ANDRESBONIFACIOCOLLEGE

SCHOOL OF ENGINEERING
College Park, Dipolog City

CE 421
CONSTRUCTION COST ENGINEERING
1:00 AM – 2:30 PM, MW

COST ESTIMATING
COMPONENTS

CABASAG, ROWEN
DINGAL, MARK JAY
GALON, MARL LOUIE
GALVEZ, MAHLALEEL
ISIP, DIRK LOU
KAGATAN, PHILJOY

ENGR.KENT JUV GALLEPOSO

INSTRUCTOR

SY 2023–2024
What Is Cost Estimation in Project Management?

A project can only come together with all the necessary materials and labor, and those
materials and labors cost money. Putting together a budget that keeps costs to a minimum, while
maximizing the project’s quality and scope can be challenging. This is why proper cost estimation
is important.

Cost Estimation definition

Cost estimation in project management is the process of forecasting the financial and other
resources needed to complete a project within a defined scope. Cost estimation accounts for each
element required for the project — from materials to labor — and calculates a total amount that
determines a project’s budget.

An initial cost estimate can determine whether an organization greenlights a project. If the
project moves forward, the estimate can be a factor in defining the project’s scope. If the cost
estimation comes in too high, an organization may decide to pare down the project to fit what they
can afford (it is also required to begin securing funding for the project). Once the project is in
motion, the cost estimate is used to manage all of its affiliated costs in order to keep the project on
budget.

Why Is Project Cost Estimation Important?

• First of all, project cost estimation allows you to decide whether to even start the
project or not. You may consider not starting the project at all or narrowing the
scope, rather than beginning work only for insufficient budget to cause it to be
abandoned.

• Cost estimation provides an insight into how the project will unfold and prevents
you from going into it blind. If potential risks are identified, you can put in
additional support and make sure it is fully-costed before work begins.

• Estimating costs makes it easier to assess your budget accurately and helps you
align your available resources with the workflow.

• Estimating costs ensures stakeholders are on the same page and helps them
understand the areas needing flexibility and the differences that may occur as the
project progresses.
 Preparing a cost estimate should include drawing a roadmap and identifying milestones. As
the name suggests, this is only an estimate. It is not possible to provide an exact cost for many
projects as there are too many variables that could occur. Therefore, this process should be
reviewed by selecting comparison points throughout the project. This helps increase your control
over the project and prevent benchmarks from being overlooked.

COST ESTIMATING COMPONENTS

1. Quantities
- Quantity in a general sense is the amount of something that there is, was or will be. This
amount may be measured in terms of number, weight, length, area, volume and time. But,
in a more specialized construction sense, ‘quantity’ or ‘quantities’ can refer to the
‘measured’ (i.e. calculated or estimated) amounts that are contained in a bill of quantities.

Bill of Quantity – is essentially a list of all the materials and labor that will be required for your
desired build. It’s often put together before a construction contractor has been hired and is a
guiding document for those companies that are bidding for the work.

Why Is a Bill of Quantities Important in Construction?

This is where you first detail all the materials and labor you’ll need to execute your project.
This process is critical in finding the best prices for the materials and labor you need before
you’re committed to the execution of that construction project.

It’s also helpful in figuring out the scope of the project. Once you have all the materials and
labor charted out on your bill of quantities, it’s only a small step forward to detail the tasks that’ll
be required to meet the goals of the project.

What Should Be Included in a Bill of Quantities?

✓ Item Number - First, you’ll want to number your list. Each item, whether material or
labor, should have a corresponding number to make it easier to find as the list grows long.

✓ Item List - Now you’ll want to differentiate between the two types of items on your bill of
quantities. Here’s where you’ll note if it’s a material or labor.

✓ Item Description - Next is the item description, for example, “paint” would describe an
item. But you’ll want to add some context, especially since there’s likely to be paint used
for a number of different things in the construction project. Consider adding paint with a
short description, such as for the exterior of the building.
✓ Measurement Unit - Whether the item is material or labor, you need to define how it’s
measured. For instance, the material would be by the gallon if it’s paint, while the painter
would be measured by the hour because they’re a laborer.

✓ Quantity - Another important piece of information that’s critical to a thorough bill of

quantities is the quantity of each item. How many gallons of paint will you need to paint
the exterior of the building, and how many hours will it take for the painters to do this job?
The answer to these questions is detailed here.

✓ Cost Per Unit - Also important is the price of the materials or the labor which is listed
here. For example, a gallon of paint might cost $5 while the painters are contracted at $25
per hour.

✓ Total Item Cost - Finally, you’ll want to address the total cost for each line item. Multiply
the paint’s price per gallon by the amount of paint you need to do the job. The same is
done for labor. At the bottom of your bill of quantities, you’ll add all these totals together
to get a grand total for all the materials and labor that’ll be used in the construction
project.
 2. Direct Cost
- Direct costs are costs that can be directly attributed to a specific project, e.g. labor, raw
materials, and equipment rental costs.

Some examples of direct costs are listed below:

• Direct labor

• Direct materials

• Manufacturing supplies

• Wages for the production staff

• Fuel or power consumption

3. Unit Cost Theory and Practice

Unit cost method of estimation in construction projects starts with dividing a project into
various components or elements for the purpose of cost estimation. The cost of each of the
project's components or elements are assessed and their cost estimation is calculated. Sum of costs
of each project elements gives the total construction cost of the project. The unit cost method of
estimation can be used for project design estimates as well as for bid estimates.

Construction cost estimates are of three types mentioned below:

❖ Preliminary Cost Estimates

• During the Preliminary Cost Estimate, as cost details of every minute elements are not
of much importance, the project is divided into major components and cost estimate of
these major units are calculated based on the past project experiences. The cost of
equipment if any is also included. For example, estimating the cost of entire floor
based on its area.

❖ Detailed Cost Estimates

• During Detailed Cost Estimates, the project is divided into components of various
major systems and cost of each component is estimated to calculate project cost. For
example, cost of installation of any equipment, cost of beams, columns or walls etc.
 ❖ Engineer's Cost Estimates

• During Engineer's cost estimates, each of the components of the major systems of the
project is divided into various components that contributes to the cost of the major
systems. For example, for cost estimation of an RCC column, the components are
concrete, which is also divided into cement, sand and aggregates, reinforcement steel,
formworks etc.

For bid estimates, the unit cost method of estimation can also be used even though the contractor
divides the project into different levels in a hierarchy as follows:

• Subcontractor Quotations: The general contractor of the construction project may get
quotations for various items from the subcontractors. The rates prescribed by the
subcontractors for various items of the projects can be used for the total construction
cost etimate for the project. However, the reliability of accuracy of the cost depends on
the method of cost estimates selected by the subcontractor.

• Quantity Takeoffs: The division of a construction project into various items of

quantities that are measured from the engineer's plan will result in a procedure similar
to that adopted for a detailed estimate or an engineer's estimate by the design
professional. The levels of detail may vary according to the desire of the general
contractor and the availability of cost data.

• Construction Procedures: If the construction procedure of a proposed project is used

as the basis of a cost estimate, the project may be decomposed into items such as labor,
material and equipment needed to perform various tasks in the projects.

4. Materials, Labor, Equipment

Labor and materials are among the most significant costs construction companies incur.
Keep reading to learn more about labor vs material costs in construction, how they compare, and
how smart construction management professionals keep track of both types of expenses.

What are construction material cost?

Construction material costs, meanwhile, include amounts paid for materials (i.e. bricks,
concrete, clay, lumber, etc) used to build structures. Often, materials must be procured, imported,
and transported to job sites, which is also factored into construction material costs.

What are materials estimate?

A material estimate is also known as a quantity takeoff, a construction takeoff or a material

takeoff. It refers to taking off information from the blueprints about the materials and how much
of them are needed for the build.
Who’s responsible for doing materials estimate?

In a large company, there may be a dedicated estimator. Small builders or contractors may
have to create the estimates themselves. If estimates are done by hand, then it is usually
performed by someone with a lot of experience and knowledge of the construction industry, or
they are performed with a lot of guesswork – making them very inaccurate, and liable to cost jobs
or to lose profits.

What are construction labor costs?

When construction professionals calculate labor costs, they typically include items such as:

• employee and contractor compensation (amounts paid directly to workers)

• payroll costs (including taxes)

• paid time off

• employment-related insurance (i.e. workers compensation)

• recruitment and training costs

• time theft and other forms of fraud

STRATEGIES FOR ESTIMATING CONSTRUCTION LABOR AND MATERIAL COSTS

• Unit pricing method - the unit pricing method entails dividing the amount of work to be
completed into smaller units and associating a price with each one.

For example, a flooring contractor working on a 2,000 square foot home might calculate
their labor and material costs based on:

• How much they’ll pay for one square foot of materials

• How much time it will take them to install one square foot of materials (and what
direct and indirect labor costs are associated with that)

Equipment Cost - Costs associated with owning and operating equipment.

Objective - Provide the right equipment at the right time and place so the work can be
accomplished at the lowest cost.

• Minimize ownership and operating (O&O) cost.

• Increase availability.

• Increase utilization
Equipment may be classified according to the following:

• The type of work it performs.

• As standard - equipment which is commonly manufactured and available to prospective

purchasers with readily accessible spare parts.

• As special - equipment which has to be manufactured for a specific project or which does
not have readily accessible spare parts

Basis of costing:

• Hourly

• Daily

• Weekly

• Fuel consumption

5. Equipment Cost of Owning and operating

What is Ownership Cost?

• Ownership cost is defined as the total cost related to the construction equipment in
order to own it.

Components of Ownership Cost:

• Initial Cost - defined as the capital investment that is required to own the equipment.

• Salvage Value - defined as the final value of equipment that is received once it has
reached its useful life.

• Taxes - Tax is the money that has to be paid to the state or the central government which is
a representation of property tax.

• Insurance Cost - defined as the premium amount that is paid to the insurance company in
order to cover the loss faced due to fire, theft or any accident for the construction
equipment.

• Storage Cost - is the cost of storing the equipment in the storage area of the company
when it is not operated for construction purposes.
 • Interest Cost - defined as the annual cost of interest that is incurred on the borrowed
money in order to acquire the ownership of the equipment.

Calculation of Ownership Cost:

• Total Annual Ownership Cost = Depreciation cost + Investment cost + tax + insurance
cost + storage cost

• Hourly Cost of Ownership = Annual Ownership Cost/ Number of operating hours the
equipment operates annually

Operating Cost:

• Labor – personnel needed to run the equipment

• Fuel – energy consumed by the equipment

• Maintenance – Repairs, lubrication, replacements, etc.

What is Depreciation?

- Depreciation expense is used in accounting to allocate the cost of a tangible asset over its
useful life. In other words, it is the reduction in the value of an asset that occurs over time
due to usage, wear and tear, or obsolescence.

Four Main Depreciation Methods:

❖ Straight-Line Depreciation Method

- Straight-line depreciation is a very common, and the simplest, method of calculating

depreciation expense. In straight-line depreciation, the expense amount is the same every
year over the useful life of the asset.

Depreciation Formula for the Straight Line Method:

Depreciation Expense = (Cost – Salvage value) / Useful life

Example

Consider a piece of equipment that costs Php25,000 with an estimated useful life of 8 years and a
Php0 salvage value. The depreciation expense per year for this equipment would be as follows:
Depreciation Expense = (Php25,000 – Php0) / 8 = Php3,125 per year

❖ Double Declining Balance Depreciation Method

- Compared to other depreciation methods, double-declining-balance depreciation results in

a larger amount expensed in the earlier years as opposed to the later years of an asset’s
useful life. The method reflects the fact that assets are typically more productive in their
early years than in their later years – also, the practical fact that any asset (think of buying
a car) loses more of its value in the first few years of its use. With the double-declining-
balance method, the depreciation factor is 2x that of the straight-line expense method.

Depreciation formula for the double-declining balance method:

Periodic Depreciation Expense = Beginning book value x Rate of depreciation

Example:

Consider a piece of property, plant, and equipment (PP&E) that costs Php25,000, with an
estimated useful life of 8 years and a Php2,500 salvage value. To calculate the double-declining
balance depreciation, set up a schedule:

The information on the schedule is explained below:

✓ The beginning book value of the asset is filled in at the beginning of year 1 and the
salvage value is filled in at the end of year 8.
 ✓ The rate of depreciation (Rate) is calculated as follows:

Expense = (100% / Useful life of asset) x 2

Expense = (100% / 8) x 2 = 25%

Note: Since this is a double-declining method, we multiply the rate of

depreciation by 2.

✓ Multiply the rate of depreciation by the beginning book value to determine the expense
for that year. For example, Php25,000 x 25% = Php6,250 depreciation expense.

✓ Subtract the expense from the beginning book value to arrive at the ending book value.
For example, Php25,000 – Php6,250 = Php18,750 ending book value at the end of the
first year.

✓ The ending book value for that year is the beginning book value for the following year.
For example, the year 1 ending book value of Php18,750 would be the year 2 beginning
book value. Repeat this until the last year of useful life.

❖ Units of Production Depreciation Method

- The units-of-production depreciation method depreciates assets based on the total number
of hours used or the total number of units to be produced by using the asset, over its useful
life.

The formula for the units-of-production method:

Depreciation Expense = (Number of units produced / Life in number of units) x (Cost – Salvage
value)
Example:

Consider a machine that costs Php25,000, with an estimated total unit production of 100 million
and a Php0 salvage value. During the first quarter of activity, the machine produced 4 million

units.

To calculate the depreciation expense using the formula above:

Depreciation Expense = (4 million / 100 million) x (Php25,000 – Php0) =Php1,000

❖ Sum-of-the-Years-Digits Depreciation Method

- The sum-of-the-years-digits method is one of the accelerated depreciation methods. A

higher expense is incurred in the early years and a lower expense in the latter years of the
asset’s useful life.

- In the sum-of-the-years digits depreciation method, the remaining life of an asset is

divided by the sum of the years and then multiplied by the depreciating base to determine
the depreciation expense.

The depreciation formula for the sum-of-the-years-digits method:

Depreciation Expense = (Remaining life / Sum of the years digits) x (Cost – Salvage value)
Example:
Consider a piece of equipment that costs Php25,000 and has an estimated useful life of 8 years and
a Php0 salvage value. To calculate the sum-of-the-years-digits depreciation, set up a schedule:

The information in the schedule is explained below:

• The depreciation base is constant throughout the years and is calculated as follows:

Depreciation Base = Cost – Salvage value

Depreciation Base = Php25,000 – Php0 = Php25,000

• The remaining life is simply the remaining life of the asset. For example, at the beginning
of the year, the asset has a remaining life of 8 years. The following year, the asset has a
remaining life of 7 years, etc.

• RL / SYD is “remaining life divided by sum of the years.” In this example, the asset has a
useful life of 8 years. Therefore, the sum of the years would be 1 + 2 + 3 + 4 + 5 + 6 + 7 +
8 = 36 years. The remaining life in the beginning of year 1 is 8. Therefore, the RM / SYD
= 8 / 36 = 0.2222.

• The RL / SYD number is multiplied by the depreciating base to determine the expense for
that year.

• The same is done for the following years. In the beginning of year 2, RL / SYD would be
7 / 36 = 0.1944. 0.1944 x Php25,000 = Php4,861 expense for year 2.
Summary of Depreciation Methods:

Example problem that can be solve using the 4 methods of depreciation:

Consider a machine that costs Php25,000, with an estimated total unit production of 100
million and a Php0 salvage value. During its 8-year life span, its unit production is
displayed below:
 6. Sub-con Cost
What is Subcontracting?

• Subcontracting is the practice of assigning, or outsourcing, part of the obligations and

tasks under a contract to another party known as a subcontractor.

Sub-con Cost. Subcontractor Costs means all costs incurred by subcontractors for the project,
including labor and non-labor costs.

How Subcontracting Works?

Using the construction industry as an example, when a government body or a company

wants to build or make repairs to infrastructure, it would usually award the contract for the job to
a contractor. The contractor is a business owner who negotiates the deal and works on a
contractual basis for an agreed-upon fee. Sometimes the work to be done is in a specialized field
such as electrical, plumbing, insulation, or more recent areas like energy optimization and smart
wiring infrastructure, which requires the contractor to contract out to another party. In this case,
the contractor will be subcontracting the work to a specialized subcontractor.

The Pros of Using Subcontractors

• Cost. Unlike your regular staff, you don’t have to pay subcontractors’ benefits or taxes.
This can help keep costs down. In addition, you can charge your client more than you
are paying your subcontractors, which means more revenue for your business.

• Skills. The number one benefit of subcontracting is securing access to skills, abilities,
and tools you don’t have. Subcontracting can bring specialized expertise to your job site,
allowing you to execute projects you otherwise couldn’t have.

• Team morale. A subcontractor can alleviate pressure from your other team members,
who will have more time to focus on the tasks they enjoy most.

The Cons of Using Subcontractors

• Cost. Subcontractors typically demand a higher rate than your regular employees. If they
charge too much, ensuring the project is profitable can be challenging.

• Skills. Your team operates like a well-oiled machine. Bringing another person into the mix
can cause issues. Your subcontractor may carry out a task in a way that disrupts
productivity or prevents future tasks from being completed properly.

• Team morale. In some cases, employees become disgruntled because the subcontractor is
paid more. In addition, subcontractors may be less committed to your business and the
client, meaning they’re more likely to show up late or not at all.
How to Price Subcontract Work

• Determine the Subcontractor’s Unit Prices

• Present a Scope of Work

• Add Extra for Your Time

• Refine Your Pricing Approach

7. Project Overhead Cost

- Project overhead costs consist of indirect expenses that are not directly tied to producing
goods or delivering services within a particular project. These costs are necessary for
supporting the operation of a business but are not charged directly to individual projects.

Common types of overhead costs include:

• Administrative expenses

• Bonding premiums

• Insurance premiums

• Equipment expenses

• Vehicle expenses

• Labor burden (salaries and benefits)

• Utilities

• Rent

• Legal and professional services

• Training and development

• Software and technology

• Licenses and permits

• Depreciation

Project overhead costs are usually allocated among projects using various methods, such as direct
labor hours, square footage, or a combination of factors. The exact allocation depends on the
nature of the business and the specific needs of the projects. The overhead cost percentage varies
according to the industry and the scale of the project, ranging from about 10% to 15% in the
construction industry.
 8. Contingencies/Taxes
- A construction contingency is a part of a project's budget put aside to cover any
unforeseen costs, risks, events, or changes in scope that may affect the project's cost over
the course of its life.

Types of construction contingencies

• Contractor contingency - A contractor contingency is an amount built into the contractor's

anticipated price for the project to account for various risk factors that cannot otherwise be
accounted for in a schedule of values.

• Owner contingency - A project owner's reserve is an amount set aside for additions or
modifications of the scope of the work. Incomplete plans or owner-directed changes are
the leading causes of dipping into an owner contingency fund.

What are construction taxes?

- are payments required on construction-related activities. This can include the sale of
construction materials, labor and equipment.

Types of taxes construction professionals need to pay:

• Construction sales tax

• Use tax

• Payroll tax

• Property tax

• Excise tax

9. Profit/Mark-Up
What is Profit?

- Profit in construction comprises all of a company's earnings after deducting overhead and
direct costs. Companies typically calculate profits after completing construction projects,
when they can determine total profits from a project's final cost.

Sales/Profit Margin - Your construction company's net profit is the amount of sales revenue left
over after you've paid all applicable costs. For example, a 40% profit margin means you get to
keep 40 cents from each dollar of sales generated.
Markup - Markup refers to the difference between the selling price of a good or service and its
cost. It is expressed as a percentage above the cost.

Types of Mark-Up

The average contractor markup is broken down into several smaller types of markups. The types
of general contractor percentage markups include:

• Subcontractor markup percentage: Typically a markup on the laborer’s hourly rate.

• Contractor markup on materials: Contractors must mark up all materials to compensate for
the total cost of materials.

• Overhead markups: Soft costs such as administrative costs, office rent, and accounting
fees.
Reference:

https://buildertrend.com/blog/construction-taxes/

https://www.projectmanager.com/blog/what-is-bill-of-quantities

https://theconstructor.org/construction/unit-cost-method-of-estimation/907/

https://www.constructiontuts.com/unit-method-estimating/

https://www.buildxact.com/us/blog/how-to-estimate-construction-materials/

https://theconstructor.org/construction/equipment/ownership-cost-construction-
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