Topic 2 - Project Cost Estimating Flashcards
When do we do cost estimating?
Concept - estimate
Design - estimate
Bidding - estimate
Construction - estimate
Less effort/ low accuracy —-> more effort, more accuracy
Why do we do cost estimating?
Financing and budgeting for owner and contractor.
What is a conceptual estimate?
2 types?
- completed prior to design
- used by owner to determine feasibility of project and magnitude of scope(whether to proceed with project or not)
- low accuracy
- low effort
- Analogous estimating: “top-down” estimate based on previous projects: Cost per function, unit area, or unit volume methods
- Parametric estimating: statistical relationship between historical data and project variables/characteristics
What is a preliminary estimate?
- complated at +/- 40% of design stage
- used to determine if company should proceed with project or not
- can be used to evaluate alternate options
- based on unit costs of similar cost elements from previous projects
What is an engineers estimate? aka owners estimate
- COMPLETED AFTER DETAILED DESIGN IS FINISHED
- used to conduct a final feasibility check
- used to provide a reliable reference point for bids
- can be used to secure resources (financing_
- based on a detailed costing of each element of work in work breakdown structure (WBS)
What is a bid estimate/detailed estimate? -aka contractors estimate
- most accurate
- based on complete bid documents
- “bottom up” estimating: detailed, first principles, based on lowest elements in WBS; includes detailed assessment of risks and opportunities and desired profit margin/markup
Conceptual Estimate types?
- Analogous estimating: “top-down” estimate based on previous projects: Cost per function, unit area, or unit volume methods
- Parametric estimating: statistical relationship between historical data and project variables/characteristics
Bid estimate/detailed estimate type?
-“bottom up” estimating: detailed, first principles, based on lowest elements in WBS; includes detailed assessment of risks and opportunities and desired profit margin/markup
Classes of estimates
Class 1 to class 5
- class 5 has very little maturity level (% of project completed), so will be most unnacurate and low preparation effort
- class 1 has high maturity level (65%to100%), so has very high accuracy and high preparation effort
Estimate class for bid/tender?
Estimate for feasibility?
Estimate for budget budget authorization/control?
- class 4 or 5
- class 1 or 2
- class 3
Methodology for class 4/5 estimates?
Methodology with class 3
Methodology with class 1/2
4/5: detailed unit cost with forced detailed take-off
3: semi detailed unit costs
1: capacity factored
2: equipment factored
Competitive bidding/tendering: who is it conducted by?What is a tender? purpose of competitive bidding?
- conducted by client (owner) or its consultant
- a tender is a bid, a formal offer to do work based upon certain terms
- purpose is to provide competition and thereby reduce costs to owners
5 methods of bidding?
-open competitive
-prequalified
-invited
negotiated
-joint ventures - one time
Steps in competitive bidding?
1) owner issues request for bids (letter of invitation, advertisement, request for pre-qualification, …)
2) contractor views/obtains tender documents
3) contractor makes decision to bod or not to bid
4) Contractor prepares estimate and tender submission
5) contractor submits bid
6) owner opens bids and awards contract
- public bid opening and closed bid opening
Types of bid openings?
Public bid opening:
- public sector owners (government, schools, hospitals)
- basis for award: generally lowest price of prequalified
Closed bid opening:
- private sector (non govt owners)
- basis for award: not necessarily lowest price (experience, capability, realistic bid, quality of subcontractors and suppliers)
Additional elements of bid:
1) alternate price
2) separate price
3) breakout price
1) price for scaled up version of an item that is also priced in regular bid
2) price for a separate part of project that may or may not go ahead, depending on owners budget
3) indicate price for a specified portion of the work - used for accounting purposes to allocate funding
Components of a detailed cost estimate
- Direct costs
- labour, equipment, materials, subcontracts - Indirect costs (overheads, preliminaries)
- management, engineering, supervision - Risk and opportunity allowance
- Margin / Markup
- includes corporate overheads and profit
steps in bidding process
- identify bid opportunity
- make decision to bid
- study plans and specifications
- break project into work packages (WBS)
- do quantity takeoff
- of each work package, record quantity and unit of measure - determine construction methods
- estimate labour and equipment productivity
- obtain and evaluate quotations from subcontractors and suppliers
- price items of work in WBS
- prepare project schedule
- price indirect (overhead) costs
- consider alternatives
- perform risk/opportunity analysis
- add corporate overhead and profit margin
- spread costs
- calculate unit prices
- submit bid
How do we measure productivity?
Productivity = Output (units of products) / Input (resources)
Labour productivity = Output (installed quantity) / person-hours
(ex: output/input = 2m^3/person-hour)
Productivity refers to how efficiently and effectively a company can turn its input (labour and capital) into products and services
Definition or production? How to change production rate?
=units of output per unit time (e.g 100m^3/hour for placing concrete)
-by changing number of person-hours available in one hour by changing crew size (increasing # of people) or by improving productivity
Production = Productivity (m^3/person-hour) * (person-hours/hour)
Productivity vs Production
production indicates how much work is being done in a given time interval; how fast work is progressing; indicates if schedule objectives will be met; not an indication of how much money is being spent
-productivity is a measure of efficiency of labour and/or equipment crew; indicates if cost objectives will be met
Capital Recovery Equation
Sinking Funds Equation
A = P[i(1+i)^n / (1+i)^n - 1]
- A=gives the equivalent annual value (A) of the purchase price (P) assuming annual interest rate (i) during the useful life of (n)
- i=MARR (minimum attractive rate of return) = interest for borrowing money + risk + average cost for taxes, insurance, storage
A = F[i / (1+i)^n -1]
- F=future salvage value
- i=annual interest rate
- n=useful life, in years
Estimating vs Bidding/Tendering
Estimating: Assessing direct costs and indirect costs
Bidding/tendering: assessing risk and opportunity allowance and margin
What is risk and opportunity assessment
identifying and assessing the impact on costs of a potential project risks and opportunities
What is a contingency (AACE)
- contingency is an amount added to an estimate to allow for items, conditions, or events for which the state, occurrence, or effect is uncertain and that experience shows will likely result in additional costs
- included in the estimate and expected to be expended (but not sure where)
- accounts for stuff like uncertainty in productivity, unit rates, minor rice fluctuations, planning/estimating errors, design developments/change within scope
What is risk and what is Risk allowance (AACE)
Risk is the degree of which dispersion or variability around the expected or “Best” value, which is estimated to exist for the economic variable in question
Risk allowance: may or may not be spend (based on probability of undesirable outcome), expected value of risk allowance will be spent, if correctly estimated
Expected cost of risk? what are risk allowance and contingency? how much do we usually pay?
- risk allowance and contingency are amounts of money used to provide for project risks, uncertainties, and unforseen costs that are associated with a construction project
- a reasonable value (combination of risk allowance and contingency) should be included in the bid to cover for the risks involved in construction
- 5% to 10% of contract price usually
Risk and opportunity assessment: the math behind it?
- identify items in the project which may have potential cost overruns (risks) or cost savings (opportunities)
- assess the most likely $ cost or savings associated with each item
- assess the probability of each cost or savings occurrence
- multiply the $ cost or savings by its probability of occurrence
- sum the total resultant costs and the total resultant savings: the difference between the two is the net project risk/opportunity allowance (contingency) (MAY BE + or -)
Items covered by markup:
- corporate overheads
- profit
- sometimes risk and opportunity allowance
What does Break even analysis acomplish?
-to determine minimum (base) markup
OR
-to determine minimum volume of work (turnover) for firm to break even (i.e to cover corporate overhead costs, without making any profit)
Break even analysis methods
Method A: predict turnover level ($) for coming year and calculate minimum markup (%)
Method B: Determine gross markup (%) (i.e profit + corporate overheads) on projects in coming year and calc minimum volume of work (turnover) ($)
Steps in break even analysis (both methods)
Forecast corporate overheads for coming year:
-ex: previous yr: $200,000
-10% inflation $20,000
-firm growth: $30,000
Forecaster corporate overheads = $240,000
Method A: forcast turnover level (e.g $2,000,000)
-minimum markup: corporate overheads / Turnover
240,000/2,000,000 = 12%
Method B: forecast gross markup, e.g 12%
- use break even analysis equations
1) Revenue - Project Costs = Gross Profit
2) Gross Profit - Corporate Overheads = Net Profit
3) Gross Profit / Revenue = Gross Markup - at break even point, Net profix = 0, so;
From (2): Gross Profit = corporate overheads
From (1): Revenue = Project costs + Corporate Overheads
from (3):
Corporate overheads / Revenue = Gorss Markup
Revenue = Corporate Overheads/Gross Markup
In our example:
Revenue = 240,000/0/12 = 2,000,000
What is a corporate overhead?
Corporate overhead refers to the indirect costs associated with running a business. In other words, corporate overhead encompasses all the costs that are not directly factored into producing a product or service. Common examples include administrative and marketing expenses.
Methods of setting markup
- BASED ON MINIMUM OR BASE MARGIN - BREAK EVEN ANALYSIS
- based on resource cost category breakdown (to reflect risks inherent in each)
- based on experience and market conditions
Provisional and Prime cost items: What do we use them for?
Provisional quantities: name the 2 and describe them
We use provisional and prime cost items to calculate markup (margin), but spread markup to all items EXCEPT provisional and prime cost items
provisional quantities: -work which may not occur or variations in quantitiy expected
-safer NOT to allocate overhead or contingency spread to these items b/c they may or may not occur
prime cost items
- owner stipulated sum of money, adopted by all bidders, for work not yet fully detailed
- amount specified can not be modified by bidders
Where do we spread overhead (indirect costs) and contingency to?
all items EXCEPT provisional and prime cost items.
Strategic spreading? 2 Uses of strategic spreading?
for unit price contracts (paid on basis of actual quantities installed):
increase unit prices of items that are underestimated by owner
decrease unit prices of items that are over estimated by owner
-can be used to reduce overall bill price to be more competitive, or to increase profit margin while maintaining original bid price
