2005 AACE International Transactions

EST.08

Controlling Non-C
Construction Costs

Mr. Peter R. Bredehoeft, Jr.

T
he success of a capital project starts years prior to the itive process which attempts to predict the final outcome of a
actual design and construction of the project, dur- future capital expenditure program even though not all parame-
ing the capital improvement budgeting process. ters and conditions concerning a project are known or are not
The cost estimating process can directly affect the fully defined when the cost estimate is prepared" [12]. The key
budgeting of capital projects. Poor cost estimating processes or word is "to predict the final outcome." Using historical factors for
lack of a standard conceptual estimating process may adversely budgeting non-construction cost is an effective way to predict the
affect capital improvement projects. Owners' expectations revolve final outcome of these costs. It should be stated that the author is
around accurate budgets that will not increase throughout the life only focusing on the initial capital cost of a project for the pur-
of the project. Accurate budgets require a cost estimating method- poses of this paper. Included are direct project costs for construc-
ology that is repeatable, defendable, and based on historical infor- tion and the indirect project cost, which include non-construction
mation.Owners seek funding through various sources, including costs for design, engineering, and services during construction,
working capital, revenue bonds, loans, or grants. Therefore, good plus other associated costs. However, the project contains other
estimating practices and methodology applied at the start of the costs that must be considered through the life-cycle of the project,
project with the initial capital budget can be the success or failure such as: operation and maintenance costs (such as labor, power,
of a project. chemicals, and consumables), general expenses, and administra-
This paper will focus on the budgeting process and method- tive expenses, all of which are a part of the total life-cycle costs [5].
ology for capital improvement projects, primarily for the water, Historical project construction and non-construction costs can be
wastewater, and public works market segments. However, the used to budget future capital projects. Use cost estimating best
author feels these processes are applicable to all industries. The practices to determine a reliable construction cost estimate and
paper is written from an owner perspective through the eyes of a then factor non-construction costs by applying historical percent-
consultant. Historical costs for construction and non-construction ages to determine the total capital cost of a project.
(soft) costs can be a good indicator for future capital projects. In
the public bidding process, non-construction costs are virtually
the only costs the owner can control. By implementing various CAPITAL IMPROVEMENT
estimating validation processes, the owner can control these non- BUDGETING METHODOLOGY
construction costs.
Approximately, 70 percent of the cost of a project is attributa- The capital improvement budgeting process involves the fol-
ble to construction costs and the remaining 30 percent is attribut- lowing major steps or processes.
able to non-construction cost for most water treatment processes,
wastewater treatment processes, and conveyance type projects. In
the late 1970s and early 1980s, the U.S. Environmental Collect Historical Information
Protection Agency studied these types of projects and determined Owners and consultants should keep track of construction
various non-construction percentages from these studies [10] [11]. and non-construction costs for historical purposes. This informa-
Other water and wastewater programs have shown these costs to tion is derived from actual construction bids and the associated
be similar [Table 3]. From a cost estimating perspective, the level design or engineering services contracts or associated internal
of effort should be spent in determination of the construction cost operational costs associated with the total project expenditures.
estimate and then by factoring a percentage of construction costs Historical non-construction costs are determined by dividing the
for non-construction costs to determine the overall capital cost of actual non-construction component of a project by the total con-
a project. his methodology is an effective and accurate method of struction cost of that project. Running averages for these non-con-
budgeting of capital projects. struction costs should be kept for historical data and analyzed on
Jelen's Cost and Optimization Engineering provides the fol- a yearly basis. See historical cost information for non-construction
lowing definition: "capital-cost estimating is essentially an intu- costs for additional information.
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 2005 AACE International Transactions
Table 1—Typical Non-cconstruction Cost.

Table 2—Typical Non-cconstruction Costs and Percentage of Construction Ranges.

Estimate Construction Cost Budget for Non-C Construction Costs

The majority of the level of effort in the production of a cap- Once a construction cost is determined, budgets for non-con-
ital cost estimate should be spent in the determination of the con- struction cost can be determined by factoring from historical non-
struction amount, since this represents approximately 70 percent construction cost percentages to determine an overall capital
of the total capital cost of a project. The cost estimates should be budget. See capital improvement budgeting for additional infor-
semi-detailed planning level estimates derived from project-spe- mation.
cific scopes. The bottoms-up estimating process, standard cost
models, or assembly costs can be used to develop a project-specif-
ic construction cost estimate. The contingency for the project Perform Engineering Labor Fee Estimates
should be included in the construction costs. See the construction As a capital project is funded and moves forward in the imple-
cost estimates section for more information. mentation process, independent labor fee estimates can be devel-
oped as a comparison to proposed fees for design services, engi-
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 2005 AACE International Transactions
Table 3—Historical Percentages and Non-cconstruction Costs.

neering services, and services during construction. Performing an simplified approach is the most advantageous. If internal opera-
independent labor fee estimate serves as a benchmark for com- tions costs for a city or government agency for items such as inter-
parison of scope, level of effort, and man-hour pricing, which nal construction management or internal construction inspection
helps both the owner and consultant have a better understanding services cannot be allocated back to the cost of a project from
of the project and the labor fee. The labor fee estimate can be some sort of accounting system or ERP system, then these costs
compared to the capital budget and the historical non-construc- must be excluded from the historical non-construction cost analy-
tion cost for reference in the negotiations process. See the con- sis. Note that all owner costs could be included under a single line
trolling non-construction costs section for additional information. entry for "estimated owner's costs."
Table 1 illustrates the typical non-construction costs that are
external and internal to an owner or agency for most capital proj-
Review Non-C Construction Costs ects. Table 2 shows various non-construction cost ranges of per-
Periodic review of the actual non-construction costs from pre- centages. Table 3 illustrates various historical non-construction
vious contract expenditures should be performed as part of the percentages from EPA documents in the 1970s and 1980s, as well
annual capital improvement planning process. These actual per- as various program non-construction cost percentages. Although
centage of construction costs should be compared with the per- these EPA studies may be old, the percentages have remained
centages used in the budgeting process for non-construction approximately the same as construction costs have risen along
budget and adjustments made accordingly. See capital improve- with costs of labor.
ment planning process for additional information.

CONSTRUCTION COST ESTIMATES

HISTORICAL COST INFORMATION FOR NON-
CONSTRUCTION COSTS In the author's opinion, the bottom-up method of cost esti-
mating is the best approach to cost estimating-even as a method
Keeping accurate historical costs can be your greatest asset in for conceptual cost estimating for capital improvement projects.
the determination of capital budgets. Documentation of historical At the conceptual or planning stage of a treatment plant project,
project contract expenditures is critical in the determination of scope items are generally known or can be assumed. Therefore,
historical percentages of construction costs. There must be a cen- these items can be estimated at some minimum level of detail,
tralized collection system that is consistently the same from proj- including: type of project, size or capacity of the project, existing
ect to project. Categories for the types of projects, types of contract facilities or process, new or planned process, location of project,
expenditures and definitions for these costs must be established and types of facilities. The estimate can be organized by facility
and remain the same from year to year so that trends in the his- type and then by CSI division of work. In the case of a con-
torical data can be determined. Only those costs that can be cap- veyance project, the following information is generally known, or
tured from actual contract expenditures can be considered. A can be assumed, and can be estimated at some level of detail. For
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 2005 AACE International Transactions
Table 4—Contingency, Based Upon Recommended Practice 18R-997.

example, type of fluid, flow, lineal feet of pipe and size of pipe can • water crossings; and
be calculated and a general route can be assumed. The estimate • rock excavation allowance.
can be organized by major runs of pipe, trenchless technology,
site work items, and general restoration items. Cost Models based on definitive level cost estimates and
For water and wastewater treatment and conveyance projects, standard design information can be used for various facility or
the following items should be estimated using a semi-detailed plant costs at the planning stage, and are often used for conceptu-
take-off, bottoms-up cost estimate: al cost estimating. Assemblies or historical unit prices can be used
for estimating construction costs for conveyance-type projects
early in the conceptual phase of a project.
Water and Wastewater Treatment—Cost Estimates: Other methods for conceptual estimating include an expo-
nent estimating Technique based on the ratio of the known cost
• Division 2—detailed take-off of major site work components. with a known capacity to estimate an unknown cost for a given
• Division 3—detail take-off of all concrete components by capacity. This is known in the industry as the six-tenths (0.6) fac-
facility. tor rule [13]. It can be used to ratio historical construction cost of
• Division 9—if specialty coatings are required. a given capacity and determine an unknown cost based on a given
• Division 11—equipment quotations for each major piece of capacity. It can also be used for unit prices of a known size for
process or mechanical equipment, based on the P&IDs. determining the cost of an unknown size. For example:
• Division 15—detailed take-off of mechanical and yard piping
greater than 0.1016 meters. C2 = Known $ ( Desired Capacity / Known Capacity) 0.6
• Historical Percentage of Total—historical percentage of total equation 1
calculations is used for the remainder of the associated divi-
sions of work, based on the associated scope of work. Example: a 10-million-gallon-per-day (mgd) water treatment plant
costs $10 million. Estimate the cost of a 15-mgd water treatment
Water or Wastewater Conveyance—Cost Estimates: plant.

15 − mgd WTP = $10 M × (15mgd / 10mgd )

0 .6
• linear feet (LF) of pipe by each size of pipe; = $12.745 M for a 15 − mgd plant
• assumed material type of pipe; example 1
• percentages for fittings;
• counts or allowances for valves; When using historical cost for factoring, always remember to
• counts or allowances for manholes or catch basins; adjust the cost of an item from one time period to another, to
• trenchless technology considerations (per LF); account for inflation. The author considers the Engineering
• pavement restoration; News-Record (ENR) Construction Cost Index for the 20-City
• landscape restoration; Average [8], which includes components for both labor and mate-
EST.08.4
 2005 AACE International Transactions
rials, as an industry standard for the water and wastewater indus- case of large projects or annual contracts. Funding for design serv-
try. If material costs only are being adjusted, then the ENR ices and land acquisition services may occur in 1 year, and the
Material Index [9] should be used. construction and services during construction may occur in sub-
sequent years. This should be a yearly process with various func-
tional areas, such as engineering and construction departmental
CONTINGENCY reviews, updating, and approving the updated capital budgets at
the appropriate levels.
The contingency of a project can be applied at various levels As the project moves forward in time and actual contract val-
of a cost estimate. These include, at the bottom line of the esti- ues are known for services such as design, bidding and award, and
mate, allocated to all costs throughout the estimate or as part of inspection, the actual costs should replace the budgeted non-con-
the construction cost. The preferred approach to using contin- struction costs and the overall capital budget should be updated
gency in a total capital cost estimate is to apply a separate contin- in the capital improvement plan on a yearly basis.
gency to the sub-total of the construction cost estimate and
include the contingency as a part of the total construction cost,
then factor for the non-construction costs to determine a total cap- USE OF FACTORING FOR
ital cost. Using this approach ensures that construction costs and NON-C CONSTRUCTION COSTS
non-construction both include contingency. The key in applying
contingency is not to apply contingency twice or double counted. In addition to capital improvement budgeting, the technique
Table 4 demonstrates the use of various contingencies on water of factoring for non-construction cost can be used in the master
and wastewater treatment and conveyance projects, base on the planning process for capital project. This technique can also be
AACE International Recommended Practice 18R-97 [7]. used for evaluating various alternative analyses, technology, or
process selection, and value engineering processes. Construction
cost estimates usually are generated for these types of analyses and
CAPITAL IMPROVEMENT BUDGETING then factored for non-construction cost to determine a total capi-
tal cost for each alternative or analysis. Factoring for non-con-
Cities, municipalities, and government agencies all perform struction costs is a cost-effective way of determining the overall
some level of yearly capital improvement planning. The forecast capital cost of a project early on in the conceptual planning and
for this planning horizon may be one year to three years, five budgeting phases of a project. See table 2 for percentages of con-
years, 10 years and even 15 years. Some planning horizons go out struction cost guidelines.
25 years for master plans. Capital projects are estimated, priori-
tized based on various internal factors, and then arranged in year-
ly categories. Some projects may span multiple years, as in the

Figure 1—Cost Estimate—Review, Validate and Approval Process.

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 2005 AACE International Transactions
CONTROLLING NON-C
CONSTRUCTION COSTS DEFINITIONS

Various government agencies, cities, and municipalities are For the purpose of this paper, the following definitions are
required to follow public bidding processes and laws. used:
Construction contracts are awarded to the lowest qualified bidder.
A professional consultant's labor fee for design services, engineer- • Construction cost—The sum of all costs, direct and indirect,
ing services, and services during construction can be negotiated as inherent in converting a design plan for material and equip-
professional services task orders between the owner and the con- ment into a project ready for startup, but not necessarily in
sultant. These professional services contracts for non-construction production operation; the sum of field labor, supervision,
costs represent the area that has the highest degree of control by administration, tools, field office expense, materials, and
the owner and should be an area of focus for the owners to help equipment [1].
control the total project cost. • Capital, fixed—The total original value of physical facilities
that are not carried as a current expense on the books of
account and for which depreciation is allowed by the federal
Independent Engineering Labor Fees government. It includes plant equipment, building, furniture
As the capital project gets underway, the owner should start to and fixtures and transportation equipment used directly in
determine an independent labor fee associated with pending engi- the production of a product or service. It includes all costs
neering services, rather than directly accepting the design consul- incident to getting the property in place and in operational
tant's labor fee proposal. By performing independent labor fee condition, including legal costs, purchased patents, and paid-
estimates for various design and engineering services, owners can up licenses. Land, which is not depreciable, is often includ-
use these labor fee estimates as a benchmark for negotiations with ed. Characteristically it cannot be converted readily into cash
design consultants, in addition to the non-construction budget [2].
established at the CIP planning phase. Having an independent • Indirect cost—All costs in construction that do not become a
labor fee estimate will help identify areas of differences in opinion final part of the installation, but that are required for the
on scope items, level of effort, and labor rates. As a result, the orderly completion of the installation and may include, but
owner and consultant will better understand the scope and each are not limited to, field administration, direct supervision,
other's expectations about the project. capital tools, startup costs, contractor's fee, insurance, taxes,
etc. [3].
• Non-construction—Often called soft costs, these costs are the
Estimate Review, Validation and Approval Process indirect cost of a project, which for public works projects typ-
When the project is in the design phase, an owner or agency ically include planning, design services, material testing,
can use a cost estimating review, validation, and approval process land, right-of-way costs, inspection services, engineering serv-
to control the overall capital cost of the project. This is typically ices during construction, bid and award, legal costs, adminis-
performed at the 30 percent, 60 percent, and 90 percent design tration costs, and program management services.
stages, because cost estimates are generated at these stages. This • Soft-costs—Indirect costs or non-construction costs.
process involves an independent estimate review of the consul- • Project—An endeavor with a specific objective to be met
tant's estimate. The owner or agency then either accepts the cur- within the prescribed time and dollar limitations and which
rent estimate or requests additional information about the esti- has been assigned for definition or execution [4].
mate. f the cost estimate varies by some specific percentage as • Total project cost—The sum of all costs, direct and indirect,
specified by the owner or agency, typically 10 to 15 percent, a val- including all construction and non-construction costs,
idation report from the design consultant may be required to throughout the life of the project for the design and con-
explain the reasons for the change. The changes between esti- struction phase. The total project cost is equal to the total
mates at various design milestones are generally caused by capital cost of the project.
changes in scope or quantities, changes in unit prices, or changes • Life cycle; project—The stages or phases of project progress
in schedule. The owner or agency then reviews the validation during the life of a project. Project life-cycle stages typically
report generated by the design consultant, with assistance from include ideation, planning, execution, and closure [5].
the independent reviewer. The owner or agency either approves • Operating costs—The expenses incurred during the normal
or rejects the current cost estimate. If the estimate is approved, the operation of a facility or component, including labor, materi-
owner should sign a budget change form and the CIP budget als, utilities, and other related costs. Includes all fuel, lubri-
should be adjusted in the capital improvement plan. Figure 1 cants, and normally scheduled part changes in order to keep
illustrates this process. a subsystem, system, particular item, or entire project func-
For additional information on the cost estimate review and tioning. Operating costs may also include general building
validation of cost estimates, refer to the technical article called maintenance, cleaning services, taxes, and similar items [6].
"The Estimate Review and Validation Process" [14]. The article is
an excellent source and provides a good overview of the validation
process of a cost estimate.

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 2005 AACE International Transactions
REFERENCES

1. AACE International, April 2004, Recommended Practice

No. 10S-90, Construction Cost, Page 13, Morgantown, WV.
2. AACE International, April 2004, Recommended Practice
No. 10S-90, Capital—Fixed, Page 10, Morgantown, WV.
3. AACE International, April 2004, Recommended Practice
No. 10S-90, Indirect Cost, Page 34, Morgantown, WV.
4. AACE International, April 2004, Recommended Practice
No. 10S-90, Project, Page 52, Morgantown, WV.
5. AACE International, April 2004, Recommended Practice
No. 10S-90, Life-Cycle—Project, Page 38, Morgantown,
WV.
6. AACE International, April 2004, Recommended Practice
No. 10S-90, Operating Costs, Page 45, Morgantown, WV.
7. AACE International, September 12, 2003, Recommended
Practice No. 18R-97, Figure 1, Page 2, Morgantown, WV.
8. Engineering News-Record (ENR), Construction Cost Index,
20-City Average, 2005.
9. Engineering News-Record (ENR), Material Price Index,
2005.
10. EPA Document #430/9-83-004, Table 3.1, June 1983,
Construction Costs for Municipal Wastewater Treatment
Plants, 1973-1982, Washington, D.C.
11. EPA Document #430/9-77-015, Table 6.5, May 1978,
Construction Costs for Municipal Wastewater Conveyance
Systems, 1973-1977, Washington, D.C.
12. Kenneth K. Humphreys, 1991, Jelen's Cost and Optimization
Engineering, Third Edition, New York, McGraw-Hill, Inc.,
page 367.
13. Kenneth K. Humphreys, 1991, Jelen's Cost and Optimization
Engineering, Third Edition, New York, McGraw-Hill, Inc.,
page 382.
14. Larry Dysert, CCC and Bruce G. Elliott, CCC, January
2002, "The Estimate Review and Validation Process," Cost
Engineering, Vol. 44/No. 1, AACE International, Page 17,
Morgantown, WV.

Mr. Pete Bredehoeft

CH2M Hill, Inc.
115 Perimeter Center Place, NE
Suite 700
Atlanta, GA 30346-1278

E-mail: [email protected]

EST.08.7