4.

0 DIRECT PROJECT COSTS

4.1 INTRODUCTION

As explained in Sections 2 and 3, the level of detail required to address direct costs is
dependent on the project design phase and the magnitude or impact of a particular item in
the Work Breakdown Structure (WBS) on the overall project cost. Generally speaking,
the cost estimator should spend the most amount of time developing detailed cost
estimates for those items in the WBS that have the most impact on the overall project
cost.

As a practical matter, many contractors break their costs down into four distinct cost
types:

• Labor
• Equipment
• Materials
• Subcontracts
This section provides recommendations on how to approach to each cost type.

When developing a cost estimate, the estimator should always include a constructability
review and a construction schedule. A thorough review of construction issues during the
constructability review will establish a construction plan and identify obstacles and
opportunities such as access, work space, weather, and other conflicts. Development of a
good construction schedule will similarly identify the overall project approach, while also
identifying conflicts in activities, and even equipment selection. This schedule should
also consider the effects of double shifting, weather, work windows, work seasons,
permit restrictions, etc. As with the cost analysis, the schedule should be updated at each
stage of project development, as schedule driven costs may have significant impacts on
overall project cost.

4.2 LABOR COSTS

Prior to calculating direct costs for any item in the WBS, approximate labor cost per hour
must be calculated for the anticipated crafts. This might include equipment operators,
laborers, carpenters, ironworkers, etc. Within each of those crafts, the cost estimator may
want to further determine costs for various skill levels within each craft. For instance, a
roller operator would likely have a lower wage than a skilled crane operator. A good
place to start would be the U.S. Department of Labor’s Prevailing Wage Rates available
on the U.S. DOL website, www.dol.gov. The cost estimator, knowing the project
location, can find base wage rates and benefits required by law for public works projects.
While these rates are appropriate for public works projects, and generally mirror union
scale rates in the U.S., various factors must be taken into account. In Right to Work
states, such as Wyoming and Texas, the wages listed by USDOL may be less than the
actual wages normally paid by contractors in that area. Beyond prevailing wage rates,

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per diems, or other incentives may need to be added to wages to account for travel to and
from projects in more remote locations.

Once the cost estimator has determined the base wages and benefits, an appropriate
amount for labor burdens, taxes and overtime must be applied. Burdens and taxes can
apply to both base wages and benefits and include FICA (Social Security), Medicare,
Federal Unemployment, State Unemployment, and Workers’ Compensation. The sum of
these burdens and taxes can be as much as 20 to 30 percent or more of the base wage
amount. The cost estimator should also consider overtime costs if anticipated on the
project. For instance, if the project is anticipated to be managed on five, 10-hour days
(50 hours per week), then the cost estimator should calculate the wage for each craft
accordingly.

Although crew size and production rates are discussed in Section 4.6, it is worth
mentioning here that, when bidding a project with expected union labor, the estimator
needs to be aware of local union work rules, which often have additional staffing
requirements for different experience levels for various tasks.

4.3 EQUIPMENT COSTS

For the purposes of construction cost estimating and the scope of this paper, equipment
costs are defined as machinery such as construction equipment, conveying systems,
processing plants, tools, and instruments that are required during construction of the
project, but do not remain a permanent part of the project.

As with other direct costs, the estimator should perform detailed analysis using individual
equipment costs for significant cost WBS items warranting such analysis.

During the course of cost estimating, the estimator should consider overall project
equipment selection based on project conditions, project specification requirements, and
knowledge of equipment capabilities. Individual WBS item equipment needs should be
addressed within the context of the entire project scope. That is to say, a small
excavation or fill task well suited to scraper operation may not be cost-effective if
scrapers have no other practical application on the project. Simply put, the cost of
mobilization and demobilization of scrapers for that WBS item may not be cost-effective.
It is noted that most contractors have their own equipment fleet. Individual contractor
bids will be based on utilization of such fleets, thus internal costs for equipment can vary
widely between contractors.

Factors affecting equipment selection and, ultimately, equipment costs include, but are
not limited to:

• Job schedule (production rate)

• Job size
• Project specification requirements
• Mobilization and demobilization costs

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 • Air pollution restrictions
• Noise ordinance restrictions
• Type of materials handled or installed
• Availability of space (access, working, storage, standby/lay down)
• Mobility and availability of equipment
• Suitability of equipment for other uses
• Equipment capabilities
• Number of shifts
• Distances material must be moved
• Steepness and direction of grades
• Weather conditions
• Hauling restrictions
• Standby time
• Load bearing conditions
• Contract requirements
• Decontamination and/or disposal of contaminated equipment
• Potential salvage or resale value of plants
• Contractor owned equipment versus rental or leased equipment

In the analysis of equipment costs of any one WBS item, the cost estimator should
evaluate the need for spare or support equipment required throughout the project.

Equipment costs can generally be divided into two categories: Ownership Costs and
Operating Costs, as discussed below.

4.3.1 Equipment Ownership Costs

Ownership costs are fixed costs, including Capital Cost, Depreciation, Cost of Facilities
Capital, and Equipment Overhead. Recovery of these costs for a contractor is generally
accomplished by developing an hourly rate for the project. The rate is generally based on
the number of expected work hours for the fiscal year, sometimes adjusted for project
usage. This is similar to the rate calculations performed by USACE, Equipment Watch
Cost Reference Guide / Blue Book, and various state departments of transportation.
These ownership costs are briefly discussed below:

• Depreciation spreads the cost of the equipment purchase over a number of years.
The basic concept involves determining the decrease in value of the equipment as
the equipment ages and expressing this figure as a cost per hour. There are many
methods of calculating depreciation, which is beyond the scope of this document.
• Cost of Facilities Capital (CFC) is an hourly cost based on cost formulas in the
Equipment Watch Cost Reference Guide. CFC is an allowance for the cost of

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 money invested in the equipment which takes into account the purchase price of
the equipment, the economic life of the equipment, the salvage value, and the cost
of money rate (interest, as determined by the U.S. Treasury Department). CFC is
intended to compensate a contractor for the capital cost of employing certain
facilities (equipment and machinery) in the performance of construction contracts.
• Equipment Overhead is defined as indirect costs associated with equipment
ownership. These costs include insurance, property taxes, inspections, licenses,
security and storage, and recordkeeping.
• Overhead Labor is charged as part of equipment ownership costs to cover the cost
of the labor needed to rebuild and recondition major components, such as engines,
undercarriages, transmissions, etc. due to wear and tear.
• Overhead Parts are incorporated into equipment ownership costs to cover the cost
of parts required for rebuilding and reconditioning major components, such as
engines, undercarriages, transmissions, etc. that are not part of operating costs.

4.3.2 Equipment Operating Costs

Equipment operating costs are those costs associated with field repair, fuel expenses,
ground engagement, and electricity costs incurred while operating a piece of equipment.
These costs include the following elements:

• Field Repair (Labor) costs are charges to account for labor costs during normal
field repair and maintenance, such as adjusting, repairing, or replacing minor
components like carburetors, injectors, pumps, seals, batteries, etc.
• Field Repair (Parts) costs are charges to account for minor parts required during
normal field repair and maintenance, such as plugs, injectors, pumps, seals,
batteries, etc.
• Fuel costs are typically the largest component of equipment operating costs. The
estimator should be aware of local fuel costs and factor these costs along with fuel
consumption rates to determine this element. The estimator may need to
anticipate upward or downward trends in fuel cost during the life of the project.
This is especially true of long-term projects. On large projects, fuel costs are
sometimes hedged by either the owner or the contractor.
• Lubrication costs are accrued to offset the costs for grease, oils, filters, and the
labor and lube truck required to maintain the equipment.
• Tire costs are expenses incurred for tire repair and replacement, if required.
• Ground Engaging Components (GEC) costs are associated with repair or
replacement of components such as cutting edges, bucket teeth, ripper teeth,
tracked equipment pads, and drums. GECs are directly affected by project
conditions, such as rock and ground pH.
• Electricity costs should be accounted for in equipment operating costs by
determining the cost of power and the rate of use.

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Equipment ownership and operating costs are available to the cost estimator from a
variety of sources, including Equipment Watch Rental Rate Blue Book for Construction
Equipment, USACE, state departments of transportation, AGC, and others.

4.3.3 Consumables

The cost for normal operating expendables with high variable wear rates (i.e., drill bits,
saw blades, etc.) are excluded from Equipment Costs and are considered consumables.
These should be accounted for in individual work items under material costs. Guidelines
on the costs of consumables are available from numerous equipment manufactures (e.g.
Caterpillar, Ingersoll Rand, Sandvik).

4.3.4 Small Tools

The cost associated with small power and hand tools and miscellaneous non-capitalized
equipment and supplies should be estimated as a percentage of the labor cost for each
project. The allowance must be determined by the cost estimator in each case, based on
experience for the type of work involved. Generally speaking, a labor intensive project,
such as pipelines, tunnels, or concrete work, will require more small tool costs per man-
hour (or work hour) than an equipment intensive project, such as excavation or earthfill
placement. Small tools costs generally range from $1 to $2 per work hour.

4.4 MATERIAL COSTS

Materials are defined as those items (materials and installed equipment) that are
incorporated into and remain part of the feature or structure.

Supplies are defined as those items that are used during construction but do not remain a
permanent part of the feature or structure (e.g., concrete forms).

Material and supply costs are an integral part of most cost estimates. For the purposes of
this document, the costs of materials and supplies include such elements as fabrication,
shipping, warranties, and supplier markups. Taxes are generally handled as one item in
the Indirect Project Costs, as detailed in Section 5.

4.4.1 Sources for Pricing

The cost estimator producing an Engineer’s Estimate may obtain prices for materials and
supplies from various sources, including, but not limited to, catalogs, vendor price sheets,
vendor quotations, pricing services (e.g., RSMeans Cost Estimating Manuals, Cost Data
Online [Richardson’s Engineering], GSA Advantage, etc.), and historical data records
(e.g., USBR’s EXPECT Program, cost curves, bid abstracts, contractor proprietary
database, etc.). The estimator should review the source of the pricing and assess the
reasonableness and applicability prior to use. Care should be exercised when using this
type of cost data to make proper allowances for long-lead times for manufacture and

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delivery, quantity discounts, escalation, location factors, and other factors affecting
contractor cost.

As an additional resource, vendor quotes should be obtained for all significant materials
and installed equipment (e.g., large quantity or high cost items) and for specialized or not
readily available items. Quotations may be received by email, fax, in writing or via
telephone. It is preferable to obtain quotes for each project to ensure that the cost is
current and that the item meets specifications. It is important to verify the vendor’s scope
so that pricing is complete. If possible, more than one quote should be obtained to be
reasonably sure the quoted prices are complete and representative.

Ensuring that vendors have enough information is important if the engineer is to receive
an accurate quote. If the vendor understands the project conditions, intended use, etc.,
chances are that the resulting cost estimate will be more accurate. Quotes should be kept
confidential by the owner and engineer to protect the integrity of the bidding process.

4.4.2 Freight

The estimator should check the basis for the price quotes to determine if they include
delivery to the job site. If they do not include delivery, freight costs to the job site must
be determined and added. The supplier can usually furnish an approximate delivery cost.
For freight, Free on Board (FOB) refers to the point to which the seller will deliver goods
without additional charge to the buyer.

If the materials or supplies are FOB factory or warehouse, freight costs to the job site
should be added to the cost of the materials or supplies. If the cost of materials or
supplies includes partial delivery, i.e., FOB to the nearest rail station or port, the cost of
unloading and transporting the materials or supplies should be included in the estimate.

4.4.3 Material Handling and Storage

Estimators should consider costs of off-loading, handling and stockpiling, and

warehousing materials.

If the materials or supplies are a large quantity or an item that requires extensive labor
and equipment for unloading and hauling, or if they have special handling and/or storage
requirements, the estimator should prepare a labor and equipment estimate for the
material handling and delivery to the installation or storage location and consider these
direct costs.

For common items, such as general construction materials or equipment needing secure
storage, the cost for the security fencing and/or site security personnel, temporary
building and material handling should be considered as an indirect cost and be included
in the job site overhead cost.

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4.4.4 Allowance for Waste and Loss Factors

Waste and loss considerations may be included in material unit price calculations. For
example, USBR’s preferred practice is to leave the pay item (bid item) quantity
unchanged and account for waste and loss by increasing the forecast quantity (quantity
used to calculate the unit price), thus increasing the unit price while leaving the pay item
quantity unchanged. Sometimes the handling of this waste incurs a cost. For instance,
drainage blanket aggregates have several layers of waste in handling – waste in the
crushing, waste in the loading and trucking, and waste in placement beyond pay lines. If
any of these activities will incur waste, it should be accounted for. For example, hauling
10 percent more material will take 10 percent more trucking effort. A note should be
included in the estimate explaining the methodology used to determine waste and loss. As
an example, 5% material swell can cause a 5% increase in handling effort for that
material.

4.4.5 Escalation for Material Pricing

Many projects require that the costs for materials be escalated from the present to the
projected installation date. Therefore, quotes are requested in advance of the expected
installation date. However, suppliers are reluctant to guarantee future prices and often
will only quote current prices especially during inflationary times or times of high
product demand. It may be necessary to adjust current prices to reflect the cost expected
at the actual purchase date. This cost adjustment, if required, should not be included as a
contingency, but should be clearly and separately defined in each estimate. Adjust current
pricing to future pricing using appropriate escalation factors and methodologies.
Escalation adjustment calculations should be clear and maintained as part of the cost
estimate backup documentation. The address of escalation should be coordinated with
the escalation approach on the entire estimate. If escalation of the entire project will be
handled as one adjustment, then escalation of individual material prices may not be
warranted.

4.5 Subcontractor Costs

Generally, the cost estimator is not concerned about whether WBS items are
subcontracted or self-performed by the general contractor. However, on water resources
projects, numerous opportunities arise for the use of specialty subcontractors and
proprietary methods, such as slurry wall construction, foundation improvement
technologies, instrumentation, and others. Similar to material costs, the cost estimator
should contact specialty subcontractors to better understand the application of techniques
and the cost of this work. For the purposes of this document, the costs of subcontracted
work include such elements as subcontractor-provided materials, subcontractor taxes, and
subcontractor markups. Overall project taxes would generally be handled as one item in
the Indirect Project Costs as detailed in Section 5.

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4.6 PRODUCTION RATES

In general, to identify labor and equipment costs for estimates, anticipated crews are
assembled and time durations are applied for appropriate crews to perform specific
quantities of work or WBS items. The durations of time are based on the assumed
production rates applied for performing the specified amount of work. For example, if
1,000 cubic yards are to be excavated and a production rate of 50 cubic yards per hour is
applied, a production duration of 20 hours is required to perform the specified
excavation.

Therefore, the components required to come up with a production rate are the duration of
time, the work-hours (and/or equipment hours) involved, and an amount of work
produced. The estimated production rates can be assumed based on the estimator’s
experience (e.g., personal observations and /or time studies), a historical database, cost
reference guides such as RSMeans Construction Cost Data Books, Caterpillar Handbook
or VSIM Production guidelines, or other sources.

4.7 SUMMARY

As with other elements of a responsible construction cost estimate, the level of detail in
developing direct costs needs to be determined according to the magnitude of each WBS
item of the estimate. The cost estimator should spend proportionately more time
evaluating costs of the more significant WBS items.

The cost estimator should break costs down into four distinct cost types: Labor,
Equipment, Materials, and Subcontracts and follow the guidelines established for each
above.

When evaluating labor and equipment hourly costs, it is important to find a reasonably
good base rate and then factor in additional costs associated with labor taxes, labor
burdens, overtime, equipment operating conditions, and other project factors. These
hourly labor and equipment rates can then be applied to crews and productions to arrive
at expected unit costs and total cost for various WBS items.

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 5.0 INDIRECT PROJECT COSTS
5.1 INTRODUCTION

Indirect Project Costs are those not addressed in specific Work Breakdown Structure
(WBS) items as Direct Costs or recovered as General and Administrative (G&A) Costs.
They are generally associated with project-specific overhead costs that occur on the
project.

Indirect costs can generally run in the range of 8 to 20 percent of overall project costs. It
is important to understand the anticipated construction contract terms and conditions,
including which costs must be absorbed as indirect and which are addressed as WBS or
bid items. For instance, the contract may anticipate bid items for such costs as a quality
control program, safety, or site security. In those instances, related costs will not be
included as indirect costs, but addressed in their respective WBS items or bid items.

It is also important to understand the project schedule. Indirect costs can generally be
separated into two distinct categories; time-sensitive and cost-sensitive. Time-sensitive
indirect costs are driven by schedule. A good example would be job staff. The cost of
employing the project management staff is directly related to the schedule. Cost-sensitive
indirect costs are driven primarily by the overall cost of the project. A good example of a
cost-sensitive indirect cost is bond cost. The cost of performance and payment bonds are
directly related to the overall project cost. It is important for the estimator to make this
distinction and account for time-sensitive costs properly. Too often, estimators ignore the
project schedule when estimating indirect costs.

At the conclusion of this section, recommendations are provided regarding the

appropriate estimating strategies for indirect costs for each of the different phases of
project development.

5.2 BONDS

5.2.1 Surety Bonds

Surety bonds are three-way agreements between a contractor (the principal) and a second
party (the surety) to ensure fulfillment of the principal's obligations to a third party (the
obligee/owner) by the surety. The contractor’s (principal’s) assets are pledged to the
surety as part of an Indemnity Agreement.

In most Government construction contracts, the Government is the obligee.

If the principal obligations are not met, the bond ensures project completion or payment,
to the extent stipulated, of any loss sustained by the obligee.

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5.2.2 Bid Bond

A bid bond is a bond provided by a bidder’s surety to guarantee that the bidder will enter
into a contract with the owner at the bidder’s bid price. Generally, a bid bond has no cost
to the bidder (contractor) or project.

5.2.3 Performance and Payment Bonds

A Performance Bond is provided by a surety to guarantee that the contractor provides

proper performance of the construction contract, including payment of subcontractors and
vendors. A Payment Bond is provided by the surety to guarantee that the contractor pays
its third-party obligations associated with the contract. Essentially, the contractor
purchases a performance bond and the payment bond is issued jointly at no extra cost.
Bond costs vary depending on the industry, location, and financial strength of the
contractor seeking the performance bond.

5.2.4 Maintenance and Warranty Bonds

Maintenance and warranty bonds guarantee against defects in workmanship or materials

for a stated period of time after the acceptance of the completed work. They sometimes
incorporate an obligation guaranteeing "efficient or successful operation," or “nameplate
hydroelectric generating capacity,” or other obligations of like intent and purpose.
Maintenance and warranty bonds carry separate costs from performance and payment
bonds. They are significantly less expensive.

5.2.5 Bond Amounts

Concerning U.S. government projects, performance and payment bonds are required for
all construction contracts of $100,000 or more and some form of payment guarantee for
lesser value contracts (FAR 28.102). The cost of all payment bonds, performance bonds,
maintenance bonds, and other types of bonds deemed to be appropriate by the estimator
should be added to the cost estimate.

Performance bond costs are generally scaled so that a higher rate applies to lower value
contracts and rates are reduced with increasing contract amounts. A typical example of
bond rates is given below:

First $500,000 $30 per $1,000

Next $1,000,000 $25 per $1,000
Next $5,000,000 $20 per $1,000
Next $10,000,000 $15 per $1,000
Remaining rate $14 per $1,000

Using the above example, a $20 million project would carry a bond cost of (($500x$30) +
($1,000x$25) + ($5,000x$20) + ($10,000x$15) + ($3,500x$14)) equaling a $339,000
premium cost, or about 1.7 percent of the contract amount. For the purposes of
engineer’s cost estimates, a straight percentage rate between 1.5 and 2.5 percent may be

25
sufficient. Additionally, a premium will be applied for project durations beyond two
years.

It is important to recognize the cost of subcontractor performance bonds. Subcontractor

bonds are generally more expensive than the prime contractor performance bonds. Rates
are typically between 2 and 3 percent of the subcontract amounts and should be applied
to the estimate for the expected subcontract amounts. While it is noted that the engineer
does not have knowledge of what items will be subcontracted, reasonable assumptions
should be made.

Warranty bonds generally run at a rate of about 0.2 percent of the project value per year
of warranty beyond one year.

5.3 SAFETY PROGRAM

Analyzing the cost of a project’s safety program requires understanding of the contract
requirements and the project schedule. The costs of a safety program are generally time-
sensitive. If the project general conditions or special provisions require a site safety
manager as a separate staff position, this needs to be accounted for in the estimate. A
good general approach is to estimate the number of safety positions, i.e., safety manager,
site safety representative, etc.; add the cost of safety facilities, such as a first aid station,
ambulance, pickup trucks, and office facilities; account for night shift or additional shifts;
and develop a monthly cost. The monthly safety program cost can then be applied to the
overall duration of the project or safety program.

5.4 QUALITY CONTROL PROGRAM

Estimating the cost of the quality control (QC) program requires a similar approach to
that described above for the safety program, again having an understanding of the
contract requirements and the project schedule. The cost of a QC program is also time-
sensitive. Similar to estimating the safety program, estimate the number of QC positions,
i.e., QC manager, QC technicians, etc.; add the cost of QC facilities, such as QC lab, QC
equipment, third-party tests, pickup trucks, and office facilities; account for night shift or
additional shifts; and develop a monthly cost. The monthly QC program cost can then be
applied to the overall duration of the project or QC program.

5.5 CONTRACTOR AND RESIDENT ENGINEER JOB STAFF

Job staff costs are generally associated with salaried project positions, such as project
manager, resident engineer, inspector, project general superintendent, area and craft
superintendents, staff engineers, project secretaries, etc. It is important to recognize
second and third shifts, if required, and also to recognize positions required by the
contract. In estimating these costs, a good approach is to list the number of personnel
required at each position and the duration of that position required by the project
schedule. Fully burdened monthly rates for these positions can then be applied
appropriately, as would any per diem costs associated with staff travel. Costs ancillary to

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the staff, such as job facilities, pickup trucks, etc., are generally handled in other items
discussed in this paper and are therefore not included in staff costs.
Staff positions to address in the estimate may include the following (be sure to address
multiple shift requirements):

• Project manager
• Superintendents
• Safety engineers
• Office/field engineers
• Timekeepers
• Foremen
• Master mechanics
• Contracts managers
• Controls engineers
• Quality inspectors
• Resident engineers

5.6 MOBILIZATION AND DEMOBILIZATION

The cost of mobilization and demobilization includes both the freight cost of moving
equipment and facilities to and from the project site and the assembly and disassembly of
the equipment. Depending on the physical size of the various equipment and the number
of individual pieces of equipment, this task can take crews of mechanics several weeks to
accomplish. These mechanic crews may also need additional equipment, such as a crane,
to assemble certain pieces of equipment. This can happen multiple times over the life of
the project as various equipment needs are addressed or as seasonal needs dictate.
Another significant mobilization and demobilization cost is the relocation of contractor
staff and families to the project site area.

The cost estimator can approach the physical moving of the equipment in terms of hauled
miles, or cost per loaded mile. This will vary by the size and weight of equipment, the
need for special permits, pilot cars, etc. Generally, the cost estimator should make
allowance for each anticipated piece of equipment and make some additional allowance
for unanticipated pieces. During the engineering phases of a project, it is not likely that
the cost estimator would be able to know where the equipment sources would be and
would therefore need to make some type of educated guess as to how far the equipment is
likely be shipped to and from the project site. Of equal importance is anticipation as to
whether various pieces would need to be moved seasonally to and from the project.
Relocation specialists can provide cost information for staff moves.

It is recommended that the cost estimator break down mobilization and demobilization
into three categories of work: equipment transportation, equipment
assembly/disassembly, and staff relocation.

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 • Transportation – break the cost down into three categories;
o Large pieces of equipment requiring heavy duty transports and pilot cars
o Medium loads requiring lowboys
o Light loads requiring a truck and trailer or float

Each category can be summarized by the number of loaded miles anticipated and
the unit cost for that category of transport. A regional trucking and transportation
firm could give the cost estimator an idea of cost per loaded mile.

• Assembly/Disassembly – The cost estimator can estimate the number of crew

hours and hourly crew cost to assemble and dissemble the fleet of equipment
• Staff – The cost estimator can use data from relocation specialists for housing,
packing, moving, and unpacking, contractor staff time per move, etc, to estimate
the cost.

Keep in mind that specialized equipment such as batch plants, aggregate processing
plants, and marine barges require special attention and should be addressed individually.

Depending on the level of detail of the cost estimate, the estimator may approach
equipment mobilization and demobilization as a percentage of the overall cost of the
project. Too often, this is approached as the same percentage on projects of very different
nature. The cost estimator should account for such factors as the equipment intensity of
large earthwork projects, seasonal mobilizations, and the remote nature of a project
requiring equipment to be transported long distances.

5.7 JOB OFFICES AND FACILITIES

Job facilities may include office trailers, shop facilities, furniture, computers, power,
heat, sanitary, water, security, and other physical facilities. These are time-sensitive costs.
A good approach to estimating the costs of these facilities is to list out the requirements
based on the number of staff positions, conference room space, contract requirements,
etc., and develop a monthly job facilities cost. This monthly cost can then be applied to
the project duration. Don’t forget to address setup and tear-down costs as well as
engineer/owner facilities required by the contract.

• Contractor’s offices
• Owner/engineer offices
• Office furniture and equipment
• Tool and storage (cargo containers, trailers, etc.)
• Shop facilities
• Temporary utilities (electricity, water, communication)
• Temporary toilets
• Lay-down/staging areas

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5.8 INDIRECT EQUIPMENT COSTS

Indirect equipment might include site equipment that is not specifically associated with
any particular work item or group of work items, but must be absorbed as an overall
project indirect cost. Examples of indirect equipment costs might include:

• Trucks and automobiles

• Forklifts
• Generators
• Compressors
• Pumps
• Hoists and scaffolding
• Cranes

5.9 GENERAL AND MISCELLANEOUS

A host of other costs that may not fall into other categories discussed in this section must
be addressed. Such costs might include:

• Site security
• Telephones – landlines and mobile
• Temporary fencing
• Yard facilities and improvements
• Office supplies
• Postage and FedEx/UPS charges
• Signs
• Photographs
• Fire suppression
• Drinking water
• Dust control
• Noise control
• Personnel Protective Equipment (PPE)
• Drug testing program
• Permit application costs

5.10 ENVIRONMENTAL PROGRAM

Estimating the cost of an environmental program requires a similar approach to those

described above for the QC and safety programs, again requiring an understanding of the
contract requirements and the project schedule. The cost of an environmental program is
also time-sensitive. Generally, an environmental program will follow the requirements of

29
various environmental permits. Some of these costs may be accounted for in the direct
costs, so coordination of this item and any direct costs, such as silt fences, sediment
basins, etc., will be required. Similar to estimating the safety program, begin by
estimating the number of environmental positions, i.e., environmental manager; add the
cost of associated facilities and equipment, third-party costs, and pickup trucks; account
for night shift or additional shifts; and develop a monthly cost. The monthly
environmental program cost can then be applied to the overall duration of the project or
environmental program.

5.11 CONSTRUCTION SURVEYING AND STAKING

Survey costs generally include establishing a site control survey, construction staking,
and as-built surveys. Costs can be both schedule- and cost-driven. Estimating these costs
may be a matter of determining the number of survey crew hours needed to keep up with
contract requirements and the pace of construction, then applying a crew cost rate to the
hours determined. Overall survey costs often run between 0.75 and 1.25 percent of
project cost.

5.12 INSURANCE AND WARRANTY COSTS

Many contracts require various types of insurance and/or warranties. Examples follow.

5.12.1 Builder’s Risk Insurance

Builder’s risk insurance provides monetary reimbursement for losses related to

equipment, vandalism, etc. Builder’s risk policies can be expensive and often carry high
deductibles. It is important to understand the exposure, premium cost, deductibles, etc.
If a builder’s risk policy is anticipated or required by the contract, it should be addressed
in the estimate.

5.12.2 General Liability Insurance

The general liability policy protects the contractor from claims resulting from the
contractor’s construction operations that result in bodily injury or property damage to a
third party. Generally speaking, this policy cost is absorbed in the general contractor’s
G&A and not as a specific project cost. Project-specific limits required by the anticipated
contract, which are higher than normally carried by contractors, will result in additional
cost that should be addressed in the estimate.

5.12.3 Truck and Automobile Insurance

Vehicle insurance protects the contractor from claims resulting from the contractor’s
vehicle operations that result in bodily injury or property damage to a third party.
Generally speaking, this policy cost is absorbed in the general contractor’s G&A and is
not treated as a specific project cost.

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5.12.4 Manufacturer’s Warranty

A manufacturer’s warranty insures against defects in materials, design, and construction

from the manufacturer for an item. Generally, the cost is addressed as part of a vendor’s
quote for major materials or equipment.

5.12.5 Warranty of Construction

This can be thought of as a warranty that work performed under the contract conforms to
contract requirements and is free of any defect in equipment, material, or design
furnished, or workmanship performed by the contractor or any subcontractor or supplier
of any tier. Generally speaking, the performance bond will cover the cost of a standard
one year warranty. If the contract requires an extended warranty, such as two years or
longer, a premium cost will be added to the cost of the performance bond, or a separate
warranty bond will be issued at additional expense to the project. Warranty bonds
generally run at a rate of about 0.2 percent of the project value per year of warranty
beyond one year.

5.13 TAXES

A detailed discussion of the various types of taxes and their applicability is beyond the
scope of this guidance. Tax codes can be very complex and vary with jurisdiction. This
section discusses the most common taxes applicable to projects. Taxes can become a
significant cost to the project and must be addressed, usually as a line item in the
estimate.

5.13.1 Sales Tax

The cost estimator will need to research and provide information about what is taxed and
what is exempt on the subject project, given its nature and location.

Materials and supplies are generally subject to sales taxes. Under some state laws,
permanent materials for the project are not subject to sales tax. Sales taxes include state
tax, local tax (i.e., county, city), and use taxes (taxes on the storing, using, consuming,
and sometimes distributing tangible personal property or providing a taxable service, i.e.,
the contractor will be subject to the use tax in the state where the project occurs).

As of 2011, the following five states had no state sales tax: Alaska, Delaware, Montana,
New Hampshire, and Oregon. However, local and use taxes may still apply; the estimator
must determine the applicable taxes.
The RSMeans Cost Estimating books contain reference sections covering state sales
taxes. The internet can be used to research the applicability and amount of local and use
taxes.

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5.13.2 TERO Taxes

TERO is an acronym for Tribal Employment Rights Ordinance. Many Indian tribes have
established a tax that is applied to contracts for projects performed on their reservations.
Tribes may impose this tax on reservations, but they have no tax authority off
reservations. However, in some circumstances TEROs can bill contractors at an agreed
upon rate for services rendered, e.g., recruitment, employee referral and related support
services even for off-reservation projects.

The TERO tax is normally a percentage of the total gross contract price. The estimator
must determine the applicability and amount of TERO tax for each project. Most tribal
organizations have a TERO office that can give the estimator guidance on applicable
TERO taxes. The internet may also be a valuable tool for this research.

5.13.3 Gross Receipts

A gross receipts tax, sometimes referred to as a gross excise tax, is a tax on the total gross
revenues of a project, regardless of their source. A gross receipts tax is similar to a sales
tax, but it is levied on the seller of goods or services rather than the consumer. In many
states, this applies to the contactor as a seller of goods and services, and must be passed
on to the owner and project. Gross receipts tax can also be applied at the city and county
levels. The total gross receipts tax rate is a combination of rates imposed by:

• The state
• The counties
• The municipalities

5.14 SUMMARY

As the estimating process progresses for a given phase of the project, the cost estimator
should develop a list of indirect project costs that are neither specifically addressed in
WBS items (direct costs) nor clearly part of G&A costs.

As the specifications and anticipated contract are developed, the cost estimator should
tailor the list of indirect costs appropriately to ensure that each item of cost is accounted
for as a direct cost or an indirect cost. The cost estimator should then determine which of
the indirect costs are schedule-driven and which are cost-driven so that a more accurate
prediction of cost can be made.

While indirect costs can generally run in the range of 8 to 20 percent of overall project
costs, this range can be more accurately determined as the cost estimate progresses during
the various phases of design development. For example, in the Reconnaissance or
Feasibility Phase, it might be sufficient to estimate indirect costs at, say, 15 percent of
overall project cost. During the Preconstruction or Construction Phases, it would be
more appropriate to define individual sub-items of indirect cost, similar to what has been
defined in this section, along with the best estimated cost for each. The cost estimator

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could then apply a much smaller percentage, say 2 to 3 percent to account for as yet
undefined indirect cost items.

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