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®

AACE International’s
Certified Estimating
™ ™
Professional (CEP)
Certification Study Guide

Co-Editors

William E. Kraus, PE CCE FAACE

Philip D. Larson, CCE CEP PSP FAACE

First Edition
2013

AACE® International
Copyright 2013
Certified Estimating Professional™
(CEP™)
Certification Study Guide

First Edition

Copyright © 2013
By AACE® International
1265 Suncrest Towne Centre Dr.
Morgantown, WV 26505-1876
USA

Phone: +1.304.2968444
Fax: +1.304.2915728
Email: info@aacei.org
Web: www.aacei.org
Printed in the United States of America

ISBN-13: 978-1482526899
ISBN-10: 1482526891
Acknowledgments

This guide is the culmination of untold hours of discussion, calculation, and composition.

The following people are recognized for substantial effort given to this guide:

Peter W. Griesmyer
Tamera Lee McCuen
Dennis E. Van Kirk
Valerie G. Venters, CCC

2012-2013 AACE® Education Board Members

Peter W. Griesmyer, Chair Ann Marie Cox EVP, Co-Chair


Nadia Al-Aubaidy Chris A. Boyd, CCE CEP
Dr. John O. Evans III, PSP Clive D. Francis, CCC
Dr. Makarand Hastak, CCE Dr. Don Mah, P.Eng.
Donald F. McDonald Jr., PE CCE PSP Bryan Payne, PE CCE CFCC
Sunu M. Pillai CCE EVP PSP Dr. Sean T. Regan, CCE CEP
Rohit Singh, P.Eng. CCE James G. Zack Jr., CFCC

The assistance of the AACE® Headquarters (HQ) staff members is also greatly appreciated:

Dennis Stork, Executive Director


Marvin Gelhausen, Managing Editor
Noah Kinderknecht, Art Director
Charla Miller, Staff Director-Education and Administration
Penny Whoolery, Manager, Certification
Table of Contents

Introduction to the CEP Certification Study Guide ..................................................................................................1


CEP Certification Requirements ...............................................................................................................................3
CEP Certification Examination Structure..................................................................................................................5
Introduction to the Cost Estimating Competency Model ........................................................................................7
Test Your CEP Knowledge ........................................................................................................................................8
Chapter 1.0 - Supporting Skills and Knowledge .......................................................................................................9
Introduction: The Role of the Cost Estimator ...................................................................................................10
Section 1.1 Elements of Cost .............................................................................................................................13
Section 1.2 Elements of Analysis........................................................................................................................19
Section 1.3 Enabling Knowledge ........................................................................................................................25
Chapter 2.0 -Cost Estimating Skills and Knowledge ...............................................................................................31
Section 2.1 General Estimating Concepts ..........................................................................................................33
Section 2.1.1 Cost Estimating Terminology ...................................................................................................35
Section 2.1.2 Cost Estimate Classifications ....................................................................................................39
Section 2.1.3 Estimate Variability ..................................................................................................................47
Section 2.1.4 Estimating Algorithms ..............................................................................................................53
Section 2.1.5 Codes of Accounts ....................................................................................................................59
Section 2.1.6 Historical Cost Data ..................................................................................................................63
Section 2.1.7 Internationalization ..................................................................................................................69
Section 2.2 Estimating Processes and Practices.................................................................................................73
Section 2.2.1 Planning the Estimate ..............................................................................................................75
Section 2.2.2 Estimating Methodologies .......................................................................................................79
Section 2.2.3 Quantification ..........................................................................................................................85
Section 2.2.4 Costing......................................................................................................................................91
Section 2.2.5 Pricing .......................................................................................................................................97
Section 2.2.6 Conditioning ...........................................................................................................................105
Section 2.2.7 Risk Evaluation and Contingency Determination ................................................................... 111
Section 2.2.8 Estimate Documentation .......................................................................................................115
Section 2.2.9 Estimate Reconciliation ..........................................................................................................121
Section 2.2.10 Estimate Review and Validation ...........................................................................................125
Section 2.2.11 Estimate Reporting ...............................................................................................................129
Section 2.2.12 Estimate Closeout ................................................................................................................133
Section 2.2.13 Building Information Modeling (BIM) ..................................................................................137
Section 2.3 Other Estimating Issues.................................................................................................................143
Section 2.3.1 Bidding ...................................................................................................................................145
Section 2.3.2 Budgeting ...............................................................................................................................151

i
Section 2.3.3 Project and Lifecycle Costing..................................................................................................155
Section 2.3.4 Project and Product Costs ......................................................................................................159
Section 2.3.5 Integrated Project Delivery ....................................................................................................163
Appendices...........................................................................................................................................................167
Appendix A: Complex Problems ...........................................................................................................................169
Appendix B: Recommended References and Resources .....................................................................................173
Appendix C: Estimating Professional Terminology and Definitions .....................................................................175
Appendix D: AACE International Canon of Ethics ................................................................................................177
Appendix E: Certified Estimating Professional Sample Application ....................................................................179
Appendix F: CEP Exam Part IV Example ...............................................................................................................181

ii
Preface

The AACE® International Certified Estimating Professional™ (CEPTM) Certification Study Guide is
being developed to accomplish two purposes similar to that of the AACE®International CCC™ /CCE™
Certification Study Guide. First, it is intended to aid aspiring candidates for the certification by
summarizing the fields of study recommended for preparation for the certification examination.
Second, the intent of the Certified Estimating Professional Certification Study Guide is to assemble
and summarize various topics considered essential for the Certified Estimating Professional’s (CEP)
knowledge, as outlined in AACE International’s Recommended Practice 11R-88, Required Skills and
Knowledge of Cost Engineering, and included in the current edition of AACE International’s Skills and
Knowledge of Cost Engineering.

We expect that the Certified Estimating Professional Certification Study Guide will be as popular and
useful as the CCC/CCE Certification Study Guide. This publication will serve the needs of estimating
professionals who prepare to take the AACE International CEP certification examination. This
publication is organized in a concise and easy to follow format, and covers the major skills and
knowledge used by a Certified Estimating Professional.

The information contained in this Certified Estimating Professional Certification Study Guide
parallels the related topics of the Skills and Knowledge of Cost Engineering and the CCC/CCE
Certification Study Guide. These publications can be combined for a course of study in both cost
engineering and estimating. The publications include sample problems related to the subject matter.

Terms and phrases incorporated in the Certified Estimating Professional Certification Study Guide
are generic to the profession and listed in AACE International’s Recommended Practice 10S-90 Cost
Engineering Terminology. The terms and phrases used in industry and technical software may not
always agree precisely with your understanding, therefore consult the CEP Estimating Terminology
and Definitions found on the AACE International website, www.aacei.org.

The goal of the AACE International Education Board is to continually improve this publication, making
it a living document that will be revised as needed to support the CEP exam while maintaining the
recognized strengths described above. All are encouraged to offer comments and suggestions for
improvements in future editions. Please forward comments to the Education Board at AACE
International.

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iv
Introduction to the CEP Certification Study Guide

This Certified Estimating Professional Certification Study Guide structures prospective certificants’
study of recommended reference materials, so they gain the knowledge essential to earn the
Certified Estimating Professional (CEP) credential. The Table of Contents generally mirrors the
organization of the CEP Competency Model developed by the CEP Task Force. The Competency
Model is explained later in this Certification Study Guide.

As a guide to study, this publication does not provide detailed, fundamental education in cost
estimating. Those seeking the CEP credential should already know the basics. One expects,
however, that even seasoned professionals do not routinely apply all estimating knowledge and skills
on a frequent basis. Recent study of seldom-used knowledge and techniques in the months before
sitting for the certification examination is prudent. This CEP Certification Study Guide enables
efficient and effective preparation for the CEP examination.

The CEP Competency Model prescribes twenty five (25) sections. Each section is addressed in this
CEP Certification Study Guide with content organized as follows:

o Introduction
o Learning Objectives
o Related Study Guide Sections
o Terms to Know
o Key Points for Review
o Summary
o Sample Questions
o Sample Question Answers

This text primarily uses process industry and building construction projects as the bases for
presenting the knowledge, skills, and abilities required of competent cost estimators.

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© 2013, AACE International (All Rights Reserved) 2
CEP Certification Requirements

The prospective Certified Estimating Professional (CEP) should know all requirements for earning the
credential. This will allow the most efficient use of time to improve one’s knowledge, skills, and
abilities to thresholds that industry consensus deems essential for a proficient cost estimator.

For the most current information regarding the eligibility requirements, applications, and payment
for this specialty certification, visit the AACE website under the Certification section.

Preparing for the Examination


Generally speaking a candidate’s education and professional experience are the primary sources that
prepare the individual for the examination. However, there are other ways to prepare for the
examination:

o Study the CEP Study Guide.


o Study the reference materials referenced in Appendix B of this manual.
o Learn the estimating terms found in Appendix C of this manual, in conjunction with AACE
International Recommended Practice 10S-90, Cost Engineering Terminology.
o Access relevant distance learning opportunities through AACE International’s website.
o Attend the CEP review seminar conducted at the AACE International Annual Meeting

Passing the Examination


To become a certified CEP, an overall passing score must be achieved, as determined by the Certification
Board.

If a candidate has special needs, such as accessibility or handicapped considerations, they must be made
known to AACE International when submitting the CEP certification exam application.

If the candidate has questions unanswered by the general information that has been published about
the examination, they should be directed to the AACE International , Certification Manager

Special attention should be given to Certification Requirements. For the latest information and
application forms, please visit AACE International’s website at www.aacei.org or contact AACE
International Headquarters at either 304-296-8444 or 1-800-858-COST.

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© 2013, AACE International (All Rights Reserved) 4
CEP Certification Examination Structure

Introduction
A review of the structure and content of the CEP certification examination is useful for prospective
applicants. This study guide provides direction for preparing to meet express or implied requirements.

Examination Basis
AACE International’s Certified Estimating Professional (CEP) certification program is designed to
establish credentials for those individuals working in the estimating field. This certification program will
give professionals a means to validate their skills and knowledge. CEP certification will distinguish you as
a Certified Estimating Professional who has the knowledge and skills that impact the bottom line.

CEP™ Exam Format:


The examination is delivered through computer based testing (CBT) and consists of multiple choice
questions and a written exercise. The topics covered in the examination are: basics of estimating
knowledge and principles; estimating knowledge, principles, processes; and practices in solving more
complex estimating problems.

The examination is closed book with any calculator, programmable or pre-programmed (including those
with financial functions), allowed. The examination is not based on use or knowledge of specific
software, but it tests the knowledge and experience of an estimator who uses the results of such tools.

Recognizing there are many industries and fields within the profession--engineering, construction,
manufacturing, process facilities, mining, utilities, transportation, aerospace, environmental, and
government—one can expect some questions in any of those settings.

For the latest information regarding the CEP exam format, visit the AACE website under the Certification
section.

Understanding and Using the Sample Questions Provided in the CEP Study Guide

The CEP Study Guide includes many sample questions with answers. These questions should be
answered so you know which areas might need additional preparation on your part. The questions are
found at the end of each section.

CEP Study Guide questions have been developed specifically for those preparing for the examination
and are similar in content and context to the actual exam questions. All of the questions on the CEP
Certification Examination, except the writing requirement, are multiple-choice questions. Each has four
possible answers with one correct solution, similar to the sample questions in this Certification Study
Guide.

Questions in the CEP Study Guide are in the following formats:

o Multiple choice questions, similar to what you might find on the certification examination. It is
important to recognize that there may be some semblance of correctness to more than one
possible answer to a question. The correct answer is the one that is most correct.
o A complex problem. The intent of this question-set is to enable the student to prepare for the
complex question section of the examination. A complex question sample is found in Appendix
A with some limited examples in some of the other sections.

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Introduction to the Cost Estimating Competency Model

The Competency Model generally prescribes the CEP Body of Knowledge (BoK). The model
comprises three primary subdivisions: Supporting Skills and Knowledge; Cost Estimating Skills and
Knowledge; and Other Functional Skills and Knowledge. Those subdivisions are ultimately divided
into a total of 25 sections.

Please note: The estimating competency model has been revised since this Guide was written and,
therefore, the organization of the Guide is not exactly as reflected in the competency model as
revised. However, the material is still covered in the Guide; it is just not organized as the
competency model shows. For the current estimating competency model, see AACE International
Recommended Practice 46R-11, Required Skills and Knowledge of Project Cost Estimating. There is
no change in format or material content on the exam as a result of the revisions to RP-46R-11.

Figure 1—Cost Estimating Competency Model

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Test Your CEP Knowledge

As a good gauge of CEP knowledge, the candidate is encouraged to start by answering the following
pre-test questions. Answers should be recorded, and when studies are complete, the candidate will
answer the same questions again. A close comparison of the results, before and after study, will
show the knowledge gained by using this study guide and references, and what gaps may remain
prior to sitting for the exam.

1. What is estimating?
2. What is the role of the cost estimator?
3. What is budgeting?
4. What is quantification?
5. What are the different classes of estimates?
6. What is the difference between costing and pricing?
7. What are the different types of parametric methodologies?
8. What are codes of accounts and their use?
9. What is Building Information Modeling (BIM)?
10. What are the fundamental considerations for internationalization?
11. What is the difference between accuracy and contingency?
12. What are cost estimating relationships (CER’s)?
13. What are location factors?
14. What is contingency?
15. What are life cycle costs?
16. What are the differences between direct and indirect costs?
17. What is the difference between a Hand Factor and a Lang Factor?
18. What is the difference between a work package and an assembly?
19. What are the keys to cost and scheduling integration?
20. What are some of the challenges for change order estimating?
21. What is the difference between a composite and an average crew rate?
22. What are the differences between bare rates and burdened rates?
23. What is the difference between material unit price and material price?
24. What is the difference between unbalancing and front end loading?
25. What are the different types of work breakdown structures (WBS) and use?
26. What is the difference between labor productivity and a labor productivity factor?

© 2013, AACE International (All Rights Reserved) 8


Chapter 1.0 - Supporting Skills and Knowledge

Supporting skills and knowledge are applied across cost engineering disciplinary lines. Proficient
application of the subject matter of this portion of the study guide is required beyond the limits of
cost estimating alone.

Competent cost estimators routinely integrate their knowledge of elements of cost, analysis, and
other enabling knowledge throughout all they do. It is readily arguable that the general economic
well-being of mankind has improved in conjunction with development and application of the concept
of cost, its estimation, and its analysis.

AACE Recommended Practice 10S-90, Cost Engineering Terminology, defines the term, “cost
estimate” as, “a compilation of all the probable costs of the elements of a project or effort included
within an agreed upon scope.”

Thus, the definition of a cost estimator relates to the duties that are performed by the professional
estimating practitioner, See figure 1.0.

Figure 1.0—Breakdown of Chapter Topics

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Introduction: The Role of the Cost Estimator

According to AACE International Recommended Practice 10S-90, Cost Engineering Terminology, cost
estimating is, “A predictive process used to quantify, cost, and price the resources required by the
scope of an asset investment option, activity, or project. As a predictive process, estimating must
address risks and uncertainties. The outputs of estimating are used primarily as inputs for budgeting,
cost or value analysis, decision making in business, asset and project planning, or for project cost and
schedule control processes. As applied in the project engineering and construction industry, cost
estimating is the determination of quantity and the predicting and forecasting, within a defined
scope, of the costs required to construct and equip a facility. Costs are determined using experience
and calculating and forecasting the future cost of resources, methods, and management within a
scheduled time frame. Included in these costs are assessments and an evaluation of risks.”

There are those who will say that the cost estimator is the most important person on the contractor’s
staff in that their role is to prepare estimates that will make or break the contractor. Whether you
agree with that or not, the role of the cost estimator is an important one in industry.

As you will see as your study of cost estimating advances, the process of development of an estimate
varies depending on the stage of scope development for the project/product. But regardless of the
current progress of development or the appropriate estimating methodology chosen, at least the
following three common steps are involved.

Step One: Quantification—Whether using a top-down methodology (otherwise known as “analogous


estimating”) or a more definitive approach, the scope must first be quantified in order to assign
costs.

Step Two: Costing—Once the scope has been translated into measurable items with quantities that
can have costs assigned to them, that is the next step, costing. That is, realistic costs assigned to
those items.

Step Three: Pricing—Once the estimate items are costed, it is time to price the estimate, entailing
making judgments concerning the anticipated economic environment, competitive situation,
allowance for overhead and profit, and other factors to shape the estimate to meet the needs of the
parties involved. Often, once the estimate has been priced, it will still need to be conditioned or
adapted to specific conditions applicable to the project or product being estimated.

Learning Objectives

o Understand the role of a cost estimator in government and industry.


o Be able to identify potential places of employment for cost estimators.
o Understand the required skills, knowledge, and abilities of cost estimators.
o Understand the career potential for cost estimators.

Related Study Guide Sections

o All

© 2013, AACE International (All Rights Reserved) 10


Terms to Know

o Cost Estimate
o Cost Estimating
o Cost Estimator
o Knowledge, Skills, and Abilities (KSAs)

Key Points for Review

o Project cost estimators predict the cost of a project for a defined scope, to be completed at a
defined location and point of time in the future.
o Cost estimators assist in the economic evaluation of potential projects by supporting the
development of project budgets, project resource requirements, and value engineering.
o Cost estimators support project control by providing input to the cost control baseline.
o Cost estimators collect and analyze data on all of the factors that can affect project costs
such as: materials, equipment, labor, location, duration of the project, and other project
requirements.
o Methods used by estimators vary widely by industry.
o Computers have become vital tools for the estimator, performing complex mathematical
calculations, as well as the more mundane calculations.
o Estimators are most often office-based, but may visit the construction site or manufacturing
floor at times to witness production.
o Estimators are usually salaried employees, often spending in excess of 40 hours at work, but
are usually classified as exempt employees.
o There is often considerable pressure on estimators as they face deadlines for delivery of
estimates and inaccurate products can result in the loss of a bid or losing a project or
product.
o Job entry requirements vary by industry, but often require either a bachelor’s degree in a
closely-allied field or actual experience in industry.
o Required skills and knowledge for estimators often include ability in mathematics,
probability, and statistics, having an analytical aptitude, and good attention to detail. Strong
interpersonal skills, especially those in communication and presentation are important.
o According to the Occupational Outlook Handbook, 2010 – 2011 Edition, expected
opportunity for estimators is expected to grow at a rate in excess of the U.S. economy in
general over the period 2008 – 2018. Other government organizations maintain national or
regional economic statistics (for example, the European Union (EU) and South Africa).

Summary

o There are multiple opportunities for cost estimators in many industries, but there are
exacting qualifications and demanding job conditions to be dealt with by those in the
position.

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© 2013, AACE International (All Rights Reserved) 12
Section 1.1 Elements of Cost

Introduction

Elements of cost include material and fixed equipment, the most desirable combination of labor and
equipment to install the material and fixed equipment, and any other costs necessary for delivering
the work at an agreed upon price. Aggregating these costs to determine a total cost is necessary to
determine pricing to cover other costs associated with being able to perform the work, and provide a
reasonable profit.

Costs within an estimate are often categorized into direct and indirect costs. Direct costs are those
costs for completing work scope that are directly attributable to its performance and are necessary
for its completion.

Direct costs include the following.

• In construction—the cost of installed equipment, material, labor and supervision directly or


immediately involved in the physical construction of the permanent facility.
• In manufacturing—service and other non-construction industries: the portion of operating
costs that is readily assignable to a specific product or process area.

Indirect costs are those costs not directly attributable to the completion of an activity Indirect costs
are typically allocated or spread across all activities on a predetermined basis.

Indirect costs include the following.

• In construction—All costs which do not become a final part of the installation, but which are
required for the orderly completion of the installation and may include, but are not limited
to, field administration, direct supervision, capital tools, startup costs, contractor's fees,
insurance, taxes, etc.
• In manufacturing—Costs not directly assignable to the end product or process, such as
overhead and general purpose labor, or costs of outside operations such as transportation
and distribution. Indirect manufacturing cost sometimes includes insurance, property taxes,
maintenance, depreciation, packaging, warehousing and loading.

Cost elements can be categorized into groupings, such as work breakdown structures, in order to
better organize, present, and analyze the estimate. A more detailed presentation of different types
of categories is covered in this study guide in Section 2.1.5 Codes of Accounts, and analysis in Section
1.2 Elements of Analysis.

Learning Objectives

o Be able to list the various elements of cost and the role they play in comprising total cost.
o Describe the process of “rolling up” cost elements into higher groupings.
o Identify the characteristics that separate direct from indirect costs.

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Related Study Guide Sections

o 2.2.3 Quantification
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.6 Conditioning
o 2.3.1 Bidding

Terms to Know

o Assembly
o Code of Accounts
o Cost Category
o Cost Element
o Direct Cost
o Equipment Costs
o Indirect Cost
o Labor Costs
o Material Costs
o Subcontractor Costs
o Suppliers
o Work Breakdown Structure (WBS)

Key Points for Review

o What are the key components that determine costs?


o How do cost estimate classifications help organize and present the estimate?
o How can elements of cost be summarized?

Summary

o The elements of cost include the material, labor, equipment, and other miscellaneous items
necessary to perform the prescribed work.
o Estimate classifications assist all parties in gaining a mutual understanding of the basis of the
estimate, as well as the expected accuracy of the estimate.
o Cost elements may be “rolled up” to higher levels of detail.

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Sample Questions for Section 1.1 Elements of Cost

1. The difference between a cost element and a cost category is best explained by:

A. Cost elements are a grouping of detailed line items.


B. Cost categories are subdivided by assemblies.
C. Cost elements are a subdivision of a cost category.
D. Cost categories are a subdivision of an assembly.

2. Which of the following is not an element of the cost of a project?

A. Material
B. Freight
C. Material waste
D. Esteem value

3. Which of the following is an indirect cost of a concrete wall?

A. Material
B. Forming labor
C. Supervisory labor
D. Labor fringe benefits and taxes

4. Variable costs in the manufacture of a product differ from fixed costs in that they____.

A. Can also be termed, “indirect costs.”


B. Increase/decrease in proportion to the quantity of product produced.
C. Cannot be readily estimated.
D. Have unit costs that are variable.

5. Unit cost refers to ________________________________________________.

A. The cost of one unit where “unit” refers to a dwelling unit such as an apartment.
B. The cost of a given unit of a product or service.
C. The cost of labor, materials, equipment, and overhead, “united.”
D. The cost of one “unit” of labor.

6. In a manufacturing environment, variable costs are ________________________________.

A. Those costs that vary with the value of local currency.


B. Labor costs that can vary with the productivity and efficiency of the specific workers
assigned to complete the task.
C. Those costs that are a function of production and those processing costs that varies with
plant output.
D. All costs that are not fixed.

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7. The term “unit hours” refers to ____________________________________________.

A. Work hours per unit of production.


B. Hours “on the clock.”
C. Total crew hours expended toward completion of a direct item of work.
D. Overtime spent in completion of an item of work.

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Solutions to Sample Questions for Section 1.1 Elements of Cost

1. C Cost elements are a subdivision of a cost category.

2. D Esteem value.

3. C Supervisory labor.

4. B Increase/decrease in proportion to the quantity of product produced.

5. B The cost of a given unit of a product or service.

6. C Those costs that are a function of production and those processing costs that vary
with plant output.

7. A Work hours per unit of production.

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Section 1.2 Elements of Analysis

Introduction

Statistics and probability are a fundamental basis for analysis of projects and costs in that there are
patterns and consistencies that to a certain level can be predicted to have a particular influence on a
cost estimate. The learning-curve function and Pareto’s Law are two examples.

Economic and financial analysis is a separate process that generally takes a broader view of the
project, but can also be used on a case by case basis to help determine desirability. Optimization
then, is a judgment of all of the independent variables, costs, quantities, qualities outlined as a basis
of project success. Physical measurements can be used to provide feedback on current cost
estimates, as well as be archived for historical purposes to be referenced later.

Learning Objectives

o Be able to explain how statistics and probability are used to facilitate analysis of projects.
o Understand how elements of cost may be optimized.
o Develop techniques for using physical measurements to evaluate current status of projects,
as well as documenting historical parameters for use in future projects.

Related Study Guide Sections

o 2.1.2 Cost Estimate Classifications


o 2.1.3 Estimate Variability
o 2.1.4 Estimating Algorithms
o 2.1.5 Code of Accounts
o 2.1.6 Historical Cost Data
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.7 Risk Evaluation and Contingency Determination
o 2.2.9 Estimate Reconciliation
o 2.2.10 Estimate Review and Validation
o 2.3.4 Project and Product Costs

© 2013, AACE International (All Rights Reserved) 19


Terms to Know

o Baseline
o Contingency
o Cost Estimate Classifications
o Costing
o Direct Cost
o Distributables
o Equipment Cost
o Fee
o Fixed Cost
o General and Administrative Expense (G&A)
o General Requirements
o Home Office Cost
o Indirect Costs
o Labor Cost
o Learning-Curve Function
o Life-Cycle Costing
o Management Reserve
o Mark-up
o Material Cost
o Overhead
o Pareto’s Law
o Price
o Profit
o Schedule of Values
o Variance

Key Points for Review

o Understand the use of statistics and probabilities to provide insight and direction in analyzing
estimates.
o Be familiar with Pareto 80/20 and how to prioritize the time available to maximize the use of
that time.
o Understand how the learning curve affects estimates.

Summary

o Statistics, probability, and other analytical tools turn the raw data of databases into data
usable in the process of estimating.
o Proper analysis of data is essential in order to prepare estimates sensitive to the context of
the project in terms of scope, time, and place.

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Sample Questions for Section 1.2 Elements of Analysis

1.1 Production rates for placing concrete in wall forms are recorded on several projects and shown in the
following table:

Project Crew hours / cubic yard


1 0.375
2 0.680
3 0.420
4 0.481
5 0.555
6 0.621
7 0.587

Calculate the average production rate experienced on these projects.


A. 0.531 crew hours / cubic yard
B. 0.620 crew hours / cubic yard
C. 0.533 crew hours / cubic yard
D. 0.465 crew hours / cubic yard

1.2 If the total yards placed per project are as shown in the following table, calculate the weighted
average production rate experienced on these projects.

Project Cubic yards placed


1 1,200
2 426
3 391
4 288
5 61
6 55
7 126

A. 636.8 crew hours / cubic yard


B. 0.531 crew hours / cubic yard
C. 0.465 crew hours / cubic yard
D. 0.0015 crew hours / cubic yard

1.3 What does calculating the standard deviation of production rates tell us about the data?

A. It provides a test of whether the average is a valid number to use in calculations.


B. It provides a measure of the variation of the rates.
C. That the production rate decreases as the quantity increases.
D. That there is no correlation between production rate and quantity.

1.4 Another way of expressing the accuracy of the production rates is ______________.

A. 0.465± 0.110
B. 0.421 to 0.642
C. To increase the number of digits.
D. To increase the accuracy of timesheets on projects.

© 2013, AACE International (All Rights Reserved) 21


1.5 If one establishes a standard that one only uses production rate data that lies plus or minus one sigma
of the mean, which (if any) data point(s) should be excluded?

A. 0.375
B. One should exclude the highest and lowest values
C. 0.420
D. 0.680

1.6 What does using methods of statistical analysis accomplish for the estimator in this instance?

A. It allows the estimator to judge that he or she should use the mean cost in the estimate.
B. It provides a 3-sigma range of costs to use in the estimate.
C. It gives the estimator a sense of the variation of data in the cost database and assists him or
her in judging the cost to be used in the estimate.
D. It is of no particular value in determining the cost to be used in the estimate.

1.7 An estimator is responsible for reviewing her team’s estimate. Pareto’s Law can be a useful tool in
that ______________________

A. By carefully selecting the items he or she reviews, he or she can review 80% of the cost of the
estimate by checking 20% of the items.
B. He or she can be certain that the estimate is 80% accurate.
C. Any 20% of items reviewed will represent 80% of the cost of the estimate.
D. Approximately 80% of the overrun will occur in 20% of the items in the estimate.

© 2013, AACE International (All Rights Reserved) 22


Solutions to Sample Questions for Section 1.2 Elements of Analysis

1.1 A 0.531 crew hours/cubic yard.

Commentary: The average production rate is calculated simply, as follows:

Project Crew hours/cubic yard


1 0.375
2 0.680
3 0.420
4 0.481
5 0.555
6 0.621
7 0.587
Sum 3.719

Average = sum / # of occurrences = 3.719 / 7 = 0.531 crew hrs / cubic yard

1.2 C 0.465 crew hours / cubic yard.)

Commentary: One can calculate the weighted average production rate as follows:

Project Cubic yards placed Crew hours/cubic yard Total Crew Hours
1 1,200 0.375 450
2 426 0.680 289.68
3 391 0.420 164.22
4 288 0.481 138.528
5 61 0.555 33.855
6 55 0.621 34.155
7 126 0.587 73.962
Sums 2547 1184.400

The weighted average is calculated by 1,184.4 / 2,547 = 0.465 crew hours / cubic
yard.

1.3 B It provides a measure of the variation of the rates.

1.4 B 0.421 to 0.642

Commentary: This is the range defined by the mean minus the standard deviation to
the mean plus the standard deviation.

© 2013, AACE International (All Rights Reserved) 23


1.5 D 0.680

Commentary: One sigma is one standard deviation and so the range in question 1.5
identifies the limits of the range. 0.680 lies outside the range and so under the
defined standard, this value should be eliminated.

1.6 C It gives the estimator a sense of the variation of data in the cost database and assists
him or her in judging the value to be used in the estimate.

1.7 A By carefully selecting the items he or she reviews, he or she can review 80% of the
cost of the estimate by checking 20% of the items.

© 2013, AACE International (All Rights Reserved) 24


Section 1.3 Enabling Knowledge

Introduction

Enabling knowledge is about taking what has been learned and being able to use that information
repeatedly for the benefit of society as a whole. A key area is to be able to record estimating
information effectively in order for any of that information to be valuable in the present, and more
importantly, in the future.

Learning Objectives

o Having a good understanding of estimating terminology and the fundamentals of estimating


is as essential to a good estimate as a strong foundation is to a sturdy structure.
o Organization is essential to the estimating process—well-organized historical data, properly
and consistently organized estimates, and the process of reporting estimate results for both
current and future use.
o An understanding of how an estimate is classified helps normalize all stakeholders’
expectations in terms of sources, purposes, levels of accuracy, etc. of the estimate.

Related Study Guide Sections

o 2.1.1 Cost Estimating Terminology


o 2.1.2 Cost Estimate Classifications
o 2.1.5 Code of Accounts
o 2.1.6 Historical Cost Data
o 2.2.2 Estimating Methodologies
o 2.2.11 Estimate Reporting
o 2.2.13 Building Information Modeling (BIM)
o 2.3.2 Budgeting
o 2.3.3 Project and Lifecycle Costing
o 2.3.4 Project and Product Costs
o 2.3.5 Integrated Project Delivery (IPD)

Terms to Know

o Codes of Accounts
o Databases
o Historical Data

© 2013, AACE International (All Rights Reserved) 25


Key Points for Review

o Describe the benefit of having accurate historical data.


o Understand the benefit of standardization as it relates to historical data.
o Describe the challenges of incorporating new standards as they emerge.

Summary

o The AACE Recommended Practices 17R-97, Cost Estimate Classification System and 18R-97,
Cost Estimate Classification System: As Applied in Engineering, Procurement, and
Construction for the Process Industries, concerning estimate classification provide a
framework for identifying the essential parameters and characteristics of estimates.
o Consistent use of the terminology of estimating and a mutual understanding of that
terminology is essential to avoid misunderstandings surrounding the estimate.
o A well-planned estimate will have had appropriate estimating methodologies identified and
executed which will result in an estimate responsive to the needs identified at the outset.

© 2013, AACE International (All Rights Reserved) 26


Sample Questions for Section 1.3 Enabling Knowledge

1. The primary benefit of having accurate historical data for estimating purposes is:
__________________________________.

A. Actual costs can be tracked accurately.


B. The estimate can be based on a work breakdown structure instead of the chart of
accounts.
C. Estimates can be based on costs actually experienced in the past on similar projects.
D. The estimate can be tied to current labor rates.

2. A chart of accounts and a work breakdown structure are examples of __________________.

A. Historical cost databases.


B. Cost element structures used in organizing data.
C. Historical cost data.
D. Cost trending tools.

3. Historical cost data for use in estimates is best obtained from _________________________.

A. The organization’s own project experience.


B. A nationally recognized cost service such as R.S. Means.
C. A database of costs experienced in the specific industry.
D. Online.

4. Labor should always be recorded in a database ____________________________________.

A. Not as costs but rather as production rates.


B. By the accounting staff.
C. Periodically throughout the life of the project.
D. In dollars and cents.

5. One means of facilitating efficient and effective estimates is _________________________.

A. To separate direct and indirect costs.


B. To use cost indices.
C. To normalize cost databases.
D. To ensure that proper rules are followed for constructing a work breakdown
structure.

6. Inputs to the cost estimating process include:

A. Scope definition, resource requirements, and historical cost information.


B. Scope definition, basis of estimate, and historical cost information.
C. Scope definition, activity-based costing, and historical cost information.
D. Scope definition, historical cost information, and schedule information.

© 2013, AACE International (All Rights Reserved) 27


7. The Deming Cycle is ______________________________________________.

A. The cyclical pattern of construction costs, fluctuating with the general economy.
B. Life cycle costing.
C. Also referred to as “plan-do-check-act” cycle.
D. The asset life cycle.

8. A cost estimate is a prediction of cost, __________________________, and/or price of


resources required by the scope of a project.

A. formulas
B. equations
C. quantities
D. resources

9. Often a contractor will borrow money for use as operating funds. Another word for cost of
capital is ____________________________________________.

A. principal
B. interest
C. escalation
D. contingency

10. A hierarchical coding structure is ________________________________________.

A. The chief estimator, senior estimators, rank and file estimators, and entry-level
estimators.
B. An example of a work breakdown structure (WBS).
C. Any work breakdown structure (WBS) dictionary.
D. Any coding system that can be represented as a multi-level tree structure in which
every code except those at the top of the tree has a parent code.

11. The term “Work Breakdown Structure” refers to ___________________________.

A. A framework for organizing and ordering the activities that makes up a project.
B. Task analysis for the labor on any project or product team.
C. A framework for analysis of the reasons costs fail to meet the budget.
D. A means of segregating labor costs into similar categories.

12. “WBS dictionary” refers to:

A. A project glossary.
B. Another term for a directory of personnel and controls/management positions on a
project or product team.
C. A document that describes each element in the work breakdown structure (WBS)
including a Statement of Work (SOW), describing work content of each WBS
element, and a Basis of Estimate (BOE).
D. Another term for Basis of Estimate (BOE).

© 2013, AACE International (All Rights Reserved) 28


Solutions to Sample Questions for Section 1.3 Enabling Knowledge

1. C Estimates can be based on costs actually experienced in the past on similar projects.

2. B Cost element structures used in organizing data.

3. A The organization’s own project experience.

4. A Not as costs but rather as production rates.

Commentary: Labor costs are a function of labor rates which fluctuate with time
whereas production rates should be relatively constant for any given location.
Therefore, it is usually deemed more accurate to use labor production rates in a cost
database.

5. D To ensure that proper rules are followed for constructing a Work Breakdown
Structure.

6. D Scope definition, historical cost information, and schedule information.

7. C Also referred to as “plan-do-check-act” cycle.

8. C Quantities.

9. B Interest.

10. D Any coding system that can be represented as a multi-level tree structure in which
every code except those at the top of the tree has a parent code.

11. A A framework for organizing and ordering the activities that makes up a project.

12. C A document that describes each element in the work breakdown structure (WBS),
including a Statement of Work (SOW), describing work content of each WBS
element, and a basis of estimate (BOE).

© 2013, AACE International (All Rights Reserved) 29


© 2013, AACE International (All Rights Reserved) 30
Chapter 2.0 -Cost Estimating Skills and Knowledge

Cost estimating is one of the most challenging endeavors in industry. With judgment sharpened by
knowledge of how work has been done and costs have been incurred in times past, the estimator
bravely forecasts costs that he or she expects will be incurred during the current project. There is
often substantial risk of error. Yet, when reviewing what happens on projects—the actual costs
versus those originally estimated—one is often surprised at how accurate the estimates usually are.
Only by applying the body of skills and knowledge that has evolved and developed over the years can
cost estimators obtain such accuracy. This subdivision guides the student’s study of the assorted
skills and knowledge that a professional cost estimator must master to assure requisite accuracy.

© 2013, AACE International (All Rights Reserved) 31


Figure 2.0—Cost Estimating Skills and Knowledge

© 2013, AACE International (All Rights Reserved) 32


Section 2.1 General Estimating Concepts

The following sections, general estimating concepts, focus on the fundamentals required to be able
to produce an estimate in a consistent and systematic way so as to maximize efficiency, minimize
redundancy, and optimize the project as a whole.

This section addresses the fundamental approaches of cost estimating, including terminology, cost
estimate classifications, codes of accounts, historical cost data, etc. without getting into specific cost
estimating functions covered in the next section of this study guide, (Section 2.2 Estimating Processes
and Practices).

Figure 2.1—Breakdown of Chapter Topics

© 2013, AACE International (All Rights Reserved) 33


© 2013, AACE International (All Rights Reserved) 34
Section 2.1.1 Cost Estimating Terminology

Introduction

Cost estimating terminology provides the backbone of effective communication through the use of a
common vocabulary. Recommended Practice 10S-90, Cost Engineering Terminology, is the AACE
source for just that, cost engineering terminology. 10S-90 contains terminology from all aspects of
cost engineering, including planning and scheduling, asset management, etc., and is not limited to
just estimating. Further, there are specialized terms from the field of estimating which are not
included in 10S-90. The AACE source document for cost estimating terminology is the Examinee
Format of Definitions, found under the CEP certification tab on the AACE website: www.aacei.org.

Learning Objectives

o Determine the level of familiarity one has with estimating terminology.


o Understand why a common understanding of terms is essential to good estimates.
o Study and understand the terminology included in the Examinee Format of Definitions.

Related Study Guide Sections

o 2.1.2 Cost Estimate Classifications


o 2.1.4 Estimating Algorithms
o 2.1.5 Codes of Accounts
o 2.2.8 Estimate Documentation
o 2.2.13 Building Information Modeling (BIM)

Terms to Know

o AACE International, Inc. (AACE)


o AEC (Architecture, Engineering, Construction)
o American Society of Professional Estimators (ASPE)
o Codes of Accounts (COAs)
o Construction Specifications Institute (CSI)
o Cost Estimate Classification
o Design Build Institute of America (DBIA)
o Direct Cost
o Escalation
o Estimating
o Fees
o Glossary
o Indirect Cost
o Organization Breakdown Structure (OBS)
o Risk
o Specifications
o Standard
o Work Breakdown Structure (WBS)

© 2013, AACE International (All Rights Reserved) 35


Key Points for Review

o Understand the different sources and political interests within the AEC industry.
o Describe how standards help to refine cost estimating terminology.
o Understand the different industries within the AEC (architectural, engineering, construction)
industry that expand basic terminology (e.g. mechanical, MCAA, SMACNA, ASHRAE).
o The formal definition of a standard is an acknowledged measure of comparison for
quantitative or qualitative value; a criterion, or something, such as a practice or a product,
that is widely recognized or employed, especially because of its excellence.

Summary

o The terminology used in cost estimating comes from a variety of industry sources.
o Some estimating terminology is specific to particular industries and to certain types of
projects.
o On the other hand, some terms used in cost estimating are standard and are used across
industries.
o Terminology is always changing as the technology, both in projects, as well as in estimating
costs, is always advancing. That is why active membership and involvement in a professional
association such as AACE International is essential to the process of keeping the estimator
current.

© 2013, AACE International (All Rights Reserved) 36


Sample Questions for Section 2.1.1 Cost Estimating Terminology

1. Why is cost estimating terminology an important aspect of estimating?

A. It’s not; estimating is more math and science dependent.


B. Poor grammar has gotten to be a common ailment internationally.
C. It is vital for the diverse stakeholders on a project to have a common understanding
of terms.
D. It is essential to a better understanding of costing techniques.

2. Why are standards important?

A. Standard is another word for baseline.


B. The process of quantity takeoff is standardized.
C. The process of pricing is standardized.
D. Standards promote consistent communication which aids in mutual understanding.

3. Which of the following is a recent example of significant change in an industry standard?

A. The work breakdown structure becoming a replacement for the chart of accounts.
B. “Deconstruction” of structures instead of “demolition” is rapidly becoming the
approach to removing deficient infrastructure.
C. Substitution of Masterformat for Uniformat.
D. Replacement of wool-based carpeting for those utilizing synthetics.

4. What are the challenges with terminology of emerging processes such as Building Information
Modeling (BIM)?

A. Translating the new terminology into other languages.


B. Consistent and accurate communication as the standard vocabulary associated with
the process evolves.
C. Gaining acceptance of the new terms.
D. Incorporation of the new terminology into glossaries and other sources.

5. The term “battery limit” refers to:

A. Geographic boundaries enclosing a plant or unit to specifically identify certain


portions of the plant or unit.
B. A boundary beyond which any battery-powered equipment will not operate.
C. The exterior wall of a processing plant.
D. A level plane equal in height to the tallest improvement in the project.

© 2013, AACE International (All Rights Reserved) 37


Solutions to Sample Questions for Section 2.1.1 Cost Estimating Terminology

1. C It is vital for the diverse stakeholders on a project to have a common understanding


of terms.

2. D Standards promote consistent communication which aids in mutual understanding.

3. B “Deconstruction” of structures instead of “demolition” is rapidly becoming the


approach to removing deficient infrastructure.

4. B Consistent and accurate communication as the standard vocabulary associated with


the process evolves.

5. A Geographic boundaries enclosing a plant or unit to specifically identify certain


portions of the plant or unit.

© 2013, AACE International (All Rights Reserved) 38


Section 2.1.2 Cost Estimate Classifications

Introduction

Cost estimates are important indicators of the quality and value of projects and products under
consideration for execution. However, expectations and understandings of the various parties
involved vary widely with respect to the information available to prepare those estimates, the
various methods employed during the estimating process, the accuracy level expected from
estimates, and the level of risk associated with estimates. A strong system for classification of cost
estimates provides a means of unifying the expectations of the various parties interested in the
estimates.

The AACE system for classifying estimates is identified in Recommended Practice (RP) 17R-97, Cost
Estimate Classification System, shown in Table 2.1.2.1. It is typical that a series of estimates will be
prepared for a project, beginning with ones based on less project definition, and progressing through
Classes 5 to 1 as the level of project definition increases. It may very well be that not all of those
estimates will be prepared on every project, depending on the organization’s defined process.

Table 2.1.2.1—Generic Cost Estimate Classification Matrix

In addition to the generic estimate classification system, a more specific version has been created for
the process industries (Table 2.1.2.2). The term “process industries” is intended to include firms
involved with the manufacturing and production of chemicals, petrochemicals, pulp/paper and
hydrocarbon processing. A subsequent AACE Recommended Practice 18R-97, Cost Estimate
Classification System: As Applied in Engineering, Procurement, and Construction for the Process

© 2013, AACE International (All Rights Reserved) 39


Industries, discusses application of the system for engineering, procurement, and construction for
the process industries.

Table 2.1.2.2—Cost Estimate Classification Matrix for the Process Industries

The commonality among this industry (for the purpose of estimate classification) is their reliance on
process flow diagrams (PFDs) and piping and instrument diagrams (P&IDs) as primary scope defining
documents. These documents are key deliverables in determining the level of project definition, and
thus the extent and maturity of estimate input information, and subsequently the estimate class for
an estimate for a process industry project.

Learning Objectives

o Understand the various classifications of estimates.


o Understand why scope definition is important for any estimate.
o Understand the basis of the AACE International system of classifying estimates.
o Understand the application of accuracy ranges for various estimates and their importance.
o Recite the factors generating need for some system or organizing estimates.
o Describe the benefits of an estimate classification system.

© 2013, AACE International (All Rights Reserved) 40


Related Study Guide Sections

o 2.1.5 Codes of Accounts


o 2.1.6 Historical Cost Data
o 2.1.7 Internationalization
o 2.2.2 Estimating Methodologies
o 2.2.3 Quantification
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.6 Conditioning
o 2.2.7 Risk Evaluation and Contingency Determination
o 2.2.8 Estimate Documentation
o 2.2.10 Estimate Review and Validation
o 2.2.11 Estimate Reporting
o 2.2.13 Building Information Modeling (BIM)

Terms to Know

o Accuracy
o Analogy Type Estimate
o Assembly Level
o Bid/Tender Estimate
o Budget Estimate
o Capacity Factored
o Check Estimate
o Concept Study
o Conceptual Estimate
o Control Estimate
o Cost Estimate Classification System
o Detailed Unit Costs
o Deterministic (Detailed)
o End-Product Units Method
o Feasibility
o Parametric Method or Model
o Physical Dimensions Method
o Preparation Effort
o Ratio or Factor Methods
o Screening
o Semi-Detailed Unit Costs
o Stochastic

© 2013, AACE International (All Rights Reserved) 41


Key Points for Review

o Understand the different classes of estimates in the cost estimate classification system and
the parameters used in classifying estimates.
o Understand the differences in the different types of estimating techniques, and for which
classes of estimates they are typically used.
o Understand the use of parametric variables and quantities
o Correlate the different classes of estimates to preparation time to do those estimates.

Summary

The primary parameter for the classification of estimates within AACE Recommended Practice (RP)
17R-97, Cost Estimate Classification System, is the degree of scope definition upon which the
estimate is based. Other estimate characteristics differentiating estimates in one classification from
those in another include the purpose of the estimate (anticipated end usage of the estimate),
methodology used in development of the estimate, the accuracy of the estimate, and the relative
effort required to produce the estimate.

AACE Recommended Practice (RP) 17R-97, Cost Estimate Classification System, maps the phases
and stages of project estimating with a maturity and quality matrix, providing a common reference
point to describe and differentiate various types of cost estimates. The matrix defines the specific
input information (i.e., design and project deliverables) that is required to produce the desired
estimate quality at each phase of the estimating process. The matrix defines the requirements for
scope definition and indicates estimating methodologies appropriate for each class of estimate.

© 2013, AACE International (All Rights Reserved) 42


Sample Questions for Section 2.1.2 Cost Estimate Classifications

1. What class of estimate is an order of magnitude?

A. Class 2
B. Class 5
C. Class 1
D. Class 3

2. ___________________ is a primary characteristic used in classifying estimates.

A. End usage or purpose of estimate


B. Level of project definition
C. Estimating methodology used in preparation of estimate
D. Expected accuracy range of estimate

3. What class of estimate is a bid tender?

A. Class 2
B. Class 5
C. Class 1
D. Class 3

4. A good Class 4 estimate can be prepared with the information available at the completion of
Phase I design. An example of information at the end of preliminary design is:

A. Equipment list and specifications.


B. Piping spool drawings.
C. Drawings released for construction.
D. Material invoiced costs.

5. You are preparing a Class 5 estimate. You have obtained an equipment quote of $60,000. The
Lang Factor is 3.15 for this type of plant. What is your estimated project cost?

A. $207,900
B. $256,642
C. $201,910
D. $189,000

6. An argument for a consistent system of classification of cost estimates is:

A. To comply with AACE International Recommended Practice 17R-97, Cost Estimate


Classification System.
B. That the system will define the specific input information needed to produce a
desired estimating outcome quality and will also define the outcome quality to be
expected.
C. To be consistent with the work breakdown structure (WBS).
D. To allow the estimate to be used in the future for cost control on the project.

© 2013, AACE International (All Rights Reserved) 43


7. An estimate prepared from very defined engineering data is referred to as a _____________.

A. Range estimate.
B. Preliminary estimate.
C. Conceptual estimate.
D. Definitive estimate.

© 2013, AACE International (All Rights Reserved) 44


Solutions to Sample Questions for Section 2.1.2 Cost Estimate Classifications

1. B Class 5.

2. B Level of project definition.

3. C Class 1.

4. A Equipment list and specifications.

5. D $189,000

Commentary: based on an equipment quote of $60,000 and the Lang Factor is 3.15
for this type of plant, the estimated project cost $189,000 (3.15 * $60,000 =
$189,000).

6. B That the system will define the specific input information needed to produce a
desired estimating outcome quality and will also define the outcome quality to be
expected.

7. D Definitive estimate.

© 2013, AACE International (All Rights Reserved) 45


© 2013, AACE International (All Rights Reserved) 46
Section 2.1.3 Estimate Variability

Introduction

Estimate variability can be generalized to be a function of two basic differences, one being scope or
quantity, and the other being cost. Price is actually the third difference usually being independent of
the first two. One of the keys of a good estimator is to be able to have enough experience to
understand these differences, as well as being able to recognize them, especially at critical times.

One of the prime factors in estimate variability, especially in construction, is the form of contract
anticipated for a project. Estimated direct costs may be precisely the same for a detailed item of
work under a cost plus or a lump sum contract. However, the amount of risk the contractor
perceives may be considerably more under the lump sum form of contract. Therefore, you would
expect the total estimate to be different, even if estimated direct costs are the same.

Learning Objectives

o Be able to describe the factors influencing variability in estimates.


o Understand realistic steps to be taken to minimize estimate variability, one of which is using
regression analysis in the estimating process.

Related Study Guide Sections

o 2.1.5 Codes of Accounts


o 2.1.6 Historical Cost Data
o 2.1.7 Internationalization
o 2.2.1 Planning the Estimate
o 2.2.2 Estimating Methodologies
o 2.2.3 Quantification
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.7 Risk Evaluation and Contingency Determination
o 2.2.9 Estimate Reconciliation
o 2.2.10 Estimate Review and Validation
o 2.2.11 Estimate Reporting
o 2.2.12 Estimate Closeout
o 2.2.13 Building Information Modeling (BIM)

© 2013, AACE International (All Rights Reserved) 47


Terms to Know

o Accuracy
o Average
o Codes of Accounts (COAs)
o Contingency
o Costing
o Escalation
o Minimum
o Maximum
o Pricing
o Quantification
o Risk
o Stakeholders
o Weather
o Weighted average
o Work Breakdown Structure (WBS)

Key Points for Review

o Understand the different classes of estimates in the cost classification system.


o Describe how the use of WBS or Code of Accounts is useful for estimate variability.
o Describe how rounding of quantities or unit prices affects estimate variability.
o Understand how probabilities can affect the accuracy and the variability of estimates.

Summary

o Variations in estimates are most often caused by variations in scope (quantity) or cost.
o Regression analysis and other probabilistic techniques utilized during estimate preparation
can aid in reducing variability.
o One of the primary causes of estimate variability is risk. Risk can be represented in a number
of ways, one of which is form of contract.

© 2013, AACE International (All Rights Reserved) 48


Sample Questions for Section 2.1.3 Estimate Variability

1. As the amount of design on a project increases, estimate accuracy should __________.

A. Become asymptotic.
B. Increase as well.
C. Remain constant.
D. Decrease
.
2. As an estimator responsible for the quantity takeoff for sitework clearing and grubbing, you
figure the quantity as 17,500 square yards at a scale of 1” = 100’. You then discover that the
scale of the drawing has been erroneously noted by the designer and is actually 1” = 200’.
Calculate a factor for correction of your clearing and grubbing quantity.

A. 0.25
B. 0.50
C. 2.00
D. 4.00

3. As an estimator responsible for the quantity takeoff for sitework clearing and grubbing, you
figure the quantity as 17,500 square yards at a scale of 1” = 100’. You then discover that the
scale of the drawing has been erroneously noted by the designer and is actually 1” = 200’.
What is the correct quantity for sitework clearing and grubbing?

A. 70,000 square yards


B. 4,375 square yards
C. 8,750 square yards
D. 35,000 square yards

4. A cube is measured as being 10.50 x 10.50 x 10.50. Round each dimension to two (2)
significant digits, and then calculate the difference of the original non-rounded volume vs.
the rounded volume calculated as a percentage of the original volume. Remember the rules
of significant digits arithmetic.

A. 10.9%
B. 0%
C. 15%
D. 13.03%

5. A cube is measured as being 10.50 x 10.50 x10.50. Round each dimension to two (2)
significant digits, and then calculate the percent difference of the original volume vs.
rounding each dimension to three (3) significant digits.

A. 10.9%
B. 0%
C. 13.03%
D. 15%

© 2013, AACE International (All Rights Reserved) 49


6. How many significant figures does the quantity 7.125 contain?

A. 4
B. 1
C. 0
D. 3

7. Which of the following forms of contract places the most risk for overrun of cost on the
contractor?

A. Time and materials.


B. Lump sum.
C. Unit price.
D. Guaranteed maximum price.

© 2013, AACE International (All Rights Reserved) 50


Solutions to Sample Questions for Section 2.1.3 Estimate Variability

1. B Increase as well.

2. D 4.00

Commentary: the ratio of correct to incorrect scales is (200 / 100 = 2.00) (a unit
length in the correct scale is two times that of a unit length in the incorrect or used
scale). Since the question pertains to area which is a product of two dimensions, the
correction factor is 2.00 x 2.00 = 4.00.

3. A 70,000 square yards

Commentary: The estimator must be careful to multiply the quantity by the factor
instead of dividing. By dividing, one would obtain the erroneous value of 4,375
square yards.

4. C 15%

Commentary: By definition, all non-zero digits are significant as well as zeroes


between any two non-zero digits, and trailing zeroes in a number containing a
decimal point. The rules of significant digits call for final results of calculations to be
rounded after completion of calculations, not at intermediate steps. Rounded to two
(2) significant digits, each dimension is 11 and the volume is 11 x 11 x 11 = 1,331.

Rounded to four (4) significant digits, each originally-measured dimension is 10.50


and the volume is 10.50 x 10.50 x 10.50 = 1,157.625. Therefore, the difference is
(1,331 – 1,157.625) / 1157.625 = 14.98% which contains four (4) significant digits.
Significant digits arithmetic rules state that the product or dividend of two numbers
should contain the least number of significant digits in any of the numbers being
multiplied together or divided. Rounded to two (2) significant digits, the correct
answer is 15%.

Common errors consist of rounding intermediate results, one final result of which
would be 10.9%.

5. D 15%

Commentary: Rounded to two (2) significant digits, each dimension is 11 and the
volume is 11 x 11 x 11 = 1,331.

Rounded to three (3) significant digits, each originally-measured dimension is 10.5


and the volume is 10.5 x 10.5 x 10.5 = 1,157.625. Therefore, the difference is (1,331 –
1,157.625) / 1157.625 = 14.98% which contains four (4) significant digits. Significant
digits arithmetic rules state that the product or dividend of two numbers should
contain the least number of significant digits in any of the numbers being multiplied
together or divided. Rounded to three (3) significant digits, the correct answer is
15%.

© 2013, AACE International (All Rights Reserved) 51


6. A 4

7. B Lump sum.

© 2013, AACE International (All Rights Reserved) 52


Section 2.1.4 Estimating Algorithms

Introduction

Estimating algorithms are simply an effective method for solving problems expressed as a finite
sequence of steps. Cost estimators, by their very nature, are generally very good at basic math skills
and how to apply them effectively, whether to develop quantities or to calculate costs, or to
determine pricing. Estimating algorithms are tools used generally in the development of conceptual
estimates before detailed drawings and specifications are available and use independent variables.
These variables are not usually direct measures of the detailed elements of the project due to the
early stage of development of the design but rather mathematical models based on relationships
between costs and other important parameters of the project.

An example of an estimating algorithm is the partition density factor, abbreviated “PDF,” where the
density of interior partitions in a certain type of building, in the case of that shown in figure 2.1.4.1, a
small office building, can be estimated from a company database or analysis of previous similar
projects.

Figure 2.1.4.1 – Small Office Building

© 2013, AACE International (All Rights Reserved) 53


Type Count Length Total
A 2 18.00 36.0
B 5 11.33 56.7
C 1 6.00 6.0
D 1 24.67 24.7
E 1 20.67 20.7
F 1 7.33 7.3
G 1 53.67 53.7
Total 205.0

Length Width Total


GFA 54 32.00 1728.0

Area Length
PDF 1728.0 205.00 8.4
Table 2.1.4.1—Partition Density Factor (PDF) Calculation Table

The Partition Density Factor (PDF) = total length of interior partitions (Length) / gross floor area (GFA)

= 1728 / 205.1 = 8.4 linear feet / square foot

Learning Objectives

o Understand the role of algorithms in cost estimating.


o Describe when the use of algorithms is appropriate in the preparation of an estimate.
o Understand why and when the use of a specific algorithm is inappropriate.

Related Study Guide Sections

o 2.1.3 Estimate Variability


o 2.1.6 Historical Cost Data
o 2.2.3 Quantification
o 2.2.9 Estimate Reconciliation
o 2.2.10 Estimate Review and Validation
o 2.2.11 Estimate Reporting
o 2.2.13 Building Information Modeling (BIM)

© 2013, AACE International (All Rights Reserved) 54


Terms to Know

o Assemblies
o Capacity Factor
o Capacity Method
o Cost Estimating Relationship (CER)
o Dimensional Variables
o Door Density Factor
o Global Dimensional Variables
o Global Specification Variables
o Hand Factor
o Lag Factor
o Law of Averages
o Law of Compensating Factors
o Master Assemblies
o Parameter
o Parametric
o Partition Density Factor
o Re-Run Assembly
o Relational Quantity
o Relationships
o Specification Variables
o Sub-Assemblies
o Weight
o Weight Total

Key Points for Review

o Understand the differences between assemblies and line items.


o Describe the different types of quantitative variables that can be used.
o Understand the importance of being able to interpret the graphical representation
(drawings) based on the (written) project specifications.
o Describe parameters, and parameter based quantification efforts.

Summary

o The process of developing an estimate relies on many different tools, one of which can be
broadly described as estimating algorithms.
o Estimating algorithms exist in many different forms.
o Most algorithms are appropriate to certain estimating phases and not appropriate to others.
For instance, use of the partition density factor is appropriate before the floor plan or
partition schedule is developed but would be inappropriate for use in an estimate once that
information is available to the estimator.

© 2013, AACE International (All Rights Reserved) 55


Sample Questions for Section 2.1.4 Estimating Algorithms

1. Another term for the Capacity Factor Method is ______________.:

A. Parametric Method.
B. Scale of Operations Method.
C. End-Product Units Method.
D. Deterministic Method.

2. The Hand factor elaborated on Lang’s work by what?

A. Expanding cost to total plant installation.


B. Including equipment installation.
C. Including indirect costs.
D. Proposing different factors for each type of equipment.

3. Estimates that have cost estimating relationships between independent variables can be
simplified by developing what?

A. Normal curves.
B. Contingency.
C. Parametric estimating relationships.
D. Waste allowance.

4. Given the following information on actual solid process plant costs, what would the Lang
factor be?
Total Installed Cost $2,000,000
Direct Cost $1,300,000
Equipment Cost $560,000

A. 3.57
B. 2.32
C. 0.28
D. 1.54

5. Given the following information on actual project costs, what is the average Hand factor for
the given pumps?

Total Installed Cost Direct Cost Pump Cost Pump Capacity


$200,000 $160,000 $36,000 2500 gpm
$150,000 $120,000 $30,000 1800 gpm
$300,000 $240,000 $60,000 3500 gpm

A. 5.16
B. 4.13
C. 5.18
D. 4.15

© 2013, AACE International (All Rights Reserved) 56


6. Given a partition density factor of 9.2 and an average partition height of 10 feet, estimate
the cost of partitions in a medical facility using an average cost of interior partition of $5.50 /
square foot of partition. The gross floor area of the medical facility is 4,500 square feet.

A. $2,277,000
B. 414,000 square feet
C. $26,902
D. $227,700

7. What is the capacity factor method?

A. A method of estimating the cost of a new facility by use of the formula C2 = C1 x er


where C2 = capacity of the new facility, C1 = capacity of an existing facility, and r = C2 / C1
B. An estimating method only applicable to assembly halls.
C. A method for deterministically estimating the cost of a new plant facility.
D. An estimating method by which the cost of a new facility is derived from the cost of a
similar existing facility multiplied by a predetermined factor relating the relative
capacities of the two facilities.

© 2013, AACE International (All Rights Reserved) 57


Solutions to Sample Questions for Section 2.1.4 Estimating Algorithms

1. B Scale of Operations Method.

2. D Proposing different factors for each type of equipment.

3. C Parametric estimating relationships.

4. A 3.57

Commentary: The Lang factor can be derived by taking the Total Installed Costs (TIC)
of $2,000,000 and dividing the total equipment cost of $560,000 to get a factor of
3.57 based on the following formula by Hans Lang:

Total plant $ = total equipment $ * equipment factor

5. D 4.15

Commentary: The Hand Factor is derived by taking the direct cost of each type of
equipment, then calculating the factor, and then averaging the factors themselves.

Total Installed Cost Direct Cost Pump Cost Hand Factor


$200,000 $160,000 $36,000 $160,000/$36,000=4.44
$150,000 $120,000 $30,000 $120,000/$30,000=4.00
$300,000 $240,000 $60,000 $240,000/$60,000=4.00

Therefore the average Hand factor (4.44+4.00+4.00 = 12.44/3) equals 4.15

6. A $2,277,000

Commentary: 9.2 x 4,500 x 10’ = 414,000 square feet


414,000 square feet x $5.50 / square feet = $2,277,000

7. D An estimating method by which the cost of a new facility is derived from the cost of a
similar existing facility multiplied by a predetermined factor relating the relative
capacities of the two facilities.

© 2013, AACE International (All Rights Reserved) 58


Section 2.1.5 Codes of Accounts

Introduction

Codes of accounts (COAs) exist to facilitate organization of estimate and other cost information.
Codes of accounts are tools for standardizing the organization of cost data and communication of
that data between parties involved in the project.

A code of accounts contains standardized cost codes in a structure designed to provide consistency in
how all parties on a project organize cost data useful to them all.

Learning Objectives

o Understand the need for and benefit of standard codes of accounts.


o Understand the need for Work Breakdown Structures (WBS).
o Be able to distinguish the terms Work Breakdown Structure (WBS) and Code of Accounts
(COA).
o Review the various structural elements used in preparation of codes of accounts.
o Know how COA dictionaries define the structure of an estimate and, for that matter, all cost
data on a project.

Related Study Guide Sections

o 2.1.2 Cost Estimate Classifications


o 2.1.3 Estimate Variability
o 2.1.4 Estimating Algorithms
o 2.1.6 Historical Cost Data
o 2.2.1 Planning the Estimate
o 2.2.3 Quantification
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.8 Estimate Documentation
o 2.2.9 Estimate Reconciliation
o 2.2.10 Estimate Review and Validation
o 2.2.11 Estimate Reporting

© 2013, AACE International (All Rights Reserved) 59


Terms to Know

o Alphanumeric fields
o Codes of Accounts (COA) or Chart of Accounts
o Cost Category
o Cost Category Labels
o Job Cost
• Job Cost Code
• Job Cost Codes
• Job Cost Export
• Job Cost Name
• Job Cost Table Note
o Major Section
o MasterFormat, See CSI
o Uniform Construction Index (UCI)
o UniFormat
o Work Breakdown Structure (WBS)
o Work Breakdown Structure Codes

Key Points for Review

o Describe WBS in general


o Describe different types of codes of accounts and their particular use.

Summary

o AACE Recommended Practice 20R-98, Project Code of Accounts provides essential


information concerning the role and preparation of codes of accounts.
o Codes of Accounts provide the essential organization of cost data for an organization.

© 2013, AACE International (All Rights Reserved) 60


Sample Questions for Section 2.1.5 Codes of Accounts

1. Which of the following is not a use of codes of accounts in project processes and phases?

A. Planning.
B. Reporting.
C. Timing.
D. Execution.

2. Which describes the Construction Specifications Institute’s (CSI) MasterFormat?

A. The AEC standard for process plant work breakdown structure.


B. An organizational standard for specifications and other information.
C. The highest level of aggregation and cost estimating coded accounts.
D. The master cost estimating report templates from which project specific versions are
developed.

3. A project code of accounts is ________________________________.

A. A means of organizing project costs, resources, and activity categories.


B. A substitute for a work breakdown structure (WBS).
C. For use in lieu of a work breakdown structure (WBS).
D. The same as a work breakdown structure (WBS).

4. Many accounts in a project code of accounts may appear in one general ledger account, the
__________________________________.

A. Construction account.
B. Fixed asset account.
C. Buildings account.
D. Work-in-progress account.

5. An essential element of a code of accounts is _____________________________.

A. Activity-based costing (ABC).


B. A cross reference.
C. A dictionary.
D. A substitute for a CPM schedule.

6. Another term for an index to facilitate finding, sorting, compiling, summarizing, or otherwise
managing information that the code is tied to is __________________________.

A. a code of accounts.
B. cost performance index.
C. criticality index.
D. values index.

© 2013, AACE International (All Rights Reserved) 61


Solutions to Sample Questions for Section 2.1.5 Codes of Accounts

1. C Timing.

Commentary: Timing is not a use of codes of accounts in project processes and


phases whereas planning, reporting, and execution are all
organizational processes.

2. B An organizational standard for specifications and other information.

3. A A means of organizing project costs, resources, and activity categories.

4. D Work-in-progress account.

5. C A dictionary.

6. A A code of accounts.

© 2013, AACE International (All Rights Reserved) 62


Section 2.1.6 Historical Cost Data

Introduction

Historical cost data is essential to a good cost estimate. Nothing supports the accuracy of an
organization’s estimate better than the use of that same organization’s historical cost data in the
preparation of estimates of the cost of future activities.

Commercially-available estimating databases are available in several industries. Any user of these
databases must take care to evaluate the basis, validate the data and determine its usefulness for the
organization and situation, and calibrate the data to the specific use.

Learning Objectives

o Identify the potential sources of historical cost data for use in the estimating process.
o Learn what constitutes accurate historical cost data.
o Understand how historical cost data should be used and filtered.

Related Study Guide Sections

o 2.1.2 Cost Estimate Classifications


o 2.1.3 Estimate Variability
o 2.2.1 Planning the Estimate
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.7 Risk Evaluation and Contingency Determination
o 2.2.10 Estimate Review and Validation
o 2.3.1 Bidding
o 2.3.2 Budgeting

© 2013, AACE International (All Rights Reserved) 63


Terms to Know

o CCI (City Cost Index)


o City Cost Index (CCI)
o Contingency
o Cost/Estimate Job Size
o Database
• Formulas
• Headings
• Image
• Item Code
• Items
• Units
• Update Date
• Editing
• Databases
o Escalation
o Location
o Location Factors
o Risk
o Weather

Key Points for Review

o There are many potential sources of historical cost data.


o Nothing substitutes for the judgment of an experienced estimator in the application and use
of historical cost data in the development of a reliable estimate.

Summary

o Reliable historical cost data is essential to the production of realistic, reliable cost estimates.
o This information must be regularly updated and must be in a useful format in order to be of
use to the estimator.

© 2013, AACE International (All Rights Reserved) 64


Sample Questions for Section 2.1.6 Historical Cost Data

1. You are assigned to prepare an estimate at project selection phase for a hospital building to
be constructed four years from now in Location B. You know that a very similar project was
completed by your company four years ago for a cost of $17,400,000. The R.S. Means City
Index for the location where it was constructed is 0.981 and the City Index for Location B is
0.890. The Engineering-News Record (ENR) Building Cost Index for the year the project was
constructed was 4369 and is projected to be 5210 in four years. Based on the information
provided, what would you estimate the proposed project will cost?

A. $22,900,000
B. $18,800,000
C. $16,100,000
D. $17,400,000

2. A common method of preparing a preliminary estimate for a building is to apply a historical


unit cost to the gross area of the building. A potentially more accurate estimate can be
derived by _______________.

A. Using the Chilton factor method.


B. Preparing a definitive estimate.
C. Applying historical unit costs to the various building subsystems.
D. Using the Lang factor method.

3. A primary reason that an estimating database containing labor costs should be centered
around production rates and not unit costs is ______________________.

A. Unit costs are a factor of labor rates which vary over time whereas production rates
are relatively constant.
B. Unit costs are dependent upon the monetary unit in which they are experienced.
C. Unit costs vary with the quantity of work performed.
D. Production rates for an individual item of work will always be identical, regardless of
the location or quantity performed.

4. There are four unit costs for furnishing and installation of 12” diameter, Class III, reinforced
concrete pipe in your unit cost database, for quantities ranging from 31 to 370 linear feet.
Unit costs range from a minimum of $29.49/linear foot to $125.04/linear foot, with an
average unit cost of $71.43/linear foot. Costs in the unit cost database reflect actual bid unit
prices on unit price contracts. A logical explanation for the variation in unit prices is
___________________________.

A. One or more of the unit prices reflect errors on the part of bidder(s).
B. Unit prices varying from the mean by more than one standard deviation should be
eliminated from the database.
C. One should utilize the mean unit price.
D. Actual bid unit prices reflect the influence of many variables such as depth of bury of
pipe, quantity of pipe installed, and unbalancing of bids.

5. You are an estimator using a historical database to prepare a conceptual estimate. Why is it
© 2013, AACE International (All Rights Reserved) 65
important to isolate direct costs from indirects as much as possible in such a database?

A. Data will be more reliable for use in the estimate for a new project, more accurately
reflecting its unique conditions.
B. Many direct costs are variable depending on the activity’s duration.
C. Indirect costs are less sensitive to escalation than direct costs.
D. In an activity-based costing (ABC) scenario, direct costs should stand by themselves
and not be mixed with indirects.

6. The Construction Cost Index (CCI) published by Engineering News-Record (ENR) is an


example of __________________________________.

A. A constant basket price index.


B. A unit cost index.
C. A cost performance index (CPI).
D. A Producer Price Index.

© 2013, AACE International (All Rights Reserved) 66


Solutions to Sample Questions for Section 2.1.6 Historical Cost Data

1. B $18,800,000

Commentary: Since both the date and location of the proposed project are different
from those of the historical cost data, the cost of the proposed project can be
calculated as the product of the ratio of cost indices, the ratio of the location factors,
and the actual cost of the historical cost, as follows:

(cost index when historical project was constructed) / (cost index when estimated
project will be constructed) x (location factor B / location factor A) x $17,400,000 =
(0.890 / 0.981) x (5210 / 4369) x $17,400,000 = $18,824,607 (rounded to
$18,800,000).

2. C Applying historical unit costs to the various building subsystems.

3. A Unit costs are a factor of labor rates which vary over time whereas production rates
are relatively constant.

4. D Actual bid unit prices reflect the influence of many variables such as depth of bury of
pipe, quantity of pipe installed, and unbalancing of bids.

5. A Data will be more reliable for use in the estimate for a new project, more accurately
reflecting its unique conditions.

6. A A constant basket price index.

© 2013, AACE International (All Rights Reserved) 67


© 2013, AACE International (All Rights Reserved) 68
Section 2.1.7 Internationalization

Introduction

Internationalization is really about being able to seamlessly translate quantities and/or costs for any
location in the world. But it is more, the need and corresponding ability for a project to be
administered and communicated in any location in the world.

Learning Objectives

o Learn the specific challenges presented by estimating projects in the global environment.
o Understand that these include differing cultures affecting work rules, holidays, and customs,
variations in measurement systems, and in currency.
o Learn how changes in exchange rates can affect the accuracy of estimates.

Related Study Guide Sections

o 2.1.3 Estimate Variability


o 2.1.4 Estimating Algorithms
o 2.1.5 Codes of Accounts
o 2.2.2 Estimating Methodologies
o 2.2.3 Quantification
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.7 Risk Evaluation and Contingency Determination
o 2.2.8 Estimate Documentation
o 2.2.10 Estimate Review and Validation
o 2.2.13 Building Information Modeling (BIM)

© 2013, AACE International (All Rights Reserved) 69


Terms to Know

o Alternate Currency
o Base Currency
o Constructability
o Conversion
o Currencies
o Currency
o Default to Metric
o Hard Metric
o International
o Labor
o Location Factor
o Metric
o Metric Conversion
o Report Currency
o Soft Metric
o Stakeholders
o Systeme Internationale (SI) (metric)
o Weather

Key Points for Review

o Converting to other measurement systems.


o Hard Metric vs. Soft Metric.
o Calculate the effects of changes in exchange rates between two currencies.

Summary

o Preparation of estimates for projects in other than the estimator’s home country takes
experience, knowledge of current conditions affecting costs, and anticipation of potential
future changes.

© 2013, AACE International (All Rights Reserved) 70


Sample Questions for Section 2.1.7 Internationalization

1. If a pump will pump 12 gallons/minute (gpm), what volume in metric units will it pump in the
same amount of time?

A. 45.4 liters/minute
B. 45.4 cubic centimeters/minute
C. 454 cubic centimeters/minute
D. 4,542 cubic centimeters/minute

2. A quantity of 270 cubic meters of concrete will yield a 4” thick slab on grade area of
__________________ square feet. Figure 5% for waste.

A. 28,890 square feet


B. 27,514 square feet
C. 30,335 square feet
D. 3,146 square feet

3. If one (1) meter is equal to 3.28 feet, how many cubic meters of concrete, rounded to the
nearest cubic meter, are required to pour a foundation that is 15 feet long by 10 feet wide by
6 feet thick, disregarding waste?

A. 26
B. 34
C. 84
D. 255

4. How does fluctuation of exchange rate influence a bid?

A. It makes it more difficult to employ foreign workers.


B. It increases the cost of doing business in foreign countries.
C. The cost of imported goods and services fluctuates with the exchange rate.
D. Labor productivity decreases.

5. An estimator who resides in Europe is responsible for preparation of a conceptual estimate


for a US corporation for the cost of a new line in a manufacturing plant. Although the
estimate of 4,000,000 EUR is prepared in Euros (EUR), the plant is to be built in Australia,
where the local currency is the Australian dollar (AUD). The US corporation desires to
convert the estimate to US. dollars (USD) in order to compare the estimated cost with its
domestic (US) plant improvements. The current appropriate exchange rates are as follows:

1 EUR = 1.41372 USD


1 USD = 0.932501 AUD

The equivalent costs in Euros and Australia dollars are:

A. 2,829,415 USD and 2,638,432 AUD


B. 3,730,004 USD and 5,273,181 AUD
C. 5,654,880 USD and 5,273,181 AUD
D. 6,064,208 USD and 2,638,432 AUD

© 2013, AACE International (All Rights Reserved) 71


Solutions to Sample Questions for Section 2.1.7 Internationalization

1. A 45.4 liters/minute

Commentary: 1 US gallon = 3.7854 liters. Therefore, (12 gal/min) * (3.7854


liters/gal) = 45.4 liters/minute.

2. B 27,514 square feet

Commentary: To account for waste, divide the total concrete by 1.05 * (270 / 1.05 =
257.14 cubic meters. Since 1 meter = 3.28 feet, convert to cubic feet by 257.14 x
(3.28)3 = 9,073.94 cubic feet. Dividing that by 0.33 feet (= 4”) gives us the result,
9,073.94/.33 = 27,514 square feet.

3. A 26

Commentary: The volume of concrete is 15’ x 10’ x 6’ = 900 cubic feet. Since 1 meter
= 3.28 feet, solve the problem by 900/ (3.28)3 = 25.50 which rounded to the nearest
cubic meter is 26.

4. C The cost of imported goods and services fluctuates with the exchange rate.

5. C 5,654,880 USD and 5,273,180 AUD

Commentary:

4,000,000 EUR x (1.41372 USD/EUR) = 5,654,880;

4,000,000 EUR x (1.41372 USD/EUR) x (0.932501 AUD/USD) =5,273,181 AUD


(rounded to 5,273,180)

The incorrect answers involve various incorrect combinations of the correct numbers
which represent errors often made by careless candidates who don’t check their
calculations during the exam.

© 2013, AACE International (All Rights Reserved) 72


Section 2.2 Estimating Processes and Practices

The following sections, estimating processes and practices, encompass the processes, techniques,
and methods used in the process of estimate preparation. This process begins even before
preparation begins, for it is important to properly plan the estimate process to avoid going down the
wrong path and, thus, wasting time and resources. To a large degree, this entails selection of the
appropriate estimate methodology (ies) to be used and for this, it is vital to have properly evaluated
the level of detail of scope information upon which the estimate is to be based, to fully understand
the intended purpose of the estimate, and to have settled on a format for the estimate’s preparation
and presentation.

Once satisfactory preparations have been made, the process of estimate preparation can begin.
Regardless of the stage of estimate, the process relies on quantification at some scale, for the cost of
any project or product is dependent upon the quantity of something. The estimate plan will have
determined what that “something” is. Once the cost of a product or project has been developed, the
price can be determined. It is important to understand that cost and price are two different
concepts.

Finally, there is the evaluation of risk and development of contingency or other means of risk
mitigation within the estimate, the process of documenting the estimate and processes utilized in
the preparation to aid in reviewers’ and end users’ understanding of the estimate within its context,
the important processes of estimate review and validation.

© 2013, AACE International (All Rights Reserved) 73


Figure 2.2—Breakdown of Chapter Topics

© 2013, AACE International (All Rights Reserved) 74


Section 2.2.1 Planning the Estimate

Introduction

Before the estimating process begins with quantity takeoff and detailed review of the scope
documents, it is essential that the estimate be planned to ascertain the following:

o Fully understand the end objective of the estimate so that the estimate will meet those
objectives.
o Matching the estimating level of effort and time available with the processes to be used in
preparation of the estimate.
o Determining the appropriate classification for the estimate.
o Make certain that planned organization of the estimate meets all requirements.
o Ascertaining the eventual use and purpose of the estimate.
o Identification of resources to be used in preparation of the estimate.

Once the objectives and purpose of the estimate are finalized, the process can proceed with progress
being measured against a baseline created during the estimate planning process.

Learning Objectives

o Familiarize yourself with the requirements of various types of estimates.


o Understand each of the individual steps that comprise the estimating process.
o Understand the objectives in generating an estimate.
o Learn how to match resources with estimating requirements.

Related Study Guide Sections

o 2.1.2 Cost Estimate Classifications


o 2.1.5 Codes of Accounts
o 2.1.6 Historical Cost Data
o 2.2.2 Estimating Methodologies
o 2.2.3 Quantification
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.7 Risk Evaluation and Contingency Determination
o 2.2.8 Estimate Documentation
o 2.2.11 Estimate Reporting
o 2.2.13 Building Information Modeling (BIM)
o 2.3.1 Bidding

© 2013, AACE International (All Rights Reserved) 75


Terms to Know

o AIA
o AIA CAD Layer Guidelines,
o American Institute of Architects (AIA). See also under AIA
o Basis
o Battery Limit
o Demolition
o Description
o Design Build
o Design Build Institute of America (DBIA)
o Estimate Info
o Estimate Information, See Estimate Info
o Estimate Items
o Estimate Job Size
o GFA (Gross Floor Area)
o Gross Floor Area (GFA)
o Gross Square Footage (GSF)
o GSF (Gross Square Footage)
o Project Duration
o Project Finish Date
o Project Start Date
o Specifications
o Uniform Drawing System (UDS)

Key Points for Review

o It is essential to fully plan the process of preparing the estimate before actual estimating is
begun.
o This will ensure an estimate progresses according to an established baseline and objectives
of the estimate are achieved.

Summary

o Estimating involves more than just the process of counting and costing items.
o A plan must be assembled identifying what is to be counted, in what units of measure, and
how these are to be organized.
o The plan for the estimate yields a baseline against which progress and the end product may
be measured.

© 2013, AACE International (All Rights Reserved) 76


Sample Questions for Section 2.2.1 Planning the Estimate

1. What is the first process in estimate preparation?

A. Pricing.
B. Scoping.
C. Quantification.
D. Costing.

2. Which is not a stage in the estimate process?

A. Quantification.
B. Pricing.
C. Cash flow.
D. Scoping.

3. An open shop project refers to what condition?

A. Only non-union workers are allowed.


B. Only union workers are allowed.
C. Union and/or non-union workers may be working.
D. There are no walls.

4. A project you are developing will require four types of labor. The type, amount and rate are
as follows: Senior Project Manager (Sr. PM) 1,000 hours at $120 per hour; Project Manager
(PM) 3,000 hours at $100 per hour; Scheduler (Sched.) 1000 hours at $110 per hour; and a
Technician (Tech) 5000 hours at $95 per hour. What should the composite rate be for the
contract?

A. $106.25/hour.
B. It cannot be determined from the data presented.
C. $1,005,000.
D. $100.50/hour.

5. One element of estimate planning is to determine the ______________ desired or required


by the requesting stakeholder.

A. Total cost
B. Estimate format
C. Costing data source
D. Estimator

© 2013, AACE International (All Rights Reserved) 77


Solutions to Sample Questions for Section 2.2.1 Planning the Estimate

1. B Scoping.

Commentary: The first process in estimate preparation is scoping, understanding the


project, then usually followed by quantification, costing, and then pricing.

2. C Cash flow.

Commentary: Quantification, pricing, and scoping are all estimating activities;


however, cash flow is not a stage in the estimate process.

3. C Union and/or non-union workers may be working.

Commentary: often, one will hear the erroneous statement that the term “open
shop” pertains to a non-union project; however, an open shop project refers to where
union and/or non-union workers may be working.

4. D $100.50/hour.

Commentary: The composite rate is equal to the weighted average rate, calculated
as follow:

Sr. PM 1,000 hrs $120/hour $120,000


PM 3,000 hrs $100/hour $300,000
Sched. 400 hrs $110/hour $440,000
Tech. 5,000 hrs $95/hour $475,000

Totals 10,000 hrs $1,005,000

$1,005,000/10,000 hours = $100.50/hour = composite rate.

One pitfall which would yield an incorrect answer would be to just average the hourly
rates of the four disciplines.

Sr. PM $120/hour
PM $100/hour
Sched. $110/hour
Tech. $95/hour

Totals $425 / hour

Average hourly rate = $425/4 = $106.25/hour.

Another erroneous answer would entail summing the total charges for each discipline
and forgetting to divide by the total worker hours to arrive at an hourly rate =
$1,005,000.

5. B Estimate format.

© 2013, AACE International (All Rights Reserved) 78


Section 2.2.2 Estimating Methodologies

Introduction

As can be seen by your review of the estimating body of knowledge to date, there are many different
methodologies used in estimating the cost of a project or, indeed, any endeavor for which cost is an
important parameter (and those for which cost is not are few and far between).

AACE International Recommended Practice 17R-97, Cost Estimate Classification System lists a
typical estimating method as a secondary characteristic used in classifying estimates and lists
judgment, stochastic, and deterministic methods of developing estimates. Selection of the
appropriate methodology (ies) is essential for the estimating process to meet budget and schedule
requirements as well as for the estimate to meet the objectives of the project.

Listing of judgment as an estimating method in 17R-97 implies that it is an estimating method in and
of itself, which could be a little misleading because the application of professional judgment is
essential regardless of the estimating methodology used. However, the professional judgment of the
estimator or estimating team can, in fact, stand alone as an estimating method for conceptual
estimates when little scope development has taken place. The stochastic and deterministic methods
are descriptive of specific types of tools used in preparation of conceptual and definitive estimates
respectively. However, at the conceptual phase, it may be that time and the depth of scope of
information available limit the estimator to the use of judgment in order to develop the estimate.

Stochastic or probabilistic methods are most often used in the preparation of conceptual estimates
where the scope is less developed and estimators rely on their professional judgment, probabilistic
evaluation of historical costs, or a combination of both as methods for preparation of conceptual
estimates. More deterministic methods are used when scopes are more developed, there are
variables which can be measured and costs assigned, and the data will support more deterministic
means of estimating the cost of the product or project.

Learning Objectives

o Be able to identify estimating methodologies readily applicable to the situation.


o Understand when specific methodologies are appropriate.
o Be able to determine quantities/costs via various estimating methodologies.
o Understand why organizations establish a standard for estimating methodology to be used.

© 2013, AACE International (All Rights Reserved) 79


Related Study Guide Sections

o 2.1.1 Cost Estimating Terminology


o 2.1.2 Cost Estimate Classifications
o 2.1.3 Estimate Variability
o 2.1.4 Estimating Algorithms
o 2.1.5 Codes of Accounts
o 2.2.3 Quantification
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.7 Risk Evaluation and Contingency Determination
o 2.2.8 Estimate Documentation
o 2.2.10 Estimate Review and Validation
o 2.2.11 Estimate Reporting
o 2.3.1 Bidding

Terms to Know

o Architectural Graphic Standards


o CAD (Computer-Aided Design)
o CAD Layer Guidelines
o CAD Object
o Calculated Fields
o Calculator
o Computer and Software,
o Computer-Aided Design (CAD)
o Cost Model
o DDE (Dynamic Data Exchange)
o Decimal Places
o Digitizer
o Dynamic Data Exchange, See DDE
o Estimate File Security
o Functional Use Estimating
o Filename
o Input Fields
o Job Order Contracting (JOC)
o Parametric Model
o Production Rates
o Quantity/Time
o Time/Quantity
o Spreadsheet
o Time and Materials (T&M)

© 2013, AACE International (All Rights Reserved) 80


Key Points for Review

o One chief discriminator to identify estimating methodologies is in the nature of the


independent variables used in execution of the methodology. If the chosen method is
primarily stochastic (probabilistic) in nature, the variables are usually something other than a
direct measure of the units of the item being measured whereas if the subject method is
essentially deterministic, those variables can generally be expected to be straightforward
counts or other measurements of the units of measure of the item described.
o A variety of different methodologies is used in the preparation of estimates, often specific to
the subject industry.
o The various methodologies used in preparation of a cost estimate may be stochastic or
deterministic or may focus on detailed physical characteristics of the end product or the
features of the end product.
o The user should always be certain that s/he understands the underlying methodologies used
in estimating software s/he uses to create any estimate.

Summary

o The choice of an appropriate estimating methodology is essential to preparation of an


estimate that will meet the accuracy objectives of the class of estimate prepared and be
prepared within the budgeted cost and schedule.
o Methods for preparation of estimates can generally be classified as stochastic (probabilistic)
or deterministic.
o Estimator’s professional judgment is an indispensable element of any estimating
methodology.

© 2013, AACE International (All Rights Reserved) 81


Sample Questions for Section 2.2.2 Estimating Methodologies

1. Which of the following is an example of a parameter in a parametric estimate?

A. The area of a wall when determining the number of worker hours required to frame
the wall.
B. A capacity factor when determining the cost of a facility based on costs of a smaller
facility.
C. Number of lines of code in a software application when determining the number of
worker hours required to develop that software.
D. The exponent "e" in the formula $B = ($A) (CapB/CapA) e.

2. An estimate for parking lot lighting is based on the area of the lot. This is an example of a
__________________ estimate.

A. Square foot.
B. Parametric.
C. Definitive.
D. Detailed.

3. A conceptual estimate is needed for the cost of a grocery warehouse. The estimator is given
the street address and gross area of the land and building, and has a database which includes
historical systems costs (substructure, superstructure, exterior wall, mechanical, electrical,
etc.) for various types of buildings. No other information concerning the project is available
upon which to base the estimate. The best approach for the estimator to use in developing
the estimate is the:

A. Physical Dimensions Method.


B. Parametric Method.
C. Capacity Factor Method.
D. End-Product Units Method.

4. Manufacturing indirect costs are those which are independent of the production rate and
must be paid regardless of plant output. Which of the following qualify as manufacturing
indirect costs?

A. Distribution costs.
B. Royalties.
C. Operating supplies.
D. Depreciation.

5. One characteristic of stochastic estimating methodologies is the fact that independent


variables used are usually not direct measures of the items being measured. An example is
_____________________________.

A. The use of the area of a building or to calculate the cost of the building.
B. The use of the area of a building or to calculate the cost of heating,
ventilating, and air conditioning (HVAC) system for the building or area.
C. The use of empty weight and speed to calculate tooling costs for aircraft airframes.
D. Calculating the cost of manufacture of an automobile using weight, wheel base, space in
© 2013, AACE International (All Rights Reserved) 82
passenger compartment, and engine horsepower.

6. For which of the following is the use of cost estimating relationships (CERs) applicable?

A. Definitive estimates.
B. Parametric estimates.
C. Neither definitive nor parametric estimates.
D. Both definitive and parametric estimates.

7. As asset/project scope becomes better defined, estimating methods become more definitive.
A resultant is that _______________________________________________.

A. Estimates become more accurate.


B. It takes less effort and, therefore, is less costly, to prepare an estimate.
C. Estimate cost probability distributions become correspondingly narrower.
D. Project durations generally increase, reflecting a corresponding increase in indirect
costs.

8. Use of the Lang Factor is an estimating methodology which is a member of what is commonly
known as the Ratio or ________________ Method family of estimating methodologies.

A. Quantitative.
B. Stochastic.
C. Factor.
D. Deterministic.

9. You have budgeted the total cost of installed equipment for a solid-fluid process plant in the
amount of $71,000,000 Euros (EUR). The Lang Factor for this type of plant is 3.63. These
variables can be used by the estimator to derive an estimate of _______________.

A. Total plant cost.


B. Inside battery limits cost.
C. Total depreciable equipment cost.
D. Anticipated utility usage cost.

© 2013, AACE International (All Rights Reserved) 83


Solutions to Sample Questions for Section 2.2.2 Estimating Methodologies

1. C Number of lines of code in a software application when determining the number of


worker hours required to develop that software is an example of a parametric
estimate.

2. B Parametric.

3. A Physical Dimensions Method.

4. D Depreciation.

5. B The use of the area of a building to calculate the cost of heating, ventilating, and air
conditioning (HVAC) system for the building.

6. D Both definitive and parametric estimates.

7. C Estimate cost probability distributions become correspondingly narrower.

Commentary: Typically, more definitive estimating methods reduce the range of


estimate values, and, thus, the correct answer is C. While it may be (and hopefully,
will be) true that the result is a more accurate estimate, it is not automatic and,
therefore, A is incorrect. The opposite of B is actually true and D is incorrect as well.

8. C Factor.

9. A Total plant cost.

© 2013, AACE International (All Rights Reserved) 84


Section 2.2.3 Quantification

Introduction

AACE Recommended Practice 10S-90, Cost Engineering Terminology defines “quantification” as, “an
activity to translate project scope information into resource quantities suitable for costing”. An
alternate definition could be describing reality with numbers. 10S-90 also defines the term “take-
off” as “a specific type of quantification that is a measurement and listing of quantities of materials
from drawings in order to support the estimate costing process and/or to support the material
procurement process.”

Learning Objectives

o Be able to evaluate the accuracy of quantities depending on the nature and level of
development of the scoping documents.
o Understand what tools are available to assist the estimator in the process of quantification
o Understand what tools are appropriate under which conditions for quantification

Related Study Guide Sections

o 2.1.2 Cost Estimate Classifications


o 2.1.3 Estimate Variability
o 2.1.4 Estimating Algorithms
o 2.1.7 Internationalization
o 2.2.6 Conditioning
o 2.2.9 Estimate Reconciliation
o 2.2.10 Estimate Review and Validation
o 2.2.13 Building Information Modeling (BIM)
o 2.3.1 Bidding

Terms to Know

o Adding takeoff items,


o Adding takeoff quantities
o Adjusted Quantity
o Assemblies
o Assembly
o Bill of Materials (BoM), See BoM
o Bill of Quantities
o BoM (Bill of Materials)
o Calculator
o Constants
o Digital Takeoff
o Digitizer
o Digitizer Drawing Name
o Digitizer Mode
o Area
o Count
o Length
© 2013, AACE International (All Rights Reserved) 85
o Perimeter
o Dimensional Variables
o Dimensions
o constants
o evaluators
o functions
o operators
o procedures
o variables
o Formulas
o Code (creating and editing)
o Identifying takeoff items
o If-Then Procedures
o Image Takeoff (or Virtual Takeoff)
o Item Takeoff
o Item Takeoff Calc in Metric
o Item Takeoff View
o Logical Operators,
o Master Assembly,
o NTS (Not to Scale)
o On Screen Takeoff
o Perimeter
o Planimeter
o Quantification
o Quantity
o Quantity (survey method, and cost estimates)
o Quantity Surveying
o Recall Perimeter
o Rules of Measurement
o Scalar
o SMM3
o SMM7
o Takeoff
• Takeoff Audit Trail
• Takeoff (Assembly)
• Takeoff (Item)
• Takeoff Calculations
• Takeoff Calculator
• Takeoff Details, Checking
• Takeoff Items
• Takeoff Pass Editor
• Takeoff Quantities
• Takeoff Quantity
• Takeoff Unit
• Takeoff Unit Partner
o Taking off items
o Type of Unit
o Virtual Takeoff (or Image Takeoff)

© 2013, AACE International (All Rights Reserved) 86


Key Points for Review

o The process of quantification translates the scope of work into items of work that may be
costed.
o Each industry has its units of measure inherent to the nature of the work within that
industry.
o Technology is rapidly bringing new tools and techniques for quantification to the industry.

Summary

o Takeoff is a specific type of quantification that is a measurement of materials required for a


project.
o A bill of materials (BoM) is a detailed quantity takeoff produced in order to facilitate
procurement for a project or product.
o In takeoff produced by measurement from drawings, it is essential to double-check drawing
scales.
o Because of the advance of technology, it is imperative that the cost estimator participate in
some type of continuing education to remain abreast with the latest in tools and techniques
for quantification.

© 2013, AACE International (All Rights Reserved) 87


Sample Questions for Section 2.2.3 Quantification

1. In the event that a drawing is noted, “Not to Scale (NTS)” and no dimensions are given, the
drawing scale may be approximated by ______________________________.

A. Asking the drafter for the scale of the drawing.


B. Throwing up your hands and faking it.
C. Identifying a feature on the drawing of known dimension such as a door and
extrapolating the scale.
D. Assuming a scale for the drawing.

2. The gross area of a building construction project entails:

A. The total floor area plus any covered exterior areas.


B. The sum of all the floor or slab areas of a project that are enclosed by the exterior
skin of the building.
C. The area of the site less areas of all paved areas (vehicular and pedestrian) and
landscaped areas.
D. The ground floor area multiplied by the number of floors above grade.

3. Three general basic categories of measurement undertaken during quantification include:


_____________________________________.

A. Count, length, time.


B. Count, length, volume.
C. Count, length, area.
D. Length, area, volume.

4. An above-ground gasoline storage tank is 45 feet in diameter and 30 feet high. What volume
of gasoline will it hold, disregarding thickness of tank walls and assuming that the entire
height is available for storage?

A. 1,345,000 gallons.
B. 1,345 m3 or 1,345 liter.
C. 1,345 m3 or 1,345,000 liter.
D. 1,345 gallons.

5. The metric equivalent of the unit of measure for lumber, board feet, is __________.

A. The board meter.


B. The cubic meter (m3).
C. The meter.
D. The cubic foot.

6 An arpent is a unit of length and a unit of area, a historic French unit of measure. A toise is,
likewise, a unit of measure for length, area, and volume which originated in early France.
Both units of measure have been used for land measurement in early Louisiana, US.

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Given the following conversions, what is the area of a parking lot of 10,000 arpents area as
expressed in square meters?

1 toise = 3.799 m2
1 arpent = 3,400 m2
1 acre = 4,046.825 m2

A. 11,902.43 m2
B. 37,990 m2
C. 15,373.89 m2
D. 8,402 m2

© 2013, AACE International (All Rights Reserved) 89


Solutions to Sample Questions for Section 2.2.3 Quantification

1. C Identifying a feature on the drawing of known dimension such as a door and


extrapolating the scale.

2. B The sum of all the floor or slab areas of a project that are enclosed by the exterior
skin of the building.

3. C Count, length, area.

Commentary: One might be tempted to list volume, but area is more fundamental.
Once you are able to calculate area, multiply by the height and you have volume.

4. C 1,345 m3 or 1,345,000 liter.

Commentary: The area of a circle of 45’ diameter is determined by πr2. 45 feet x


(.3048 meter/foot) = 13.7 meter and r = d / 2 = 45 / 2 = 22.5 feet = 6.86 meter. So the
area covered by the tank = A = π x r2 = 3.14 x 6.862 = 147.8 m2. The tank height of 30’
x (.3048 meter/foot) = 9.1 meter. The volume V = A x h = 147.8 m2 x 9.1 m = 1,345
m3. 1,345 m3 = 1,345,000 liters.

5. B the cubic meter (m3).

6. D 8,402 m2 (product of a number with five significant figures and a number with four
significant figures).

© 2013, AACE International (All Rights Reserved) 90


Section 2.2.4 Costing

Introduction

Costing is, in the process of preparing a definitive estimate, the process of assigning costs to
individual scope items. In the words of the Skills and Knowledge of Cost Engineering, 5th Edition, “the
process of applying unit costs to the individual quantities of items associated with the estimate.” For
conceptual estimates, cost estimating relationships (CERs) and other methods provide means of
costing the general elements of a concept. The term “costing” as applied to the estimating process is
not to be confused with “job costing” which pertains to the comparison of actual costs of specific
activities to budgeted costs of those activities. In many other types of estimates, costs may be
determined utilizing any one or combination of estimating methodologies of which you’ve learned in
your review.

Learning Objectives

o Be able to differentiate costing from pricing.


o Understand the difference between “costing” applied to the estimating process and the
process of job costing.
o Describe the process of costing for the different classifications of estimates.

Related Study Guide Sections

o 2.1.5 Codes of Accounts


o 2.1.6 Historical Cost Data
o 2.2.5 Pricing
o 2.2.6 Conditioning
o 2.2.11 Estimate Reporting
o 2.2.13 Building Information Modeling (BIM)

Terms to Know

o Composite Mix Rates


o Crew Hour
o Crew Rate
o Crews (building up)
o Daily Rates
o Double Overtime Rate
o Equipment
• Equipment Fleets
• Equipment Hours
• Equipment Mix
• Equipment Pieces
• Equipment Productivity
• Equipment Rate
• Equipment Total
• Equipment Unit Price
o Equivalent Labor and Equipment
o FF&E See Furniture, Furnishings and Equipment
© 2013, AACE International (All Rights Reserved) 91
o Fleets (equipment fleets)
o Fringe Benefits
o General and Administrative Expense (G&A)
o General Requirements
o Home Office Cost
o Indirect Costs
o Item Cost Buildup
o Item Description
o Item Details
o Labor
• Labor Base Cost
• Labor Burden
• Labor Burden Cost
• Labor Crew
• Labor Cost
• Labor Factor
• Labor Hour(s)
• Labor Mix
• Labor Productivity
• Labor Productivity Factor
• Labor Rate
• Labor Rate Table
• Labor Tables
• Labor Total
• Labor Trades
• Labor Unit Price
o Location Factor
o Lump Sum (LS or lsum)
o Material
• Material Class
• Material Factor
• Material Price
• Material Price Links
• Material Quantity
• Material Reprice Index
• Material Suppliers
• Material Class
• Material Conversion
• Material Price
• Material Price Update (user defined)
• Material Price Update Service
• Material Quantity
• Material Supplier
• Material Total
• Material Unit
• Material Unit Price
• Material Waste
o Monthly Rates
o Open Shop
© 2013, AACE International (All Rights Reserved) 92
o Other Total
o Other Unit Price
o Preset costs
o Prevailing Wages
o Productivity
o Rate Tables
o Equipment
o Labor
o Sales Tax
o Social Security (SSA)
o Total Unit Price
o Union
o Wage
o Waste
o Waste Percentage
o Weekly Rates
o Workers Compensation Insurance
o Workhours (WHS)

Key Points for Review

o The process of costing relies on the estimator’s knowledge of the nature of the scope of work
and the resources available for production.
o Cost estimating relationships are effective tools for costing in conceptual estimating situations
as are historical cost databases for definitive estimates.

Summary

o Costs are “what it’s all about.” Unfortunately, stakeholders are often unconcerned with the
peripheral issues concerning estimates and all they’re interested in is, “the bottom line.”
o This places considerable emphasis on the process of costing but effective costing relies on
accurate scope definition and quantification.

© 2013, AACE International (All Rights Reserved) 93


Sample Questions for Section 2.2.4 Costing

1. Which of the following is the best example of handling as a materials management cost?

A. Waste.
B. Unloading.
C. Freight.
D. Fabrication.

2. Which of the following is the best example of demurrage as a purchasing cost?

A. The cost of wasted materials on a project.


B. Indirect costs.
C. Additional charge to customers for container rental beyond a set period in the
agreement for unloading.
D. Freight.

3. A derrick barge will be used to install an offshore platform and the daily rate is $320,000 per
day and a mobilization/demobilization cost of $200,000. The installation time is expected to
be five days. How much will it cost to install the offshore platform?

A. $1,600,000
B. $1,160,000
C. $1,800,000
D. $1,700,000

4. The all-in labor cost of a welder (excluding a welding machine) is $60 per hour. The welding
machine rental cost is $220 per hour. A welding crew is comprised of two (2) welders and
one (1) welding machine. Assume each weld takes two (2) hours to complete. What is the
cost of completing 20 welds?

A. $ 680
B. $13,600
C. $3,400
D. $11,200

5. A crew consists of three (3) carpenters, two (2) laborers, and a foreman. The burdened
hourly rate for a carpenter is $30, for a laborer, $20, and for the foreman, $35. What is the
composite burdened hourly crew rate?

A. $85.00/hour.
B. $28.33/hour.
C. $27.50/hour.
D. $165.00/hour.

© 2013, AACE International (All Rights Reserved) 94


6. An idle construction equipment rental rate or standby rate is the cost of equipment that
remains on site ready for use but is placed in standby basis. The standby rate includes:

A. Some proportion of ownership costs but not operating labor or fuel or maintenance
costs.
B. Life cycle cost(ing).
C. Long lead costs.
D. All costs except the cost of capital.

7. Employees are exempt if _________________________________________.

A. Their duties are such that they are not covered by the minimum wage and overtime
provisions of the U.S. Fair Labor Standards Act (FLSA).
B. They are ineligible for health, life, and other fringe benefits.
C. They are not required to “clock in.”
D. They are not required to conform to the dress code.

8. The term “field cost” refers to _____________________________________________.

A. Costs associated with Greenfield projects.


B. All work within battery limits.
C. The total associated with site work cost.
D. Engineering and construction costs associated with the construction site rather than
with the home office.

© 2013, AACE International (All Rights Reserved) 95


Solutions to Sample Questions for Section 2.2.4 Costing

1. B Unloading.

2. D The best example of demurrage is as a purchasing cost is freight.

3. C $1,800,000

Commentary: The barge has a variable rate based on the number of days required
whereas the mobilization/demobilization is a lump sum to be distributed across the
number of days or the value simply as a total cost added to the cost of renting the
barge itself.

5 days x $320,000/day = $1,600,000


1 lsum x $200,000/each = 200,000
Total Installation $1,800,000

4. B $13,600

Commentary: 20 welds x 2 hr/weld x ((2 x $60) + $220) = $13,600. Typical errors


made by candidates include misinterpreting some of the given data, such as
erroneously interpreting given data as 2 welds/hour which yields the erroneous
answer of $3,400, or forgetting to count two welders which yields another wrong
answer of $11,200. Another possible error is to give the answer for one weld instead
of 20, yielding the wrong answer of $680.

5. C $27.50/hour.

Commentary: (3 carpenters x $30 / hour) + (2 laborers x $20) + (1 foreman x


$35/hour)/6 workers = ($90 + $40 + $35)/6 = $165/6 = $27.50/hour.

6. A Some proportion of ownership costs but not operating labor or fuel or maintenance
costs.

7. A Their duties are such that they are not covered by the minimum wage and overtime
provisions of the US Fair Labor Standards Act (FLSA).

8. D Engineering and construction costs associated with the construction site rather than
with the home office.

© 2013, AACE International (All Rights Reserved) 96


Section 2.2.5 Pricing

Introduction
Pricing is defined as the process of determining the cost of a product or project to the ultimate user
or owner of the item. While there are many tools and techniques available to assist in an analytical
approach to pricing, there is also a strong need for a certain amount of “market savvy” in the pricing
of any product or improvement.

In a project context, pricing is a term used to describe the process of adjusting estimated costs for
specific project terms and conditions and commercial terms or market conditions. The inputs to the
pricing process include individual item costs and knowledge of the organization’s overhead costs and
profit requirements as well as the current conditions affecting the competitive market situation.
Insofar as product pricing goes, it is important to be able to differentiate fixed costs from variable
costs.

It is important that the process of pricing is an on-going process in that costs and environmental
constraints such as labor rates, competitive situation, and laws and regulations are ever-changing.

Clearly from the above, whether pricing products or projects, it is imperative for costs to be known
first. That knowledge, along with an understanding of environmental factors such as the competitive
situation and regulatory environment, will allow determination of pricing objectives (maximization of
short-term profit, maximization of long-term profit, market penetration, etc.), and price
determination.

Learning Objectives

o Understand the forces acting on the process of pricing an estimate.


o Understand the difference between costs and prices.
o Appreciate the factors acting in the market which influence pricing of products and capital
improvements.
o Be able to describe how costs of resources and profit affect pricing.
o Be able to explain how various business strategies and market forces affect pricing.
o Understand the effect on pricing different types of contracts impose on the vendor or
contractor.
o Describe the effects of risk, competition, desired rate of return, and cash flow requirements
affect pricing.
o Understand the special challenges in pricing changes to the original contract.

Related Study Guide Sections

o 2.1.6 Historical Cost Data


o 2.2.4 Costing
o 2.2.6 Conditioning
o 2.2.7 Risk Evaluation and Contingency Determination
o 2.2.8 Estimate Documentation
o 2.2.10 Estimate Review and Validation
o 2.2.11 Estimate Reporting
o 2.3.1 Bidding
o 2.3.2 Budgeting
© 2013, AACE International (All Rights Reserved) 97
Terms to Know

o Add-ons
o Breakeven Analysis
o Breakeven Point
o Compound Subtotal
o Consumables
o Contingency
o Directs
o Escalation
o Fee
o Fixed Fee
o Federal Insurance Corporation of America (FICA)
o Federal Unemployment Tax Act (FUTA)
o General Conditions
o Gross Margin
o Gross Markups
o Gross Total Costs
o Gross Unit Price
o Indirect Costs
o Labor Total – Gross
o Labor Total – Net
o Market Conditions
o Markup Amount
o Markups
o Compound,
o Simple
o Net Markups
o Profit
o Gross
o Net
o Operating
o Profit Margin
o Pricing Strategy
o Return on Investment (ROI)
o Return on Sales (ROS)
o State Sales Tax
o State Unemployment Tax Act (SUTA)
o Tax
o Taxes
o Unemployment Insurance

Key Points for Review

o Effective pricing relies on detailed understanding of project / product-specific conditions and


current or anticipated market conditions.
o Market conditions of concern in the process of pricing include anticipated competitor
approaches and actions, and legal constraints such as required wage rates to be paid,
purchase of domestically-produced products, etc.
© 2013, AACE International (All Rights Reserved) 98
o Strategies for pricing should be established on an organization-wide basis and then adjusted
for time- and context-sensitive situations.

Summary

o Price determination is highly dependent upon several other factors, among them cost,
competition, demand, and seller’s objectives.

© 2013, AACE International (All Rights Reserved) 99


Sample Questions for Section 2.2.5 Pricing

1. Indirect costs are often estimated as a percentage of direct costs. One disadvantage of this
approach is that _________________________________.

A. Indirect costs are mostly a factor of the duration of the project and not readily
determined as a percentage of direct cost.
B. Bonds and insurance will not be included.
C. The appropriate percentage can vary widely.
D. An error in calculation of direct costs will result in a corresponding error in indirect
cost totals.

2. Your annual home office costs are $3,600,000. Your annual project cost base for general and
administrative expense (G&A) is $60,000,000. What is your annual G&A rate?

A. 3.0%
B. 4.5%
C. 5.0%
D. 6.0%

3. Your direct cost estimate is $2,000,000. Your organization applies the following markups
general and administrative expense (G&A) 5%, contingency 10%, profit 7%. The markups are
compounded. What is your total project cost?

A. $2,440,000
B. $2,630,490
C. $3,907,136
D. $2,471,700

8. Given the following, what percentage is the field indirect cost?

Direct field cost $200,000. Small tools $10,000; Field Supervision $24,000; Estimate
Preparation $6,000; Construction Equipment $16,000; Legal Fees $3,000; Trailer $4,000; G&A
5%; and Profit 10%.

A. 22%
B. 27%
C. 32%
D. 33%

5. Which of the following is most commonly used to figure escalation for a project?

A. Present and future value analysis.


B. Time value of money.
C. Price indices.
D. Monte Carlo risk analysis.

© 2013, AACE International (All Rights Reserved) 100


6. The term “deflation” when applied to cost management refers to __________________.

A. A flat tire suffered in the vehicle in which a courier is riding to deliver a bid to the bid
opening.
B. An operation by means of which a current dollar value series is transformed into a
constant dollar value series.
C. The opposite of inflation.
D. Negative escalation.

7. A purchase order for laboratory fume hoods contains an escalation clause which provides for
payment by the purchaser of the quoted price for fume hoods plus an amount for escalation
calculated as the ratio of the producer price index (PPI) for laboratory equipment on the
scheduled shipping date (December 1, 20XX). Subject PPI was 129.5 on December 1, 20XX
and was 127.0 on January 1, 20XX. The purchase order amount was $241,000. What should
the amount of the final invoice for the fume hoods be?

A. $241,000
B. $245,744
C. $236,347
D. $370,988

8. Value engineering is:

A. Is a function that must be performed by a certified value specialist.


B. Limited to product development in the manufacturing industry.
C. A function with the objective to design a facility or item that will yield least life
cycle costs or provide greatest value while satisfying all performance and other
criteria established for it.
D. Reduction of project scope with the objective of meeting budget.

9. It is estimated that addition of a new bottling line which will allow production to be
increased by a total of $2,750,000/year requires an investment of $14,500,000 which cost
includes the capital investment and additional annual operating and maintenance costs over
a period of five years. Calculate the rate of return (ROI) offered by this investment.

A. 10%
B. -78%
C. 20%
D. 22%

10. The bottling line from the previous question is capable of producing 4,000 completed
units/hour, fixed costs being estimated at $20,000. Variable costs per unit are $0.50 and the
bottler estimates that he can charge $1.50/bottle. Calculate the breakeven point.

A. 5,000
B. 100,000
C. 200,000
D. 400,000

© 2013, AACE International (All Rights Reserved) 101


© 2013, AACE International (All Rights Reserved) 102
Solutions to Sample Questions for Section 2.2.5 Pricing

1. A Indirect costs are mostly a factor of the duration of the project and not readily
determined as a percentage of direct cost.

2. D 6.0%

Commentary: The annual G&A rate is calculated by taking the annual home office
costs of $3,600,000 and dividing that by the annual project cost base of $60,000,000
($3,600,000/$60,000,000 = 0.06) which equals 0.06 or 6.0%.

3. D $2,471,700

Commentary: By taking the direct costs of $2,000,000 and then adding each markup
separately, subtotaling each and then applying the next markup to the previous
subtotal will then result in the grand total project cost.

Direct Costs $2,000,000


G&A @5% $ 100,000
Subtotal $2,100,000
Contingency @10% $ 210,000
Subtotal $2,310,000
Profit @7% $ 161,700
Grand Total $2,471,700

Another way is to simply add each percentage to a base of 1.00 and then multiply
each to get a final factor to multiply against the direct costs. In this case,(1.00 + 5% =
1.05, etc.) 1.05 * 1.10 = 1.115 * 1.07 = 1.23585 * $2,000,000 = $2,471,000.

4. B 27%

Commentary: To calculate the percentage of the field indirect costs, you must first
identify which are field indirect costs vs. home office indirect costs. Field indirect costs
include small tools, field supervision, construction equipment, and trailer since these
are all site specific.

Direct Costs $200,000


Small Tools $ 10,000
Subtotal $210,000
Field Supervision $ 24,000
Subtotal $234,000
Construction Equip. $ 16,000
Subtotal $250,000
Trailer $ 4,000
Grand Total $254,000

$254,000/$200,000 = 1.27, which represents 27.0% of direct costs as field indirects,


or take the difference of $254,000 and $200,000 to get $54,000 and then divide that
against the direct cost of $200,000 to get 0.27, or 27%.

© 2013, AACE International (All Rights Reserved) 103


5. C Price indices

Commentary: Price indices are most commonly used to figure escalation for a project
as they reflect historical trends and can be used to forecast trends.

6. B An operation by means of which a current dollar value series is transformed into a


constant dollar value series.

7. B $245,744

Commentary: The final invoice amount should be equal to the original purchase
order amount multiplied by the ratio of the PPI at the time of invoicing and the PPI at
the time of issuance of the purchase order. Final invoice amount = $241,000 x
(129.5/127.0) = $245,744.

8. C A function with the objective to design a facility or item that will yield least life
cycle costs or provides greatest value while satisfying all performance and other
criteria established for it.

9. A 10%

Commentary: There is an annual increase in return due to the investment of


$2,750,000 over a period of five years which totals $2,750,000 x 5 = $13,750,000. The
return on investment (ROI) then is the difference between total return and the total
invested divided by the total investment or ($13,750,000 - $12,500,000)/$12,500,000
= 10%.

10. C 200,000

With fixed costs of $200,000, the breakeven point = 200,000/ (1.50 – 0.50) = 200,000
units. An incorrect answer can be calculated by dividing the total fixed costs by the
number of units completed per hour $200,000/4,000) = 5,000 units.

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Section 2.2.6 Conditioning

Introduction

Conditioning is a global term for preparing an estimate for a given purpose or set of “conditions” per
se. A good example of conditioning is an estimate for a change order. Change orders (COs) are
typically challenged by the amount of work a contractor may be required to do and the usual scope is
more on a work package basis with a more finite or limited scope than estimating for an entire
project. Also, indirect costs and totals page markups may be defined by specific contract vs. a generic
Request for Proposal (RFP).

An estimate may need to be conditioned to give proper cost consideration to specific terms and
conditions of the contract. For example, a construction project may require a remote staging area
which will require workers to park remote from the scene where they will work, clock in, be shuttled
to the site of the work, perhaps comply with certain security conditions, and only then begin work.
At the end of the working shift, a similar situation may arise. As a result, it is possible that workers
will have less than the full shift of productive working hours but still be required to be paid for the
full shift.

A printing project may require a higher volume of output than the printer’s press and staff are
capable of producing in the required time period. A contract for furnishing fabricated reinforcing
steel for a construction project may require delivery sooner than the fabricator’s shop is capable of
providing without special consideration, such as overtime or subcontracting a portion of the work to
another shop. Often an addendum to the original bidding documents will contain provisions
requiring special considerations in the estimate. Often adjustments will need to be made to an
estimate at the last moment before submission to account for the latest in market conditions or the
competitive situation. Or, an adjustment may need to be made to account for a shortcoming in the
estimate discovered at the last moment.

Terms and conditions of a contract often provide for work required to be performed outside of
normal working hours, either after an operating facility closes down, or on weekends or other
unusual times. Often, terms of construction or manufacturing contracts, while not specifically
requiring overtime or hours outside of regular shifts, allow for a period of performance that is
deemed too short to allow for successful completion without overtime work or other considerations
that will add to the cost of performance.

All of the situations discussed above and many others may be cause for conditioning the estimate.
Another good term to describe conditioning would be “adjusting the estimate.”

© 2013, AACE International (All Rights Reserved) 105


Learning Objectives

o Understand what is meant by “estimate conditioning.”


o Be able to relate what to look for that may result in a need to condition your estimate.
o Describe the actions that may be taken in order to condition an estimate.

Related Study Guide Sections

o 2.1.3 Estimate Variability


o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.7 Risk Evaluation and Contingency Determination
o 2.2.8 Estimate Documentation
o 2.2.9 Estimate Reconciliation
o 2.2.10 Estimate Review and Validation
o 2.2.11 Estimate Reporting

Terms to Know

o Addenda
o Allowances
o Alternate Name
o Alternates
o Americans With Disabilities Act (ADA)
o Assumptions in an estimate sheet
o Balance
o Category
o Change Orders
o Front End Loading
o Unbalance

Key Points for Review

o Estimates may be conditioned by factoring, modifying escalation, making specific changes to


recognize specific conditions, or by a multitude of other means of adjustment.

Summary

o Conditioning an estimate involves making adjustments to the estimate to suit a specific


purpose or to meet certain requirements.

© 2013, AACE International (All Rights Reserved) 106


Sample Questions for Section 2.2.6 Conditioning

1. The derrick barge used in Section 2.2.4, question #3, will be used to install the same offshore
platform. The daily rental rate for the derrick barge is $320,000 per day and a
mobilization/demobilization cost of $200,000. The installation time is expected be five days.
The equipment rule of 3s is a general rule that is based on the daily rate. The weekly rate
then is calculated as 3x the daily rate, and the monthly rate, 3x the weekly rate. How much
will it cost to install the offshore platform based on the equipment rule of 3s?

A. $1,600,000
B. $1,160,000
C. $1,800,000
D. $1,700,000

2. An anticipated activity is performed by a worker earning a base rate of $22/hour and labor
burden amounts to 45% of the base rate. The standard production rate for the activity is 4
units/hour. However, constraints on the activity on a given project result in the worker only
being productive for 6 hours in an 8-hour shift. If the cost for this activity is to reflect that
inefficiency and the anticipated quantity is 400 units, what is the estimated unburdened
labor cost for the activity?

A. $1,650
B. $2,200
C. $2,933
D. $4,253

3. Which of the following is the most commonly used to forecast escalation?

A. Price indices.
B. Monte Carlo risk analysis.
C. Time value of money.
D. Present and future risk analysis.

4. The fundamental difference between a merit or open shop and a union shop is:

A. Workers in a union shop are not eligible for bonuses.


B. Workers in a union shop are represented by a collective bargaining unit.
C. Workers in a union shop must be members of the union with which the firm has a
collective bargaining agreement in order to be considered for employment.
D. Workers in a merit shop are not eligible for overtime.

© 2013, AACE International (All Rights Reserved) 107


5. You are an estimator for a concrete reinforcing steel placement contractor preparing a bid on
a project in which your team determines that workers will have 5-1/2 hours of productive
work during an eight-hour shift. Your company’s historical labor production figures for #4
bars in a footing are based on working eight-hour shifts and average 0.0057 hr/lb. If your
firm adjusts costs for individual detail items within the scope for production offsets such as
this as opposed to allocating the extra costs to a separate account as in activity-based costing
(ABC), what adjusted figure should you use in this estimate?

A. 0.0057hr/lb.
B. 0.0039hr/lb.
C. 0.0083hr/lb.
D. There is inadequate information provided to answer this question.

© 2013, AACE International (All Rights Reserved) 108


Solutions to Sample Questions for Section 2.2.6 Conditioning

1. B $1,260,000

Commentary: For every project there becomes a threshold that the estimator needs
to adjust for based on the size of the project, and also on the sequencing of the work.

5 days * $960,000/week = $960,000


1 lsum * $200,000/each = $200,000
Total Installation $1,160,000

Compare this against the total installation cost in Section 2.2.4, this is an example of
where change orders based on valid daily rates on work activities going beyond just a
few days will result in a higher than expected value.

2. D $2,933

Commentary: Since the worker is only productive for six (6) hours in an 8-hour shift
then the efficiency is 6/8 = 0.75 of normal, and since the standard production rate for
the activity is 4 units/hour, then the revised production is 0.75 * 4.0 = 3.0 units/hour.
Thus, 400 units would require 400/3.0 = 133.3 hours. Then, just using the unburdened
base rate of $22/hour * 133.3 hours = $2,933

3. A Price indices

Commentary: Price indices are most commonly used to forecast escalation based on
past history and then that information to predict future values.

4. B Workers in a union shop are represented by a collective bargaining unit.

5. C 0.0083 hr/lb

Commentary: 0.0057 hr/lb x 8/5.5 = 0.0083 hr/lb. A common error made by


candidates would be to invert the ratio which would result in an erroneous value of
0.0039 hr/lb.

© 2013, AACE International (All Rights Reserved) 109


© 2013, AACE International (All Rights Reserved) 110
Section 2.2.7 Risk Evaluation and Contingency Determination

Introduction

Development of any product or capital asset involves certain risks which must be recognized,
evaluated, and the estimate conditioned to manage those risks. Often, that is accomplished via
introduction of contingency, which AACE International Recommended Practice 10S-90, Cost
Engineering Terminology defines as, “an amount added to an estimate to allow for items, conditions,
or events for which the state, occurrence, or effect is uncertain and that experience shows will likely
result, in aggregate, in additional costs.” Another term used in the construction industry to describe
contingency is a cost allowance for the “known unknowns” experienced during the execution of a
project.

Learning Objectives

o Describe the means of identifying and evaluating risk.


o Understand what contingency is and how it is used to mitigate risk.
o Understand the steps that may be taken to manage project risks in an estimate.
o Be able to establish project contingencies in a systematic manner.
o Understand the methods available for determining appropriate contingency values.
o Be able to determine the confidence level of an estimate.

Related Study Guide Sections

o 2.1.2 Cost Estimate Classifications


o 2.1.3 Estimate Variability
o 2.1.6 Historical Cost Data
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.6 Conditioning
o 2.2.8 Estimate Documentation
o 2.2.9 Estimate Reconciliation
o 2.2.10 Estimate Review and Validation
o 2.3.1 Bidding
o 2.3.2 Budgeting

© 2013, AACE International (All Rights Reserved) 111


Terms to Know

o Accuracy
o Confidence Level
o Constructability
o Contingency
o Modeling (Risk)
o Monte Carlo simulation
o Probability
o Overrunning (or Underrunning)
o Probability Distribution
o Cumulative
o Normal
o Skewed
o Return on Investment (ROI)
o Risk
o Risk Analysis
o Risk Analysis Models
o Detailed
o Strategic
o Single Point Estimate
o Stakeholders
o Uncertainties
o Variability

Key Points for Review

o Risks must be identified, evaluated, and managed. The estimate reflects methods developed
to manage contingency.
o Contingency is often determined using probabilistic methods.
o However, professional judgment is just as often relied upon.
o Contingency is expected to be expended.

Summary

o Risks must be evaluated in order to effectively manage them.


o Contingency is an effective and often-used means of providing for risk management.

© 2013, AACE International (All Rights Reserved) 112


Sample Questions for Section 2.2.7 Risk Evaluation and Contingency Determination

1. The result of using an estimating method that deals with uncertainty and risk will provide
a(n) ______________________________.

A. Class 4 estimate.
B. Inaccurate estimate.
C. Conceptual estimate.
D. Range estimate.

2. Contingency is an amount added to an estimate in order to _______________________.

A. Avoid the necessity of accurately assessing estimated final cost.


B. Allow for additional scope unforeseen at the time of estimate preparation to be
added to the project.
C. Allow for items, conditions, or events for which the state, occurrence, or effect is
uncertain and that experience shows will likely result, in aggregate, in additional
costs.
D. Avoid the need for management reserve.

3. As a predictive process, estimating must address risks and uncertainties. One of the ways an
estimator addresses risks and uncertainties in her estimate is to
___________________________________________.

A. Perform a thorough risk assessment.


B. Include contingency in the estimate using Monte Carlo simulation.
C. Evaluate the risk and include potential costs in unit costs.
D. Model potential costs of omission.

4. Management reserve is _______________________________________________.

A. An amount outside the project scope and cost baseline to allow for discretionary
management purposes.
B. Another term for “contingency.”
C. Reserved for work outside the original scope.
D. Usually under the control of the project team.

5. Which of the following is not a customary means of managing risk?

A. Insurance.
B. Contingency.
C. Avoidance.
D. Revisions to the estimate.

6. Which of the following represents the highest risk of cost overrun to the contractor?

A. Lump sum contract.


B. Lump sum contract with liquidated damages clause.
C. Cost plus contract.
D. Guaranteed maximum price.

© 2013, AACE International (All Rights Reserved) 113


Solutions to Sample Questions for Section 2.2.7 Risk Evaluation and Contingency Determination

1. D Range estimate.

2. C Allow for items, conditions, or events for which the state, occurrence, or effect is
uncertain and that experience shows will likely result, in aggregate, in additional
costs.

3. B Include contingency in the estimate using Monte Carlo simulation.

4. A An amount outside the project scope and cost baseline to allow for discretionary
management purposes.

5. D Revisions to the estimate.

6. B Lump sum contract with liquidated damages clause.

© 2013, AACE International (All Rights Reserved) 114


Section 2.2.8 Estimate Documentation

Introduction

Estimate documentation is important for a number of reasons. Foremost is that it is vital to


communicate the important background information to the user of the estimate surrounding
preparation of the estimate. That background information includes documentation of the scope
upon which the estimate is based, the source of that scope information, source of costing data,
assumptions, inclusions and, perhaps more important, exclusions, the estimator or estimating team
responsible for estimate preparation, and a multitude of other information of value to users of the
estimate to understand its breadth, shortcomings inherent in the estimate, and other important
information concerning the estimate as described in AACE International Recommended Practice
34R-05, Basis of Estimate. A good Basis of Estimate (BOE) will help the user evaluate the risks
involved in the estimate and the steps taken by the estimator to manage the risks.

Quality is an integral part of the organization’s foundation. The estimator’s ability to perform quality
work begins with the care with which all project estimates are developed. Because estimates create
strong budget and performance expectations, clients will hold the organization accountable in
providing cost estimates that are consistent with the project design. The thoroughness and accuracy
of estimates will be a factor in determining the extent of the organization’s financial success on every
project undertaken. For these reasons, a clear and accurate documentation trail is critically
important.

In addition to providing background information to the ultimate users of the estimate,


documentation of the estimate serves a number of other purposes, one of importance to the
estimate preparers themselves. For estimate documentation facilitates review of the estimate by all
parties including internal reviewers.

A properly constructed Basis of Estimate forms the prime component of estimate documentation. A
review of the Basis of Estimate is the first step in a thorough review of an estimate.

Learning Objectives

o Understand the purposes of estimate documentation.


o Understand the importance of the Basis of Estimate (BOE).
o Understand the components of clear and accurate documentation of the cost estimate.
o Understand the role estimate documentation plays in estimate review.
o Be able to summarize the estimate documentation into a clear and concise Basis of Estimate
(BOE) document.

Related Study Guide Sections

o 2.1.1 Cost Estimating Terminology


o 2.1.5 Codes of Accounts
o 2.1.7 Internationalization
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.9 Estimate Reconciliation
o 2.2.10 Estimate Review and Validation
© 2013, AACE International (All Rights Reserved) 115
o 2.2.11 Estimate Reporting
o 2.3.1 Bidding
o 2.3.2 Budgeting

Terms to Know

o Audit Trail
o Backing up estimate files
o Backup (estimate backup)
o Basis of Estimate (BOE)
o Code of Accounts (COA)
o Comparison
o Estimate Backup
o Estimate Item History
o History
o Item History
o Item Memos
o Item Notes
o Item Status
o On Screen Takeoff
o Unit Cost Development
o Work Breakdown Structure (WBS)
o Validation
o Reconciliation

Key Points for Review

o Estimate documentation sets the stage and prepares the audience for presentation of the
estimate. An estimate without proper documentation is like a sporting event or a musical
performance without a program.
o Not only does the documentation enumerate what is included in the estimate, but it also
discusses what is not included and any shortcomings the estimating team found in the
scoping documentation.

Summary

o Documentation of the cost estimate is critical because it provides an accurate audit of the
project cost history and becomes the basis for change management and dispute resolution.
o The Basis of Estimate (BOE) is the primary vehicle for estimate documentation. AACE
International Recommended Practice 34R-05, Basis of Estimate, describes in detail the
contents and composition of a BOE.
o It is essential that estimate documentation address all inconsistencies with standard practice,
conflicts, omissions, and other concerns with scope documents that have not been able to
previously be resolved.
o Review and validation of the estimate is an integral part of the documentation process.
AACE International Recommended Practice 31R-03, Reviewing, Validating and
Documenting the Estimate, defines the basic elements of and provides broad guidelines for
the cost estimate review, validation, and documentation process.

© 2013, AACE International (All Rights Reserved) 116


Sample Questions for Section 2.2.8 Estimate Documentation

1. Which of the following is not normally included in the Basis of Estimate (BOE) document?

A. Design basis.
B. Cost basis.
C. Review comments.
D. Scope definition.

2. Detailed estimate backup should be organized as follows:

A. By work breakdown structure.


B. By specification division.
C. By schedule activity.
D. By any of the above, as long as the organization is consistent.

3. In the Basis of Estimate (BOE), quantity takeoffs should be referenced in:

A. Project scope description.


B. Design basis.
C. Planning basis.
D. Methodology.

4. The project schedule and key milestones should be documented in the estimate because
____________________________________________________.

A. The stakeholders will expect it.


B. They are generally part of the estimate submittal.
C. They are closely related to the estimate.
D. Productivities will vary by trade or location within the project boundaries.

5. What is the most frequently ignored item in a detailed design level cost estimate?

A. General conditions in the specifications.


B. Field supervision (above the level of craft foreman).
C. Project schedule.
D. Local market conditions.

6. The term “estimate backup” refers to ______________________________________.

A. The electronic estimate file saved to an alternate storage medium for purposes of
archiving and emergency access.
B. A substitute member of the estimating staff who can fill in for the primary author of
the estimate in the event of an emergency or unforeseen occurrence.
C. Basic data, project objectives, scope, drawings, quotes, estimating data,
qualifications, and assumptions used in preparing the estimate and supporting the
basis.
D. An alternate but separately-developed estimate prepared by a different estimating
team.

© 2013, AACE International (All Rights Reserved) 117


7. A Basis of Estimate (BOE) is _____________________________________.

A. A basic required component of any estimate.


B. Not required unless specifically required by the stakeholders.
C. Not necessary except for a Class 1 estimate.
D. A synopsis of the scope documents upon which the estimate is based.

8. Estimate documentation is _________________________________________.

A. An essential component of a well-prepared estimate.


B. Not required if an estimate is well-prepared.
C. A line item-by-line item description of what is included in the estimate.
D. Signed by the estimator or captain of the estimating team.

9. Estimate documentation will:

A. Never hold an independent source of quantities responsible for that contribution.


B. Hold harmless any independent source of quantities used in development of the
estimate.
C. Seek to confirm quantities not developed by a member of the estimating team.
D. Identify the source of any quantities not developed by the estimator or a member of
the estimating team.

10. A Basis of Estimate (BOE) _________________________________________.

A. Should not describe the accuracy of the estimate, leaving that up to the independent
judgment of the stakeholders.
B. Should not discuss drawbacks or shortcomings of the scoping documents in order
not to antagonize their developer.
C. Will describe the primary estimating methodology used in preparation of the
estimate.
D. Will not address any anomalies, variances, or other shortcomings of the estimate or
scoping documents.

© 2013, AACE International (All Rights Reserved) 118


Solutions to Sample Questions for Section 2.2.8 Estimate Documentation

1. C Review comments.

Commentary: The BOE must be updated to reflect changes resulting from the review
process, but the detailed comments, while part of the estimate backup, are not
required.

2. D By any of the above, as long as the organization is consistent.

Commentary: Consistency is of primary importance here. Many design teams prefer


organization by spec division, while others prefer organization by WBS or process
system.

3. B Design basis.

Commentary: It may be useful to document specific quantity metrics for specific


projects, such as overall quantities for excavation, concrete, piping, etc. as part of the
design basis.

4. D Productivities will vary by trade or location within the project boundaries.

5. A General conditions in the specifications.

Commentary: Design teams often either ignore the general conditions or use a
percentage of the direct costs to cover it. The constraints placed on the contractor by
the owner, and field supervision above the level of craft foreman are the two items
within the GC’s that have the greatest effect on project costs.

6. C Basic data, project objectives, scope, drawings, quotes, estimating data,


qualifications, and assumptions used in preparing the estimate and supporting the
basis.

7. A A basic required component of any estimate.

8. A An essential component of a well-prepared estimate.

9. C Seek to confirm quantities not developed by a member of the estimating team.

10. C Will describe the primary estimating methodology used in preparation of the
estimate.

© 2013, AACE International (All Rights Reserved) 119


© 2013, AACE International (All Rights Reserved) 120
Section 2.2.9 Estimate Reconciliation

Introduction

The process of estimate reconciliation consists of resolving or otherwise reconciling variances


between the estimate and any previous versions of the estimate, any alternative expectations of the
value of the estimate, or any competing estimates based on the same scope of work. The process of
reconciliation identifies any cost differences due to changes in scope (i.e., quantity), pricing, methods
of accomplishment, or risk between the two versions of the estimate.

Reconciliation also may occur between an estimate and the final costs of a project; in fact, that is the
best way to update an historical cost database. Another example of reconciliation might be as simple
as reconciling an estimated utility meter reading with an actual reading made at another time.
Reconciliation should occur when the differences between two estimates for the same scope of work
are greater than or less than an established threshold; i.e., 10% of Total Estimated Cost.

Learning Objectives

o Be able to describe the goals of estimate reconciliation.


o Understand the process of estimate reconciliation.
o Describe how to report on the results of estimate reconciliation.

Related Study Guide Sections

o 2.1.3 Estimate Variability


o 2.1.5 Codes of Accounts
o 2.2.2 Estimating Methodologies
o 2.2.3 Quantification
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.8 Estimate Documentation
o 2.2.10 Estimate Review and Validation
o 2.2.11 Estimate Reporting
o 2.2.12 Estimate Closeout
o 2.3.1 Bidding

© 2013, AACE International (All Rights Reserved) 121


Terms to Know

o Audit trail
o Boolean Search
o Code of Accounts (COA)
o Memos
o Notes
o Parametric
o Search
o Variance

Key Points for Review

o A well-prepared estimate variance report will describe in general any differences in scope,
pricing, or risk resulting in differences between any two estimates or an estimate and an
accounting being reconciled.
o Estimate reconciliation should take place with the estimate, as well as all supporting information
including the Basis of Estimate (BOE), the schedule upon which it is based, the risk assessment,
etc.

Summary

o Reconciliation is an essential process which can add to the reliability and accuracy of any
estimate.
o Estimate reconciliation can occur between estimates on the same project prepared at
different phases of development, between estimates on similar but different projects, or
between an estimate and a final accounting of actual costs. In each case, much can be
learned by a rigorous comparison of costs between the two.

© 2013, AACE International (All Rights Reserved) 122


Sample Questions for Section 2.2.9 Estimate Reconciliation

1. Estimate reconciliation identifies differences between two estimates resulting from:

A. Changes in scope or pricing from one estimate to the other.


B. Different estimators in charge of the two estimates.
C. Differences in labor and/or equipment unit costs.
D. Differences in labor and/or equipment production rates.

2. An estimate variance report describes differences in ______________ between two


estimates on a single project.

A. Quantities.
B. Costs.
C. Total cost.
D. All of the above.

3. A logical explanation of differences between two estimates is:

A. The estimator has made a mistake.


B. Different estimating software was used in preparation of the two estimates
C. A change has been made in the scope of the project.
D. The estimates were prepared at different points in time

4. The main benefit of reconciling an estimate on a project with an accounting of the final costs
incurred on the project is:

A. It provides a basis for reward or penalty for the estimator.


B. It provides a basis for reward or penalty for the project manager.
C. The lessons that can be learned from the comparison of actual costs with those
estimated that can then be applied to future estimates.
D. All of the above.

5. An effective tool for reconciliation of two estimates is:

A. The Basis of Estimate (BOE).


B. A comparison of the totals of the two estimates.
C. A table of variances between detailed quantities and costs in the two estimates.
D. A comparison of the scopes of the two estimates.

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Solutions to Sample Questions for Section 2.2.9 Estimate Reconciliation

1. A Changes in scope or pricing from one estimate to the other.

2. D All of the above.

3. C A change has been made in the scope of the project.

4. C The lessons that can be learned from the comparison of actual costs with those
estimated that can then be applied to future estimates.

5. C A table of variances between detailed quantities and costs in the two estimates.

© 2013, AACE International (All Rights Reserved) 124


Section 2.2.10 Estimate Review and Validation

Introduction

Estimate review and validation are critical elements of the estimating process as an estimate
generally represents a vital factor in the project’s success and the success of each project is
important to the mission of the organization.

An estimate, no matter how large or small, will never be solely the product of one estimator in a
well-run organization. Review of all of the elements of an estimate by others not associated with
preparation of the estimate is essential. In addition, management of the organization will probably
review the estimate to determine that it effectively meets the purpose for which it was prepared.

It is not the responsibility of the estimator to validate the scope of work for accuracy but obviously
this is something that must be done by other stakeholders.

Learning Objectives

o Understand the importance of estimate reviews and validation.


o Be able to relate the essential steps in review of an estimate.
o Describe what is meant by estimate validation.

Related Study Guide Sections

o 2.1.3 Estimate Variability


o 2.1.5 Codes of Accounts
o 2.2.2 Estimating Methodologies
o 2.2.3 Quantification
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.8 Estimate Documentation
o 2.2.9 Estimate Reconciliation
o 2.2.11 Estimate Reporting
o 2.3.1 Bidding
o 2.3.2 Budgeting

© 2013, AACE International (All Rights Reserved) 125


Terms to Know

o Basis of Estimate (BOE)


o Estimate Status
o Approved
o Denied
o Pending
o Pareto, See Pareto Law
o Pareto Chart
o Pareto Cost Model
o Pareto Law (80/20 Rule)
o Part Number

Key Points for Review

o The essential steps in review of an estimate include:

o Review of the Basis of Estimate (BOE).


o Thorough cost review of the estimate, especially in the context of the anticipated
project schedule.
o Validation of the estimate, comparing the cost against other project baselines and
performing “sanity checks” of the components and total of the estimate.

Summary

o Review of an estimate is an primary concern of management and of the ultimate user or


client of the estimating process.
o Validation is the process of confirming fitness for use of the estimate.

© 2013, AACE International (All Rights Reserved) 126


Sample Questions for Section 2.2.10 Estimate Review and Validation

1. A common approach to an estimate is to leave review of the frontends of contracts until


after the direct costs have been estimated. One result is that __________________.

A. It is immaterial as direct costs are independent of terms and conditions.


B. Estimated costs do not reflect the terms and conditions of the contract.
C. Indirect costs are overestimated.
D. Terms and conditions are ignored by the contractor.

2. If you suspect a contractor’s bid estimate is unbalanced, which of the following best
describes what to look for in an estimate review?

A. Items that will be purchased or installed early that seem to have very high cost
values.
B. Errors and omissions concentrated in only a few elements of the work breakdown or
cost account structure.
C. Allowances for overtime that on balance appear to be excessive.
D. Extremely high escalation costs, particularly for those items installed later in the
project schedule.

3. If steel beams are typically installed at 20 labor hours per ton, how many labor hours would
be estimated to install 20 beams, each weighing 10 tons?

A. 400 hours.
B. 1,000 hours.
C. 2,000 hours.
D. 4,000 hours.

4. An obvious place to begin a review of the second version of an estimate is:

A. A cost review of individual items of work.


B. A review of where the estimate has changed from the last version.
C. Comparison of the total value of this version of the estimate compared to the last.
D. A review of the Basis of Estimate.

5. The primary purpose of an estimate review is to:

A. Verify that the total cost is correct.


B. Absolve the estimator of responsibility for the validity of the estimate.
C. Present the estimate and supporting information in such a manner as to allow the
reviewer to verify that the estimate fulfills its chief purpose.
D. Allow the review to ascertain that individual costs are in line with previous historical
costs.

© 2013, AACE International (All Rights Reserved) 127


Solutions to Sample Questions for Section 2.2.10 Estimate Review and Validation

1. B Estimated costs do not reflect the terms and conditions of the contract.

2. A Items that will be purchased or installed early that seem to have very high cost
values.

3. D 4,000 hours.

Commentary: 20 beams x (10 tons/beam) x (20 labor hours/ton) = 4,000 labor hours.

4. B A review of where the estimate has changed from the last version.

5. C Present the estimate and supporting information in such a manner as to allow the
reviewer to verify that the estimate fulfills its chief purpose.

© 2013, AACE International (All Rights Reserved) 128


Section 2.2.11 Estimate Reporting

Introduction

Estimate reporting is an essential element of estimate preparation, as an estimate provided without


an explanation as to what is included, excluded, assumptions made, what the source of the scope
information was, who participated in preparation of the estimate, and other details is an estimate
out-of-context and a poor reflection on preparers of the estimate.

AACE International Recommended Practice 34R-05, Basis of Estimate describes in detail the
requirements and composition of a Basis of Estimate (BOE), which is the primary component of a
report to accompany an estimate. In fact, a complete and well-written BOE should eliminate the
need to include much of anything else in an estimate report.

As important as a written estimate report is, all estimators should be prepared to present an
estimate in person as well, discussing the essential elements of the estimate and being prepared to
defend it if necessary and to answer questions concerning its contents and the details of its
preparation. That verbal report may be to the project team, to internal organization management,
or to an external client. This is where one of the not-so-obvious benefits of membership in AACE
International and presenting papers at AACE Annual Meetings and other functions of the association
have benefitted many members over the years in that they have not had the opportunity at work or
in other settings to develop the essential personal presentation skills but have achieved a level of
competence and confidence in presenting at AACE functions.

Learning Objectives

o Describe the essential components of estimate reporting.


o Be able to prepare a Basis of Estimate (BOE).
o Learn to present an estimate in person.

Related Study Guide Sections

o 2.1.5 Codes of Accounts


o 2.2.2 Estimating Methodologies
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.8 Estimate Documentation
o 2.2.9 Estimate Reconciliation
o 2.2.10 Estimate Review and Validation

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Terms to Know

o Company Information
o Company Shipping Information
o Comparison Reports
o Conditional Reporting
o Conditions
o Cover Page Information
o Criteria
o DIN 276
o Extensible Markup Language (XML), See XML
o Final reports
o Grid Lines
o Horizontal Lines
o Vertical Lines
o Gridlines
o Header and Footer
o Heading Code
o Heading Totals Level
o Headings Level
o Major Section - Summary
o Page Footer
o Page Header
o Page Setup
o Page Style
o Page Style Attachments
o Preparing reports
o Report printing
o Reports
o Tabular

Key Points for Review

o The Basis of Estimate (BOE) forms the centerpiece of estimate reporting.


o Estimate summary and, if applicable, detail reports are also appropriate to an estimate
report.
o As important as what is included in the estimate is a specific description of what is not
included.

Summary

o A well-written and comprehensive estimate report is an essential element of any estimate.

© 2013, AACE International (All Rights Reserved) 130


Sample Questions for Section 2.2.11 Estimate Reporting

1. Which of the following is not included in the burdened labor rate base wage?

A. Profit.
B. State Unemployment Insurance.
C. Social Security.
D. Health Insurance.

2. Which of the following is not an essential element of a Basis of Estimate (BOE)?

A. A list of activities on the schedule critical path.


B. Names of individuals involved in preparation of the estimate.
C. Benchmarking data.
D. Summary estimate report.

3. A benchmarking report is important as an element of an estimate report because


____________________________________________.

A. It verifies the elevation datum upon which the estimate scoping documents are
based.
B. It identifies methodologies used in preparation of the estimate.
C. It compares costs of similar projects and provides a context for the estimate.
D. It provides data upon which other estimators can benchmark their estimates.

4. With respect to management reserve, a Basis of Estimate (BOE) should


_____________________________________________________.

A. Only contrast it with contingency.


B. Not address it as it is not a part of the estimate.
C. Identify the specific purpose and use for which it is intended.
D. Describe it as a part of contingency.

5. If a previous estimate totaled $55,000,000 and a current estimate, $52,500,000, it can be


said that the $2,500,000 is __________________________________________.

A. Evidence that a mistake was made on one or the other of the estimates.
B. To be disregarded an inconsequential.
C. Not to be discussed to avoid embarrassment of the estimators.
D. To be evaluated and explained in a reconciliation section of the estimate report.

© 2013, AACE International (All Rights Reserved) 131


Solutions to Sample Questions for Section 2.2.11 Estimate Reporting

1. A Profit.

2. A A list of activities on the schedule critical path.

3. C It compares costs of similar projects and provides a context for the estimate.

4. C Identify the specific purpose and use for which it is intended.

5. D To be evaluated and explained in a reconciliation section of the estimate report.

© 2013, AACE International (All Rights Reserved) 132


Section 2.2.12 Estimate Closeout

Introduction

The term “estimate closeout” has multiple meanings. In the context of project closeout, the process
of estimate closeout consists of verifying final actual costs and organizing those costs for entry into
the organization’s historical cost database for use in future estimating efforts. In much the same
way, “estimate closeout” often refers to the process of arranging final costs and adding them to the
cost basis of a fixed asset in the organization’s balance sheet to allow them to be included in the
basis for depreciation. Others refer to the process of posting last minute adjustments in a “cut and
add” bid sheet to the estimate in order to begin creation of an “as-bid” estimate as “estimate
closeout.”

Regardless of the meaning you apply to the term, it is important to understand the typical evolution
of an estimate.

• Conversion of scope of work into measurable elements or development of quantities


(quantity takeoff).
• Incorporation of those quantities into a draft estimate.
• Development of resource requirements necessary to accomplish those quantities.
• Refinement of the estimate incorporating comments of associates and reviewers and adding
basis and other supporting documentation.
• Depending upon the purpose of the estimate, finalization of estimate and application to the
purpose for which it was created.
• Periodic adjustment and modification of the estimate to account for changes in scope,
timing, or use.
• Transformation of estimated values and format into other formats to facilitate secondary
purposes of the estimate, such as a control estimate against which actual costs will be
tabulated and measured.

o An example of this type of transition is conversion of an estimate originally produced


in the format of the project work breakdown structure into a format consistent with
the organization’s code of accounts; a transition from a project accounting-friendly
format into an accounting-friendly format.

Of course, some of the above topics are more or less applicable to a particular classification of
estimate, within the topics described above are represented several instances of estimate closeout.

Learning Objectives

o Understand the many processes of estimate closeout and what occurs in any of those
processes.
o Recognize the importance of a “lessons learned” session at estimate closeout in order to
capitalize on important estimating elements to be carried forward to future efforts.

© 2013, AACE International (All Rights Reserved) 133


Related Study Guide Sections

o 2.1.2 Cost Estimate Classifications


o 2.1.5 Codes of Accounts
o 2.1.6 Historical Cost Data
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.8 Estimate Documentation
o 2.2.9 Estimate Reconciliation
o 2.2.11 Estimate Reporting
o 2.3.1 Bidding
o 2.3.2 Budgeting

Terms to Know

o As-Built Estimates
o Buyout
o Code of Accounts (COA)
o Control Estimate
o Schedule of Values

Key Points for Review

o As the process of buyout progresses, the estimate transitions from an estimate upon which a
bid or budget is based (an “as-bid” estimate), to an “as-bought” estimate, to a control
estimate. As the actual amounts of subcontracts or material or equipment purchase orders
replace estimated values, the estimate moves closer to a control estimate, a document upon
which cost control of the project is based.
o An estimator working for a contractor will modify his/her estimate by posting last minute
adjustments (“cuts” or “adds”) to the estimate to create an “as-bid” estimate.
o An “as-bought” or control estimate forms the basis for cost control on the project.
o A final control estimate forms the basis for posting capital costs to the organization’s balance
sheet to “capitalize” the costs and begin the process of depreciation.

Summary

o Regardless of the meaning, estimate closeout is a vital process in the evolution of cost
control on a project.
o Estimate closeout is an excellent opportunity to capture actual costs, to learn lessons from
the variances between estimated and actual costs, and to update historical cost databases
with actuals from the estimate.

© 2013, AACE International (All Rights Reserved) 134


Sample Questions for Section 2.2.12 Estimate Closeout

1. An estimate at a stage of development to form the basis for project cost control is a(n)
__________________________________________.

A. Budget estimate.
B. As-bought estimate.
C. Control estimate.
D. As-bid estimate.

2. The process of posting costs from an estimate to the cost basis of a fixed asset in the
organization’s balance sheet is known as _________________________________.

A. Cost control.
B. Cost capture.
C. Capitalization.
D. Amortization.

3. The process of verifying final actual costs and organizing those costs for entry into the
organization’s historical cost database for use in future estimating efforts is known as
__________________________________.

A. Estimate reconciliation.
B. Estimate validation.
C. Estimate reporting.
D. Estimate closeout.

4. The process of converting an estimate prepared to comply with a format required for bid
submission into the preparing organization’s code of accounts is known as
_______________________________________.

A. Estimate consolidation.
B. Estimate closeout.
C. Estimate recapitulation.
D. Estimate reconciliation.

5. The process of posting last minute adjustments in a “cut and add” bid sheet to the estimate
in order to begin creation of an “as-bid” estimate is known as
____________________________________.

A. Estimate closeout.
B. Estimate reporting.
C. Estimate consolidation.
D. Estimate reconciliation.

© 2013, AACE International (All Rights Reserved) 135


Solutions to Sample Questions for Section 2.2.12 Estimate Closeout

1. C Control estimate.

2. C Capitalization.

3. D Estimate closeout.

4. B Estimate closeout.

5. A Estimate closeout.

© 2013, AACE International (All Rights Reserved) 136


Section 2.2.13 Building Information Modeling (BIM)

Introduction

Building Information Modeling (BIM) refers to a digital representation of the physical and functional
characteristics of a facility. A BIM is a shared knowledge resource for information about a facility
forming a reliable basis for decisions during the facility’s life-cycle. A BIM is a shared resource for
stakeholders to insert, extract, update or modify information in the BIM to support or reflect the
roles of that stakeholder.

A comprehensive representation of a facility includes multiple dimensions of data rich intelligent


objects. The dimensions for modeling the information and geometry about a facility are: 3D
graphical modeling, 4D time modeling, and 5D cost modeling. Graphical representations with
associated object information are combined for the 3D content of a BIM. A facility’s 4D view includes
3D plus time. 5D is the 4D view plus cost.

As with traditional facility information, cost estimating a project in BIM begins with classifying the
cost estimate to be completed. This activity relies on the level of project definition, which in BIM is
known as the Level of Detail/Level of Development (LOD). The LOD is a taxonomy that includes the
design model content and subsequent authorized uses for 4D scheduling and 5D cost estimating.
LOD 100 is the lowest and is authorized for 4D total project construction duration and 5D conceptual
cost allowance. LOD 500 is the as-built BIM and is authorized for 5D record costs.

BIM is evolving in both the technology and methodology aspects, especially in terms of how a
facility’s cost estimate is produced from a BIM. As a result the estimator’s role in BIM is evolving as
capabilities expand across the dimensions in BIM.

Learning Objectives

o Identify the multiple dimensions of BIM and the interrelationship of each with cost
estimating in BIM.
o Cross reference the cost estimate classification by BIM Level of Detail.
o Recall key terms associated with BIM.

Related Study Guide Sections

o 2.1.2 Cost Estimate Classifications


o 2.1.3 Estimate Variability
o 2.1.6 Historical Cost Data
o 2.2.1 Planning the Estimate
o 2.2.2 Estimating Methodologies
o 2.2.3 Quantification
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.6 Conditioning
o 2.2.8 Estimate Documentation
o 2.2.10 Estimate Review and Validation
o 2.3.1 Bidding
o 2.3.2 Budgeting

© 2013, AACE International (All Rights Reserved) 137


Terms to Know

o 3D models
o 4D models
o 5D models
o Building Information Modeling (BIM)
o Intelligent objects
o Integration
o Interoperability
o Level of Detail
o Cost Estimate Classifications
o Assembly
o BIM methodology

Key Points for Review

o What are the dimensions in BIM and how does each impact cost estimating in BIM?
o What does the term “intelligent object” mean and how do intelligent objects affect a cost
estimate using a BIM?
o How does each Level of Detail in a BIM relate to the cost estimate?
o How is object information exchanged from the design model to the estimating model?

Summary

o BIM is 3D, 4D, and 5D data rich representations of a facility created with intelligent objects.
o Information for cost estimating in BIM is extracted directly from the design model through
technology that is either interoperable or it is integrated between the technologies.
o The Level of Detail in a design model guides the cost estimating activities for which that BIM
may be used.
o The classification of a cost estimate in BIM is associated with the level of project definition as
defined by the Level of Detail.

References

The following references are suggested for your study of Building Information Modeling:

1. Bedrick, Jim (2009). Organizing the Development of a Building Information Model,


http://www.ipd-ca.net/IPD%20Tools%20and%20Publications.htm

2. National Institute of Building Sciences (2007), National Building Information Modeling


Standard, Version 1- Part 1: Overview, Principles, and Methodologies,
http://www.buildingsmartalliance.org/index.php/nbims/

3. National Institute of Standards and Technology (NIST), NISTIR 7417 (2007). General Buildings
Information Handover Guide: Principles, Methodology and Case Studies.
http://www.wbdg.org/pdfs/nistir_7417.pdf

© 2013, AACE International (All Rights Reserved) 138


Sample Questions for Section 2.2.13 Building Information Modeling (BIM)

1. A cost estimate generated from a LOD 400 BIM is authorized for ________________.

A. Conceptual cost allowance purposes.


B. Buyout purposes.
C. Record cost purposes.
D. Preliminary cost purposes.

2. A 4D BIM is 3D plus ____________________.

A. Cost.
B. Data.
C. Time.
D. Geometry.

3. Interoperability is _________________________________.

A. Integrated software applications for BIM.


B. Complex computer code for representing geometric properties in BIM.
C. Achieved with a network server coordinating multiple models.
D. Seamless data exchange between BIM software applications.

4. 3D BIM is a digital representation created using data rich ______________ objects.

A. Intelligent.
B. Simple.
C. Scaled.
D. Unique.

5. The Model Progression Specification includes ______________ Levels of Detail.

A. Ten.
B. Seven.
C. Three.
D. Five.

6. 5D modeling includes the following, __________, as well as the traditional X, Y, and Z


dimensions.

A. Cost and price.


B. Cost and time.
C. Time and effort.
D. Time and resources.

© 2013, AACE International (All Rights Reserved) 139


7. A cost estimate generated from a LOD 200 is a cost estimate based on __________________.

A. Validated design model.


B. Measurement of generic elements.
C. Conceptual cost allowances.
D. Complete and specific assemblies.

8. According to the National BIM Standard, a BIM serves as a shared resource for information
about a facility for decision during its ________________ from inception forward.

A. Construction.
B. Design.
C. Life-cycle.
D. Closeout.

9. BIM is a critical element in reducing industry _____________________.

A. Overhead and profit.


B. Time for construction.
C. Lack of innovation.
D. Waste due to inefficiencies.

10. 4D scheduling models are authorized for use in fabrication and assembly detail, including
construction means and methods, at a LOD of ______.

A. 400
B. 100
C. 500
D. 300

© 2013, AACE International (All Rights Reserved) 140


Solutions to Sample Questions for Section 2.2.13 Building Information Modeling (BIM)

1. B Buyout purposes.

2. C Time.

3. D Seamless data exchange between BIM software applications.

4. A Intelligent.

5. D Five.

6. B Cost and time.

7. B Measurement of generic elements.

8. C Life-cycle.

9. D Waste resulting from inefficiencies.

10. A 400

© 2013, AACE International (All Rights Reserved) 141


© 2013, AACE International (All Rights Reserved) 142
Section 2.3 Other Estimating Issues

While the previous sections of this Certification Study Guide have dealt with the specific processes,
techniques, and methods used in preparation of estimates, the following sections discuss the
application of those processes, techniques, and methods and the variations in those methods which
allow one to produce estimates for the purposes of bidding and budgeting, as well as preparation of
estimates focusing on lifecycle or product costs.

Figure 2.3—Breakdown of Chapter Topics

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© 2013, AACE International (All Rights Reserved) 144
Section 2.3.1 Bidding

Introduction

Bidding is the process of submitting a formal proposal to enter into an agreement to provide a
service, product, or project in return for an identified price. The term “bid” is known as a “tender” in
some countries. The estimate plays a prime role in the process of bidding. Other factors include
strategies to be the successful bidder as well as to structure the bid to the advantage of the bidder.

The process of assembling a bid can be quite complex, depending on the project, the terms of the
bidding documents, the available resources, and the timeframe. In addition to the decision as to
whether to submit a bid, there is the necessity to study and understand the bidding documents, the
estimate must be assembled, qualified sources of supply for labor, materials, and equipment must be
identified and solicited, and bids for those commodities as well as subcontracts must be encouraged,
accepted, and analyzed.

The decision to bid can involve much inquiry and analysis. Factors involved include the nature of the
prospective project and how closely the organization’s resources, abilities, and experience match its
requirements, other expected bidders, experience with the owner, architect / engineer, and other
parties expected to be involved, the availability of qualified subcontractors and vendors, and what is
usually a subjective evaluation of the risk factors of undertaking the project and how well the
organization can manage those risks.

Quite a lot of energy and analysis generally is spent on putting the organization in a position to
submit a bid on a project. Often the organization must make a convincing argument that it is
qualified to perform on the project and gain approval from the owner or other enabling authorities in
order to be placed on the approved bidder list. Bonding and insurance requirements must be met
and a variety of other requirements studied, understood, and met. From the owner’s standpoint,
prospective bidders’ qualifications must be examined, references checked, and decisions made as to
which prospective bidders are likely to be able to perform and do the best job.

In formulating its bid estimate, a bidder must not only prepare a bid meeting all of the requirements
of the bidding documents but also often include various items in addition to the actual bid such as
numerous certifications, bid security (bid bond or other security acceptable to the owner), a list of
proposed subcontractors, resumes and other qualifications of proposed project staff, and a variety of
other submittals.

The bid usually must be submitted on a form and in a format prescribed by the bidding documents,
often quite voluminous and not necessarily in the format in which the bidders’ estimate would
normally be prepared.

Since there generally is much riding on a bid and its accuracy and ability to achieve the goals of the
bidder, it is important that the estimate supporting the bid be reviewed by the appropriate
stakeholders in the organization in accordance with Section 2.2.10 Estimate Review and Validation of
this study guide.

© 2013, AACE International (All Rights Reserved) 145


Learning Objectives

o Understand the advantages and disadvantages for both parties of various forms of contract.
o Be able to repeat the activities necessary from various parties’ perspectives on preparing a
bid (or a project for bid).

Related Study Guide Sections

o 2.1.2 Cost Estimate Classifications


o 2.1.5 Codes of Accounts
o 2.1.6 Historical Cost Data
o 2.2.3 Quantification
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.6 Conditioning
o 2.2.7 Risk Evaluation and Contingency Determination
o 2.2.8 Estimate Documentation
o 2.2.9 Estimate Reconciliation
o 2.2.10 Estimate Review and Validation
o 2.2.11 Estimate Reporting

Terms to Know

o Allowance
o American Institute of Steel Construction (AISC)
o American National Standards Institute (ANSI)
o American Society of Testing Materials (ASTM)
o Analyzing bids and quotes
o Assigning bid items
o Bid
• Bid Adjustments
• Bid Day
• Bid Item
• Bid Shopping
• Bidder
• Bids
o Change Order
o Liquidated Damages (LDs)
o Quotes
o Request for Quotation (RFQ)
o Subcontractor
o Supplier
o Unbalanced bid

© 2013, AACE International (All Rights Reserved) 146


Key Points for Review

o Among the key factors relating to an estimate for the purposes of submitting a bid is a
complete and accurate assessment of the scope of work of the proposed project, most
commonly represented by a quantity takeoff or bill of materials.
o In addition, accurate costing contributes to an estimate in which the bidder can have
confidence that quantities and cost are not major elements of risk to be managed.
o An accurate assessment of market conditions and other risks is also an important ingredient.
o Once those factors have been thoroughly evaluated, markups can be determined and
applied.
o An owner’s estimate serves a similar but different purpose. The owner’s estimate attempts
to predict that the lowest responsible bid submitted will be within the funds available
whereas the bidder’s estimate attempts to be that lowest responsible bid.

Summary

o Bidding is a complex action for all parties.


o There is a lot riding on the bidding process, again for all parties.

© 2013, AACE International (All Rights Reserved) 147


© 2013, AACE International (All Rights Reserved) 148
Sample Questions for Section 2.3.1 Bidding

1. You are the chief estimator for a contractor preparing a fixed price/unit price bid for a civil
construction project. In a unit price bid, the price for each bid item in the bid schedule is a
function of its direct cost plus its pro-rata share of indirect costs and overhead and profit. For the
bid item, Embankment – In Place, the engineer’s quantity is 420,000 cubic yards and the total of
your direct estimated costs is $4,400,000. The total of all direct estimated costs including the
embankment is $17,500,000. The total of indirect costs you have estimated at $2,100,000 and
your overhead and profit amount to $980,000. What should your bid unit cost for Embankment –
In Place be if you distribute indirect costs and overhead and profit against direct costs in straight
pro-rata fashion?

A. $12.32
B. $5,174,400
C. $10.48
D. $12.81

2. Bidding documents require you to include in your estimate an allowance of $700/thousand for
the material cost of brick including tax and freight. In a pre-bid conference, the architect states
that he has calculated that a total of 32,000 brick will be required. However, you estimate that
the project will require 34,000 brick including waste and allowance for damaged and non-
conforming brick. What total for the material cost of brick should you include in your estimate?

A. $23,800
B. $23,800,000
C. $22,400
D. $22,400,000

3. Which of the following is NOT a usually-justifiable reason for a sole-source bid?

A. It is required to interface with existing equipment/systems.


B. The specification was written around the technical parameters of one manufacturer.
C. Only one vendor can meet the specification.
D. Only one vendor can meet the schedule.

4. Bid shopping is ________________________________________.

A. The procurement of materials for a project.


B. The unethical practice of a prime contractor providing the low price for a scope of work
to other subcontractors or suppliers in an attempt to get the other subcontractors or
suppliers to underbid the original price quoted.
C. The practice of requesting subcontractors’ and vendors’ quotations on a project.
D. Illegal.

5. An unbalanced bid is _____________________________________.

A. A bid submitted without adequate preparation.


B. A bid in which costs are front-end loaded.
C. A bid in which costs are allocated disproportionately to various accounts to achieve an
unfair advantage over the other party.
D. A bid much different in total from the other bids submitted.

© 2013, AACE International (All Rights Reserved) 149


Solutions to Sample Questions for Section 2.3.1 Bidding

1. A $12.32

Commentary: The ratio of direct costs of embankment to total direct costs is


$4,400,000/$17,500,000 or 25.14%. 25.14% of the sum of total indirect costs and
total overhead and profit is $774,400 which, added to embankment direct costs is
$5,174,000 and that divided by 420,000 cubic yards is $12.32/cubic yard.

$5,174,400 is incorrect for an answer even though it is the correct total price for
embankment. Candidates need to take care to read all questions carefully; in this
instance, the question asks for the correct UNIT price, not TOTAL price. While it may
seem like a minor point, in practice, management or a client may ask similar
questions. Likewise, $10.48, the embankment direct unit cost, is incorrect as well as
$12.81, the embankment direct unit cost with prorated OHP (overhead and profit).

2. A $23,800

Commentary: The estimated direct cost is ($700/1000) * 34,000 = $23,800.Forgetting


to divide by 1,000 yields the incorrect answer of $23,800,000. Similarly, an erroneous
decision to use the architect’s quantity of 32,000 brick yields the incorrect $22,400
and $22,400,000.

3. B The specification was written around the technical parameters of one manufacturer.

Commentary: It is important for the estimator to carefully study the specifications


and fully understand any “or equal” clauses. The most frequent justification for a
sole source specification is the requirement to interface with existing equipment or
systems. However, the estimator should research all potential vendors in order to
obtain the “best” price meeting the requirements of the specifications.

4. B The unethical practice of a prime contractor providing the low price for a scope of
work to other subcontractors or suppliers in an attempt to get the other
subcontractors or suppliers to underbid the original price quoted.

5. C A bid in which costs are allocated disproportionately to achieve an unfair advantage


over the other party.

© 2013, AACE International (All Rights Reserved) 150


Section 2.3.2 Budgeting

Introduction

AACE International Recommended Practice 10S-90, Cost Engineering Terminology defines “budget”
as “a planned allocation of resources” and “baseline” as “the budget and schedule that represent
approved scope of work and work plan.” The AACE International TCM Framework refers to
“budgeting” as, “a process to develop a cost plan by allocating estimated costs or prices to
controllable cost accounts or activities and time phasing the cost in accordance with the schedule.”

As it is for the bidding process, budgeting for projects is a necessary process for all parties to the
project, those submitting bids on goods and services, as well as the party developing the project.
Regardless of the part a party may play in a project, it is vital for that party to develop a budget for its
participation. That budget may begin as a worker-hour budget and then be translated into dollars.
For the owner or developer, cash flows or the schedule upon which funds will be available and
required is a critical issue. Whether the project is a capital infrastructure improvement, a new
manufacturing line, or a new drug or medication, the developer’s goal is to produce a budget which
will help in meeting the organization’s mission while it develops a plan for capital that meets its
needs and abilities and creates a cost baseline against which actual costs can be controlled.

Much the same is of concern to the vendor or contractor, for an exterior source of working capital is
often required for any type of capital project or manufacture of a product. In order for the project to
be undertaken or manufacture to begin on a new product, financing may be necessary. Funds must
be replenished by sales, cash inflows generated by sale of the product or progress and periodic
payments received on the project.

From the owner or developer’s perspective, the goal is usually to develop a budget that accurately
reflects all anticipated costs to develop the project. These include, in addition to construction costs,
all other costs it is likely that the owner will incur in completing the project. These might include land
acquisition, rezoning costs, research and development costs, design, testing and other quality
assurance costs, the costs of moving to a new facility, and legal and real estate fees associated with
the development among others. It is not unusual to see a Class 1 to Class 5 estimate at the budget
stage but obviously Class 3 estimates are the most common.

© 2013, AACE International (All Rights Reserved) 151


Learning Objectives

o Understand the role budgeting plays in project development and in cost control.
o Be able to describe the value of estimating in the budget development process.
o Understand how to estimate appropriate contingency as a means of dealing with risk.

Related Study Guide Sections

o 2.1.2 Cost Estimate Classifications


o 2.1.5 Codes of Accounts
o 2.1.6 Historical Cost Data
o 2.2.1 Planning the Estimate
o 2.2.2 Estimating Methodologies
o 2.2.3 Quantification
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.7 Risk Evaluation and Contingency Determination
o 2.2.10 Estimate Review and Validation
o 2.3.1 Bidding

Terms to Know

o Accuracy
o Allowances
o Budgetary
o Contingency
o Escalation
o Risk
o Year to Date (YTD)

Key Points for Review

o Be clear on the various classifications of estimates and what classification, level of


development, and accuracy are appropriate to a budget.

Summary

o Estimates form the basis for budgets and budgets along with schedules in the form of
baselines, form the basis for project control. The timing of inflows and outflows is essential
for a budget to be of value in managing and controlling all aspects of the project.
o Budgets may be prepared in worker-hours, dollars, or other units, but eventually, they will
inevitably end up in currency units.

© 2013, AACE International (All Rights Reserved) 152


Sample Questions for Section 2.3.2 Budgeting

1. Escalate $10,000,000 at an annual rate of 5% for a period of four years and eight months.

A. $12,335,000
B. $12,558,970
C. $12,657,394
D. $12,608,086

2. Two essentials for an effective project control baseline are ___________________.

A. Cash flow and the estimate.


B. A resource-loaded schedule and value engineering plan.
C. The schedule and budget.
D. The Actual Cost of Work Performed (ACWP) and an updated schedule.

3. A budget estimate is typically but not always a Class ___ estimate.

A. 3
B. 1
C. 5
D. 4

4. Which of the following is not likely to be an element of a maintenance budget for an


apartment complex?

A. Painting costs.
B. Lawn mowing costs.
C. Land acquisition costs.
D. Cost of a data/telephone wiring maintenance contract.

5. What role do historical costs play in budgeting?

A. None. Historical costs have nothing to do necessarily with a current endeavor.


B. Budget estimates should be based on historical costs.
C. Budgeted costs should be based on historical costs adjusted for escalation.
D. They provide a sound basis for forecasting and budgeting costs of future activities
and assets.

© 2013, AACE International (All Rights Reserved) 153


Solutions to Sample Questions for Section 2.3.2 Budgeting

1. B $12,558,970

2. C The schedule and budget.

3. A 3.

4. C Land acquisition costs.

5. D They provide a sound basis for forecasting and budgeting costs of future activities
and assets.

© 2013, AACE International (All Rights Reserved) 154


Section 2.3.3 Project and Lifecycle Costing

Introduction

Total Cost Management (TCM) is defined as, “the effective application of professional and technical
expertise to plan and control resources, costs, profitability, and risk”; in other words, “a systematic
approach to managing cost throughout the life cycle of any enterprise, program, facility, project,
product, or service.” While many members of AACE International are specifically involved in the
process of developing capital improvement projects, intelligent decisions cannot be made regarding
any investment without consideration of all costs of the improvement. It is important not to
disregard those costs involved after the initial development of the project, the costs of operating,
maintaining, and eventually disposing of the improvement. That is especially true since often the
operation and maintenance costs of a facility far exceed the costs of its initial development.

It is important that the estimator not lose track of the fact that there are generally other costs
associated with any project or product other than those with which s/he is directly concerned. For
the construction contractor’s estimator, there are costs that the project’s owner will incur outside
those directly associated with construction. They might include land acquisition, legal fees, design,
and furnishings and/or equipment other than that included in the construction contract. For the
construction contractor, there are also the home office overhead expenses such as office rent and
utilities, home office salaries, income and real estate taxes, etc. that must be distributed as a share to
each of the projects the firm executes.

For the manufacturer, there is an analogy. For any product, a child’s toy, an article of clothing, or an
aspirin tablet, there are the direct costs of manufacture—the materials and other components that
go into fabrication of the article itself, but there are also the costs of marketing, packaging, and
distributing the product.

The subject of life cycle costs brings to bear the costs of any capital development over its lifetime—
not only the costs of its initial development, but also costs of operating, maintaining, upgrading and
otherwise prolonging its functional utility over the life of the improvement, and then the costs of
demolition, salvage, or otherwise disposing of the asset at the end of its functional life.

Learning Objectives

o Understanding the “broader” aspect of costs beyond those with which the estimator may be
immediately concerned.
o Be able to describe what is meant by the life cycle of any enterprise.
o Be able to apply life cycle cost principles to the selection of system alternatives.

Related Study Guide Sections

o 2.1.1 Cost Estimating Terminology


o 2.1.4 Estimating Algorithms
o 2.1.5 Codes of Accounts
o 2.1.6 Historical Cost Data
o 2.2.3 Quantification
o 2.2.4 Costing
o 2.2.5 Pricing
© 2013, AACE International (All Rights Reserved) 155
o 2.3.2 Budgeting

Terms to Know

o Life Cycle Costing (LCC)


o Project Costing

Key Points for Review

o There is often a full range of costs associated with any endeavor, many of which are outside
the scope with which the estimator is currently concerned. For instance, the estimator
concerned only with the cost of electrical systems needs to have an appreciation for the fact
that there are other systems such as mechanical and equipment contributing to the cost of a
product or project. The nature of the mechanical system can have a direct bearing on the
cost of the electrical system.
o It is helpful for the estimator to understand that all costs have a role in the ultimate cost of
the endeavor.
o The estimator needs to have an understanding of the time value of money in order to be able
to estimate life cycle costs.

Summary

o The cost estimator, in addition to his or her area of expertise, must have a working
knowledge of all costs associated with an endeavor.
o Initial costs of development of a project are often a fraction of the total cost of ownership
and operation over the lifetime of the improvement.

© 2013, AACE International (All Rights Reserved) 156


Sample Questions for Section 2.3.3 Project and Lifecycle Costing

1. An estimate update entails ________________________________________.

A. Revision of the estimate to reflect the most current information on the project.
B. Updating the estimate to reflect current anticipated schedule.
C. Correction of any errors found in the original estimate.
D. Conversion of the budget estimate into a control or baseline estimate.

2. Which of the following is not a capital cost insofar as life cycle costing is concerned?

A. Salvage value of an asset during the retirement and disposal phase.


B. Architectural and engineering design costs for the original asset.
C. Construction costs, including costs of materials, equipment, labor, and
miscellaneous.
D. Labor and material costs for maintenance and repairs.

3. The discount rate to be used in life cycle cost calculations is _________________________.

A. The asset owner’s minimum acceptable rate of return (MARR).


B. The best rate of return available to the owner of the asset.
C. The rate of discount the asset’s owner is credited for early payment of accounts due
the interest rate charged to commercial banks on loans they receive from the US
Federal Reserve Bank.

4. The difference between a life cycle cost analysis expressed in constant dollars and one
expressed in current dollars is _________________________________.

A. Irrelevant.
B. The difference between being able to convert an investment in dollars to a different
currency.
C. Independent of the nation’s gross domestic product (GDP).
D. The amount due to inflation.

5. A project cost estimate includes _________________________________.

A. The construction cost as well as other non-construction costs.


B. All costs up to the time construction of the project is started.
C. Only the costs related to the original development or construction of the project.
D. The construction cost and contingencies.

6. If the “real” discount rate is 3.0% and the “nominal” discount rate for the same period is
6.6%, what can be said about the difference?

A. It represents an annual inflation value of -3.6%.


B. The difference is an expression of general inflation.
C. The “nominal” rate represents the owner’s minimum acceptable rate of return
(MARR).
D. It represents overhead and profit available in the transaction.

© 2013, AACE International (All Rights Reserved) 157


Solutions to Sample Questions for Section 2.3.3 Project and Lifecycle Costing

1. A Revision of the estimate to reflect the most current information on the project.

2. D Labor and material costs for maintenance and repairs.

3. A The asset owner’s minimum acceptable rate of return (MARR).

4. D The amount due to inflation.

5. A The construction cost as well as other non-construction costs.

6. B The difference is an expression of general inflation.

© 2013, AACE International (All Rights Reserved) 158


Section 2.3.4 Project and Product Costs

Introduction

AACE International Recommended Practice 10S-90 defines project as, “a temporary endeavor with a
specific objective to be met within the prescribed time and monetary limitations and which has been
assigned for definition or execution.” A product is one of many outputs from the execution of a
project. Those outputs can be in tangible or intangible form, a product being one of the possible
tangible forms.

Project and product costs share many characteristics. A project cost reflects all costs attributable to
the project, including its share of home office overhead costs and any costs not directly attributable
to the project (indirect costs). Product costs entail all costs attributable to delivery of the product
including all direct costs plus overhead costs. Some product costs are fixed; in other words, costs
such as the cost of land and improvements which do not vary with the number of units produced.
Other product costs are variable, such as material and labor associated specifically with production of
the item, that vary with the number of units produced.

Learning Objectives

o Be able to distinguish between “construction costs” and “project costs.


o Be able to distinguish between “product direct costs” and “indirect costs.”
o Understand what is meant by the “cost-to-serve” channel.

Related Study Guide Sections

o 2.1.2 Cost Estimate Classifications


o 2.1.5 Codes of Accounts
o 2.1.6 Historical Cost Data
o 2.2.2 Estimating Methodologies
o 2.2.3 Quantification
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.10 Estimate Review and Validation

© 2013, AACE International (All Rights Reserved) 159


Terms to Know

o Activity-Based Costing Management (ABC/M)


o Procurement
o Standard Costs

Key Points for Review

o Arbitrary cost allocations are the output of contemporary cost accounting systems. The
allocations do not yield accurate records of actual total costs. One possible solution is
implementation of activity-based cost management (ABC/M).
o Product costs are the output of business processes.
o Project costs are the output of the direct work for which the project was developed, as well
as those support activities which result in indirect costs.

Summary

o A key element of product or project cost estimating is the ability to envision those costs
that don’t contribute directly to the cost of the product or project.
o Construction cost is a subset of project cost.

© 2013, AACE International (All Rights Reserved) 160


Sample Questions for Section 2.3.4 Project and Product Costs

1. What is the relationship between the product cost and the cost of quality (COQ)?

A. Product cost plus the increase in cost due to inflation is equal to the cost of quality
(COQ).
B. The difference is depreciation.
C. The cost of quality should be within six standard deviations (6-sigma) of the product
cost.
D. As the cost of quality (COQ) decreases, product cost can be reduced and/or the
manufacturer’s margin can be increased.

2. What is the relationship between project cost and construction cost?

A. There is no relationship between project cost and construction cost.


B. Construction cost only includes direct costs.
C. Construction cost is a subset of project cost; i.e., project cost includes construction
cost.
D. Construction cost is equal to project cost less indirect costs.

3. Cost drivers are an important concept to the understanding of ________________.

A. Earned value management (EVM).


B. Parametric estimating.
C. Estimate/schedule coordination.
D. Activity-based cost management (ABC/M).

4. In production of Product A, a manufacturer incurs a total of $4,500,000 for direct materials in the
course of a year. Total direct labor expended in manufacture of Product A for the same period
totaled $4,000,000. Total variable manufacturing overhead expenses allocated to Product A
total $2,200,000 and fixed manufacturing overhead expenses for Product A total $11,650,000.
Total output for the year of Product A was 100,000 units, of which 90,000 were sold. What is the
total product cost per unit of Product A?

A. $248.33/unit
B. $107.00/unit
C. $223.50/unit
D. $118.89/unit

5. Which of the following cost categories is included in project cost but not in construction cost?

A. Contingency.
B. Prime contractor’s markups.
C. Architectural and/or engineering fees.
D. Contractor’s allowances.

© 2013, AACE International (All Rights Reserved) 161


Solutions to Sample Questions for Section 2.3.4 Project and Product Costs

1. D As the cost of quality (COQ) decreases, product cost can be reduced and/or the
manufacturer’s margin can be increased.

2. C Construction cost is a subset of project cost; i.e., project cost includes construction
cost.

3. D activity-based cost management (ABC/M).

4. C $223.50/unit

Commentary: Product cost totals direct materials, labor, and manufacturing


overhead, as well as fixed manufacturing overhead attributed to the product divided
by the total number of units produced. ($4,500,000 + $4,000,000 + $2,200,000 +
$11,650,000)/100,000 units = $223.50/unit. A common error would be to mistake
the number of units sold for the number produced which would result in the
erroneous number of $248.33/unit. The other erroneous answers result from failing
to include the fixed manufacturing overhead costs.

5. C Architectural and/or engineering fees

© 2013, AACE International (All Rights Reserved) 162


Section 2.3.5 Integrated Project Delivery

Introduction

Integrated Project Delivery (IPD) is an approach to executing a project in which increased


cooperation and communication between all parties leads to timely involvement of those parties in
project activities and can lead to efficiencies in production, cost, and schedule in project execution.

Driving the move to innovative approaches to project development are statistics indicating that,
while other non-farm industries have increased productivity by nearly 200% since 1964 while that of
the construction industry has actually decreased. Couple that with project stakeholders’ need to
increase the value of their projects by decreasing the amount of time it takes and the cost to develop
their projects and add to that the quantum increases in the capabilities of software tools for project
development and the potential benefits of IPD are very attractive.

Learning Objectives

o Understand how a more collaborative approach to planning, designing, and completing a


project can yield more effective results for all parties.
o Be able to explain both the challenges and benefits associated with implementing IPD.
o Identify the specific challenges of and benefits possible in implementation of Integrated
Project Delivery (IPD).

Related Study Guide Sections

o 2.1.2 Cost Estimate Classifications


o 2.1.5 Codes of Accounts
o 2.1.6 Historical Cost Data
o 2.2.2 Estimating Methodologies
o 2.2.3 Quantification
o 2.2.4 Costing
o 2.2.5 Pricing
o 2.2.10 Estimate Review and Validation
o 2.2.13 Building Information Modeling (BIM)

© 2013, AACE International (All Rights Reserved) 163


Terms to Know

o Accounting
o Activity
o Activity Based Costing (ABC)
o Building Information Modeling (BIM)
o Collaboration
o Data Fields
o Integration
o Lean Construction
o Procurement
o Schedule
o Scheduling

Key Points for Review

o Technology offers tools to enhance the goals of IPD – software which facilitates team
collaboration and communication as well as improves team visualization of project details
such as computer-aided design/manufacturing (CAD/CAM), 3-D CAD, etc.
o Timely involvement in project activities by all appropriate parties is essential to gaining their
special expertise at a time when it can best be put to use by the project team.
o Contracting methods appropriate to IPD will reward each party in proportion to the risk that
it shares and the extent to which project objectives are matched by actual outcomes.
o Lean production (lean manufacturing, lean construction, etc.) is a term denoting techniques.

Summary

o Teamwork is an often-abused term. But truly effective team operation in which all project
stakeholders have the opportunity for input in their areas of expertise, share in
appropriately-proportional risk, and have the opportunity to share in a corresponding
portion of the reward is essential to effective application of IPD.
o Tools conducive to use in IPD are those that enhance team communication, collaboration,
and productivity.
o Timing is everything in IPD so that the parties with the knowledge of their specialties are
involved when decisions are being made concerning those areas.

© 2013, AACE International (All Rights Reserved) 164


Sample Questions for Section 2.3.5 Integrated Project Delivery

1. Which of the following best describes Integrated Project Delivery (IPD) as a concept?

A. A project strategy in which involvement is equal and not subject to discrimination on


the basis of race, color, religion, sex, or national origin.
B. Strategies in which a variety of contract styles is used.
C. A project strategy in which collaboration between all parties is essential.
D. A project strategy in which required materials and equipment are delivered to the
site in a just-in-time (JIT) manner.

2. Integrated Project Delivery (IPD) is characterized by:

A. Critical path scheduling and parametric estimating.


B. Fast-track design and construction.
C. Expedited procurement and delivery of all materials and equipment.
D. Early involvement in the project decision making process of parties with expertise in
specific areas of project development.

3. From an estimating standpoint, Integrated Project Delivery (IPD) requires


_________________________________________.

A. A schedule allowing for the increased time required by IPD thus affecting all
duration-sensitive items of cost.
B. A complete Basis of Estimate (BOE) to allow thorough communication with the
remainder of the project team.
C. An historical cost database which includes costs of similar items to those contained
in the project.
D. A definitive estimate.

4. Integrated Project Delivery (IPD) can best be characterized by ____________________.

A. Collaboration, communication, and technology.


B. Fast-track design and construction, building information modeling, critical path
scheduling.
C. A work breakdown structure integrated with the organization’s code of accounts.
D. A cost and resource-loaded schedule.

5. Which of the following is not usually a feature of Integrated Project Delivery (IPD)?

A. Traditional design, bid, build.


B. Design/build.
C. Construction manager at risk (CMAR).
D. Open book pricing.

© 2013, AACE International (All Rights Reserved) 165


Solutions to Sample Questions for Section 2.3.5 Integrated Project Delivery

1. C A project strategy in which collaboration between all parties is essential.

2. D Early involvement in the project decision making process of parties with expertise in
specific areas of project development.

3. B A complete Basis of Estimate (BOE) to allow thorough communication with the


remainder of the project team.

4. A Collaboration, communication, and technology.

5. A Traditional design, bid, build.

© 2013, AACE International (All Rights Reserved) 166


Appendices

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© 2013, AACE International (All Rights Reserved) 168
Appendix A:
Complex Problems
Sample Questions

Example: Scenario Questions #1

You are an estimator for Leaky Tub Moving and Storage, a commercial relocation contractor. You estimate that
it will take a packing/unpacking crew a total of 22 crew-hours to pack the contents of a home for a move. The
packing/unpacking crew consists of one foreman and three journeyman packers. Signatory to a collective
bargaining agreement with the United Group of Lackeys and Yokels (UGLY), you employ journeyman packers at
a base rate of $17.40/hour. Foremen earn journeyman’s wages plus $2.10/hour. Fringe benefits and payroll
taxes and insurance amount to 45% of the base rate for journeymen and foremen.

Your company has an estimating standard for the cost of shipping supplies (boxes, sealing tape, and
miscellaneous supplies) of $75/crew hour for the packing/unpacking crew.

Leaky Tub transports its packing/unpacking crew from the office to the site of work in a crew van and charges
the project $20/crew hour for the total duration of packing, loading, unloading, and unpacking for the van, fuel,
insurance, and maintenance and repairs.

Loading is estimated at four hours and is performed by a packing/unpacking crew with the substitution of a
moving van driver for a foreman. The driver is paid a base rate of $27.50/hour and fringes, payroll taxes, and
insurance for the driver amount to 28% of the base rate of pay. The estimate must include the cost of the
moving van during the loading and unloading operations and is charged at a rate of $75/hour.

The actual moving of the household is expected to take a total of 3.5 days based on an estimated distance of
1,750 miles and an assumption of 500 miles/day. The driver is prohibited by regulation to be behind the wheel
more than eight hours in any 24-hour period. The driver is paid an allowance for meals and lodging of $100/
day for any day or fraction thereof while behind the wheel. Required permits are estimated to add a total of
$475 to the moving cost.

Unloading is estimated at four hours and unpacking is estimated to take 75% of the amount of time loading is
estimated for. The same crews are used for unloading as for loading, and for unpacking as for packing.

Leaky Tub will add 4.75% of its total costs for overhead and profit.

1. What is the fully-burdened hourly labor rate for a packer?

A. $25.23/hour.
B. $17.40/hour.
C. $26.43/hour.
D. $18.23/hour.

2. Would state unemployment insurance normally already be included in this estimate or does it need to
be added?

A. No, it would not be included and would need to be added.


B. It depends upon the state.
C. It would already be included in the estimate as a part of labor burden.
D. Insufficient information is given in order to be able to answer.

© 2013, AACE International (All Rights Reserved) 169


3. What AACE estimate classification would this estimate fall into?

A. Class 2.
B. Class 1.
C. Class 3.
D. Definitive.

4. Which category of resource cost (labor, material, equipment, and miscellaneous expense) is typically
the most volatile (most susceptible to under/over estimating of its quantity)?

A. Labor.
B. Material.
C. Deterministic Method.
D. Miscellaneous expense.

5. Which category of resource cost in this estimate bears the most risk as a percentage of total estimated
cost?

A. Labor.
B. Material.
C. Deterministic Method.
D. Miscellaneous expense.

6. If the driver were awarded a premium of $0.55/hour for the moving part of this move only, what
would be the total impact on the contractor’s bid?

A. +$15.40
B. +$19.71
C. +$20.65
D. No impact

7. What is the total bid for this move?

A. $13,057.87
B. $11,475.31
C. $12,934.56
D. $13,898.10

© 2013, AACE International (All Rights Reserved) 170


Solutions to Sample Questions

1. A $25.23/hour. (S&K 5th Ed., p11.4)

Commentary: The fully burdened rate for packers is the base rate of $17.40 + 45% for fringes,
payroll taxes, and insurance or $17.40 x 1.45 = $25.23/hour.

2. C It would already be included in the estimate as a part of labor burden.

3. B Class 1.

Commentary: A Class 1 estimate is a bid/tender estimate.

4. A Labor.

5. A Labor.

6. C +$20.65

Commentary: The moving part of this move consists of 3.5 days x 8 hours/day x ($0.55/hour x
1.28) x 1.0475 = $20.65.

7. D $13,898.10

Commentary: Burdened packing/unpacking crew cost = ((3 x $17.40) + ($17.40 + $2.10)) x 1.45 =
$103.97/hour. Burdened loading/unloading crew cost = ((3 x $17.40 x 1.45) + ($27.50 x 1.28) =
$110.89/hour. Burdened driver cost = $27.50 x 1.28 = $35.20/hour.

Labor:
Packing – 22 hrs x $103.97 = $2,287.23
Unpacking – 16.5 hrs x $103.97 = $1,715.42
Loading – 4 hrs x $110.89 = $443.56
Unloading – 4 hrs x $110.89 = $443.56
Moving – 28 hrs x $35.20 = $985.60

Total labor $5,875.37

Equipment:
Moving van – 36 hrs x $75 = $2,700.00
Crew van – 46.5 hrs x $20 = $930.00

Total equipment $3,630.00

Expenses:
Meal allowance – 4 days x $100 = $400.00
Permit $475.00
Supplies – 38.5 hrs x $75 = $2,887.50

Total expenses $3,762.50

Total cost $13,267.87

Overhead and profit @ 4.75% $630.22

Total bid $13,898.10

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© 2013, AACE International (All Rights Reserved) 172
Appendix B:
Recommended References and Resources
Primary Reference Materials
Skills and Knowledge of Cost Engineering, 5th Edition. (See especially Chapter 9, Estimating, Chapter
10, Process Product Manufacturing, and Chapter 20, Discrete Product Manufacturing.) Amos, S. (Ed.).
(2004).

Total Cost Management Framework: A Process for Applying the Skills and Knowledge of Cost
Engineering.Hollman, J. (Ed.). (2006).

AACE International Recommended Practices:


Note: AACE International Recommended Practices evolve over time, please refer to www.aacei.org
for the latest revision.

AACE Recommended Practice (RP) 10S-90, Cost Engineering Terminology. (2010).

AACE Recommended Practice (RP) 11R-88, Required Skills and Knowledge of Cost Engineering.
(2006).

AACE Recommended Practice (RP) 13S-90, Recommended Method for Determining Building Area.
(1990).

AACE Recommended Practice (RP) 17R-97, Cost Estimate Classification System. (1997).

AACE Recommended Practice (RP) 18R-97, Cost Estimate Classification System—As Applied in
Engineering, Procurement, and Construction for the Process Industries. (2005).

AACE Recommended Practice (RP) 19R-97, Estimate Preparation Costs—As Applied for the Process
Industries. (1998).

AACE Recommended Practice (RP) 25R-03, Estimating Lost Labor Productivity in Construction
Claims. (2004).

AACE Recommended Practice (RP) 28R-03, Developing Location Factors by Factoring—As Applied in
Architecture and Engineering and in Engineering, Procurement, and Construction. (2006).

AACE Recommended Practice (RP) 11R-88, Required Skills and Knowledge of Cost Engineering.
(2006).

AACE Recommended Practice (RP) 31R-03, Reviewing, Validating and Documenting the Estimate.
(2009).

AACE Recommended Practice (RP) 34R-05, Basis of Estimate. (2007).


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AACE Recommended Practice (RP) 40R-08, Contingency Estimating: General Principles. (2008).

AACE Recommended Practice (RP) 41R-08, Risk Analysis and Contingency Determination Using
Range Estimating. (2008).

AACE Recommended Practice (RP) 42R-08, Risk Analysis and Contingency Estimating Using
Parametric Estimating. (2009).

AACE Recommended Practice (RP) 46R-11, Required Skills and Knowledge of Project Cost
Estimating. (2013).

CCC/CCE Certification Study Guide, 3rd Edition, AACE International, 2009.

Secondary Reference Materials


Professional Practice Guides (PPGs):

Professional Practice Guide #6: Construction Cost Estimating, 2nd Edition, Douglas D. Gransberg PE
CCE and Carla Lopez del Puerto CCC. AACE International. (2006).

Professional Practice Guide #8: Contingency, 3rdEdition,Kul B. Uppal PE. AACE International. (2010).

Professional Practice Guide #13: Parametric and Conceptual Estimating, 2nd Edition, Douglas W.
Leo CCC, Larry R. Dysert CCC, and Bruce Elliott CCC. AACE International. (2004).

Cost Estimating, 2nd Edition, Rodney D. Stewart, Wiley-InterScience.

Cost Estimator’s Reference Handbook, 2nd Edition, R. Stewart, R. Wyskida, R. Johannes, John Wiley &
Sons.

The Engineer’s Cost Handbook, R. Westney, Marcel Decker.

Project and Cost Engineer’s Handbook, 4th Edition, McGraw-Hill.

Parametric Estimating Handbook, Department of Defense.2nd Ed. (1999).

Construction Cost Estimating for Project Control. Neil, J., Prentice-Hall. (1981). (Book is out of print,
but a limited number are available at Amazon.com).

Construction Cost Analysis and Estimating. Ostwald, P., Prentice-Hall. (2001).

Estimating Construction Costs. Peurifoy, R. and Oberlender, G., McGraw-Hill. (2001).

Control and Management of Capital Projects, 2nd Edition, AACE International.

Jelen’s Cost and Optimization Engineering, 3rd Edition, McGraw-Hill (Out of print, used copies
available at Amazon.com).

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Appendix C:
Estimating Professional Terminology and Definitions
As described in this study guide in Section 2.1.1 Cost Estimating Terminology, the terminology of any
discipline defines the essential communication vehicle through the use of a common vocabulary.
Cost estimating is no exception and as is often the case, many terms are used primarily in the
discipline of cost estimating or in project controls.

While Recommended Practice 10S-90, Cost Engineering Terminology includes the essential
terminology of project controls, many of those terms are not directly related to the practice of
estimating. Likewise, cost estimating uses some terms that are pretty much the domain of the
estimator and are not commonly used by other disciplines in the project environment.

AACE International has developed a glossary of cost estimating terminology which includes the
vocabulary used by most cost estimators. The definitions included in that glossary are those upon
which the examination for the CEP is based and can be found on the website at
http://www.aacei.org/educ/cert/CEP/CEP_Examinee_Format-of-Definitions.pdf.

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Appendix D:
AACE International Canons of Ethics
AACE members and those certified by AACE International agree to be bound by the terms of the
AACE International Canons of Ethics, a criterion that says all individuals will practice their profession
in a manner that meets fundamental ethical standards. The Canons of Ethics can be found at the
association website at www.aacei.org.

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Appendix E:
Certified Estimating Professional Sample Application
The application for the Certified Estimating Professional (CEP) certification is available on the AACE
International website at http://www.aacei.org/educ/cert/CEP/CEP_Brochure.pdf.

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Appendix F:
CEP Exam Part IV Example
Part IV of the CEP Exam requires the candidate to demonstrate writing skills and general knowledge
around an estimating competency. The candidate is required to write a memorandum demonstrating
their ability to communicate effectively their knowledge on a selected estimating subject. Below you
will find a sample question and an example of a memorandum that might be prepared for Part IV of
the CEP examination.

Question: You have been assigned as the lead estimator on a project to replace a fire-training tower
used for educational purposes at a local community college. As part of the estimate, you are
responsible for documenting risks and calculating costs associated with the removal of the existing
fire tower. A site visit is necessary to accomplish this task. Prepare a memorandum to the project
manager regarding your request for access to the site.

MEMO
To: Jane Gebhardt, Project Manager
From: John Sweeney, Estimate Team Leader
Date: August 10, 2007
Subject: Site Access Required for Fire Tower Replacement Project

The estimate for the replacement of Fire Tower #1 is moving forward as planned and is scheduled for
completion on September 5. As you know, the scope of the project will include the demolition and
disposal of the existing fire tower. In order to understand the cost risks associated with this part of
the project, our estimating team requires access to the site.

The purpose of our visit is to ensure that all potential items of cost have been documented in the
scope, verify that the proper quantities and associated costs have been included in the estimate, and
assess costs risks attributable to the demolition scope. In addition, our team will attempt to expose
any scope that may have been overlooked. Here is what we plan to do during our assessment:

1. Evaluate existing fire tower for potential environmental hazards.


2. Identify any utilities that must be disconnected.
3. Confirm interferences that are included in the scope and identify interferences that are
not included in the scope.
4. Survey the surrounding area to identify potential damage that may occur during
demolition.
5. Verify accessibility of heavy equipment required for demolition and refuse removal.

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Please note that the estimate review is scheduled for three weeks from today (September 1). A
comprehensive risk analysis must be prepared to help determine the appropriate contingency costs
prior to review of the completed estimate. Therefore, it is imperative that this site assessment occur
no later than next Tuesday (August 18).
As always, thank you for your help in meeting the objective of a safe and cost effective solution. You
can reach me at anytime during working hours at (987) 654-3210 to arrange this activity.

John Sweeney, Estimate Team Leader for Fire Tower Replacement Project

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