Cost Estimate

• Approximation of the cost of a

program, project, or operation.

• The product of the cost estimating

process.

• Has a single total value and may

have identifiable component
values.
• Often needed to support evaluations of
project feasibility or funding
requirements in support of planning.
• Often used to establish a budget as the
cost constraint for a project or
operation.
• A problem with a cost overrun can be
avoided with a credible, reliable, and
accurate cost estimate.
 Cost Overrun
• Also known as cost increase or budget
overrun
• An unexpected cost incurred in excess of
a budgeted amount to an
underestimation of the actual cost during
budgeting
• Should be distinguished from cost
escalation, which is used to express an
anticipated growth in a budgeted cost
due to factors such as inflation
 Accuracy of Estimate
• Since a cost estimate is the
approximation of the cost of a project
or operation, then estimate accuracy is
a measure of how closely the estimate
is able to predict the actual
expenditures for the project or
operation.
 Accuracy of Estimate
• This can only be known after the
project is completed.
• The accuracy of an estimate is
measured by how well the estimated
cost compares to the actual total
installed cost.
The accuracy of an early estimate
depends on four determinants:
 who was involved in preparing
the estimate
 how the estimate was prepared
what was known about the project
 other factors considered while
preparing the estimate.
 Contingency
• A contingency may be included in an
estimate to provide for unknown
costs which are indicated as likely to
occur by experience, but are not
identifiable.
 Contingency
• When using an estimate which has no
contingency to set a budget or to set
aside funding, a contingency is often
added to improve the probability that
the budget or funding will be adequate
to complete the project.

• Being unable to complete a project risks

public ridicule.
 Cost Contingency
• When estimating the cost for a
project, product or other item or
investment, there is always
uncertainty as to the precise content
of all items in the estimate, how
work will be preformed, what work
conditions will be like when the
project is executed and so on.
• These uncertainties are risks to the
project.
• Some refer to these risks as “known-
unknowns” because the estimator is
aware of them, and based on the
past experience, can even estimate
their probable costs.
• The estimated costs of the known-
unknowns is referred to by cost
estimators as cost contingency.
In project management, project cost
management is a major functional
division.
Cost estimating is one of three activities
performed in project cost management.
In cost engineering, cost estimation is a
basic activity.
The engineering practice devoted to the
project cost management, involving such as
activities as estimating, cost control, cost
forecasting, investment appraisal, and risk
analysis.
In construction contracting, a cost
estimate is usually prepared to submit a
bid or tender to compete for a contract
award.

 Estimates for the cost of facility

construction are a major part of the
cost estimate domain
 A construction general contractor
or subcontractor must normally
prepare definitive cost estimates to
prepare bids in the construction
bidding process to compete for
award of the contract.
• In many countries, specifically defined
by legislation, which requires that such
projects should be carried out by
registered engineers and / or
registered engineering companies.
• That is, companies with license to
carry out such work as design and
construction of buildings, power
plants, industrial facilities, installation
and erection of electrical grid
networks, transportation
infrastructure and the like.
• The scope of the project is specified
in a contract between the owner,
the engineer and construction
parties.

• As a rule, an engineering project is

broken down into design and
construction phases.
• The outputs of the design process
are drawings, calculations, and all
other design documentation
necessary to carry out the next
phase.
• The next phase would normally be
sending the project plans to a
developer who will then help
construct the plans (building).
 Cost Estimating Methods and Best
Practices
• Estimating methods may vary by type
and class of estimate.
• The method used for most definitive
estimates is to fully define and
understand the scope, take off or
quantify the scope, and apply costing
to the scope, which can then be
summed to a total cost.
• Proper documentation and
review are also important.

• Early estimates may employ various

means of cost modeling.

• Pricing transforms the cost estimate

into what the firm wishes to charge
for the scope.
 The basic characteristics of effective
estimating include:

• Clear identification of task

• Broad participation in preparing

estimates
• Availability of valid data
• Standardized structure of estimate
• Provision for program uncertainties

• Recognition of inflation

• Recognition of excluded
costs
• Independent review of estimates

• Revision of estimates for significant

program changes
Application of best practices helps ensure a
high – quality estimate. “Certain best
practices should be followed if accurate and
credible cost estimates to be developed.
These best practices represent an overall
process of established, repeatable methods
that result in high-quality cost estimates
that are comprehensive and accurate and
that can be easily and clearly traced,
replicated, and updated.”
Tools that may be part of costs
estimation are cost indexes. These
factors promote time adjustment of
capital costs, following changes in
technology, availability of materials and
labor, and inflation. Due to the inferent
unavailability of up-to-date cost
literature, several inflation or cost
indexes are available.
 Types of Estimator
There are different types of estimators,
whose title may be preceded by a
modifier:
 Building estimator

 Electrical estimator

 Chief estimator
 Other professional titles may also
prepare estimates or contribute to
estimates;
 Quality surveyors
 Cost engineers
 Etc.
 The Professionals
Licensed professionals known as cost
estimators prepare cost estimates.
An estimator cannot be trained
entirely in a classroom.
The theory and science of estimating is
important, but it takes experience with
Construction, as well as experience actually
quantifying and costing work, to complete
the training of an estimator.
 A person possessing the “art of
estimating” has a good feel for the effort
required to produce work, good construction
experience, and knowledge of the theory and
science of estimating.

The less information available

about a project, the more experience is
required to do a cost estimate.
 An estimator would typically have an
engineering or architectural background
and be qualified by experience.

A knowledge of building technology is

essential to be able to break down a
building into components in a structured
way and then price the different
components with applicable unit rates to
derive the total cost.
 Large construction firms may also
have in-house cost estimators.

Many planners chose to have two

cost estimates as a check against each
other, but if a single cost estimate is to
be utilized, then the use of an
independent cost estimator is highly
recommended.
 Quantity Surveyor (QS)

• A professional working within the

construction industry concerned
with building costs.
 Cost Engineers

• They budget, plan, and monitor

investment projects.

• They seek the optimum balance

between cost, quality and time
requirements.
• An engineer whose judgment and
experience are utilized in the application
of scientific principles and techniques to
problems of estimation; cost control;
business planning and management
science; profitability analysis; project
management; and planning and schedule.
 Types of Cost Estimate
Cost estimates fall into two groups:
Conceptual estimating or
parametric estimating is
the process of
conceptual establishing a project’s
estimates cost, often before any
graphical representation
of a facility has been
developed.
 The detailed construction estimate
is the product of a process
whereby the cost of a proposed
construction project is predicted.
detailed The estimate is prepared by
estimates breaking down the items of
work in an orderly and logical
basis
Determining the cost of each item
from experience
Summarizing the total