Cost Estimating

Part4: Cost Estimating (Closed book)

Important Chapters

1.CHP 9
2. APPENDIX F

Cost Estimating: Predictive Process

Used to find the Cost of an investment Opportunity.

Output of Estimating Process: Cost Estimate

Use of the Cost Estimate:

To establish Project Budget

To Determine Economic Feasibility of a project
To Compare two project alternatives
To provide basis for project cost control

Estimate Accuracy

Estimating is an iterative process that is applied in each

phase of the project life cycle
As the project scope becomes more defined, modified and
refined as a result the estimate becomes more accurate.
From owners perspective, if the cost estimate is not
accurate, the financial return may not be realized.
Estimating is critical for optimal use of capital
Incase of a contractor the profit margin of a contractor is
dependent on accuracy of his estimate especially when
lump-sum bidding is done. Cost plus project contractor will
face less economic risk, but the reputation damage can be
severe.

Cost Engineering

The Cost Estimate establishes Project budget and

Monitors the budget during project execution

Cost estimate is a relationship between estimating,

Scheduling and cost control and is usually identified
as cost Engineering

Estimate Classification

AACE identifies five classes of estimates. A Class 5

estimate associated with the lowest level of project
definition and a Class 1 estimate is associated with the
highest level of project definition.
The characteristics used to distinguish estimates from
others are:
1. Degree of project definition
2. End usage of the estimates
3. Estimating methodology
4. Estimating accuracy, and
5. Effort required to produce the estimate

Generic Cost Estimate Classification Matrix

Pg No. 9.2 ( Table 9.1)

Comparison Between ACCE & ANSI Std.

Pg. No. F.7 ( Fig 3a)

Estimating Methodologies
Two broad Categories
Conceptual
Deterministic

Conceptual

The independent variables used are generally different

than direct measure of the units.

They usually involve simple or complex modeling

based on inferred or statistical relationship between
cost and other designed indirect variables

Conceptual

Conceptual estimating methods require significant

effort in data gathering and method development
before estimate preparation ever begins

There is a significant effort in historical cost analysis to

develop accurate factors and estimating algorithms to
support conceptual estimate.

Preparing a conceptual estimate itself takes relatively

less time, some times less than an hour.

Deterministic

The independent variables used in estimating are

more or less a direct measure of the item being
estimated, such as tons of steel required multiplied by
cost of steel per ton.

Deterministic estimating require high degree of

precision in determinations of Quantities, pricing and
completeness of scope definition.

Any particular estimate may involve combination of

deterministic and conceptual methods.

Deterministic

Deterministic estimate requires a large effort during

actual preparation of the estimate.

The evaluation and quantification of the project can

take a substantial amount of time, sometimes weeks
or even months for extremely large projects.

Type of Estimating method Depends on

The end usage of the estimate
The amount of time and money available
Estimating tool and data
The level of project definition

Conceptual Estimating Methodologies

It is typically used for Class 5 and 4 (and sometimes Class

3 estimates). They are often referred to as order-ofmagnitude.

This is relatively a quick method of estimating. This can be

used for:
Establishing an early screening estimate or a proposed
project
Evaluating the general feasibility of a project
Screening project alternatives
Evaluating the cost impacts of design alternatives
Establishing preliminary budget

Conceptual estimate can be very reliable, especially in

estimating repeat projects

Conceptual Estimating Techniques

End-product units (Parking, Hospital Bed)

Physical dimensions (length, area, volume, etc)
Capacity factors
Various ratio or factor methods (Equipment cost x
Factor (based on type of plant))
Parametric modeling (Capacity factors and
Factors methods are example of parametric
modeling)

 End-Product Units Method

Used when the estimator has enough historical data

available from similar projects
This allows the estimate to be prepared relatively quickly

Examples of End product unit are

The construction cost of electricity generating plant and the plants
capacity in kilowatts
The construction cost of a hotel and the number of guest rooms
The construction cost of a hospital and the number of patient beds
The construction cost of a parking place and number of parking
places available parking spaces

End-Product Units Method

Example:

Consider a investor who wants to build 1500 room luxury hotel in a

resort area. Investor wants to know approximate cost for the same. A
similar luxury hotel have has be recently completed at a nearby resort
and the following information is available.
Number of rooms 1000
Total construction cost $67,500,000

Construction cost per room is $67,500,000/1000

= $67,500
Therefore the approximate cost of Proposed hotel
= $67,500 x 1500
= $101,250,000
This type of Estimate can be used for feasibility Study
Method ignores any Economy of Scale that will reduce cost because of
larger Hotel

Physical Dimension Method

Similar to End of Product Units Method

This method uses physical Dimensions like
Length, Area, Volume etc

Examples

Building estimate can be feet/meters or Cubic Volume

of building
Pipe Lines, Roadways and Railroads are based on
linear units (Km, Miles )

Physical Dimension Method

Example:
Estimate to construct new ware house of a 3600m 2.
Recently completed ware house 2900m2 completed at
a cost of $623,500, thus costing $215/m2 .
The new ware house will cost approximately
= 3600 x $215
= $774,000

Method ignores any Economy of Scale that will

reduce cost because of larger ware house

Capacity Factor Method

Cost of a new facility is derived from the cost of a

similar facility of a known capacity.
Capacity factor is based on Non- linear relationship
between capacity and cost
$B = $A( CapB / CapA )e
$B is the cost of the facility being estimated
$A is the known cost of a similar facility
CapB is the capacity of the facility being estimated
CapA is the capacity of the similar facility
e is the exponent or proration factor
Exponent e typically lies between 0.5 & 0.85

Capacity Factor Method

This method of using capacity factors is sometimes referred to as

the Scale of operations method. Or the sixth tenth factors due
to common reliance on an exponent value of 0.6

Example: A recently completed 200MW power project cost was

$150 Million. What will be the approximate cost of similar power
plant if
1)The capacity is doubled
2) The Capacity is tripled
Take e as 0.6
1. $B = $A ( CapB/CapA)^e
= 150 ( 2)^0.6
= 150 x ( 1.5157) = $227M
% increase in Cost Estimate

= ( 227-150)/150
= 51.33%

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Capacity Factor Method

2. $B = $A ( CapB/CapA)^e
$B = 150(3)^0.6
= $290M
% increase in Cost Estimate

= ( 290-150)/150
= 93.33%

Doubling the capacity increases the costs by

Approximately 50%
Tripling the capacity increases the cost
approximately by 100%
Using previous methods increasing the capacity
would have increased the cost by same
percentage

Capacity Factor Method

Adjustment for Scope, location & Time

Example:

Estimate the cost of new Coal Power plant of 500Mw

capacity at location xyz. A similar power plant of 300MW
was constructed 2 years ago with a final cost of $250M
at location pqr.
Construction in xyz will cost 1.25 times more than the
construction in pqr. Escalation during the previous two
years was 8%.
Project in pqr required Railroad to be built at a cost of
10M which is not required at xyz. Also additional
pollution control facility will be required in xyz at a cost of
20M.
Take e=0.75

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Capacity Factor Method

Adjustment for Scope, location & Time
Example:
Solution

300Mw Plant Cost

Scope Reduction
( Railroad Not Reqd.)
Adjusted Scope
Increased Construction
Cost @ 1.25
Escalate by 1.08 times

$250M

$A

$10M
$240M
$300M
$324 CapA

Capacity of B

500Mw CapB

$B=$A(CapB/CapA)^0.75

$346M

Add Pollution Requirement

Final Estimate

$20M
$366M

Estimate the cost of new Coal

Power plant of 500Mw capacity at
location xyz. A similar power
plant of 300MW was constructed
2 years ago with a final cost of
$250M at location pqr.
Construction in xyz will cost 1.25
times more than the construction
in pqr. Escalation during the
previous two years was 8%.
Project in pqr required Railroad to
be built at a cost of 10M which is
not required at xyz. Also
additional pollution control facility
will be required in xyz at a cost of
20M.
Take e=0.75

Ratio or Factor Method

Ratio or factored methods are used in situations where the total cost
of an item or facility can be reliably estimated from the cost of a
primary component.

Commonly used in estimating the cost of plant where cost of a

specialized equipment takes up a significant portion of the total
project cost

Also known as equipment factor.

Estimation is based on the principle that a ratio or a factor exists

between the cost of an main equipment and costs for the associated
no equipment items (like piping, foundation, electrical setup etc)

Factored estimate can typically be generated when project definition

is approximately 1 to 15%.

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Ratio or Factor Method

Total Plant cost = Total equipment cost x Equipment factor
Lang proposed three separate factors based on the type of process
plant
The following is an example of Lang Factor estimate for fluid process
plant
Lang Factors (Pg. No. 9.8)

Type of Plant

Factor

Solid Process Plant

Solid-Fluid Process Plant
Fluid Process Plant

3.10
3.63
4.74

Total estimated equipment cost =$1.5M

Total Plant cost
=$1.5M x 4.74
=$7.11M

Parametric Method

A parametric estimate comprises cost estimating

relationships that provide logical relationships between
independent variables, such as design parameters and
dependent variable cost

Capacity Factor and Equipment factor are simple example

of parametric estimate.

Parametric estimate involves several independent variables

or cost drivers

Cost Estimating relationship ( CERs) :

The relationship between cost and independent variables is
reliant on collection and analysis of previous project Cost Data

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Parametric Method

1.
2.
3.
4.
5.
6.
7.

Developing Parametric Model generally involves

Cost model scope determination
Data collection
Data normalization
Data analysis
Data application
Testing
documentation

Deterministic Estimating Methodologies

It is prepared to support final budget authorization,

contractor bid tenders, cost control during project
execution, and change orders. (Class 3 to Class 1)

Deterministic estimating methodology require a cost and

engineering hours to prepare the estimate.

Detailed engineering drawing should be available.

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Steps in preparing deterministic

estimate
1.
2.
3.
4.
5.
6.
7.
8.
9.

Prepare project estimate basis and schedule

Prepare direct field cost estimate
Prepare indirect field cost estimate
Prepare home office cost estimate
Prepare sales tax / duty estimates
Prepare escalation estimates
Prepare project fee estimates (for contractors)
Prepare cost risk analysis / contingency determination
Review / validate estimate

Project estimate basis and schedule

The project work break down structure should be reviewed

with the project team, and agreement should be reached
on the estimate format, structure, and deliverables.

Estimating team should identify the estimating resources,

techniques, and data that will be used during estimate
preparation

Any estimate exclusions that are known at this time should

be reviewed and documented

The estimate schedule should be prepared giving

information about when major sections of estimate should
be complete and when review schedule will be held

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Prepare Direct Field Cost estimate

DFC: The costs of all equipments, material, and

direct-hire or subcontract labor directly associated with
the construction of the project.

Require Engineering drawings and Technical

Information
Estimating involves quantifying all materials and labor
involved
Material pricing is applied to the material quantities
DFC estimate is then summarized and formatted

Prepare Indirect Field Cost estimate

IFC: The costs of services and materials required in

support of the field construction effort which do not
contribute directly to the permanent facility.

Labor work hours are typically basis for many of the

indirect cost

IFC estimate is then summarized and formatted

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Prepare Home Office Cost estimate

HOC: Executive and administrative salaries, Home

office rent and expenses Advertising, Company
insurance Recruiting costs, Utilities, telephone, fax
and computers

Require detailed work hour estimate from Project

administration and engineering disciplines of their
respective activities to calculate estimate.

Remaining costs

If sales tax is applicable to all of the facility, they are

required to be estimated using local sales tax rates
If materials are to be imported, duties will be
applicable
Escalation cost needs estimated based on the project
schedule and needs to be included in the final
estimate.
Cost associated with identified risk should be also
included in the estimate.

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TAKE-OFF

Estimating take-off is the process of quantifying the

material and labor quantities associated with the
project.

The term take-off is also used to refer to the quantities

themselves (often known as a bill of quantities).

Once the take off is complete, and the total quantities

of like items are summarized, then each items can be
priced.

The result of take-off is the direct field cost for the

project.

Costing vs. Pricing

Costing: is the process of applying unit costs to the

individuals quantities of items associated with the
estimate.
Example: Wage rates, material costs
This information normally comes from sources such as
in-house or commercial database, vendor quotes, the
procurement department, estimating experience etc.
Pricing: Adjusting the costs that have been applied for
specific project conditions, and commercial terms.
Pricing is usually done to allow for overhead and profit, to
improve cash flow, etc

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Estimate Allowances

Allowances are often included in an estimate to

account for the predictable but un-definable costs
associated with project scope.

Level of project information available may not be

sufficient to enable certain cost to be estimated
definitively

In some cases it is not cost effective to quantify and

cost every small item included with the project.

Allowances are often included in the estimate as a

percentage of some detailed cost component.

Estimate Accuracy

Accuracy is normally represented as +/- percentage

range around the point estimate, with a stated
confidence level.
Estimate accuracy tends to improve as the level of
project definition improves
Refer Table 9.1
(Page 9.2)

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Estimate Accuracy

Any specific estimate may not exhibit the pattern

shown in previous figure

It is possible for class five estimate may have very

narrow estimate range, particularly for repeat
projects

It is also possible to have wide accuracy range for

class 3 estimate, especially for first-of-kind
projects.

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