Basic of Cost Estimate

ESTIMATING – GETTING IT RIGHT ACES PRESENTATION 19TH MARCH 2013

1 AUSTRALIAN COST ENGINEERING SOCIETY Stuart Chalmers A Technical Society of ENGINEERS AUSTRALIA 19 March 2013

A presentation made by Mr Stuart Chalmers, MIEAust, to the Australian Cost Engineering

Society, Victorian Chapter, 19th March 2013.

INTRODUCTION

Stuart Chalmers:

o A foundation member of ACES;

o Has been involved with estimating and project controls for over 40 years with

Fluor Australia;

o Experience covers a wide range of big and small mining, petrochemical, and

industrial projects.

Presentation Overview:

This presentation will look at what is an estimate, and discuss some details of

preparing an estimate including what the estimate model looks like, where the

data comes from and how to assemble the estimate:

o What is an estimate and why is it important;

o Review of types of cost estimate and estimate classification;

o Estimate planning;

o Factored and parametric estimates – data sources and estimate assembly;

o Detailed estimates – data sources and estimate assembly.

Note that any data used in examples is only for the purpose of explaining

methods being discussed and is not to be used for commercial or other purposes.

WHAT IS AN ESTIMATE

AACEI Recommended Practice 46R-11 Required Skills and Knowledge of Project

Cost Estimating (16-Jan-2013):

Here are some extracts from RP 46R-11:

o A cost estimate is a compilation of all the probable costs of the elements of a

project or effort included within an agreed scope;

o Cost estimating is the predictive process used to quantify, cost, and price the

resources required by the scope of an investment option, activity, or project.

o Cost estimating is a process used to predict uncertain future costs;

o A goal of cost estimating is to minimize the uncertainty of the estimate given

the level and quality of scope definition;

o Historical reference cost data improves the reliability of cost estimating;

o Cost estimating process is generally applied during each phase of the asset

or project life cycle as the asset or project scope is defined, modified and

refined;

o Specific estimating tools and techniques used vary widely depending upon

the industry, organization, life cycle phase, types of asset or project, and the

level of scope definition available;

ESTIMATING - GETTING IT RIGHT – ACES PRESENTATION 19th MARCH 2013


o Estimating is a predictive process which requires judgement and experience;

o Effective cost estimating requires an understanding of the work being

planned;

o The cost estimating process includes:

Planning for the estimate;

Quantifying scope;

Applying cost to the scope;

Pricing of the project;

Reviewing, and validating the estimate;

Documenting the estimate.

o Estimators predict the cost of a project for a defined scope to be completed at

a defined location and point of time in the future;

o Estimators may have different perspectives depending on their particular

situation:

For an owner organization, estimators are involved directly in

supporting the economic evaluation of a potential program or project.

They will establish the baseline estimate for budgetary purposes and

financing;

For a contracting organization, estimators determine the probable cost

of the contractor’s defined scope plus the contractor’s profit. This

typically constitutes the contractor’s bid, tender or proposal.

Note this AACE RP 46R-11 also contains information on career progression from

junior estimator to chief estimator.

Why cost and time estimates are important to every project:

o Cost estimates are more than just how much money the owner needs to

commit and when is it required;

o The ability to accurately forecast completion cost and completion time of

projects allows owners, builders, investors, users, and the general community

to plan their investments and operations with more certainty and without the

adverse impacts that sudden and unexpected surprises give;

o Even positive impacts, when unexpected, can have a reduced positive flow-

on effect.



TYPES OF COST ESTIMATE

Estimate types can be described by:

End Use:

o Project screening and economic viability;

o Selection of preferred development options and location;

o Concept and feasibility studies;

o Project financing, budget approvals and control baselines;

o Tenders and bid check estimates;

o Change management;

o Completion cost forecasts.

Methodology:

o Factored estimate;

o Parametric estimate;

o Detailed estimate.

Level of Project Definition:

o Stage gate estimate

Expected accuracy range:

o Target estimate accuracy range.

ESTIMATE CLASSIFICATION

AACE International has defined five estimate class levels:

o Class 5: 0% to 2% project definition, capacity factored estimate,

typically -30%, +50% accuracy;

o Class 4: 1% to 15% project definition, equipment factored estimate,


o Class 3: 10% to 40% project definition, semi-detailed estimate,


o Class 2: 30% to 75% project definition, detailed estimate,

typically -5%, +15%accuracy;

o Class 1: 65% to 100% project definition, detailed estimate,

typically -5%, +10%accuracy;

Classification level depends primarily on level of project definition with end use,

methodology, accuracy and estimating effort secondary characteristics.

The AACEI Recommended Practices include more detailed descriptions, end

usages, estimating methodology, and alternate names.

The following are extracts from the Recommended Practices indicating various

characteristics and expected accuracy ranges.



RECOMMENDED PRACTICE 18R-97 FOR PROCESS INDUSTRIES

Industries that rely on process flow diagrams (PFD’s) and piping and instrument

diagrams (P&ID’s) as primary scope defining documents.



RECOMMENDED PRACTICE 56R-08 FOR BUILDINGS & GENERAL CONSTRUCTION

For building construction and site/civil projects and intended for projects which are

repetitive and repeatable.



ESTIMATE PLANNING - SCOPE OF ESTIMATE PREPARATION ACTIVITIES

There can be wide variation in the activities required to prepare an estimate,

particularly for detailed estimates.

It is thus essential that the required activities are clearly established prior to

commencing and preparing estimating plans and forecast costs.

For a capacity factored, equipment factored, or parametric estimate activities may

include:

o Review project and estimate scope;

o Establish reference projects and data for capacity factors;

o Establish reference projects and data for equipment factors;

o Establish parametric estimate models;

o Receive and review project capacity data and apply capacity factors;

o Receive and review priced project equipment and apply equipment factors;

o Receive and review project metrics or key project measurements defining the

project and apply to parametric estimate model;

o Review estimate, document, and publish estimate.

Minimum activities for a detailed estimate may consist of the following:

o Set up a database or spread-sheet with WBS structure;

o Create or copy and update unit rates;

o Receive quantities for estimate items;

o Receive current supply pricing for equipment, materials, and services;

o Apply unit rates to applicable unit rate items;

o Estimate cost of other direct cost items;

o Estimate cost of indirect cost and other cost items;

o Estimating team review and publish reports;

o Collect and store relevant documentation.

Other activities which may be required, particularly for a more detailed class 3, class

2, and class 1 estimates:

o Review estimating scope and estimating checklists;

o Spending time gaining a clear understanding of the scope of the facilities, the

scope of work for those facilities, and the scope of services for that scope of

work (this being especially important for preparation of competitive tender

estimates);

o Coordination with engineering, procurement, construction, and client:

Develop plan and guidelines for supply of estimate source data;

Monitor supply of source data (including subsequent revisions);

Attend progress meetings;

o Develop estimate preparation guidelines and estimate preparation plan;

o Monitor estimating progress against plan;

o Develop and update WBS;

o Training estimators in new software;



o Prepare quantities;

o Review supplied source data with originators;

o Obtain current supply pricing for equipment, materials, and services;

o Study option estimates;

o Support to value engineering studies;

o Operating cost estimates;

o Life cycle cost estimates;

o Risk analysis and contingency development;

o Cash flow and escalation calculations;

o Foreign exchange content;

o Benchmarking key parameters;

o Prepare basis of estimate documentation;

o Analyse changes from previous estimates;

o Prepare documentation and attend estimate reviews with project team,

corporate management (at different levels) and client – note required review

material varies with level of review;

o Maintain records of documentation supplied to estimators with revision and

date received;

o Maintain records of estimate revisions and distribution;

o Prepare documentation for feasibility study reports and other reports;

o Prepare documentation for tender bid submissions (pricing schedules,

qualifications, inclusions and exclusions) and any follow up pre-award

submissions;

o Convert estimate into control budget for project cost control;

o Prepare required estimating files for retention.

It is absolutely critical that the estimating scope is clearly understood and specific

estimate preparation guidelines and an estimate preparation plan be developed that

includes not only estimating activities, but takes into account the supply of

information to the estimator, and the various estimate reviews that are required

before final estimate issue.

FACTORED AND PARAMETRIC ESTIMATES

These are the initial estimates prepared when only limited project definition

information is available and use capacity factors, equipment factors, and for

parametric estimates, key project metrics or measurements defining the project.

Factored estimates are used in the process industries and are based on block flow

diagrams or process flow diagrams. Factored estimate models rely on the

relationships between cost and design related parameters, and with the process

equipment being a prime cost driver.

AACEI Recommended Practice 59R-10 Development of Factored Cost Estimates –

As Applied In Engineering, Procurement, And Construction For The Process

Industries contains further information on these estimating methods.



CAPACITY FACTORED ESTIMATES

An early screening method to determine whether project should be continued or to

decide between alternative plant designs and plant sizes.

Used to determine costs of process plant units within battery limits – i.e. does not

include infrastructure and other plant outside of unit battery limits.

Cost of a new plant is derived from cost of a similar plant of known capacity with

similar process and type of equipment.

Relationship is:

CostB/CostA = (CapB/CapA)r x f1 x f2 x f3

Where CostB, CapB, CostA and CapA are plant B and plant A costs and

capacities, and f1, f2, f3 etc are escalation, location, scope, technology and

any other factors

EXAMPLE OF CAPACITY FACTORED ESTIMATE

Cost of known plant 120.5 $Mill Capacity of known plant 150 units Completion of known plant 2010

Capacity of new plant 220 units Estimate date for new plant 2013

Escalation adjustment 10% Location adjustment Nil Scope/technology additions 10% Exponential factor 0.6

Cost of new plant [120.5x(220/150)0.6]x1.10x1.0x1.10

=ROUND((120.5*(POWER((220/150),0.6))*1.1*1*1.1),0)

Cost of new plant 183 $Mill



Above table 1 from RP 59R-10 shows factors for various types of process plant

Care must also be taken to ensure that when scaling up or down that the equipment

size and cost movement is not constrained by design and fabrication limitations.

Note that RP 59R-10 indicates that the exponential factor tends to increase as

capacities increase and approaches a value of 1.0 at the limits of existing technology.

The exponential factor “r” was originally 0.6 and the basis for this was “doubling the

size of the plant increased the cost by half”.

Values of “r” are typically between 0.5 and 0.85 and a number of these factors are

given in RP 59R-10 as well as earlier publications referred to in “Fundamentals of

Estimating for Engineering Construction” (Slattery, 1988).

As in example, when using this method costs need to be adjusted for escalation,

location, and any known scope differences.



EQUIPMENT FACTORED ESTIMATES

For many types of process plants, there are ratios between the cost of the process

equipment and the total installed cost of the plant.

Thus when the process design is to the stage of specifying the process equipment in

sufficient detail to determine equipment costs, this method can be used.

The first step is to obtain the equipment list and then estimate or obtain the cost of

each item. Recent orders and estimates are the usual source of the equipment costs.

Costs should include associated items usually included in the equipment supply

together with freight.

The equipment list should be reviewed against Process Flow Diagrams (PFD’s) and

Piping and Instrument Diagrams (P&ID’s) for completeness and to determine an

allowance for equipment not defined.

Clarification should be obtained as to whether equipment sizing is for normal

operating conditions and whether allowances are needed for final purchase sizes.

After the equipment cost is established the applicable equipment factors are applied.

Equipment factors can be developed from previous project experience or previous

estimates.

Make sure the scope included in the equipment factors is clear – are they direct field

cost or do they include indirect field and off site indirect costs.

Equipment factors are sometimes referred to as “Lang Factors” after JJ Lang

developed factors to estimate the total installed cost of a plant:

o “Solids” handling plant: 3.89;

o “Solids-fluid” plant 5.04;

o “Fluids” plant 6.21.



RP 59R-10 includes the above Table 3 and also provides further developments of

this method. However I believe your previous project experience and previous

estimate data from similar projects will provide suitable factors with the project

conditions known.

PARAMETRIC ESTIMATES

Parametric estimates are estimates based on an all-up cost per measurement unit or

multiple measurement units.

Estimate models are based on relationships between physical or functional

characteristics and costs of a project.

Examples such as cost of road per km, bridges per surface m2, tracklaying per km,

buildings per m2.

Capacity and equipment factored estimates are examples of simple parametric

estimates.

In developing a parametric model the first step is to define its scope, and then to

establish the critical cost drivers and the relationship between cost and their physical

characteristics.

Most practical examples will have a number of relationships to be considered.

Models should be based on using key characteristics that can be defined early in the

project scope development.



While models should be based on actual costs from completed projects, provision

must be made for scope and location variations, and for cost escalation.

Documenting the scope and conditions for applications of a model is essential.

Cost relationships are expressed as:

Cost = a + bV1 + cV2 + … (linear relationships where a, b, c are

constants and V1, V2 are values of the physical or functional

characteristics) or

Cost = a + bV1x + cV2y + … (non-linear relationship where x and y are

exponential factors) or

A mix of linear and exponential relationships.

Significant effort is required to develop parametric estimate models and this activity

should precede the expected use of any developed models.

DETAILED ESTIMATES

As project definition reaches a stage where project specific quantities are developed

and project execution options are clarified, we can move into the preparation of

detailed estimates.

As indicated in the estimate classifications above, detailed estimates are based on

the application of semi-detailed or detailed unit costs to these project specific

quantities.

In addition to quantity/unit cost items, a detailed estimate will also include various

lump sum items and allowances or provisions.

EXAMPLE OF PARAMETRIC ESTIMATE

Cost of new house (single storey, outer suburb)

$

Cost of land 300,000$

Cost of house 1,200$ per m2

Thus for a new house 320 m2

Cost of new house and land = $300,000 + ($1,200 x 320)

684,000$



RELIABILITY LIMITATIONS AND ACCURACY

Estimate accuracy is defined as “the closeness to actual costs, excluding scope

changes and extraordinary developments or occurrences”.

Any estimate has a number of variables that impact reliability and accuracy, and

significant variables include:

o Level of scope definition;

o A sound execution plan;

o Knowledge of site conditions;

o Level of review;

o Benchmark data for the review process;

o Time to prepare the estimate.

A DIFFERENCE BETWEEN CONTRACTOR COST AND PRICE

Cost is the known or estimated cost to a contractor.

Price is the selling amount by a contractor and incorporates cost, overhead, profit

and contingency.

WORK BREAKDOWN STRUCTURE

Detailed estimate items are grouped together using the project Work Breakdown

Structure (WBS).

The estimator needs to review the WBS to ensure it reflects the current scope, and

includes all items of cost that may be needed, such as “Owners” and other indirect

type costs.

A typical WBS should cover all the direct field cost physical areas and then make

provision for field or site indirect costs, off-site indirect costs, and other project costs.

For a contractor’s tender estimate the pricing schedule may require the distribution of

indirect and other project costs against direct field cost items.



The following is a high level sample WBS:

COST CATEGORIES IN A DETAILED ESTIMATE

Direct Costs

o Also described as field costs;

o Directly proportional to the quantity of physical permanent work to be

performed;

o Work performed on the physical work site plus the materials incorporated into

the work.

Indirect Costs

o Indirect costs are time based or “one-off” costs;

o Indirect costs for a contractor estimate include:

Overheads and supervision;

General plant including site facilities and services;

Camp or accommodation;

o Indirect costs for EPCM of client estimate include:

Temporary site facilities and services;

Camp or site accommodation.

o Note that these indirect costs include establishment, operation, maintenance,

and removal of temporary site facilities and services.

Other Costs

o Other costs for a contractor estimate include:

Taxes, insurances;

Specific risk allowances;

Escalation;

Contingency.

WORK BREAKDOWN STRUCTURE

1000 MINE AREA

2000 PROCESS AREA

2100 Raw Material Handling

2200 Treatment Plant

2300 Product Material Handling and Loadout

2400 Reject Handling

3000 SITE INFRASTRUCTURE

4000 OFF SITE INFRASTRUCTURE

5000 TEMPORARY SITE FACILITIES

6000 EPCM AND SERVICES

7000 OWNER COST

8000 OTHER COSTS

8100 Escalation

8200 Contingency



o Other costs for EPCM and client estimates include:

Engineering, procurement, and construction management;

Other offsite project services;

Owner’s costs;

Escalation;

Contingency.

Cost Elements

o Each estimate line item contains one or more cost elements.

o Direct cost elements include:

Direct Labour;

Construction Equipment;

Job (Temporary) Materials;

Permanent Materials (Engineered equipment, fabricated, and bulk

materials);

Freight;

Subcontracts;

Contractor indirect cost allocation (for EPCM and client estimates).

o Indirect cost and other cost items may use the direct cost elements or use a

single indirect cost element.

Prime Cost Accounts

o Within a WBS grouping estimate items are usually grouped according to

prime cost accounts.

o Typical prime cost accounts for direct costs are:

Earthworks and civil;

Concrete;

Structural and steelwork;

Building and architectural;

Mechanical;

Piping;

Electrical;

Instrumentation and control;

Painting and Insulation.

o Indirect cost prime accounts may be allocated to a single indirect prime or a

high level project cost account group which may also be used in the WBS.

ALLOWANCES AND CONTINGENCY

Allowances are included in estimates to cover the cost of expected but undefined

requirements and are part of the basic estimate. Prime cost items are an example of

allowances.

Contingency is included to cover the cost of uncertainties or unexpected and

unforeseeable items.



ESTIMATING SOFTWARE

Most detailed estimates will be prepared using databases.

A database provides a structured framework and various coding structures.

A database is usually reliable in adding up estimate amounts.

Database software does not replace estimator knowledge to:

o Determine construction methods;

o Determine production rates;

o Determine applicable resources.

SCOPE OF WORK AND SCOPE OF SERVICES

Estimator must spend time to understand scope of work and scope of services.

Defining scope of work may be progressive if project definition is part of the current

scope of services.

Need to identify and clarify all areas of uncertainty.

Refer to available check lists when reviewing scope of work and services

ESTIMATE PLANNING

Prepare an estimate preparation plan showing supply of data to estimator and

proposed estimate reviews and issue.

Supply of data will come from engineering disciplines, procurement and contract

groups, construction, and from other specialist support functions (such as industrial

relations).

BASIS OF ESTIMATE

The estimator must document the following as a “Basis of Estimate” document:

o Estimate methodology;

o Estimate organisation and format;

o Scope of work and scope of services;

o List of documents used including revision;

o Definition of all cost elements;

o Project execution philosophy and schedule;

o Qualifications and assumptions.



ESTIMATE MODEL SETUP

Database model usually copied from a previous model containing relevant unit rates.

Various database tables setup include:

o Work breakdown structure;

o Pricing bill structure (contractor estimate);

o Other coding and reporting structures;

o Exchange rates;

o Cost element types;

o Labour rates;

o Construction equipment rates;

o Material and equipment rates;

o Unit rates.

ESTIMATE UNIT RATES

Estimate unit rates are established mainly for use with the direct field cost physical

permanent work, but can also be established for indirect cost and other cost items.

Unit rates contain the cost elements listed earlier.

Composite unit rates may be built up from other unit rates. In this case the estimator

must understand database calculations to ensure updated unit rates are carried

forward.

ESTIMATE ITEM QUANTITIES

Estimate items and their quantities are usually prepared by others.

Estimator needs to ensure quantities are supplied in accordance with WBS

structures.

Estimator needs to review items with originator to understand item scope and any

allowances included in quantities such as;

o Earthworks bulking;

o Material wastage;

o Hand excavation.

Increased level of item detail in itself does not improve the accuracy of an estimate

but it does increase the cost of preparing the estimate:

o Consider concrete footing quantities split up into concrete volume, formwork,

rebar, embedded metalwork, and surface finishes compared with just

concrete volume and types of concrete such as various footing, wall, and slab

types (with typical formwork and rebar allowed for each concrete type);



o If the footings design is still at a preliminary stage awaiting information to

determine number and size of footings then providing more detail of current

quantities is not going to improve estimate accuracy.

DIRECT LABOUR HOURS AND PRODUCTIVITY

Labour hours for estimate items are developed by considering the crew size and

production rate for each item.

Crew size and production rates should be established by experienced field personnel

or checked by them if generated by the estimator or others.

The following is an example showing a crew and production rate calculation. Shift

hours are total paid hours for the shift.

Production per shift needs to take into account non-productive time moving to a work

site and any down time such as for train movements.

Crew and production rates are usually calculated outside of a database.

Non item specific job materials and consumables are usually allocated to the

estimate on an hourly basis and can be included with labour rates.

Subcontract costs can be part of crew costs.



DIRECT LABOUR RATES

Labour rates are required for each labour classification and for each different work

pattern. Note that shutdowns and commissioning activities can be two twelve hour

shifts per day.

Basic rates included in labour agreements and the agreements being used should be

reviewed with industrial relations (IR) specialists for application on the work being

estimated.

Labour rates are built up by the estimator for the total cost per hour and include:

o “All purpose” base rates and base allowances;

o Flat allowances;

o Casual loadings;

o Overtime, Saturday, Sunday, and worked public holiday loadings;

o Shift allowances;

o Non-productive time burdens:

Annual leave and any leave loading;

Public holidays and picnic days;

Sick or personal leave.

o Payroll benefits:

Long service leave;

Superannuation;

Severance payment provision;

Income protection provision.

o Statutory burdens:

Payroll tax;

Workers compensation.

Other indirect costs proportional to labour costs are often included with direct labour

rates:

o Payroll administration;

o Human relations (HR)/personnel administration;

o Small tools and consumables;

o Personal protective clothing and equipment;

o Camp/accommodation;

o Rest and recreation (R&R) travel costs;

o Living away from home allowances;

o Fringe Benefits Tax (FBT) where applicable.



The following is an example of a labour rate calculation:

CONSTRUCTION EQUIPMENT COSTS

Construction equipment costs are attributed to the permanent work activity being

performed.

Fixed costs such as move-in, assembly, and move-out are included as plant indirect

costs.

Equipment costs may be either outside hire or company owned equipment costs.

Outside hire rates need to be checked for inclusion of operator, supply of fuels, other

servicing provisions, move-in & move-out, minimum hire periods, and any extra

charges.



For company owned equipment hourly (or daily) cost rates need to be estimated for

each equipment item with cost components providing for:

o Service and repair labour;

o Operating materials and supplies – fuel, oils, tyres, consumables and spares;

o Workshop overheads may be included as a surcharge or included as plant

indirect costs;

o Major overhaul and repair reserves;

o Ownership costs such as depreciation, insurances, and registration.

JOB OR TEMPORARY MATERIALS

Job materials are associated with directly performing the work and include items

such as concrete formwork, lifting slings, and welding rods.

Major items of job material such as scaffold hire where cost is not directly related to

work performed are included in plant indirect costs.

Specific pricing is usually obtained for major job materials items.

PERMANENT MATERIALS AND FREIGHT

Permanent materials are the items that remain in the completed work.

Permanent materials include:

o Engineered items (such as conveyor items, pumps, transformers);

o Fabricated items (structural steel);

o Bulk commodities (concrete, piping, electrical cable).

Pricing may be obtained through procurement personnel or by estimators.

Estimators must check quotations to ensure all scope requirements are included

such as supply of manuals, special tools, installation supervision, and spares.

Materials pricing must be clear on point of delivery.

Where local (same country) freight costs are to be added, a percentage of the

equipment or material price can usually be established for freight costs.

International and special freight requirements should be based on quotations for the

specific requirements.

International freight may also require a local freight component to be included.



SUBCONTRACTS

Pricing is usually obtained through procurement/contracts personnel.

Estimator must review pricing schedules before issue to ensure pricing is suitable for

incorporating in estimate.

Estimator must review full quotations/bids to ensure completeness and any

qualifications and exclusions are identified.

Costs for support activities and services may be required.

INDIRECT COSTS

Indirect costs are usually time based or lump sum type costs and may be field

indirect costs or “home office” and other off site indirect costs.

Indirect labour costs include:

o Direct field labour indirect activities such as travel, training, toolbox meetings;

o Support field labour such as warehouse, general labourers, flagmen;

o Supervision and overhead field support labour;

o “Home office” and off site support labour for field activities.

Labour hours for indirect costs should be determined from project execution plans

and schedules. Rates for field supervision and overhead support are usually

available as weekly rates, with off site support or home office staff available as hourly

charge out rates.

Site buildings, facilities, and services requirements are usually established in

conjunction with construction managers or supervisors. Detailed costs are built up by

the estimator and include establishment, operation, maintenance, and removal.

General plant and equipment costs provide for costs not included in the direct field

cost. These will include warehouse cranes and forklifts, support vehicles, equipment

freight, assembly, disassembly, and standby time plus items such as site radios,

signs and barricades.

Site office and miscellaneous expenses. These costs cover the operation of a field

office and may include items such as safety awards, and local donations.

Camp, travel and accommodation costs. These costs are based on the specific plan

of project execution and estimated costs are developed based on detailed

requirements being established.

Check lists usually contain an extensive list of indirect cost items and these should

be used.



OTHER COSTS

Other costs include:

o Engineering, procurement and construction management. Separate specific

detailed estimates are prepared for incorporation in project estimates;

o Owner costs. Detailed coordination with the client or owner is required to

ensure that the scope of owner cost is clearly understood and agreed;

o Owner costs are usually included in estimates at summary levels;

o Taxes such as Goods and Services Tax (GST) are usually excluded from

estimates and shown as an estimate qualification. Other taxes such as payroll

tax and stamp duty should be included in labour rates or the applicable

estimate item.

ALLOWANCES AND PROVISIONS

Specific allowances and provisions should be made for the cost of expected but

undefined items.

Required allowances are determined by reviewing check lists as well as the required

scope and the plan of project execution.

Details of allowances and provisions should be included in the basis of estimate.

ESCALATION

Escalation costs provisions are determined as the estimate is nearing completion

when project engineering, procurement, and construction schedules are available.

Costs are grouped at suitable summary levels that reflect expenditure profiles and

applicable escalation rates are then applied.

In some cases where external parties are preparing project financial analyses a cash

flow may only be required.

CONTINGENCY – PROBABILISTIC METHODS

The contingency is usually based on two components:

o Estimate accuracy of the fixed current estimate scope:

The estimate is summarised at a high level and probability ranges

established for these summary groupings.

These probability ranges are determined by reviewing the level of

project definition on which the quantities are based, and the level of

confidence in the pricing.



o Project risk events impacting on the cost:

The risk items together with likelihood and severity are usually

identified in risk review sessions involving persons experienced and

with knowledge of the project.

A Monte Carlo simulation is prepared and used to determine the range of estimate

values for particular confidence levels.

Contingency is then applied to bring the base estimate to the required level of

confidence.

Items such as major scope changes and “force majeure” events are usually excluded

and noted as such in the basis of estimate qualifications and exclusions.

MARGINS

For contractor estimates, corporate management reviews the estimate including

contingency and risk items, and determines the mark up to cover corporate overhead

costs and profit margins.

For an EPCM or client estimate, these contractor margins are included with the direct

cost items. EPCM contractor margins are usually included with EPCM labour costs or

as separate EPCM fees.

ESTIMATE REVIEWS

Initially review estimate details, including exclusions and qualifications with the

project team.

For management reviews, prepare estimate summaries, benchmark comparisons,

and risk areas, plus the basis of estimate.

If you are part of a management review team, go through the basis of estimate in

detail before looking at any numbers.

ESTIMATE ADMINISTRATION

As an estimator looking after estimate administration, ensure:

o Meetings are recorded;

o Document receipts are recorded with revisions;

o Document issues are recorded with revisions and distribution list;

o Documents are kept secure;

o Files and records are retained.



WHAT DOES THE FINAL ESTIMATE LOOK LIKE

Some sample estimate reports showing estimate items and summary levels:

WBS Level 4, Prime & Item

WBS Level 3 Summary

WBS Level 1 Summary



SUMMARY AND CONCLUSIONS

This presentation has looked at:

o What an estimate is and types of estimate;

o Classification of estimates based on level of project definition;

o Scope of estimate preparation activities;

o Capacity and equipment factored estimates;

o Parametric estimates;

o Detailed estimates and the cost components of direct field cost, indirect cost,

and other costs;

o Crews and production rates and labour rate calculations;

o Sources and the inclusion of other estimate cost components.

From this we conclude that systematic estimating processes are available to be used

by those preparing estimates, but these processes require experienced estimators,

plus a reliance on other team members being able to provide not only quantities, but

project execution plans and a great deal of other information.

REFERENCES

AACEI International Recommended Practices:

o RP18R-97 Cost Estimate Classification System – As applied in engineering,

procurement, and construction for the process industries Rev November 29,

2011;

o RP46R-11 Required Skills and Knowledge of Project Cost Estimating – TCM

Framework: General Reference Rev January 16, 2013;

o RP56R-08 Cost Estimate Classification System – As applied for the building

and general construction industries Rev December 13, 2011;

o RP59R-10 Development of Factored Cost Estimates – As applied in

engineering, procurement, and construction for the process industries Rev

June 18, 2011.

Australian Federation of Construction Contractors – Fundamentals of Estimating for

Engineering Construction; FJ Slattery, 1988.

AACE International web site for obtaining Recommended Practices:

o http://www.aacei.org/resources/rp/:

Member access;

Non-member registered access.

http://www.aacei.org/resources/rp/