Unit 6: Engineering Economics, Estimation and Costing

1. Bid
The term bid refers to an offer made by an individual or corporation to purchase an asset.
Buyers commonly make bids at auctions and in various markets, such as the stock market. Bids
may also be made by companies that compete for project contracts. When a buyer makes a bid,
they stipulate how much they're willing to pay for the asset along with how much they are
willing to purchase.

In Civil Engineering a construction bidding is the process of submitting a tender by the

contractor to the client as a proposal to conduct or manage a particular construction project.
The bidding process is an incredibly important part of a construction project.

The bid documents help a project owner choose the right contractor for the project, be it a
commercial construction project or a government project related to public works.

1.1 How a Bid Works?

The basic construction bidding process involves:

a. The client or general contractors send bid invitations to the contractors or the
subcontractors.
b. The contractors or the subcontractors receive the invitation that includes:
i. Scope of Work
ii. Time of Completion
iii. Penalty
iv. Pre-Qualification Details
c. Contractors or Sub-Contractors download the tender document and review the project
based on their respective cost codes.
d. Contractors or Sub-Contractors submit their bid to the client or general contractor.
e. The general contractor or client awards the bid to the subcontractors with a most
competitive bid and it is converted into a commitment.

1.2 Estimation of Bid

Estimation of bid price or tender cost of a construction project is calculated as the sum of the
total cost of construction and mark-up price. Total cost of construction project consists of direct
cost and indirect costs for the construction works. Direct cost of construction project includes
the cost of materials, labors, plants and equipment while the indirect costs are associated with
expenses on personnel recruitment and their training, research and development required for
the construction works. Thus a direct cost is associated with the activities performed at

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construction site. In case of indirect costs, they are non-traceable based on activity. Indirect
costs may have incurred even if the construction works / activities have not been performed.
Thus, following formulas can be used to calculate the cost of construction projects:

Direct Cost = Labor Cost + Plants & Equipment Cost + Crew Cost + Materials Cost +
Subcontractor Cost

Indirect Cost = Project Overheads + Common Plants & Equipment Cost + Common Workmen
Cost

Mark-up Cost = Profit + Contingency + General Overheads + Allowance for Risks

Construction Project Cost = Direct Cost + Indirect Cost + Mark-up Cost

Estimate Bid Price - Tender Cost of Construction Project

1.2.1 Estimation of Direct Cost of Construction Project

Direct cost of construction project consists of cost of materials, labors, plants and equipment,
subcontractors and crew costs. Following are the guidelines for estimating components of
direct cost:
a. Cost of Material: Cost of materials includes cost of all construction materials which will
go into the building or the construction work. These materials include cement, aggregates,
reinforcement steel etc.
b. Cost of Labor: The cost of labor is the payment made to labor for works done at
construction site on daily or weekly or monthly basis.
c. Cost of Plants & Equipment: Cost of plants & equipment covers the cost incurred
towards owning and operating the equipment for various construction activities like
mobilization cost, cost of fuel, oil and lubricants, cost of repair and maintenance of
equipment, cost of spare parts, cost of operators, drivers, statutory expenses, personnel,
carrier expenses and demobilization costs.
d. Subcontractor Costs: In a large construction project, the main contractor has one or many
sub-contractors under them for various construction works or activities or specialized
works such as waterproofing, wood works, aluminium works, anti-termite treatments etc.
e. Crew Cost: A crew is a group of men (workers, supervisors etc.) and machineries which
are assigned a particular type of construction activity such as excavation, piping, welding,
woodwork etc.

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1.2.2 Estimate Indirect Cost of Construction Project

The indirect costs are also called as overheads. A construction project has many activities to be
complete. Some costs are incurred in a construction project which are not associated with only
one activity and they can be distributed to many activities. Thus these costs are not considered
as direct costs and considered separately as indirect costs. For example, for a material cost, the
indirect cost can be purchase cost, inventory carrying cost etc. The indirect cost includes project
overheads, common workmen, common plants and equipment costs.

a. Project Overheads Cost

Project overhead cost consists of following in a construction project:
i. Salaries and benefits: This includes the salaries and benefits to staffs including engineers,
supervisors and other administrative posted at construction site.
ii. Insurance cost: A construction project possesses many types of safety and health hazards.
It includes insurance for life and health and provided to all staff and workmen.
iii. Financing cost: A large construction project required a large amount of money to mobilize
and carryout the construction activities. For this, the loans are arranged from various banks
which attracts interest.
iv. Conveyance cost, Travel and transfer Cost: Many times equipments, staffs and
workmen need to move from one place to another for various purposes which incurs a cost
known as conveyance cost.
v. Temporary Site Installation Cost: This cost includes temporary site installation such as
site office, workshops, stores, fencing, warehouses and storage areas, sanitary, first aid,
furniture and fittings, computers and other electronics, temporary roads, car parking and
even residential units and messing facilities are provided at construction site.
vi. Clients and Consultants Requirements: Many times a contractor has to provide facilities
to client and consultants such as office staffs, office space, furniture, telephone etc.
vii. Utilities Cost: This cost includes utilities such as water, power etc.
viii. Taxes and Duties: Taxes such as contract tax, excise duties, custom duties, income tax,
sales tax, service tax, value added tax etc.
ix. Miscellaneous Expenses: There can be other expense other than mentioned above such
as administrative expenses, field expenses, stationary, documentation, communication,
tools and consumables, safety and protective equipments etc.

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1.3 Bid Conditions

Bid conditions are the contract terms, by submitting a bid, the contractor agrees to accept all
contract terms.
1.3.1 General Terms and Conditions to Bidder
Below are the some general conditions for bidder (for study purpose only):
a. Purpose: The purpose of these specifications is to require the furnishing and delivery of
the highest quality products and services in accordance with the specifications.
b. Governing Laws and Regulations: Any contract issued shall be construed to the laws of
the State of Maharashtra. Additionally, the contractor shall comply with all local, state,
and federal laws and regulations related to the performance of the contract to the extent
that the same may be applicable.
c. Taxes: The contractor shall assume and pay all taxes and contributions including, but not
limited to, State, Federal, and Municipal which are payable by virtue of the furnishing and
delivery of the items specified.
d. Preference: In accordance with our policy, preference shall be given to our products,
materials, services, and firms when the goods or services to be provided are equally or
better suited for the intended purpose and can be obtained without additional cost.
e. Equal Opportunity and Non-Discrimination: In connection with the furnishing of
products and/or services under the contract, the contractor and all subcontractors shall
agree not to discriminate against any recipients of services, or employees or applicants for
employment on the basis of race, color, religion, national origin, sex, age, disability, or
veteran status. The contractor shall comply with federal laws, rules, and regulations
applicable to subcontractors of government contracts including those relating to equal
employment of minorities, women, persons with disabilities and certain veterans. Contract
clauses required by the United States Government are incorporated herein by reference.
f. Insurance: The Contractor shall purchase and maintain such insurance as will protect the
Contractor against any and all claims and demands arising from the execution of the
project. Further, when stated in the Detailed Specifications and Special Conditions, the
Contractor shall be required to procure and maintain the types and limits of insurance as
specified.

1.4 Alternate Specifications: Alternate specifications involving two or more designs,

functional or performance criteria may be proposed by a bidder if the specification

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satisfactorily meet the requirements and alternates specificaions are permitted in the bid
document.

1.5 Alternative Bid

The alternative bid is a very powerful tool in winning tenders but it is often overlooked.
In simple terms, it means offering something different to what is being asked for in the
invitation to tender (ITT). For example, an ITT specifies using a particular brand of product,
the alternative bid can be to offer different brand.

1.5.1 When to Use an Alternative Bid

It is used only when there is a benefit to the customer. If the ITT specifies using Brand X but
you are certain that using Brand Y would save them money, time or provide some other benefit
then it would be good to offer an alternative using Brand Y.
Other examples of alternative bids include: i) Alternative pricing model e.g. an ITT asks for a
bundled price but a different pricing model could save them money ii) Different methodology
e.g. the specification shows how things currently operate but they could be improved by using
different processes, technology or materials
Essentially the alternative should offer savings, improvement, innovation, added value or some
other tangible benefit to the customer. Therefore you must clearly explain ‘what is in it for
them’.

1.5.2 When Not to Use an Alternative Bid

Firstly check if alternatives are allowed (or not specifically disallowed). Many tenders
encourage them but if in doubt, check.
The alternative bid should not normally replace a compliant tender; submit an alternative in
addition to a compliant bid. The reason being that tender panels normally want to be able to
compare like-with-like; alternatives are normally assessed in addition to a compliant bid.
Ensure that your compliant bid meets their needs before working on options.
Do not offer an alternative bid just because it is more convenient or beneficial to you – it must
also benefit the customer. For example, the specification might ask for something that you don’t
normally stock or use. Ideally you will find a way of pricing for this, then also offer an
alternative along with its benefits.

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1.5.3 Why use an Alternative Bid?

It offers two advantages:
a. Differentiating you from the competition by demonstrating that your company is
innovative and forward thinking
b. Giving you two chances of being competitive – compliant (standard) and alternative
(innovative) bid

1.6 Bid Management Process

The bid management process involves the completion of pre-qualification questionnaires
(PQQs) and invitations to tender (ITTs) – documents specifically created to evaluate and
commission the most suitable supplier to deliver a contract. This process is generally overseen
by a bid manager or a manager or director within an organisation.
It is everything from ensuring compliance to responding to questions and confirming the bid is
submitted on time. For some bid managers, this can mean overseeing multiple bids at any given
time.
Bid management begins even before the release of a potential contract. A bid manager will
prepare supporting documents, model answers and case studies of previous contracts. These
can be work-shopped and quality assured in order to guarantee the strongest possible bid once
the official bid process is live.
Once a PQQ or ITT is released the bid manager will assess the organisation for compliance and
begin gathering all the required information to respond to the questions. Following this the
submission can be completed.
However, the process does not end there. An effective bid manager will follow up on the bid
and, regardless of the result, will request feedback in order to improve future submissions.

1.7 The Minimum Wages Act

The Minimum Wages Act 1948 is an Act of Parliament concerning Indian labour law that sets
the minimum wages that must be paid to skilled and unskilled labours.
The Indian Constitution has defined a 'living wage' that is the level of income for a worker
which will ensure a basic standard of living including good health, dignity, comfort, education
and provide for any contingency. However, to keep in mind an industry's capacity to pay the
constitution has defined a 'fair wage'. Fair wage is that level of wage that not just maintains a
level of employment, but seeks to increase it keeping in perspective the industry's capacity to
pay. In public opinion government must set an yearly wage change just like countries
internationally do.

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To achieve this in its first session during November 1948, the Central Advisory Council
appointed a Tripartite Committee of Fair Wage. This committee came up with the concept of a
minimum wage, which not only guarantees bare subsistence and preserves efficiency but also
provides for education, medical requirements and some level of comfort.

India introduced the Minimum Wages Act in 1948, giving both the Central government and
State government jurisdiction in fixing wages. The act is legally non-binding, but statutory.
Payment of wages below the minimum wage rate amounts to forced labour. Wage boards are
set up to review the industry's capacity to pay and fix minimum wages such that they at least
cover a family of four's requirements of calories, shelter, clothing, education, medical
assistance, and entertainment. Under the law, wage rates in scheduled employments differ
across states, sectors, skills, regions and occupations owing to difference in costs of living,
regional industries' capacity to pay, consumption patterns, etc. Hence, there is no single uniform
minimum wage rate across the country and the structure has become overly complex. The
highest minimum wage rate as updated in 2012 was Rs. 322/day in Andaman and Nicobar and
the lowest was Rs. 38/day in Tripura. In Mumbai, as of 2017, the minimum wage was Rs.
348/day for a safai karmachari (sewage cleaner and sweeper).
The Act provides for fixing wage rate (time, piece, guaranteed time, overtime) for any industry:
a. While fixing hours for a normal working day as per the act should make sure of the
following:
i. The number of hours that are to be fixed for a normal working day should have one or
more intervals/breaks included.
ii. At least one day off from an entire week should be given to the employee for rest.
iii. Payment for the day decided to be given for rest should be paid at a rate not less than
the overtime rate.
b. If an employee is involved in work that categorises his service in two or more scheduled
employments, the employee's wage will include respective wage rate of all work for the
number of hours dedicated at each task.
c. It is mandatory for the employer to maintain records of all employee's work, wages and
receipts.
d. Appropriate governments will define and assign the task of inspection and appoint
inspectors for the same.
e. Wages to disabled people and those payable to a dependent family member of the employer

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f. Violation of the act in regards to minimum wages, working hours and other comes under
Central Act as offences, and there is a penalties of 6 months imprisonment and fine of Rs.
500/- (under section act 22).

1.8 Worker’s Compensation Act 1923

Employees or Worker’s Compensation Act, 1923 is one of the most important social security
law. The act’s main aim is to provide financial protection and assistance to employees and their
dependents through compensation in case of any accidental injury occurs during the course
employment. It is generally applicable to the cases where such incidents lead to either death or
disablement of the worker.

1.8.1 Applicability of the Act

a. It applies to all employees working in mines, factories, plantations, construction
establishments, oilfields, etc. Moreover, it applies to establishments which are under
Schedule II of the Worker’s Compensation Act.
b. The act applies to persons who are working abroad or outside India as per Schedule II of
the Act.
c. It applies to a person recruited as the mechanic, helper, driver, etc. in connection with a
motor vehicle. It also applies to a captain or members of the crew of an aircraft.
d. The act does not cover the members of armed forces who are already under ESI (Employee
State Insurance) Act.

1.8.2 Employer’s Liability

(A) Cases where they have to pay
a. Injury by accident during employment
b. Diseases in occupation

(B) Cases where they do not have to pay

a. In case of any injury or damage which does not lead to the semi or total disablement of
the workers for a period exceeding 3 days.
b. In case of any injury which does not result in death or permanent total disablement
under the following circumstances:
i. The workman present at the time of the work under the control of drink or drugs.
ii. When the worker deliberately disobeys the rule which ensures their safety.
iii. Non-application of the devices which are especially for the safety of the workers.