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Cost EstimateCost EstimateModule 3Module 3

Dr. Ari Sandhyavitri

Engineering Faculty

UNRI, 2004

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Cost and PriceCost and Price

Cost : cost directly attributable to an element ofwork plus overhead.

Cost = direct costs + overhead (e.g. 5%-10%).

Price : cost of an element of work plus allowancefor general overhead, insurance, taxes, interest

charges, and profits (contributions).

Price = cost estimate+ risk+ overhead+ profit+mark up/mark down.

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Cost ComponentsCost Components

Cost (Direct costcomponents):

Labours

Materials Equipment

Sub-contractors

Price (In-direct cost

components): Taxes

Insurances

Overheads: Offices & adms.

Sites

General conditions

Risks: Contingencies

Loss & profit

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Category of EstimationCategory of Estimation

Abduh, 2004 summarised 4 category ofestimation:

Order of magnitude estimation

Budget estimation

Defined estimation

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Terms of PaymentTerms of Payment

Price based: ls and unit rate submitted by acontractor in tender.

Cost based: cost reimbursable and target

costs. The actual cost incurred by the

contractor are reimbursed plus fee,

overhead and profits.

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1a. Lump Sum1a. Lump Sum

Based on a single tendered price for thewhole works.

Amount to pay is fixed (or subject to

change for escalation). Paid after completion a major stage of work

or a milestone (defined stage of progress)

a planned payment scheme. Inflexible.

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1b. Advantages and Disadvantages of Ls1b. Advantages and Disadvantages of Ls

Advantages: High degree of certainty about the final price.

Administration is easy.

Keen pricing.

The promoters mgt. resources are freed for otherprojects.

Disadvantages:

Unsuitable for any changes. The lowest bidder may in the loss situation (bear

the overall financial and economic risks).

Minimum involvement of the promoters and design

org. in the mgt. of construction.

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2a. Unit Rate2a. Unit Rate((AdmeasurementAdmeasurement))

Bill of Quantities (BoQ) or Schedule Rates. Items of work are specified with quantities.

Tender rates against each item of works.

Payment : monthly or measuring quantities completed

works or valuing the rates in the tender or new negotiatedrates.

A scheduled of measured works or rates : total price isfixed rates but it changes if the quantities change (+/-15%).

Separate organisation structures.

Completed major design.

Public sector users.

E.g. bridges, roads, schools and urban sewerage systems.

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2b. Advantages and Disadvantages of2b. Advantages and Disadvantages ofBoQBoQ

Advantages: Widely used. Offer some degree of flexibility for design change.

May overlap design and construction progress.

Competitive bidders.

Indication of final price (change is low).

Disadvantages: Claims resolution is difficult (Quantity based).

Limited flexibility (involvement of promoters in the mgt. and to

add new items). Under disruption and major change emerge, the final price may not

be determined.

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3a. Cost Reimbursable3a. Cost Reimbursable Payment of actual cost + fees (for overhead and profits).

Contractors cost account are open to the promoters (Open-bookaccounting).

The scope and timing of works are uncertain. Almost impossible to define quantity of works and the

programmes.

E.g. installation of pipe works and cables, repairs, services,

demolition, an emergency project/ rescue of disruption projects,and site clearing.

Agreed period (terms).

Monthly or based on an impressed account.

Promoters pay all satisfactory accepted works (reimburse) andsome rejected works.

Contractors technical risks are low.

The contractors profit rate is lower than BoQ.

Contractor is an extension of promoters organisation.

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3b. Advantages and Disadvantages of3b. Advantages and Disadvantages ofCost ReimbursableCost Reimbursable

Advantages: Extremely flexible.

Fair pay and good control of risks.

Promoters involvement.

Joint planning.

Knowledge of actual costs.

Disadvantages :

Little incentives to the contractors efficiency.

No estimate of the final price at tender.

Administration procedures are unfamiliar.

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4a. Target Costs4a. Target Costs

Promoters and contractors agreed at the start aprobable (target) costs for an uncertain scope ofwork (inadequate definition of work).

Promoters role are significant.

Contractors actual cost monitored andreimbursed.

Final cost Actual cost will be shared (usingincentive mechanism).

Fee of the contractor covers o/h and cost in thecontract (excluding profit).

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AC = Actual Cost

TC = Target cost

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4b. Advantages and Disadvantages4b. Advantages and Disadvantagesof Target Costof Target Cost

Advantages: Fair payment and control risks.

Flexibility of design changes.

Encourage to be efficient (common interest).

Promoters involvement.

Should ensure adequate resources and methods.

Knowledge improvement.

Disadvantages: Full promoters involvement and need to change

attitude from BoQ contract.

Unfamiliar administration procedures.

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ReferencesReferences

Smith, N. J. (Editor), Engineering Project

Management, Blackwell Science, 1999,

UK.

Peurfoy, R, L and Oberlender, G, D, (1989),Estimating Construction Costs, McGraw-

Hill Book Company,USA.