings (example around
Lalibela). Planning committees may dictate the material selections and configurations that designers
must abide by to suit certain local conditions.

These design considerations can create estimating problems in historic districts. The estimator must
know if the materials specified are, in fact, locally available of if local labor exists to carry out
complicated historical work, such as ornate plaster work; if not, a specialist will be required.
Traditional building techniques tended to be labor intensive. If the same techniques must be repeated,
then the estimator must be familiar with the procedures involved. If workers are required to use
traditional, building methods with which they are unfamiliar, then a learning curve cost needs to be
built into any unit price.

The local climate also dictates the designer’s choices in mechanical and electrical systems and in the
choice of materials and design of the building envelope. Material resources will fluctuate from location
to location throughout the country, and the designer must investigate what materials are locally and
economically available.

Finally, each locality tends to have its own construction trade practices, and the estimator should be
familiar with them.

Vandalism and Site Security

Site integrity is an important problem in urban areas. Protective measures can be expensive, for
example, when 24-hour guard service and perimeter enclosures, are required. The level of security
will depend on the risk to the project from the surrounding neighborhood. The local police should be
consulted.

1.6.4 Construction Time

A project is estimated at a given point in time, but usually the actual procurement and field
construction occur at some point in the future. Sometimes this future can be years away, especially in
the case of a very large or phased project. The estimate, then, must take into consideration when the
actual project will be built. Labor and material costs usually escalate in time; so by examining past
and current trends, the estimator can predict where these costs will be at the time of actual
construction.
Other:
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An estimator who accurately incorporates project size, project quality, location, and time has an
estimate that reflects the fair value for the project. In a normal market without any unusual
circumstances, this estimate should reflect the price that is paid.

Market conditions, however, shift; and owners, designers, and contractors all look at a given project
from different perspectives. In a market without much work, contractors may bid a project at cost or
with little profit to cover their overhead and keep their staff employed. On complicated projects,
contractors may bid the work low in hopes of making significant profit on future changes. Conversely,
they may bid a work high to cover the increased risks of a complex project. It is not unusual for
contractors to offer very competitive prices when they hope to enter a new market or establish a
relationship with a new owner. Such issues are very difficult to quantify but should be considered in
the preparation of the estimate. They are usually treated as a percentage applied at the end of the
estimate, included in either overhead or profit or in a final contingency.

ACTIVITY-1:

Define cost engineering.

Discuss on depreciation/depletion costs.
What is residual value?
What is basic material price index?
Define direct cost of a project.
Define overhead cost of a project.
Discuss the most common traits in cost engineering.
List and discuss the main considerations in cost estimating.
What is cost benefit analysis?
 20

Chapter Two
2. Construction Pricing and Contracting
2.1 Tendering Policy and Procedure

Because of the unique nature of construction projects, it is almost imperative to have a separate price
for each. The construction contract price includes the direct project cost including field supervision
expenses which are often referred as site overhead costs plus the markup imposed by contractors for
general overhead expenses and profit. For any firm to operate its business in a satisfactory manner, it
is necessary for its policy directors to establish a clear objectives or a strategy. In construction pricing,
it is required for an organization to have a continual process of determining the missions and goals of
an organization within the context of its external environment that create opportunities and threats,
and its internal environment which are expressed as strengths and weaknesses. This strategy often
depends upon many factors which the management body of the contractor has to make a thorough
analysis of the situations at hand and take up appropriate competitive advantage. Among the factors
that one has to consider during construction pricing include:

Work at hand in reference to contractor’s The ultimate goal of the financial manager
assets deployed to the work, (profit maximization or wealth
The geographical areas in which the firm maximization),
will operate, Projected risks and uncertainties of the
Type of structure the organization seek to project,
control, Form of the bid: (open, short-listed, pre-
Type of services the organization is to qualification, etc) – please refer the diagram
deliver, in the next page.
Type of client the organization is to favor, (
private, local authority, community
services, )
It will then be the task of the executive management to make internal analysis of its strength and
weakness to hold the best advantage. Keep organization’s strength to exploit the opportunities and
minimize the weakness, say employing the available resources of the firm, to overcome external
threats.
2.1.1 Bidding Strategy
In a competitive tendering situation, the contracting firm is constantly facing a tradeoff of submitting
a high price for getting profit and the resulting shortage of work, with that of a low price for winning
the contracts, but allow little profit margin. A bidding strategy may be evolved for determining the
optimum bid, which will be the relationship between maximum profit and the probability of being the
lowest tenderer.
 21

As the basis for this, it is necessary to analyze the bidding pattern of competitors, and apply statistics
rule for comparing the result with the firm’s own estimated costs over a number of contracts. A
competitor’s bid could be obtained from the list of tender results and a bidding pattern established.

Fig: Forms of Bid

In practice, because of contractor’s marketing policies, a contractor will find he is in competition with
a limited number of firms for any project in the locality. A bidding pattern could be worked out for his
major competitors.

If the contractor were able to identify the competition, an optimum bid could be ascertained by
combining the probability curves (the Z-distribution) and developing a bidding curve using a linear
regression line for this situation. The following steps shall be followed by a competing firm to assume
a bidding strategy.

i) Preparation of a database of price quotations offered by competing bidders. One has to

collect and record the tender sum of each competitor from the tender opening sessions. At
 22

least the winning price and the tender sum of the contractor under consideration have to be
recorded and put in a database file for further undertakings.
Example:

Contract No. Contractor’s Quotation Least Bidder’s Quotation

(Birr) (Birr)

1 500,000 450,000

2 750,000 750,000

3 1,000,000 800,000

4 625,000 600,000

5 850,000 800,000

6 250,000 250,000

7 400,000 350,000

8 1,200,000 1,000,000

9 900,000 875,000

10 1,100,000 950,000

ii) After having sufficient records of the respective bid prices, one could plot the information
on a scattered diagram.

X-axis: Contractor’s own tender prices

Y-axis: The least bidder and most responsive bidder’s price

For the example in (i), the scattered diagram looks the following:
 23

1,200,000

1,000,000

800,000

600,000 Series1
Scattered Diagram

400,000

200,000

0
0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000

Contractor’s Own Price

iii) Draw the most likely curve referred as a regression line. The simplest to draw is a linear
regression line that can be represented by:

Y = mX + b

Where: Y: refers to the most likely winning price,

X: refers to contractor’s tender prices
m & b are coefficients of the regression line.
m: The slope of the line
b: The intercept of the line.
n : number of samples.

m
n xy    x  y 
b
 y  x    x  xy
2

  
n  x 2   x 
2
n x    x 
2 2

Furthermore, one has to determine the standard deviations, to define the probable region of winning
a tender.
 24

n 1 2
VARIANCE 
n2

s y  m 2 sx2 

Alternatively, Using the Microsoft Excel:

m= INDEX (LINEST(Y values, X values), 1)

b= INDEX (LINEST(Y values, X values), 2)
Sy = STDEVA (Y values)
Sx = STDEVA (X values)

For the example in (i),

m= 0.813, b= 66476.91, Standard deviation = 55509.2

iv) The final step is to decide the probability of winning a tender using the normal distribution.
The chance of winning the tender by offering the most likely price is 50%. A contractor can
increase or decrease the probability of winning the tender using the Z-normal distribution
theory of statistics.

Example: For the example in (i), suppose the contractor’s tender sum amounts to 675,000 Birr.
Determine the rebate to be improvised with 95 % probability of winning the tender.
The most likely winning price, Y = 0.813(675,000) + 66476.91 = Birr 615,251.91:- taken as the mean value
(µ) with a winning chance of 50%.
The Z-values of 95% probability, from the table = 1.645. The relation between Z, and probability in this
case is inverse. Higher probability is achieved by reducing the bid price and hence we need to use the
negative value of what we read from the table.
Yi  
Z

Z= -1.645, µ = 615,251.91 and δ = 55509.2,
Yi = Birr 523,939.28
Rebate (R) = 100% -- (523,939.28/675,000) x100%
= 22.38 % (95% probability of wining)
= 8.9% (50% probability of winning)
2.1.2 Tendering Procedure
In order that the tendering policy of the firm be maintained it is necessary that a procedure for the
preparation of all tenders be established. This will vary with different contractors, depending on size
and personnel, but a basis could follow the stages set out by the Ministry of Infrastructure.
Decision to Tender:
 25

A management decision based on the firm’s position at the time of invitation in relation to:

Production workload, Associated risk,

Future commitments, Prestige, reputation
Market, Estimating workload,
Capital, Time for preparation of tender,
Collection of Information:

If management decides to tender for the project, the estimating staff should assemble information about
project costs. An accurate estimate can only be produced when each element is broken down into its
simplest terms and the cost estimated on factual information. Some of the factors required include:

Time scale for tendering with key dates as mentioned in the invitation to bid,
Examination of contract documents, with preliminaries attached with the tender,
Assessment of client and design team,
Enquiries to suppliers and sub-contractors with a time scale,
Site and locality visit,
Discussion with site management, plant and planning department,
Evaluation of alternatives
Preparation of detailed construction method statement and pre-tender program, developed to
include production outputs, gang sizes, plant details, etc.
Preparation of estimate:

Having assembled all the information, the next task of the estimating staff is to build the cost of the
unit rates. This requires the calculation of all-in rates for labor, plant, materials and extending these,
using the production details from the pre-tender programme. The cost of any on site administration
and services, known as project overheads is also calculated. These net production costs, together with
a project appraisal report are then submitted to management for adjudication.
The tender:

The management of the firm would consider the mark-up required on the estimated production costs,
to cover the firm’s overheads, profit and risk of the tender. These additional costs included, the tender
figure can then be determined and submitted.
Action with tender results:

An analysis of tenders and a comparison of results should be completed for each project to provide a
basis for future bidding strategy. With a successful tender, cost information during the progress of the
work and a final reconciliation of estimated and final account costs should be made.

2.1.3 Firm’s Mark-up target

In a construction firm the financial turnover will be mainly derived from carrying out individual
construction projects in competition with other contractors. It is necessary, therefore, that a policy be
 26

established in tendering so that each project contributes to the firm. This will entail the setting up of a
mark-up target, over the production costs, for all contracts to be undertaken. To determine firm’s mark-
up, it is required establish:

i. Return on Capital Employed (ROCE), which is made to account the following costs:

The average weighted cost of capital ( Interest of capital employed)

Profit margin (dividends, capital reserves...)
Corporate obligations such as taxations and deprecation costs.
Contingencies to cover uncertainties ( Risks)
ii. Annual Turnover on contracts. This can be obtained from the firm’s short term plan committed
or planned for execution in the current year.
iii. General overhead costs (off-site administration): can be identified within a company’s accounts
by items such as rent, telephone charges, electric bills, office equipment hire charges, payment
to staff directors etc. Often it is established in relation with the total turnover planned in the
trading year.

Example:

Assumptions for determination of firm’s mark-up:

Capital Employed: Birr 2,000,000

Turnover on contracts for year: Birr 4,000,000
General overheads: Birr 160,000
Return on Capital Employed 17%

Target: Contracts must contribute (Head office Mark-up)

General overheads Birr 160,000
Return (ROCE) 17% (2,000,000) Birr 340,000
Head office Mark-up = Birr 500,000

Production Costs = 4,000,000 – 500,000 = Birr 3,500,000

Mark-up on contracts = (500,000 / 3,500,000) x 100 = 14.3%
2.1.4 General Overheads
One of the items in the mark-up is general overheads. These are the costs entailed in administering the
company and providing off-site services. They should not be confused with project overheads which
are the costs of administering a project and providing onsite services. The allocation of general
overhead costs to individual projects and the company as a whole is decided by management as part
of their policy.
 27

The general overheads vary with individual firms, but a broad list may include:

Rent, rates on office and yard, Office heating and lighting

Fees, salaries and wages for directors and Insurances on office and staff
office staff, Interest on capital borrowed
Office equipment, stationary, postage,
telephones, cars
Each contract must contribute towards these costs; the usual method of recovery is to express them in
terms of a percentage of a previous year’s turnover.

For example:

If last year’s turnover was Birr 2,000,000 and the fixed costs Birr 160,000 then:

The general overhead cost used = 160000/ 2000000 = 8%

2.2 Contract Provisions for Risk Allocation

One of the factors to be considered by management in assessing the mark-up rate on individual
contracts would be the provision and allocation of risks in a contract. Provisions for the allocation of
risk among parties to a contract can appear in numerous areas in addition to the total construction
price. Typically, these provisions assign responsibility for covering the costs of possible or unforeseen
occurrences. A partial list of responsibilities with concomitant risk that can be assigned to different
parties would include:
Force major (i.e., this provision absolves an owner or a contractor for payment for costs due to
"Acts of God" and other external events such as war or labor strikes)
Indemnification (i.e., this provision absolves the indemnified party from any payment for
losses and damages incurred by a third party such as adjacent property owners.)
Liens (i.e., assurances that third party claims are settled such as "mechanics liens" for worker
wages),
Labor laws (i.e., payments for any violation of labor laws and regulations on the job site),
Differing site conditions (i.e., responsibility for extra costs due to unexpected site conditions),
Delays and extensions of time,
Liquidated damages (i.e., payments for any facility defects with payment amounts agreed to in
advance)
Consequential damages (i.e., payments for actual damage costs assessed upon impact of
facility defects),
Occupational safety and health of workers,
Permits, licenses, laws, and regulations,
Equal employment opportunity regulations,
Termination for default by contractor,
Suspension of work,
Warranties and guaranties
 28

Standard forms for contracts can be obtained from numerous sources, such as the International
Conditions of Contract, FIDIC, Standard Conditions of Contract by Ministry of Works and Urban
Development. These standard forms may include risk and responsibility allocations which are
unacceptable to one or more of the contracting parties. In particular, standard forms may be biased to
reduce the risk and responsibility of the originating organization or group. Parties to a contract should
read and review all contract documents carefully.

All owners want quality construction with reasonable costs, but not all are willing to share risks and/or
provide incentives to enhance the quality of construction. In recent years, more owners recognize that
they do not get the best quality of construction by squeezing the last cash of profit from the contractor,
and they accept the concept of risk sharing/risk assignment in principle in letting construction
contracts. However, the implementation of such a concept in the past decade has received mixed
results.
Those public and private owners have found that while initial bid prices may have decreased
somewhat, claims and disputes on contracts are more frequent than before, and notably more so in
public than in privately funded construction. Some of these claims and disputes can no doubt be
avoided by improving the contract provisions.
Since most claims and disputes arise most frequently from lump sum and unit price contracts for both
public and private owners, the following factors are particularly noteworthy:
Unbalanced bids in unit prices on which periodic payment estimates are based.
Change orders subject to negotiated payments.
Changes in design or construction technology.
Incentives for early completion and penalties of damage for late completion.
Exceptional climatic condition or physical obstruction beyond the capacity of an experienced
contractor.
An unbalanced bid refers to raising the unit prices on items to be completed in the early stage of the
project and lowering the unit prices on items to be completed in the later stages. The purpose of this
practice on the part of the contractor is to ease its burden of construction financing. It is better for
owners to offer explicit incentives to aid construction financing in exchange for lower bid prices than
to allow the use of hidden unbalanced bids. Unbalanced bids may also occur if a contractor feels some
item of work was underestimated in amount, so that a high unit price on that item would increase
profits. Since lump sum contracts are awarded on the basis of low bids, it is difficult to challenge the
low bidders on the validity of their unit prices except for flagrant violations. Consequently remedies
should be sought by requesting the contractor to submit pertinent records of financial transactions to
substantiate the expenditures associated with its monthly billings for payments of work completed
during the period.

One of the most contentious issues in contract provisions concerns the payment for change orders. The
owner and its engineer should have an appreciation of the effects of changes for specific items of work
 29

and negotiate with the contractor on the identifiable cost of such items. The owner should require the
contractor to submit the price quotation within a certain period of time after the issuance of a change
order and to assess whether the change order may cause delay damages. If the contract does not contain
specific provisions on cost disclosures for evaluating change order costs, it will be difficult to negotiate
payments for change orders and claim settlements later.

In some projects, the contract provisions may allow the contractor to provide alternative design and/or
construction technology. The owner may impose different mechanisms for pricing these changes. For
example, a contractor may suggest a design or construction method change that fulfills the
performance requirements. Savings due to such changes may accrue to the contractor or the owner, or
may be divided in some fashion between the two. The contract provisions must reflect the owner’s risk-
reward objectives in calling for alternate design and/or construction technology. While innovations
are often sought to save money and time, unsuccessful innovations may require additional money and
time to correct earlier misjudgment. At worse, a failure could have serious consequences.

In spite of admonitions and good intentions for better planning before initiating a construction project,
most owners want a facility to be in operation as soon as possible once a decision is made to proceed
with its construction. Many construction contracts contain provisions of penalties for late completion
beyond a specified deadline; however, unless such provisions are accompanied by similar incentives
for early completion, they may be ruled unenforceable in court. Early completion may result in
significant savings, particularly in rehabilitation projects in which the facility users are inconvenienced
by the loss of the facility and the disruption due to construction operations.

2.3 Construction Contracts

While construction contracts serve as a means of pricing construction, they also structure the allocation
of risk to the various parties involved. The owner has the sole power to decide what type of contract
should be used for a specific facility to be constructed and to set forth the terms in a contractual
agreement. It is important to understand the risks of the contractors associated with different types of
construction contracts.

2.3.1 Lump Sum Contract

In a lump sum contract, the owner has essentially assigned all the risk to the contractor, who in turn
can be expected to ask for a higher markup in order to take care of unforeseen contingencies. Beside
the fixed lump sum price, other commitments are often made by the contractor in the form of submittals
such as a specific schedule, the management reporting system or a quality control program. If the actual
cost of the project is underestimated, the underestimated cost will reduce the contractor's profit by that
amount. An overestimate has an opposite effect, but may reduce the chance of being a low bidder for
the project.
 30

2.3.2 Unit Price Contract

In a unit price contract, the risk of inaccurate estimation of uncertain quantities for some key tasks has
been removed from the contractor. However, some contractors may submit an "unbalanced bid" when
it discovers large discrepancies between its estimates and the owner's estimates of these quantities.
Depending on the confidence of the contractor on its own estimates and its propensity on risk, a
contractor can slightly raise the unit prices on the underestimated tasks while lowering the unit prices
on other tasks. If the contractor is correct in its assessment, it can increase its profit substantially since
the payment is made on the actual quantities of tasks; and if the reverse is true, it can lose on this basis.
Furthermore, the owner may disqualify a contractor if the bid appears to be heavily unbalanced. To
the extent that an underestimate or overestimate is caused by changes in the quantities of work, neither
error will affect the contractor's profit beyond the markup in the unit prices.
For example if the contractor feels that the masonry work for construction of retaining wall for a project
is not properly defined and underestimated in the design, he can raise the unit prices, say from 250 Birr
per m2 to 400 Birr per m2 and lowering the unit prices on other tasks to take up competitive advantage
of the bid. The following table shows the effect of “unbalanced bid” among competitors.

Price as per Tender:

Description Estimated Unit prices (Birr) Tender Amount ( Birr)

Quantity Contr. A Contr. B Contr. A Contr. B

Masonry Works 50 m3 250 400 12,500 20,000

Re. Bars 5000 kg 8 6 40,000 30,000
52,500 50,000

Actual Price during Construction

Description Actual Quantity Unit prices (Birr) Actual Amount ( Birr)
Contr. A Contr. B Contr. A Contr. B

Masonry Works 200 m3 250 400 50,000 80,000

Re. Bars 5100 kg 8 6 40,800 30,600
90,800 110,600

The table clearly shows the effect of inaccurate estimation in changing the ranking positions of
competitive contractors. Contractor B seems the lowest bidder in table 1 by taking the advantage of the
underestimated quantity of masonry work. As construction progresses, the risks of the
underestimation will be transferred to the owner which is contrary to the lump sum contract provision,
 31

where the contractor will be responsible to absorb all risks associated with inaccurate estimation of
works.

2.3.3 Cost plus Fixed Percentage Contract

For certain types of construction involving new technology or extremely pressing needs, the owner is
sometimes forced to assume all risks of cost overruns. The contractor will receive the actual direct job
cost plus a fixed percentage, and have little incentive to reduce job cost. Furthermore, if there are
pressing needs to complete the project, overtime payments to workers are common and will further
increase the job cost. Unless there are compelling reasons, such as the urgency in the construction of
military installations, the owner should not use this type of contract.

2.3.4 Cost plus Fixed Fee Contract

Under this type of contract, the contractor will receive the actual direct job cost plus a fixed fee, and
will have some incentive to complete the job quickly since its fee is fixed regardless of the duration of
the project. However, the owner still assumes the risks of direct job cost overrun while the contractor
may risk the erosion of its profits if the project is dragged on beyond the expected time.

2.3.5 Cost plus Variable Percentage Contract

For this type of contract, the contractor agrees to a penalty if the actual cost exceeds the estimated job
cost, or a reward if the actual cost is below the estimated job cost. In return for taking the risk on its
own estimate, the contractor is allowed a variable percentage of the direct job-cost for its fee.
Furthermore, the project duration is usually specified and the contractor must abide by the deadline
for completion. This type of contract allocates considerable risk for cost overruns to the owner, but also
provides incentives to contractors to reduce costs as much as possible.

2.3.6 Target Estimate Contract

This is another form of contract which specifies a penalty or reward to a contractor, depending on
whether the actual cost is greater than or less than the contractor's estimated direct job cost. Usually,
the percentages of savings or overrun to be shared by the owner and the contractor are predetermined
and the project duration is specified in the contract. Bonuses or penalties may be stipulated for different
project completion dates.
2.3.7 Guaranteed Maximum Cost Contract
When the project scope is well defined, an owner may choose to ask the contractor to take all the risks,
both in terms of actual project cost and project time. Any work change orders from the owner must be
extremely minor if at all, since performance specifications are provided to the owner at the outset of
construction. The owner and the contractor agree to a project cost guaranteed by the contractor as
maximum. There may be or may not be additional provisions to share any savings if any in the contract.
This type of contract is particularly suitable for turnkey operation.
 32

ACTIVITY-2

Discuss on bidding types/strategy.

Discuss on the concept of a firm’s markup.
What is force major?
What is risk allocation?
Discuss how risk allocation provisions in contracts can mitigate risk.
Discuss on the types of contracts.
Discuss the difference between lump sum contract and unit price contract.
 33

Chapter Three
3. Cost Estimating Approach
3.1 Types and Methods of Estimates
3.1.1 Approximate Estimate
This is made to find out an approximate cost in a short time and thus enable the responsible authority
concerned to consider the financial aspect of the scheme for according sanction to the same. Such an
estimate is prepared adopting different methods for different types of works. During preparation of
the estimate detailed surveying, design, drawings etc., are not required. This estimate is prepared after
preliminary investigation, preliminary surveying and a line sketch of the drawing according to the
requirements. Rates are determined either from practical knowledge or from records of similar works.

The estimate is accompanied with a brief report stating the sources of proposal, necessity and demand,
provisions or accommodations made, viability, basis of the estimate, rates and how the expenditure
involved can be met. Beside the report the estimate is provided with a line plan, site or layout plan, soil
testing by trial boring etc…
Preliminary Estimates: Early in the planning stages, both building owners and designers must agree on
an anticipated cost of the project at bid award. Preliminary Estimates are employed in the early
planning phases of a proposed project to match an owner's needs, expressed as written programmatic
requirements, with budget constraints in order to establish its overall scope (size) and quality
expectations. Estimate comparisons at this stage are especially valuable in evaluating the feasibility of
strategic alternatives being considered to satisfy current and projected space requirements (e.g. new
construction versus renovation, or lease space). As the design is not fully developed at this stage, a
contingency is typically included in the order of 15%.
Intermediate Estimates: After proceeding with a preferred course of action, Intermediate Estimates are
employed at various stages of project design development to maintain accountability for initial budget
projections and as a means of evaluating competing alternative construction assemblies, systems, and
materials. On large projects it is common practice for an owner to employ a construction manager or
professional estimator to continually update project estimates and provide feedback on budget impacts
of decisions on major design elements. As the design progresses, the contingency can be.

Purpose of approximate estimate:

Approximate estimate is worked out before preparation of detailed estimate of a work or a project to
serve mainly for the following purposes:

To investigate feasibility: An approximate to take up such a project considering

estimate of a project gives an idea for the availability to fund can be ascertained.
probable expenditure in a short time. From the To save time and money: Before having any
outline idea of expenditure the practicability rough idea of financial implications if detailed
 34

drawings, specifications and detailed Adjustment of Planning: For unavoidable

estimates are prepared, spending much time, projects approximate estimates for a number
labor and money and finally the project is of alternatives for the original work after
rejected due to unexpected difference between adjustment of sketch of the intention along
the amount of the detailed estimate and the with sketch reports are required for study.
availability of fund then the entire time and From these approximate comparative
money are lost. So it is a general procedure to estimates, a decision is made to select the
prepare a preliminary estimate before sketch for preparation of its detailed design
drawing up detailed estimate for a project. and estimate.
To investigate benefit and comparison of cost To obtain administrative approval: For
with utility: Where there is no scarcity of fund government or public body projects
but it is intended to know readily whether the approximate estimate with a brief report and
investment shall be ideal then approximate site plan has to be submitted to obtain
estimated cost of the project is drawn up and administrative approval to proceed with
compared with the income or benefits availed detailed with detailed investigation and
from such expenditure. In case the preliminary preparation of detailed estimate.
studies from the preliminary estimate show For insurance and tax schedule: For insurance
the investment returns more than the and tax schedule, the value of a property or a
investment, then approval is given for project is drawn up from the approximated
expenses to prepare the detailed estimate of cost estimate.
the project.
3.1.2 Detailed Estimate
Final Estimates: As the design is completed a detailed pre-bid estimate can be prepared. At this stage
the contingency would be reduced to zero. The estimate should be organized in the same format as
required of the bidders, which typically is the unit price bill of quantity format. This then allows for a
comparison of the final estimate with the bids received and can aid in negotiating with the lowest
bidder. In addition, having the final estimate and bids in the same format facilitates the development
of a cost database for use in planning future projects.

Estimating Methods
There are four primary methods used to estimate construction costs. Those methods are known as:
Project Comparison Estimating or Assembly & System Estimating, and
Parametric Cost Estimating, Unit Price & Schedule Estimating
Area & Volume Estimating,
Each method of estimating offers a level of confidence that is directly related to the amount of time
required to prepare the estimate: fig A
 35

Fig A: Relative Accuracy of Estimate Types

(Courtesy of From Concept to Bid…Successful Estimating Methods by John D.
Bledsoe)
Graph of Relative Accuracy of Estimate Types – comparison of relative accuracy and time spent in
preparing the estimate. From least accurate and shortest time spent to most accurate and longest
time spent: Preliminary or Project Comparison Estimate (hours), Square Foot and Cubic Foot
Estimate (hours-days), Assembly and System Estimate (days), Unit Price and Schedule Estimate
(weeks).

Project Comparison Estimating or Parametric Cost Estimating is often used in early planning stages
when little information is known about the program other than overall project parameters. This method
is sometimes called a “preliminary “or "ballpark" estimate and has no better than 15% to 25% accuracy.
Project comparison estimating uses historical information on total costs from past projects of similar
building type. For example, the number of beds in a hospital, or number of spaces in a parking garage,
or number of courtrooms in a courthouse can form the basis of a project comparison estimate by
comparing them to similar scope projects recently done in the same geographic region.
This estimating method requires the assumption of an approximate gross area for the proposed work
and a sufficient historical record of similar building types. The greater the number of prior project
combinations for which scope and prices are known, the easier it is to perform Project Comparison
Estimating. Fig. B illustrates an example of regression analysis used to develop a project comparison
estimate. The scattered points in the figure show the combinations of overall project size and cost. The
line shown is the "best fit" of a linear relationship between size and construction cost and may serve to
predict a preliminary budget. The distances between the line and the points give a visual impression
of the statistical confidence of the estimate.
 36

Fig. B: Project Relative Accuracy of Estimate Types

(Courtesy of From Concept to Bid…Successful Estimating Methods by John D. Bledsoe)

Line graph of the Range of Costs compared to the approximate gross area in thousands of square
meters for similar building types- graph begins roughly at a gross area of two thousand square
meters at a cost of under two million and increases at an incremental rate twenty thousand square
meters at a cost of ten million.

Square Foot & Cubic Foot Estimates are another method of developing both preliminary and
intermediate budgets based on historical data. This method is effective in preparing fairly accurate
estimates if the design is developed enough to allow measurement and calculation of floor areas and
volumes of the proposed spaces. There are several historical databases available to support this method
of estimating providing unit costs that are adjusted annually and many of the large estimating firms
maintain their own databases. More accurate estimates made with this method make adjustments and
additions for regional cost indices, local labor market rates, and interpolation between available cost
tables. Further adjustments may be made to account for other unique aspects of the design such as
special site conditions or design features being planned. In addition, the estimate can develop overall
"core and shell" costs along with build-out costs of different space types, allowing for relative ease of
determining the impact of changes to the program. Estimates made with this method can be expected
to be within 5% to 15% of accurate.
Assembly & Systems Estimates are intermediate level estimates performed when design drawings are
between 50% and 75% complete. Assemblies or systems group the work of several trades or disciplines
and/or work items into a single unit for estimating purposes. For example, a foundation usually
requires excavation, formwork, reinforcing, and concrete— including placement and finish— and
backfill. An Assembly & Systems estimate prices all of these elements together by applying values
available in assemblies cost data guides. Estimates made with this method can be expected to be within
10% of accurate.
 37

Unit Price and Schedule Estimating, the work is divided into the smallest possible work increments,
and a "unit price" is established for each piece. That unit price is then multiplied by the required
quantity to find the cost for the increment of work. This calculation is often called "extending". Finally,
all costs are summed to obtain the total estimated cost. For example, the cost to erect a masonry wall
can be accurately determined by finding the number of bricks required and estimating all costs related
to delivering, storing, staging, cutting, installing, and cleaning the brick along with related units of
accessories such reinforcing ties, weep-holes, flashings and the like. This method of estimating
provides the most accurate means of projecting construction costs, beyond which accuracy is more
likely to be affected by supply and demand forces in the current market.

It is the task of the estimator to predict the cost of construction for the items of finished works presented
in the bill of quantities. An accurate cost prediction can only take place when each item has been
analyzed into its simplest element and the cost methodology estimated on the basis of factual
information.

The planning department of the firm does the analysis of the physical resources required for the project
and the deployment of these resources. Pre-tender program will be prepared after consultation with
other relevant departments and evaluation of alternate construction methods and sequences. The
program would be presented as a network or bar chart to show deployment of resources to
constructional elements on a time scale. The amount of detail developed would depend on the
complexity of the project and the time available for preparation. It should show the detailed labor and
plant requirements for each operation and the production outputs anticipated for these resources. A
schedule of labor and plant requirements is sometimes prepared to amplify the program.

The task of the estimator is to evaluate the cost of the resources from the program and to build up a
unit rate for each finished work item. A fundamental principle is that unit rates should be prepared
net. A unit rate prepared on this methodology will take into account methods of construction and all
circumstances which may affect the execution of work on the project. It will consist of a prediction of
the cost of the physical resources and mark-up by management. These physical resources are: Labor,
materials, and plant.
Disposition of the Cost Calculation

I. Direct itemized costs

Costs that can be allocated directly to a product

a. Material costs

Construction/Building material Loading, unloading and transportation

Operating supplies costs
Wastages
b. Labor costs
 38

The real challenge in pricing construction work is the computation of labor and equipment costs. These
are the categories of construction expense that are inherently variable and the most difficult to estimate
accurately because of human variance and external conditions. To do an acceptable job of establishing
these costs, the estimator must make a complete and thorough job analysis, maintain a comprehensive
library of costs and production rates from past projects (historical data), and obtain advance decisions
about how construction operation will be conducted.
Labor costs include:
Standard wages Social Service payments
Extra pay Supplements
Supplementary pay Other payments
c. Equipment costs:
All costs for commissioning /holding and operation of the equipment
Ownership of plant
Hire of plant
All items of mechanical plant should be estimated in terms of all-in rate and a production output. In
the case of hired plant, the standing costs will be comparable to the hire charge. The main factors in
building up a rate will be:

Standing Costs: includes capital sum based on purchase price and operating cost,
maintenance, tax and insurance
Operating Costs: operators cost, fuel, consumable stores
 39

The diagram below summarizes the components of unit rate build-ups.

UNIT RATE

BUILD UPS

LABOR MATERIAL PLANT

ALL IN OUTPUT GANG HIRE OPERATOR FUEL ATTEND

LABOR CONSTANT RATE ANT
RATE COST COST COST
BUILD UPS LABOR
COST
PET UNIT

SUPPLY COST UNLOADING WASTE

ALLOWANCE PLANT COST
DELIVERED TO COSTS
LABOR COSTS SITE

MATERIAL
COST
ON SITE

MATERIAL
COST

UNIT RATE
COST
PER UNIT OF
MEASURE

d. Costs for sub-constructor

If the work is to be subjected to a nominated sub-contractor, the cost shall be determined and separately
established as a sub-contractor fee. Example:
Marble cladding
Supply and fix items (aluminum frames)
Furniture etc.

II. Indirect Costs

The project overheads are the cost of administering a project and providing the general plant, facilities
and site based services. They consist of the items that cannot be satisfactorily allocated to individual
unit rates of finished work. The cost of some of the project are time related and will be estimated in
terms of the contract period or length of time on site and the all-in rate for a unit of time, the information
 40

on time being obtained from the pre-tender program. Other project overheads are value related and
will not be able to be evaluated until after the adjudication process by management.

a. Site overhead costs

Time-independent costs

Costs for site plant/site installations Operation risks

Cost for site facilities Special costs
Engineering and controlling
Time-dependent costs

Commissioning /holding costs

Operating costs
Costs for contractor’s agent
b. General overhead costs
c. Risks and profit
Direct cost + Indirect cost = bid sum
+Value-added Tax (VAT)
Bid sum inclusive turnover tax /vat

Direct cost + Site overhead Cost = Production cost

Production cost + General overhead cost = Self-costs
Self- costs + Risk& profit = Bid sum
Bid sum + Vat = Bid sum inclusive vat.
Execution of the Cost Calculation

a) Construction Material Costs

Cost of all material which will be part of the building. What is the required information?

Quantity of material required to produce a unit amount of itemized work

Basic price (Prime cost) at the source of material
Transport, loading and unloading to the site
Waste/loss (e.g. Breaking, rupture, defective material, wastage etc).
Ex. Calculation of material costs for 1m3 of C-25 grade concrete. Required information for the
calculation of material cost

Type and quantity of materials for a unit amount of work.

Basic price including transportation, loading and unloading of materials.
Loss or wastage amount.
Example

1) Calculation of the material costs of 1m3 concrete C-25 grade given.

 41

1Qtl of cement at Mugher -55 Birr 1m3 water 1 Birr

1truck of Sand (13 m2 ) from source to Site Transportation cost 0.07 Birr/Qtl/Km
1500 Birr Wastage 5%
1 truck of gravel (6m3) from source to site
800 Birr
Type of material Unit Qty Rate (Birr) Cost/Unit (Birr)
Cement Qt1 3.6 62 223.2
Sand M3 0.5 115.38 57.69
Gravel M3 0.75 133.33 108.00
Water M3 0.3 1 0.30
SUM 381.19
Loss 5% 19.06
Total 400.25 Birr/m3

b) Labor Costs
All costs, which result from the building /construction works of the employees on site include:-

Standard wages
Extra and supplementary pay for:

Production bonus Merit increase

Long continuity of Service Property creating performance
(permanent laborer) Less favorable condition
Over time pay /allowances
Social Service payments:

Holiday pay if any Unemployment insurance

Health insurance Payment during sickness

Required information for the calculation of labor cost

Number and type of skilled and unskilled manpower for a particular type of work, (Crew)
Performance of crew per hour for a unit amount of work
Indexed hourly cost of the workman ship.
Utilization factor of the workmanship. Share of a particular personal per hour for the specified
work.
Example-1: Calculation of indexed hourly cost for carpenter

Standard wage:- 40 birr /day

Extra pay (for long continuity of service)
1Birr/hr for 60 % of the carpenters
 42

Over time
50 weekly working hours/44 weekly working hours/
6 overtime hours with 25% increment
Property- Creating performance
For 80% of the employees 0.25birr/hr

Supplements: 10% of wage

Solution:
Standard wage..........................................5 Birr /hr
Extra pay = 0.6 (1) ...................................0.6 birr/hr
Over time = 6/50x0.25 x 5...............................0.15 birr/hr

Property creating performance 0.86(0.25) = 0.2 birr/hr

Supplements= 0.1(5)..............................…..0.5birr/hr
Total..................................................…….. 6.45 b/hr.
Example-2:

Calculation of labor cost for a m3 of concrete; production rate 1.25 m3 /hr

Labor No UF Indexed hourly cost Hourly cost (Birr)

Forman 1 1/2 7.29 3.645
Plasterer 2 1 4.28 8.76
Carpenter 1 1/4 6.45 1.61
Bar bender 1 1/4 6.45 1.61
D. Laborer 18 1 1/13 20.34
Total 35.97
Labor cost = 35/1.25= 28.78/m3

c) Equipment cost
Required information

Type of equipment for a particular item of work.

Performance of equipment per hour for a unit amount of work (production rate)
Two methods of calculation are followed:

i. With charges accounted for depreciation, interest return and monthly repair costs
ii. With monthly rental charges.

Example:

Calculation of equipment cost for m3 of concrete. Assume 8 working hours per day and 22 days per
month.
 43

Mixer:
Original cost = 50.000 Birr
Useful life = 3yrs
Interest rate=6.5%
Monthly repair cost with supplies: - 700 Birr
Vibrator:
Original cost = 5.000 Birr
Useful life = 7yrs
Repair cost monthly = 50 Birr
Hourly equipment cost
i. For Mixer:
50,000
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 (𝑑) =
3∗12∗(22∗8)=7.89 Birr/hr

1
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 (𝑖) = 3 ∗ (50,000 ∗ (1 + 0.0665)3 − 50,000) = 3465.83 Birr/yr

3465.88
𝐻𝑜𝑢𝑟𝑙𝑦 𝑐𝑜𝑠𝑡 = 12∗8∗22 = 1.641 Birr/hr

700
Hourly repair cost = 8∗22 = 3.98 Birr/hr

Hourly Mixer cost = 7.89 + 1.641 + 3.98 = 13.511 Birr/hr

ii. For Vibrator:

5000
Depreciation (d) = = 0.338
7x12x8x22
1
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑒𝑡𝑢𝑟𝑛 (𝑖) = 7 ∗ [ (5000 (1 + 0.065)7 − 5000] = 395.7 Birr/hr
395.7/(12𝑥8𝑥22) = 0.187 𝐵𝑖𝑟𝑟/ℎ𝑟

50
𝑅𝑒𝑝𝑎𝑖𝑟 𝑐𝑜𝑠𝑡 = = 0.284 𝐵𝑖𝑟𝑟/ℎ𝑟
8x22

𝐻𝑜𝑢𝑟𝑙𝑦 𝑣𝑖𝑏𝑟𝑎𝑡𝑜𝑟 𝑐𝑜𝑠𝑡 = 0.338 + 0.187 + 0.284 = 0.81 𝐵𝑖𝑟𝑟/ℎ𝑟

Type of equipment No UF Hourly rental rate Hourly Cost

Mixer 1 1 1 13.51 13.51
Vibrator 1 1 0.81 0.81
Total hourly cost (Birr) 14.32
Equipment cost for (1m3 concrete) 14.32/1.25 = 11.46 Birr/m3
 44

Example.

Equipment cost using monthly rental changes

Mixer= 5000 Birr/month

Vibrator = 500 Birr/month

Hourly cost:

Mixer = 5000/22x8 = 28.41 Birr/hr

Vibrator = 500/22x8 = 2.84 Birr /hr

Total = 31.25 Birr/hr

Equipment cost for 1 m3 of concrete = 31.25/1.25 = 25 Birr/m3

Example

2) Costs For Formwork

Two methods of calculation to be accounted

i) With monthly rental charges

Ex. Steel form works

ii) With charges according to the number of uses

Ex. Timber formworks

1m2 formwork for floor slab made of zigba: - 300 birr & number of possible uses 7

Type of material Unit Qty Rate Cost per unit

Zigba m2 1 42.85 42.85

Batten m 1 2.0 2.00
Beams m 1 4.16 4.16
Eucalyptus posts m 1 2.5 2.5
Mold oil 1t 0.1 1 0.1
Nail kg 0.22 8 1.78
Sum 53.37
Loss 5% 2.67
Total 56.04
 45

3. Two approaches for cost calculation

i/ Cost Calculation with predetermined charges

Direct itemized cost Indirect itemized cost

-Material -site overhead costs
-Labor -General overhead
cost risk and profit
-Equipment
-Subcontractor

Unit prices
(Rate)

Bid Sum

Procedure for the cost calculation with predetermined charges

The direct itemized cost will be established in accordance with the methods and approach illustrated
in the previous examples. However the indirect itemized cost will be a product of the corresponding
direct itemized cost with some fixed charge to be established by the individual contractors for the
particular project. In our country high-class contractors presume 30-40% of the direct itemized cost
as an indirect cost for the particular item of work. One can readily establish the corresponding unit
prices by just summing up the direct and indirect itemized costs. The summation of the price of the
whole item which results from the multiplication/unit price x quantity/ would give the bid sum to
the particular project.

Example: Establish the unit price of 1 m3 concrete considered for in the previous examples. Given that
the surcharge for the indirect cost is 35%.

Material cost = 400.25

Labor cost = 28.78
Equipment cost = 11.04
Direct cost = 440.07
Indirect cost = 0.35 (440.07) = 154.02
Unite price = 440.07 + 154.02= 494.1 Birr/ m3
 46

ii/ Cost calculation through the bid Sum

In this approach, amounts for site overhead costs, general overhead costs, risk and profit are to be
ascertained separately for each project. Here from surcharges on direct itemized costs result with
different amount for each project. Four steps for this calculation method:

Establishing the production costs Establishing the surcharges on direct

Establishing the bid sum itemized costs
Establishing the unit prices
Example

Given the following detail for the construction of 5Om long fence around a site.

1/ List of items quantities and direct itemized costs are as given in the table

No Items of work Unit Quantity Direct Amount

itemized cost
1 Excavation to a depth of 1m M3 40 6.0 240
2 50 cm thick masonry wall M3 25 185.0 4625
3 Concrete M3 5 425.0 2125
4 Dia. 14 deformed bar Kg 242 5.0 1210
5 Dia. 8 stirrups Kg 132 4.5 594
6 Formwork M2 20 45.0 900
7 20cm thick HCB wall M2 90 52.0 4680
Direct cost 14,374 birr

2) Site overhead costs

Site facilities (office, store…) = 2500 birr

Electricity, water & telephone = 800 birr
Salary professionals = 2000 birr
Secretarial service = 300 birr
3) General overhead cost = 10 % direct cost

4) Risk & profit = 7% of direct cost

Question: Establish bid sum and unit prices for the itemized works.

Step 1: Establish production cost. (Direct cost + Site overhead cost)

Direct cost = 14,374 birr

Site overhead cost = 5,600 birr
Production cost 19,974 birr
 47

Step 2: Establish bid sum [production cost + General overhead cost + risk & profit]

Production cost = 19,974 birr

General overhead cost (10 %) = 0.1*14,374 = 1,437.40 birr
Risk & profit (7 %) = 0.07*14374 = 1,006.18 birr
Bid sum without VAT = 22417.58 birr
VAT (15%) = 3362.64 birr
Bid sum with VAT = 25780.22 birr

Step 3: Surcharge on direct itemized cost

𝐵𝑖𝑑 𝑠𝑢𝑚 𝑤𝑖𝑡ℎ𝑜𝑢𝑡 𝑣𝑎𝑡

𝑆𝑢𝑟𝑐ℎ𝑎𝑟𝑔𝑒 =
Direct itemized cost

22,417.58
𝑆𝑢𝑟𝑐ℎ𝑎𝑟𝑔𝑒 = = 𝟏. 𝟓𝟔
14,374

Step 4: Establishing unit prices

Unit price = (Surcharge) x (direct itemized cost)

Unit
Item of work Unit Quantity Amount
price
Excavation m3 40 9.36 374.40
Masonry wall m3 25 288.53 7,213.25
Concrete m3 5 662.83 3,314.15
Dia. 4 bar kg 242 7.798 1,887.12
Dia. 8 bar kg 132 7.018 926.38
Formwork m2 20 70.18 1,403.60
HCB wall m2 90 81.099 7,298.91
Bid sum without VAT 22,417.80
Add 15 % VAT 3,362.67
Bid sum with VAT 25,780.47

3.2 Pro-rata Rates

It is sometimes found that there are a number of items which vary from the original measurement and
description of finished work in the bill of quantities. Those items which differ only in output or quality
of materials may be related to contract rates on a pro-rata basis. A pro-rata rate is the procedure of
determining unit prices of items that undergo changes in output or quality of materials from the
original contract rates.
 48

The price of a unit of finished work will consist of the elements of labor, materials and a markup for
profit and on costs, which are not readily adjustable by simple proportionate methods. This may be
illustrated by the example that whilst a 40 mm screed will require double the quantity of material to
that of a 20mm screed, however the labor in laying will not be doubled, as there will be less surface to
work to a smooth finish per volume of material laid.

The major assumptions behind the concept is that: Material, equipment and indirect costs can readily be
determined or available from existing prices and predetermined charges and hence readily adjustable whilst
difficult to readily drive the labor cost component for existing rates and hence remain as uncertain factor.

There are three main methods of assessing pro-rata rates and some skill and thought is needed to
decide which is appropriate to the particular work at hand.
3.2.1 By Derivation
By derivation from two or more similar unit rates. This a simple and straight forward method of
obtaining a pro-rata rate but it may only correctly be used in certain circumstances, and to illustrate
this, two examples are quoted below.
Example-1:
Assuming a priced bill has rates for 20mm and 40mm thickness screeds for the same mix laid to a
similar specification: simple deduction of one rate from the other will give the additional value of the
material, mixing and profit for an increase in thickness of 20mm. As already stated, the value of
spreading in these circumstances would not be appreciably altered, therefore, to find the price of 25mm
thickness (an additional 5 mm) all that is needed is to add ¼ of the difference in price between 20mm
and 40mm thickness screed to the 20mm thickness.
Screed 20 mm: 20 Birr
Screed 40 mm: 30 Birr
The price of 25 mm screed is therefore Birr 22.5
Example-2:
The following items and prices appear in a bill of quantities prices by a contractor.
50 x 100 mm softwood joist Birr 31.5
50 x 125 mm softwood joist Birr 37.0
50 x 150 mm softwood joist Birr 42.5

From the above it is required to calculate the rates of the following:

50 x 75mm Softwood member =???

50 x 112.5 mm Softwood member =???
By inspection it can be seen that the rate increases by Birr 5.5 for each increase in 25 mm depth of joist,
also that the increase is not proportionate to the volume of timber contained in each item or to the area
of the surface. It is therefore reasonable to assume that the price for the other two items given should
 49

be derived from the bill figure in the same way as they were priced- Birr 5.5 for each increase or
decrease in 25mm depth. Thus the rate becomes:

Birr 26 for the 50 x 75mm Softwood member

Birr 34.25 for the 50 x 112.5 mm Softwood member

3.2.2 By Reconciliation of Analysis

This is by far the most frequent method that has to be employed in preparing proper pro-rata rates.
Current market costs of materials are fairly readily available and the quantity of material in a given
item may be calculated. Rates of wages and costs of insurances are also available so that the only
variables in the contract bill rates are the labor outputs and profit and markup. A difference of a few
points in the markup makes very little difference to the ultimate answer and therefore the most
important factor left is the labor cost. Working on this theory it is usually practicable to break down a
unit rate to arrive fairly closely at the figure included by the contractor as the labor on the item and
thus apply it to another item of similar labor output.
The following method has, of course, to be varied slightly in detail to suit the circumstances of the
problem and may be used in circumstances to discover a material cost included in a bill rate, although
generally it is the labor factor which is the uncertain factor in a bill price. The principle is to look for
the differences between the given items as only this need to be analyzed in detail. It is, however, of
vital importance to set out the problem in logical steps and to give detailed explanations at each stage.

1st Step:

Break down a unit rate into its component to arrive fairly closely at the figures included by the
contractor as labor component.

2nd Step:

Apply the labor cost to arrive at a pro rata rate of a similar item.

Example:

A bill of quantities contains the following item:

Hollow Concrete Block wall for load bearing superstructure Class-A bonded in mortar 1: 6 =
Birr 150 / m3.
During construction, the engineer issued work order to change the HCB to class C wall with
1:3 mortar.

Determine the rate on pro-rata basis.

i) Deduct a reasonable rate for mark-up (Profit + Administrative Costs). 20% is assumed.

Direct Cost = 150/1.2 = Birr 125.00

 50

ii) Deduct Material cost (Available data):

HCB: 12.5 pcs x 5 = Birr 62.5

Mortar: Cement- 0.1 qtl. x 150 = Birr 15.00
Lime - 0.1 qtl. x 80 = Birr 8.00
Sand - 0.05 m3 x 120 = Birr 6.00
All-in-material Cost = Birr 91.5
iii) All-in-Labor Cost:
125-91.5 = Birr 33.5

iv) Adjusted material cost for class-C HCB wall.

HCB: 12.5 pcs x 4 = Birr 50.00

Mortar (1:3): Cement: 0.1 x 150 = Birr 15.00
Sand: 0.06 x 120 = Birr 7.20
Direct Cost = Birr 105.7
Mark-up (20%) = Birr 21.14
New Item Rate = Birr 126.84
3.2.3 By Analogy
With knowledge of pricing and building operations it is sometimes possible to discover items of
different description, or even trades, which are equivalent in labor, or labor and material, to the item
for which a price is sought.
By way of example, one may require a rate for joinery of a different description of hardwood to that
given, and investigation shows that the cost of the raw material is practically the same and the degree
of workability equal. In such case one may well agree with the contractor that item for item there is no
variation in price.
Similarly a rate might be required for screwing and pelleting hardwood and only a rate for the same
operation in softwood appears in the bill. It is a safe assumption, providing the screws are of the same
description (The pellets being manufactured out of waste material have no value as such), that the
difference is virtually one of labor only and may be adjusted for hardwood by multiplying by the
additional labor value.
 51

ACTIVITY-3

Methods of cost estimating?

Discuss the difference between approximate and detail cost estimating methods.
What is a pro rata rate?
List and discuss on methods of calculating pro rata rates.
Compare the relative accuracy of the four detail cost estimating types
Calculate material cost of 1m3 concrete C-25 grade using the given data below.
 1 Qtl of cement at Dangote-55 Birr
 1 truck of Sand (13 m3 ) from source to Site 15000 Birr
 1 truck of gravel (6m3) from source to site 1000 Birr
 1m3 water 10 Birr
 Transportation cost 0.15 Birr/Qtl/Km
 Wastage 5%
Given the following data for the construction of a septic tank. Establish bid sum and
unit prices for the itemized works.
i. List of items quantities and direct itemized costs are as given in the table

No Items of work Unit Quantity Direct itemized cost Amount

(Birr) (Birr)
1 Excavation M3 85 150 12,750.00
2 50 cm thick masonry M3 30 2500 75,000.00
3 Concrete
wall M3 7 5500 38,500.00
4 Dia. 14 deformed bar Kg 255 6 1,530.00
5 Dia. 8 stirrups Kg 125 6.5 812.50
6 Formwork M2 25 1500 37,500.00
7 20cm thick HCB work M2 50 1200 60,000.00
Direct cost 226,092.50
ii. Site overhead costs

Site facilities (office, store…) = 2500 birr

Electricity, water & telephone = 800 birr
Salary professionals = 2000 birr
Secretarial service = 300 birr
iii. General overhead cost = 10 % direct cost
iv. Risk & profit = 15% of direct cost
 52
ACTIVITY -3 cont…

Use this information to answer the next questions

Given a project that has been delayed due to factors under the control of the owner, calculate
the damages due to a loss of productivity using the “Comparison of Periods” method. The project
was scheduled to finish on November 30, however the completion was delayed until March 30.
The average crew wage rate was a constant $30. The following cost data was extracted from the
labor cost reports.

Warm September Cold December

Weather to to Bid Total
November March
Work-hours concrete 63,750 27,500 85,500
Quantity of Concrete (m3) 15,000 5,000 19,000
1. What was the increase in the production rate for the winter work, compared to the work
done in September to November?
a) 0.25 wh/m3
b) 0.50 wh/m3
c) 0.75 wh/m3
d) 1.00 wh/m3
e) 1.25 wh/m3
2. How many work-hours did the contractor lose due to the lower productivity in the
winter?
a) 1250 wh
b) 2500 wh
c) 3750 wh
d) 5000 wh
e) 6250 wh
3. How much money did the contractor lose due to the lower productivity in the winter?
a) $37,500
b) $75,000
c) $112,500
d) $150,000
e) $187,500
 53

Chapter Four
4. Progress and Cost Control
4.1 Earned Value Overview
Traditional earned value analysis (EVA) is an established method for the evaluation and financial
analysis of projects throughout their life cycle’. Earned value management (EVM) is a fully integrated
project cost- and schedule control system which allows through trend analysis, the formation of ‘S’
curves and cost/schedule variances. The technique can be applied to the management of all capital
projects in any industry, while employing any contracting approach. EVM is superior to independent
schedule and cost control for evaluating work progress in order to identify potential schedule slippage
and areas of budget overruns. EVM involves calculating three key values for each activity in the WBS:

i. The planned value (PV): formerly known as the budgeted cost of work scheduled (BCWS) – that
portion of the approved cost estimate planned to be spent on the given activity during a given
period;
ii. The actual cost (AC): formerly known as the actual cost of work performed (ACWP) – the total of
costs incurred in accomplishing work on the activity in a given period. The actual cost must
correspond to whatever was budgeted for in the PV and earned value (EV) (e.g. all labor,
materials, construction equipment and indirect costs).
iii. The earned value (EV): formerly known as the budget cost of work performed (BCWP) – the value
of the work actually completed. These three values are combined to determine at that point in
time whether or not work is being accomplished as planned. The most commonly used measures
are the cost variance and the schedule variance: Cost variance (CV) = EV- AC

Similarly the cost of impact of schedule slippage, the schedule variance in terms of cost, may be
determined. Schedule variance (SV) = EV – PV The same data can be expressed as ratios that give an
indication of value for money. If work is proceeding to, or better than plan, these ratios will be equal
to or greater than 1.0. Conversely unfavorable variances will be less than 1.0.

1. How are we doing on money? We can measure our project cost performance using:
Cost performance index (CPI) = EV/AC
2. How well are we doing on time? We can measure our project time performance using:
Schedule performance index (SPI) = EV/PV
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ACTIVITY 4.1
Given a project with the following characteristics:
 You are the project manager of a project to build warehouses.
 You are to build two warehouses a month for 12 months.
 Each warehouse is planned to cost $100.
 Your project is scheduled to last for 12 months.
 It is the beginning of month 10.
 You have built 20 warehouses and your CPI is .9091.
Based on the above data answer the following questions:
1. How is the project performing?
A. Over budget and ahead of schedule
B. Under budget and ahead of schedule
C. Over budget and behind schedule
D. Under budget and behind schedule.
2. What is the actual cost of the project right now?
A. $1800 B. $2000 C. $2200 D. $2400
3. Assuming that the COST variance experienced so far in the project will continue, how much
more money will it take to complete the project?
A. $400 B. $440 C. $2800 D. $2840
4. If the variance experienced so far were to stop, what is the project’s estimate at completion?
A. $2400 B. $2440 C. $2600 D. $2800
5. What is the project’s TCPI using the project’s budget at completion?
A. 5 B. 1 C. 1.5 D. 2
6. Senior management wants to the percentage of the project that is complete. What should you report?
A. 75% B. 83% C. 92% D. 95%
7. Imagine if instead of 10 months and costing $2200, the project was in month three and costing $4000. What
formula might you use for BAC?
A. [(BAC – EV) / (CPI * SPI)] + AC
B. new bottom-up estimate
C. AC + new ETC
D. AC + BAC – EV
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4.2 Value Engineering

Value Engineering is a systematic and organized effort to identify the functions of a product, system
or procedure and to attain that function with minimum life cycle cost without jeopardizing quality,
aesthetics, appearance etc. It is an organized creative approach which has for its purpose the efficient
identification of unnecessary cost without scarifying reliability, performance or maintainability.

Value engineering studies may be performed by consultants during design development as a

contractor performed pre-construction services, or by the contractor during construction. The most
effective time to conduct such studies is during design development. Some construction contracts
contain a value engineering incentive provision that allows the contractor to share in the savings that
results from approved value engineering change proposals. Value engineering change proposals
submitted by the contractor are reviewed by the consultant and owner for acceptability. If approved,
up to 50% of the savings in construction cost may go to the contractor. The percentage split between
the owner and the contractor will be stated in the value engineering provision of the contract.

The value of a component or system can be defined as its function plus quality divided by its life-cycle
cost.

𝐹𝑢𝑛𝑐𝑡𝑖𝑜𝑛 + 𝑄𝑢𝑎𝑙𝑖𝑡𝑦
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎 𝑐𝑜𝑚𝑝𝑜𝑛𝑒𝑛𝑡 = − 𝑊𝑜𝑟𝑡ℎ 𝑏𝑒𝑛𝑒𝑓𝑖𝑡
𝐿𝑖𝑓𝑒 𝐶𝑦𝑐𝑙𝑒 𝐶𝑜𝑠𝑡
𝑳𝒊𝒇𝒆 𝑪𝒚𝒄𝒍𝒆 𝑪𝒐𝒔𝒕 = 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑜𝑟 𝐶𝑜𝑛𝑠𝑡𝑟𝑢𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 + 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 + 𝑀𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒 𝐶𝑜𝑠𝑡 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 – 𝑎𝑛𝑦 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒

Value Engineering seeks the highest value design components by Improving utility with same cost or
maintains same function with less cost. In general Value engineering:

Enhances value of money

Effects improvements in function, performance and quality,
Enables people pin point areas that need attention and improvement,
Provides a method of generating ideas and alternatives for possible solution to a problem,
Provides a vehicle for dialogue,
Documents the rationale for decisions,
Improves the value of goods and services.
Steps in Value Engineering
i. Information Gathering:

The information gathering phase involves studying the design to identify potential components or
systems for detailed study. The essential functions of each component or system are studied to estimate
the potential for value improvement. The study team needs to understand the rationale used by the
designer in developing the plan and the assumptions made in establishing design criteria and selecting
materials and equipment.
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ii. Speculation through Creative Thinking:

The purpose of the speculation or creative phase is to identify alternative ways to accomplish
the essential functions of the items selected for the study. The intent is to develop a list of
alternative materials or components that might be used. No intent is made to evaluate the
identified alternatives, but rather to generate ideas that will be evaluated in the next step of the
study process.
iii. Evaluation through preliminary Life-Cycle Costing:

The evaluation phase involves determining the most promising alternatives from the set
identified in the speculation phase. Preliminary cost data is generated and functional
comparisons are made between the potential design components being studied. The intent is to
determine which alternatives will meet the owner’s functional requirements and provide more
value to the completed project.
iv. Development of Technical Solutions:

The development phase involves creating design concepts for the alternatives identified during
the evaluation phase. This involves developing detailed functional and economic data for each
alternative. Estimated Life-Cycle cost data is developed for each alternative and compared with
the estimated life-cycle cost of the components under study. The advantages and disadvantages
of each alternative are identified. Alternatives are compared, and the ones representing the best
value are selected for presentation to the designer and the owner.
v. Presentation of Alternative Options:

The final step is the preparation of the value engineering proposals, in which detailed technical
and cost data are developed to support the recommendations. The advantages and
disadvantages of each recommendation are described. The proposals are submitted to the
designer and the owner for proposal. If approved, the proposals are incorporated into the
design. If not approved, the design is not changed.

4.3 Asset Management

Asset Management is defined as a cost effective approach for asset operation, maintenance, upgrade,
and disposal. Asset management has wide and a very broad scope, covering a variety of areas including
general management, operations and production and, financial and human aspects. There are five
different types of assets in any organization ranging from human assets, information assets, financial
assets and intangible assets (reputation, morale, intellectual property, goodwill, etc.). The physical
assets represent only one of these broad categories of asset types that have to be managed holistically
in order to achieve the organizational strategic plan. A physical asset is recognized as any item owned
for long term and short term use, in all economic activities for an organization. This asset can be any
item within the organization and it can be of tangible or intangible. In the past, the importance of asset
management were not properly recognized and applied in many organizations but recently it had
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become of great value as the physical asset represent an important factor in the whole asset
management process. A physical asset is defined as an entity that is capable of creating, sustaining or
destroying value at any stage in its life-cycle.

The main principal objective of asset management is to enable an organization to meet its objectives
efficiently and effectively. Effective asset management could be achieved by ensuring that all
service potential of assets are appropriately used and maintained, In contrast with this, efficient AM
should always seek the continuous upgrade and improvement of asset utilization, performance and
feasibility in short term and long term basis. In addition, it can be addressed that managing asset in
an organization is mainly concerned by achieving organization’s goals at the lowest possible life
cycle cost.

Engineering Asset Management (EAM)

Engineering asset management is generally refer to the management of the engineering assets such as:

Equipment,
Buildings,
Inventories, etc.

Engineering asset management is a multidisciplinary approach which includes management,

economics and information technology. It requires an information system to capture data that can be
used to support decision making. EAM is concerned with the life cycle management of “engineered”
physical assets in order to achieve the business objectives for an organization that may own or manage
an asset.

EAM becomes a vital part of business management for many organizations especially when capital
investment in plant equipment or infrastructure is significant and the productivity/sustainability of
the asset is crucial to the competitive capability of the business.

ACTIVITY 4.2

What is asset management?

Why do it is important?
Discus on the concept of Engineering Asset Management.
Define value Engineering.
Discuss on the importance of value Engineering