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Introduction to Cost Estimation

There are always two questions asked by a client considering an

investment in construction: How much? and How long?
Estimating responds to the first question. Very few projects can go
forward before the cost of the construction has been determined.
Estimating is a distinct function in the construction management
field, and unlike some other jobs in construction, the estimators
role is pretty specific. The estimators primary focus is costs. They
have the awesome responsibility of accurately determining the
price of the project while maintaining a competitive edge in the
marketplace. Projects are won or lost by the efforts of the
estimator. However, no matter what your job or position is in the
construction company, you need to understand the estimating
process as well.
Estimating project costs requires a methodical approach yet at the
same time demands a certain finesse. This chapter introduces you
to both aspects and walks you through the steps necessary to build
a construction estimate from the ground up.
1.1

Cost Estimate

Any considered prediction of future or final project costs.

1.2

Approximate Estimating

The process of determining what the cost of a project should be. It

occurs before the preparation of a cost plan and should be based
on the Clients fundamental requirements.
As you can see, estimators have an awesome responsibility. First,
they must come up with an accurate but competitive estimate that
will win the job. Second, their planning and calculations set the
stage for the overall management targets for the entire project.
Once the estimator turns the project over to the project manager
and the on-site team, the estimator shifts to a support role and
really has no direct management duties associated with the day-today operations.
Every time contractors estimate a job and submit a bid, they are
taking a risk. It is a high-stakes gamble, and many factors may
influence the outcome. The construction management team is on
the front lines of managing this risk to a successful outcome.
1.3

Elements of Cost

On receipt of the instructions, specifications, drawings, bills of

quantities and the standard form of contract from the clients
representative, the contractors estimators task is to price the
project and produce an estimate. Initially the estimator will
subdivide the work into individual sections to be priced out. With
bills of quantities, the work will have been submitted to the
estimator in sections, if not, the estimator must prepare these
sections for pricing.
Sections or packages of the project, which are carried out by the
sub-contractor will be identified by the contractors estimator. To
ensure competition several sub-contractors will be invited to
tender for each of the work packages and will send to each a copy
of the relevant section of the bills of quantities. The successful
tenderers prices will, with an addition for the contractors
overheads and profits, be incorporated into the contractors offer.

The remainder of the work will be priced by the estimator based

on the sources of data from previous jobs, rates and experience. In
each work section rates for items of work will be built up by
calculations (in a manner which will be described in this course)
based on the key resources required, mainly labour, plant,
materials plus an allowance for overheads and profit.
It is important for the estimator to keep the direct and indirect
costs separate in an estimate. Keeping indirect costs separate
allows one to more accurately account for the unique conditions
that will be encountered in a new project as many estimates are
based on a historical database compiled from previous projects
data.
1.3.1

Direct Costs

Those costs, which can be directly attributed to a particular item

of work or activity.
Direct costs are those items that actually go into building the
facility. An item is considered a direct cost if it can be linked to a
specific item of work on a project. Direct costs make up the bulk
of any construction estimate.
(i) Labour costs:
The total of the actual amounts paid to the
field personnel who perform the actual work on the project such
as carpenters, labourers, masons, painters, etc. Labour costs can be
broken into two main groups:
a). The basic wage (the wage rate x the number of hours).
b). The labour burden - includes items such as taxes, insurance,
etc. which employers are required by law to pay as well as fringe
benefits negotiated between employers and employees either
individually or collectively.
The estimator will have to price the time it will take for an
operative or a gang to complete an item of work. Tables of labour
constants are available in estimating books which are normally
expressed as an output of work per hour. By totaling the hours
and multiplying by a cost per hour, the estimator can determine
the labour costs associated with the work item.
(ii) Material costs:
Usually include the prices of materials
or parts incorporated into a project. The price of materials is
based on its purchase price with allowances for delivery, offloading, storage and placing in position. In addition, an allowance
must be made to cover wastage which may arise as follows:-

(a) Handling/breakages brittle materials such as bricks, clay tiles

and precast concrete paving slabs, etc have high breakage rate
even for the advances in mechanized handling of material which is
wrapped and delivered to site on pallets.

(b) Site losses an allowance has to be made for loose material

such as sand and aggregate which, when delivered and tipped on

site will, to some extent, be trampled into the ground, washed
away by rain, etc.

(c) Cutting losses sheet materials are manufactured in standard

sizes, Therefore plaster-board, plywood, glass, carpet, etc must be

cut to fit. Where the material is patterned has to be cut to a
difficult shape, losses can be considerable.
Materials can be in any one of the categories below:(a). Permanent materials included in the final constructed product
or structure.

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(b) Expendable materials and supplies that are necessary for the
work to be accomplished, but will not be incorporated into the
final structure, or will otherwise be used up during the work, such
as lubricants and concrete forms.
(iii) Equipment costs:
The cost of the equipment that a
contractor uses to perform a contract (such as cranes, bulldozers,
backhoes etc.) and not equipment that is to be installed
permanently as part of contract. Equipment costs are calculated as
follows:1. If owned by contractor - consists of owning costs (investment,
insurance, depreciation, etc.) and operating costs (fuel,
maintenance, repairs etc.).
2. If leased - consists of lease costs and fuel costs.
The cost of Operators for operating equipment is included by
most contractors in the direct labour costs. Alternatively the cost s
Generally, plant is priced on the same basis as labour, if plant is
used for a specific task. For example, an excavator digging a drain
trench will be priced on the basis of the amount of work that it
can do in one hour. Static plant, which cannot be associated solely
to one item of work, such as scaffolding, site hutting or even a
tower crane will be priced on the basis of time that it is required
on site. The cost is added to the tender as a lump sum and not
priced per unit of task.
(iv) Subcontract costs: The costs of services provided by
subcontractors for performing of specific portion of a given
project that the general contractor does not perform with us own
forces.
1.3.2

Indirect Costs

Defined as: (1) in construction, all costs which do not become a

final part of the installation, but are required for the orderly
completion of the installation and not limited to field
administration, direct supervision capital tools, start-up costs,
contractors fees, insurance, taxes, etc. (2) in manufacturing, costs
not directly assignable to the end product or process, such as
overhead and general purpose labour, or costs of outside
operations, such as transpiration and distribution.
Indirect costs are the expenses incurred in order to manage and
deliver the materials, labor, equipment, and subcontracts
employed on any given job. They are often referred to as jobspecific overhead or general conditions.

may be other risk items e.g. weather, labour problems,

transportation problems etc. Therefore, real costs can be either
higher or lower than the estimate. Unfortunately, in most cases,
they turn out to be higher. A contingency markup is added by
management in those cases using subjective reasoning and / or
structured risk analysis.
(iii) Overhead:
A cost or expense inherent in the
performance of an operation, i.e. engineering, construction,
operating or manufacturing. It cannot be charged to or identified
with a part of the work, product or asset, and therefore, must be
allocated on some arbitrary basis believed to the equitable. This
consists of two major sub-components.
(a) Home office overhead - Includes the fixed costs and expenses
that are incurred in the course of doing business by a company,
regardless of the amount of work completed or contracts received.
Home office overheads includes the costs of items such as: Home
Office rent or lease, Utilities, Communications (phone, fax, net
etc), Advertising, Salaries of Home Office employees, Salaries of
Executive Personnel, Donations, Legal Costs, Accounting Expense
etc
(b)Job Site overhead - Includes the cost that one has to furnish in
order to perform contract.
Include supervision, insurance,
signboard, hoarding, scaffolding, temporary facilities, site office,
temporary stores, water and power for works, security, toilets,
utilities, permits etc. This item is usually covered under the
Preliminaries section of the Bills of Quantities. In the event that the
employer requires the bidders to distribute these items in the
measured works section as opposed to lump sums in the
Preliminaries then the Estimator should compute the total jobsite
overheads and then distribute it in the rates for measured works.
The amount added for overheads and profit is normally given as a
percentage, the allowance generally being decided by the
contractors board of directors. The estimator will provide the cost
of labour, plant and materials, leaving the deciding factor in a
competitive tender of whether the contract will be won or lost
dependent upon the percentage addition for overheads and
profit. The contractor has four choices for the distribution of
overheads and profit.
1.

Percentage addition to all individual rates: This has an

2.

Add the total amount to one item in the preliminaries

section: Usually the supervision item. This has the advantage
that the amount cannot be reduced, and puts the contractor
in a strong negotiating position where a claim is made for
additional supervision owing to the contract period being
lengthened.

(i) Taxes: May vary from client to client due to say the taxexempt status of the owner. Therefore they are usually separated
to facilitate accounting.
(ii) Risk.
(a) Profit - Regarded as the amount of money included by a
contractor in his estimate as compensation for his risk, efforts, and
endeavour to undertake a project. It is usually the residue of
money left after a contractor has met all the costs, both direct and
indirect on a project. The amount of profit to be added is a very
subjective and individual matter. It however, usually depends on
some considerations such as competition, how badly one needs
the project, the job market, the local conditions, and the
economy.
(b) Contingency - In cost estimating, there is always an element of
uncertainty since estimates are based on assumed values of cost
and productivity, which actually are subject to variability. There

advantage where a variation to the work adds additional

quantity, since the contractor will recover additional
overheads and profit, but the converse is also true.

3.

Addition to the summary total at the end of the bills of

quantities. This reveals the overheads and profits addition

and can prove to be a disadvantage if an overestimate of

provisional sums and provisional quantities is made in the
bills of quantities. Also a re-measurement of these items may
lead to a reduction in the contract sum and hence also in
the blanket addition.
4.

Add the amount selectively to specific items in the bills of

quantities. This will improve cash flow. This has advantages,
but is also dangerous where work is subject to remeasurement.

1.4

Characteristics of a good estimator

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The consequences of any errors or omissions in the estimate are

borne by the contractor, and the contractor will not actually
know what the true cost of the construction is until the project is
complete. If the estimated cost is equal to or greater than the
actual cost, the project makes money for the contractor. If the
estimated cost is less than the actual cost, the contractor loses
money on the project.
The estimator is probably one of the most important people in
construction management. Without the estimator, the rest of the
team wouldnt have much to do because they wouldnt have any
jobs. The following specific skills and characteristics are common
among estimators:
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.
XII.
XIII.
XIV.
1.5

Reads contract documents well

Is knowledgeable about construction techniques
Is familiar with typical job conditions
Is familiar with construction products
Has good visualisation skills
Follows instructions explicitly
Is creative, yet practical
Is detail-oriented and thorough
Can meet deadlines and work under pressure
Is familiar with purchasing
Is familiar with computer applications
Works well with numbers and statistics
Is a perfectionist at the task level
Has very good organization skills
Qualities of a Good Estimate

Winning or losing depends upon the quality of the estimateand

of course, a little luck. High-quality estimates display the same
characteristics:
I.
II.
III.
IV.
V.
VI.
VII.
VIII.

Organization
Correct quantities
Accurate labor hours
Correct pricing
Accurate calculations
Completeness
Proper overhead
Proper profit

If the estimator was successful, they will gather together all of the
documents and label or tag them as original tender documents.
It is very important that there is a clear paper trail detailing exactly
how the final tender was compiled. Eventually a clean set of
drawings and specs will be issued to the builder to formally
execute the contract.
The estimator will want to check these documents against the
original tender documents to make sure nothing has changed. All
of the calculations, price quotes, subcontractor tenders, and any
other pertinent documentation that could track the estimate logic
will be organized and bundled into a package that will be passed
on to the project manager charged with running the job. And
although the estimators primary job is complete once the tender
is finished, they will provide support to the project team as the
job moves forward, often clarifying information and pricing
change orders / Variation orders.