Cost Estimating Challenges - Part B

What are the challenges in detailed estimating, especially in construction work?

 

Detailed Cost Estimating

(Estimating labor costs, the advantages of learning curve effects, and estimating material and equipment costs are discussed in our previous Issacon #1333)

Other challenges facing cost estimators working at the detailed level include

·         Estimating subcontractor costs

·         Estimating overhead costs

·         Determination and application of contingency

·         Each are described on the following pages

 

Subcontractor Costs - 1

Subcontracting

·         Some or most of a project may be "let out" to one or more other companies as subcontractors

·         This transfers the responsibility for estimating

·         If "firm prices" are required

·         It is usual to obtain several quotations

·         Unless the value of the contract would be very small

·         Or the service is very specialized

·         Or the relationship with the service supplier is long-standing and very solid

 

Subcontractor Costs - 2

·         Subcontracts can cover

·         Labor only

·         Or complete production

·         The subcontractors must cover their own

·         Work of tendering

·         Marketing and sales

·         Administrative overheads and profit

·         These may be embedded in the unit pricing

·         Or expressed as a percentage add-on

·         Make sure you know which!

 

Overhead Costs - 1

Asset considerations include

·         Office space costs or rental

·         Office utilities and services

·         Office equipment costs or rental

·         Business and property insurance and taxes

·         Cost of corporate financing, interest on loans

·         Depreciation and upgrading of equipment

 

Overhead Costs - 2

Staff considerations include

·         Corporate management and administrative costs

·         Other corporate staff

·         Marketing, accounting, legal, quality assurance

·         Downtime, lost time, vacations, pension plans, etc

·         Personnel management

·         Including hiring and firing

 

Contingency - 1

    A contingency allowance should cover specifically and only

·         Provision for unforeseen elements of cost

·         For both detailed design work as well as execution

·         But within the overall scope of the assignment

·         May include inflation/escalation and/or currency fluctuations

·         Usually as separate contingency entries

    Potential changes in scope

·         Should be covered separately

·         By a Management Reserve

 

Contingency - 2

Contingency allowance determination

·         Ideally, arrived at by a risk assessment

·         Based on the uncertainties applicable to each major activity or work package

·         With evaluation of extreme values

·         And probability of occurrence

·         This approach provides an objective basis

·         Alternatively, the allowance can be based on well-established past experience

 

Contingency - 3

Administration of contingency allowance

·         Identified as a separate item in the budget

·         Broken down by major components

·         Not used as a "big bucket" to be dipped into

·         But carefully managed as work progresses

·         Subject to some management approval process

·         Transactions carefully recorded, tracked and forecast

·         Like any of the other line items

 

Sources of information

Where do I find all this information?

·         Expenditure histories from previous projects

·         Standard costs provided by the organization

·         For on-costs, overheads and expenses

·         Team estimating sessions

·         Expert advice and assistance

·         Quotes from vendors and service suppliers

·         Standard unit pricing guidelines

·         They all help!