Chapter 3: Project Cost Estimating

1. CE 366PROJECT MANAGEMENT AND ECONOMICSRobert G. Batson, Ph.D., P.E.Professor of Construction EngineeringThe University of AlabamaRbatson@eng.ua.edu

2. Chapter 3:Project Cost Estimating

3. Preliminary Cost Estimates • Called the engineer’s or architect’s estimate • Made during project planning and design phases, with many uses • Methods commonly used by the estimators: • Cost per Function Estimate • Index Number Estimate • Unit Area Cost Estimate • Unit Volume Cost Estimate • Panel Unit Cost Estimate • Parameter Cost Estimate • Partial Take off Estimate

4. Final Cost Estimate (Contractor’s Estimate) • Prepared when finalized working drawing and specifications are ready • Detailed compilation of all costs, usually associated with a bid • Winning contractor’s estimate becomes basis for construction cost control system • Accuracy of estimate depends on many factors • Quality of cost data available to estimators • Similarity of construction activities to contractor’s experience • Uncertainties/imponderables of this project • Expertise of the estimator(s)

5. Highway Bridge Estimate • Bid Form (blank and completed) • Quantity Survey, Figure 3.4 • Pre-bid Meeting(s) with management • Field Supervision chart (title, name, experience) • Construction Methods studies and finalization • General Time Schedule (Project Master Plan), Figure 3.5 • Construction Equipment decisions (identify type and source) • Summary Sheets and detailed pricing - Labor cost (Direct and Indirect) - Equipment Cost “The real challenge” - Material Cost

8. Labor Costs Estimator Must • make a complete and thorough job analysis • have access to unit costs and production rates, past projects • obtain decisions about construction operations, this project • make decisions about direct vs. indirect; regular time vs. overtime, etc. Direct labor cost • job analysis leads to production quantity • production quantity/production rate = production time • production time x hourly cost (rate) = direct labor cost Indirect labor cost • Expenses in addition to basic hourly wages • Payroll taxes, insurance, and employee fringe benefits • can be added as a percentage of total direct labor expense • preferable to estimate at same time as direct labor, by work type

9. Equipment Cost Estimating • Equipment = contractor’s construction equipage • Materials = all items that become part of the finished structure, including “electrical and mechanical plant” • Equipment accounts for a substantial portion of engineering project expense (less so for buildings) - minor equipment and small tools, no detailed study - major equipment items deserve much study as to their sizes and type, quantities, when and where needed - decisions have to be made about ownership vs. lease vs. rent - operating costs include all expenses associated with use and maintenance, but not typically operator wages

10. Basis for Equipment Cost Estimating • Equipment expenses include • Cost of ownership, lease, or rental: often expressed as a monthly amount times number of months needed • Cost of operations (use): based on the project work quantities, equipment production rate (adjust historical averages to anticipated job conditions), and operating cost per hour • These may be combined into a total equipment charge per unit time (hour, week, month), e.g. $105/hour for 50-ton crane • Equipment mobilization and demobilization costs are kept separate, but included, in the bid item requiring the equipment • All historical ownership and operating expenses for a piece of equipment should be recorded in a “ledger account”

11. Subcontractor Bids • Estimators work through purchasing professionals to solicit via drawings and specifications “subbids” to perform specialized work in the project • Each subbid in turn has to be evaluated • Low bidder is important, but not always selected • Do they understand the work, and how qualified are they? • Unsolicited proposals may be considered • Compared to the estimate if prime does work himself • Significant cost advantage? • A subcontractor we want as project participant? • General contractor is completely responsible to the owner for all subcontracted work

12. Overhead • Indirect expenses that do not apply to any specific work item • Project Overhead (job overhead, field overhead) • Indirect field expenses • Chargeable directly to the project • For small projects or preliminary estimates, a percent of direct job cost • To be complete, hence transparent and reliable, use an overhead estimating sheet like Figure 3.7, with move-in and clean-up estimated on separate sheets • Home Office Overhead • General and administrative costs of the business, often costing 2-8% of sales; some proportion included in each bid for new business • In Figure 3.8, term “markup” = home office expense + profit; if these are shown separately, listed as a percentage + a fee

15. Markup (Margin) • Covers profit, and may include office overhead and so- called contingency if these are not itemized elsewhere • Profit is the minimum acceptable return on the contractor’s investment • Greater profit risk (many factors, some know and some uncertain or unknown at time of bidding) requires the contractors to “cover himself” either with a higher profit percentage, or a contingency allowance • Therefore, markups may range from 5% to more than 20% • The contractor also has to consider his decreasing probability of being the low bidder if his markup is too large

16. Project Cost vs. Project Price • Project price = Project cost + Markup • Assumes you will only do the work if your markup amount leads to a winning bid • Markup = Project Price - Project Cost • Implies you have insight into what project price (bid price) will win the work • Your company is willing to “policy price” the work to “just qualify” as the lowest bidder

17. Bonds • Construction company failure rates are reported by Dunn Bradstreet to range from 20-40%, and the highest rates were for those in business the longest (>10 years)! • A surety (bonding) company receives a premium (paid by the contractor) to ensure the owner that should the contractor fail to meet contractual commitments, the surety will provide sufficient funds to cover project expenses to completion. • Three types of bonds -- bid bond and two “contract bonds” • Bid bond ≡ protects the owner against a contractor declining to accept the contract after being declared low bidder (covers losses if second-lowest then receives the contract) • Payment bond ≡ guarantees the contractor will pay their subcontractors, and material and equipment suppliers • Performance bond ≡ ensures the owner that the contractor will promptly and faithfully perform the work as specified

18. Summary Project Documents • Recap Sheet • recapitulates, or summarizes, bottom lines from bid item summary sheet and overhead sheet • indicates total direct project bid price • add-ons, to generate project bid price • “ratio-up” factor to spread bid price across bid items, pro rata • bid unit prices, where bid total is divided by quantity of work, creates a so-called “balanced bid” • Completed Bid Form (Unit Price Schedule) • enter unit prices to nearest cent (or dollar) • compute estimated amounts, and tally to get total estimated amount • Project Budget (direct labor, equipment, and materials costs by cost code)