Cost Estimating Components Lecture

COST ESTIMATING COMPONENTS ELEMENTS  What makes up construction cost? Construction cost is only part of the total cost for developing properties. Land acquisition, planning, feasibility studies and getting through the entitlement process make up a sizable portion of the total...

COST ESTIMATING COMPONENTS ELEMENTS  What makes up construction cost? Construction cost is only part of the total cost for developing properties. Land acquisition, planning, feasibility studies and getting through the entitlement process make up a sizable portion of the total development cost. But construction is often the critical last major capital investment before the property owners and managers begin reaping the asset's utility or returns. Whether the developer hit or missed their construction cost target will ultimately impact the real estate pro-forma. Before construction starts, cost estimating professionals are called upon to verify that their targets are feasible and reflect reality.  The Cost of Construction is on the minds of contractors, real estate developers and construction lenders alike. Many careers in construction have construction cost a major focus on their jobs. For example, project managers hire or have a cost estimating professional on their team to measure and help manage the expected cost of the construction project.  For many owners and developers, the accuracy of the cost estimation reports is vital for assessing a project’s financial risk and how well their investment will perform in the long run.  Accurately forecasting future costs of construction is not easy, however by learning the principles and forces that make up construction cost, anyone with basic research skills can get a rough grasp on construction cost trends and plan accordingly. Factors of Construction Cost L A BO R includes all the man-hours that are 1 worked on the construction project, from supervision by project owner to subcontractor apprentice OV E R H E A D & P R O F I T Companies have overhead that they need to cover: office rent, 3 M AT E R I A L S contractor’s insurance and employee include manufactured products like wages & costs. When they bid on a 2 components, fittings, items of project, they also include a profit equipment and systems; naturally margin, so their business can grow. occurring materials such as stone, timber and thatch; and backfilling for excavations in connection with building work  Labor Force Cost Of Living is closely tied to the demand-supply of labor since it acts as a natural “floor” to the laborer’s wages 3 Local Labor Demand & Supply most construction today depends on the labor force located in the area of the building project 2 Productivity includes matching the right skilled workforce with the work, creating an effective project schedule, and overseeing the day-to-day Fa c t o r s o f L a b o r 1 craftsmanship Cost  Labor Force Cost Of Living The project’s architect works diligently on realizing the owner’s vision that complies with the local jurisdiction’s building code. 3 Local Materials it’s much more cost effective to have heavy raw materials like concrete aggregate come from the local quarry. 2 Global Markets The value of the dollar, the commodity F a c t o r s A ff e c t i n g market and the worldwide market for raw construction materials are major factors Material Cost In 1affecting the cost. Construction in order to effectively forecast material cost, both local and global markets for different items have to be looked at. Another impactor is the local building code requirements, which can greatly impact the materials specified for construction. 7 Specifi c Essential Elements in Construction Cost Estimation 01 Quantity takeoff The cost estimator will first accurately identify and develop the required materials for the project. This step is crucial, as without an accurate takeoff, there will be inaccuracies in the project.  A cost estimator will estimate labor rates with a basic wage and estimate for each given work. This estimation will take into account various taxes like FICA and FUI, along with other taxes required by the company. The cost estimator will also take into consideration the possibility of overtime work and the increase in cost that will be associated with those extra hours. 02 04 Labor rates Labor hours Price of materials Next, the cost estimator will use 03 Correctly estimating the cost of materials can be more complicated his experience to estimate the then it initially appears. This is because labor hours required to complete the cost of a given material fluctuates the project. The varying levels of greatly depending on the market labor productivity based upon the demand and supply, the required complexity of each stage of the quantity, the cost of transportation to the building site and exchange rates, in project will be taken into case the materials have to be shipped considerations. to another country.  Cost estimation will also take into account many factors in regards to the equipment. This will include the capacity of the equipment and the cost differential that occurs if the equipment has to be rented. The cost of equipment 06 Subcontractor quotes 05 At times, portions of a project will be completed by subcontractors. The cost estimator should consider costs around the labor, materials and equipment required by the contractor.  07 Indirect costs A cost estimation of indirect costs is important in the overall estimation of the project. Temporary on-site utilities, land acquisition, mobilization, design fees and office support are a few important items that must be considered in order to arrive at an accurate cost estimate. It is no doubt that construction cost estimation is the cornerstone of every construction project. The construction of any project begins with an accurate estimation of costs. Getting an accurate cost estimation from a professional construction estimator is critical to developing and maintaining a realistic budget of project costs.  As you would know, it is virtually impossible that the initial estimate will be the same as the final price tag of the project. However, a comprehensive estimate will enable your developers to make important choices. With a cost Why is estimate in hand, developers can determine the construction profitability and feasibility of a prospective project. The procurement of financing will also depend on the cost cost estimation. During the development of the project, your estimation developers will be able to make important decisions about alterations in the project design/materials that can affect important? the project negatively or positively. Most importantly, an accurate cost estimation can keep all the involved parties focused on delivering the project on time and within the budget. A construction cost estimation will hold your team accountable for increased costs or overrun.  COST E S T I M AT I O N The capital cost for a construction project includes the expenses related to the initial establishment of the facility: Land acquisition, Planning and Architectural and Construction, Field supervision of including assembly, feasibility studies engineering design including materials, construction holding and equipment and labor improvement The capital cost for a construction project includes the expenses related to the initial establishment of the facility: Construction financing Insurance and taxes Owner's general office Equipment and Inspection and testing during construction overhead furnishings not included in construction The operation and maintenance cost in subsequent years over the project life cycle includes the following expenses: Land rent, if Periodic Operating staff Labor and material applicable renovations for maintenance and repairs The magnitude of each of these cost components depends on the nature, size and location of the project as well as the management organization, among many considerations. The owner is interested in achieving the lowest possible overall project cost that is consistent with its investment objectives. The operation and maintenance cost in subsequent years over the project life cycle includes the following expenses: Insurance and Financing costs Utilities Owner's other taxes expenses It is important for design professionals and construction managers to realize that while the construction cost may be the single largest component of the capital cost, other cost components are not insignificant.  It is important for design professionals and construction managers to realize that while the construction cost may be the single largest component of the capital cost, other cost components are not insignificant. For example, land acquisition costs are a major expenditure for building construction in high-density urban areas, and construction financing costs can reach the same order of magnitude as the construction cost in large projects such as the construction of nuclear power plants.  From the owner's perspective, it is equally important to estimate the corresponding operation and maintenance cost of each alternative for a proposed facility in order to analyze the life cycle costs. The large expenditures needed for facility maintenance, especially for publicly owned infrastructure, are reminders of the neglect in the past to consider fully the implications of operation and maintenance cost in the design stage.  In most construction budgets, there is an allowance for contingencies or unexpected costs occurring during construction. This contingency amount may be included within each cost item or be included in a single category of construction contingency. The amount of contingency is based on historical experience and the expected difficulty of a particular construction project.  For example, one construction firm makes estimates of the expected cost in five different areas: Contingent amounts not spent for construction can be released near the end of construction to the owner or to add additional project elements. Design development 01 changes 02 Schedule adjustments General administration 03 changes (such as wage rates) Diff ering site conditions 04 for those expected Third party requirements 05 imposed during construction, such as new permits. Example 5-1: Energy project resource demands The resources demands for three types of major energy projects investigated during the energy crisis in the 1970's are shown in Table 5-1. These projects are: (1) an oil shale project with a capacity of 50,000 barrels of oil product per day; (2) a coal gasification project that makes gas with a heating value of 320 billions of British thermal units per day, or equivalent to about 50,000 barrels of oil product per day; and (3) a tar sand project with a capacity of 150,000 barrels of oil product per day. For each project, the cost in billions of dollars, the engineering manpower requirement for basic design in thousands of hours, the engineering manpower requirement for detailed engineering in millions of hours, the skilled labor requirement for construction in millions of hours and the material requirement in billions of dollars are shown in Table 5-1. To build several projects of such an order of magnitude concurrently could drive up the costs and strain the availability of all resources required to complete the projects. Consequently, cost estimation often represents an exercise in professional judgment instead of merely compiling a bill of quantities and collecting cost data to reach a total estimate  Production function 1 It relates the amount or volume of output to the various inputs of labor, material and equipment. Empirical cost inference 2 requires statistical techniques which relate the cost of constructing or operating a facility to a few important characteristics or attributes of the system Unit costs for bill of quantities A p p ro a c h e s 3 A unit cost is assigned to each of the facility components or tasks as represented by the bill t o C o s t of quantities. E s t i m a t i o n Allocation of joint costs Cost estimating is one of the most important steps in project management. A cost estimate establishes the base line of the project 4 each expenditure item can be assigned to particular characteristics of the operation cost at different stages of development of the project. A cost estimate at a given stage of project development represents a prediction provided by the cost engineer or estimator on the basis of available data.  Production function In construction, the production function may be expressed by the relationship between the volume of construction and a factor of production such as labor or capital. For example, the amount of output Q may be derived as a function of various input factors x 1, x2,..., xn by means of mathematical and/or statistical methods. Thus, for a specified level of output, we may attempt to find a set of values for the input factors so as to minimize the production cost. The relationship between the size of a building project (expressed in square feet) to the input labor (expressed in labor hours per square foot) is an example of a production function for construction.  Empirical cost inference Empirical estimation of cost functions requires statistical techniques which relate the cost of constructing or operating a facility to a few important characteristics or attributes of the system. The role of statistical inference is to estimate the best parameter values or constants in an assumed cost function. Usually, this is accomplished by means of regression analysis techniques.  Unit costs for bill of quantities A unit cost is assigned to each of the facility components or tasks as represented by the bill of quantities. The total cost is the summation of the products of the quantities multiplied by the corresponding unit costs. The unit cost method is straightforward in principle but quite laborious in application. The initial step is to break down or disaggregate a process into a number of tasks. Collectively, these tasks must be completed for the construction of a facility. Once these tasks are defined and quantities representing these tasks are assessed, a unit cost is assigned to each and then the total cost is determined by summing the costs incurred in each task. The level of detail in decomposing into tasks will vary considerably from one estimate to another.  Allocation of joint costs Allocations of cost from existing accounts may be used to develop a cost function of an operation. The basic idea in this method is that each expenditure item can be assigned to particular characteristics of the operation. Ideally, the allocation of joint costs should be causally related to the category of basic costs in an allocation process. In many instances, however, a causal relationship between the allocation factor and the cost item cannot be identified or may not exist. For example, in construction projects, the accounts for basic costs may be classified according to (1) labor, (2) material, (3) construction equipment, (4) construction supervision, and (5) general office overhead. These basic costs may then be allocated proportionally to various tasks which are subdivisions of a project. T H A N K YO U ! ANY QUESTIONS?