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l-5

Selden

H. Harlow

Construction

Charles

Boston,

McCreedy

Manager

T.

Prudential

C. Thomas

Main

International,

Inc.

Charles

T.

Main

International,

Center
Massachusetts,

ANALYSIS

Inc.

Prudential
USA

OF

THE

Boston,

INDIRECT

INVESTMENT

COSTS

OF

COST

Center

Massachusetts,

PROJECT

USA

CAPITAL

ESTIMATES

tion cost, contingency


reserves,
professional
owner's
and other charges,
escalaservices,
tion and financing
costs.

INTRODUCTION
There is a wide variance
throughout
the
industry
in the manner of estimating
the indirect
costs of major capital
investment
proThis paper is presentjects of long duration.
ed to (1) identify
the components of total
project
cost,
(2) analyze the direct
costs,
(3) analyze the indirect
costs,
(4) identify
optional
direct
costs that could,
instead,
be categorized
as indirect,
and (5) recommend
a position
with regard to the indirect
cost
approach.

TABLE
COMPONENTS

NO.

GENERAL

Direct
Cat
Indirect
Construction
Cost
Professional
Services
Owners
and Other Charges
contingency
Reserves
Escalation
Financing
Costs
Total

This paper is the result


of a study conducted by Charles T. Main International,
Inc.
for a Federal
Agency whereby conceptual
estimates were prepared
by Main and one other
professional
firm for similar
advanced energy
systems.
The results
were substantially
different,
both as to the makeup of Direct
Cost and the amount of Indirect
Cost, and an
analysis
was undertaken
as reported
herein.

COST

Approximate
of Total

E.5
1
2
3
4
5
6
7

OF TOTAL PROTECT

Project

Cost

Percentage
Cost

57.0%
8.2%
5.2%
1.0%
5.0%
10.2%
13.4%
100.0%

coal
Note that,
in this case, a typical
fired
steam electric
power station,
the indirect
costs amount to 43% of the total
cost.
The direct
costs (57%) are calculated
by experienced
estimators
working
with drawings,
and material
and labor
estimated
quantities,
costs drawn from current
data and past experThe indirects
ience with similar
projects.
are then calculated
by applying
percent
factors
to the direct
cost.
The higher
the
percent,
the greater
the likelihood
of error.
we believe
it is best to maximize
Therefore,
the items considered
in the direct
cost estimating.

This paper is directed


toward the preparation
of conceptual
estimates
for a project
For conceptual
of several
years duration.
estimating
purposes,
percentages
are often
As the proused to estimate
indirect
costs.
the estimate
is refined
and
ject proceeds,
estimates
updated and, in many cases, actual
than percent
factors,
are
of cost, rather
All perused for the indirect
accounts.
centages
shown herein
are percentages
of
total
project
cost except Table No. 5
which recasts
the cost into percent
of
Direct
Cost.

ANALYSIS OF DIRECT COST


The direct
cost can be divided
into
land, materials,
three main categories:
and installation,
which are further
broken
down
into
the subcategories
shown in Table
No. 2.

COMPONENTS OF TOTAL PROJECT COST

The land costs include


the purchase of
the properties
required
for the project
and
all costs associated
with the acquisition
of
the land, including
agent's
fees, title
search
and property
surveys,
condemnations,
removals,
relocations,
etc.

The two major categories


of total
project
cost are the direct
costs and all other costs
which are identified
in this paper as indirect
Table No. 1 identifies
the components
costs.
of total
project
cost and gives approximate
percentages
allocated
to each component.
A
detailed
analysis
of each of these components
follows,
but it should be noted that indirects,
as defined herein,
include
indirect
construc361

charged,
TABLE NO.
ANALYSIS

OF DIRECT

COST

.33

.34
.35
.36
.37
.38

fees.

The cost of all manual labor is estimated


in the direct
accounts.
The percent
used in
this example includes
ancillary
labor for
unloading,
storing
and sorting
materials
and
equipment,
general
and final
cleanup,
and
other miscellaneous
activities
charged to the
direct
accounts.

Approximate
Percentage
of Total Cost
1.00
1.10
1.20
.21
.22
.23
.24
.25
.26
.27
.2S
.29
1.30
.31
.32

and contractor

Direct Cost
Land and Acquisition
Cost
Permanent Materials
and Equipment
Ma,or Purchase Order
Field Purchase
Order
Furnish and Erect Contracts
Contra&or
FurnIshed
Materials
Freight and Special
Packaging
Technical
Service Engineers
Customs and Dutiw
spare parts
Sales Taxes
Installation
cost
Manual
Labor Wages
Wage Related Costs (fringe benefits)
Health and Welfare
Pension
Plan
Apprenticeship
Travel and Subsistence
.X&iOS
spec1a1 Insurance
costs
Industry Promotion
Funds
Payroll Taxes
FICE
State Unemployment
Federal Unemployment
Payroll Premium Costs
Casual overtime
High, Tool, Mask, etc.
Workmens
Compensation
Insurance
Supervision
(foremanshlp)
Construction
Equipment
forSpecialty
Contractors
Fees

57.0
0.7
39.2
35.4
0.6
0.4
1.5
0.2
0.1

Also included
are all fringe
benefits,
payroll
taxes, payroll
premium costs (casual
overtime,
mask, tool, high time pay, etc.)
and workmen's
compensation
insurance
costs
Conwhich are built
into the wage rate.
tractor
fees, which are frequently
included
in unit price estimates
which are generated
in later
updates of the estimate,
are also
included.

0.2
0.8
17.1
10.4
1.5

Finally,
for items such as earthwork,
(such as chimneys
piling,
roads, specialties
and cooling
towers),
contractor
equipment
and other overhead costs are estimated
on
a lump sum or unit price basis and charged
directly
to a single
account.

0.9

0.3

Work

0.7
1.5
0.8
1.0

COMPONEmS OF INDIRECT CONSTRUCTION COST


There are many items of cost associated
with any construction
project
which cannot
be conveniently
charged directly
to a single
estimating
account.
These items are commonly
referred
to as indirect
costs,
or distributables,
in the industry.

The permanent materials


and equipment
include
the cost of all materials
permanently
incorporated
in the work from whatever
source
t.hey are procured.
The major purchase orders
are the engineered
equipment,
systems and
These are
materials
requiring
long lead times.
generally
procured
by the engineer
or the ownCertain
er's central
purchasing
department.
llong lead time items such as chimneys,
cooling
elevators,
field
assembled tanks,
and
towers,
architectural
features
are often procured
on
The erection
a furnished
and erected
basis.
cost portion
is carried
in installation
cost.

The indirect
accounts include
indirect
construction
cost, contingency
reserve,
professional
services,
owner's
and other charges,
escalation
and financing
costs.
For conceptual estimates,
these items are often expressed
When detailed
as a percent
of the direct
cost.
construction
cost estimates
are produced
later
many of these items can
in the project
period,
be calculated
on a unit or fixed cost basis,
but they are still
considered
indirects
because of their multipurpose
nature.

The field
purchase orders are for those
materials
which can be purchased
with less
lead time and are normally
procured
by the
These
construction
manager or contractor.
materials
usually
include
civil
engineering
materials
such as sand, gravel,
concrete
and
and miscellaneous
piping
paving materials,
and electrical
materials
purchased
to suppleWe consider
all
ment the major purchases.
costs associated
with the procurement
of
permanent materials
and equipment
as part
Allowances
for freight,
of the direct
cost.
technical
service
engineers,
especial packaging,
(customs and duties,
spare parts,
and sales
taxes are included
in direct
cost materials.

Indirect
Construction
Costs include
equipment
and services
required
facilities,
to directly
support
the construction
operations.
These items are summarized in Table
No. 3.
TABLE NO.
COMPONENTS

OF INDIRECT

CONSTRUCTION

COSTS
Approximate
Percentage
of Total Cost

2.10

For international
projects
the costs
special
packaging
and
,allowed for freight,
customs
and duties will
vary from the standards shown in Table No. 2 and special
attention must be paid to these categories.

Field

Office
and Labor Expenses
Office
Space and Equipment
Operating
Expenses
and Supplies
Communications
Safety Equipment
Inclement
Weather
Gear

Gmstruction
.20
.30
-40

The installation
portion
of direct
cost
j.ncludes wage costs for all manual labor,
foremanship,
all wage related
costs mandated
by labor agreement,
payroll
taxes,
construction equipment
associated
with certain
civil
work items to which the costs can be directly
362

1.3

Camp Operations

On-site
Transportation
Non-Manual
Labor Wages and Benefits
Temporary
Construction
Buildings
Construction
Tools and Equipment
Heavy Equipment
Automotive
Equipment
Maintenance
Costs
Small Tools
Special
Equipment
Rentals

0.8
0.9
2.7

TABLE NO.

NC?,
.50

.EO

.>'O

. HO

.30

use.
As mentioned
earlier,
specialty
equipment required
for equipment
intensive
work,
such as pile driving
and earth work, is
included
in the direct
cost section
of the
estimate.

3 (Continued)
Approximate
Percentage
of Total Cost

Temporary
Facilities
Utility
Distribution
Systems
Transport,
Railroad,
Parking,
Roads
Inclement
Weather
Protection
Scaffolding
Expendable
Supplies
Utility
Charges
Fuels;
Oils and Lubricants
G.St?S
Chemicals
Concrete
Form Materials
Construction
Service
Contracts
or Costs
Testins
Laboratodes
Guard service
Toilet Rental
Trash Disposal
surveying
Premium Payments
(pay for non-productive
time)
Showup Time
Paid Holidays
Absence
or Sick Leave
Scheduled
Overtime
Labor Dlsruptio
Insurance
and Bonds
All Risk Builders
Risk
Public
Liability
and Property
Damage
Vehicle
PL and PD
Bid and Performance
Bond Premiums

0.4

Temporary facilities
(0.4%) is the fifth
component of indirect
construction
cost and
includes
the installation
of temporary
utility distribution
systems (water,
air, gases,
sanitary,
electricity,
etc.),
and temporary
transport
facilities,
such as roads, railroads, and parking
areas.
Special
provisions
for inclement
weather
protection,
including
enclosures
and services
(heat, lights,
etc.),
are also estimated
herein.

0.5

0.3

0.3

The sixth
component of indirect
construction cost is the category
of expendable
supplies
(0.5%) and this includes
charges for utility
services,
fuels,
oils and lubricants
used
during
construction.
The cost of other expendable supplies,
such as gases and chemicals,
are also in this category,
as is the cost of
concrete
form materials
which can be distributed to the direct
accounts upon completion
of the work.

1.0

Field office
and labor expense (1.3%)
includes
the cost of providing
the field
office
building
and furnishing
and equipping
it: with office
equipment.
This category
also includes
the field
office
operating
expense, such as janitorial
service,
utility
services,
stationery
supplies
and reproduction
The costs
costs,
and communications
costs.
associated
with the employment of construction
labor,
such as safety equipment,
inclement
weather
gear, and labor administrative
costs
are also included
in this category
of indirect
construction
cost.
If the project
is at an
isolated
site requiring
a construction
camp,
t'he.costs
of developing
and operating
the camp
would be included
here.

Construction
service
contracts
or costs
(0.3%),
such as testing
laboratories
and
surveying,
security
services,
toilet
rental,
trash disposal,
are estimated
as a component
of indirect
construction
cost whether
performed by service
contractors,
the construction
manager, or included
in
installation
contracts.
Premium payments for time not worked
(0.3%) are also estimated
as an indirect
construction
cost and include
such premiums as
inclement
weather,
showup time, paid holidays,
paid absences and sick leave,
if any, and
allowances
for lost time due to labor disruptions.

The second category


of indirect
construction cost in non-manual
labor
(0.8%) which
includes
the wages and benefits
for inspectors
and technicians,
clerks,
typists,
draftsmen,
timekeepers,
messengers,
and such other field
personnel
that are usually
locally
hired.
It
should be noted that construction
management
personnel
are not included
herein,
but will
be
covered later under Professional
Services.

In the event that an accelerated


schedule or severe labor shortages
make it desirable
to schedule
overtime,
the premium pay cost,
together
with a factor
to cover the reduction
in productivity
which usually
follows,
is
carried
as an indirect
cost.
The 0.3% value
used here does not represent
any allowance
for scheduled
overtime
as this practice
is
avoided whenever possible.

The cost of temporary


construction
buildings (0.9%) is included
as a component of indirect
construction
cost and includes
change
workshops
and assembly
buildings,
warehouses,
toilet
buildings,
and all trailers
buildings,
and buildings
used by service
engineers.

The cost of insurnnce


and bonds (1.0%)
is the final
component of indirect
construction
cost and includes
the premiums paid for all
risk,
builders
risk coverage,
public
liability and property
damage, vehicle
PL and PD,
and bid and performance
bonds whether procured
on a project
umbrella
coverage policy
or conIt should
tractor's
individual
policy
basis.
be noted that workmen's
compensation
coverage
is included
in the direct
cost.

The cost of construction


tools and equipment (2.7%) is the fourth
part of indirec
construction
cost and includes
the cost o
procuring
and maintaining
heavy equipment,
automotive
equipment,
and special
equipment
rentals
as required.
The source of supply
of such equipment
is not considered
significant for estimating
purposes
arid could be
owner-furnished,
or leased or furnished
by
The cost of
contractors
working
on the job.
small tools is also included,
although
these
are usually
furnished
by the contractors
who are responsible
for controlling
their

CONTINGENCY RESERVE (5.0%)


Contingency
is an allowance
for
which may be incurred
as a result
of
which cannot be specifically
anticipated
therefore,
cannot be included
in the
Items such as unknown site
accounts.
363

costs
factors
and,
direct
condi-

FINANCING COSTS (13.4%)

tions,
unforeseen
construction
problems,
estimating
errors
and
minor scope changes,
omissions,
engineering
uncertainty
and variances in labor productivity
are included.
In recent years it has also been necessary
to consider
the effects
of an uncertain
and
ralpidly
changing
economy.
Wage rates and
benefits,
escalation
and financing
costs are
all accounted
for elsewhere
in the estimate,
but the uncertainty
with respect
to these
forecasts
may also be considered
as part of
the contingency
reserve.
Contingency
does not
or major scope changes.

include

Force

The final
item in the estimate
is financing
costs which include
the total
cost
of all financing
charges that are capitalIncluded
are allowized as project
costs.
ances for funds used during
construction
(AFDC) and any fund commitment fees for
international
projects.
To calculate
AFDC,
it is necessary
to prepare
a cash flow matching the cost and schedule
and for loans at
different
interest
rates,
separate
calculations are desirable.

Majeure

For conceptual
estimating
purposes
financing
costs are often combined into
interest
"factor"
which is a percentage
the total
project
cost.

There are many ways to estimate


contingency at the conceptual
level.
Frequently,
a higher
factor
is used on that portion
of the
project
estimate
involving
the civil
works,
if the site conditions
are uncertain.
In
addition,
the factor
varies with the degree
of uncertainty
with respect
to engineering
In some advanced technology
an.d technology.
projects,
a separate
factor
is carried
for
engineering
uncertainties.
In this case, we
have used 5% which amounts to 8.8% of the
direct
cost.
EOFESSIONAL

these
an
of

OPTIONAL COSTS - DIRECT OR INDIRECT


Throughout
the text of this paper, we have
identified
project
costs and indicated
our
preference
for treating
them as direct
or
indirect
costs.
In Table
in the direct
as indirects,

No. 4 the items


cost, but which
are listed.

which
could

we include
be treated

SERVICES (5.2%)
TABLE NC.

Professional
services
include
the followproject
management, prelimining activities:
detail
engineering
and design,
ary engineering,
construction
management,
procurement
services,
architectural
design,
shop inspection
and
expediting.
These services
may be performed
professional
engineering
by the owner, a single
firm,
or by a combination
of professional
firms,
but we recommend that all professional
services
be grouped together
in this manner for estimating purposes.

OPTIONAL

COSTS

- DIRECT

4
OR INDIRECT
Approximate
of Total

y&
1
2
3
4
5
6

-OWNER'S AND OTHER CHARGES (1.0%)

7
8

Allowances
must be made in the project
estimate
for owner's
charges that are capiThese owntalized
as part of the project.
er's charges include
such categories
as
general
office
expense,
owner's
field
staff,
legal fees, ad valorum taxes, and capitalized
startup
costs.
Other charges that are estimated in this category
include
spare parts
and special
tools for operation
and maintenance of the completed
project.

10

and special
packaging
cost
for material
and equipment
cost of technical
service
engineers
from manufacturers
customs
charges,
duties
and sales taxes
Spare parts
Payroll
taxes and workmens
compensation
lSranCe
Payroll
premium costs
(casual
OYertlme,
etc.)
Supervision
(foremanship)
Ancillary
labor (unloading
and storage,
housekeeping,
final cleanup)
Construction
equipment
for equipment
Intensive
work (such as earth work
and pi11ng) and for specialty
erection
contracts
(such as chimneys
and
c001i11g towers)
cc,ntractor
fees

Percent
Cost
.2

Freight

.1
.8
.2
1.6
.3
1.5
.7
.8

1.0
7.2

SUMMARY AND RECOMMENDATIONS


PsCALATION

(10.2%)

We have summarized and explained


the
components of capital
cost estimate
for a
major project.
We have also identified
optional
costs which could be considered
in-

The Cost of major projects


of long duration are affected
greatly
by international
economic conditions
and we recommend that
the
project
estimate
be prepared
for
the current Y=~L and the costs be escalated
to meet
the project
schedule.
The other option
is
to calculate
the escalation
individually
for
each component of direct
cost and include
escalation
as part of the direct
cost.
We
recommend that escalation
be carried
as a
line item of indirect
cost where it is visible to management.

direct

rather

than direct

cost,

To place this in perspective


for objective analysis,
we have recast the estimate
with all categories
shown as a percentage
of direct
cost.
This enables us to compare
the total
project
cost if the optional
costs
are in the directs,
as we recommend against
the other extreme with all optional
costs
as indirects.
364

Analysis
of Table 5 points
out the value
of minimizing
the percent
added for indirect
time and effort
is excosts. Considerable
pended by estimators
to accurately
forecast
If the inflated
multipliers
tke Direct
Cost.
the error
in the estimate
is
are incorrect,
If direct
cost estimates
are
magnified.
inaccurate
because of error
or poor definimultipliers
again magnify
tfLon the inflated
the rhange in the estimate.
Last, and perindirect
costs are diffhaps most important,
i<:ult to monitor
and control
and therefore
wnstruction
management personnel
tend to
overlook
the supervision
of a substantial
portion
of project
cost.

TABLE NO. 5
ESTIMATE

SUMMARY

AS PERCENTAGE

OF DIRECT

Recommended
Method
Direct

1.2
68.8
30.0

Material
Installation

100.0
Indirect

Total

Current

Construction

Escalation
Financing

365

Method

1.4
75.0
23.6
100.0

Costs
Indirect
Construction
Cost
Professional
Services
Owner
and Other
Charges
Contingency
Reserve

Total

Optional

Cost
Land

As a result
of this study, we recommend:
(IL) The Direct
Cost is the base for the estimate and should be as large as possible,
(2)
iE there are options
available
to estimate
costs as either
direct
or indirect,
estimate
them as direct
costs to increase
the base,
and (3) consider
all the components of indirect
cost carefully
before establishing
the
percentage
to be added for such costs.

COST

Costs
Project

Cost

Cost

14.4
9.1
1.8
8.8

30.9
10.4
2.0
10.0

134.1

153.3

17.9

20.5

23.5

26.9

175.5

200.7