Construction Cost Estimation Fundamentals

Cost Estimating Components

• Cost estimating is a crucial aspect of construction projects.
• Construction cost is just one part of the overall project cost.
• Land acquisition, planning, feasibility studies, and entitlement processes also contribute significantly to the total cost.
• Construction is often the final major capital investment before returns.
• Cost estimation accuracy is vital for financial risk assessment.
• Cost estimating professionals verify feasibility and accuracy before construction.

Elements of Construction Cost

• Labor: Includes all man-hours, from supervision to subcontractor work.
• Overhead & Profit: Includes costs like office rent, insurance, employee wages & costs, plus a profit margin.
• Materials: This involves manufactured components, equipment, naturally occurring materials (like stone, timber), and backfilling.

Factors Affecting Construction Cost

• Labor Force Cost of Living: Directly tied to the demand and supply of labor, creating a "natural floor" for wages.
• Local Labor Demand & Supply: Construction labor is often tied to the local labor force in a given area.
• Productivity: Matching skilled labor with the work; this creates a project schedule and allows for efficient day to day operations.
• Local Materials: Using locally sourced materials is often more cost effective.
• Global Markets: The value of the dollar, the commodity market, and worldwide raw material markets are all significant cost factors.

Essential Elements in Construction Cost Estimation

• Quantity takeoff: This is the process of meticulously identifying and cataloging the required materials.
• Labor hours: Estimating the specific labor hours required to complete each stage of the project, considering labor productivity differences across stages.
• Labor rates: This includes basic wages and all related taxes (FICA, FUI), plus overtime possibilities if necessary and possible.
• Price of materials: Accurately estimating the cost of materials. This must take into account fluctuations in market demand and supply, shipping costs, and exchange rates if necessary.
• Cost of equipment: This factor must also account for rentals and/or equipment capacity.
• Subcontractor quotes: Estimating costs for subcontracted portions of the project, including labor, materials, and equipment.

Indirect Costs in Construction

• Indirect costs are equally important to consider.
• These can include: insurance; safety equipment; vehicles and equipment maintenance; cell phone, computer and software costs; payroll burden (taxes, insurance); and general office overhead.

Importance of Construction Cost Estimation

• The initial cost estimate rarely exactly matches the final cost.
• Accurate cost estimation is vital for profitability decisions, financial planning, procuring financing, and managing alterations/changes to the project.

Capital Costs for Construction Projects

• The capital cost encompasses initial facility expenses.
  • Land acquisition, holding, and improvement
  • Feasibility and planning studies
  • Architectural and engineering design
  • Construction (materials, equipment, labor)
  • Supervision/inspection during construction
• Construction financing
• Insurance and taxes during construction
• Owner's general office overhead related to the project.
• Equipment and furnishings not directly related to the construction phases
• Inspection and testing of the final project

Operation and Maintenance Costs

• These occur after the initial construction phase, in subsequent years.
  • Land rent (if applicable)
  • Operating staff
  • Labor and materials for maintenance/repairs
  • Periodic renovations
  • Insurance and taxes
  • Financing costs
  • Utilities
  • Owner's other expenses

Project Resource Demands

• Construction projects require various resources.
• Different project types require different amounts of resources (manpower, materials, etc.)

Cost Estimation Approaches

• Production function: relates output volume to inputs of labor, materials, and equipment
• Empirical cost inference: relates cost to characteristics/attributes of the system using statistical techniques.
• Unit Costs for Bill of Quantities: assigns unit costs to each component/task, then sums these costs.
• Allocation of joint costs: allocates shared costs to specific tasks/characteristics of operation.

Explore the vital components of cost estimating in construction projects. Understand how factors like labor, materials, and overhead impact overall project costs and accuracy. This quiz covers essential elements necessary for financial risk assessment in construction.