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Construction EngineeringCCE 4004

• Lecture 5
• Cost Estimating

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Introduction

• What is a cost estimate?
• It is a prediction of probable cost
• It is figuring out how to put the pieces together
  in the most economical manner
• Estimating is both art and science
• Identifying and quantifying the pieces of the
  takeoff
• Identifying construction methods
• Engineering - Will it be stable during
  construction?
• Predicting the productivity rate

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Bidding v. Estimating

• Bidding is NOT the same as estimating
• When we bid
• We want to develop the lowest price without
  losing money
• When we estimate
• We want to develop the expected REAL cost of the
  work
• Identify RISK

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Types of Estimates

• Feasibility estimate
• Also called Screening estimate, or
  order-of-magnitude estimate
• Performed by Owner or Consultant
• Target Accuracy (/- 25 - 30)
• Known Information
• Building or Project Type
• Hospital, School, Office, Hotel. etc.,
• Relative Size
• 140-150,000 sf., 3 story etc.,
• Location
• Community, focused area or a specific site.
• Rough Quality Level or Relative Complexity

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Types of Estimates

• Conceptual or preliminary estimate
• Performed by project architect
• Target accuracy (/- 20 - 25)
• Known information
• Site, building type size
• Possible main materials finishes
• Degree of complexity rough quality
• Unknowns
• How it is to be put together (labor)
• Specific detailed site information

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Types of Estimates

• Engineers estimate
• Performed by the project architect / engineer
• Target accuracy (/- 5 - 10)
• Known information
• Complete design info is available
• Construction drawings project technical specs
• Unknowns
• Some sub-surface conditions
• Exact labor material rates of contractor (G.C.
  mark-up, motivation, market 15-20)

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Types of Estimates

• Detailed cost estimate
• Performed by general contractor subs
• Target accuracy (must be exact)
• Known information
• Complete design info is available
• Construction drawings project technical specs
• Unknowns
• Some sub-surface conditions
• Remaining questions directed to A/E

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Approaches to Cost Estimation

• Production Function
• Relationship between the volume of construction
  and a factor of production such as labor
• Empirical Cost Inference
• Relationship between the cost and a few important
  attributes of the facility/ system
• Unit costs for bill of quantities
• A unit cost is assigned to each of the facility
  components or tasks as represented by the bill of
  quantities.
• Allocation of joint costs
• Allocations of cost from existing accounts may be
  used to develop a cost function of an operation.

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Example

• In making a screening estimate of an industrial
  plant for the production of batteries, an
  empirical formula based on data of a similar
  buildings completed before 1987 was proposed
• C (16,000)(Q 50,000)1/2
• where
• Q is the daily production capacity of batteries
  and
• C is the cost of the building in 1987 dollars.

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Example (contd)

• If a similar plant is planned for a daily
  production capacity of 200,000 batteries, find
  the screening estimate of the building in 1987
  dollars.
• Solution
• C (16,000)(200,000 50,000)1/2
• 8,000,000 (in 1987 dollars)

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Approaches to Cost Estimation

• Production Function
• Relationship between the volume of construction
  and a factor of production such as labor
• Empirical Cost Inference
• Relationship between the cost and a few important
  attributes of the facility/ system
• Unit costs for bill of quantities
• A unit cost is assigned to each of the facility
  components or tasks as represented by the bill of
  quantities.
• Allocation of joint costs
• Allocations of cost from existing accounts may be
  used to develop a cost function of an operation.

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Cost Indices

• A price index is a weighted aggregate measure of
  constant quantities of goods and services
  selected for the package.

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Cost Indices (contd)

• The input price indices of labor and/or material
  reflect the price level changes of such input
  components of construction
• the output price indices, where available,
  reflect the price level changes of the completed
  facilities.
• the construction cost index and the building cost
  index are reported periodically in the
  Engineering News-Record (ENR).

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Historical Cost Data

• the following types of information are available
  
• Catalogs of vendors' Data (Sweets' Catalog-
  McGraw-Hill )
• Periodicals (ENR - McGraw-Hill, Cost Engineering)
• Commercial cost reference manuals (R.S. Means,
  Dodge Manual for Building Construction)
• Digests of actual project costs (Dodge Digest of
  Building Costs and Specifications, ENR weekly)

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Parametric Estimation

• The application of the single parameter cost
  function for estimates are
• Exclude special local conditions in historical
  data
• Adjust for size or capacity
• Adjust for inflation index
• Adjust for local index of construction costs
• Adjust for different regulatory constraints
• Adjust for local factors for the new facility

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Adjust for size or capacity

• Cost of unit A Cost of unit B (capacity of unit
  A/capacity of unit B) x
• Where
• X is the cost capacity factor
• Example The cost of a 320 (ft3/hr) process unit
  is 675,000. From historical cost records, the
  capacity ratio factor is 0.72. Estimate the cost
  of similar process unit with a capacity of 450
  ft3/hr.
• Cost of unit A (675,000)( 450/320)0.72
• 862,797

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Adjust for inflation index

• Cost (_at_ t n) Cost (_at_t) (1i)n
• Where I is the expected inflation rate
• Example the screening estimate of an industrial
  plant for the production of batteries is 120
  million in 2001 dollars, if the inflation rate is
  expected to be 8 per year , find the cost in
  2004 dollars.
• Cost (120)(1.08)3 151.2 million in 2004
  dollars

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Adjust for local index of construction costs

• The total construction cost of a refinery in
  Tallahassee, Fl was 100 million. It is proposed
  that a similar refinery will be built in Los
  Angeles, CA. if the location index was 0.92 for
  Tallahassee, FL and 1.14 for Los Angeles, CA,
  make an order of magnitude estimate of the cost
  of the proposed plant.
• Cost of CA plant (100)(1.14/0.92)
  126.67 million

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Parametric Estimation Example

• The total construction cost of a refinery with a
  production capacity of 200,000 bbl/day in Gary,
  Indiana, completed in 1999 was 100 million. It
  is proposed that a similar refinery with a
  production capacity of 300,000 bbl/day be built
  in Los Angeles, California, for completion in
  2003. For the additional information given below,
  make an order of magnitude estimate of the cost
  of the proposed plant.

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Example (contd)

• In the total construction cost for the Gary,
  Indiana, plant, there was an item of 5 million
  for site preparation which is not typical for
  other plants.
• The variation of sizes of the refineries can be
  approximated by the exponential rule, Equation
  (5.4), with m 0.6.
• The inflation rate is expected to be 8 per year
  from 1999 to 2003.

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Example (contd)

• The location index was 0.92 for Gary, Indiana and
  1.14 for Los Angeles in 1999. These indices are
  deemed to be appropriate for adjusting the costs
  between these two cities.
• New air pollution equipment for the LA plant
  costs 7 million in 2003 dollars (not required in
  the Gary plant).
• The contingency cost due to inclement weather
  delay will be reduced by the amount of 1 of
  total construction cost because of the favorable
  climate in LA (compared to Gary).

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Solution

• On the basis of the above conditions, the
  estimate for the new project may be obtained as
  follows
• Typical cost excluding special item at Gary, IN
  is 100 million - 5 million 95 million
• Adjustment for capacity based on the exponential
  law yields (95)(300,000/200,000)0.6
  (95)(1.5)0.6 121.2 million
• Adjustment for inflation leads to the cost in
  2003 dollars as (121.2)(1.08)4 164.6 million

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Solution (contd)

• Adjustment for location index gives
  (164.6)(1.14/0.92) 204.6 million
• Adjustment for new pollution equipment at the LA
  plant gives 204.6 7 211.6 million
• Reduction in contingency cost yields
  (211.6)(1-0.01) 209.5 million
• Since there is no adjustment for the cost of
  construction financing, the order of magnitude
  estimate for the new project is 209.5 million.

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More Examples!!!