4/4/2015

ProjectManagementforConstruction:CostEstimation

GoUptoTableofContents
GoToChapter4
(Labor,Materialand
EquipmentUtilization)

GoToChapter6
(EconomicEvaluationof
FacilityInvestments)

CostEstimation
CostsAssociatedwithConstructedFacilities
ApproachestoCostEstimation
TypeofConstructionCostEstimates
EffectsofScaleonConstructionCost
UnitCostMethodofEstimation
MethodsforAllocationofJointCosts
HistoricalCostData
CostIndices
ApplicationsofCostIndicestoEstimating
EstimateBasedonEngineer'sListofQuantities
AllocationofConstructionCostsOverTime
ComputerAidedCostEstimation
EstimationofOperatingCosts
References
Problems
Footnotes

5.CostEstimation
5.1CostsAssociatedwithConstructedFacilities
Thecostsofaconstructedfacilitytotheownerincludeboththeinitialcapitalcostandthesubsequentoperationand
maintenancecosts.Eachofthesemajorcostcategoriesconsistsofanumberofcostcomponents.
Thecapitalcostforaconstructionprojectincludestheexpensesrelatedtotheinitalestablishmentofthefacility:
Landacquisition,includingassembly,holdingandimprovement
Planningandfeasibilitystudies
Architecturalandengineeringdesign
Construction,includingmaterials,equipmentandlabor
Fieldsupervisionofconstruction
Constructionfinancing
Insuranceandtaxesduringconstruction
Owner'sgeneralofficeoverhead
Equipmentandfurnishingsnotincludedinconstruction
Inspectionandtesting
Theoperationandmaintenancecostinsubsequentyearsovertheprojectlifecycleincludesthefollowingexpenses:
Landrent,ifapplicable
Operatingstaff
Laborandmaterialformaintenanceandrepairs
Periodicrenovations
Insuranceandtaxes
Financingcosts
Utilities
Owner'sotherexpenses
Themagnitudeofeachofthesecostcomponentsdependsonthenature,sizeandlocationoftheprojectaswellasthe
managementorganization,amongmanyconsiderations.Theownerisinterestedinachievingthelowestpossibleoverall
projectcostthatisconsistentwithitsinvestmentobjectives.
Itisimportantfordesignprofessionalsandconstructionmanagerstorealizethatwhiletheconstructioncostmaybethesingle
largestcomponentofthecapitalcost,othercostcomponentsarenotinsignificant.Forexample,landacquisitioncostsarea
majorexpenditureforbuildingconstructioninhighdensityurbanareas,andconstructionfinancingcostscanreachthesame
orderofmagnitudeastheconstructioncostinlargeprojectssuchastheconstructionofnuclearpowerplants.
Fromtheowner'sperspective,itisequallyimportanttoestimatethecorrespondingoperationandmaintenancecostofeach
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

1/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

alternativeforaproposedfacilityinordertoanalyzethelifecyclecosts.Thelargeexpendituresneededforfacility
maintenance,especiallyforpubliclyownedinfrastructure,areremindersoftheneglectinthepasttoconsiderfullythe
implicationsofoperationandmaintenancecostinthedesignstage.
Inmostconstructionbudgets,thereisanallowanceforcontingenciesorunexpectedcostsoccuringduringconstruction.This
contingencyamountmaybeincludedwithineachcostitemorbeincludedinasinglecategoryofconstructioncontingency.
Theamountofcontingencyisbasedonhistoricalexperienceandtheexpecteddifficultyofaparticularconstructionproject.
Forexample,oneconstructionfirmmakesestimatesoftheexpectedcostinfivedifferentareas:
Designdevelopmentchanges,
Scheduleadjustments,
Generaladministrationchanges(suchaswagerates),
Differingsiteconditionsforthoseexpected,and
Thirdpartyrequirementsimposedduringconstruction,suchasnewpermits.
Contingentamountsnotspentforconstructioncanbereleasedneartheendofconstructiontotheownerortoaddadditional
projectelements.
Inthischapter,weshallfocusontheestimationofconstructioncost,withonlyoccasionalreferencetoothercostcomponents.
InChapter6,weshalldealwiththeeconomicevaluationofaconstructedfacilityonthebasisofboththecapitalcostandthe
operationandmaintenancecostinthelifecycleofthefacility.Itisatthisstagethattradeoffsbetweenoperatingandcapital
costscanbeanalyzed.
Example51:Energyprojectresourcedemands[1]
Theresourcesdemandsforthreetypesofmajorenergyprojectsinvestigatedduringtheenergycrisisinthe1970's
areshowninTable51.Theseprojectsare:(1)anoilshaleprojectwithacapacityof50,000barrelsofoilproduct
perday(2)acoalgasificationprojectthatmakesgaswithaheatingvalueof320billionsofBritishthermalunits
perday,orequivalenttoabout50,000barrelsofoilproductperdayand(3)atarsandprojectwithacapacityof
150,000barrelsofoilproductperday.
Foreachproject,thecostinbillionsofdollars,theengineeringmanpowerrequirementforbasicdesignin
thousandsofhours,theengineeringmanpowerrequirementfordetailedengineeringinmillionsofhours,the
skilledlaborrequirementforconstructioninmillionsofhoursandthematerialrequirementinbillionsofdollars
areshowninTable51.Tobuildseveralprojectsofsuchanorderofmagnitudeconcurrentlycoulddriveupthe
costsandstraintheavailabilityofallresourcesrequiredtocompletetheprojects.Consequently,costestimation
oftenrepresentsanexerciseinprofessionaljudgmentinsteadofmerelycompilingabillofquantitiesand
collectingcostdatatoreachatotalestimatemechanically.
TABLE51ResourceRequirementsofSomeMajorEnergyProjects

Cost
($billion)
Basicdesign
(Thousandsofhours)
Detailedengineering
(Millionsofhours)
Construction
(Millionsofhours)
Materials
($billion)

Oilshale
(50,000barrels/day)

Coalgasification
(320billionsBTU/day)

TarSands
(150,000barrels/day)

2.5

8to10

80

200

100

3to4

4to5

6to8

20

30

40

2.5

Source:ExxonResearchandEngineeringCompany,FlorhamPark,NJ
Backtotop

5.2ApproachestoCostEstimation
Costestimatingisoneofthemostimportantstepsinprojectmanagement.Acostestimateestablishesthebaselineofthe
projectcostatdifferentstagesofdevelopmentoftheproject.Acostestimateatagivenstageofprojectdevelopment
representsapredictionprovidedbythecostengineerorestimatoronthebasisofavailabledata.AccordingtotheAmerican
AssociationofCostEngineers,costengineeringisdefinedasthatareaofengineeringpracticewhereengineeringjudgment
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

2/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

andexperienceareutilizedintheapplicationofscientificprinciplesandtechniquestotheproblemofcostestimation,cost
controlandprofitability.
Virtuallyallcostestimationisperformedaccordingtooneorsomecombinationofthefollowingbasicapproaches:
Productionfunction.Inmicroeconomics,therelationshipbetweentheoutputofaprocessandthenecessaryresourcesis
referredtoastheproductionfunction.Inconstruction,theproductionfunctionmaybeexpressedbytherelationshipbetween
thevolumeofconstructionandafactorofproductionsuchaslabororcapital.Aproductionfunctionrelatestheamountor
volumeofoutputtothevariousinputsoflabor,materialandequipment.Forexample,theamountofoutputQmaybederived
asafunctionofvariousinputfactorsx1,x2,...,xnbymeansofmathematicaland/orstatisticalmethods.Thus,foraspecified
levelofoutput,wemayattempttofindasetofvaluesfortheinputfactorssoastominimizetheproductioncost.The
relationshipbetweenthesizeofabuildingproject(expressedinsquarefeet)totheinputlabor(expressedinlaborhoursper
squarefoot)isanexampleofaproductionfunctionforconstruction.SeveralsuchproductionfunctionsareshowninFigure3
3ofChapter3.
Empiricalcostinference.Empiricalestimationofcostfunctionsrequiresstatisticaltechniqueswhichrelatethecostof
constructingoroperatingafacilitytoafewimportantcharacteristicsorattributesofthesystem.Theroleofstatistical
inferenceistoestimatethebestparametervaluesorconstantsinanassumedcostfunction.Usually,thisisaccomplishedby
meansofregressionanalysistechniques.
Unitcostsforbillofquantities.Aunitcostisassignedtoeachofthefacilitycomponentsortasksasrepresentedbythebill
ofquantities.Thetotalcostisthesummationoftheproductsofthequantitiesmultipliedbythecorrespondingunitcosts.The
unitcostmethodisstraightforwardinprinciplebutquitelaboriousinapplication.Theinitialstepistobreakdownor
disaggregateaprocessintoanumberoftasks.Collectively,thesetasksmustbecompletedfortheconstructionofafacility.
Oncethesetasksaredefinedandquantitiesrepresentingthesetasksareassessed,aunitcostisassignedtoeachandthenthe
totalcostisdeterminedbysummingthecostsincurredineachtask.Thelevelofdetailindecomposingintotaskswillvary
considerablyfromoneestimatetoanother.
Allocationofjointcosts.Allocationsofcostfromexistingaccountsmaybeusedtodevelopacostfunctionofanoperation.
Thebasicideainthismethodisthateachexpenditureitemcanbeassignedtoparticularcharacteristicsoftheoperation.
Ideally,theallocationofjointcostsshouldbecausallyrelatedtothecategoryofbasiccostsinanallocationprocess.Inmany
instances,however,acausalrelationshipbetweentheallocationfactorandthecostitemcannotbeidentifiedormaynotexist.
Forexample,inconstructionprojects,theaccountsforbasiccostsmaybeclassifiedaccordingto(1)labor,(2)material,(3)
constructionequipment,(4)constructionsupervision,and(5)generalofficeoverhead.Thesebasiccostsmaythenbeallocated
proportionallytovarioustaskswhicharesubdivisionsofaproject.
Backtotop

5.3TypesofConstructionCostEstimates
Constructioncostconstitutesonlyafraction,thoughasubstantialfraction,ofthetotalprojectcost.However,itisthepartof
thecostunderthecontroloftheconstructionprojectmanager.Therequiredlevelsofaccuracyofconstructioncostestimates
varyatdifferentstagesofprojectdevelopment,rangingfromballparkfiguresintheearlystagetofairlyreliablefiguresfor
budgetcontrolpriortoconstruction.Sincedesigndecisionsmadeatthebeginningstageofaprojectlifecyclearemore
tentativethanthosemadeatalaterstage,thecostestimatesmadeattheearlierstageareexpectedtobelessaccurate.
Generally,theaccuracyofacostestimatewillreflecttheinformationavailableatthetimeofestimation.
Constructioncostestimatesmaybeviewedfromdifferentperspectivesbecauseofdifferentinstitutionalrequirements.Inspite
ofthemanytypesofcostestimatesusedatdifferentstagesofaproject,costestimatescanbestbeclassifiedintothreemajor
categoriesaccordingtotheirfunctions.Aconstructioncostestimateservesoneofthethreebasicfunctions:design,bidand
control.Forestablishingthefinancingofaproject,eitheradesignestimateorabidestimateisused.
1. DesignEstimates.Fortheowneroritsdesignateddesignprofessionals,thetypesofcostestimatesencounteredrun
parallelwiththeplanninganddesignasfollows:
Screeningestimates(ororderofmagnitudeestimates)
Preliminaryestimates(orconceptualestimates)
Detailedestimates(ordefinitiveestimates)
Engineer'sestimatesbasedonplansandspecifications
Foreachofthesedifferentestimates,theamountofdesigninformationavailabletypicallyincreases.
2. BidEstimates.Forthecontractor,abidestimatesubmittedtotheownereitherforcompetitivebiddingornegotiation
consistsofdirectconstructioncostincludingfieldsupervision,plusamarkuptocovergeneraloverheadandprofits.
Thedirectcostofconstructionforbidestimatesisusuallyderivedfromacombinationofthefollowingapproaches.
Subcontractorquotations
Quantitytakeoffs
Constructionprocedures.
3. 3.ControlEstimates.Formonitoringtheprojectduringconstruction,acontrolestimateisderivedfromavailable
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

3/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

informationtoestablish:
Budgetestimateforfinancing
Budgetedcostaftercontractingbutpriortoconstruction
Estimatedcosttocompletionduringtheprogressofconstruction.

DesignEstimates
Intheplanninganddesignstagesofaproject,variousdesignestimatesreflecttheprogressofthedesign.Attheveryearly
stage,thescreeningestimateororderofmagnitudeestimateisusuallymadebeforethefacilityisdesigned,andmust
thereforerelyonthecostdataofsimilarfacilitiesbuiltinthepast.Apreliminaryestimateorconceptualestimateisbasedon
theconceptualdesignofthefacilityatthestatewhenthebasictechnologiesforthedesignareknown.Thedetailedestimate
ordefinitiveestimateismadewhenthescopeofworkisclearlydefinedandthedetaileddesignisinprogresssothatthe
essentialfeaturesofthefacilityareidentifiable.Theengineer'sestimateisbasedonthecompletedplansandspecifications
whentheyarereadyfortheownertosolicitbidsfromconstructioncontractors.Inpreparingtheseestimates,thedesign
professionalwillincludeexpectedamountsforcontractors'overheadandprofits.
Thecostsassociatedwithafacilitymaybedecomposedintoahierarchyoflevelsthatareappropriateforthepurposeofcost
estimation.Thelevelofdetailindecomposingthefacilityintotasksdependsonthetypeofcostestimatetobeprepared.For
conceptualestimates,forexample,thelevelofdetailindefiningtasksisquitecoarsefordetailedestimates,thelevelofdetail
canbequitefine.
Asanexample,considerthecostestimatesforaproposedbridgeacrossariver.Ascreeningestimateismadeforeachofthe
potentialalternatives,suchasatiedarchbridgeoracantilevertrussbridge.Asthebridgetypeisselected,e.g.thetechnology
ischosentobeatiedarchbridgeinsteadofsomenewbridgeform,apreliminaryestimateismadeonthebasisofthelayout
oftheselectedbridgeformonthebasisofthepreliminaryorconceptualdesign.Whenthedetaileddesignhasprogressedtoa
pointwhentheessentialdetailsareknown,adetailedestimateismadeonthebasisofthewelldefinedscopeoftheproject.
Whenthedetailedplansandspecificationsarecompleted,anengineer'sestimatecanbemadeonthebasisofitemsand
quantitiesofwork.

BidEstimates
Thecontractor'sbidestimatesoftenreflectthedesireofthecontractortosecurethejobaswellastheestimatingtoolsatits
disposal.Somecontractorshavewellestablishedcostestimatingprocedureswhileothersdonot.Sinceonlythelowestbidder
willbethewinnerofthecontractinmostbiddingcontests,anyeffortdevotedtocostestimatingisalosstothecontractorwho
isnotasuccessfulbidder.Consequently,thecontractormayputintheleastamountofpossibleeffortformakingacost
estimateifitbelievesthatitschanceofsuccessisnothigh.
Ifageneralcontractorintendstousesubcontractorsintheconstructionofafacility,itmaysolicitpricequotationsforvarious
taskstobesubcontractedtospecialtysubcontractors.Thus,thegeneralsubcontractorwillshifttheburdenofcostestimating
tosubcontractors.Ifallorpartoftheconstructionistobeundertakenbythegeneralcontractor,abidestimatemaybe
preparedonthebasisofthequantitytakeoffsfromtheplansprovidedbytheowneroronthebasisoftheconstruction
proceduresdevisedbythecontractorforimplementingtheproject.Forexample,thecostofafootingofacertaintypeand
sizemaybefoundincommercialpublicationsoncostdatawhichcanbeusedtofacilitatecostestimatesfromquantity
takeoffs.However,thecontractormaywanttoassesstheactualcostofconstructionbyconsideringtheactualconstruction
procedurestobeusedandtheassociatedcostsiftheprojectisdeemedtobedifferentfromtypicaldesigns.Hence,itemssuch
aslabor,materialandequipmentneededtoperformvarioustasksmaybeusedasparametersforthecostestimates.

ControlEstimates
Boththeownerandthecontractormustadoptsomebaselineforcostcontrolduringtheconstruction.Fortheowner,abudget
estimatemustbeadoptedearlyenoughforplanninglongtermfinancingofthefacility.Consequently,thedetailedestimateis
oftenusedasthebudgetestimatesinceitissufficientdefinitivetoreflecttheprojectscopeandisavailablelongbeforethe
engineer'sestimate.Astheworkprogresses,thebudgetedcostmustberevisedperiodicallytoreflecttheestimatedcostto
completion.Arevisedestimatedcostisnecessaryeitherbecauseofchangeordersinitiatedbytheownerorduetounexpected
costoverrunsorsavings.
Forthecontractor,thebidestimateisusuallyregardedasthebudgetestimate,whichwillbeusedforcontrolpurposesaswell
asforplanningconstructionfinancing.Thebudgetedcostshouldalsobeupdatedperiodicallytoreflecttheestimatedcostto
completionaswellastoinsureadequatecashflowsforthecompletionoftheproject.
Example52:Screeningestimateofagroutingsealbeneathalandfill[2]
Oneofthemethodsofisolatingalandfillfromgroundwateristocreateabowlshapedbottomsealbeneaththe
siteasshowninFigure50.Thesealisconstructedbypumpingorpressureinjectinggroutundertheexisting
landfill.Holesareboredatregularintervalsthroughoutthelandfillforthispurposeandthegrouttubesare
extendedfromthesurfacetothebottomofthelandfill.Alayerofsoilataminimumof5ft.thickisleftbetween
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

4/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

thegroutedmaterialandthelandfillcontentstoallowforirregularitiesinthebottomofthelandfill.Thegrout
linercanbebetween4and6feetthick.AtypicalmaterialwouldbePortlandcementgroutpumpedunder
pressurethroughtubestofillvoidsinthesoil.Thisgroutwouldthenhardenintoapermanent,impermeableliner.

Figure51:GroutBottomSealLinerataLandfill
Theworkitemsinthisprojectinclude(1)drillingexploratoryboreholesat50ftintervalsforgrouttubes,and(2)
pumpinggroutintothevoidsofasoillayerbetween4and6ftthick.Thequantitiesforthesetwoitemsare
estimatedonthebasisofthelandfillarea:
8acres=(8)(43,560ft2/acre)=348,480ft2
(Asanapproximation,use360,000ft2toaccountforthebowlshape)
Thenumberofboreholesina50ftby50ftgridpatterncovering360,000ft2isgivenby:

Theaveragedepthoftheboreholesisestimatedtobe20ft.Hence,thetotalamountofdrillingis(144)(20)=
2,880ft.
Thevolumeofthesoillayerforgroutingisestimatedtobe:
fora4ftlayer,volume=(4ft)(360,000ft2)=1,440,000ft3
fora6ftlayer,volume=(6ft)(360,000ft2)=2,160,000ft3
Itisestimatedfromsoilteststhatthevoidsinthesoillayerarebetween20%and30%ofthetotalvolume.Thus,
fora4ftsoillayer:
groutingin20%voids=(20%)(1,440,000)=288,000ft3
groutingin30%voids=(30%)(1,440,000)=432,000ft3
andfora6ftsoillayer:
groutingin20%voids=(20%)(2,160,000)=432,000ft3
groutingin30%voids=(30%)(2,160,000)=648,000ft3
Theunitcostfordrillingexploratoryboreholesisestimatedtobebetween$3and$10perfoot(in1978dollars)
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

5/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

includingallexpenses.Thus,thetotalcostofboringwillbebetween(2,880)(3)=$8,640and(2,880)(10)=
$28,800.TheunitcostofPortlandcementgroutpumpedintoplaceisbetween$4and$10percubicfoot
includingoverheadandprofit.Inadditiontothevariationintheunitcost,thetotalcostofthebottomsealwill
dependuponthethicknessofthesoillayergroutedandtheproportionofvoidsinthesoil.Thatis:
fora4ftlayerwith20%voids,groutingcost=$1,152,000to$2,880,000
fora4ftlayerwith30%voids,groutingcost=$1,728,000to$4,320,000
fora6ftlayerwith20%voids,groutingcost=$1,728,000to$4,320,000
fora6ftlayerwith30%voids,groutingcost=$2,592,000to$6,480,000
Thetotalcostofdrillingboreholesissosmallincomparisonwiththecostofgroutingthattheformercanbe
omittedinthescreeningestimate.Furthermore,therangeofunitcostvariesgreatlywithsoilcharacteristics,and
theengineermustexercisejudgmentinnarrowingtherangeofthetotalcost.Alternatively,additionalsoiltests
canbeusedtobetterestimatetheunitcostofpumpinggroutandtheproportionofvoidsinthesoil.Supposethat,
inadditiontoignoringthecostofboreholes,anaveragevalueofa5ftsoillayerwith25%voidsisusedtogether
withaunitcostof$7percubicfootofPortlandcementgrouting.Inthiscase,thetotalprojectcostisestimated
tobe:
(5ft)(360,000ft2)(25%)($7/ft3)=$3,150,000
Animportantpointtonoteisthatthisscreeningestimateisbasedtoalargedegreeonengineeringjudgmentof
thesoilcharacteristics,andtherangeoftheactualcostmayvaryfrom$1,152,000to$6,480,000eventhough
theprobabilitiesofhavingactualcostsattheextremesarenotveryhigh.
Example53:Exampleofengineer'sestimateandcontractors'bids[3]
Theengineer'sestimateforaprojectinvolving14milesofInterstate70roadwayinUtahwas$20,950,859.Bids
weresubmittedonMarch10,1987,forcompletingtheprojectwithin320workingdays.Thethreelowbidders
were:

1.Ball,Ball&Brosame,Inc.,DanvilleCA
2.NationalProjects,Inc.,Phoenix,AR
3.KiewitWesternCo.,Murray,Utah

$14,129,798
$15,381,789
$18,146,714

Itwasastoundingthatthewinningbidwas32%belowtheengineer'sestimate.Eventhethirdlowestbidderwas
13%belowtheengineer'sestimateforthisproject.Thedisparityinpricingcanbeattributedeithertothevery
conservativeestimateoftheengineerintheUtahDepartmentofTransportationortoareacontractorswhoare
hungrierthanusualtowinjobs.
Theunitpricesfordifferentitemsofworksubmittedforthisprojectby(1)Ball,Ball&Brosame,Inc.and(2)
NationalProjects,Inc.areshowninTable52.Thesimilarityoftheirunitpricesforsomeitemsandthedisparity
inotherssubmittedbythetwocontractorscanbenoted.

TABLE52:UnitPricesinTwoContractors'BidsforRoadwayConstruction
Items

Unit

Quantity

Unitprice

Mobilization
Removal,berm
Finishsubgrade
Surfaceditches
Excavationstructures

ls
lf
sy
lf
cy

1
8,020
1,207,500
525
7,000

1
115,000
1.00
0.50
2.00
3.00

Basecourse,untreated,3/4''
Leanconcrete,4''thick
PCC,pavement,10''thick
Concrete,ciAA(AE)
Smallstructure
Barrier,precast
Flatwork,4''thick

ton
sy
sy
ls
cy
lf
sy

362,200
820,310
76,010
1
50
7,920
7,410

4.50
3.10
10.90
200,000
500
15.00
10.00

http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

2
569,554
1.50
0.30
1.00
5.00
5.00
3.00
12.00
190,000
475
16.00
8.00
6/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

10''thick

sy

4,241

20.00

27.00

Slopeprotection
Metal,endsection,15''
18''
Post,rightofway,modification
Salvageandrelaypipe
Looseriprap

sy
ea
ea
lf
lf
cy

2,104
39
3
4,700
1,680
32

25.00
100
150
3.00
5.00
40.00

30.00
125
200
2.50
12.00
30.00

Bracedposts
Delineators,typeI
typeII
Constructivesignsfixed
Barricades,typeIII
Warninglights

ea
lb
ea
sf
lf
day

54
1,330
140
52,600
29,500
6,300

100
12.00
15.00
0.10
0.20
0.10

110
12.00
12.00
0.40
0.20
0.50

Pavementmarking,epoxymaterial
Black
Yellow
White
Plowable,onewaywhite
Topsoil,contractorfurnished

gal
gal
gal
ea
cy

475
740
985
342
260

90.00
90.00
90.00
50.00
10.00

100
80.00
70.00
20.00
6.00

Seedling,methodA
Excelsiorblanket
Corrugated,metalpipe,18''
Polyethylenepipe,12''
Catchbasingrateandframe
Equalopportunitytraining

acr
sy
lf
lf
ea
hr

103
500
580
2,250
35
18,000

150
2.00
20.00
15.00
350
0.80

200
2.00
18.00
13.00
280
0.80

Granularbackfillborrow
Drillcaisson,2'x6''
Flagging
Prestressedconcretemember
typeIV,141'x4''
132'x4''

cy
lf
hr

ea
ea

274
722
20,000

10.00
100
8.25

16.00
80.00
12.50

7
6

12,000
11,000

16.00
14.00

Reinforcedsteel
Epoxycoated
Structuralsteel
Sign,covering
typeC2woodpost
24''
30''

lb
lb
ls
sf
sf
ea
ea

6,300
122,241
1
16
98
3
2

0.60
0.55
5,000
10.00
15.00
100
100

0.50
0.50
1,600
4.00
17.00
400
160

48''
Auxiliary
Steelpost,48''x60''
type3,woodpost
24''
30''

ea
sf
ea
sf
ea
ea

11
61
11
669
23
1

200
15.00
500
15.00
100
100

300
12.00
700
19.00
125
150

36''
42''x60''
48''
Auxiliary
Steelpost
12''x36''

ea
ea
ea
sf
sf
ea

12
8
7
135
1,610
28

150
150
200
15.00
40.00
100

180
220
270
13.00
35.00
150

http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

7/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

Foundation,concrete
Barricade,48''x42''
Woodpost,roadclosed

ea
ea
lf

60
40
100

300
100
30.00

650
100
36.00

Backtotop

5.4EffectsofScaleonConstructionCost
Screeningcostestimatesareoftenbasedonasinglevariablerepresentingthecapacityorsomephysicalmeasureofthedesign
suchasfloorareainbuildings,lengthofhighways,volumeofstoragebinsandproductionvolumesofprocessingplants.
Costsdonotalwaysvarylinearlywithrespecttodifferentfacilitysizes.Typically,scaleeconomiesordiseconomiesexist.If
theaveragecostperunitofcapacityisdeclining,thenscaleeconomiesexist.Conversely,scalediseconomiesexistifaverage
costsincreasewithgreatersize.Empiricaldataaresoughttoestablishtheeconomiesofscaleforvarioustypesoffacility,if
theyexist,inordertotakeadvantageoflowercostsperunitofcapacity.
Letxbeavariablerepresentingthefacilitycapacity,andybetheresultingconstructioncost.Then,alinearcostrelationship
canbeexpressedintheform:
(5.1)
whereaandbarepositiveconstantstobedeterminedonthebasisofhistoricaldata.NotethatinEquation(5.1),afixedcost
ofy=aatx=0isimpliedasshowninFigure52.Ingeneral,thisrelationshipisapplicableonlyinacertainrangeofthe
variablex,suchasbetweenx=candx=d.Ifthevaluesofycorrespondingtox=candx=dareknown,thenthecostofa
facilitycorrespondingtoanyxwithinthespecifiedrangemaybeobtainedbylinearinterpolation.Forexample,the
constructioncostofaschoolbuildingcanbeestimatedonthebasisofalinearrelationshipbetweencostandfloorareaifthe
unitcostpersquarefootoffloorareaisknownforschoolbuildingswithincertainlimitsofsize.

Figure52:LinearCostRelationshipwithEconomiesofScale
Anonlinearcostrelationshipbetweenthefacilitycapacityxandconstructioncostycanoftenberepresentedintheform:

(5.2)
whereaandbarepositiveconstantstobedeterminedonthebasisofhistoricaldata.For0<b<1,Equation(5.2)represents
thecaseofincreasingreturnstoscale,andforbgt1,therelationshipbecomesthecaseofdecreasingreturnstoscale,as
showninFigure53.Takingthelogarithmofbothsidesthisequation,alinearrelationshipcanbeobtainedasfollows:

http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

8/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

Figure53:NonlinearCostRelationshipwithincreasingorDecreasingEconomiesofScale

(5.3)
AlthoughnofixedcostisimpliedinEq.(5.2),theequationisusuallyapplicableonlyforacertainrangeofx.Thesame
limitationappliestoEq.(5.3).Anonlinearcostrelationshipoftenusedinestimatingthecostofanewindustrialprocessing
plantfromtheknowncostofanexistingfacilityofadifferentsizeisknownastheexponentialrule.Letynbetheknowncost
ofanexistingfacilitywithcapacityQn,andybetheestimatedcostofthenewfacilitywhichhasacapacityQ.Then,fromthe
empiricaldata,itcanbeassumedthat:
(5.4)
wheremusuallyvariesfrom0.5to0.9,dependingonaspecifictypeoffacility.Avalueofm=0.6isoftenusedforchemical
processingplants.TheexponentialrulecanbereducedtoalinearrelationshipifthelogarithmofEquation(5.4)isused:
(5.5)
or
(5.6)
Theexponentialrulecanbeappliedtoestimatethetotalcostofacompletefacilityorthecostofsomeparticularcomponent
ofafacility.
Example54:Determinationofmfortheexponentialrule

http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

9/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

Figure54:LogLogScaleGraphofExponentialRuleExample

Theempiricalcostdatafromanumberofsewagetreatmentplantsareplottedonaloglogscaleforln(Q/Qn)and
ln(y/yn)andalinearrelationshipbetweentheselogarithmicratiosisshowninFigure54.For(Q/Qn)=1or
ln(Q/Qn)=0,ln(y/yn)=0andforQ/Qn=2orln(Q/Qn)=0.301,ln(y/yn)=0.1765.Sincemistheslopeofthe
lineinthefigure,itcanbedeterminedfromthegeometricrelationasfollows:

Forln(y/yn)=0.1765,y/yn=1.5,whilethecorrespondingvalueofQ/Qnis2.Inwords,form=0.585,thecostof
aplantincreasesonly1.5timeswhenthecapacityisdoubled.
Example55:Costexponentsforwaterandwastewatertreatmentplants[4]
Themagnitudeofthecostexponentmintheexponentialruleprovidesasimplemeasureoftheeconomyofscale
associatedwithbuildingextracapacityforfuturegrowthandsystemreliabilityforthepresentinthedesignof
treatmentplants.Whenmissmall,thereisconsiderableincentivetoprovideextracapacitysincescaleeconomies
existasillustratedinFigure53.Whenmiscloseto1,thecostisdirectlyproportionaltothedesigncapacity.The
valueofmtendstoincreaseasthenumberofduplicateunitsinasystemincreases.Thevaluesofmforseveral
typesoftreatmentplantswithdifferentplantcomponentsderivedfromstatisticalcorrelationofactual
constructioncostsareshowninTable53.
TABLE53EstimatedValuesofCostExponentsforWaterTreatmentPlants
Treatmentplant
type
1.Watertreatment
2.Wastetreatment
Primarywithdigestion(small)
Primarywithdigestion(large)
Tricklingfilter
Activatedsludge
Stabilizationponds

Exponent
m

Capacityrange
(millionsofgallonsperday)

0.67

1100

0.55
0.75
0.60
0.77
0.57

0.110
0.7100
0.120
0.1100
0.1100

Source:DataarecollectedfromvarioussourcesbyP.M.Berthouex.Seethereferencesinhisarticlefortheprimarysources.
Example56:SomeHistoricalCostDatafortheExponentialRule
TheexponentialruleasrepresentedbyEquation(5.4)canbeexpressedinadifferentformas:

http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

10/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

where

IfmandKareknownforagiventypeoffacility,thenthecostyforaproposednewfacilityofspecifiedcapacity
Qcanbereadilycomputed.
TABLE54CostFactorsofProcessingUnitsforTreatmentPlants
Processing
unit
1.Liquidprocessing
Oilseparation
Hydroclonedegritter
Primarysedimentation
Furialclarifier
Sludgeaerationbasin
Ticklingfilter
Aeratedlagoonbasin
Equalization
Neutralization
2.Sludgehandling
Digestion
Vacuumfilter
Centrifuge

Unitof
capacity

KValue
(1968$)

m
value

58,000
3,820
399

0.84
0.35
0.60

ft2
mil.gal.
mil.gal.
mgd

700
170,000
21,000
46,000
72,000
60,000

0.57
0.50
0.71
0.67
0.52
0.70

ft3

67,500

0.59

ft2
lbdry
solids/hr

9,360

0.84

318

0.81

mgd
mgd
ft2
ft2
mil.gal.

Source:DataarecollectedfromvarioussourcesbyP.M.Berthouex.Seethereferencesinhisarticlefortheprimarysources.
TheestimatedvaluesofKandmforvariouswaterandsewagetreatmentplantcomponentsareshowninTable54.TheK
valuesarebasedon1968dollars.TherangeofdatafromwhichtheKandmvaluesarederivedintheprimarysourcesshould
beobservedinordertousetheminmakingcostestimates.
Asanexample,takeK=$399andm=0.60foraprimarysedimentationcomponentinTable54.Foraproposednewplant
withtheprimarysedimentationprocesshavingacapacityof15,000sq.ft.,theestimatedcost(in1968dollars)is:
y=($399)(15,000)0.60=$128,000.
Backtotop

5.5UnitCostMethodofEstimation
Ifthedesigntechnologyforafacilityhasbeenspecified,theprojectcanbedecomposedintoelementsatvariouslevelsof
detailforthepurposeofcostestimation.Theunitcostforeachelementinthebillofquantitiesmustbeassessedinorderto
computethetotalconstructioncost.Thisconceptisapplicabletobothdesignestimatesandbidestimates,althoughdifferent
elementsmaybeselectedinthedecomposition.
Fordesignestimates,theunitcostmethodiscommonlyusedwhentheprojectisdecomposedintoelementsatvariouslevels
ofahierarchyasfollows:
1. PreliminaryEstimates.Theprojectisdecomposedintomajorstructuralsystemsorproductionequipmentitems,e.g.
theentirefloorofabuildingoracoolingsystemforaprocessingplant.
2. DetailedEstimates.Theprojectisdecomposedintocomponentsofvariousmajorsystems,i.e.,asinglefloorpanelfor
abuildingoraheatexchangerforacoolingsystem.
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

11/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

3. Engineer'sEstimates.Theprojectisdecomposedintodetaileditemsofvariouscomponentsaswarrantedbythe
availablecostdata.Examplesofdetaileditemsareslabsandbeamsinafloorpanel,orthepipingandconnectionsfora
heatexchanger.
Forbidestimates,theunitcostmethodcanalsobeappliedeventhoughthecontractormaychoosetodecomposetheproject
intodifferentlevelsinahierarchyasfollows:
1. SubcontractorQuotations.Thedecompositionofaprojectintosubcontractoritemsforquotationinvolvesaminimum
amountofworkforthegeneralcontractor.However,theaccuracyoftheresultingestimatedependsonthereliabilityof
thesubcontractorssincethegeneralcontractorselectsoneamongseveralcontractorquotationssubmittedforeachitem
ofsubcontractedwork.
2. QuantityTakeoffs.Thedecompositionofaprojectintoitemsofquantitiesthataremeasured(ortakenoff)fromthe
engineer'splanwillresultinaproceduresimilartothatadoptedforadetailedestimateoranengineer'sestimatebythe
designprofessional.Thelevelsofdetailmayvaryaccordingtothedesireofthegeneralcontractorandtheavailability
ofcostdata.
3. ConstructionProcedures.Iftheconstructionprocedureofaproposedprojectisusedasthebasisofacostestimate,
theprojectmaybedecomposedintoitemssuchaslabor,materialandequipmentneededtoperformvarioustasksinthe
projects.

SimpleUnitCostFormula
Supposethataprojectisdecomposedintonelementsforcostestimation.LetQibethequantityoftheithelementanduibe
thecorrespondingunitcost.Then,thetotalcostoftheprojectisgivenby:
(5.7)
wherenisthenumberofunits.Basedoncharacteristicsoftheconstructionsite,thetechnologyemployed,orthemanagement
oftheconstructionprocess,theestimatedunitcost,uiforeachelementmaybeadjusted.

FactoredEstimateFormula
Aspecialapplicationoftheunitcostmethodisthe"factoredestimate"commonlyusedinprocessindustries.Usually,an
industrialprocessrequiresseveralmajorequipmentcomponentssuchasfurnaces,towersdrumsandpumpinachemical
processingplant,plusancillaryitemssuchaspiping,valvesandelectricalelements.Thetotalcostofaprojectisdominated
bythecostsofpurchasingandinstallingthemajorequipmentcomponentsandtheirancillaryitems.LetCibethepurchase
costofamajorequipmentcomponentiandfibeafactoraccountingforthecostofancillaryitemsneededfortheinstallation
ofthisequipmentcomponenti.Then,thetotalcostofaprojectisestimatedby:
(5.8)
wherenisthenumberofmajorequipmentcomponentsincludedintheproject.Thefactoredmethodisessentiallybasedon
theprincipleofcomputingthecostofancillaryitemssuchaspipingandvalvesasafractionoramultipleofthecostsofthe
majorequipmentitems.ThevalueofCimaybeobtainedbyapplyingtheexponentialrulesotheuseofEquation(5.8)may
involveacombinationofcostestimationmethods.

FormulaBasedonLabor,MaterialandEquipment
Considerthesimplecaseforwhichcostsoflabor,materialandequipmentareassignedtoalltasks.Supposethataprojectis
decomposedintontasks.LetQibethequantityofworkfortaski,Mibetheunitmaterialcostoftaski,Eibetheunit
equipmentratefortaski,LibetheunitsoflaborrequiredperunitofQi,andWibethewagerateassociatedwithLi.Inthis
case,thetotalcostyis:
(5.9)
NotethatWiLiyieldsthelaborcostperunitofQi,orthelaborunitcostoftaski.Consequently,theunitsforalltermsin
Equation(5.9)areconsistent.
Example57:Decompositionofabuildingfoundationintodesignandconstructionelements.
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

12/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

Theconceptofdecompositionisillustratedbytheexampleofestimatingthecostsofabuildingfoundation
excludingexcavationasshowninTable55inwhichthedecomposeddesignelementsareshownonhorizontal
linesandthedecomposedcontractelementsareshowninverticalcolumns.Foradesignestimate,the
decompositionoftheprojectintofootings,foundationwallsandelevatorpitispreferredsincethedesignercan
easilykeeptrackofthesedesignelementshowever,forabidestimate,thedecompositionoftheprojectinto
formwork,reinforcingbarsandconcretemaybepreferredsincethecontractorcangetquotationsofsuchcontract
itemsmoreconvenientlyfromspecialtysubcontractors.
TABLE55IllustrativeDecompositionofBuildingFoundationCosts
Contractelements

Design
elements
Footings
Foundationwalls
Elevatorpit
Totalcost

Formwork

Rebars

Concrete

Totalcost

$5,000
15,000
9,000
$29,000

$10,000
18,000
15,000
$43,000

$13,000
28,000
16,000
$57,000

$28,000
61,000
40,000
$129,000

Example58:Costestimateusinglabor,materialandequipmentrates.
ForthegivenquantitiesofworkQifortheconcretefoundationofabuildingandthelabor,materialand
equipmentratesinTable56,thecostestimateiscomputedonthebasisofEquation(5.9).Theresultistabulated
inthelastcolumnofthesametable.
TABLE56IllustrativeCostEstimateUsingLabor,MaterialandEquipmentRates

Description

Formwork
Rebars
Concrete
Total

Quantity
Qi

Material
unitcost
Mi

Equipment
unitcost
Ei

Wage
rate
Wi

Labor
input
Li

Labor
unitcost
WiLi

Direct
cost
Yi

12,000ft2
4,000lb

$0.4/ft2
0.2/lb

$0.8/ft2
0.3/lb

0.2hr/ft2
0.04hr/lb

$3.0/ft2
0.6/lb

500yd3

5.0/yd3

50/yd3

$15/hr
15/hr
15/hr

0.8hr/yd3

12.0/yd3

$50,400
4,440
33,500
$88,300

Backtotop

5.6MethodsforAllocationofJointCosts
Theprincipleofallocatingjointcoststovariouselementsinaprojectisoftenusedincostestimating.Becauseofthe
difficultyinestablishingcasualrelationshipbetweeneachelementanditsassociatedcost,thejointcostsareoftenproratedin
proportiontothebasiccostsforvariouselements.
Onecommonapplicationisfoundintheallocationoffieldsupervisioncostamongthebasiccostsofvariouselementsbased
onlabor,materialandequipmentcosts,andtheallocationofthegeneraloverheadcosttovariouselementsaccordingtothe
basicandfieldsupervisioncost.Supposethataprojectisdecomposedintontasks.Letybethetotalbasiccostfortheproject
andyibethetotalbasiccostfortaski.IfFisthetotalfieldsupervisioncostandFiistheprorationofthatcosttotaski,thena
typicalproportionalallocationis:
(5.10)
Similarly,letzbethetotaldirectfieldcostwhichincludesthetotalbasiccostandthefieldsupervisioncostoftheproject,and
zibethedirectfieldcostfortaski.IfGisthegeneralofficeoverheadforprorationtoalltasks,andGiisthesharefortaski,
then
(5.11)
Finally,letwbethegrandtotalcostoftheprojectwhichincludesthedirectfieldcostandthegeneralofficeoverheadcost
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

13/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

chargedtotheprojectandwibethatattributabletaski.Then,
(5.12)
and
(5.13)

Example59:Proratedcostsforfieldsupervisionandofficeoverhead
Ifthefieldsupervisioncostis$13,245fortheprojectinTable56(Example58)withatotaldirectcostof
$88,300,findtheproratedfieldsupervisioncostsforvariouselementsoftheproject.Furthermore,ifthegeneral
officeoverheadchargedtotheprojectis4%ofthedirectfieldcostwhichisthesumofbasiccostsandfield
supervisioncost,findtheproratedgeneralofficeoverheadcostsforvariouselementsoftheproject.
Fortheproject,y=$88,300andF=$13,245.Hence:
z=13,245+88,300=$101,545
G=(0.04)(101,545)=$4,062
w=101,545+4,062=$105,607
TheresultsoftheprorationofcoststovariouselementsareshowninTable57.
TABLE57ProrationofFieldSupervisionandOfficeOverheadCosts

Description

Formwork
Rebars
Concrete
Total

Basiccost
yi

Allocated
fieldsupervisioncost
Fi

Total
fieldcost
zi

Allocated
overheadcost
Gi

Totalcost
Li

$50,400
4,400
33,500
$88,300

$7,560
660
5,025
$13,245

$57,960
5,060
38,525
$101,545

$2,319
202
1,541
$4,062

$60,279
5,262
40,066
$105,607

Example510:Astandardcostreportforallocatingoverhead
Therelianceonlaborexpensesasameansofallocatingoverheadburdensintypicalmanagementaccounting
systemscanbeillustratedbytheexampleofaparticularproduct'sstandardcostsheet.[5]Table58isanactual
product'sstandardcostsheetofacompanyfollowingtheprocedureofusingoverheadburdenratesassessedper
directlaborhour.Thematerialandlaborcostsformanufacturingatypeofvalvewereestimatedfromengineering
studiesandfromcurrentmaterialandlaborprices.TheseamountsaresummarizedinColumns2and3ofTable
58.TheoverheadcostsshowninColumn4ofTable58wereobtainedbyallocatingtheexpensesofseveral
departmentstothevariousproductsmanufacturedinthesedepartmentsinproportiontothelaborcost.Asshown
inthelastlineofthetable,thematerialcostrepresents29%ofthetotalcost,whilelaborcostsare11%ofthe
totalcost.Theallocatedoverheadcostconstitutes60%ofthetotalcost.Eventhoughmaterialcostsexceedlabor
costs,onlythelaborcostsareusedinallocatingoverhead.Althoughthistypeofallocationmethodiscommonin
industry,thearbitraryallocationofjointcostsintroducesunintendedcrosssubsidiesamongproductsandmay
produceadverseconsequencesonsalesandprofits.Forexample,aparticulartypeofpartmayincurfewoverhead
expensesinpractice,butthisphenomenonwouldnotbereflectedinthestandardcostreport.
TABLE58StandardCostReportforaTypeofValve
(1)Materialcost
Purchasedpart
Operation
Drill,face,tap(2)
Degrease
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

(2)Laborcost

(3)Overheadcost

$1.1980

(4)Totalcost
$1.1980

$0.0438
0.0031

$0.2404
0.0337

$0.2842
0.0368
14/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

Removeburs
Totalcost,thisitem
Othersubassemblies
Totalcost,subassemblies
Assembleandtest
Packwithoutpaper
Totalcost,thisitem
Costcomponent,%

1.1980
0.3523
1.5233

$1.5233
29%

0.0577
0.1046
0.2994
0.4040
0.1469
0.0234
$0.5743
11%

0.3241
0.5982
1.8519
2.4501
0.4987
0.1349
$3.0837
60%

0.3818
1.9008
2.4766
4.3773
0.6456
0.1583
$5.1813
100%

Source:H.T.JohnsonandR.S.Kaplan,Relevancelost:TheRiseandFallofManagementAccounting,Harvard
BusinessSchoolPress,Boston.Reprintedwithpermission.
Backtotop

5.7HistoricalCostData
Preparingcostestimatesnormallyrequirestheuseofhistoricaldataonconstructioncosts.Historicalcostdatawillbeuseful
forcostestimationonlyiftheyarecollectedandorganizedinawaythatiscompatiblewithfutureapplications.Organizations
whichareengagedincostestimationcontinuallyshouldkeepafilefortheirownuse.Theinformationmustbeupdatedwith
respecttochangesthatwillinevitablyoccur.Theformatofcostdata,suchasunitcostsforvariousitems,shouldbeorganized
accordingtothecurrentstandardofusageintheorganization.
Constructioncostdataarepublishedinvariousformsbyanumberoforganizations.Thesepublicationsareusefulas
referencesforcomparison.Basically,thefollowingtypesofinformationareavailable:
Catalogsofvendors'dataonimportantfeaturesandspecificationsrelatingtotheirproductsforwhichcostquotations
areeitherpublishedorcanbeobtained.Amajorsourceofvendors'informationforbuildingproductsisSweets'Catalog
publishedbyMcGrawHillInformationSystemsCompany.
Periodicalscontainingconstructioncostdataandindices.OnesourceofsuchinformationisENR,theMcGrawHill
ConstructionWeekly,whichcontainsextensivecostdataincludingquarterlycostreports.CostEngineering,ajournal
oftheAmericanSocietyofCostEngineers,alsopublishesusefulcostdataperiodically.
Commercialcostreferencemanualsforestimatingguides.AnexampleistheBuildingConstructionCostData
publishedannuallybyR.S.MeansCompany,Inc.,whichcontainsunitpricesonbuildingconstructionitems.Dodge
ManualforBuildingConstruction,publishedbyMcGrawHill,providessimilarinformation.
Digestsofactualprojectcosts.TheDodgeDigestofBuildingCostsandSpecificationsprovidesdescriptionsofdesign
featuresandcostsofactualprojectsbybuildingtype.Onceaweek,ENRpublishesthebidpricesofaprojectchosen
fromalltypesofconstructionprojects.
Historicalcostdatamustbeusedcautiously.Changesinrelativepricesmayhavesubstantialimpactsonconstructioncosts
whichhaveincreasedinrelativeprice.Unfortunately,systematicchangesoveralongperiodoftimeforsuchfactorsare
difficulttopredict.Errorsinanalysisalsoservetointroduceuncertaintyintocostestimates.Itisdifficult,ofcourse,toforesee
alltheproblemswhichmayoccurinconstructionandoperationoffacilities.Thereissomeevidencethatestimatesof
constructionandoperatingcostshavetendedtopersistentlyunderstatetheactualcosts.Thisisduetotheeffectsofgreater
thananticipatedincreasesincosts,changesindesignduringtheconstructionprocess,oroveroptimism.
Sincethefuturepricesofconstructedfacilitiesareinfluencedbymanyuncertainfactors,itisimportanttorecognizethatthis
riskmustbebornetosomedegreebyallpartiesinvolved,i.e.,theowner,thedesignprofessionals,theconstruction
contractors,andthefinancinginstitution.Itistothebestinterestofallpartiesthattherisksharingschemeimplicitinthe
design/constructprocessadoptedbytheownerisfullyunderstoodbyall.Wheninflationadjustmentprovisionshavevery
differentriskimplicationstovariousparties,thepricelevelchangeswillalsobetreateddifferentlyforvarioussituations.
Backtotop

5.8CostIndices
Sincehistoricalcostdataareoftenusedinmakingcostestimates,itisimportanttonotethepricelevelchangesovertime.
Trendsinpricechangescanalsoserveasabasisforforecastingfuturecosts.Theinputpriceindicesoflaborand/ormaterial
reflectthepricelevelchangesofsuchinputcomponentsofconstructiontheoutputpriceindices,whereavailable,reflectthe
pricelevelchangesofthecompletedfacilities,thustosomedegreealsomeasuringtheproductivityofconstruction.
Apriceindexisaweightedaggregatemeasureofconstantquantitiesofgoodsandservicesselectedforthepackage.Theprice
indexatasubsequentyearrepresentsaproportionatechangeinthesameweightedaggregatemeasurebecauseofchangesin
prices.Letltbethepriceindexinyeart,andlt+1bethepriceindexinthefollowingyeart+1.Then,thepercentchangein
priceindexforyeart+1is:
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

15/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

(5.14)
or
(5.15)
Ifthepriceindexatthebaseyeart=0issetatavalueof100,thenthepriceindicesl1,l2...lnforthesubsequentyearst=1,2...n
canbecomputedsuccessivelyfromchangesinthetotalpricechargedforthepackageofgoodsmeasuredintheindex.
ThebestknownindicatorsofgeneralpricechangesaretheGrossDomesticProduct(GDP)deflatorscompiledperiodicallyby
theU.S.DepartmentofCommerce,andtheconsumerpriceindex(CPI)compiledperiodicallybytheU.S.Departmentof
Labor.Theyarewidelyusedasbroadgaugesofthechangesinproductioncostsandinconsumerpricesforessentialgoods
andservices.Specialpriceindicesrelatedtoconstructionarealsocollectedbyindustrysourcessincesomeinputfactorsfor
constructionandtheoutputsfromconstructionmaydisproportionatelyoutpaceorfallbehindthegeneralpriceindices.
ExamplesofspecialpriceindicesforconstructioninputfactorsarethewholesaleBuildingMaterialPriceandBuildingTrades
UnionWages,bothcompiledbytheU.S.DepartmentofLabor.Inaddition,theconstructioncostindexandthebuildingcost
indexarereportedperiodicallyintheEngineeringNewsRecord(ENR).BothENRcostindicesmeasuretheeffectsofwage
rateandmaterialpricetrends,buttheyarenotadjustedforproductivity,efficiency,competitiveconditions,ortechnology
changes.Consequently,alltheseindicesmeasureonlythepricechangesofrespectiveconstructioninputfactorsas
representedbyconstantquantitiesofmaterialand/orlabor.Ontheotherhand,thepriceindicesofvarioustypesofcompleted
facilitiesreflectthepricechangesofconstructionoutputincludingallpertinentfactorsintheconstructionprocess.The
buildingconstructionoutputindicescompiledbyTurnerConstructionCompanyandHandyWhitmanUtilitiesarecompiled
intheU.S.StatisticalAbstractspublishedeachyear.
Figure57andTable59showavarietyofUnitedStatesindices,includingtheGrossDomesticProduct(GDP)pricedeflator,
theENRbuildingindex,andtheTurnerConstructionCompanyBuildingCostIndexfrom1996to2007,using2000asthe
baseyearwithanindexof100.
TABLE59SummaryofInputandOutputPriceIndices,19962007
Year
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
TurnerConstructionBuildings 84.9 88.2 92.3 95.8 100.0 103.0 104.0 104.4 110.1 120.5
ENRBuildings
90.5 95.0 95.8 97.6 100.0 101.0 102.4 104.4 112.6 118.8
GDPDeflator
94.0 95.6 96.8 98.0 100.0 102.3 104.2 105.9 107.2 108.6

2006
133.3
123.5
110.2

2007
143.5
126.7
112.0

Note:Index=100inbaseyearof2000.

Figure57TrendsforUSpriceindices.

http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

16/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

Figure58Priceandcostindicesforconstruction.
SinceconstructioncostsvaryindifferentregionsoftheUnitedStatesandinallpartsoftheworld,locationalindicesshowing
theconstructioncostataspecificlocationrelativetothenationaltrendareusefulforcostestimation.ENRpublishes
periodicallytheindicesoflocalconstructioncostsatthemajorcitiesindifferentregionsoftheUnitedStatesaspercentages
oflocaltonationalcosts.
Whentheinflationrateisrelativelysmall,i.e.,lessthan10%,itisconvenienttoselectasinglepriceindextomeasurethe
inflationaryconditionsinconstructionandthustodealonlywithasinglesetofpricechangeratesinforecasting.Letjtbethe
pricechangerateinyeart+1overthepriceinyeart.Ifthebaseyearisdenotedasyear0(t=0),thenthepricechangeratesat
years1,2,...tarej1,j2,...jt,respectively.LetAtbethecostinyeartexpressedinbaseyeardollarsandAt'bethecostinyeart
expressedinthencurrentdollars.Then:
(5.16)
Conversely
(5.17)
Ifthepricesofcertainkeyitemsaffectingtheestimatesoffuturebenefitsandcostsareexpectedtoescalatefasterthanthe
generalpricelevels,itmaybecomenecessarytoconsiderthedifferentialpricechangesoverandabovethegeneralinflation
rate.Forexample,duringtheperiodbetween1973through1979,itwascustomarytoassumethatfuelcostswouldescalate
fasterthanthegeneralpricelevels.Withhindsightin1983,theassumptionforestimatingcostsovermanyyearswouldhave
beendifferent.Becauseoftheuncertaintyinthefuture,theuseofdifferentialinflationratesforspecialitemsshouldbe
judicious.
Futureforecastsofcostswillbeuncertain:theactualexpensesmaybemuchlowerormuchhigherthanthoseforecasted.This
uncertaintyarisesfromtechnologicalchanges,changesinrelativeprices,inaccurateforecastsofunderlyingsocioeconomic
conditions,analyticalerrors,andotherfactors.Forthepurposeofforecasting,itisoftensufficienttoprojectthetrendof
futurepricesbyusingaconstantratejforpricechangesineachyearoveraperiodoftyears,then
(5.18)
and
(5.19)
Estimationofthefuturerateincreasejisnotatallstraightforward.Asimpleexpedientistoassumethatfutureinflationwill
continueattherateofthepreviousperiod:
(5.20)
Alongertermperspectivemightusetheaverageincreaseoverahorizonofnpastperiods:

http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

17/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

(5.21)

Moresophisticatedforecastingmodelstopredictfuturecostincreasesincludecorrectionsforitemssuchaseconomiccycles
andtechnologychanges.
Example512:Changesinhighwayandbuildingcosts
Figure59showsthechangeofstandardhighwaycostsfrom1992to2002,andTable510showsthechangeof
residentialbuildingcostsfrom1970to1990.Ineachcase,therateofcostincreasewassubstantiallyabovethe
rateofinflationinthedecadeofthe1970s..Indeed,therealcostincreasebetween1970and1980wasinexcess
ofthreepercentperyearinbothcases.However,thesedataalsoshowsomecauseforoptimism.Forthecaseof
thestandardhighway,realcostdecreasestookplaceintheperiodfroml970tol990.Unfortunately,comparable
indicesofoutputsarenotbeingcompiledonanationwidebasisforothertypesofconstruction.

Figure59ProducerPricesofHighwayandStreetConstruction(ProducerPriceIndex:HighwaysandStreetsmonthlydata).
TABLE510ComparisonofResidentialBuildingCosts,19701990

year

Standard
residencecost
(1972=100)

Pricedeflator
(1972=100)

Standardresidence
realcost
(1972=100)

Percentage
change
peryear

1970
1980
1990

77
203
287

92
179
247

74
99
116

+3.4%
+1.7%

Source:StatisticalAbstractoftheUnitedStates.GNPdeflatorisusedforthepricedeflatorindex.
Backtotop

5.9ApplicationsofCostIndicestoEstimating
Inthescreeningestimateofanewfacility,asingleparameterisoftenusedtodescribeacostfunction.Forexample,thecost
ofapowerplantisafunctionofelectricitygeneratingcapacityexpressedinmegawatts,orthecostofasewagetreatment
plantasafunctionofwasteflowexpressedinmilliongallonsperday.
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

18/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

Thegeneralconditionsfortheapplicationofthesingleparametercostfunctionforscreeningestimatesare:
1. Excludespeciallocalconditionsinhistoricaldata
2. Determinenewfacilitycostonbasisofspecifiedsizeorcapacity(usingthemethodsdescribedinSections5.3to5.6)
3. Adjustforinflationindex
4. Adjustforlocalindexofconstructioncosts
5. Adjustfordifferentregulatoryconstraints
6. Adjustforlocalfactorsforthenewfacility
Someoftheseadjustmentsmaybedoneusingcompiledindices,whereasothersmayrequirefieldinvestigationand
considerableprofessionaljudgmenttoreflectdifferencesbetweenagivenprojectandstandardprojectsperformedinthepast.
Example513:Screeningestimateforarefinery
Thetotalconstructioncostofarefinerywithaproductioncapacityof200,000bbl/dayinGary,Indiana,
completedin2001was$100million.Itisproposedthatasimilarrefinerywithaproductioncapacityof300,000
bbl/daybebuiltinLosAngeles,California,forcompletionin2003.Fortheadditionalinformationgivenbelow,
makeanorderofmagnitudeestimateofthecostoftheproposedplant.
1. InthetotalconstructioncostfortheGary,Indiana,plant,therewasanitemof$5millionforsite
preparationwhichisnottypicalforotherplants.
2. Thevariationofsizesoftherefineriescanbeapproximatedbytheexponentialrule,Equation(5.4),withm
=0.6.
3. Theinflationrateisexpectedtobe8%peryearfrom1999to2003.
4. Thelocationindexwas0.92forGary,Indianaand1.14forLosAngelesin1999.Theseindicesaredeemed
tobeappropriateforadjustingthecostsbetweenthesetwocities.
5. NewairpollutionequipmentfortheLAplantcosts$7millionin2003dollars(notrequiredintheGary
plant).
6. Thecontingencycostduetoinclementweatherdelaywillbereducedbytheamountof1%oftotal
constructioncostbecauseofthefavorableclimateinLA(comparedtoGary).
Onthebasisoftheaboveconditions,theestimateforthenewprojectmaybeobtainedasfollows:
1. TypicalcostexcludingspecialitematGary,INis
$100million$5million=$95million
2. Adjustmentforcapacitybasedontheexponentiallawyields
($95)(300,000/200,000)0.6=(95)(1.5)0.6=$121.2million
3. Adjustmentforinflationleadstothecostin2003dollarsas
($121.2)(1.08)4=$164.6million
4. Adjustmentforlocationindexgives
($164.6)(1.14/0.92)=$204.6million
5. AdjustmentfornewpollutionequipmentattheLAplantgives
$204.6+$7=$211.6million
6. Reductionincontingencycostyields
($211.6)(10.01)=$209.5million
Sincethereisnoadjustmentforthecostofconstructionfinancing,theorderofmagnitudeestimateforthenew
projectis$209.5million.
Example514:Conceptualestimateforachemicalprocessingplant
Inmakingapreliminaryestimateofachemicalprocessingplant,severalmajortypesofequipmentarethemost
significantparametersinaffectingtheinstallationcost.Thecostofpipingandotherancillaryitemsforeachtype
ofequipmentcanoftenbeexpressedasapercentageofthattypeofequipmentforagivencapacity.Thestandard
costsforthemajorequipmenttypesfortwoplantswithdifferentdailyproductioncapacitiesareasshownin
Table511.Ithasbeenestablishedthattheinstallationcostofallequipmentforaplantwithdailyproduction
capacitybetween100,000bbland400,000bblcanbestbeestimatedbyusinglinearinterpolationofthestandard
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

19/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

data.
TABLE511CostDataforEquipmentandAncillaryItems
Costofancillaryitems
Equipment EquipmentCost($1000) as%ofequipmentcost($1000)
type
100,000bbl 400,000bbl 100,000bbl
400,000bbl
Furnace
3,000
10,000
40%
30%
Tower
2,000
6,000
45%
35%
Drum
1,500
5,000
50%
40%
Pump,etc.
1,000
4,000
60%
50%
Anewchemicalprocessingplantwithadailyproductioncapacityof200,000bblistobeconstructedin
Memphis,TNinfouryears.Determinethetotalpreliminarycostestimateoftheplantincludingthebuildingand
theequipmentonthefollowingbasis:
1. TheinstallationcostforequipmentwasbasedonlinearinterpolationfromTable511,andadjustedfor
inflationfortheinterveningfouryears.Weexpectinflationinthefouryearstobesimilartotheperiod
19901994andwewillusetheGNPDeflatorindex.
2. Thelocationindexforequipmentinstallationis0.95forMemphis,TN,incomparisonwiththestandard
cost.
3. Anadditionalcostof$500,000wasrequiredforthelocalconditionsinMemphis,TN.
Thesolutionofthisproblemcanbecarriedoutaccordingtothestepsasoutlinedintheproblemstatement:
1. Thecostsoftheequipmentandancillaryitemsforaplantwithacapacityof200,000bblcanbeestimated
bylinearinterpolationofthedatainTable511andtheresultsareshowninTable512.

TABLE512ResultsofLinearInterpolationforanEstimationExample
Equipment
EquipmentCost
Percentagefor
type
(in$1,000)
ancillaryitems
Furnace
$3,000+(1/3)($10,000$3,000)=$5,333 40%(1/3)(40%30%)=37%
Tower
$2,000+(1/3)($6,000$2,000)=$3,333 45%(1/3)(45%35%)=42%
Drum
$1,500+(1/3)($5,000$1,500)=$2,667 50%(1/3)(50%40%)=47%
Pumps,etc. $1,000+(1/3)($4,000$1,000)=$2,000 60%(1/3)(60%50%)=57%
Hence,thetotalprojectcostinthousandsofcurrentdollarsisgivenbyEquation(5.8)as:
($5,333)(1.37)+($3,333)(1.42)+($2,667)(1.47)+($2,000)(1.57)=
=$2,307+$4,733+$3,920+$3,140=$19,000
2. ThecorrespondingcostinthousandsoffouryearinthefuturedollarsusingEquation(5.16)andTable59
is:
($19,100)(105/94)=$21,335
3. Thetotalcostoftheprojectafteradjustmentforlocationis
(0.95)($21,335,000)+$500,000 $20,800,000
Backtotop

5.10EstimateBasedonEngineer'sListofQuantities
Theengineer'sestimateisbasedonalistofitemsandtheassociatedquantitiesfromwhichthetotalconstructioncostis
derived.Thissamelistisalsomadeavailabletothebiddersifunitpricesoftheitemsonthelistarealsosolicitedfromthe
bidders.Thus,theitemizedcostssubmittedbythewinningcontractormaybeusedasthestartingpointforbudgetcontrol.
Ingeneral,theprogresspaymentstothecontractorarebasedontheunitsofworkcompletedandthecorrespondingunitprices
oftheworkitemsonthelist.Hence,theestimatebasedontheengineers'listofquanititiesforvariousworkitemsessentially
definesthelevelofdetailtowhichsubsequentmeasuresofprogressfortheprojectwillbemade.
Example515:Bidestimatebasedonengineer'slistofquantities
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

20/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

Usingtheunitpricesinthebidofcontractor1forthequantititesspecifiedbytheengineerinTable52(Example
53),wecancomputethetotalbidpriceofcontractor1fortheroadwayproject.Theitemizedcostsforvarious
workitemsaswellasthetotalbidpriceareshowninTable513.

TABLE513:BidPriceofContractor1inaHighwayProject
Items
Mobilization
Removal,berm
Finishsubgrade
Surfaceditches

Unit
ls
lf
sy
lf

Excavationstructures
Basecourse,untreated,3/4''
Leanconcrete,4''thick
PCC,pavement,10''thick
Concrete,ciAA(AE)
Smallstructure
Barrier,precast
Flatwork,4''thick
10''thick
Slopeprotection
Metal,endsection,15''
18''

1
8,020
1,207,500
525

Unitprice
115,000
1.00
0.50
2.00

Itemcost
115,000
8.020
603,750
1,050

cy
ton
sy
sy
ls
cy
lf
sy
sy
sy
ea
ea

7,000
362,200
820,310
76,010
1
50
7,920
7,410
4,241
2,104
39
3

3.00
4.50
3.10
10.90
200,000
500
15.00
10.00
20.00
25.00
100
150

21,000
1,629,900
2,542,961
7,695,509
200,000
25,000
118,800
74,100
84,820
52,600
3,900
450

Post,rightofway,modification
Salvageandrelaypipe
Looseriprap
Bracedposts
Delineators,typeI
typeII
Constructivesignsfixed
Barricades,typeIII
Warninglights
Pavementmarking,epoxymaterial
Black
Yellow
White

lf
lf
cy
ea
lb
ea
sf
lf
day

gal
gal
gal

4,700
1,680
32
54
1,330
140
52,600
29,500
6,300

3.00
5.00
40.00
100
12.00
15.00
0.10
0.20
0.10

14,100
8,400
1,280
5,400
15,960
2,100
5,260
5,900
630

475
740
985

90.00
90.00
90.00

42,750
66,600
88,650

Plowable,onewaywhite
Topsoil,contractorfurnished
Seedling,methodA
Excelsiorblanket
Corrugated,metalpipe,18''
Polyethylenepipe,12''
Catchbasingrateandframe
Equalopportunitytraining
Granularbackfillborrow
Drillcaisson,2'x6''
Flagging
Prestressedconcretemember
typeIV,141'x4''
132'x4''

ea
cy
acr
sy
lf
lf
ea
hr
cy
lf
hr

ea
ea

342
260
103
500
580
2,250
35
18,000
274
722
20,000

50.00
10.00
150
2.00
20.00
15.00
350
0.80
10.00
100
8.25

17,100
2,600
15,450
1,000
11,600
33,750
12,250
14,400
2,740
72,200
165,000

7
6

12,000
11,000

84,000
66,000

http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

Quantity

21/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

Reinforcedsteel
Epoxycoated
Structuralsteel
Sign,covering
typeC2woodpost
24''
30''
48''
Auxiliary
Steelpost,48''x60''
type3,woodpost
24''
30''
36''
42''x60''
48''
Auxiliary
Steelpost
12''x36''
Foundation,concrete

lb
lb
ls
sf
sf
ea
ea
ea
sf
ea
sf
ea
ea
ea
ea
ea
sf
sf
ea
ea

6,300
122,241
1
16
98
3
2
11
61
11
669
23
1
12
8
7
135
1,610
28
60

0.60
0.55
5,000
10.00
15.00
100
100
200
15.00
500
15.00
100
100
150
150
200
15.00
40.00
100
300

3,780
67,232.55
5,000
160
1,470
300
200
2,200
915
5,500
10,035
2,300
100
1,800
1,200
1,400
2,025
64,400
2,800
18,000

Barricade,48''x42''
Woodpost,roadclosed
Total

ea
lf

40
100

100
30.00

4,000
3,000
$14,129,797.55

Backtotop

5.11AllocationofConstructionCostsOverTime
Sinceconstructioncostsareincurredovertheentireconstructionphaseofaproject,itisoftennecessarytodeterminethe
amountstobespentinvariousperiodstoderivethecashflowprofile,especiallyforlargeprojectswithlongdurations.
Consequently,itisimportanttoexaminethepercentageofworkexpectedtobecompletedatvarioustimeperiodstowhich
thecostswouldbecharged.Moreaccurateestimatesmaybeaccomplishedoncetheprojectisscheduledasdescribedin
Chapter10,butsomeroughestimateofthecashflowmayberequiredpriortothistime.
Considerthebasicproblemindeterminingthepercentageofworkcompletedduringconstruction.Onecommonmethodof
estimatingpercentageofcompletionisbasedontheamountofmoneyspentrelativetothetotalamountbudgetedforthe
entireproject.Thismethodhastheobviousdrawbackinassumingthattheamountofmoneyspenthasbeenusedefficiently
forproduction.Amorereliablemethodisbasedontheconceptofvalueofworkcompletedwhichisdefinedastheproductof
thebudgetedlaborhoursperunitofproductionandtheactualnumberofproductionunitscompleted,andisexpressedin
budgetedlaborhoursfortheworkcompleted.Then,thepercentageofcompletionatanystageistheratioofthevalueofwork
completedtodateandthevalueofworktobecompletedfortheentireproject.Regardlessofthemethodofmeasurement,itis
informativetounderstandthetrendofworkprogressduringconstructionforevaluationandcontrol.
Ingeneral,theworkonaconstructionprojectprogressesgraduallyfromthetimeofmobilizationuntilitreachesaplateau
thentheworkslowsdowngraduallyandfinallystopsatthetimeofcompletion.Therateofworkdoneduringvarioustime
periods(expressedinthepercentageofprojectcostperunittime)isshownschematicallyinFigure510inwhichtentime
periodshavebeenassumed.ThesolidlineArepresentsthecaseinwhichtherateofworkiszeroattimet=0andincreases
linearlyto12.5%ofprojectcostatt=2,whiletheratebeginstodecreasefrom12.5%att=8to0%att=10.Thedottedline
Brepresentsthecaseofrapidmobilizationbyreaching12.5%ofprojectcostatt=1whilebeginningtodecreasefrom12.5%
att=7to0%att=10.ThedashlineCrepresentsthecaseofslowmobilizationbyreaching12.5%ofprojectcostatt=3
whilebeginningtodecreasefrom12.5%att=9to0%att=10.

http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

22/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

Figure510:RateofWorkProgressoverProjectTime

Thevalueofworkcompletedatagiventime(expressedasacumulativepercentageofprojectcost)isshownschematicallyin
Figure511.Ineachcase(A,BorC),thevalueofworkcompletedcanberepresentedbyan"Sshaped"curve.Theeffectsof
rapidmobilizationandslowmobilizationareindicatedbythepositionsofcurvesBandCrelativetocurveA,respectively.

Figure511:ValueofWorkCompletedoverProjectTime

WhilethecurvesshowninFigures510and511representhighlyidealizedcases,theydosuggestthelatitudeforadjusting
theschedulesforvariousactivitiesinaproject.Whiletherateofworkprogressmaybechangedquitedrasticallywithina
singleperiod,suchasthechangefromrapidmobilizationtoaslowmobilizationinperiods1,2and3inFigure510,the
effectonthevalueofworkcompletedovertimewilldiminishinsignificanceasindicatedbythecumulativepercentagesfor
laterperiodsinFigure511.Thus,adjustmentoftheschedulingofsomeactivitiesmayimprovetheutilizationoflabor,
materialandequipment,andanydelaycausedbysuchadjustmentsforindividualactivitiesisnotlikelytocauseproblemsfor
theeventualprogresstowardthecompletionofaproject.
Inadditiontothespeedofresourcemobilization,anotherimportantconsiderationistheoveralldurationofaprojectandthe
amountofresourcesapplied.Variousstrategiesmaybeappliedtoshortentheoveralldurationofaprojectsuchas
overlappingdesignandconstructionactivities(asdescribedinChapter2)orincreasingthepeakamountsoflaborand
equipmentworkingonasite.However,spatial,managerialandtechnicalfactorswilltypicallyplaceaminimumlimitonthe
projectdurationorcausecoststoescalatewithshorterdurations.
Example516:CalculationofValueofWorkCompleted
FromtheareaofworkprogressinFigure510,thevalueofworkcompletedatanypointinFigure511canbe
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

23/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

derivedbynotingtheareaunderthecurveuptothatpointinFigure510.Theresultfort=0throught=10is
showninTable514andplottedinFigure511.

TABLE514CalculationofValueofWorkCompleted
Time

CaseA

CaseB

CaseC

0
1
2
3
4
5
6
7
8
9
10

0
3.1%
12.5
25.0
37.5
50.0
62.5
75.0
87.5
96.9
100.0

0
6.2%
18.7
31.2
43.7
56.2
68.7
81.2
91.7
97.9
100.0

0
2.1%
8.3
18.8
31.3
43.8
56.3
68.8
81.9
93.8
100.0

Backtotop

5.12ComputerAidedCostEstimation
Numerouscomputeraidedcostestimationsoftwaresystemsarenowavailable.Theserangeinsophisticationfromsimple
spreadsheetcalculationsoftwaretointegratedsystemsinvolvingdesignandpricenegotiationovertheInternet.Whilethis
softwareinvolvescostsforpurchase,maintenance,trainingandcomputerhardware,somesignificantefficienciesoftenresult.
Inparticular,costestimatesmaybepreparedmorerapidlyandwithlesseffort.
Someofthecommonfeaturesofcomputeraidedcostestimationsoftwareinclude:
Databasesforunitcostitemssuchasworkerwagerates,equipmentrentalormaterialprices.Thesedatabasescanbe
usedforanycostestimaterequired.Iftheserateschange,costestimatescanberapidlyrecomputedafterthedatabases
areupdated.
Databasesofexpectedproductivityfordifferentcomponentstypes,equiptmentandconstructionprocesses.
Importutilitiesfromcomputeraideddesignsoftwareforautomaticquantitytakeoffofcomponents.Alternatively,
specialuserinterfacesmayexisttoentergeometricdescriptionsofcomponentstoallowautomaticquantitytakeoff.
Exportutilitiestosendestimatestocostcontrolandschedulingsoftware.Thisisveryhelpfultobeginthemanagement
ofcostsduringconstruction.
Versioncontroltoallowsimulationofdifferentconstructionprocessesordesignchangesforthepurposeoftracking
changesinexpectedcosts.
Provisionsformanualreview,overrideandeditingofanycostelementresultingfromthecostestimationsystem
Flexiblereportingformats,includingprovisionsforelectronicreportingratherthansimplyprintingcostestimateson
paper.
Archivesofpastprojectstoallowrapidcostestimateupdatingormodificationforsimilardesigns.
Atypicalprocessfordevelopingacostestimateusingoneofthesesystemswouldinclude:
1. Ifasimilardesignhasalreadybeenestimatedorexistsinthecompanyarchive,theoldprojectinformationisretreived.
2. Acostengineermodifies,addordeletescomponentsintheprojectinformationset.Ifasimilarprojectexists,manyof
thecomponentsmayhavefewornoupdates,therebysavingtime.
3. Acostestimateiscalculatedusingtheunitcostmethodofestimation.Productivitiesandunitpricesareretrievedfrom
thesystemdatabases.Thus,thelatestpriceinformationisusedforthecostestimate.
4.
Thecostestimationissummarizedandreviewedforanyerrors.
Backtotop

5.13EstimationofOperatingCosts
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

24/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

Inordertoanalyzethelifecyclecostsofaproposedfacility,itisnecessarytoestimatetheoperationandmaintenancecosts
overtimeafterthestartupofthefacility.Thestreamofoperatingcostsoverthelifeofthefacilitydependsuponsubsequent
maintenancepoliciesandfacilityuse.Inparticular,themagnitudeofroutinemaintenancecostswillbereducedifthefacility
undergoesperiodicrepairsandrehabilitationatperiodicintervals.
Sincethetradeoffbetweenthecapitalcostandtheoperatingcostisanessentialpartoftheeconomicevaluationofafacility,
theoperatingcostisviewednotasaseparateentity,butasapartofthelargerparceloflifecyclecostattheplanningand
designstage.Thetechniquesofestimatinglifecyclecostsaresimilartothoseusedforestimatingcapitalcosts,including
empiricalcostfunctionsandtheunitcostmethodofestimatingthelabor,materialandequipmentcosts.However,itisthe
interactionoftheoperatingandcapitalcostswhichdeservespecialattention.
Assuggestedearlierinthediscussionoftheexponentialruleforestimating,thevalueofthecostexponentmayinfluencethe
decisionwhetherextracapacityshouldbebuilttoaccommodatefuturegrowth.Similarly,theeconomyofscalemayalso
influencethedecisiononrehabilitationatagiventime.Astherehabilitationworkbecomesextensive,itbecomesacapital
projectwithalltheimplicationsofitsownlifecycle.Hence,thecostestimationofarehabilitationprojectmayalsoinvolve
capitalandoperatingcosts.
WhiledeferringthediscussionoftheeconomicevaluationofconstructedfacilitiestoChapter6,itissufficienttopointout
thatthestreamofoperatingcostsovertimerepresentsaseriesofcostsatdifferenttimeperiodswhichhavedifferentvalues
withrespecttothepresent.Consequently,thecostdataatdifferenttimeperiodsmustbeconvertedtoacommonbaselineif
meaningfulcomparisonisdesired.
Example517:Maintenancecostonaroadway[6]
Maintenancecostsforconstructedroadwaystendtoincreasewithbothageanduseofthefacility.Asanexample,the
followingempiricalmodelwasestimatedformaintenanceexpendituresonsectionsoftheOhioTurnpike:
C=596+0.0019V+21.7A
whereCistheannualcostofroutinemaintenanceperlanemile(in1967dollars),Visthevolumeoftrafficontheroadway
(measuredinequivalentstandardaxleloads,ESAL,sothataheavytruckisrepresentedasequivalenttomanyautomobiles),
andAistheageofthepavementinyearssincethelastresurfacing.Accordingtothismodel,routinemaintenancecostswill
increaseeachyearasthepavementservicedeteriorates.Inaddition,maintenancecostsincreasewithadditionalpavement
stressduetoincreasedtrafficortoheavieraxleloads,asreflectedinthevariableV.
Forexample,forV=500,300ESALandA=5years,theannualcostofroutinemaintenanceperlanemileisestimatedtobe:
C=596+(0.0019)(500,300)+(21.7)(5)
=596+950.5+108.5=1,655(in1967dollars)
Example518:Timestreamofcostsoverthelifeofaroadway[7]
Thetimestreamofcostsoverthelifeofaroadwaydependsupontheintervalsatwhichrehabilitationiscarriedout.Ifthe
rehabilitationstrategyandthetrafficareknown,thetimestreamofcostscanbeestimated.
Usingalifecyclemodelwhichpredictstheeconomiclifeofhighwaypavementonthebasisoftheeffectsoftrafficandother
factors,anoptimalscheduleforrehabilitationcanbedeveloped.Forexample,atimestreamofcostsandresurfacingprojects
foronepavementsectionisshowninFigure511.Asdescribedinthepreviousexample,theroutinemaintenancecosts
increaseasthepavementages,butdeclineaftereachnewresurfacing.Asthepavementcontinuestoage,resurfacingbecomes
morefrequentuntiltheroadwayiscompletelyreconstructedattheendof35years.

http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

25/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

Figure511:TimeStreamofCostsovertheLifeofaHighwayPavement
Backtotop

5.14References
1. Ahuja,H.N.andW.J.Campbell,Estimating:FromConcepttoCompletion,PrenticeHall,Inc.,EnglewoodCliffs,NJ,
1987.
2.
Clark,F.D.,andA.B.Lorenzoni,AppliedCostEngineering,MarcelDekker,Inc.,NewYork,1978.
3.
Clark,J.E.,StructuralConcreteCostEstimating,McGrawHill,Inc.,NewYork,1983.
4. Diekmann,J.R.,"ProbabilisticEstimating:MathematicsandApplications,"ASCEJournalofConstructionEngineering
andManagement,Vol.109,1983,pp.297308.
5.
Humphreys,K.K.(ed.)ProjectandCostEngineers'Handbook(sponsoredbyAmericanAssociationofCost
Engineers),2ndEd.,MarcelDekker,Inc.,NewYork,1984.
6. Maevis,A.C.,"ConstructionCostControlbytheOwners,"ASCEJournaloftheConstructionDivision,Vol.106,1980,
pp.435446.
7. Wohl,M.andC.Hendrickson,TransportationInvestmentandPricingPrinciples,JohnWiley&Sons,NewYork,
1984.
Backtotop

5.15Problems
1. SupposethatthegroutingmethoddescribedinExample52isusedtoprovideagroutingsealbeneathanotherlandfill
of12acres.Thegroutlineisexpectedtobebetween4.5and5.5feetthickness.Thevoidsinthesoillayerarebetween
25%to35%.Usingthesameunitcostdata(in1978dollars),findtherangeofcostsinascreeningestimateforthe
groutingproject.
2. ToavoidsubmergingpartofU.S.Route40southandeastofSaltLakeCityduetotheconstructionoftheJardinalDam
andReservoir,22milesofhighwaywererelocatedtothewestaroundthesiteofthefuturereservoir.Threeseparate
contractswerelet,includingonecovering10milesoftheworkwhichhadanengineer'sestimateof$34,095,545.The
bidsweresubmittedonJuly21,1987andthecompletiondateoftheprojectunderthecontractwasAugust15,1989.
(SeeENR,October8,1987,p.34).Thethreelowestbidswere:
1)W.W.Clyde&Co.,Springville,Utah
$21,384,919
2)SlettenConstructioncompany,GreatFalls,Montana
$26,701,018
3)GilbertWesternCorporation,SaltLakecity,Utah
$30,896,203
Findthepercentageofeachofthesebiddersbelowtheengineer'scostestimate.
3. Inmakingascreeningestimateofanindustrialplantfortheproductionofbatteries,anempiricalformulabasedondata
ofasimilarbuildingscompletedbefore1987wasproposed:
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

26/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

C=(16,000)(Q+50,000)1/2
whereQisthedailyproductioncapacityofbatteriesandCisthecostofthebuildingin1987dollars.Ifasimilarplant
isplannedforadailyproductioncapacityof200,000batteries,findthescreeningestimateofthebuildingin1987
dollars.
4. ForthecostfactorK=$46,000(in1968dollars)andm=0.67foranaeratedlagoonbasinofawatertreatmentplantin
Table54(Example56),findtheestimatedcostofaproposednewplantwithasimilartreatmentprocesshavinga
capacityof480milliongallons(in1968dollars).Ifanothernewplantwasestimatedtocost$160,000byusingthe
sameexponentialrule,whatwouldbetheproposedcapacityofthatplant?
5. UsingthecostdatainFigure55(Example511),findthetotalcostincludingoverheadandprofitofexcavating90,000
cu.yd.ofbulkmaterialusingabackhoeof1.5cu.yd.capacityforadetailedestimate.Assumethattheexcavated
materialwillbeloadedontotrucksfordisposal.
6.

Thebasiccosts(labor,materialandequipment)forvariouselementsofaconstructionprojectaregivenasfollows:
Excavation
Subgrade
Basecourse
Concretepavement
Total

$240,000
$100,000
$420,000
$640,000
$1,400,000

Assumingthatfieldsupervisioncostis10%ofthebasiccost,andthegeneralofficeoverheadis5%ofthedirectcosts
(sumofthebasiccostsandfieldsupervisioncost),findtheproratedfieldsupervisioncosts,generalofficeoverhead
costsandtotalcostsforthevariouselementsoftheproject.
7.

Inmakingapreliminaryestimateofachemicalprocessingplant,severalmajortypesofequipmentarethemost
significantcomponentsinaffectingtheinstallationcost.Thecostofpipingandotherancillaryitemsforeachtypeof
equipmentcanoftenbeexpressedasapercentageofthattypeofequipmentforagivencapacity.Thestandardcostsfor
themajorequipmenttypesfortwoplantswithdifferentdailyproductioncapacitiesareasshowninTable515.Ithas
beenestablishedthattheinstallationcostofallequipmentforaplantwithdailyproductioncapacitybetween150,000
bbland600,000bblcanbestbeestimatedbyusinglinerinterpolationofthestandarddata.Anewchemicalprocessing
plantwithadailyproductioncapacityof400,000bblisbeingplanned.Assumingthatallotherfactorsremainthesame,
estimatethecostofthenewplant.

Equipmenttype
Furnace
Tower
Drum
Pumps,etc.

8.

Table515
Equipmentcost($1,000)
150,000bbl
600,000bbl
$3,000
$10,000
2,000
6,000
1,500
5,000
1,000
4,000

Factorforancillaryitems
150,000bbl
600,000bbl
0.32
0.24
0.42
0.36
0.42
0.32
0.54
0.42

Thetotalconstructioncostofarefinerywithaproductioncapacityof100,000bbl/dayinCaracas,Venezuela,
completedin1977was$40million.Itwasproposedthatasimilarrefinerywithaproductioncapacityof$160,000
bbl/daybebuiltinNewOrleans,LAforcompletionin1980.Fortheadditionalinformationgivenbelow,makea
screeningestimateofthecostoftheproposedplant.
1. InthetotalconstructioncostfortheCaracus,Venezuelaplant,therewasanitemof$2millionforsitepreparation
andtravelwhichisnottypicalforsimilarplants.
2.
Thevariationofsizesoftherefineriescanbeapproximatedbytheexponentiallawwithm=0.6.
3.
TheinflationrateinU.S.dollarswasapproximately9%peryearfrom1977to1980.
4. Anadjustmentfactorof1.40wassuggestedfortheprojecttoaccountfortheincreaseoflaborcostfromCaracas,
VenezuelatoNewOrleans,LA.
5. NewairpollutionequipmentfortheNewOrleans,LAplantcost$4millionin1980dollars(notrequiredforthe
Caracasplant).
6.
ThesiteconditionatNewOrleansrequiredspecialpilingfoundationwhichcost$2millionin1980dollars.

9. Thetotalcostofasewagetreatmentplantwithacapacityof50milliongallonsperdaycompleted1981foranewtown
inColoradowas$4.5million.Itwasproposedthatasimilartreatmentplantwithacapacityof80milliongallonsper
daybebuiltinanothertowninNewJerseyforcompletionin1985.Foradditionalinformationgivenbelow,makea
screeningestimateofthecostoftheproposedplant.
1. InthetotalconstructioncostinColorado,anitemof$300,000forsitepreparationisnottypicalforsimilarplants.
http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

27/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

2. Thevariationofsizesforthistypeoftreatmentplantscanbeapproximatedbytheexponentiallawwithm=0.5.
3.
Theinflationratewasapproximately5%peryearfrom1981to1985.
4. ThelocationalindicesofColoradoandNewJerseyareasare0.95and1.10,respectively,againstthenational
averageof1.00.
5. Theinstallationofaspecialequipmenttosatisfythenewenvironmentalstandardcostanextra$200,000in1985
dollarfortheNewJerseyplant.
6.
ThesiteconditioninNewJerseyrequiredspecialfoundationwhichcost$500,00in1985dollars.
10. UsingtheENRbuildingcostindex,estimatethe1985costofthegroutingsealonalandfilldescribedinExample52,
includingthemostlikelyestimateandtherangeofpossiblecost.
11. Usingtheunitpricesinthebidofcontractor2forthequantititesspecifiedbytheengineerinTable52(Example53),
computethetotalbidpriceofcontractor2fortheroadwayprojectincludingtheexpenditureoneachitemofwork.
12.

TherateofworkprogressinpercentofcompletionperperiodofaconstructionprojectisshowninFigure513in
which13timeperiodshavebeenassumed.ThecasesA,BandCrepresentthenormalmobilizationtime,rapid
mobilizationandslowmobilizationfortheproject,respectively.Calculatethevalueofworkcompletedincumulative
percentageforperiods1through13foreachofthecasesA,BandC.Alsoplotthevolumeofworkcompletedversus
timeforthesecases.

Figure513
13.

TherateofworkprogressinpercentofcompletionperperiodofaconstructionprojectisshowninFigure514in
which10timeperiodshavebeenassumed.ThecasesA,BandCrepresenttherapidmobilizationtime,normal
mobilizationandslowmobilizationfortheproject,respectively.Calculatethevalueofworkcompletedincumulative
percentageforperiods1through10foreachofthecasesA,BandC.Alsoplotthevolumeofworkcompletedversus
timeforthesecases.

Figure514
14. SupposethattheempiricalmodelforestimatingannualcostofroutinemaintenanceinExample517isapplicableto
sectionsofthePennsylvaniaTurnpikein1985iftheENRbuildingcostindexisappliedtoinflatethe1967dollars.
Estimatetheannualcostofmaintenanceperlanemileofthetunrpikeforwhichthetrafficvolumeontheroadwayis
750,000ESALandtheageofthepavementis4yearsin1985.
15.

TheinitialconstructioncostforaelectricrowerlineisknowntobeafunctionofthecrosssectionalareaA(incm2)

http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

28/29

4/4/2015

ProjectManagementforConstruction:CostEstimation

andthelengthL(inkilometers).LetC1betheunitcostofconstruction(indollarspercm3).Then,theinitial
constructioncostP(indollars)isgivenby
P=C1AL(105)
Theannualoperatingcostofthepowerlineisassumedtobemeasuredbythepowerloss.ThepowerlossS(inkwh)is
knowntobe

whereJistheelectriccurrentinamperes,Ristheresistivityinohmcentimeters.LetC2betheunitoperatingcost(in
dollarsperkwh).Then,theannualoperatingcostU(indollars)isgivenby

SupposethatthepowerlineisexpectedtolastnyearsandthelifecyclecostTofthepowerlineisequalto:
T=P+UK
whereKisadiscountfactordependingontheusefullifecyclenandthediscountratei(tobeexplainedinChapter6).
Indesigningthepowerline,allquantititesareassumedtobeknownexceptAwhichistobedetermined.Iftheowner
wantstominimizethelifecyclecost,findthebestcrosssectionalareaAintermsoftheknownquantities.
Backtotop

5.16Footnotes
1.Thisexamplewasadaptedwithpermissionfromapaper,"ForecastingIndustryResources,"presentedbyA.R.Crosbyat
theInstitutionofChemicalEngineersinLondon,November4,1981.(Back)
2.ThisexampleisadaptedfromacostestimateinA.L.Tolman,A.P.Ballestero,W.W.BeckandG.H.Emrich,Guidance
ManualforMinimizingPollutionfromWasteDisposalSites,MunicipalEnvironmentalResearchLaboratory,U.S.
EnvironmentalProtectionAgency,Cincinatti,Ohio,1978.(Back)
3.See"UtahInterstateForgesOn,"ENR,July2,1987,p.39.(Back)
4.ThisandthenextexamplehavebeenadaptedfromP.M.Berthouex,"EvaluatingEconomyofScale,"JournaloftheWater
PollutionControlFederation,Vol.44,No.11,November1972,pp.21112118.(Back)
5.SeeH.T.JohnsonandR.S.Kaplan,RelevanceLost:TheRiseandFallofManagementAccounting,HarvardBusiness
SchoolPress,Boston,MA1987,p.185.(Back)
6.ThisexampleisadaptedfromMcNeil,S.andC.Hendrickson,"AStatisticalModelofPavementMaintenance
Expenditure,"TransportationResearchRecordNo.846,1982,pp.7176.(Back)
7.ThisexampleisadaptedfromS.McNeil,ThreeStatisticalModelsofRoadManagementBasedonTurnpikeData,M.S.
Thesis,CarnegieMellonUniversity,Pittsburgh,PA,1981.(Back)
PreviousChapter | TableofContents | NextChapter

http://pmbook.ce.cmu.edu/05_Cost_Estimation.html

29/29