Contract,

Specification &
Quantity Survey

Lecturer: Ayansa Kebede

(MSc. In Construction Engineering & Management)
 CHAPTER FOUR:
PROJECT COST ESTIMATION AND
PROJECT VALUATION

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 2
 4.1 Introduction
 Project Cost estimation is the process of valuing on monetary
expression, including the cost of all possible entrants necessary
for the:
 planning,
 implementing and
 monitoring stages of the proposed project under consideration.

 Cost estimation is the determination of the probable cost

of a project.

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 3
Introduction Ctd…
 Project Cost includes:
 Preliminary investigation (project appraisal costs);
 Design and supervision (consultancy cost);
 Construction works (contractor’s cost);
 Land owning cost, and
 Monitoring costs.

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 4
Introduction Ctd…
 An estimate serves a number of different functions,
depending on the stage of the project, as shown below :
 Feasibility: Initially feasibility of the project need to be
determined Feasibility Estimate (Conceptual).
 Schematic Design (Conceptual design): Sketches are prepared. Major
elements are defined. Use a preliminary method to estimate cost. Cost of
each element is established (cost plan).
 Design Development: Progressively the scope of the project is defined. A
series of preliminary estimates are done during this phase to assure
adherence to cost plan.
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 5
Introduction Ctd…
 Contract Document: Finalize drawings and Specifications: Designer’s
estimate to anticipate and check contractor’s bid prices.
 Bidding Phase: Contractors prepare detailed estimate to submit bids.
 Construction Phase: Estimates are prepared for cost control and for change
order evaluations.

 Factors which affect the cost estimation are summarized

as follow:
 Type and documentation of the project;
 Construction scheduling;

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 6
Introduction Ctd…
 Bidding environment;

 Quality and availability of material and labor

(given in specification);
 Construction facilities/tools and method of construction;
 Location of the site: Transportation charges;

 Proper management;
 Land charges (lease); and
 Nature of subsurface condition.
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 7
Introduction Ctd…
 Estimation can be broadly classified as preliminary
(approximate) and detailed.

1. Preliminary /approximate costing

 Is required to know the financial position of the client
before costly detailed designs are carried out.

A. Cost per Functional Unit

Hospital =cost per bed,
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 8
Preliminary /approximate costing
Ctd…

 Cinema or theatre = cost per seat,

 residential buildings = cost per area,

 Road works = cost per kilometer length,

 culverts or bridges = cost per meter span,
 water supply or sewerage projects = cost per head
of population.

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 9
 Preliminary /approximate costing
Ctd…

B. Plinth Area method – cost per m2

 Based on Plinth Area - roof area or external dimensions
at the plinth level (Courtyard and open area shall not be
included).
 The rate per meter square is deduced from the cost of
similar building projects in the locality.

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 10
 C. Cubical Content method – cost per m3
 Based on cubical contents of various buildings,

i.e. Plinth area of the building * height * cubic content

rate.
 Height should be taken from the top of flat roof (or
halfway of the sloped roof) to the top of concrete in
foundation.
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 11
2. Detailed Cost Estimate (Based on Item Rate)
 This is the most reliable and accurate type of estimate.

 The quantities of items are carefully prepared from the

drawings and the total cost worked out from up to date
market rates.
 A detail cost estimate thus requires:
 Quantity surveying, and

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 12
 Analysis of the different rates for the quantities
prepared.

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 13
2.1 Unit Rate Analysis

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 14
2.1.1 Direct Material Unit Cost
(E)

 Direct material cost is the total cost of construction

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

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 15
Direct Material Unit Cost Ctd…

 In order to have a better material cost estimation,

contractors shall develop their own material price
database and the database should contain, but not
limited to, the following information:
 Material price at place of delivery;
 Supplier’s address such as telephone, fax and mail
address;
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 16
Direct Material Unit Cost Ctd…

 Supplier’s contact person, email address and web

site;
 Supplier’s credit facility;
 Country of origin, Material delivery time;
 Place of delivery such as at the supplier’s shop,
project site, Addis Ababa air port or Djibouti port;
 Transportation charges usually per ton-km as well
as transporters.
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 17
Direct Material Unit Cost Ctd…

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 18
Direct Material Unit Cost Ctd…

 The contractor shall add the following costs to the

material supplier’s price to get the material unit cost at
the project site:
 Loading expenses at the supplier’s place of delivery;
 Transportation costs to the project site;
 Insurance charges during transportation to the project
site; and
 Unloading expenses at the project site.

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 19
Direct Material Unit Cost Ctd…

Example: Coarse aggregate 20mm (Site of work = Mettu)

A. Material Source……………………..Gambella
B. Material Price at Gambella ……….... 576.92 Birr/m3
C. Loading Cost …………………………20Birr/m3
D. Transportation Cost with damp truck..110Birr/m3
Solution
 Coarse aggregate unit cost = B+C+D
 Coarse agg. Unit cost = 576.92+20+110 = 706.92Birr/m3

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 20
2.1.2 Direct Labor Unit Cost (F)

 In calculating the direct labor cost, contractors need to

calculate the direct labor hourly cost which is the total
hourly cost of labor crew required to execute a specific
activity in the project.
 In estimating the direct labor hourly cost, the contractor
shall obtain the following inputs:
 Number of labor;
 Skill and labor utilization factor (UF);
 Labor basic salary; and
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 21
Direct Labor Unit Cost ctd…

 Labor index from his previous records and the labor market.

 Labor Index is a multiplying factor of the basic salary

which represents the additional benefits whereby a
worker gets from the contractor such as:
 Severance pay;

 Annual leave;

 Occupational accident expenses;

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 22
Direct Labor Unit Cost ctd…

 Occupational disease expenses;

 Overtime pay;

 Occupational safety, health and working environment;

and
 Benefits resulting from collective agreements.

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 23
Direct Labor Unit Cost ctd…

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 24
Direct Labor Unit Cost
Ctd…

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 25
2.1.3 Direct Equipment Unit Cost (G)

 In order to calculate the direct equipment cost,

contractors need to calculate the direct equipment hourly
cost which is the total hourly cost of equipment crew
required to execute a specific activity in a project.
 In estimating the direct equipment hourly cost, the
contractor shall obtain:
 The number of equipments;

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 26
Direct Equipment Unit Cost
ctd…

 Capacity and equipment utilization factor(UF); and

 The equipment hourly cost.

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 27
Direct Equipment Unit Cost
ctd…

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 28
Direct Equipment Unit Cost
ctd…

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 29
Direct Equipment Unit Cost
ctd…

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 30
2.1.4 Site Overhead Cost (I)

 It is easier to express the site overhead costs as a

percentage of the direct unit cost of an activity.

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 31
2.1.5 Head Office Overhead Cost
(J)

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 32
 2.1.6 Risk Allowance (L)

 Let’s assume the following factors represent the

percentage cost increment of each cost component and
the risk allowance will be calculated as follows:

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 33
2.1.8 Total Unit Price without VAT (N)

 If the contractor is registered for VAT but the contract is

VAT exempted, the contractor’s unit price in his tender is
the sum of direct unit cost (H), indirect unit cost (K), risk
allowance (L) and gross profit (M).

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 34
2.1.9 Total Unit Price with VAT

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MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 36
Examples

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 37
Examples Ctd…

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 38
Examples Ctd…

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 39
Examples Ctd…

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 40
Examples Ctd…

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 41
Examples Ctd…

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 42
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 43
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 44
 4.2 Risk Analysis for Cost
Estimation

 Schedule Planning and Development, Cost Estimating

and Budgeting, Resource Planning, Procurement
Planning, Profitability Study, etc. always involve some
uncertainty since not all the components that go into the
study are exactly known.
 Most are estimates, thus it is required to pay attention to
and inclusion of uncertainty as well as understand the
impact of risk and uncertainty.
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 45
 Risk Analysis Ctd…

 Risk: is a characteristic of a situation, action, or event in which a

number of outcomes are possible, the particular one that will
occur is uncertain, and at least one of the possibilities is
undesirable.
 Uncertainty: is a situation in which a number of possibilities exist
and which of them has occurred, or will occur, is unknown.
 All risks are uncertain but not all uncertainties are risky.

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 46
 4.2.1 Inherent Risk in Construction

A) Inherent Risk
 Inherent (range) Risk in the measured items (that have a 100%
likelihood of occurring) included within the various components
(direct costs, indirect costs, margin and owner’s costs ) of the
Base Estimate (such as Rates, Quantities, Assumptions, etc).
B) Contingent Risk
 Contingent Risk being the risk attached to items outside the Base
Estimate (that have a less than 100% likelihood of occurring).
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 47
 Contingent Risk Ctd…

 Contingent risk is the risk due to unmeasured items.

 Typical contingent risks include:

 weather impact,

 industrial issues,
 safety, planning approval conditions,

 design development,
 owner requirements,

 Geotechnical investigations and

 potential claims from contractors.
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 48
 Contingent Risk Ctd…

 Contingent Risks could be categorized under:

1. Acts ofGod: Flood, Earthquake, Landslide, Fire, Wind damage;

2. Physical: subsurface conditions;
3. Financial & Economic: uncertainty with high inflation and interest rates,
Availability of funds, Exchange rate fluctuations, Financial default;
4. Construction Related: Labor strikes, Labor productivity, Different site
conditions, Design changes, Equipment failure, inability of a subcontractor
to perform, Damage to structure, Damage to equipment, Labor injuries,
Fire, Theft, offsite accidents by vehicles;
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 49
 Contingent Risk Ctd…

5. Design Related: Incomplete design scope, Design assumptions, Defective

design/ constructability, Errors and omissions, Inadequate specifications;
6. Political/public and Environmental: Changes in laws and regulations
(such as environmental protection and public safety regulations),
Requirement for permits/ disapproval of the required project permits, Law
and order, Pollution and safety rules; and
7. Organizational and Contractual: Contractual relations, Attitudes of
participants, Communication, risks assigned by contract over which the
contractor has no control.
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 50
 4.2 Risk Analysis for Cost
Estimation

 Risk Analysis:

Reducing or effectively addressing uncertainty quality of

estimate improves Better decisions.
Key Variables of Project Management and Associated Risks

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 51
4.2.1 Why Risk Analysis in Cost
Estimates?

 Cost estimation is prediction.

 Little in cost estimating is certain.

 There is an inherent need for accurate forecasts of costs in all of
business activities for obvious reasons.
 A risk analysis framework for estimating costs is required for
improving the quality of cost estimates for Civil Works projects
because it provides opportunities to explicitly address much of the
uncertainty inherent in the cost estimating process.
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 52
 Why Risk Analysis Ctd…

 The general approach to think about risk assessment

includes:
 Recognize that uncertainty exists;

 Identify the key sources of significant uncertainty;

 Reduce the uncertainty whenever possible;

 Account for the uncertainty that cannot be reduced;

and
 Probabilistic Vs. Deterministic.

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 53
 4.3 Valuation

 Value Engineering (VE), also known as Value Analysis, is a

systematic and function-based approach to improving the value of
products, projects, or processes.
 Value is a personal perspective of your willingness to pay for the
performance delivered by a product, process or project.
 Good value is achieved when the required performance can be
accurately defined and delivered at the lowest life cycle cost.

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 54
 4.3 Valuation

 In the final analysis, Value Engineering is not only beneficial, but

essential because:
 The functionality of the project is often improved as well as producing
tremendous savings, both initial and Life-Cycle Cost.
 A "second look" at the design produced by the architect and engineers gives
the assurance that all reasonable alternatives have been explored.
 Cost estimates and scope statements are checked thoroughly assuring that
nothing has been omitted or underestimated.
 Assures that the best value will be obtained over the life of the
building/infrastructure.
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 55
 4.3.1 Purpose of VE

 In general, Value Engineering is used to:

 Determine the best design alternatives for Projects,

 Reduce cost on existing Projects,

 Improve quality, increase reliability and availability, and customer
satisfaction,
 Improve organizational performance,

 improve schedule and reduce risk, and

 Identify problems and develop recommended solutions.

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 56
4.3.2 Concept of Valuation

Value = Function/Cost

MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 57
 4.3.2 Stages in Valuation

 Planning:

- At the Planning stage of development, there are additional benefits to be derived

from a Value Engineering Workshop. An independent team can:
 Review the program;
 Perform a functional analysis of the facility;
 Obtain the owner/users definition of value;
 Define the key criteria and objectives for the project;
 Verify/validate the proposed program;
 Review master plan utility options (e.g. Central Utility Plant versus individual systems);
 Offer alternative solutions (square meters needs per function, adjacency solutions, etc.); and
 Verify if the budget is adequate for the developed program.
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 58
 Stages in Valuation Ctd…

 Design:

- This is the stage that most VE participants are used to becoming involved,
when the design has at least made it to the schematic stage.
 Construction:

- During this phase value engineering is still possible through the use of
Value Engineering Change Proposals (VECP).
- Contractors can be provided monetary incentives to propose solutions that
offer enhanced value to the owner, and share in the financial benefits
realized.
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 59
 Thank
You!
MeU, FoET, Dep't: CoTM, Lecturer: Ayansa K. (MSc. In Construction Engineering & Management) 60