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ADDIS ABABA UNIVERSITY SCHOOL OF GRADUATE STUDIES

CONSTRUCTION COST ESTIMATION GUIDELINE FOR LOCAL CONTRACTORS IN ETHIOPIA

TADESSE YEMANE ADVISOR - DR.-ING. ABEBE DINKU

A thesis submitted to the School of Graduate Studies of Addis Ababa University in partial fulfillment of
the requirements for the Degree of Master of Science in Construction Technology and Management.
November 2006

Construction Cost Estimation Guideline for Local Contractors in Ethiopia 2005/06 MSc Thesis,
Construction Technology and Management, CENG 799

II

ADDIS ABABA UNIVERSITY SCHOOL OF GRADUATE STUDIES

CONSTRUCTION COST ESTIMATION GUIDELINE FOR LOCAL CONTRACTORS IN ETHIOPIA

TADESSE YEMANE ADVISOR - DR.-ING. ABEBE DINKU

APPROVED BY THE BOARD OF EXAMINERS __________________________ _______________________

ADVISOR

_________________________ _______________________

INTERNAL EXAMINER

_________________________ _______________________

EXTERNAL EXAMINER

_________________________ _______________________

CHAIRMAN

Construction Cost Estimation Guideline for Local Contractors in Ethiopia 2005/06 MSc Thesis,
Construction Technology and Management, CENG 799

III

TABLE OF CONTENTS
Acknowledgement …………………………………………………….………………….V Abstract
……………………………………………………...…………....………….…...VI 1 - Research Background………………...
………………………………..…………....1

1.1 Construction Cost Estimation Practice in Ethiopia………………………….3

1.2

Research Objective…………………………………………………………….4

1.3

Research Application…………………………………………………………..5

2 – Literature Survey…………...………………………………………..……….………6

2.1 Types of Construction Projects………………………………………………..7 2.2 Methods of

Tendering…………………………………………………………..8 2.3 Types of Construction
Contracts………………………………..…………...12

3 – Basic Cost Components of Construction Projects…………………………...21

3.1 Direct Construction Costs……………………………………………………..21 3.2 Indirect Construction

Costs…………………………………………………...22 3.3 Risk Allowance…………………………………………………………………
26 3.4 Profit and Income Tax…………………...…………………………………….26

4 – Fundamental Approaches to Construction Cost Estimation……….…….…27

4.1 General and Particular Conditions of Contract……………………………..28 4.2 Technical

Specifications………………………………………………………31 4.3
Drawings………………………………………………………………………..34 4.4 Estimated Bill of
Quantities…………………………………………………...34 4.5 Supporting
Documents………………………………………………………..35 4.6 Site
Visits……………………………………………………………………….35 4.7 Method of
Measurement………………………………………………………37 4.8 Construction Method
Statements…………………………………………….40

5 – Construction Cost Estimation Formats……….………………………………...45 6 – Material Unit Cost

Estimation………..……………………………………………54

6.1 Materials Purchased from Local Market…………………………………….54 6.2 Materials purchased from
International Market…………………………….57

7 – Labor Hourly Cost Estimation………..…………………………………………..70

Construction Cost Estimation Guideline for Local Contractors in Ethiopia 2005/06 MSc Thesis,
Construction Technology and Management, CENG 799

IV

8 – Equipment Hourly Cost Estimation……….……………………………………..76

8.1 Equipment Owning Costs……………………………………………………..76 8.2 Equipment Operating

Costs…………………………………………………..84 8.3 Operator’s Salary and
Benefits……………………………………………….93 8.4 Overhead
Costs………………………………………………………………..96 8.5 Equipment Breakeven
Costs…………………………………………………97 8.6 Profit and Income Tax…………………………………………………………
97 8.7 Equipment Rental Rates………………………………………………………98

9 – Indirect Cost Estimation………..………………………………...………………103

9.1 Head office Overhead Cost Estimation…………………………………….103 9.2 Site Overhead Cost
Estimation……………………………………………..113

10 – Risk Allowance Estimation………..……………………………………………124 11 – Worked Out Examples………..

…………………………………………………129 12 – Conclusions and Recommendations.........................
………………………138 References……………………………………………………….…..………………….141
Declaration………………………………………………………..……………………..144

Construction Cost Estimation Guideline for Local Contractors in Ethiopia 2005/06 MSc Thesis,
Construction Technology and Management, CENG 799

ACKNOWLEDGEMENTS

In the preparation of this thesis many have contributed priceless data, idea, resource books as well as
moral support. First and foremost, my deepest gratitude goes to my advisor, Dr.-Ing. Abebe Dinku, for
his valuable and constructive ideas as well as all his precious time spent in reviewing and improving the
quality of the thesis work. Special thanks also to Dr.-Ing. Gashaw Yayehyirad for his valuable
contributions in developing procedures on how to establish earthmoving equipment rental rates.
Moreover, I am also indebted to Prof. Dr.-Ing Christoph Motzko and Prof. Dr.-Ing. Manfred Ostrowski
from Technische Universitat Darmstadt (TUD) in Germany and Mr. Aamer Saeed Harron (General
Manager, Sur Construction Plc), who have provided all necessary technical and administrative supports
for a better refinement of the research work during my stay in the Institute of Construction
Management in TUD on a student exchange program arranged between the universities. The realization
of this research work is entirely related to all the organizations and individuals who provide me valuable
company information, which is actually the sole basis of my thesis. Some of these organizations and
individuals are SUR Construction Plc, CWGS Joint Venture, EPS Joint Venture, Ries Engineering, Ethiopian
Roads Authority, Building Design Share Company, Ato Mulugeta knife and Ato Tewoldebirhan Getahun
from SUR construction Plc, Ato Fethanegest Aynalem from SATCON Construction Plc, Ato Melese Mamo
from AKIR Construction Plc as well as Ato Tsegay Okubu and Ato Moges Tadesse from Flintstone
Engineering. Last but not least, my deepest gratitude to his Excellency Ato Arkebe Okubay, State
Minister, Ministry of Works and Urban Development, who provide me several valuable books on project
and construction management from his personal collections. The moral support from my family will
never be forgotten and this work is dedicated to them.

Construction Cost Estimation Guideline for Local Contractors in Ethiopia 2005/06 MSc Thesis,
Construction Technology and Management, CENG 799

VI

ABSTRACT

Cost estimation is one of the most important steps in the process of construction project execution
whereby an organization interested in the construction of a project attempts to estimate the expected
expenditure of resources such as materials, manpower, machineries, finance and time in advance
necessarily to realize the intended project. Construction cost estimation helps project owners in such a
way decision can be made to finance or shelf the intended project. Incase, the owner decides to finance
the project, the next task is either to execute the construction works on force account or outsource
these works to a capable contractor who can deliver the project with the lowest possible construction
cost, high quality of works and shortest time possible. However, it is usually difficult and challenging for
contractors to satisfy higher quality and shorter time requirements of project owners with lowest
construction costs. On the other hand, unless a contractor offers the lowest possible construction cost,
there is high tendency of losing the competition to get the intended construction project and becoming
out of business. Therefore, contractors’ construction cost estimation shall be competent in order to get
the intended project and at the same time these estimates shall be accurate enough in order to keep
the profitability of the construction company. Moreover, competent construction cost estimate is also
vital to project owners in such a way it addresses properly the required quality of works, time for
completion as well as reasonable cost of construction. As a result, this thesis work mainly focuses on
how to develop and establish the unit costs of construction project activities as well as the overall
estimated construction costs of a project.

Key words:

Direct material cost, Direct labor cost, Direct equipment cost, Head office overhead cost, Site overhead
cost, Risk allowance, Profit and income tax.

Construction Cost Estimation Guideline for Local Contractors in Ethiopia 2005/06 MSc Thesis,
Construction Technology and Management, CENG 799

1 – RESEARCH BACKGROUND

Construction projects involve various types of costs to the owner in its lifetime, which are broadly
categorized as the initial capital costs and the subsequent operation and maintenance costs. The capital
costs for a construction project include all expenses related to the initial establishment of the project
such as expenses related to:

Planning and feasibility studies

Land acquisition

Architectural and engineering design

Construction, including materials, equipment and labor

Construction supervision

Construction financing


Insurance and taxes during construction

Owner's general office overhead

Equipment and furnishings not included in construction

Inspection, testing and commissioning The operation and maintenance costs are also all expenses of the
facility in the subsequent years during the life time of the project after the final testing and
commissioning of the construction phase and these operation and maintenance costs include expenses
related to:

Land rent, if applicable

Operating staff

Labor, equipment and material for maintenance and repairs

Periodic renovations

Insurance and taxes

Financing costs

Utilities

Owner's overhead and other expenses The magnitude of each of these cost components depends on
the nature, size and location of the project. In most large civil engineering projects such as hydropower
projects, construction cost is the single largest component of the capital costs. In other instances, land
acquisition cost can be the major expenditure for building construction projects in high densely
populated urban areas. It is also possible that construction financing costs can reach the same order of
magnitude as that of the construction costs in large projects such as construction of nuclear power
plants. Moreover, from the owner's perspective, it is also equally important to estimate the
corresponding operation and maintenance costs of each alternatives of a project in order to analyze the
total life cycle costs of the project.

Construction Cost Estimation Guideline for Local Contractors in Ethiopia 2005/06 MSc Thesis,
Construction Technology and Management, CENG 799

Therefore, in order to decide whether to finance a proposed project or not, owners shall clearly
understand and identify all project related costs starting from the feasibility study up to the final testing
and commissioning as well as the operational and maintenance costs. Once the project owner has
proved the intended project is feasible and accordingly made arrangements to finance the project, the
single most important task remaining is to find a capable contractor who can deliver the construction
phase of the project with the lowest possible construction cost, high quality of works and shortest time
possible. For this purpose, project owners usually select contractors based on technical and financial
competitions. As a contractor, in addition to all technical and managerial capabilities, it is usually
difficult and challenging to satisfy the quality and time requirements of the project owner with lowest
construction costs. On the other hand, unless a contractor offers the lowest possible construction price,
there is high tendency of losing the competition and becoming out of business. Therefore, competent
construction cost estimates are vital both to the contractor and the project owner which enables the
execution of the project to the quality standards and time tables set by the owner with reasonable
construction costs. In Ethiopia, almost all governmental, public and private projects are constructed by
contractors based on the conventional design, bid and build procedures whereby the project owners
prepare bidding documents which include all necessary drawings, technical specifications, estimated bill
of quantities, general and particular conditions of contract and contractors compete based on these
bidding documents to get the construction projects based on their submitted tender prices. The sole
basis of these tender prices is the contractor’s unit price of each work item in the estimated bill of
quantities. In the process of bidding, the main objective of a project owner is to find a potential
contractor with the lowest possible tender price and who can execute the project to the satisfaction of
the quality standards stated in the drawings and technical specifications as well as complete the works
within in the time frame stated in the bidding documents. Therefore, in estimating the unit price of each
activity in the estimated bill of quantities, the contractor’s cost estimate shall be competent in order to
get the intended project and at the same time these estimates shall be accurate enough in order to keep
the profitability of the construction company. As a result, this thesis will mainly focus on how to
develop the unit construction costs of an activity and obtain the total construction cost estimation for
local construction projects in Ethiopia.

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