.

Cost Estimation
5.1 Costs Associated with Constructed Facilities
The costs of a constructed facility to the owner include both the initial capital cost
and the subsequent operation and maintenance costs. Each of these major cost
categories consists of a number of cost components.

The capital cost for a construction project includes the expenses related to the inital
establishment of the facility:

 Land acquisition, including assembly, holding and improvement

 Planning and feasibility studies
 Architectural and engineering design
 Construction, including materials, equipment and labor
 Field supervision of construction
 Construction financing
 Insurance and taxes during construction
 Owner's general office overhead
 Equipment and furnishings not included in construction
 Inspection and testing

The operation and maintenance cost in subsequent years over the project life cycle
includes the following expenses:

 Land rent, if applicable

 Operating staff
 Labor and material for maintenance and repairs
 Periodic renovations
 Insurance and taxes
 Financing costs
 Utilities
 Owner's other expenses

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.

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 occuring 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:

 Design development changes,

 Schedule adjustments,
 General administration changes (such as wage rates),
 Differing site conditions for those expected, and
 Third party requirements imposed during construction, such as new permits.

Contingent amounts not spent for construction can be released near the end of
construction to the owner or to add additional project elements.

In this chapter, we shall focus on the estimation of construction cost, with only
occasional reference to other cost components. In Chapter 6, we shall deal with the
economic evaluation of a constructed facility on the basis of both the capital cost
and the operation and maintenance cost in the life cycle of the facility. It is at this
stage that tradeoffs between operating and capital costs can be analyzed.

Example 5-1: Energy project resource demands [1]

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 mechanically.

TABLE 5-1 Resource Requirements of Some Major Energy Projects

Oil shale Coal gasification Tar Sands

(50,000 (320 billions (150,000
barrels/day) BTU/day) barrels/day)

Cost
2.5 4 8 to 10
   ($ billion)
Basic design
   (Thousands of 80 200 100
hours)
Detailed
engineering
3 to 4 4 to 5 6 to 8
   (Millions of
hours)
Construction
   (Millions of 20 30 40
hours)
Materials
1 2 2.5
   ($ billion)

Source: Exxon Research and Engineering Company, Florham Park, NJ

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5.2 Approaches to Cost Estimation

Cost estimating is one of the most important steps in project management. A cost
estimate establishes the base line of the project 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. According to the American Association of Cost Engineers, cost
engineering is defined as that area of engineering practice where engineering
judgment and experience are utilized in the application of scientific principles and
techniques to the problem of cost estimation, cost control and profitability.

Virtually all cost estimation is performed according to one or some combination of

the following basic approaches:
Production function. In microeconomics, the relationship between the output of a
process and the necessary resources is referred to as the 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. A production function relates the amount or volume of output to the
various inputs of labor, material and equipment. 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. Several such production
functions are shown in Figure 3-3 of Chapter 3.

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.

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5.3 Types of Construction Cost Estimates
Construction cost constitutes only a fraction, though a substantial fraction, of the
total project cost. However, it is the part of the cost under the control of the
construction project manager. The required levels of accuracy of construction cost
estimates vary at different stages of project development, ranging from ball park
figures in the early stage to fairly reliable figures for budget control prior to
construction. Since design decisions made at the beginning stage of a project life
cycle are more tentative than those made at a later stage, the cost estimates made at
the earlier stage are expected to be less accurate. Generally, the accuracy of a cost
estimate will reflect the information available at the time of estimation.

Construction cost estimates may be viewed from different perspectives because of

different institutional requirements. In spite of the many types of cost estimates
used at different stages of a project, cost estimates can best be classified into three
major categories according to their functions. A construction cost estimate serves
one of the three basic functions: design, bid and control. For establishing the
financing of a project, either a design estimate or a bid estimate is used.

1. Design Estimates. For the owner or its designated design professionals, the

types of cost estimates encountered run parallel with the planning and
design as follows:
o Screening estimates (or order of magnitude estimates)
o Preliminary estimates (or conceptual estimates)
o Detailed estimates (or definitive estimates)
o Engineer's estimates based on plans and specifications

For each of these different estimates, the amount of design information

available typically increases.

2. Bid Estimates. For the contractor, a bid estimate submitted to the owner

either for competitive bidding or negotiation consists of direct construction
cost including field supervision, plus a markup to cover general overhead
and profits. The direct cost of construction for bid estimates is usually
derived from a combination of the following approaches.
o Subcontractor quotations
o Quantity takeoffs
o Construction procedures.
3. 3. Control Estimates. For monitoring the project during construction, a
control estimate is derived from available information to establish:
o Budget estimate for financing
o Budgeted cost after contracting but prior to construction
o Estimated cost to completion during the progress of construction.
Design Estimates

In the planning and design stages of a project, various design estimates reflect the
progress of the design. At the very early stage, the screening estimate or order of
magnitudeestimate is usually made before the facility is designed, and must
therefore rely on the cost data of similar facilities built in the past. A preliminary
estimate or conceptual estimateis based on the conceptual design of the facility at
the state when the basic technologies for the design are known. The detailed
estimate or definitive estimate is made when the scope of work is clearly defined
and the detailed design is in progress so that the essential features of the facility are
identifiable. The engineer's estimate is based on the completed plans and
specifications when they are ready for the owner to solicit bids from construction
contractors. In preparing these estimates, the design professional will include
expected amounts for contractors' overhead and profits.

The costs associated with a facility may be decomposed into a hierarchy of levels
that are appropriate for the purpose of cost estimation. The level of detail in
decomposing the facility into tasks depends on the type of cost estimate to be
prepared. For conceptual estimates, for example, the level of detail in defining
tasks is quite coarse; for detailed estimates, the level of detail can be quite fine.

As an example, consider the cost estimates for a proposed bridge across a river. A
screening estimate is made for each of the potential alternatives, such as a tied arch
bridge or a cantilever truss bridge. As the bridge type is selected, e.g. the
technology is chosen to be a tied arch bridge instead of some new bridge form, a
preliminary estimate is made on the basis of the layout of the selected bridge form
on the basis of the preliminary or conceptual design. When the detailed design has
progressed to a point when the essential details are known, a detailed estimate is
made on the basis of the well defined scope of the project. When the detailed plans
and specifications are completed, an engineer's estimate can be made on the basis
of items and quantities of work.

Bid Estimates

The contractor's bid estimates often reflect the desire of the contractor to secure the
job as well as the estimating tools at its disposal. Some contractors have well
established cost estimating procedures while others do not. Since only the lowest
bidder will be the winner of the contract in most bidding contests, any effort
devoted to cost estimating is a loss to the contractor who is not a successful bidder.
Consequently, the contractor may put in the least amount of possible effort for
making a cost estimate if it believes that its chance of success is not high.

If a general contractor intends to use subcontractors in the construction of a

facility, it may solicit price quotations for various tasks to be subcontracted to
specialty subcontractors. Thus, the general subcontractor will shift the burden of
cost estimating to subcontractors. If all or part of the construction is to be
undertaken by the general contractor, a bid estimate may be prepared on the basis
of the quantity takeoffs from the plans provided by the owner or on the basis of the
construction procedures devised by the contractor for implementing the project.
For example, the cost of a footing of a certain type and size may be found in
commercial publications on cost data which can be used to facilitate cost estimates
from quantity takeoffs. However, the contractor may want to assess the actual cost
of construction by considering the actual construction procedures to be used and
the associated costs if the project is deemed to be different from typical designs.
Hence, items such as labor, material and equipment needed to perform various
tasks may be used as parameters for the cost estimates.

Control Estimates

Both the owner and the contractor must adopt some base line for cost control
during the construction. For the owner, a budget estimate must be adopted early
enough for planning long term financing of the facility. Consequently, the detailed
estimate is often used as the budget estimate since it is sufficient definitive to
reflect the project scope and is available long before the engineer's estimate. As the
work progresses, the budgeted cost must be revised periodically to reflect the
estimated cost to completion. A revised estimated cost is necessary either because
of change orders initiated by the owner or due to unexpected cost overruns or
savings.

For the contractor, the bid estimate is usually regarded as the budget estimate,
which will be used for control purposes as well as for planning construction
financing. The budgeted cost should also be updated periodically to reflect the
estimated cost to completion as well as to insure adequate cash flows for the
completion of the project.

Example 5-2: Screening estimate of a grouting seal beneath a landfill [2]

One of the methods of isolating a landfill from groundwater is to create a bowl-

shaped bottom seal beneath the site as shown in Figure 5-0. The seal is constructed
by pumping or pressure-injecting grout under the existing landfill. Holes are bored
at regular intervals throughout the landfill for this purpose and the grout tubes are
extended from the surface to the bottom of the landfill. A layer of soil at a
minimum of 5 ft. thick is left between the grouted material and the landfill contents
to allow for irregularities in the bottom of the landfill. The grout liner can be
between 4 and 6 feet thick. A typical material would be Portland cement grout
pumped under pressure through tubes to fill voids in the soil. This grout would
then harden into a permanent, impermeable liner.
 Figure 5-1: Grout Bottom Seal Liner at a Landfill

The work items in this project include (1) drilling exploratory bore holes at 50 ft
intervals for grout tubes, and (2) pumping grout into the voids of a soil layer
between 4 and 6 ft thick. The quantities for these two items are estimated on the
basis of the landfill area:

8 acres = (8)(43,560 ft2/acre) = 348,480 ft2

(As an approximation, use 360,000 ft2 to account for the bowl shape)

The number of bore holes in a 50 ft by 50 ft grid pattern covering 360,000 ft 2 is

given by:

The average depth of the bore holes is estimated to be 20 ft. Hence, the total
amount of drilling is (144)(20) = 2,880 ft.

The volume of the soil layer for grouting is estimated to be:

for a 4 ft layer, volume = (4 ft)(360,000 ft 2) = 1,440,000 ft3 
for a 6 ft layer, volume = (6 ft)(360,000 ft 2) = 2,160,000 ft3
It is estimated from soil tests that the voids in the soil layer are between 20% and
30% of the total volume. Thus, for a 4 ft soil layer:
grouting in 20% voids = (20%)(1,440,000) = 288,000 ft 3 
grouting in 30 % voids = (30%)(1,440,000) = 432,000 ft 3
and for a 6 ft soil layer:
grouting in 20% voids = (20%)(2,160,000) = 432,000 ft 3 
grouting in 30% voids = (30%)(2,160,000) = 648,000 ft 3
The unit cost for drilling exploratory bore holes is estimated to be between $3 and
$10 per foot (in 1978 dollars) including all expenses. Thus, the total cost of boring
will be between (2,880)(3) = $ 8,640 and (2,880)(10) = $28,800. The unit cost of
Portland cement grout pumped into place is between $4 and $10 per cubic foot
including overhead and profit. In addition to the variation in the unit cost, the total
cost of the bottom seal will depend upon the thickness of the soil layer grouted and
the proportion of voids in the soil. That is:
for a 4 ft layer with 20% voids, grouting cost = $1,152,000 to $2,880,000 
for a 4 ft layer with 30% voids, grouting cost = $1,728,000 to $4,320,000 
for a 6 ft layer with 20% voids, grouting cost = $1,728,000 to $4,320,000 
for a 6 ft layer with 30% voids, grouting cost = $2,592,000 to $6,480,000
The total cost of drilling bore holes is so small in comparison with the cost of
grouting that the former can be omitted in the screening estimate. Furthermore, the
range of unit cost varies greatly with soil characteristics, and the engineer must
exercise judgment in narrowing the range of the total cost. Alternatively, additional
soil tests can be used to better estimate the unit cost of pumping grout and the
proportion of voids in the soil. Suppose that, in addition to ignoring the cost of
bore holes, an average value of a 5 ft soil layer with 25% voids is used together
with a unit cost of $ 7 per cubic foot of Portland cement grouting. In this case, the
total project cost is estimated to be:
(5 ft)(360,000 ft2)(25%)($7/ft3) = $3,150,000
An important point to note is that this screening estimate is based to a large degree
on engineering judgment of the soil characteristics, and the range of the actual cost
may vary from $ 1,152,000 to $ 6,480,000 even though the probabilities of having
actual costs at the extremes are not very high.
Example 5-3: Example of engineer's estimate and contractors' bids[3]
The engineer's estimate for a project involving 14 miles of Interstate 70 roadway in
Utah was $20,950,859. Bids were submitted on March 10, 1987, for completing
the project within 320 working days. The three low bidders were:
 
1. Ball, Ball & Brosame, Inc., Danville
$14,129,798
CA
2. National Projects, Inc., Phoenix, AR $15,381,789
3. Kiewit Western Co., Murray, Utah $18,146,714
It was astounding that the winning bid was 32% below the engineer's estimate.
Even the third lowest bidder was 13% below the engineer's estimate for this
project. The disparity in pricing can be attributed either to the very conservative
estimate of the engineer in the Utah Department of Transportation or to area
contractors who are hungrier than usual to win jobs.

The unit prices for different items of work submitted for this project by (1) Ball,
Ball & Brosame, Inc. and (2) National Projects, Inc. are shown in Table 5-2. The
similarity of their unit prices for some items and the disparity in others submitted
by the two contractors can be noted.

TABLE 5-2: Unit Prices in Two Contractors' Bids for Roadway Construction

Unit price
Items Unit Quantity
1 2
Mobilization ls 1 115,000 569,554
Removal, berm lf 8,020 1.00 1.50
Finish subgrade sy 1,207,500 0.50 0.30
Surface ditches lf 525 2.00 1.00
Excavation structures cy 7,000 3.00 5.00
Base course, untreated, 3/4'' ton 362,200 4.50 5.00
   Lean concrete, 4'' thick sy 820,310 3.10 3.00
PCC, pavement, 10'' thick sy 76,010 10.90 12.00
Concrete, ci AA (AE) ls 1 200,000 190,000
   Small structure cy 50 500 475
   Barrier, precast lf 7,920 15.00 16.00
   Flatwork, 4'' thick sy 7,410 10.00 8.00
   10'' thick sy 4,241 20.00 27.00
   Slope protection sy 2,104 25.00 30.00
Metal, end section, 15'' ea 39 100 125
   18'' ea 3 150 200
   Post, right-of-way, modification lf 4,700 3.00 2.50
Salvage and relay pipe lf 1,680 5.00 12.00
Loose riprap cy 32 40.00 30.00
Braced posts ea 54 100 110
Delineators, type I lb 1,330 12.00 12.00
   type II ea 140 15.00 12.00
Constructive signs fixed sf 52,600 0.10 0.40
   Barricades, type III lf 29,500 0.20 0.20
Warning lights day 6,300 0.10 0.50
Pavement marking, epoxy material  
 TABLE 5-2: Unit Prices in Two Contractors' Bids for Roadway Construction
Unit price
Items Unit Quantity
   Black gal 475 90.00 100
   Yellow gal 740 90.00 80.00
   White gal 985 90.00 70.00
   Plowable, one-way white ea 342 50.00 20.00
Topsoil, contractor furnished cy 260 10.00 6.00
Seedling, method A acr 103 150 200
Excelsior blanket sy 500 2.00 2.00
Corrugated, metal pipe, 18'' lf 580 20.00 18.00
Polyethylene pipe, 12'' lf 2,250 15.00 13.00
Catch basin grate and frame ea 35 350 280
Equal opportunity training hr 18,000 0.80 0.80
Granular backfill borrow cy 274 10.00 16.00
Drill caisson, 2'x6'' lf 722 100 80.00
Flagging hr 20,000 8.25 12.50
Prestressed concrete member  
   type IV, 141'x4'' ea 7 12,000 16.00
   132'x4'' ea 6 11,000 14.00
Reinforced steel lb 6,300 0.60 0.50
   Epoxy coated lb 122,241 0.55 0.50
Structural steel ls 1 5,000 1,600
Sign, covering sf 16 10.00 4.00
   type C-2 wood post sf 98 15.00 17.00
   24'' ea 3 100 400
   30'' ea 2 100 160
   48'' ea 11 200 300
   Auxiliary sf 61 15.00 12.00
   Steel post, 48''x60'' ea 11 500 700
   type 3, wood post sf 669 15.00 19.00
   24'' ea 23 100 125
   30'' ea 1 100 150
   36'' ea 12 150 180
   42''x60'' ea 8 150 220
   48'' ea 7 200 270
   Auxiliary sf 135 15.00 13.00
   Steel post sf 1,610 40.00 35.00
   12''x36'' ea 28 100 150
   Foundation, concrete ea 60 300 650
Barricade, 48''x42'' ea 40 100 100
   Wood post, road closed lf 100 30.00 36.00
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5.4 Effects of Scale on Construction Cost

Screening cost estimates are often based on a single variable representing the
capacity or some physical measure of the design such as floor area in buildings,
length of highways, volume of storage bins and production volumes of processing
plants. Costs do not always vary linearly with respect to different facility sizes.
Typically, scale economies or diseconomies exist. If the average cost per unit of
capacity is declining, then scale economies exist. Conversely, scale diseconomies
exist if average costs increase with greater size. Empirical data are sought to
establish the economies of scale for various types of facility, if they exist, in order
to take advantage of lower costs per unit of capacity.

Let x be a variable representing the facility capacity, and y be the resulting

construction cost. Then, a linear cost relationship can be expressed in the form:

(5.1)

where a and b are positive constants to be determined on the basis of historical

data.  Note that in Equation (5.1), a fixed cost of y = a at x = 0 is implied as shown
in Figure 5-2. In general, this relationship is applicable only in a certain range of
the variable x, such as between x = c and x = d. If the values of y corresponding to
x = c and x = d are known, then the cost of a facility corresponding to any x within
the specified range may be obtained by linear interpolation. For example, the
construction cost of a school building can be estimated on the basis of a linear
relationship between cost and floor area if the unit cost per square foot of floor area
is known for school buildings within certain limits of size.
 Figure 5-2: Linear Cost Relationship with Economies of Scale

A nonlinear cost relationship between the facility capacity x and construction cost
y can often be represented in the form: 
 

(5.2)

where a and b are positive constants to be determined on the basis of historical

data. For 0 < b < 1, Equation (5.2) represents the case of increasing returns to
scale, and for b ;gt 1, the relationship becomes the case of decreasing returns to
scale, as shown in Figure 5-3. Taking the logarithm of both sides this equation, a
linear relationship can be obtained as follows:
Figure 5-3: Nonlinear Cost Relationship with increasing or Decreasing Economies
of Scale

(5.3)

Although no fixed cost is implied in Eq.(5.2), the equation is usually applicable

only for a certain range of x. The same limitation applies to Eq.(5.3). A nonlinear
cost relationship often used in estimating the cost of a new industrial processing
plant from the known cost of an existing facility of a different size is known as
the exponential rule. Let yn be the known cost of an existing facility with capacity
Qn, and y be the estimated cost of the new facility which has a capacity Q. Then,
from the empirical data, it can be assumed that:

(5.4)

where m usually varies from 0.5 to 0.9, depending on a specific type of facility. A
value of m = 0.6 is often used for chemical processing plants. The exponential rule
can be reduced to a linear relationship if the logarithm of Equation (5.4) is used:

(5.5)

or
(5.6)

The exponential rule can be applied to estimate the total cost of a complete facility
or the cost of some particular component of a facility.

Example 5-4: Determination of m for the exponential rule

Figure 5-4: Log-Log Scale Graph of Exponential Rule Example

The empirical cost data from a number of sewage treatment plants are plotted on a
log-log scale for ln(Q/Qn) and ln(y/yn) and a linear relationship between these
logarithmic ratios is shown in Figure 5-4. For (Q/Q n) = 1 or ln(Q/Qn) = 0, ln(y/yn) =
0; and for Q/Qn = 2 or ln(Q/Qn) = 0.301, ln(y/yn) = 0.1765. Since m is the slope of
the line in the figure, it can be determined from the geometric relation as follows:

For ln(y/yn) = 0.1765, y/yn = 1.5, while the corresponding value of Q/Q n is 2. In
words, for m = 0.585, the cost of a plant increases only 1.5 times when the capacity
is doubled.
Example 5-5: Cost exponents for water and wastewater treatment plants[4]
The magnitude of the cost exponent m in the exponential rule provides a simple
measure of the economy of scale associated with building extra capacity for future
growth and system reliability for the present in the design of treatment plants.
When m is small, there is considerable incentive to provide extra capacity since
scale economies exist as illustrated in Figure 5-3. When m is close to 1, the cost is
directly proportional to the design capacity. The value of m tends to increase as the
number of duplicate units in a system increases. The values of m for several types
of treatment plants with different plant components derived from statistical
correlation of actual construction costs are shown in Table 5-3.
TABLE 5-3  Estimated Values of Cost Exponents for Water Treatment Plants

Treatment plant  Exponent  Capacity range 

type m (millions of gallons per day)

1. Water treatment 0.67 1-100

2. Waste treatment
    Primary with digestion (small) 0.55 0.1-10
    Primary with digestion (large) 0.75 0.7-100
    Trickling filter 0.60 0.1-20
    Activated sludge 0.77 0.1-100
    Stabilization ponds 0.57 0.1-100

Source: Data are collected from various sources by P.M. Berthouex. See the references in his
article for the primary sources.

Example 5-6: Some Historical Cost Data for the Exponential Rule

The exponential rule as represented by Equation (5.4) can be expressed in a

different form as:

where

If m and K are known for a given type of facility, then the cost y for a proposed
new facility of specified capacity Q can be readily computed.
TABLE 5-4  Cost Factors of Processing Units for Treatment Plants

Processing  Unit of  K Value  m 

unit capacity (1968 $) value

1. Liquid processing
   Oil separation mgd 58,000 0.84
   Hydroclone degritter mgd 3,820 0.35
   Primary sedimentation ft2 399 0.60
   Furial clarifier ft2 700 0.57
   Sludge aeration basin mil. gal. 170,000 0.50
   Tickling filter ft2 21,000 0.71
   Aerated lagoon basin mil. gal. 46,000 0.67
   Equalization mil. gal. 72,000 0.52
   Neutralization mgd 60,000 0.70
2. Sludge handling
   Digestion ft3 67,500 0.59
   Vacuum filter ft2 9,360 0.84
lb dry 
   Centrifuge 318 0.81
solids/hr

Source: Data are collected from various sources by P.M. Berthouex. See the references in his
article for the primary sources.

The estimated values of K and m for various water and sewage treatment plant
components are shown in Table 5-4. The K values are based on 1968 dollars. The
range of data from which the K and m values are derived in the primary sources
should be observed in order to use them in making cost estimates.

As an example, take K = $399 and m = 0.60 for a primary sedimentation

component in Table 5-4. For a proposed new plant with the primary sedimentation
process having a capacity of 15,000 sq. ft., the estimated cost (in 1968 dollars) is:

y = ($399)(15,000)0.60 = $128,000.
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5.5 Unit Cost Method of Estimation

If the design technology for a facility has been specified, the project can be
decomposed into elements at various levels of detail for the purpose of cost
estimation. The unit cost for each element in the bill of quantities must be assessed
in order to compute the total construction cost. This concept is applicable to both
design estimates and bid estimates, although different elements may be selected in
the decomposition.

For design estimates, the unit cost method is commonly used when the project is
decomposed into elements at various levels of a hierarchy as follows:

1. Preliminary Estimates. The project is decomposed into major structural

systems or production equipment items, e.g. the entire floor of a building or
a cooling system for a processing plant.
2. Detailed Estimates. The project is decomposed into components of various
major systems, i.e., a single floor panel for a building or a heat exchanger
for a cooling system.
3. Engineer's Estimates. The project is decomposed into detailed items of
various components as warranted by the available cost data. Examples of
detailed items are slabs and beams in a floor panel, or the piping and
connections for a heat exchanger.
For bid estimates, the unit cost method can also be applied even though the
contractor may choose to decompose the project into different levels in a hierarchy
as follows:

1. Subcontractor Quotations. The decomposition of a project into

subcontractor items for quotation involves a minimum amount of work for
the general contractor. However, the accuracy of the resulting estimate
depends on the reliability of the subcontractors since the general contractor
selects one among several contractor quotations submitted for each item of
subcontracted work.
2. Quantity Takeoffs. The decomposition of a project into items of quantities
that are measured (or taken off) from the engineer's plan will result in a
procedure similar to that adopted for a detailed estimate or an engineer's
estimate by the design professional. The levels of detail may vary according
to the desire of the general contractor and the availability of cost data.
3. Construction Procedures. If the construction procedure of a proposed
project is used as the basis of a cost estimate, the project may be
decomposed into items such as labor, material and equipment needed to
perform various tasks in the projects.

Simple Unit Cost Formula

Suppose that a project is decomposed into n elements for cost estimation. Let Q i be
the quantity of the ith element and ui be the corresponding unit cost. Then, the total
cost of the project is given by:

(5.7)

where n is the number of units. Based on characteristics of the construction site,

the technology employed, or the management of the construction process, the
estimated unit cost, ui for each element may be adjusted.

Factored Estimate Formula

A special application of the unit cost method is the "factored estimate" commonly
used in process industries. Usually, an industrial process requires several major
equipment components such as furnaces, towers drums and pump in a chemical
processing plant, plus ancillary items such as piping, valves and electrical
elements. The total cost of a project is dominated by the costs of purchasing and
installing the major equipment components and their ancillary items. Let C i be the
purchase cost of a major equipment component i and f i be a factor accounting for
the cost of ancillary items needed for the installation of this equipment component
i. Then, the total cost of a project is estimated by:
(5.8)

where n is the number of major equipment components included in the project. The
factored method is essentially based on the principle of computing the cost of
ancillary items such as piping and valves as a fraction or a multiple of the costs of
the major equipment items. The value of C i may be obtained by applying the
exponential rule so the use of Equation (5.8) may involve a combination of cost
estimation methods.

Formula Based on Labor, Material and Equipment

Consider the simple case for which costs of labor, material and equipment are
assigned to all tasks. Suppose that a project is decomposed into n tasks. Let Q i be
the quantity of work for task i, Mi be the unit material cost of task i, E i be the unit
equipment rate for task i, Li be the units of labor required per unit of Q i, and Wi be
the wage rate associated with Li. In this case, the total cost y is:

(5.9)

Note that WiLi yields the labor cost per unit of Qi, or the labor unit cost of task i.
Consequently, the units for all terms in Equation (5.9) are consistent.

Example 5-7: Decomposition of a building foundation into design and

construction elements.

The concept of decomposition is illustrated by the example of estimating the costs

of a building foundation excluding excavation as shown in Table 5-5 in which the
decomposed design elements are shown on horizontal lines and the decomposed
contract elements are shown in vertical columns. For a design estimate, the
decomposition of the project into footings, foundation walls and elevator pit is
preferred since the designer can easily keep track of these design elements;
however, for a bid estimate, the decomposition of the project into formwork,
reinforcing bars and concrete may be preferred since the contractor can get
quotations of such contract items more conveniently from specialty subcontractors.
TABLE 5-5  Illustrative Decomposition of Building Foundation
Costs

Contract elements
Design 
elements
Formwork Rebars Concrete Total cost

Footings $5,000 $10,000 $13,000 $28,000

 Foundation walls 15,000 18,000 28,000 61,000
Elevator pit   9,000   15,000   16,000   40,000
Total cost $29,000 $43,000 $57,000 $129,000

Example 5-8: Cost estimate using labor, material and equipment rates.

For the given quantities of work Qi for the concrete foundation of a building and
the labor, material and equipment rates in Table 5-6, the cost estimate is computed
on the basis of Equation (5.9). The result is tabulated in the last column of the
same table.
TABLE 5-6  Illustrative Cost Estimate Using Labor, Material and Equipment Rates

Material  Equipment  Wage  Labor  Labor  Direct 

Quantity 
Description unit cost  unit cost  rate  input  unit cost  cost 
Qi
Mi Ei Wi Li WiLi Yi

Formwork 12,000 ft2 $0.4/ft2 $0.8/ft2 $15/hr 0.2 hr/ft2 $3.0/ft2 $50,400
Rebars 4,000 lb 0.2/lb 0.3/lb 15/hr 0.04 hr/lb 0.6/lb 4,440
Concrete 500 yd3 5.0/yd3 50/yd3 3 3
15/hr 0.8 hr/yd 12.0/yd  33,500
Total $88,300

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5.6 Methods for Allocation of Joint Costs

The principle of allocating joint costs to various elements in a project is often used
in cost estimating. Because of the difficulty in establishing casual relationship
between each element and its associated cost, the joint costs are often prorated in
proportion to the basic costs for various elements.

One common application is found in the allocation of field supervision cost among
the basic costs of various elements based on labor, material and equipment costs,
and the allocation of the general overhead cost to various elements according to the
basic and field supervision cost. Suppose that a project is decomposed into n tasks.
Let y be the total basic cost for the project and y i be the total basic cost for task i. If
F is the total field supervision cost and Fi is the proration of that cost to task i, then
a typical proportional allocation is:

(5.10)

Similarly, let z be the total direct field cost which includes the total basic cost and
the field supervision cost of the project, and z i be the direct field cost for task i. If
G is the general office overhead for proration to all tasks, and G i is the share for
task i, then

(5.11)

Finally, let w be the grand total cost of the project which includes the direct field
cost and the general office overhead cost charged to the project and w i be that
attributable task i. Then,

(5.12)

and

(5.13)

Example 5-9: Prorated costs for field supervision and office overhead

If the field supervision cost is $13,245 for the project in Table 5-6 (Example 5-8)
with a total direct cost of $88,300, find the prorated field supervision costs for
various elements of the project. Furthermore, if the general office overhead
charged to the project is 4% of the direct field cost which is the sum of basic costs
and field supervision cost, find the prorated general office overhead costs for
various elements of the project.

For the project, y = $88,300 and F = $13,245. Hence:

z = 13,245 + 88,300 = $101,545 

G = (0.04)(101,545) = $4,062 
w = 101,545 + 4,062 = $105,607
The results of the proration of costs to various elements are shown in Table 5-7.
TABLE 5-7  Proration of Field Supervision and Office Overhead Costs

Allocated  Total  Allocated 

Description Basic cost  field supervision cost  field cost  overhead cost  Total cost 
yi Fi zi Gi Li

Formwork $50,400 $7,560 $57,960 $2,319 $60,279

Rebars 4,400 660 5,060 202 5,262
 Concrete 33,500 5,025 38,525 1,541 40,066
Total $88,300 $13,245 $101,545 $4,062 $105,607

Example 5-10: A standard cost report for allocating overhead

The reliance on labor expenses as a means of allocating overhead burdens in

typical management accounting systems can be illustrated by the example of a
particular product's standard cost sheet. [5] Table 5-8 is an actual product's
standard cost sheet of a company following the procedure of using overhead
burden rates assessed per direct labor hour. The material and labor costs for
manufacturing a type of valve were estimated from engineering studies and from
current material and labor prices. These amounts are summarized in Columns 2
and 3 of Table 5-8. The overhead costs shown in Column 4 of Table 5-8 were
obtained by allocating the expenses of several departments to the various products
manufactured in these departments in proportion to the labor cost. As shown in the
last line of the table, the material cost represents 29% of the total cost, while labor
costs are 11% of the total cost. The allocated overhead cost constitutes 60% of the
total cost. Even though material costs exceed labor costs, only the labor costs are
used in allocating overhead. Although this type of allocation method is common in
industry, the arbitrary allocation of joint costs introduces unintended cross
subsidies among products and may produce adverse consequences on sales and
profits. For example, a particular type of part may incur few overhead expenses in
practice, but this phenomenon would not be reflected in the standard cost report.
TABLE 5-8  Standard Cost Report for a Type of Valve

(1) Material (2) Labor (3) Overhead (4) Total

cost cost cost cost

Purchased part $1.1980 $1.1980

Operation
   Drill, face, tap (2) $0.0438 $0.2404 $0.2842
   Degrease 0.0031 0.0337 0.0368
   Remove burs   0.0577   0.3241   0.3818
      Total cost, this item 1.1980 0.1046 0.5982 1.9008
   Other subassemblies   0.3523   0.2994   1.8519   2.4766
      Total cost,
  1.5233 0.4040 2.4501 4.3773
subassemblies
   Assemble and test 0.1469 0.4987 0.6456
   Pack without paper   0.0234   0.1349   0.1583
      Total cost, this item $1.5233 $0.5743 $3.0837 $5.1813
Cost component, % 29% 11% 60% 100%

Source: H. T. Johnson and R. S. Kaplan, Relevance lost: The Rise and Fall of

Management Accounting, Harvard Business School Press, Boston. Reprinted with
 permission.

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5.7 Historical Cost Data

Preparing cost estimates normally requires the use of historical data on
construction costs. Historical cost data will be useful for cost estimation only if
they are collected and organized in a way that is compatible with future
applications. Organizations which are engaged in cost estimation continually
should keep a file for their own use. The information must be updated with respect
to changes that will inevitably occur. The format of cost data, such as unit costs for
various items, should be organized according to the current standard of usage in the
organization.

Construction cost data are published in various forms by a number of

organizations. These publications are useful as references for comparison.
Basically, the following types of information are available:

 Catalogs of vendors' data on important features and specifications relating to

their products for which cost quotations are either published or can be
obtained. A major source of vendors' information for building products
is Sweets' Catalog published by McGraw-Hill Information Systems
Company.
 Periodicals containing construction cost data and indices. One source of
such information is ENR, the McGraw-Hill Construction Weekly, which
contains extensive cost data including quarterly cost reports. Cost
Engineering, a journal of the American Society of Cost Engineers, also
publishes useful cost data periodically.
 Commercial cost reference manuals for estimating guides. An example is
the Building Construction Cost Data published annually by R.S. Means
Company, Inc., which contains unit prices on building construction
items. Dodge Manual for Building Construction, published by McGraw-
Hill, provides similar information.
 Digests of actual project costs. The Dodge Digest of Building Costs and
Specifications provides descriptions of design features and costs of actual
projects by building type. Once a week, ENR publishes the bid prices of a
project chosen from all types of construction projects.

Historical cost data must be used cautiously. Changes in relative prices may have
substantial impacts on construction costs which have increased in relative price.
Unfortunately, systematic changes over a long period of time for such factors are
difficult to predict. Errors in analysis also serve to introduce uncertainty into cost
estimates. It is difficult, of course, to foresee all the problems which may occur in
construction and operation of facilities. There is some evidence that estimates of
construction and operating costs have tended to persistently understate the actual
costs. This is due to the effects of greater than anticipated increases in costs,
changes in design during the construction process, or overoptimism.

Since the future prices of constructed facilities are influenced by many uncertain
factors, it is important to recognize that this risk must be borne to some degree by
all parties involved, i.e., the owner, the design professionals, the construction
contractors, and the financing institution. It is to the best interest of all parties that
the risk sharing scheme implicit in the design/construct process adopted by the
owner is fully understood by all. When inflation adjustment provisions have very
different risk implications to various parties, the price level changes will also be
treated differently for various situations. Back to top

5.8 Cost Indices

Since historical cost data are often used in making cost estimates, it is important to
note the price level changes over time. Trends in price changes can also serve as a
basis for forecasting future costs. The input price indices of labor and/or material
reflect the price level changes of such input components of construction; the output
price indices, where available, reflect the price level changes of the completed
facilities, thus to some degree also measuring the productivity of construction.

A price index is a weighted aggregate measure of constant quantities of goods and

services selected for the package. The price index at a subsequent year represents a
proportionate change in the same weighted aggregate measure because of changes
in prices. Let lt be the price index in year t, and lt+1 be the price index in the
following year t+1. Then, the percent change in price index for year t+1 is:

(5.14)

or

(5.15)

If the price index at the base year t=0 is set at a value of 100, then the price indices
l1, l2...ln for the subsequent years t=1,2...n can be computed successively from
changes in the total price charged for the package of goods measured in the index.

The best-known indicators of general price changes are the Gross Domestic
Product (GDP) deflators compiled periodically by the U.S. Department of
Commerce, and the consumer price index (CPI) compiled periodically by the U.S.
Department of Labor. They are widely used as broad gauges of the changes in
production costs and in consumer prices for essential goods and services. Special
price indices related to construction are also collected by industry sources since
some input factors for construction and the outputs from construction may
disproportionately outpace or fall behind the general price indices. Examples of
special price indices for construction input factors are the wholesale Building
Material Price and Building Trades Union Wages, both compiled by the U.S.
Department of Labor. In addition, the construction cost index and the building cost
index are reported periodically in the Engineering News-Record (ENR). Both ENR
cost indices measure the effects of wage rate and material price trends, but they are
not adjusted for productivity, efficiency, competitive conditions, or technology
changes. Consequently, all these indices measure only the price changes of
respective constructioninput factors as represented by constant quantities of
material and/or labor. On the other hand, the price indices of various types of
completed facilities reflect the price changes of construction output including all
pertinent factors in the construction process. The building construction output
indices compiled by Turner Construction Company and Handy-Whitman Utilities
are compiled in the U.S. Statistical Abstracts published each year.

Figure 5-7 and Table 5-9 show a variety of United States indices, including the
Gross Domestic Product (GDP) price deflator, the ENR building index, and the
Turner Construction Company Building Cost Index from 1996 to 2007, using 2000
as the base year with an index of 100.

TABLE 5-9  Summary of Input and Output Price Indices, 1996-2007

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Turner
Construction -
Buildings 84.9 88.2 92.3 95.8 100.0 103.0 104.0 104.4 110.1 120.5 133.3 143.5
ENR - Buildings 90.5 95.0 95.8 97.6 100.0 101.0 102.4 104.4 112.6 118.8 123.5 126.7
GDP Deflator 94.0 95.6 96.8 98.0 100.0 102.3 104.2 105.9 107.2 108.6 110.2 112.0
Note: Index = 100 in base year of 2000. 
  
 
 Figure 5-7  Trends for US price indices.

Figure 5-8  Price and cost indices for construction.

Since construction costs vary in different regions of the United States and in all
parts of the world, locational indices showing the construction cost at a specific
location relative to the national trend are useful for cost estimation. ENR publishes
periodically the indices of local construction costs at the major cities in different
regions of the United States as percentages of local to national costs.

When the inflation rate is relatively small, i.e., less than 10%, it is convenient to
select a single price index to measure the inflationary conditions in construction
and thus to deal only with a single set of price change rates in forecasting. Let j t be
the price change rate in year t+1 over the price in year t. If the base year is denoted
as year 0 (t=0), then the price change rates at years 1,2,...t are j 1,j2,...jt, respectively.
Let At be the cost in year t expressed in base-year dollars and A t' be the cost in year
t expressed in then-current dollars. Then:

(5.16)

Conversely

(5.17
)

If the prices of certain key items affecting the estimates of future benefits and costs
are expected to escalate faster than the general price levels, it may become
necessary to consider the differential price changes over and above the general
inflation rate. For example, during the period between 1973 through 1979, it was
customary to assume that fuel costs would escalate faster than the general price
levels. With hindsight in 1983, the assumption for estimating costs over many
years would have been different. Because of the uncertainty in the future, the use
of differential inflation rates for special items should be judicious.

Future forecasts of costs will be uncertain: the actual expenses may be much lower
or much higher than those forecasted. This uncertainty arises from technological
changes, changes in relative prices, inaccurate forecasts of underlying
socioeconomic conditions, analytical errors, and other factors. For the purpose of
forecasting, it is often sufficient to project the trend of future prices by using a
constant rate j for price changes in each year over a period of t years, then

(5.18)

and

(5.19)

Estimation of the future rate increase j is not at all straightforward. A simple

expedient is to assume that future inflation will continue at the rate of the previous
period:
(5.20)

A longer term perspective might use the average increase over a horizon of n past
periods:

(5.21)

More sophisticated forecasting models to predict future cost increases include

corrections for items such as economic cycles and technology changes.

Example 5-12: Changes in highway and building costs

Figure 5-9 shows the change of standard highway costs from 1992 to 2002, and
Table 5-10 shows the change of residential building costs from 1970 to 1990. In
each case, the rate of cost increase was substantially above the rate of inflation in
the decade of the 1970s.. Indeed, the real cost increase between 1970 and 1980 was
in excess of three percent per year in both cases. However, these data also show
some cause for optimism. For the case of the standard highway, real
cost decreasestook place in the period from l970 to l990. Unfortunately,
comparable indices of outputs are not being compiled on a nationwide basis for
other types of construction.
 Figure 5-9  Producer Prices of Highway and Street Construction (Producer Price
Index: Highways and Streets-monthly data).

TABLE 5-10  Comparison of Residential Building Costs, 1970-1990

Standard  Standard residence  Percentage 

residence cost  Price deflator  real cost  change 
year (1972=100) (1972=100) (1972=100) per year

1970 77 92 74
1980 203 179 99 +3.4%
1990 287 247 116 +1.7%

Source: Statistical Abstract of the United States. GNP deflator is used for the price deflator
index.

Back to top

5.9 Applications of Cost Indices to Estimating

In the screening estimate of a new facility, a single parameter is often used to
describe a cost function. For example, the cost of a power plant is a function of
electricity generating capacity expressed in megawatts, or the cost of a sewage
treatment plant as a function of waste flow expressed in million gallons per day.

The general conditions for the application of the single parameter cost function for
screening estimates are:

1. Exclude special local conditions in historical data

2. Determine new facility cost on basis of specified size or capacity (using the
methods described in Sections 5.3 to 5.6)
3. Adjust for inflation index
4. Adjust for local index of construction costs
5. Adjust for different regulatory constraints
6. Adjust for local factors for the new facility

Some of these adjustments may be done using compiled indices, whereas others
may require field investigation and considerable professional judgment to reflect
differences between a given project and standard projects performed in the past.

Example 5-13: Screening estimate for a refinery

The total construction cost of a refinery with a production capacity of 200,000

bbl/day in Gary, Indiana, completed in 2001 was $100 million. It is proposed that a
similar refinery with a production capacity of 300,000 bbl/day be built in Los
Angeles, California, for completion in 2003. For the additional information given
below, make an order of magnitude estimate of the cost of the proposed plant.

1. In the total construction cost for the Gary, Indiana, plant, there was an
item of $5 million for site preparation which is not typical for other
plants.
2. The variation of sizes of the refineries can be approximated by the
exponential rule, Equation (5.4), with m = 0.6.
3. The inflation rate is expected to be 8% per year from 1999 to 2003.
4. The location index was 0.92 for Gary, Indiana and 1.14 for Los
Angeles in 1999. These indices are deemed to be appropriate for
adjusting the costs between these two cities.
5. New air pollution equipment for the LA plant costs $7 million in
2003 dollars (not required in the Gary plant).
6. The contingency cost due to inclement weather delay will be reduced
by the amount of 1% of total construction cost because of the
favorable climate in LA (compared to Gary).

On the basis of the above conditions, the estimate for the new project may be
obtained as follows:

1. Typical cost excluding special item at Gary, IN is

 $100 million - $5 million = $ 95 million

2. Adjustment for capacity based on the exponential law yields

($95)(300,000/200,000)0.6 = (95)(1.5)0.6 = $121.2 million

3. Adjustment for inflation leads to the cost in 2003 dollars as

($121.2)(1.08)4 = $164.6 million

4. Adjustment for location index gives

($164.6)(1.14/0.92) = $204.6 million

5. Adjustment for new pollution equipment at the LA plant gives

$204.6 + $7 = $211.6 million

6. Reduction in contingency cost yields

($211.6)(1-0.01) = $209.5 million

Since there is no adjustment for the cost of construction financing, the order of
magnitude estimate for the new project is $209.5 million.
Example 5-14: Conceptual estimate for a chemical processing plant
In making a preliminary estimate of a chemical processing plant, several major
types of equipment are the most significant parameters in affecting the installation
cost. The cost of piping and other ancillary items for each type of equipment can
often be expressed as a percentage of that type of equipment for a given capacity.
The standard costs for the major equipment types for two plants with different
daily production capacities are as shown in Table 5-11. It has been established that
the installation cost of all equipment for a plant with daily production capacity
between 100,000 bbl and 400,000 bbl can best be estimated by using linear
interpolation of the standard data.

TABLE 5-11  Cost Data for Equipment and Ancillary Items

Cost of ancillary items 
Equipment  Equipment Cost ($1000) as % of equipment cost ($1000)
type
100,000 bbl 400,000 bbl 100,000 bbl 400,000 bbl
Furnace 3,000 10,000 40% 30%
Tower 2,000 6,000 45% 35%
Drum 1,500 5,000 50% 40%
Pump, etc. 1,000 4,000 60% 50%
A new chemical processing plant with a daily production capacity of 200,000 bbl
is to be constructed in Memphis, TN in four years. Determine the total preliminary
cost estimate of the plant including the building and the equipment on the
following basis:

1. The installation cost for equipment was based on linear interpolation from
Table 5-11, and adjusted for inflation for the intervening four years. We
expect inflation in the four years to be similar to the period 1990-1994 and
we will use the GNP Deflator index.
2. The location index for equipment installation is 0.95 for Memphis, TN, in
comparison with the standard cost.
3. An additional cost of $500,000 was required for the local conditions in
Memphis, TN.

The solution of this problem can be carried out according to the steps as outlined in
the problem statement:

1. The costs of the equipment and ancillary items for a plant with a capacity of
200,000 bbl can be estimated by linear interpolation of the data in Table 5-
11 and the results are shown in Table 5-12. 
 

TABLE 5-12  Results of Linear Interpolation for an Estimation Example

Equipment  Equipment Cost  Percentage for 
type (in $1,000) ancillary items
Furnace $3,000 + (1/3)($10,000-$3,000) = $5,333 40% - (1/3)(40%-30%) = 37%
Tower $2,000 + (1/3)($6,000-$2,000) = $3,333 45% - (1/3)(45%-35%) = 42%
Drum $1,500 + (1/3)($5,000-$1,500) = $2,667 50% - (1/3)(50%-40%) = 47%
Pumps, etc. $1,000 + (1/3)($4,000-$1,000) = $2,000 60% - (1/3)(60%-50%) = 57%

2. Hence, the total project cost in thousands of current dollars is given by

Equation (5.8) as:
3. ($5,333)(1.37) + ($3,333)(1.42) +($2,667)(1.47) + ($2,000)(1.57) = 
= $2,307 + $4,733 + $3,920 + $3,140 = $ 19,000
4. The corresponding cost in thousands of four year in the future dollars using
Equation (5.16) and Table 5-9 is:

($19,100)(105/94) = $21,335

5. The total cost of the project after adjustment for location is

(0.95)($21,335,000) + $500,000   $20,800,000

Back to top
5.10 Estimate Based on Engineer's List of Quantities
The engineer's estimate is based on a list of items and the associated quantities
from which the total construction cost is derived. This same list is also made
available to the bidders if unit prices of the items on the list are also solicited from
the bidders. Thus, the itemized costs submitted by the winning contractor may be
used as the starting point for budget control.

In general, the progress payments to the contractor are based on the units of work
completed and the corresponding unit prices of the work items on the list. Hence,
the estimate based on the engineers' list of quanitities for various work items
essentially defines the level of detail to which subsequent measures of progress for
the project will be made.

Example 5-15: Bid estimate based on engineer's list of quantities

Using the unit prices in the bid of contractor 1 for the quantitites specified by the
engineer in Table 5-2 (Example 5-3), we can compute the total bid price of
contractor 1 for the roadway project. The itemized costs for various work items as
well as the total bid price are shown in Table 5-13.

TABLE 5-13: Bid Price of Contractor 1 in a Highway Project

Items Unit Quantity Unit price Item cost
Mobilization ls 1 115,000 115,000
Removal, berm lf 8,020 1.00 8.020
Finish subgrade sy 1,207,500 0.50 603,750
Surface ditches lf 525 2.00 1,050
Excavation structures cy 7,000 3.00 21,000
Base course, untreated, 3/4'' ton 362,200 4.50 1,629,900
   Lean concrete, 4'' thick sy 820,310 3.10 2,542,961
PCC, pavement, 10'' thick sy 76,010 10.90 7,695,509
Concrete, ci AA (AE) ls 1 200,000 200,000
   Small structure cy 50 500 25,000
   Barrier, precast lf 7,920 15.00 118,800
   Flatwork, 4'' thick sy 7,410 10.00 74,100
   10'' thick sy 4,241 20.00 84,820
   Slope protection sy 2,104 25.00 52,600
Metal, end section, 15'' ea 39 100 3,900
   18'' ea 3 150 450
   Post, right-of-way, modification lf 4,700 3.00 14,100
Salvage and relay pipe lf 1,680 5.00 8,400
Loose riprap cy 32 40.00 1,280
 TABLE 5-13: Bid Price of Contractor 1 in a Highway Project
Items Unit Quantity Unit price Item cost
Braced posts ea 54 100 5,400
Delineators, type I lb 1,330 12.00 15,960
   type II ea 140 15.00 2,100
Constructive signs fixed sf 52,600 0.10 5,260
   Barricades, type III lf 29,500 0.20 5,900
Warning lights day 6,300 0.10 630
Pavement marking, epoxy material  
   Black gal 475 90.00 42,750
   Yellow gal 740 90.00 66,600
   White gal 985 90.00 88,650
   Plowable, one-way white ea 342 50.00 17,100
Topsoil, contractor furnished cy 260 10.00 2,600
Seedling, method A acr 103 150 15,450
Excelsior blanket sy 500 2.00 1,000
Corrugated, metal pipe, 18'' lf 580 20.00 11,600
Polyethylene pipe, 12'' lf 2,250 15.00 33,750
Catch basin grate and frame ea 35 350 12,250
Equal opportunity training hr 18,000 0.80 14,400
Granular backfill borrow cy 274 10.00 2,740
Drill caisson, 2'x6'' lf 722 100 72,200
Flagging hr 20,000 8.25 165,000
Prestressed concrete member  
   type IV, 141'x4'' ea 7 12,000 84,000
   132'x4'' ea 6 11,000 66,000
Reinforced steel lb 6,300 0.60 3,780
   Epoxy coated lb 122,241 0.55 67,232.55
Structural steel ls 1 5,000 5,000
Sign, covering sf 16 10.00 160
   type C-2 wood post sf 98 15.00 1,470
   24'' ea 3 100 300
   30'' ea 2 100 200
   48'' ea 11 200 2,200
   Auxiliary sf 61 15.00 915
   Steel post, 48''x60'' ea 11 500 5,500
   type 3, wood post sf 669 15.00 10,035
   24'' ea 23 100 2,300
   30'' ea 1 100 100
   36'' ea 12 150 1,800
   42''x60'' ea 8 150 1,200
 TABLE 5-13: Bid Price of Contractor 1 in a Highway Project
Items Unit Quantity Unit price Item cost
   48'' ea 7 200 1,400
   Auxiliary sf 135 15.00 2,025
   Steel post sf 1,610 40.00 64,400
   12''x36'' ea 28 100 2,800
   Foundation, concrete ea 60 300 18,000
Barricade, 48''x42'' ea 40 100 4,000
   Wood post, road closed lf 100 30.00 3,000
Total $14,129,797.55

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5.11 Allocation of Construction Costs Over Time

Since construction costs are incurred over the entire construction phase of a
project, it is often necessary to determine the amounts to be spent in various
periods to derive the cash flow profile, especially for large projects with long
durations. Consequently, it is important to examine the percentage of work
expected to be completed at various time periods to which the costs would be
charged. More accurate estimates may be accomplished once the project is
scheduled as described in Chapter 10, but some rough estimate of the cash flow
may be required prior to this time.

Consider the basic problem in determining the percentage of work completed

during construction. One common method of estimating percentage of completion
is based on the amount of money spent relative to the total amount budgeted for the
entire project. This method has the obvious drawback in assuming that the amount
of money spent has been used efficiently for production. A more reliable method is
based on the concept of value of work completed which is defined as the product of
the budgeted labor hours per unit of production and the actual number of
production units completed, and is expressed in budgeted labor hours for the work
completed. Then, the percentage of completion at any stage is the ratio of the value
of work completed to date and the value of work to be completed for the entire
project. Regardless of the method of measurement, it is informative to understand
the trend of work progress during construction for evaluation and control.

In general, the work on a construction project progresses gradually from the time
of mobilization until it reaches a plateau; then the work slows down gradually and
finally stops at the time of completion. The rate of work done during various time
periods (expressed in the percentage of project cost per unit time) is shown
schematically in Figure 5-10 in which ten time periods have been assumed. The
solid line A represents the case in which the rate of work is zero at time t = 0 and
increases linearly to 12.5% of project cost at t = 2, while the rate begins to decrease
from 12.5% at t = 8 to 0% at t = 10. The dotted line B represents the case of rapid
mobilization by reaching 12.5% of project cost at t = 1 while beginning to decrease
from 12.5% at t = 7 to 0% at t = 10. The dash line C represents the case of slow
mobilization by reaching 12.5% of project cost at t = 3 while beginning to decrease
from 12.5% at t = 9 to 0% at t = 10. 

Figure 5-10:  Rate of Work Progress over Project Time

The value of work completed at a given time (expressed as a cumulative

percentage of project cost) is shown schematically in Figure 5-11. In each case (A,
B or C), the value of work completed can be represented by an "S-shaped" curve.
The effects of rapid mobilization and slow mobilization are indicated by the
positions of curves B and C relative to curve A, respectively. 
 Figure 5-11:  Value of Work Completed over Project Time

While the curves shown in Figures 5-10 and 5-11 represent highly idealized cases,
they do suggest the latitude for adjusting the schedules for various activities in a
project. While the rate of work progress may be changed quite drastically within a
single period, such as the change from rapid mobilization to a slow mobilization in
periods 1, 2 and 3 in Figure 5-10, the effect on the value of work completed over
time will diminish in significance as indicated by the cumulative percentages for
later periods in Figure 5-11. Thus, adjustment of the scheduling of some activities
may improve the utilization of labor, material and equipment, and any delay
caused by such adjustments for individual activities is not likely to cause problems
for the eventual progress toward the completion of a project.

In addition to the speed of resource mobilization, another important consideration

is the overall duration of a project and the amount of resources applied. Various
strategies may be applied to shorten the overall duration of a project such as
overlapping design and construction activities (as described in Chapter 2) or
increasing the peak amounts of labor and equipment working on a site. However,
spatial, managerial and technical factors will typically place a minimum limit on
the project duration or cause costs to escalate with shorter durations.

Example 5-16: Calculation of Value of Work Completed

From the area of work progress in Figure 5-10, the value of work completed at any
point in Figure 5-11 can be derived by noting the area under the curve up to that
point in Figure 5-10. The result for t = 0 through t = 10 is shown in Table 5-14 and
plotted in Figure 5-11.

TABLE 5-14  Calculation of Value of Work Completed

Time Case A Case B Case C

0 0 0 0
1 3.1% 6.2% 2.1%
2 12.5 18.7 8.3
3 25.0 31.2 18.8
4 37.5 43.7 31.3
5 50.0 56.2 43.8
6 62.5 68.7 56.3
7 75.0 81.2 68.8
8 87.5 91.7 81.9
9 96.9 97.9 93.8
10 100.0 100.0 100.0

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5.12 Computer Aided Cost Estimation

Numerous computer aided cost estimation software systems are now available.
These range in sophistication from simple spreadsheet calculation software to
integrated systems involving design and price negotiation over the Internet. While
this software involves costs for purchase, maintenance, training and computer
hardware, some significant efficiencies often result. In particular, cost estimates
may be prepared more rapidly and with less effort.

Some of the common features of computer aided cost estimation software include:

 Databases for unit cost items such as worker wage rates, equipment rental or
material prices. These databases can be used for any cost estimate required.
If these rates change, cost estimates can be rapidly re-computed after the
databases are updated.
 Databases of expected productivity for different components types,
equiptment and construction processes.
  Import utilities from computer aided design software for automatic quantity-
take-off of components. Alternatively, special user interfaces may exist to
enter geometric descriptions of components to allow automatic quantity-
take-off.
 Export utilities to send estimates to cost control and scheduling software.
This is very helpful to begin the management of costs during construction.
 Version control to allow simulation of different construction processes or
design changes for the purpose of tracking changes in expected costs.
 Provisions for manual review, over-ride and editing of any cost element
resulting from the cost estimation system
 Flexible reporting formats, including provisions for electronic reporting
rather than simply printing cost estimates on paper.
 Archives of past projects to allow rapid cost-estimate updating or
modification for similar designs.

A typical process for developing a cost estimate using one of these systems would
include:

1. If a similar design has already been estimated or exists in the company

archive, the old project information is retreived.
2. A cost engineer modifies, add or deletes components in the project
information set. If a similar project exists, many of the components may
have few or no updates, thereby saving time.
3. A cost estimate is calculated using the unit cost method of estimation.
Productivities and unit prices are retrieved from the system databases. Thus,
the latest price information is used for the cost estimate.
4. The cost estimation is summarized and reviewed for any errors.

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5.13 Estimation of Operating Costs

In order to analyze the life cycle costs of a proposed facility, it is necessary to
estimate the operation and maintenance costs over time after the start up of the
facility. The stream of operating costs over the life of the facility depends upon
subsequent maintenance policies and facility use. In particular, the magnitude of
routine maintenance costs will be reduced if the facility undergoes periodic repairs
and rehabilitation at periodic intervals.

Since the tradeoff between the capital cost and the operating cost is an essential
part of the economic evaluation of a facility, the operating cost is viewed not as a
separate entity, but as a part of the larger parcel of life cycle cost at the planning
and design stage. The techniques of estimating life cycle costs are similar to those
used for estimating capital costs, including empirical cost functions and the unit
 cost method of estimating the labor, material and equipment costs. However, it is
the interaction of the operating and capital costs which deserve special attention.

As suggested earlier in the discussion of the exponential rule for estimating, the
value of the cost exponent may influence the decision whether extra capacity
should be built to accommodate future growth. Similarly, the economy of scale
may also influence the decision on rehabilitation at a given time. As the
rehabilitation work becomes extensive, it becomes a capital project with all the
implications of its own life cycle. Hence, the cost estimation of a rehabilitation
project may also involve capital and operating costs.

While deferring the discussion of the economic evaluation of constructed facilities

to Chapter 6, it is sufficient to point out that the stream of operating costs over time
represents a series of costs at different time periods which have different values
with respect to the present. Consequently, the cost data at different time periods
must be converted to a common base line if meaningful comparison is desired.

Example 5-17: Maintenance cost on a roadway [6]

Maintenance costs for constructed roadways tend to increase with both age and use
of the facility. As an example, the following empirical model was estimated for
maintenance expenditures on sections of the Ohio Turnpike:

C = 596 + 0.0019 V + 21.7 A

where C is the annual cost of routine maintenance per lane-mile (in 1967 dollars),
V is the volume of traffic on the roadway (measured in equivalent standard axle
loads, ESAL, so that a heavy truck is represented as equivalent to many
automobiles), and A is the age of the pavement in years since the last resurfacing.
According to this model, routine maintenance costs will increase each year as the
pavement service deteriorates. In addition, maintenance costs increase with
additional pavement stress due to increased traffic or to heavier axle loads, as
reflected in the variable V.

For example, for V = 500,300 ESAL and A = 5 years, the annual cost of routine
maintenance per lane-mile is estimated to be:

C = 596 + (0.0019)(500,300) + (21.7)(5)

= 596 + 950.5 + 108.5 = 1,655 (in 1967 dollars)
Example 5-18: Time stream of costs over the life of a roadway [7]

The time stream of costs over the life of a roadway depends upon the intervals at
which rehabilitation is carried out. If the rehabilitation strategy and the traffic are
known, the time stream of costs can be estimated.
Using a life cycle model which predicts the economic life of highway pavement on
the basis of the effects of traffic and other factors, an optimal schedule for
rehabilitation can be developed. For example, a time stream of costs and
resurfacing projects for one pavement section is shown in Figure 5-11. As
described in the previous example, the routine maintenance costs increase as the
pavement ages, but decline after each new resurfacing. As the pavement continues
to age, resurfacing becomes more frequent until the roadway is completely
reconstructed at the end of 35 years.

Figure 5-11:  Time Stream of Costs over the Life of a Highway Pavement

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5.14 References
1. Ahuja, H.N. and W.J. Campbell, Estimating: From Concept to Completion,
Prentice-Hall, Inc., Englewood Cliffs, NJ, 1987.
2. Clark, F.D., and A.B. Lorenzoni, Applied Cost Engineering, Marcel Dekker,
Inc., New York, 1978.
3. Clark, J.E., Structural Concrete Cost Estimating, McGraw-Hill, Inc., New
York, 1983.
 4. Diekmann, J.R., "Probabilistic Estimating: Mathematics and
Applications," ASCE Journal of Construction Engineering and
Management, Vol. 109, 1983, pp. 297-308.
5. Humphreys, K.K. (ed.) Project and Cost Engineers' Handbook (sponsored
by American Association of Cost Engineers), 2nd Ed., Marcel Dekker, Inc.,
New York, 1984.
6. Maevis, A.C., "Construction Cost Control by the Owners," ASCE Journal of
the Construction Division, Vol. 106, 1980, pp. 435-446.
7. Wohl, M. and C. Hendrickson, Transportation Investment and Pricing
Principles, John Wiley & Sons, New York, 1984.

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5.15 Problems
1. Suppose that the grouting method described in Example 5-2 is used to
provide a grouting seal beneath another landfill of 12 acres. The grout line is
expected to be between 4.5 and 5.5 feet thickness. The voids in the soil layer
are between 25% to 35%. Using the same unit cost data (in 1978 dollars),
find the range of costs in a screening estimate for the grouting project.

2. To avoid submerging part of U.S. Route 40 south and east of Salt Lake City
due to the construction of the Jardinal Dam and Reservoir, 22 miles of
highway were relocated to the west around the site of the future reservoir.
Three separate contracts were let, including one covering 10 miles of the
work which had an engineer's estimate of $34,095,545. The bids were
submitted on July 21, 1987 and the completion date of the project under the
contract was August 15, 1989. (See ENR, October 8, 1987, p. 34). The three
lowest bids were:

1) W.W. Clyde & Co., Springville, Utah $21,384,919

2) Sletten Construction company, Great Falls, Montana $26,701,018
3) Gilbert Western Corporation, Salt Lake city, Utah $30,896,203

3. Find the percentage of each of these bidders below the engineer's cost
estimate.

4. In making a screening estimate of an industrial plant for the production of

batteries, an empirical formula based on data of a similar buildings
completed before 1987 was proposed:

C = (16,000)(Q + 50,000)1/2

where Q is the daily production capacity of batteries and C is the cost of the
building in 1987 dollars. If a similar plant is planned for a daily production
 capacity of 200,000 batteries, find the screening estimate of the building in
1987 dollars.

5. For the cost factor K = $46,000 (in 1968 dollars) and m = 0.67 for an
aerated lagoon basin of a water treatment plant in Table 5-4 (Example 5-6),
find the estimated cost of a proposed new plant with a similar treatment
process having a capacity of 480 million gallons (in 1968 dollars). If another
new plant was estimated to cost $160,000 by using the same exponential
rule, what would be the proposed capacity of that plant?

6. Using the cost data in Figure 5-5 (Example 5-11), find the total cost
including overhead and profit of excavating 90,000 cu.yd. of bulk material
using a backhoe of 1.5 cu.yd. capacity for a detailed estimate. Assume that
the excavated material will be loaded onto trucks for disposal.

7. The basic costs (labor, material and equipment) for various elements of a
construction project are given as follows: 

Excavation $240,000
Subgrade $100,000
Base course $420,000
Concrete pavement $640,000
   Total $1,400,000

8. Assuming that field supervision cost is 10% of the basic cost, and the
general office overhead is 5% of the direct costs (sum of the basic costs and
field supervision cost), find the prorated field supervision costs, general
office overhead costs and total costs for the various elements of the project.

9. In making a preliminary estimate of a chemical processing plant, several

major types of equipment are the most significant components in affecting
the installation cost. The cost of piping and other ancillary items for each
type of equipment can often be expressed as a percentage of that type of
equipment for a given capacity. The standard costs for the major equipment
types for two plants with different daily production capacities are as shown
in Table 5-15. It has been established that the installation cost of all
equipment for a plant with daily production capacity between 150,000 bbl
and 600,000 bbl can best be estimated by using liner interpolation of the
standard data. A new chemical processing plant with a daily production
capacity of 400,000 bbl is being planned. Assuming that all other factors
remain the same, estimate the cost of the new plant.

Table 5-15
 Equipment cost ($1,000) Factor for ancillary items
Equipment type
150,000 bbl 600,000 bbl 150,000 bbl 600,000 bbl
Furnace $3,000 $10,000 0.32 0.24
Tower 2,000 6,000 0.42 0.36
Drum 1,500 5,000 0.42 0.32
Pumps, etc. 1,000 4,000 0.54 0.42

10.The total construction cost of a refinery with a production capacity of

100,000 bbl/day in Caracas, Venezuela, completed in 1977 was $40 million.
It was proposed that a similar refinery with a production capacity of
$160,000 bbl/day be built in New Orleans, LA for completion in 1980. For
the additional information given below, make a screening estimate of the
cost of the proposed plant.
1. In the total construction cost for the Caracus, Venezuela plant, there
was an item of $2 million for site preparation and travel which is not
typical for similar plants.
2. The variation of sizes of the refineries can be approximated by the
exponential law with m = 0.6.
3. The inflation rate in U.S. dollars was approximately 9% per year from
1977 to 1980.
4. An adjustment factor of 1.40 was suggested for the project to account
for the increase of labor cost from Caracas, Venezuela to New
Orleans, LA.
5. New air pollution equipment for the New Orleans, LA plant cost $4
million in 1980 dollars (not required for the Caracas plant).
6. The site condition at New Orleans required special piling foundation
which cost $2 million in 1980 dollars.

11.The total cost of a sewage treatment plant with a capacity of 50 million

gallons per day completed 1981 for a new town in Colorado was $4.5
million. It was proposed that a similar treatment plant with a capacity of 80
million gallons per day be built in another town in New Jersey for
completion in 1985. For additional information given below, make a
screening estimate of the cost of the proposed plant.
1. In the total construction cost in Colorado, an item of $300,000 for site
preparation is not typical for similar plants.
2. The variation of sizes for this type of treatment plants can be
approximated by the exponential law with m = 0.5.
3. The inflation rate was approximately 5% per year from 1981 to 1985.
 4. The locational indices of Colorado and New Jersey areas are 0.95 and
1.10, respectively, against the national average of 1.00.
5. The installation of a special equipment to satisfy the new
environmental standard cost an extra $200,000 in 1985 dollar for the
New Jersey plant.
6. The site condition in New Jersey required special foundation which
cost $500,00 in 1985 dollars.

12.Using the ENR building cost index, estimate the 1985 cost of the grouting
seal on a landfill described in Example 5-2, including the most likely
estimate and the range of possible cost.

13.Using the unit prices in the bid of contractor 2 for the quantitites specified
by the engineer in Table 5-2 (Example 5-3), compute the total bid price of
contractor 2 for the roadway project including the expenditure on each item
of work.

14.The rate of work progress in percent of completion per period of a

construction project is shown in Figure 5-13 in which 13 time periods have
been assumed. The cases A, B and C represent the normal mobilization
time, rapid mobilization and slow mobilization for the project, respectively.
Calculate the value of work completed in cumulative percentage for periods
1 through 13 for each of the cases A, B and C. Also plot the volume of work
completed versus time for these cases.

Figure 5-13
 15.The rate of work progress in percent of completion per period of a
construction project is shown in Figure 5-14 in which 10 time periods have
been assumed. The cases A, B and C represent the rapid mobilization time,
normal mobilization and slow mobilization for the project, respectively.
Calculate the value of work completed in cumulative percentage for periods
1 through 10 for each of the cases A, B and C. Also plot the volume of work
completed versus time for these cases.

Figure 5-14

16.Suppose that the empirical model for estimating annual cost of routine
maintenance in Example 5-17 is applicable to sections of the Pennsylvania
Turnpike in 1985 if theENR building cost index is applied to inflate the 1967
dollars. Estimate the annual cost of maintenance per lane-mile of the
tunrpike for which the traffic volume on the roadway is 750,000 ESAL and
the age of the pavement is 4 years in 1985.

17.The initial construction cost for a electric rower line is known to be a

function of the cross-sectional area A (in cm 2) and the length L (in
kilometers). Let C1 be the unit cost of construction (in dollars per cm 3).
Then, the initial construction cost P (in dollars) is given by

P = C1AL(105)

The annual operating cost of the power line is assumed to be measured by

the power loss. The power loss S (in kwh) is known to be
 where J is the electric current in amperes, R is the resistivity in ohm-
centimeters. Let C2 be the unit operating cost (in dollars per kwh). Then, the
annual operating cost U (in dollars) is given by

Suppose that the power line is expected to last n years and the life cycle cost
T of the power line is equal to:

T = P + UK

where K is a discount factor depending on the useful life cycle n and the
discount rate i (to be explained in Chapter 6). In designing the power line,
all quantitites are assumed to be known except A which is to be determined.
If the owner wants to minimize the life cycle cost, find the best cross-
sectional area A in terms of the known quantities.

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5.16 Footnotes
1. This example was adapted with permission from a paper, "Forecasting Industry
Resources," presented by A.R. Crosby at the Institution of Chemical Engineers in
London, November 4, 1981. (Back)

2. This example is adapted from a cost estimate in A.L. Tolman, A.P. Ballestero,
W.W. Beck and G.H. Emrich, Guidance Manual for Minimizing Pollution from
Waste Disposal Sites, Municipal Environmental Research Laboratory, U.S.
Environmental Protection Agency, Cincinatti, Ohio, 1978. (Back)

3. See "Utah Interstate Forges On," ENR, July 2, 1987, p. 39.(Back)

4. This and the next example have been adapted from P.M. Berthouex, "Evaluating
Economy of Scale," Journal of the Water Pollution Control Federation, Vol. 44,
No. 11, November 1972, pp. 2111-2118. (Back)
 5. See H.T. Johnson and R.S. Kaplan, Relevance Lost: The Rise and Fall of
Management Accounting, Harvard Business School Press, Boston, MA 1987, p.
185. (Back)

6. This example is adapted from McNeil, S. and C. Hendrickson, "A Statistical

Model of Pavement Maintenance Expenditure," Transportation Research
Record No. 846, 1982, pp. 71-76. (Back)

7. This example is adapted from S. McNeil, Three Statistical Models of Road

Management Based on Turnpike Data, M.S. Thesis, Carnegie-Mellon University,
Pittsburgh, PA, 1981. (Back)