Polytechnic University of the Philippines
College of Engineering
Bachelor of Science in Civil Engineering
CIEN 30293
Construction Methods and Project Management
Module-5
Construction Cost Estimates
Dr. J. Berlin P. Juanzon, CE, MSCM
Learning Outcomes
• Introduction to construction cost estimates
• Identify and define construction constracts used
in cost estimates
• Identify different types of cost estimates
• Determine the cost of owning and operating
equipment
Introduction
“Cost estimating is employed as one of the main tools of
successful cost management. Once an initial budget has
been established, it is important to test its assumptions
by employing a series of increasingly precise cost
estimating techniques that coincide with further
development of design and construction details.”
CONSTRUCTION COST ESTIMATING
An estimate may be defined as a process of
calculating. Forecasting or predicting the costs and
quantities of the different item of work included in
the bid schedule of a certain project proposed for
construction.
Estimating requires a
talent to predict or
avoid the unexpected.
A good estimator
understands
construction
materials, methods
and systems, as well
as the labor and
equipment required to
complete all tasks in
their correct
sequence, on time and
on budget.
The structure of an estimate
Estimates are typically organized in a work-breakdown structure
(WBS).
A work breakdown structure (WBS) is a hierarchical system used to
define and group discrete tasks or elements, covering the work scope
of the project.
100% Rule:
A WBS must include 100% of the work defined by the project scope
and capture all deliverables – internal, external and interim.
The structure of an estimate
The Construction Specification Institute’s (CSI) has
created the "de facto" standard for the
Construction Industry (known as MasterFormat).
The CIS has also created the UniFormat, a new
design-based structure focusing on early stages of
a project planning.
MasterFormat
(also referred as the CSI Format)
-Created by the Construction Specification
Institute CSI, 1961
- Used by nearly every business, in specifications
and pricing
- Focus on materials and methods (construction
approach)
- Contains 49 divisions (as of 2008)
- Better suited for pricing & construction
Example:
DIVISION 05 – METALS
05 00 00 METALS
05 01 00 Maintenance of Metals
05 10 00 STRUCTURAL METAL
FRAMING
05 12 00 Structural Steel Framing
For more information
http://www.csinet.org/s_csi/sec.asp?CID=1377&DID=11339
CONSTRUCTION CONTRACTS
Types of Construction Contracts
1. STIPULATED SUM / UNIT PRICE
Stipulated sum and stipulated unit price are grouped
together because of the similarity of their cost control
requirements as described separately from the contractor’s and
owner’s view point.
A Contractor in a stipulated sum agrees to construct
project for a fixed amount no matter what difficulty or
expenses he encounters. The remuneration may be made in a
series of partial payments after acceptance of the contractor’s
work.
1. STIPULATED SUM / UNIT PRICE
PRICE
A “unit-price contract” is one on which
payment for the work is to be based on the
computed quantities of work performed on
specific work items and materials furnished
and used by the contractor on the project,
each such quantities being multiplied by
the contractor’s bid price of the unit.
1. STIPULATED SUM / UNIT PRICE
There are two types of “unit-price”
contracts:
1. Unit-Price Flat Rate : Rate per unit
remains constant regardless of change
in estimated quantities given.
2. Unit-Price Sliding Rate : If estimated
quantities increase or decreases by
stipulated percentage, then the unit
price is adjusted accordingly.
2.0 COST-PLUS
“Cost Plus” is another type of contract. The
prime contractor is generally involved prior to
completion of the contract documents, when the
scope of work is not clearly defined. The contractor
is reimbursed for his actual expenditures and is paid
a fee for supervision. The fee paid to him may be
based on a percentage of the cost of the work or a
fixed amount predetermined as compensation for his
services.
3.0 PROJECT MANAGEMENT
CONTRACT
The third type of contract is the Project
Management Contract. It provides a
method for project development where the
owner hires the Project Manager who in turn
employs the services of architects, engineers,
and other consultants. In this method, the
initiation of policy, programming, budgeting,
design, and construction are controlled by a
team of professionals under the direction of a
project manager.
KINDS OF ESTIMATES
Range in accuracy
1.0 Floor Area Estimate +/- 40%
2.0 Function Estimate +/- 30%
3.0 Factor Estimate +/- 20%
4.0 Parameter Estimate +/- 15%
5.0 Detailed Estimate +/- 7%
1. FLOOR AREA ESTIMATE :
Experience showed that for a similar building project, the building costs
are very closely related to floor area. It is based on historical data.
A minimum of information is used to develop this type of "Ball Park
Estimate." The estimate is prepared from in-house-data available from
past jobs on similar plants. From these actual jobs, the proposed plant
capacity is divided by an existing plant cost. This cost is multiplied against
the new plant capacity or unit to derive new plant cost and then adjusted
for escalation. A cost estimate determined this way is only valid for a
similar plant.
2. FUNCTION ESTIMATE: Measures the cost of a
building relative to its use or function.
Type of Project Function Estimates
School Building Cost per
student
Hospital Cost per bed
Theater Cost per seat
Parking deck Cost per
parking space
3.FACTOR ESTIMATE:
A factored estimate requires that all process equipment must be
priced. A factored estimate is produced by taking the cost of
individual types of process equipment, and multiplying it by an
"installation factor" to arrive at the Total Direct Process Cost.
4.0 PARAMETER ESTIMATES:
This is an improvement over the floor area estimate
because several parameter measures are used
instead of one. Lump sum cost of trade are related to
component system of construction.
a. Structural steel cost related to gross area covered.
b. Parking area per number of building occupants.
c. HVAC cost per CM of the building.
5.0 DETAILED COST ESTIMATES:
This is a careful calculation of the quantities and
costs of everything that is stipulated in the contract
based on detailed construction plans, specifications
and bid documents. A detailed estimate of the cost
is prepared by determining the cost of materials,
labor, equipment, subcontract work, overhead, and
profit. Detailed estimates are generally prepared by
the contractors from a complete set of contract
documents prior to submission of the bid to the owner.
Major elements of Detailed Cost Estimate
-Direct costs (may be grouped in systems or
assemblies)
Materials
Labor
Equipment
Major elements of a Detailed Cost Estimate
- Indirect costs
Taxes
Insurance
Bonds
Operating costs
- Overhead, profit, other markups
- Contingency
- Time & escalation
- Phasing & mobilization costs
- Geographic index
COMPETITIVE ESTIMATING AND BIDDING
“Bid low enough to obtain the project, yet high enough to make profit”
is the most competitive bidding Philosophy. Competitive estimating and
bidding rely on the following factors:
1. Accuracy of quantity take-off and unit cost analysis
2. Quotations of Suppliers and Subcontractors
3. Competitors bid price
4. Construction Methodology
5. Direct Labor rates
6. Equipment rental rates
Common estimating options
- Spreadsheets and manual takeoffs
“Excel is still the king”
- CAD and digital takeoff systems
- Online databases and services
BNI
R.S. Means
- Corporate software (modular systems)
- Building Information Modeling (BIM)
Estimating Software - Desirable Features
- Must be able to handle multiple projects (!)
- Hierarchical/WBS organization
- Detailed view per item
- Take-off system (screen-based or digitizing devices)
- Handling of complex systems and assemblies
- Items linked to cost of products & resources
(labor, materials, subcontractors, etc)
- Automated calculations
- Indirect costs, markup & overhead
Estimating Software - Desirable Features (cont.)
- Purchasing & contracting
- Cost comparisons (between different systems
&/or providers)
- Closeout capabilities, (Manual overrides &
customization)
- Reporting (links to scheduling)
To Be or not to Be(IM)
BIM Advantages
- Better coordination
- Problems identified earlier
- Hidden conflicts are discovered more easily
(Structural vs MEP)
- Reduction of RFIs
- 2D Drawings are an output of model
- Produce takeoffs (debateable)
To Be or not to Be(IM)
-BIM Challenges:
- Heavy requirements (processing power, storage, net traffic)
- Adoption of same technology across
different disciplines
- Existing legacy of 2D CAD
- No standards to date
- Does not replace knowledge of materials & systems
- Misconception that BIM will do the work for you
For more information: http://bim.arch.gatech.edu/?id=402
COST OF OWNING AND
OPERATING CONSTRUCTION
EQUIPMENT
COST OF OWNING AND OPERATING
EQUIPMENT
Ownership cost is the cumulative result of those
cash flows an owner experiences whether or not
the machine is productively employed on a job.
Ownership Cost
1. Purchase expense
2. Salvage value
3. Tax savings from depreciation
4. Major repairs and overhauls
5. Insurance
6. Storage and miscellaneous
Purchase Expense
The cash outflow the firm experiences in acquiring of a machine is
purchase expense.
It is the total delivered cost, including amounts for all options,
shipping, and taxes.
The machine will show as an asset in the firm’s accounting records.
Salvage Value
Is the cash inflow a firm receives if a machine still has value at the time of
disposal.
This revenue will occur at a future date
Tax Savings from Depreciation
Depreciating a machine’s loss in value with age will lessen the net cost of
machine ownership.
The cost savings, the prevention of a cash outflow, afforded by tax
depreciation is a result of shielding the company from taxes
Tax Savings from Depreciation
Depreciating a machine’s loss in value with age will lessen the net cost of
machine ownership.
The cost savings, the prevention of a cash outflow, afforded by tax
depreciation is a result of shielding the company from taxes
Major repairs and overhauls
Considered as an investment in an old machine resulting in a an extension of
a machine’s service life.
Taxes
Refers to those equipment ownership taxes that are
charged by any government agencies.
They are commonly assessed at a percentage rate applied
against the book value of the machine.
Insurance
Insurance includes the cost to cover fire, theft, and damage to the
equipment.
Annual rate can be range from 1 to 3%.
This cost can be actual premium payments to insurance companies.
Depreciation
Straight-Line depreciation
Depreciation rate, Rn = 1/N
N= no. of years
Dn = Unadjusted basis x Rn
Dn = Unadjustaed basis / N
Book Value year m BVm = Unadjusted basis –
(n X Dn)
Storage and Miscellaneous
Between jobs or during bad weather, a company will
require storage facilities for its equipment.
The cost of maintaining storage yards and facilities should
be prorated to those machines that required such
harborage.
ELEMENTS OF OPERATING COST
Fuel
Lubricants, filters and grease
Repairs
Tires
Replacement of high-wear items
COST OF OPERATING
Fuel
Fuel expense is best determined by measurement on
the job.
Accurate service records tell the owner how many
liters of fuel a machine consumes over a period of time
and under what job conditions
COST OF OPERATING
Lubricants
The cost of lube oils, filters, and grease will
depend on the maintenance practices of the
company and the conditions of the work
location.
COST OF OPERATING
Repairs
Normal maintenance-type repairs.
These are the repair expenses incurred on the job site where the
machine is operated and would include the costs of parts and
labor.
COST OF OPERATING
Tires
Tires for wheel type equipment are a major
operating cost because they have a short life I
relation to the machine itself.
COST OF OPERATING
Replacement of High-Wear Items
These includes clutch linings, brake pads and
cables.
Cost of Money / Capital
Uniform series payment:
A= Uniform end-of-period payments/ receipts.
P = Purchase price
n = no of years
i = cost of money / interest
Cost of Money / Capital
Uniform series sinking fund factor:
A= Uniform end-of-period paymenrs / receipts.
F = Sinking fund
n = no of years
i = cost of money / interest
Problem – Cost of Owning
A company having a cost capital rate of 8%
purchases a Ph3,000,000 loader. This
machine has an expected service life of
4year and will be utilized 2,500 hr per year.
The tires on this machine cost Ph145,000.
the estimated salvage value at the end of 4
year is Ph450,000. Calculate the
depreciation portion of the ownership cost
for this machine. What is the cost of owning
the machine?
Ownership Cost-Time Value
Method
Given:
i = 8%
P = Ph3,000,000.00
Useful Life = 4years
Cost of tires = 145,000.00
Salvage Value = Ph450,000.00
Hours used per Year = 2,500hours/year
Ownership Cost-Time Value
Method
Cost to Owner:
Cost of delivered to owner = Ph 3,000,000.00
Less: Cost of Tires = 145,000.00
Total cost of equipment = 2,855,000.00
Tires are considered a wear item and are treated as an operating
cost.
Uniform series payment:
A = Ph 905,409.15 (Present amount of Money)
Ownership Cost-Time Value
Method
Uniform series sinking fund factor:
F = 450,000.00 (salvage value)
Therefore:
A = Ph 99,864.36 (Future amount of money)
Cost of owning and operating per hour:
Ph(905,409.15 – 99,864.36)per year / 2,500hours/yr
= Ph 322.22/hour
GROUP EXERCISE 2.0
A backhoe cost Ph 2,115,000 to purchase. Fuel, oil grease,
and minor maintenance are estimated to cost Ph580 per
operating hour. A set of tires cost Ph150,000 to replace, and
their estimated life is 2,800 use hours.
A Ph282,000 major repair will probably be required after
4,200hr of use. The equipment is expected to last for 8,400
hr, after which it will be sold at a price equal to 15% of the
original purchase price.
A final set of new tires will not be purchased before the
sale.
How much should the owner of the Backhoe charge per
hour of use, if it is expected that the machine will operate
1,400 hr per year? The company’s capital rate is 8%.
End of Module - 5
Thank you for listening
