5- Project Cost Estimation

5.1. Introduction
5.2. Types of Costing or Estimation
5.3. Fundamental approach to construction cost Estimation
5.4. Basic Cost Components of a construction project
5.5. Unit Rate Analysis

1
Introduction

• Estimation is the scientific way of working out the

approximate cost of an engineering project before
execution of the work.
• An estimate of the cost of a construction job is the
probable cost of that job as computed from plans and
specifications.
• Project Cost includes:
⁃ Preliminary investigation (project appraisal
costs)
⁃ Design and supervision (consultancy cost )
⁃ Construction works (contractor’s cost )
⁃ Land owning cost, and
2
⁃
 Introduction Cont …
An estimate serves a number of different functions,
depending on the stage of the project, as shown below :
• Feasibility: Initially feasibility of the project need to be
determined. Feasibility Estimate (Conceptual
Estimate).
• Schematic Design (Conceptual design): Sketches are
prepared.
Major elements are defined. Use a preliminary method to
estimate cost. Cost of each element is established (cost
plan).
• Design Development: Progressively the scope of the
project is defined. A series of preliminary estimates are
done during this phase to assure adherence to cost plan. 3
 Introduction Cont …

Contract Document: Finalized drawings & Specifications:

Designer’s estimate: to anticipate and check

contractor’s bid prices.
Bidding Phase: Contractors prepare detailed estimate
to submit bids.
Construction Phase: Estimates are prepared for cost
Control and for change order evaluations.
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 Introduction Cont …
Feasibility Estimate (Conceptual Estimate)
• Needed to make decision proceed/not
with the project
• Costs include:
‾ LAND
‾ CONSULTATIONS/STUDIES
‾ PROJECT MANAGEMENT
‾ CONSTRUCTION
‾ OPERATION & MAINTENANCE

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 Introduction Cont …

Preliminary Estimates and Cost Planning

• The Conceptual Estimate found during feasibility
becomes the initial project budget
• Subsequent design development should remain
within the limit of this budget
• For that purpose, several preliminary estimates are
performed as more details become available
through the design.

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 Introduction Cont …

• Preliminary estimates assign cost to various

assemblies (elements) of the project (Cost
Plan). {substructure, superstructure, interior
partitions & doors, exterior cladding ..etc.}
• Preliminary estimates allow for Value Analysis
– Compare value of an element with its cost,
Consider alternatives, Select desired option.

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 Purpose of cost estimation

Over all the main purpose of cost estimation can be

summarized as follows:
• know the volume of work in reference to the fund available
• Determine actual cost per unit of item
• Identifying engineering estimate of the work for bidding
purpose
• Work out economical use of materials, labor and equipment
• In cases of variations to determine the extra cost to be
incurred
• When there is escalation, to work out the escalation in cost

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 Purpose of cost estimation cont …

• For a good estimate, the actual cost of the proposed work

after completion should not differ by more than 5 to 10 %
from its approximate cost estimate, provided there are no
unusual, unforeseen circumstances.

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 Information required for cost estimation
The following information is required to define cost per
unit of work
• Correct information of the market price of the materials
at the time of need to be used as a basic price
• Correct information of the rates of various categories of
skilled and unskilled laborers as wage rates to be used
for daily work rate
• Output of laborers per day for various types of items
(productivity)
• Correct information of the rates of various categories of
equipment and tools as rental rates to be used for major
items of rates
• Up-to-date knowledge of the construction methods. 10
Knowledge and managerial skills for cost estimation

The following knowledge, managerial talents, and degree

of construction experience make a good estimator.
• Ability to read and understand contract documents,
with special skills in reading construction drawings for
all specialties and related specifications.
• Ability to accurately take off the quantities of
construction work for which he or she is preparing the
detail estimate.
• Ability to visualize the future building from drawings,
which usually requires some years of construction site
experience.
• Knowledge of arithmetic, basic geometry, and
statistics. 11
• Knowledge of building construction methods.
• Knowledge of labor productivity, crew composition, and
impacts of various forecasted site conditions on crew
output.
• Possession of office managerial skills in organizing
project-related cost information.
• Ability to work under pressure and to meet all bid
requirements and deadlines.

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 Factors Affecting Cost Estimation

Factors which affect the cost estimation are

summarized as follow:
• Type of the project
• Construction scheduling
• Bidding environment
• Quality and availability of material and labor
(given in specification)
• Construction facilities /tools and method of
construction
• Location of the site: Transportation charges
• Land charges (lease)
• Nature of subsurface condition 13
 Types of Costing or Estimation

Estimation can be broadly classified as

preliminary (approximate) and detailed.
Preliminary /approximate costing
• This type of cost estimation is required to know
the financial position of the client before costly
detailed designs are carried out.
• Such estimates are based on practical
knowledge and cost of similar previous works.
Examples of approximate cost estimations are
as follows:
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A. Cost per functional unit

• Hospital =cost per bed,

• Dormitory = cost per student,
• Cinema or theatre = cost per seat,
• residential buildings = cost per area,
• road works = cost per kilometer length,
• culverts or bridges = cost per meter span.

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 Preliminary /approximate costing cont…

B. Plinth area method – cost per m2

• Based on Plinth Area- roof area or external dimensions
at the plinth level (Courtyard & open area shall not be
included)
• The rate per meter square is deduced from the cost of
similar building projects in the locality.
C. Cubical Content method – cost per m3
• Based on cubical contents of various buildings, i.e.
Plinth area of the building x height x cubic content rate.
• Height should be taken from the top of flat roof (or
halfway of the sloped roof) to the top of concrete in
foundation.
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 Detailed Cost Estimate (Based on Item Rate)

• This is the most reliable and accurate type of

estimate.

• The quantities of items are carefully prepared

from the drawings and the total cost worked out
from up to date market rates.

• A detail cost estimate thus requires:

o Quantity surveying and
o Analysis of the different rates for the
quantities prepared.
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Fundamental approach to construction cost Estimation
• Efficient construction cost estimates shall address properly
the required project quality, time for completion of works
• In deciding to participate in the intended project tender,
the contractor shall carefully assess the impact of the
following key factors:
- Type of project
- Method of tendering
- Type of construction contract
- Number and progress of contracts already at hand
- Resource availability i.e. skilled manpower, plants and
machineries
- Financial position
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 Fundamental approach to construction cost Estimation cont.

• Once decision is made to participate in the intended tender, the

contractor shall give due attention to the following major items
listed below
- General and particular conditions of contract contained
in the bidding documents
- Technical specifications
- Drawings
- Estimated bill of quantities
- Method of measurement
- Supporting documents such as information regarding
geological formations and hydrological data
- Site visits & Construction method statements 19
Fundamental approach to construction cost Estimation cont...
A. General and particular conditions of contract
Proper understanding of the general and particular
conditions of contract is mainly important for construction
cost estimation in identifying the responsibilities and cost
implications on the project
– Amount and type of performance security
– Amount of advance payment and type of advance
repayment guarantee
– Time for completion of the whole project
– Limit of liquidated damages
– Retention money
– Claims and disputes settlement
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 Fundamental approach to construction cost Estimation cont…

A. General and particular conditions of contract

• Price escalation
• Tax exemptions
• Insurance of the works
• Owner’s risks
• Applicable laws

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Fundamental approach to construction cost Estimation cont.

B. Technical Specification
• Technical specifications specify the following crucial
information to the contractor and it is the sole basis both
for the construction methods to be adapted and the
construction cost of the project.
- Quality of materials
- Quality of machineries and plants
- Quality of workmanship
- Erection and installation methods
- Test and inspection requirements and methods

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Fundamental approach to construction cost Estimation cont.

B. Technical Specification
• Technical specifications basically have restricted
applications, which usually define specific work items.
Therefore, for a better understanding and cost estimation
of the project, the contractor must check the given
specifications for:
- Technical accuracy and adequacy
- Define and clear requirements
- Fair and equitable requirements
- Formats which can be easily used during bidding and
construction
- Legal enforceability
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Fundamental approach to construction cost Estimation

C. Drawings
• The contractor mainly understands from the drawings what type
of construction methods to be adapted during cost estimation as
well as construction of the project.
• Some of the construction methods which need to be addressed
during cost estimation of this building project are:
- Concrete production
- Concrete transportation and placement
- Transportation of construction materials to different floors
- Methods and type of scaffolding
- Types and methods of shuttering works
- Erection and installation of glazing works
- Temporary access for manpower working at different floors
- Skilled manpower requirement 24
Fundamental approach to construction cost Estimation cont…

D. Estimated Bill Quantities

• Estimated quantities of work are also the basis to

determine the type and number of resources to be
deployed during construction of the project.

• Moreover, construction methods shall be selected in

such a way the given quantity of works can be
executed during the completion time of the project.

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Fundamental approach to construction cost Estimation cont.
D. Estimated Bill Quantities
• Based on the estimated quantity of works, the contractor
shall decide the method of construction to be adapted
during executing of the project; such as:
- Type and size of crushing plants
- Type and size of mechanical mixers or batching plants
- Type, size and number of machineries such as dozers,
graders, loaders, rollers, dump trucks and so on.
- Skill and number of manpower requirement
- Type and quantity of construction materials

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Fundamental approach to construction cost Estimation cont…

E. Supporting Documents
• Supporting documents such as geological formations,
hydrological data and other technical reports like socio-
economic studies are usually provided by the owner to
contractors for their own interpretations for heavy
construction projects.
• Therefore, the contractor shall have the technical ability
and experience in interpreting the technical data
provided to determine construction methods to be
adapted which directly affects the construction cost
estimates.

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Fundamental approach to construction cost Estimation cont.
F. Site Visit
i. Location of the site:
• It helps to determine the mobilization and demobilization costs.
• It also helps to determine the transportation cost of materials from
main material suppliers.
• Availability and expected wages of daily labors can be fairly
estimated based on the location of the site.
• Site location also helps to determine the type of camp facilities
required to be constructed such as project offices, living areas, food
accommodations and so on.
• Having proper understanding of site location and local weather
condition helps the contractor to determine salaries and benefits of
staffs, skilled manpower and daily laborers.

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Fundamental approach to construction cost Estimation cont…

F. Site Visit
ii. Location of local construction material
• The contractor shall identify the location and quality of local
construction materials such as quarry area for gravel production,
sand, selected material, water as well as sub base and base course
materials in the case of road projects.
• Moreover, the contractor shall have the general understanding of
the site layout for different plants such as batching and crushing
plants.
iii. Access Roads
• Site access roads to the main works, quarry areas, water supply,
sand, and the like shall be identified which incurs additional
construction and maintenance costs. These costs are extremely
high, incase of heavy construction sites such as road works,
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hydropower projects and so on.
Fundamental approach to construction cost Estimation cont…
F. Site Visit
iv. Water and power supply
v. Communication facilities
vi. Environmental protection
vii. Existing facilities
F. Method of measurement
Contractors shall thoroughly understand the method of
measurement incorporated within the bidding documents before
starting any cost breakdown calculations.
• BaTCoDA Technical specification and method of
measurement
• ERA standard specifications
• Civil Engineering Standard Method of Measurement (CESMM)
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Fundamental approach to construction cost Estimation cont…

G. Construction Method Statements

• Construction method statements give the clear picture of
each project activity execution during the construction
phase of the project.
• The required quality of works as per the specifications,
estimated quantity of works, safety standards, as well as
time for completion are the sole basis in determining the
construction method statements of a project.
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Fundamental approach to construction cost Estimation cont…
G. Construction Method Statements
Construction method statements shall clearly indicate the
following crucial construction issues:
• Skill and number of manpower required
• Type and specification of equipment required
• Quantity and quality of materials required
• Proposed working crews
• Estimated crew productivity
• Estimated duration for completion
• Expected defects and remedial measures

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Fundamental approach to construction cost Estimation cont…

Basic Cost Components of a construction project

Basically the cost of any construction project comprises
A. Direct costs, which include the direct cost of
materials, labor as well as equipments and
B. Indirect costs, which include but not limited to head
office and site overhead costs.
A. Direct Construction Cost
• Direct construction costs are all costs that can be
specifically booked with an activity in a project.
• Direct costs can be budgeted, monitored and controlled
far more effectively than the indirect costs.
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Basic Cost Components of a construction project cont…
A. Direct Construction Cost
• The direct costs mainly include material, labor, equipment and
subcontract costs as described below.
- Direct material costs – These costs referring to the cost of
materials, consumables and components used for executing an
activity including the allowances for wastages.
- Direct labor costs – All costs related to the workers working on
a specific activity such as carpenters, masons, erectors, painters,
plumbers and so on.
- Direct equipment costs – These costs referring to the costs of
machineries and plants used in executing a specific activity.
- Subcontract costs – In case some specific activities are
subcontracted, the subcontract price will be considered as the
direct cost of the activities to be executed by the subcontractor.
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Basic Cost Components of a construction project cont…
B. Indirect Construction Cost
• Indirect construction costs are all costs, which can not be
directly booked under a specific activity in a construction
project but required to keep the whole project operational.
• These costs are also called overhead costs, which mainly
include the head office and site overhead costs.
i. Head office overhead costs
• Head office overhead costs are all costs required to run
the whole operation of the construction company, which
usually administers different projects at a time.
• These costs are not usually associated with specific
project but rather shared proportionally by all projects
under the company. 36
Basic Cost Components of a construction project cont…
B. Indirect Construction Cost
i. Head office overhead costs
Some of the checklists for head office overhead costs are given
below with further clarifications.
• Senior management costs – These refer to costs related with
salaries and benefit packages of the senior management in the
head office.
• Indirect labor costs – Staffs other than the senior management
members working at the head office such as the technical,
administrative, marketing, finance and supply staffs.
• Head office building costs – In both cases, costs are incurred in
such a way either rental costs will be paid, if the building is rented
and building depreciation will be considered, if the building is
owned.
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Basic Cost Components of a construction project cont…
B. Indirect Construction Cost
i. Head office overhead costs
• Bidding Expenses – These costs are usually associated with bid
document purchases, site visit expenses, bid bonds and so on. These
costs are sometimes called sunk costs.
• Expertise service costs – These costs will be incurred when
professional services are required such as the services of external
auditors, lawyers, management consultants and external trainings.
• Office furniture and equipment – Different office furniture and
equipment are required depending on the size and standard of the
company.
• Office running expenses – The head office operation requires lots
of miscellaneous expenses such as telephones, fax, internet
services, stationery, mail services and so many others.
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Basic Cost Components of a construction project cont…
B. Indirect Construction Cost
i. Head office overhead costs
• Workshops, garages and warehouses – Costs related to central
workshops, garages and warehouses such as the depreciation costs
of the buildings or rental expenses.
• Bank charges – It is very natural that companies may borrow
money from banks. Therefore, the interest to be paid on the
borrowed capital shall be considered under the head office costs.
• Insurance charges – Employees medical insurance, office building
and small vehicles insurance.
• Transportation and travel expenses–costs related to
transportation, per diem.
• Sundry expenses – These are miscellaneous expenses such as
advertisement expenses, reception parties and donations.
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Basic Cost Components of a construction project cont…
B. Indirect Construction Cost
ii. Site overhead costs
• Site overhead costs are all costs required to run the whole operation
of a specific construction project at site level.
• These costs are not associated with specific activity in a project but
rather shared proportionally by all activities within the project.
Some of the site overhead costs are listed below with further
clarifications.
- Site management costs – These costs refer to costs related
with salaries and benefit packages of the site management
members in the project site.
- Indirect labor costs – salaries and benefits of staffs other than
the site management members working at the project site such
as site engineers, office engineers, administrative and finance
staffs, data collectors and so on. 40
Basic Cost Components of a construction project cont…
B. Indirect Construction Cost
ii. Site overhead costs
• Mobilization and demobilization costs – These costs are mainly
transportation costs.
• Tender Expenses – These costs are related with the costs of the
contract performance security, advance repayment guarantee,
contractor’s all risk insurance, insurance of the works and third
party insurance depending on the contract conditions agreed.
• Site offices – site offices are constructed from different materials
such as corrugated iron sheets, prefabricated materials, material
packing steel containers, steel structure and normal hollow concrete
blocks.
• Expertise service costs – These costs will be incurred when
professional services are required at the project site such as
lawyers, claim experts and so on. 41
Basic Cost Components of a construction project cont…
B. Indirect Construction Cost
ii. Site overhead costs
• Office furniture and equipments – Different office
furniture and equipments are required depending on the
size and location of the project.
• Office running expenses - The site office operation
requires different expenses such as telephones, fax,
internet service, mail service and stationery.
• Radio communications - If the coverage area of the
construction project is vast, hand held and stationed
radio communications may be used within the site and
with the head office.
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Basic Cost Components of a construction project cont…
B. Indirect Construction Cost
ii. Site overhead costs
• Camp facilities – The costs of construction and operation of
other facilities such as restaurants, recreational centers and
playgrounds are also included under the camp facilities.
• Access roads – Depending on the topography and location of
the project site, different access roads may be required to
construct such as detour roads, access roads to quarry and
disposal areas, etc.
• Water and power supply – All the site offices, camp
facilities, the construction itself requires water and power
supply for operating the whole project properly.
• Workshops garages and warehouses, Transportation and
travel expenses, Insurance charges, etc… 43
Basic Cost Components of a construction project cont…

C. Risk Allowance
Usually contractors incorporate risk allowances in their tender
prices to compensate the negative impacts of different risks such
as contractual, technical, political and economic risks.
• Contractual risks are usually stemming from the contract
agreements with the project owner, subcontractors and
suppliers.
• Technical risks are associated usually with the clarification of
the technical specifications, working drawings, construction
technology and difficulties in understanding new method of
constructions.
• Political and economic risks reflect the impact of political
situations, stability of economic policies, inflation and price
escalation on the execution of the intended construction project.
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Basic Cost Components of a construction project cont…

D. Profit and Income Tax

• Construction projects are executed by contractors whereby
these contractors will commit to invest their capital to get
maximum possible profit from the contracts to be performed.
• A profit margin entirely depends on the market
competitiveness and company strategies.
• Any construction company operating a profitable business in
Ethiopia shall pay 30% of its gross profit as an income tax as
per the income tax proclamation No. 286/2002.
• If the contractor is registered for VAT, which is usually the
case, the contractor’s construction cost estimate shall also
include Value Added Tax which is 15% of the tender amount
in accordance with the Value Added Tax proclamation No.
285/2002. 45
Unit Rate Analysis
• Rate Analysis is the process of fixing cost per unit of
measurement for the different item of works.
• Total cost per unit of work (TC) = Direct cost (DC) +
Indirect cost (IC)
• Direct Cost (DC) includes cost due to material (MC),
cost due to labor (LC), cost due to equipment (EC)
• Indirect Cost (IC) covers overhead costs, and
contractor’s profit.
• In order to facilitate estimation Material break
down is essential
• Different formats, Excel sheets and other software are
used for rate analysis. 46
Unit Rate Analysis cont…
It is advisable that contractors shall adapt suitable
construction cost estimation formats which enables to
see all the detailed cost breakdowns of the required:
– Direct materials,
– Labor and equipment
– Head office and site overhead costs,
– Risk allowances,
– Profit,
– Income tax and
– Value Added Tax (VAT) or Turnover tax (TOT).
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 Unit Rate Analysis cont…

I. Direct Material Unit Cost

• Direct material cost is the total cost of construction
materials required to execute a unit of specific activity
in a project.
• In estimating the direct material cost, the contractor
shall obtain the quantity and quality of materials
required to produce the specific unit of an activity

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 Unit Rate Analysis cont…
I. Direct Material Unit Cost (E)
In order to have a better material cost estimation, contractors shall
develop their own material price database and the database should
contain, but not limited to, the following information:
– Material price at place of delivery
– Supplier’s address such as telephone, fax and mail address
– Supplier’s contact person
– Supplier’s email address and web site
– Supplier’s credit facility
– Country of origin
– Material delivery time
– Place of delivery such as at the supplier’s shop, project site,
Addis Ababa air port or Djibouti port
– Transportation charges usually per ton-km as well as
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transporters
 Unit Rate Analysis cont…
I. Direct Material Unit Cost (E)
The contractor shall add the following costs to the material
supplier’s price to get the material unit cost at the project
site:

⁃Loading expenses at the supplier’s place of delivery

⁃Transportation costs to the project site
⁃Insurance charges during transportation to the project site
⁃Unloading expenses at the project site
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 Unit Rate Analysis cont…

II. Direct Labor Unit Cost (F)

• In calculating the direct labor cost, contractors need to

calculate the direct labor hourly cost which is the total
hourly cost of labor crew required to execute a specific
activity in the project.

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• In estimating the direct labor hourly cost, the contractor
shall obtain the:
- Number of labor,
- Skill and labor utilization factor (UF)
- Labor basic salary and
- Labor index from his previous records and the
labor market.

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 Unit Rate Analysis cont…
III. Direct Equipment Cost (G)
• In order to calculate the direct equipment cost, contractors need to
calculate the direct equipment hourly cost which is the total hourly
cost of equipment crew required to execute a specific activity in a
project.
• In estimating the direct equipment hourly cost, the contractor shall
obtain
- The number of equipments,
- Capacity and equipment utilization factor (UF), and
- The equipment hourly cost.

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 UNIT COST ANALYSIS SHEET
Project:- _______________________________________ Labor Hourly Output = ________
Work Item:- ____________________________________
Volume of Work item = ___________ Result: __________

Material cost (1:01) Labor hourly cost (1:02) Equipment hourly cost (1:03)
Labor Indexed Hourly
Type of Cost by hourly Hourly Type of rental Hourly
material Unit Qty Rate per unit Grade No. UF cost cost equipment No. UF rate cost

Total (1:01) Total (1:02) Total (1:03)

B) Man power unit cost = C) Equipment unit cost =
A= Material unit cost (1:01) = _________ 1:02/Hourly output 1:03/Hourly output

B) = = _____ C= = _____

1) Direct cost of work item = (A + B + C ) = _______________

2) Overhead cost = 10%(A + B + C) = ____________
3) Profit = 15%(A + B + C) = ____________
Total Unit Cost = 1+2+3 = _____________

* Inclusive of Waste, transport handling, etc.

* Inclusive of benefits, travel subsides, and cost of overtime
UF = Utilization Factor