Cost Estimate - Mansosp.mans.edu.eg/elbeltagi/IEN314P Ch6.pdf · The objective of cost estimate is...

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Cost EstimateCost Estimate

14/10/2016 Emad Elbeltagi 2

IntroductionIntroductionCost EstimatingCost EstimatingCost Estimating may be defined as:

Estimating is the compilation of all the costs of the elements of a project within an agreed upon project scope

it is the production of a statement of the approximate quantity of materials, time and costs to perform construction decisions

The basic challenges the construction contractor faces are to estimate the cost of constructing a project

The objective of cost estimate is to produce an accurate, cost effective prediction of what a project will most likely cost and it needs to be done in different manners at different stages

Cost Estimating may be defined as:

Estimating is the compilation of all the costs of the elements of a project within an agreed upon project scope

it is the production of a statement of the approximate quantity of materials, time and costs to perform construction decisions

The basic challenges the construction contractor faces are to estimate the cost of constructing a project

The objective of cost estimate is to produce an accurate, cost effective prediction of what a project will most likely cost and it needs to be done in different manners at different stages

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IntroductionIntroductionEstimating PurposeEstimating Purpose

The purpose of estimating is to forecast the cost required to complete a project in accordance with the contract plans and specifications

There are two distinct tasks in estimating:

To determine the probable real cost of the project

To determine the probable real time to build the project

Because estimates are prepared before a project is constructed, an estimate is, at best, a close approximation of the actual costs

The purpose of estimating is to forecast the cost required to complete a project in accordance with the contract plans and specifications

There are two distinct tasks in estimating:

To determine the probable real cost of the project

To determine the probable real time to build the project

Because estimates are prepared before a project is constructed, an estimate is, at best, a close approximation of the actual costs


IntroductionIntroductionProject CostsProject Costs

The principal components of a contractor's costs result from the use of labors, materials, equipment, and subcontractors

The costs that spent on a specific activity or project can be classified as:

Fixed cost

Time-related cost

Quantity-proportional cost

Project direct costs

Project indirect costs

The principal components of a contractor's costs result from the use of labors, materials, equipment, and subcontractors

The costs that spent on a specific activity or project can be classified as:

Fixed cost

Time-related cost

Quantity-proportional cost

Project direct costs

Project indirect costs

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IntroductionIntroductionCost Estimating: Indirect costCost Estimating: Indirect costIndirect costs comprises project (site); and General (head-office)

overheads

Project overheads The cost of items that cannot be directly charged to a specific

work element It includes site utilities, supervisors, parking, offices,

workshops, stores, first aid facility, et. A detailed analysis of site-related costs is required to arrive at

an accurate estimate of these costs Companies use their own forms and checklists for estimating

these costs. Site overhead costs are estimated to be between 5% - 15% of project total direct cost

Indirect costs comprises project (site); and General (head-office)

overheads

Project overheads The cost of items that cannot be directly charged to a specific

work element It includes site utilities, supervisors, parking, offices,

workshops, stores, first aid facility, et. A detailed analysis of site-related costs is required to arrive at

an accurate estimate of these costs Companies use their own forms and checklists for estimating

these costs. Site overhead costs are estimated to be between 5% - 15% of project total direct cost


IntroductionIntroductionCost Estimating: Indirect costCost Estimating: Indirect cost

General overheads

The costs that cannot be directly attributed to a specific project

They represent the cost of the head-office expenses, mangers, directors, design engineers, schedulers, etc.

Continuous observations of the company expenses help estimating reasonable values for the general overhead

For a given project, it can be estimated between 2% - 5% of

the contract direct cost

General overheads

The costs that cannot be directly attributed to a specific project

They represent the cost of the head-office expenses, mangers, directors, design engineers, schedulers, etc.

Continuous observations of the company expenses help estimating reasonable values for the general overhead

For a given project, it can be estimated between 2% - 5% of

the contract direct cost

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IntroductionIntroductionTypes of cost estimateTypes of cost estimate When beginning to prepare an estimate, it is important to

understand its intended use

An estimate can be prepared at any point through the project life

Depending on the information available and the time spent preparing the estimate, the accuracy it provides will vary

here are four different stages at which estimates take place:

Conceptual phase

Schematic phase

Design development phase

Procurement phase

When beginning to prepare an estimate, it is important to understand its intended use

An estimate can be prepared at any point through the project life

Depending on the information available and the time spent preparing the estimate, the accuracy it provides will vary

here are four different stages at which estimates take place:

Conceptual phase

Schematic phase

Design development phase

Procurement phase


IntroductionIntroductionTypes of cost estimate: Conceptual estimateTypes of cost estimate: Conceptual estimate The owner needs cost information very early on in a project so that

decisions as to the location and scope can be made before money is spent on design or property purchase

Prepared with very little information, relying on historical data

This type of estimate is called a Conceptual , Rough Order

of Magnitude, top-down or parametric estimate and is generally prepared long before the construction starts

Sketch or a brief written description of the project

The owner needs cost information very early on in a project so that decisions as to the location and scope can be made before money is spent on design or property purchase

Prepared with very little information, relying on historical data

This type of estimate is called a Conceptual , Rough Order

of Magnitude, top-down or parametric estimate and is generally prepared long before the construction starts

Sketch or a brief written description of the project

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IntroductionIntroductionTypes of cost estimate: Schematic Design PhaseTypes of cost estimate: Schematic Design Phase This estimate include some area take-off, for major project elements

At this stage, some of the key sub-contractors might be asked for input for complicated systems

At the end of this stage, the presentation of the design to the owner is accompanied by an estimate of the cost of the project

Any design alternatives will also be accompanied by an estimate of the cost of the project

Before the project team moves on to the next phase of design, the owner will decide on basic design parameters and on project budget

Any cost reduction ideas are presented and priced

This estimate include some area take-off, for major project elements

At this stage, some of the key sub-contractors might be asked for input for complicated systems

At the end of this stage, the presentation of the design to the owner is accompanied by an estimate of the cost of the project

Any design alternatives will also be accompanied by an estimate of the cost of the project

Before the project team moves on to the next phase of design, the owner will decide on basic design parameters and on project budget

Any cost reduction ideas are presented and priced


IntroductionIntroductionTypes of cost estimate: Design PhaseTypes of cost estimate: Design Phase In this phase, much more defined information

Because of this, the time taken to prepare this type of estimates is longer, but the accuracy is greater

The estimate in this stage will be based on a design that is 60% complete

Most of the major project items will be quantifiable, and the more important unit prices should be known at this point

With the presentation of this estimate, the costs of the materials and methods will be known and should be compared to past similar projects

In this phase, much more defined information

Because of this, the time taken to prepare this type of estimates is longer, but the accuracy is greater

The estimate in this stage will be based on a design that is 60% complete

Most of the major project items will be quantifiable, and the more important unit prices should be known at this point

With the presentation of this estimate, the costs of the materials and methods will be known and should be compared to past similar projects

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IntroductionIntroductionCost Estimating: detailed (Procurement) estimateCost Estimating: detailed (Procurement) estimate

It is also known as a bottom-up, fair-cost, or bid estimate

Prepared once the design has been completed and all construction documents prepared

the estimator must make a complete and thorough job analysis

For a detailed estimate, a thorough knowledge of labor, material, equipment, crews, and methods of construction should be collected

It is also known as a bottom-up, fair-cost, or bid estimate

Prepared once the design has been completed and all construction documents prepared

the estimator must make a complete and thorough job analysis

For a detailed estimate, a thorough knowledge of labor, material, equipment, crews, and methods of construction should be collected


IntroductionIntroductionTypes of cost estimateTypes of cost estimate

Type of Estimate Construction Document Development ExpectedPercent Error*

Conceptual (Parametric)Schematic Design0-30% Construction Documents

± 10-25 %

Semi-DetailedDesign Development30-90% Construction Documents

± 5-15 %

Detailed 90-100% Plans and Specifications ± 2-5%

* Percent error means the expected variation between cost estimate and actual cost

Conceptual cost estimates; incomplete project documentation Semi-detailed estimates are prepared when parts of the project

have been completed Detailed cost estimates are prepared based on fully developed

construction drawings and specifications

Conceptual cost estimates; incomplete project documentation Semi-detailed estimates are prepared when parts of the project

have been completed Detailed cost estimates are prepared based on fully developed

construction drawings and specifications

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Conceptual Cost Estimating

Conceptual Cost Estimating


DefinitionDefinition A “conceptual estimate” is an estimate prepared by using

engineering concepts and avoiding the counting of individual pieces

The forecast of project costs that is performed before any significant amount of information is available from detailed design and with incomplete work scope definition

It is used as the basis for important project decisions like go/no-go and the appropriation of funds decisions

A conceptual estimate is also used to set a preliminary construction budget

All pre-construction estimates start with a database of past projects

A “conceptual estimate” is an estimate prepared by using engineering concepts and avoiding the counting of individual pieces

The forecast of project costs that is performed before any significant amount of information is available from detailed design and with incomplete work scope definition

It is used as the basis for important project decisions like go/no-go and the appropriation of funds decisions

A conceptual estimate is also used to set a preliminary construction budget

All pre-construction estimates start with a database of past projects

Conceptual Cost EstimatingConceptual Cost Estimating

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CharacteristicsCharacteristics Early project stages

Accuracy ± 25 %

The availability of a good, complete scope definition is considered the most crucial factor for conceptual estimating

Conceptual estimating is a resource restricted activity where the time and cost available for making the estimate is restricted

Therefore, the estimate, although important, cannot be given much time and resources

Early project stages

Accuracy ± 25 %

The availability of a good, complete scope definition is considered the most crucial factor for conceptual estimating

Conceptual estimating is a resource restricted activity where the time and cost available for making the estimate is restricted

Therefore, the estimate, although important, cannot be given much time and resources



Unit methodUnit method Depends on the cost per functional unit of the building, a

functional unit being, for example, a hotel bedroom

It is suitable for clients who specialize in one type of project; for example, hotel or supermarket chains

Schools – cost per pupil

Hospitals – cost per bed

Note that, all other adjustments must be also made (time, location and unit)

Depends on the cost per functional unit of the building, a functional unit being, for example, a hotel bedroom

It is suitable for clients who specialize in one type of project; for example, hotel or supermarket chains

Schools – cost per pupil

Hospitals – cost per bed

Note that, all other adjustments must be also made (time, location and unit)

Conceptual Estimating MethodsConceptual Estimating Methods

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Square foot (meter) methodSquare foot (meter) method The square meter method is a single price rate method

based on the cost per square meter of the building

The most frequently used method of approximate estimating

Quick and simple to use

Similar to the unit rate method with more accuracy

Quantities of materials and labor required to build a project ar also reported per square meter

With the quantities held constant, each year the unit prices are adjusted to reflect current costs for labor and materials

The square meter method is a single price rate method based on the cost per square meter of the building

The most frequently used method of approximate estimating

Quick and simple to use

Similar to the unit rate method with more accuracy

Quantities of materials and labor required to build a project ar also reported per square meter

With the quantities held constant, each year the unit prices are adjusted to reflect current costs for labor and materials



Square Meter method: ExampleSquare Meter method: Example

Gross floor area for office block = 10.0 x 25.0 - 2 x 3.0 x 7.50 = 205.0 m2

Area of 5 floors 205.0 x 5 = 1025.0 m2 x LE1100 /m2 = LE1,127,500.0

Basement 7.00 x 25.0 = 175.0 m2 x LE1300 /m2 = LE227,500.0

Estimate for block = LE1,355,000.0

Gross floor area for office block = 10.0 x 25.0 - 2 x 3.0 x 7.50 = 205.0 m2

Area of 5 floors 205.0 x 5 = 1025.0 m2 x LE1100 /m2 = LE1,127,500.0

Basement 7.00 x 25.0 = 175.0 m2 x LE1300 /m2 = LE227,500.0

Estimate for block = LE1,355,000.0


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Assembly Estimate (Approximate quantities)Assembly Estimate (Approximate quantities) Assemblies estimating – also called Systems Estimating –

is best accomplished concurrently with the design phase of a project

Most accurate preliminary method of estimating, provided that there is sufficient information to work on

group items corresponding to a given operations and relating them to a common unit of measurement

This estimate is prepared by working with the system or assembly unit of a project

Assemblies estimating – also called Systems Estimating –is best accomplished concurrently with the design phase of a project

Most accurate preliminary method of estimating, provided that there is sufficient information to work on

group items corresponding to a given operations and relating them to a common unit of measurement

This estimate is prepared by working with the system or assembly unit of a project



Assembly Estimate (Approximate quantities)Assembly Estimate (Approximate quantities) Rates are built up for these items

All measurements are taken as gross

In units estimate, a gross unit is established, for example the number of hospital beds required

In square foot estimating the estimator works with the project area

In assemblies estimating the estimator will use more detailed units such as: (square feet of partition wall, number of plumbing fixtures, or square feet of carpet)

Rates are built up for these items

All measurements are taken as gross

In units estimate, a gross unit is established, for example the number of hospital beds required

In square foot estimating the estimator works with the project area

In assemblies estimating the estimator will use more detailed units such as: (square feet of partition wall, number of plumbing fixtures, or square feet of carpet)


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Estimate BasicsEstimate Basics Unit cost should be determined as an average of previous projects

data not depending on one project

UC = (A + 4B + C) / 6

UC = forecast unit cost

A = minimum unit cost of previous projects

B = average unit cost of previous project

C = maximum unit cost of previous projects

Total cost =Number of units × unit cost

Unit cost should be determined as an average of previous projects data not depending on one project

UC = (A + 4B + C) / 6

UC = forecast unit cost

A = minimum unit cost of previous projects

B = average unit cost of previous project

C = maximum unit cost of previous projects

Total cost =Number of units × unit cost



Estimate BasicsEstimate Basics Example

Use the weighted unit cost to determine the conceptual cost estimate for a proposed parking that is to contain 135 parked cars

Example

Use the weighted unit cost to determine the conceptual cost estimate for a proposed parking that is to contain 135 parked cars


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ExampleExample Unit cost per car

Then, the average unit cost = 30,431.5 / 8 = LE3,803.94 / car

The forecast unit cost = (2,987.3 + 4 × 3,803.94 + 4,375.8) / 6 = 3,763.14.

The cost estimate for 135-cars parking = 135 × 3,763.14 = LE508,023

Unit cost per car

Then, the average unit cost = 30,431.5 / 8 = LE3,803.94 / car

The forecast unit cost = (2,987.3 + 4 × 3,803.94 + 4,375.8) / 6 = 3,763.14.

The cost estimate for 135-cars parking = 135 × 3,763.14 = LE508,023



Time adjustmentTime adjustment The adjustment should represent the relative inflation or

deflation of costs with respect to time due to factors such as labor rates, material costs, interest rates

Time value of money

Index numbers are used to reflect changes in money values

Various organizations publish indices that show the economic trends of the construction industry with respect to time

New project cost = Past project cost (New year index/past year index)

The adjustment should represent the relative inflation or deflation of costs with respect to time due to factors such as labor rates, material costs, interest rates

Time value of money

Index numbers are used to reflect changes in money values

Various organizations publish indices that show the economic trends of the construction industry with respect to time

New project cost = Past project cost (New year index/past year index)

Conceptual Estimate AdjustmentConceptual Estimate Adjustment

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Time adjustment: ExampleTime adjustment: Example The economic indices for building projects are shown below. It is

required to use the cost of a LE843,500 project completed last year to prepare a conceptual estimate for a project proposed for construction 3 years from now.

The economic indices for building projects are shown below. It is required to use the cost of a LE843,500 project completed last year to prepare a conceptual estimate for a project proposed for construction 3 years from now.



Time adjustment: ExampleTime adjustment: Example

The equivalent interest rate can be calculated based on the change in the cost index during the 3-year period as follow:

(378/358) = (1 + i)3

Then i = 1.83%

Accordingly, the cost of the project should be adjusted for time as follows:

Cost = LE843,500 × (1 + 0.0183)4 = LE906,960

The equivalent interest rate can be calculated based on the change in the cost index during the 3-year period as follow:

(378/358) = (1 + i)3

Then i = 1.83%

Accordingly, the cost of the project should be adjusted for time as follows:

Cost = LE843,500 × (1 + 0.0183)4 = LE906,960


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Location adjustmentLocation adjustment Tender price levels vary according to the region of the country

where the work is carried out

the use of cost information from a previous project should be adjusted to represent the difference in cost between the locations of the two projects

The adjustment should represent the relative difference in costs of material, equipment and labor of the two locations

Indices that show the relative difference in construction costs with respect to location is published by many organizations

Tender price levels vary according to the region of the country where the work is carried out

the use of cost information from a previous project should be adjusted to represent the difference in cost between the locations of the two projects

The adjustment should represent the relative difference in costs of material, equipment and labor of the two locations

Indices that show the relative difference in construction costs with respect to location is published by many organizations



Location adjustment: ExampleLocation adjustment: Example The indices for different location of construction costs are shown

below. The construction cost of a project completed at city A is LE387,200, it is required to prepare a conceptual estimate for a similar project proposed in city D

The cost of the proposed project

Cost =

LE387,200 × (1.105 / 1.025)

= LE417,420

The indices for different location of construction costs are shown below. The construction cost of a project completed at city A is LE387,200, it is required to prepare a conceptual estimate for a similar project proposed in city D

The cost of the proposed project

Cost =

LE387,200 × (1.105 / 1.025)

= LE417,420


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Size adjustmentSize adjustment In general, the cost of a project is directly proportional to its

size

The use of cost information from a previous project to forecast the cost of a future project will not be reliable unless an adjustment is made that represents the difference in size of the two projects

The adjustment is generally a simple ratio of the size of the proposed project to the size of the previous project from which the cost data are obtained

In general, the cost of a project is directly proportional to its size

The use of cost information from a previous project to forecast the cost of a future project will not be reliable unless an adjustment is made that represents the difference in size of the two projects

The adjustment is generally a simple ratio of the size of the proposed project to the size of the previous project from which the cost data are obtained



Size adjustmentSize adjustment Knowing the Typical Building area, the cost multiplier for the

size adjustment can be calculated as follows:

Size factor = Proposed building area/Typical building area

Using the size factor, a cost multiplier could be identified from recorded data.

Size adjusted cost = Base cost x Cost multiplier

Knowing the Typical Building area, the cost multiplier for the size adjustment can be calculated as follows:

Size factor = Proposed building area/Typical building area

Using the size factor, a cost multiplier could be identified from recorded data.

Size adjusted cost = Base cost x Cost multiplier


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Combined adjustment: ExampleCombined adjustment: Example Prepare the conceptual cost estimate for a building with 62,700

m2 of floor area. The building is to be constructed 3 years from now in city B. A similar type of building that cost LE2,197,540 and contained 38,500 m2 completed 2 years ago in city E. Estimate the probable cost of the proposed building The

Prepare the conceptual cost estimate for a building with 62,700 m2 of floor area. The building is to be constructed 3 years from now in city B. A similar type of building that cost LE2,197,540 and contained 38,500 m2 completed 2 years ago in city E. Estimate the probable cost of the proposed building The



Combined adjustment: ExampleCombined adjustment: Example Original building:

Area: 38500

Year: 2 years ago

City: E (1.24)

Proposed building:

Area: 62700

Year: 3 years from now

City: B (index 1.17)

Inflation: 1.83%

Original building:

Area: 38500

Year: 2 years ago

City: E (1.24)

Proposed building:

Area: 62700

Year: 3 years from now

City: B (index 1.17)

Inflation: 1.83%


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Combined adjustment: ExampleCombined adjustment: Example Proposed cost

= Previous cost × Time adjustment × Location adjustment × Size adjustment

= LE2,179,540 × (1 + 0.0183)5 × (1.17 / 1.24)

× (62,700 / 38,500)

= LE3,700,360

Without time and location adjustment

= Previous cost × Size adjustment

= LE2,179,540 × (62,700 / 38,500) = LE3,549,537

Proposed cost

= Previous cost × Time adjustment × Location adjustment × Size adjustment

= LE2,179,540 × (1 + 0.0183)5 × (1.17 / 1.24)

× (62,700 / 38,500)

= LE3,700,360

Without time and location adjustment

= Previous cost × Size adjustment

= LE2,179,540 × (62,700 / 38,500) = LE3,549,537



Unit cost adjustmentUnit cost adjustment Although the total cost of a project will increase with size, the

cost per unit may decrease

For example, the cost of an 1800-m2 house may be LE535/ m2

where as the cost of a 2200 m2 house of comparable construction maybe only LE487/ m2

certain items such as furniture, garage, etc., are independent of the size of the project

The estimator must obtain cost records from previous projects to develop appropriate adjustments for new projects

Although the total cost of a project will increase with size, the cost per unit may decrease

For example, the cost of an 1800-m2 house may be LE535/ m2

where as the cost of a 2200 m2 house of comparable construction maybe only LE487/ m2

certain items such as furniture, garage, etc., are independent of the size of the project

The estimator must obtain cost records from previous projects to develop appropriate adjustments for new projects


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Unit cost adjustment: ExampleUnit cost adjustment: Example Cost records from previous projects are shown below. Find the

adjusted unit cost Cost records from previous projects are shown below. Find the

adjusted unit cost



Unit cost adjustment: ExampleUnit cost adjustment: Example Plot these points and find the linear equation Plot these points and find the linear equation


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17

19

21

23

25

27

0 50 100 150 200

Unit cost = [(17.9 – 24.75) / (190 – 60)] x + 24.75 = - 0.0526 x + 24.75

where 60 < x < 190, then y = 24.75 – 0.0526 (S – 60)

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Unit cost adjustment: ExampleUnit cost adjustment: Example Using Excel curve fitting

Add trend line

Write the equation

Using Excel curve fitting

Add trend line

Write the equation


Unit cost = - 0.056 x + 27.81


Estimating the cost of work items include estimating the cost of labor, equipment and material.

The analysis of a given job requires a thorough review of the plans and specifications of the bid documents

Evaluation of the soil investigation reports and a visit to the jobsite where the project is to be constructed.

Consider swell and compaction factors Consider waste factors

Estimating the cost of work items include estimating the cost of labor, equipment and material.

The analysis of a given job requires a thorough review of the plans and specifications of the bid documents

Evaluation of the soil investigation reports and a visit to the jobsite where the project is to be constructed.

Consider swell and compaction factors Consider waste factors

Estimating Work Items CostsEstimating Work Items Costs

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Unit rate estimatingUnit rate estimating This type of estimating is used in building work and

for civil work where the nature of work is repetitive

It is based on the resources required and their output rates for each category of work

It can also be used for determining certain detailed costs in conceptual budgets or during design development

This type of estimating is used in building work and for civil work where the nature of work is repetitive

It is based on the resources required and their output rates for each category of work

It can also be used for determining certain detailed costs in conceptual budgets or during design development

Estimating Direct CostEstimating Direct Cost


Unit rate estimatingUnit rate estimating There are some disadvantages of using the unit-rate

method for estimating major works:

It does not demand the examination of the program (schedule) or the method statement or the risks costs in undertaking the work

Also, the precision and level of detail in pricing an item can give a false sense of confidence in the resulting estimate

There are some disadvantages of using the unit-rate method for estimating major works:

It does not demand the examination of the program (schedule) or the method statement or the risks costs in undertaking the work

Also, the precision and level of detail in pricing an item can give a false sense of confidence in the resulting estimate


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Operational estimatingOperational estimating It is recommended method for estimating civil

engineering work

It requires the estimator to build up the cost of the operation based on its principles including the total cost of construction equipment, labor and permanent/temporary materials

This method links well with the planning and scheduling process

It is recommended method for estimating civil engineering work

It requires the estimator to build up the cost of the operation based on its principles including the total cost of construction equipment, labor and permanent/temporary materials

This method links well with the planning and scheduling process



Operational estimatingOperational estimating It embraces the total anticipated time that the

construction equipment and labor crew are involved in the operation including all idle time

The operational estimating involves the following:

Prepare the method statement showing the sequence, resources, timing, etc.

Prepare the work schedule

Smooth or level the resources

It embraces the total anticipated time that the construction equipment and labor crew are involved in the operation including all idle time

The operational estimating involves the following:

Prepare the method statement showing the sequence, resources, timing, etc.

Prepare the work schedule

Smooth or level the resources


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Site OverheadsSite Overheads Develop comprehensive checklists for general jobsite

requirements, for example:

Cost of temporary site utilities

Jobsite production facilities (concrete batching plants, quarry, various shops

Jobsite personnel wages

Field buildings, etc.

It is assumed between 5 -15 % of total direct cost

Develop comprehensive checklists for general jobsite requirements, for example:

Cost of temporary site utilities

Jobsite production facilities (concrete batching plants, quarry, various shops

Jobsite personnel wages

Field buildings, etc.


Estimating Indirect CostEstimating Indirect Cost


Head Office (General) OverheadsHead Office (General) Overheads The company home office expenses cannot be

charged to a single project, for example:

Office supplies, Office utilities and communication

President, estimators, human resources staff, all personnel working at the head office

Accounting and legal services, travel, etc.


The company home office expenses cannot be charged to a single project, for example:

Office supplies, Office utilities and communication

President, estimators, human resources staff, all personnel working at the head office

Accounting and legal services, travel, etc.


Estimating Indirect CostEstimating Indirect Cost

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Construction contingencesConstruction contingences The amount of money added to cover the unforeseen

conditions, difficulties, or estimating accuracy:

Unpredictable price escalation for materials, labor, and installed equipment for projects

Unforeseen safety and environmental requirements

Weather changes; construction difficulties; economic and financial problems; etc.

The amount of money added to cover the unforeseen conditions, difficulties, or estimating accuracy:

Unpredictable price escalation for materials, labor, and installed equipment for projects

Unforeseen safety and environmental requirements

Weather changes; construction difficulties; economic and financial problems; etc.

Estimating Mark upEstimating Mark up


ProfitProfit The contractor should balance between the profit and

the competition, profit is governed by:

The number of competitors

The need for the work

The project size

Project complexity

Working with a certain type of projects or agency

The contractor should balance between the profit and the competition, profit is governed by:

The number of competitors

The need for the work

The project size

Project complexity

Working with a certain type of projects or agency

Estimating Mark upEstimating Mark up

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Finalizing a Tender PriceFinalizing a Tender Price

Price

CostMarkup

Direct costIndirect costProfitRisk allowance Financial charge


The indirect costs and mark up will be distributed over the different work items

There are three ways to price work items:

Balanced pricing (bidding)

Un-balanced pricing (bidding)

Method-related charge

The indirect costs and mark up will be distributed over the different work items

There are three ways to price work items:

Balanced pricing (bidding)

Un-balanced pricing (bidding)

Method-related charge


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Balanced Bid (straight-forward method)Balanced Bid (straight-forward method) The share of each item = (direct cost of this item /

total direct cost) x (total indirect cost + mark up)

Example:

Assume that the direct cost for an item (a) is LE 400,000 and that item is included in a contract whose price is LE 3,500,000 and its total direct cost is LE 2,800,000. Calculate the price for item (a) considering a balanced bid

The share of each item = (direct cost of this item / total direct cost) x (total indirect cost + mark up)

Example:

Assume that the direct cost for an item (a) is LE 400,000 and that item is included in a contract whose price is LE 3,500,000 and its total direct cost is LE 2,800,000. Calculate the price for item (a) considering a balanced bid



Balanced Bid (straight-forward method)Balanced Bid (straight-forward method) Bid price = direct cost + indirect cost + markup

Indirect cost + markup (for the whole contract) = Bid price - direct cost = 3,500,000 - 2,800,000 = LE 700,000

Indirect cost + markup for activity (a) = (400000/2800000) x 700000 = 100000

Price of activity a = its direct cost + indirect cost = 400,000 + 100,000 = LE 500,000

Bid price = direct cost + indirect cost + markup

Indirect cost + markup (for the whole contract) = Bid price - direct cost = 3,500,000 - 2,800,000 = LE 700,000

Indirect cost + markup for activity (a) = (400000/2800000) x 700000 = 100000

Price of activity a = its direct cost + indirect cost = 400,000 + 100,000 = LE 500,000


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Un-Balanced Bid (Loading of rates)Un-Balanced Bid (Loading of rates) The contract price is said to be unbalanced if the

contractor raises the prices on certain bid items (usually the early items on the bill of quantities) and decreases the prices on other items so that the tender price remain the same

This process is also called the loading of rates

Loading of rates may be risky to both the contractor and the owner

The contract price is said to be unbalanced if the contractor raises the prices on certain bid items (usually the early items on the bill of quantities) and decreases the prices on other items so that the tender price remain the same

This process is also called the loading of rates

Loading of rates may be risky to both the contractor and the owner



Un-Balanced Bid (Loading of rates)Un-Balanced Bid (Loading of rates) If the contractor raised the price for an item and the

quantity of this item increased then, this situation is risky to the owner as it will cost the owner more money

On the other hand, if the contractor reduced the price of an item and the quantity of that item increased, thus situation will be risky to the contractor

If the contractor raised the price for an item and the quantity of this item increased then, this situation is risky to the owner as it will cost the owner more money

On the other hand, if the contractor reduced the price of an item and the quantity of that item increased, thus situation will be risky to the contractor


27


Un-Balanced Bid (Loading of rates)Un-Balanced Bid (Loading of rates)


Activity QuantityDirect

cost rate

Balanced bid Unbalanced bid

Rate Price Rate Price

ABCDE

100100100100100

48

16168

510202010

5001000200020001000

61418189

600140018001800900

Tender price 6500 6500

Date post:	29-Jul-2018
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