CE 366 PROJECT MANAGEMENT AND ECONOMICS Robert G. Batson, Ph.D., P.E. Professor of Construction Engineering The University of Alabama

Chapter 3: Project Cost Estimating 2

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 3

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) 4.2

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 3.3

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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 3.4

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 3.5

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” 3.6

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 3.7

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 3.8

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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 3.9

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 3.10

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 3.11

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) 3.12

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