Cost Estimation

Costs Associated with Constructed Facilities

Approaches to Cost Estimation
Type of Construction Cost Estimates
Effects of Scale on Construction Cost
Unit Cost Method of Estimation
Methods for Allocation of Joint Costs
Historical Cost Data
Cost Indices
Applications of Cost Indices to Estimating
Estimate Based on Engineer's List of Quantities
Allocation of Construction Costs Over Time
Computer Aided Cost Estimation
Estimation of Operating Costs
References
Problems
Footnotes

5. Cost Estimation
5.1 Costs Associated with Constructed Facilities
The costs of a constructed facility to the owner include both the initial capital cost and the
subsequent operation and maintenance costs. Each of these major cost categories consists of a
number of cost components.

The capital cost for a construction project includes the expenses related to the inital
establishment of the facility:

• Land acquisition, including assembly, holding and improvement

• Planning and feasibility studies
• Architectural and engineering design
• Construction, including materials, equipment and labor
• Field supervision of construction
• Construction financing
 • Insurance and taxes during construction
• Owner's general office overhead
• Equipment and furnishings not included in construction
• Inspection and testing

The operation and maintenance cost in subsequent years over the project life cycle includes the
following expenses:

• Land rent, if applicable

• Operating staff
• Labor and material for maintenance and repairs
• Periodic renovations
• Insurance and taxes
• Financing costs
• Utilities
• Owner's other expenses

The magnitude of each of these cost components depends on the nature, size and location of the
project as well as the management organization, among many considerations. The owner is
interested in achieving the lowest possible overall project cost that is consistent with its
investment objectives.

It is important for design professionals and construction managers to realize that while the
construction cost may be the single largest component of the capital cost, other cost components
are not insignificant. For example, land acquisition costs are a major expenditure for building
construction in high-density urban areas, and construction financing costs can reach the same
order of magnitude as the construction cost in large projects such as the construction of nuclear
power plants.

From the owner's perspective, it is equally important to estimate the corresponding operation and
maintenance cost of each alternative for a proposed facility in order to analyze the life cycle
costs. The large expenditures needed for facility maintenance, especially for publicly owned
infrastructure, are reminders of the neglect in the past to consider fully the implications of
operation and maintenance cost in the design stage.

In most construction budgets, there is an allowance for contingencies or unexpected costs

occuring during construction. This contingency amount may be included within each cost item or
be included in a single category of construction contingency. The amount of contingency is
based on historical experience and the expected difficulty of a particular construction project. For
example, one construction firm makes estimates of the expected cost in five different areas:

• Design development changes,

• Schedule adjustments,
• General administration changes (such as wage rates),
• Differing site conditions for those expected, and
• Third party requirements imposed during construction, such as new permits.
Contingent amounts not spent for construction can be released near the end of construction to the
owner or to add additional project elements.

In this chapter, we shall focus on the estimation of construction cost, with only occasional
reference to other cost components. In Chapter 6, we shall deal with the economic evaluation of
a constructed facility on the basis of both the capital cost and the operation and maintenance cost
in the life cycle of the facility. It is at this stage that tradeoffs between operating and capital costs
can be analyzed.

Example 5-1: Energy project resource demands [1]

The resources demands for three types of major energy projects investigated during the energy
crisis in the 1970's are shown in Table 5-1. These projects are: (1) an oil shale project with a
capacity of 50,000 barrels of oil product per day; (2) a coal gasification project that makes gas
with a heating value of 320 billions of British thermal units per day, or equivalent to about
50,000 barrels of oil product per day; and (3) a tar sand project with a capacity of 150,000 barrels
of oil product per day.

For each project, the cost in billions of dollars, the engineering manpower requirement for basic
design in thousands of hours, the engineering manpower requirement for detailed engineering in
millions of hours, the skilled labor requirement for construction in millions of hours and the
material requirement in billions of dollars are shown in Table 5-1. To build several projects of
such an order of magnitude concurrently could drive up the costs and strain the availability of all
resources required to complete the projects. Consequently, cost estimation often represents an
exercise in professional judgment instead of merely compiling a bill of quantities and collecting
cost data to reach a total estimate mechanically.

TABLE 5-1 Resource Requirements of Some Major Energy Projects

Oil shale Coal gasification Tar Sands
(50,000 (320 billions (150,000
barrels/day) BTU/day) barrels/day)
Cost
2.5 4 8 to 10
($ billion)
Basic design
(Thousands of 80 200 100
hours)
Detailed
engineering
3 to 4 4 to 5 6 to 8
(Millions of
hours)
Construction
(Millions of 20 30 40
hours)
Materials 1 2 2.5
 ($ billion)
Source: Exxon Research and Engineering Company, Florham Park, NJ

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5.2 Approaches to Cost Estimation

Cost estimating is one of the most important steps in project management. A cost estimate
establishes the base line of the project cost at different stages of development of the project. A
cost estimate at a given stage of project development represents a prediction provided by the cost
engineer or estimator on the basis of available data. According to the American Association of
Cost Engineers, cost engineering is defined as that area of engineering practice where
engineering judgment and experience are utilized in the application of scientific principles and
techniques to the problem of cost estimation, cost control and profitability.

Virtually all cost estimation is performed according to one or some combination of the following
basic approaches:

Production function. In microeconomics, the relationship between the output of a process and
the necessary resources is referred to as the production function. In construction, the production
function may be expressed by the relationship between the volume of construction and a factor
of production such as labor or capital. A production function relates the amount or volume of
output to the various inputs of labor, material and equipment. For example, the amount of output
Q may be derived as a function of various input factors x1, x2, ..., xn by means of mathematical
and/or statistical methods. Thus, for a specified level of output, we may attempt to find a set of
values for the input factors so as to minimize the production cost. The relationship between the
size of a building project (expressed in square feet) to the input labor (expressed in labor hours
per square foot) is an example of a production function for construction. Several such production
functions are shown in Figure 3-3 of Chapter 3.

Empirical cost inference. Empirical estimation of cost functions requires statistical techniques
which relate the cost of constructing or operating a facility to a few important characteristics or
attributes of the system. The role of statistical inference is to estimate the best parameter values
or constants in an assumed cost function. Usually, this is accomplished by means of regression
analysis techniques.

Unit costs for bill of quantities. A unit cost is assigned to each of the facility components or
tasks as represented by the bill of quantities. The total cost is the summation of the products of
the quantities multiplied by the corresponding unit costs. The unit cost method is straightforward
in principle but quite laborious in application. The initial step is to break down or disaggregate a
process into a number of tasks. Collectively, these tasks must be completed for the construction
of a facility. Once these tasks are defined and quantities representing these tasks are assessed, a
unit cost is assigned to each and then the total cost is determined by summing the costs incurred
in each task. The level of detail in decomposing into tasks will vary considerably from one
estimate to another.
Allocation of joint costs. Allocations of cost from existing accounts may be used to develop a
cost function of an operation. The basic idea in this method is that each expenditure item can be
assigned to particular characteristics of the operation. Ideally, the allocation of joint costs should
be causally related to the category of basic costs in an allocation process. In many instances,
however, a causal relationship between the allocation factor and the cost item cannot be
identified or may not exist. For example, in construction projects, the accounts for basic costs
may be classified according to (1) labor, (2) material, (3) construction equipment, (4)
construction supervision, and (5) general office overhead. These basic costs may then be
allocated proportionally to various tasks which are subdivisions of a project.

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5.3 Types of Construction Cost Estimates

Construction cost constitutes only a fraction, though a substantial fraction, of the total project
cost. However, it is the part of the cost under the control of the construction project manager.
The required levels of accuracy of construction cost estimates vary at different stages of project
development, ranging from ball park figures in the early stage to fairly reliable figures for budget
control prior to construction. Since design decisions made at the beginning stage of a project life
cycle are more tentative than those made at a later stage, the cost estimates made at the earlier
stage are expected to be less accurate. Generally, the accuracy of a cost estimate will reflect the
information available at the time of estimation.

Construction cost estimates may be viewed from different perspectives because of different
institutional requirements. In spite of the many types of cost estimates used at different stages of
a project, cost estimates can best be classified into three major categories according to their
functions. A construction cost estimate serves one of the three basic functions: design, bid and
control. For establishing the financing of a project, either a design estimate or a bid estimate is
used.

1. Design Estimates. For the owner or its designated design professionals, the types of cost
estimates encountered run parallel with the planning and design as follows:
o Screening estimates (or order of magnitude estimates)
o Preliminary estimates (or conceptual estimates)
o Detailed estimates (or definitive estimates)
o Engineer's estimates based on plans and specifications

For each of these different estimates, the amount of design information available
typically increases.

2. Bid Estimates. For the contractor, a bid estimate submitted to the owner either for
competitive bidding or negotiation consists of direct construction cost including field
supervision, plus a markup to cover general overhead and profits. The direct cost of
construction for bid estimates is usually derived from a combination of the following
approaches.
o Subcontractor quotations
 o Quantity takeoffs
o Construction procedures.
3. 3. Control Estimates. For monitoring the project during construction, a control estimate
is derived from available information to establish:
o Budget estimate for financing
o Budgeted cost after contracting but prior to construction
o Estimated cost to completion during the progress of construction.

Design Estimates

In the planning and design stages of a project, various design estimates reflect the progress of the
design. At the very early stage, the screening estimate or order of magnitude estimate is usually
made before the facility is designed, and must therefore rely on the cost data of similar facilities
built in the past. A preliminary estimate or conceptual estimate is based on the conceptual design
of the facility at the state when the basic technologies for the design are known. The detailed
estimate or definitive estimate is made when the scope of work is clearly defined and the detailed
design is in progress so that the essential features of the facility are identifiable. The engineer's
estimate is based on the completed plans and specifications when they are ready for the owner to
solicit bids from construction contractors. In preparing these estimates, the design professional
will include expected amounts for contractors' overhead and profits.

The costs associated with a facility may be decomposed into a hierarchy of levels that are
appropriate for the purpose of cost estimation. The level of detail in decomposing the facility into
tasks depends on the type of cost estimate to be prepared. For conceptual estimates, for example,
the level of detail in defining tasks is quite coarse; for detailed estimates, the level of detail can
be quite fine.

As an example, consider the cost estimates for a proposed bridge across a river. A screening
estimate is made for each of the potential alternatives, such as a tied arch bridge or a cantilever
truss bridge. As the bridge type is selected, e.g. the technology is chosen to be a tied arch bridge
instead of some new bridge form, a preliminary estimate is made on the basis of the layout of the
selected bridge form on the basis of the preliminary or conceptual design. When the detailed
design has progressed to a point when the essential details are known, a detailed estimate is made
on the basis of the well defined scope of the project. When the detailed plans and specifications
are completed, an engineer's estimate can be made on the basis of items and quantities of work.

Bid Estimates

The contractor's bid estimates often reflect the desire of the contractor to secure the job as well as
the estimating tools at its disposal. Some contractors have well established cost estimating
procedures while others do not. Since only the lowest bidder will be the winner of the contract in
most bidding contests, any effort devoted to cost estimating is a loss to the contractor who is not
a successful bidder. Consequently, the contractor may put in the least amount of possible effort
for making a cost estimate if it believes that its chance of success is not high.
If a general contractor intends to use subcontractors in the construction of a facility, it may solicit
price quotations for various tasks to be subcontracted to specialty subcontractors. Thus, the
general subcontractor will shift the burden of cost estimating to subcontractors. If all or part of
the construction is to be undertaken by the general contractor, a bid estimate may be prepared on
the basis of the quantity takeoffs from the plans provided by the owner or on the basis of the
construction procedures devised by the contractor for implementing the project. For example, the
cost of a footing of a certain type and size may be found in commercial publications on cost data
which can be used to facilitate cost estimates from quantity takeoffs. However, the contractor
may want to assess the actual cost of construction by considering the actual construction
procedures to be used and the associated costs if the project is deemed to be different from
typical designs. Hence, items such as labor, material and equipment needed to perform various
tasks may be used as parameters for the cost estimates.

Control Estimates

Both the owner and the contractor must adopt some base line for cost control during the
construction. For the owner, a budget estimate must be adopted early enough for planning long
term financing of the facility. Consequently, the detailed estimate is often used as the budget
estimate since it is sufficient definitive to reflect the project scope and is available long before
the engineer's estimate. As the work progresses, the budgeted cost must be revised periodically
to reflect the estimated cost to completion. A revised estimated cost is necessary either because
of change orders initiated by the owner or due to unexpected cost overruns or savings.

For the contractor, the bid estimate is usually regarded as the budget estimate, which will be used
for control purposes as well as for planning construction financing. The budgeted cost should
also be updated periodically to reflect the estimated cost to completion as well as to insure
adequate cash flows for the completion of the project.

Example 5-2: Screening estimate of a grouting seal beneath a landfill [2]

One of the methods of isolating a landfill from groundwater is to create a bowl-shaped bottom
seal beneath the site as shown in Figure 5-0. The seal is constructed by pumping or pressure-
injecting grout under the existing landfill. Holes are bored at regular intervals throughout the
landfill for this purpose and the grout tubes are extended from the surface to the bottom of the
landfill. A layer of soil at a minimum of 5 ft. thick is left between the grouted material and the
landfill contents to allow for irregularities in the bottom of the landfill. The grout liner can be
between 4 and 6 feet thick. A typical material would be Portland cement grout pumped under
pressure through tubes to fill voids in the soil. This grout would then harden into a permanent,
impermeable liner.
 Figure 5--1: Grout Bo
ottom Seal L
Liner at a Laandfill

The work k items in th

his project include (1) driilling explorratory bore hholes at 50 ftt intervals foor
grout tub
bes, and (2) pumping
p gro
out into the voids
v of a soil layer betw
ween 4 and 6 ft thick. Thhe
quantities for these tw
wo items aree estimated on
o the basis oof the landfiill area:

8 acres = (8)(43,560 ft2/acre) = 348,480

3 ft2
(As an ap n, use 360,000 ft2 to account for the bowl shape))
pproximation

The num
mber of bore holes
h in a 50 g pattern covering 3660,000 ft2 is ggiven by:
0 ft by 50 ft grid

The averrage depth off the bore ho

oles is estimaated to be 200 ft. Hence, tthe total amoount of drilliing is
(144)(20) = 2,880 ft.

The volu
ume of the so
oil layer for grouting
g is estimated
e to be:
for a 4 ft layer, volume = (4 ft)(360,000 ft2) = 1,440,000 ft3
for a 6 ft layer, volume = (6 ft)(360,000 ft2) = 2,160,000 ft3
It is estimated from soil tests that the voids in the soil layer are between 20% and 30% of the
total volume. Thus, for a 4 ft soil layer:
grouting in 20% voids = (20%)(1,440,000) = 288,000 ft3
grouting in 30 % voids = (30%)(1,440,000) = 432,000 ft3
and for a 6 ft soil layer:
grouting in 20% voids = (20%)(2,160,000) = 432,000 ft3
grouting in 30% voids = (30%)(2,160,000) = 648,000 ft3
The unit cost for drilling exploratory bore holes is estimated to be between $3 and $10 per foot
(in 1978 dollars) including all expenses. Thus, the total cost of boring will be between (2,880)(3)
= $ 8,640 and (2,880)(10) = $28,800. The unit cost of Portland cement grout pumped into place
is between $4 and $10 per cubic foot including overhead and profit. In addition to the variation
in the unit cost, the total cost of the bottom seal will depend upon the thickness of the soil layer
grouted and the proportion of voids in the soil. That is:
for a 4 ft layer with 20% voids, grouting cost = $1,152,000 to $2,880,000
for a 4 ft layer with 30% voids, grouting cost = $1,728,000 to $4,320,000
for a 6 ft layer with 20% voids, grouting cost = $1,728,000 to $4,320,000
for a 6 ft layer with 30% voids, grouting cost = $2,592,000 to $6,480,000
The total cost of drilling bore holes is so small in comparison with the cost of grouting that the
former can be omitted in the screening estimate. Furthermore, the range of unit cost varies
greatly with soil characteristics, and the engineer must exercise judgment in narrowing the range
of the total cost. Alternatively, additional soil tests can be used to better estimate the unit cost of
pumping grout and the proportion of voids in the soil. Suppose that, in addition to ignoring the
cost of bore holes, an average value of a 5 ft soil layer with 25% voids is used together with a
unit cost of $ 7 per cubic foot of Portland cement grouting. In this case, the total project cost is
estimated to be:
(5 ft)(360,000 ft2)(25%)($7/ft3) = $3,150,000
An important point to note is that this screening estimate is based to a large degree on
engineering judgment of the soil characteristics, and the range of the actual cost may vary from $
1,152,000 to $ 6,480,000 even though the probabilities of having actual costs at the extremes are
not very high.
Example 5-3: Example of engineer's estimate and contractors' bids[3]
The engineer's estimate for a project involving 14 miles of Interstate 70 roadway in Utah was
$20,950,859. Bids were submitted on March 10, 1987, for completing the project within 320
working days. The three low bidders were:

1. Ball, Ball & Brosame, Inc., Danville CA $14,129,798

2. National Projects, Inc., Phoenix, AR $15,381,789
3. Kiewit Western Co., Murray, Utah $18,146,714
It was astounding that the winning bid was 32% below the engineer's estimate. Even the third
lowest bidder was 13% below the engineer's estimate for this project. The disparity in pricing
can be attributed either to the very conservative estimate of the engineer in the Utah Department
of Transportation or to area contractors who are hungrier than usual to win jobs.
The unit prices for different items of work submitted for this project by (1) Ball, Ball &
Brosame, Inc. and (2) National Projects, Inc. are shown in Table 5-2. The similarity of their unit
prices for some items and the disparity in others submitted by the two contractors can be noted.

TABLE 5-2: Unit Prices in Two Contractors' Bids for Roadway Construction

Unit price
Items Unit Quantity
1 2
Mobilization ls 1 115,000 569,554
Removal, berm lf 8,020 1.00 1.50
Finish subgrade sy 1,207,500 0.50 0.30
Surface ditches lf 525 2.00 1.00
Excavation structures cy 7,000 3.00 5.00
Base course, untreated, 3/4'' ton 362,200 4.50 5.00
Lean concrete, 4'' thick sy 820,310 3.10 3.00
PCC, pavement, 10'' thick sy 76,010 10.90 12.00
Concrete, ci AA (AE) ls 1 200,000 190,000
Small structure cy 50 500 475
Barrier, precast lf 7,920 15.00 16.00
Flatwork, 4'' thick sy 7,410 10.00 8.00
10'' thick sy 4,241 20.00 27.00
Slope protection sy 2,104 25.00 30.00
Metal, end section, 15'' ea 39 100 125
18'' ea 3 150 200
Post, right-of-way, modification lf 4,700 3.00 2.50
Salvage and relay pipe lf 1,680 5.00 12.00
Loose riprap cy 32 40.00 30.00
Braced posts ea 54 100 110
Delineators, type I lb 1,330 12.00 12.00
type II ea 140 15.00 12.00
Constructive signs fixed sf 52,600 0.10 0.40
Barricades, type III lf 29,500 0.20 0.20
Warning lights day 6,300 0.10 0.50
Pavement marking, epoxy material
Black gal 475 90.00 100
 TABLE 5-2: Unit Prices in Two Contractors' Bids for Roadway Construction

Items Unit Quantity Unit price

Yellow gal 740 90.00 80.00
White gal 985 90.00 70.00
Plowable, one-way white ea 342 50.00 20.00
Topsoil, contractor furnished cy 260 10.00 6.00
Seedling, method A acr 103 150 200
Excelsior blanket sy 500 2.00 2.00
Corrugated, metal pipe, 18'' lf 580 20.00 18.00
Polyethylene pipe, 12'' lf 2,250 15.00 13.00
Catch basin grate and frame ea 35 350 280
Equal opportunity training hr 18,000 0.80 0.80
Granular backfill borrow cy 274 10.00 16.00
Drill caisson, 2'x6'' lf 722 100 80.00
Flagging hr 20,000 8.25 12.50
Prestressed concrete member
type IV, 141'x4'' ea 7 12,000 16.00
132'x4'' ea 6 11,000 14.00
Reinforced steel lb 6,300 0.60 0.50
Epoxy coated lb 122,241 0.55 0.50
Structural steel ls 1 5,000 1,600
Sign, covering sf 16 10.00 4.00
type C-2 wood post sf 98 15.00 17.00
24'' ea 3 100 400
30'' ea 2 100 160
48'' ea 11 200 300
Auxiliary sf 61 15.00 12.00
Steel post, 48''x60'' ea 11 500 700
type 3, wood post sf 669 15.00 19.00
24'' ea 23 100 125
30'' ea 1 100 150
36'' ea 12 150 180
42''x60'' ea 8 150 220
 TABLE 5--2: Unit Prices in Two Contractors'
C B
Bids for Roaadway Consttruction

Items Unit Quantity Unit price

48
8'' ea 7 200 270
Au
uxiliary sf 135 15.00 13.00
Stteel post sf 1,610 40.00 35.00
12
2''x36'' ea 28 100 150
Fo
oundation, concrete ea 60 300 650
Barrricade, 48''x4
42'' ea 40 100 100
Wood
W post, ro
oad closed lf 100 30.00 36.00

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5.4 Effectss of Scale on Coonstructiion Costt

Screeniing cost estim mates are oftten based on n a single varriable repressenting the capacity or soome
physicaal measure of o the design n such as flooor area in buuildings, lenggth of highw ways, volumee of
storage bins
b and prod duction volu umes of proccessing plantts. Costs do nnot always vvary linearlyy with
respeect to differeent facility siizes. Typicallly, scale ecoonomies or ddiseconomiees exist. If thhe
averagge cost per unit
u of capaccity is decliniing, then scaale economiees exist. Connversely, scaale
disecoonomies exist if averagee costs increaase with greaater size. Em mpirical dataa are sought tto
estab
blish the econ nomies of sccale for varioous types off facility, if thhey exist, in order to takke
advanttage of lowerr costs per uunit of capaciity.

Let x be
b a variablee representing the facility
y capacity, aand y be the rresulting connstruction coost.
Th hen, a linear cost relation
nship can be expressed inn the form:

(5.1)

where a and
a b are po ositive constaants to be deetermined onn the basis off historical ddata. Note thhat in
Equatio on (5.1), a fixxed cost of y = a at x = 0 is implied as shown inn Figure 5-2. In general, this
relationsship is appliccable only inn a certain raange of the vvariable x, suuch as betweeen x = c andd x =
d. If the
t values off y correspon nding to x = c and x = d are known, then the cosst of a facilitty
corresp ponding to an ny x within the
t specified d range may be obtained by linear innterpolation. For
examp ple, the consstruction cost of a schooll building caan be estimatted on the baasis of a lineear
relationsship between n cost and flooor area if th
he unit cost pper square fooot of floor aarea is know
wn for
schooll buildings within
w certainn limits of siize.
 Figure 5-2: Lin
near Cost Reelationship w
with Econom
mies of Scale

A nonlin
near cost relaationship bettween the facility capaciity x and connstruction coost y can ofteen be
represennted in the foorm:

(5.2)

where a and b are poositive consttants to be deetermined onn the basis oof historical ddata. For 0 < b <
1, Equation
E (5.2) representts the case off increasing returns to sccale, and for b ;gt 1, the
relationsship becomees the case off decreasing
g returns to sccale, as showwn in Figuree 5-3. Takingg the
log
garithm of bo
oth sides thiss equation, a linear relatiionship can be obtained as follows:
 Figure 5-3: Nonliinear Cost Relationship
R with
w increasing or Decreeasing Econoomies of Scaale

(5.3)

Althoughh no fixed co ost is implied d in Eq.(5.2)), the equatioon is usuallyy applicable only for a ceertain
range of
o x. The sam me limitation n applies to Eq.(5.3).
E A nnonlinear cosst relationshhip often usedd in
estim
mating the cosst of a new industrial
i proocessing plaant from the kknown cost of an existinng
facility of a differrent size is known
k as thee exponentiaal rule. Let yn be the knoown cost of aan
existin
ng facility wiith capacity Qn, and y bee the estimatted cost of thhe new faciliity which haas a
capaccity Q. Then n, from the emmpirical datta, it can be aassumed thaat:

(5.4)

where m usually varries from 0.5 5 to 0.9, depending on a specific typpe of facility.. A value of m =
0.6 is offten used forr chemical prrocessing plaants. The exp
xponential ruule can be redduced to a liinear
relationship
p if the logarrithm of Equuation (5.4) iis used:

(5.5)

or
(5.6)

The expo
onential rulee can be appllied to estim
mate the totall cost of a coomplete facillity or the coost of
som
me particular component of a facility..

Ex
xample 5-4: Determinattion of m fo r the expon
nential rule

Figu
ure 5-4: Log
g-Log Scale Graph of Exxponential R
Rule Examplee

The emppirical cost data

d from a number
n of seewage treatmment plants aare plotted onn a log-log sscale
for ln(Q
Q/Qn) and ln((y/yn) and a linear relatio
onship between these loggarithmic raatios is show wn in
Figure 5-4.
5 For (Q/Qn) = 1 or ln n(Q/Qn) = 0, ln(y/yn) = 00; and for Q//Qn = 2 or lnn(Q/Qn) = 0.3301,
ln(y/yn) = 0.1765. Since m is th
he slope of the
t line in thhe figure, it ccan be determ
mined from tthe
geometric relation
r as fo
follows:

For ln(y
y/yn) = 0.176
65, y/yn = 1.5 Q/Qn is 2. Inn words, for m =
5, while the correspondinng value of Q
0.585, the co
ost of a plan
nt increases only
o 1.5 timees when the capacity is ddoubled.
Example
E 5-5: Cost exponents for water
w and w
wastewater ttreatment p plants[4]
The magnitude of th he cost expoonent m in thhe exponentiaal rule proviides a simplee measure off the
economy y of scale asssociated with h building ex
xtra capacityy for future ggrowth and ssystem reliabbility
for the prresent in thee design of trreatment plan
nts. When m is small, thhere is considderable inceentive
to provvide extra caapacity sincee scale econoomies exist aas illustratedd in Figure 55-3. When m is
closee to 1, the co
ost is directly
y proportionaal to the desiign capacityy. The value of m tends tto
increase as the numb ber of duplicate units in a system inccreases. The values of m for several ttypes
of treatm
ment plants with
w differen
nt plant comp ponents deriived from staatistical corrrelation of acctual
consttruction costts are shown in Table 5-33.
TABLE 5-3 Estimated d Values of Cost
C Exponeents for Water Treatmennt Plants

Treatm
ment plant Exponennt Capacityy range
type
t m (milllions of galllons per dayy)

1. Water treatment 0.67 1-1000

2. Waste treatment
Primarry with digesstion (small)) 0.55 0.1-110
Primarry with digesstion (large) 0.75 0.7-100
Trickliing filter 0.60 0.1-220
Activaated sludge 0.77 0.1-100
Stabiliization pond
ds 0.57 0.1-100

Source: Data
D are colllected from various
v sourrces by P.M. Berthouex. See the refeerences in his
article fo
or the primary sources.

Examp
ple 5-6: Som
me Historica
al Cost Dataa for the Exp
ponential R
Rule

The exp
ponential ru
ule as represeented by Equ
uation (5.4) ccan be expreessed in a diffferent form
m as:

where

If m and
d K are know
wn for a giveen type of faacility, then tthe cost y foor a proposedd new facilitty of
specifieed capacity Q can be reaadily computted.
TABL
LE 5-4 Costt Factors of Processing
P U
Units for Treeatment Plannts

Prrocessing Unit of K Valuee m

unit capacityy (1968 $)) valuue

1. Liquid
d processing
Oil sep
paration mgd 58,000 0.884
Hydrocclone degrittter mgd 3,820 0.335
Primaryy sedimentattion ft2 399 0.660
Furial clarifier
c ft2 700 0.557
Sludge aeration bassin mil. gall. 170,0000 0.550
Ticklin
ng filter ft2 21,000 0.771
Aeratedd lagoon bassin mil. gall. 46,000 0.667
 Equalization mil. gal. 72,000 0.52
Neutralization mgd 60,000 0.70
2. Sludge handling
Digestion ft3 67,500 0.59
Vacuum filter ft2 9,360 0.84
lb dry
Centrifuge 318 0.81
solids/hr

Source: Data are collected from various sources by P.M. Berthouex. See the references in his
article for the primary sources.

The estimated values of K and m for various water and sewage treatment plant components are
shown in Table 5-4. The K values are based on 1968 dollars. The range of data from which the K
and m values are derived in the primary sources should be observed in order to use them in
making cost estimates.

As an example, take K = $399 and m = 0.60 for a primary sedimentation component in Table 5-
4. For a proposed new plant with the primary sedimentation process having a capacity of 15,000
sq. ft., the estimated cost (in 1968 dollars) is:

y = ($399)(15,000)0.60 = $128,000.
Back to top

5.5 Unit Cost Method of Estimation

If the design technology for a facility has been specified, the project can be decomposed into
elements at various levels of detail for the purpose of cost estimation. The unit cost for each
element in the bill of quantities must be assessed in order to compute the total construction cost.
This concept is applicable to both design estimates and bid estimates, although different elements
may be selected in the decomposition.

For design estimates, the unit cost method is commonly used when the project is decomposed
into elements at various levels of a hierarchy as follows:

1. Preliminary Estimates. The project is decomposed into major structural systems or

production equipment items, e.g. the entire floor of a building or a cooling system for a
processing plant.
2. Detailed Estimates. The project is decomposed into components of various major
systems, i.e., a single floor panel for a building or a heat exchanger for a cooling system.
3. Engineer's Estimates. The project is decomposed into detailed items of various
components as warranted by the available cost data. Examples of detailed items are slabs
and beams in a floor panel, or the piping and connections for a heat exchanger.
 For biid estimates,, the unit cosst method caan also be appplied even tthough the contractor maay
choose to decompose
d th
he project into different llevels in a hhierarchy as ffollows:

1. Subcontract
S tor Quotatio ons. The deccompositionn of a projectt into subconntractor item ms for
quotation
q inv
volves a min nimum amou unt of work ffor the generral contractoor. Howeverr, the
accuracy off the resultingg estimate depends on thhe reliabilityy of the subcontractors siince
th
he general coontractor sellects one am mong several contractor qquotations suubmitted for each
item of
o subcontraccted work.
2. Quantity Takeoffs. The T decompo osition of a pproject into iitems of quanntities that aare
measured
m (orr taken off) from
f the enggineer's plan will result iin a procedurre similar to that
adopted
a for a detailed esstimate or an n engineer's eestimate by tthe design pprofessional. The
levels of detail may vary
v according to the dessire of the geeneral contraactor and thee
availability of coost data.
3. Constructio
C n Procedures. If the con nstruction prrocedure of a proposed pproject is useed as
the basis of a cost estimmate, the prooject may bee decomposeed into itemss such as labor,
mateerial and equ uipment need ded to perforrm various ttasks in the pprojects.

Simple Un
nit Cost Foormula

Supposee that a projeect is decomp

posed into n elements foor cost estim
mation. Let Qi be the quanntity
th
of the i element and d ui be the co
orresponding
g unit cost. T
Then, the tottal cost of the project is ggiven
by:

(5.7)

where n is the numb

ber of units. Based on chharacteristicss of the consstruction sitee, the technollogy
employ
yed, or the management
m of the consttruction proccess, the estimated unit ccost, ui for eaach
element may be adjuusted.

Factored
F Estimate
E F
Formula

A speecial applicaation of the unit

u cost metthod is the "ffactored estiimate" comm monly used iin
process industries. Usually,
U an industrial
i proocess requirees several m
major equipm ment componnents
such ass furnaces, to
owers drumss and pump in i a chemicaal processingg plant, plus ancillary iteems
such as piping, vallves and elecctrical elemeents. The totaal cost of a pproject is dom
minated by tthe
costs of purchasing
p and
a installing g the major equipment ccomponents and their ancillary itemss. Let
Ci be th
he purchase cost
c of a majjor equipmeent componennt i and fi bee a factor acccounting forr the
cost of ancillary
a item
ms needed fo or the installlation of thiss equipment component i. Then, the total
cost
c of a pro oject is estim
mated by:

(5.8)
 where n is the nummber of majo or equipmentt componentts included iin the project. The factorred
methood is essentiaally based on
n the principle of compututing the costt of ancillaryy items such as
nd valves as a fraction orr a multiple of the costs of the majorr equipment items. The vvalue
piping an
of Ci maay be obtaineed by applyinng the exponnential rule sso the use off Equation (55.8) may invvolve
a com
mbination off cost estimattion methodds.

Fo
ormula Bassed on Lab
bor, Materrial and Eq
quipment

Considder the simplle case for which

w costs of
o labor, matterial and equ
quipment are assigned to all
tasks. Su
uppose that a project is decomposed intoi n tasks. Let Qi be thhe quantity oof work for ttask i,
Mi be the
t unit mateerial cost of task
t i, Ei be the unit equuipment rate for task i, Li be the unitss of
labor reequired per unit
u of Qi, an nd Wi be thee wage rate aassociated wwith Li. In thiis case, the tootal
cost
c y is:

(5.9)

Note thaat WiLi yield

ds the labor cost
c per unitt of Qi, or thee labor unit ccost of task i. Consequenntly,
the units fo
or all terms in
n Equation ((5.9) are connsistent.

Exa
ample 5-7: Decompositi
D ion of a buillding found ation into d
design and cconstruction
n
elements.
e

The conncept of deco omposition is illustrated by the exam mating the coosts of a building
mple of estim
foun
ndation exclu uding excavaation as show wn in Table 5-5 in whichh the decompposed designn
elemeents are showwn on horizo ontal lines an
nd the decommposed contrract elements are shown in
verttical columnns. For a desiign estimate, the decompposition of thhe project innto footings,
foundaation walls an nd elevator pit
p is preferrred since the designer caan easily keepp track of thhese
design elements; ho owever, for a bid estimate, the decom mposition off the project into formwoork,
reinforccing bars and concrete may
m be prefeerred since thhe contractorr can get quootations of suuch
conttract items more
m conveniiently from sspecialty subbcontractors.
TAB
BLE 5-5 Illu
ustrative Decompositionn of Buildingg Foundationn
Costs

Contraact elements
Design
elements
e
Formw
work Rebaars Concrete Total coost

Footin
ngs $5,0
000 $10,0000 $13,0000 $28,000
Founddation walls 15,0
000 18,0000 28,0000 61,000
Elevattor pit 9,0
000 15,0000 16,0000 40,000
Total
T cost $29,0
000 $43,0000 $57,0000 $129,000

Example 5-8: Cost esstimate usin

ng labor, maaterial and equipment rates.
 For thhe given quaantities of woork Qi for th
he concrete fo foundation off a building and the laboor,
material and equipment rates in Table
T 5-6, th
he cost estim
mate is compuuted on the bbasis of Equuation
(5.9)). The result is tabulated in the last ccolumn of thee same tablee.
ABLE 5-6 Illustrative
TA I Cost
C Estimatte Using Labbor, Materiall and Equipm
ment Rates

Maaterial Equ
uipment W
Wage Labbor Labbor Direcct
uantity
Qu
Descriiption unit cost unnit cost rrate inpput unit ccost costt
Qi
Mi Ei Wi Li WiLi Yi

Formw
work 12,,000 ft2 0.4/ft2
$0 0.8/ft2
$0 $115/hr 0.2 hhr/ft2 $3.00/ft2 $50,4000
Rebarss 4,0
000 lb 0.2/lb
0 0.3/lb
0 155/hr 0.04 hhr/lb 0.6//lb 4,4400
Concreete 00 yd3
50 5.0/yd3 50/yd3 3
155/hr 0.8 hrr/yd 12.0//yd 3
33,5000
Tootal $88,3000

Back to top

5.6 Method
ds for Allocatio
A on of Joiint Costss
The principle
p of allocating
a jo
oint costs to various
v elem
ments in a prroject is oftenn used in cosst
estimatting. Becausse of the diffficulty in estaablishing cassual relationnship betweeen each elemment
and itts associated
d cost, the joiint costs are often proratted in proporrtion to the bbasic costs fo
for
varioous elementss.

One coommon appllication is fo ound in the allocation of field supervvision cost am mong the baasic
costs of various elemments based on labor, maaterial and eqquipment coosts, and the allocation oof the
generaal overhead cost to vario ous elementss according tto the basic aand field suppervision cost.
Suppose that a projecct is decomp posed into n tasks. Let y be the total basic cost foor the projecct and
yi be the total basic cost
c for task i. If F is thee total field ssupervision ccost and Fi iss the proratioon of
th
hat cost to taask i, then a typical
t propportional alloocation is:

(5.10)

Similarly, let z bee the total dirrect field cosst which inc ludes the tottal basic cost and the field
supervission cost of the
t project, anda zi be thee direct fieldd cost for taskk i. If G is thhe general offfice
overheead for proraation to all taasks, and Gi is the share for task i, thhen

(5.11)

Finally
y, let w be th
he grand total cost of the project whicch includes tthe direct fieeld cost and the
generral office overhead cost charged
c to th
he project annd wi be thatt attributablee task i. Thenn,
(5.12)

and

(5.13)

Examplee 5-9: Prora

ated costs fo
or field supeervision and
d office overrhead

If the field
f supervision cost is $13,245
$ for the project iin Table 5-6 (Example 55-8) with a tootal
directt cost of $88
8,300, find thhe prorated field
f superviision costs foor various ellements of thhe
projectt. Furthermo ore, if the gen
neral office overhead chharged to thee project is 4% of the dirrect
field co
ost which is the sum of basic
b costs and
a field suppervision cosst, find the prrorated geneeral
office
o overheead costs forr various eleements of thee project.

oject, y = $88,300 and F = $13,245. Hence:

For the pro

z = 13,245 + 88,300 = $$101,545

G = (0.04)((101,545) = $4,062
w = 101,5455 + 4,062 = $$105,607
The results of
o the prorattion of costs to various eelements are shown in Taable 5-7.
TABLE
E 5-7 Proration of Field Supervisionn and Office Overhead C
Costs

Allocated
A Total Allocated
Description Basic cost field
f supervission cost fieeld cost ovverhead cost Total cost
yi Fi zi Gi Li

Form
mwork $50,400 $7,560 $$57,960 $2,319 $60,279
Reb
bars 4,400 660 5,060 202 5,262
Con
ncrete 33,500 5,025 38,525 1,541 40,066
Total $88,300 $13,245 $1101,545 $4,062 $105,607

Exam
mple 5-10: A standard cost report for allocatiing overhead

The reliaance on laborr expenses as

a a means off allocating ooverhead buurdens in typpical manageement
accouunting systemms can be illu
ustrated by the
t example of a particullar product'ss standard coost
sheett. [5] Table 5-8
5 is an acttual product'ss standard coost sheet of a company ffollowing the
proceduure of using overhead
o burrden rates asssessed per ddirect labor hhour. The m
material and labor
 costs for manufacturing a type of valve were estimated from engineering studies and from
current material and labor prices. These amounts are summarized in Columns 2 and 3 of Table 5-
8. The overhead costs shown in Column 4 of Table 5-8 were obtained by allocating the expenses
of several departments to the various products manufactured in these departments in proportion
to the labor cost. As shown in the last line of the table, the material cost represents 29% of the
total cost, while labor costs are 11% of the total cost. The allocated overhead cost constitutes
60% of the total cost. Even though material costs exceed labor costs, only the labor costs are
used in allocating overhead. Although this type of allocation method is common in industry, the
arbitrary allocation of joint costs introduces unintended cross subsidies among products and may
produce adverse consequences on sales and profits. For example, a particular type of part may
incur few overhead expenses in practice, but this phenomenon would not be reflected in the
standard cost report.
TABLE 5-8 Standard Cost Report for a Type of Valve

(1) Material (2) Labor (3) Overhead (4) Total

cost cost cost cost

Purchased part $1.1980 $1.1980

Operation
Drill, face, tap (2) $0.0438 $0.2404 $0.2842
Degrease 0.0031 0.0337 0.0368
Remove burs 0.0577 0.3241 0.3818
Total cost, this item 1.1980 0.1046 0.5982 1.9008
Other subassemblies 0.3523 0.2994 1.8519 2.4766
Total cost,
1.5233 0.4040 2.4501 4.3773
subassemblies
Assemble and test 0.1469 0.4987 0.6456
Pack without paper 0.0234 0.1349 0.1583
Total cost, this item $1.5233 $0.5743 $3.0837 $5.1813
Cost component, % 29% 11% 60% 100%

Source: H. T. Johnson and R. S. Kaplan, Relevance lost: The Rise and Fall of
Management Accounting, Harvard Business School Press, Boston. Reprinted with
permission.

Back to top

5.7 Historical Cost Data

Preparing cost estimates normally requires the use of historical data on construction costs.
Historical cost data will be useful for cost estimation only if they are collected and organized in a
way that is compatible with future applications. Organizations which are engaged in cost
estimation continually should keep a file for their own use. The information must be updated
 with respect to changes that will inevitably occur. The format of cost data, such as unit costs for
various items, should be organized according to the current standard of usage in the organization.

Construction cost data are published in various forms by a number of organizations. These
publications are useful as references for comparison. Basically, the following types of
information are available:

• Catalogs of vendors' data on important features and specifications relating to their

products for which cost quotations are either published or can be obtained. A major
source of vendors' information for building products is Sweets' Catalog published by
McGraw-Hill Information Systems Company.
• Periodicals containing construction cost data and indices. One source of such information
is ENR, the McGraw-Hill Construction Weekly, which contains extensive cost data
including quarterly cost reports. Cost Engineering, a journal of the American Society of
Cost Engineers, also publishes useful cost data periodically.
• Commercial cost reference manuals for estimating guides. An example is the Building
Construction Cost Data published annually by R.S. Means Company, Inc., which
contains unit prices on building construction items. Dodge Manual for Building
Construction, published by McGraw-Hill, provides similar information.
• Digests of actual project costs. The Dodge Digest of Building Costs and Specifications
provides descriptions of design features and costs of actual projects by building type.
Once a week, ENR publishes the bid prices of a project chosen from all types of
construction projects.

Historical cost data must be used cautiously. Changes in relative prices may have substantial
impacts on construction costs which have increased in relative price. Unfortunately, systematic
changes over a long period of time for such factors are difficult to predict. Errors in analysis also
serve to introduce uncertainty into cost estimates. It is difficult, of course, to foresee all the
problems which may occur in construction and operation of facilities. There is some evidence
that estimates of construction and operating costs have tended to persistently understate the
actual costs. This is due to the effects of greater than anticipated increases in costs, changes in
design during the construction process, or overoptimism.

Since the future prices of constructed facilities are influenced by many uncertain factors, it is
important to recognize that this risk must be borne to some degree by all parties involved, i.e.,
the owner, the design professionals, the construction contractors, and the financing institution. It
is to the best interest of all parties that the risk sharing scheme implicit in the design/construct
process adopted by the owner is fully understood by all. When inflation adjustment provisions
have very different risk implications to various parties, the price level changes will also be
treated differently for various situations. Back to top

5.8 Cost Indices

Since historical cost data are often used in making cost estimates, it is important to note the price
level changes over time. Trends in price changes can also serve as a basis for forecasting future
costs. The input price indices of labor and/or material reflect the price level changes of such
 input components
c of constructtion; the outp
put price inddices, where available, reeflect the priice
level chaanges of the completed facilities,
f thu
us to some ddegree also m
measuring the productiviity of
construction.

A pricce index is a weighted agggregate meeasure of connstant quantiities of goodds and services
selected for the pack kage. The priice index at a subsequennt year represents a proportionate change
in the samme weighted d aggregate measure
m beccause of channges in pricees. Let lt be tthe price inddex in
year t, and lt+1 be the
t price index in the following yearr t+1. Then, tthe percent cchange in prrice
index for
f year t+1 is:

(5.14)

or

(5.15)

If the prrice index att the base year t=0 is set at a value o f 100, then tthe price inddices l1, l2...ln for
the su
ubsequent years t=1,2...n can be com mputed succe ssively from m changes in the total priice
charged
c for the
t package of goods meeasured in thhe index.

The best-known in ndicators off general pricce changes ar are the Grosss Domestic P Product (GDP)
deflatorrs compiled periodically y by the U.S. Departmentt of Commerrce, and the consumer price
index (CPI)
( compiled periodically by the U.S.U Departm ment of Laboor. They are widely usedd as
broad gaauges of the changes in production
p costs
c and in consumer prrices for esseential goods and
services.. Special pricce indices reelated to construction aree also collectted by indusstry sources ssince
some in nput factors for construcction and thee outputs froom constructiion may dispproportionattely
outtpace or fall behind the general
g pricee indices. Exxamples of sspecial price indices for
construcction input faactors are th
he wholesale Building M Material Pricee and Buildinng Trades U Union
Wages, both
b compiled by the U..S. Departmeent of Laborr. In additionn, the construuction cost inndex
and thee building co ost index aree reported peeriodically inn the Engineeering News--Record (EN NR).
Both EN NR cost indiices measuree the effects of wage ratee and materiial price trennds, but theyy are
not adjusted
a for productivity y, efficiency,, competitivee conditionss, or technoloogy changess.
Consequ uently, all th
hese indices measure onlly the price cchanges of respective coonstruction innput
factorss as represennted by consstant quantitiies of materiial and/or labbor. On the oother hand, tthe
price in
ndices of varrious types of
o completed d facilities reeflect the priice changes of constructiion
outpuut including all
a pertinent factors in th he constructiion process. The buildingg constructioon
outputt indices commpiled by Tu urner Constru uction Comppany and Haandy-Whitm man Utilities aare
com mpiled in thee U.S. Statisttical Abstraccts publishedd each year.
Figure 5-7 and Table 5-9 show a variety of United States indices, including the Gross Domestic
Product (GDP) price deflator, the ENR building index, and the Turner Construction Company
Building Cost Index from 1996 to 2007, using 2000 as the base year with an index of 100.

TABLE 5-9 Summary of Input and Output Price Indices, 1996-2007

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Turner Construction
- Buildings 84.9 88.2 92.3 95.8 100.0 103.0 104.0 104.4 110.1 120.5 133.3 143.5
ENR - Buildings 90.5 95.0 95.8 97.6 100.0 101.0 102.4 104.4 112.6 118.8 123.5 126.7
GDP Deflator 94.0 95.6 96.8 98.0 100.0 102.3 104.2 105.9 107.2 108.6 110.2 112.0
Note: Index = 100 in base year of 2000.

Figure 5-7 Trends for US price indices.

 Figure 5--8 Price and
d cost indicess for construuction.

Since constructionn costs vary in different regions of thhe United Sttates and in aall parts of thhe
world
d, locational indices showwing the con nstruction coost at a speciific location relative to thhe
nation
nal trend are useful for co
ost estimatioon. ENR pubblishes periodically the inndices of loccal
constru
uction costs at
a the major cities in diffferent regionns of the Uniited States ass percentagees of
local to
o national coosts.

When th he inflation rate is relativ vely small, i.e.,

i less thann 10%, it is cconvenient to select a sinngle
price in ndex to meassure the inflaationary con nditions in coonstruction aand thus to ddeal only witth a
single seet of price ch hange rates in
i forecasting. Let jt be th
the price chaange rate in yyear t+1 oveer the
price in n year t. If th he base yearr is denoted as
a year 0 (t= =0), then the price changge rates at years
1,2,...t arre j1,j2,...jt, reespectively. Let At be thee cost in yeaar t expressed in base-yeear dollars annd At'
bee the cost in year t expresssed in then--current dolllars. Then:

(5.16)

Conversely
C

(5.17
)

If the priices of certain key itemss affecting th he estimates of future bennefits and coosts are expeected
to escalate
e fasteer than the geeneral price levels, it maay become nnecessary to cconsider thee
differeential price changes
c overr and above the general inflation ratee. For exampple, during tthe
 period between 197 73 through 1979,
1 it was customary too assume thaat fuel costs would escallate
faster th
han the generral price levels. With hin ndsight in 19983, the assuumption for estimating ccosts
over maany years wo ould have beeen different. Because off the uncertaainty in the fufuture, the usse of
diffferential inflaation rates fo
or special iteems should bbe judicious..

Futuree forecasts of costs will be

b uncertain n: the actual eexpenses maay be much llower or muuch
higherr than those forecasted.
f This
T uncertaiinty arises frrom technoloogical changges, changess in
relativee prices, inacccurate foreccasts of undeerlying sociooeconomic conditions, annalytical errors,
and otther factors. For the purp pose of foreccasting, it is often sufficient to projeect the trend of
future prices by using a constaant rate j for price
p changees in each yeear over a peeriod of t yeaars,
then

(5.18)

and

(5.19)

Estimation of the future rate in

ncrease j is not
n at all straaightforwardd. A simple eexpedient is to
assume thhat future infflation will continue
c at thhe rate of thee previous pperiod:

(5.20)

nger term perrspective miight use the average

A lon a incrrease over a horizon of n past periodds:

(5.21)

More sophisticated
s d forecasting
g models to predict
p futurre cost increaases include corrections for
items such as
a economic cycles and ttechnology cchanges.

Example
E 5-1
12: Changess in highwayy and build
ding costs

Figuree 5-9 shows the change ofo standard highway

h cossts from 19992 to 2002, aand Table 5-110
shows the
t change of o residentiall building costs from 19770 to 1990. IIn each case, the rate of cost
increase was substanntially abovee the rate of inflation
i in tthe decade oof the 1970s.. Indeed, thee real
cost in
ncrease betw
ween 1970 an nd 1980 wass in excess oof three perceent per year in both casees.
 Howeveer, these dataa also show some cause for optimism m. For the caase of the staandard highwway,
real cost decreases to
ook place in the period from
f l970 to l990. Unforrtunately, coomparable inndices
of outputs
o are not being com
mpiled on a nationwide
n bbasis for other types of cconstruction..

Figu
ure 5-9 Prod
ducer Pricess of Highway
y and Street Constructionn (Producer Price Index:
Highways and Streets-monnthly data).

TABL
LE 5-10 Com
mparison of Residential
R B
Building Coosts, 1970-19990

Standaard S
Standard ressidence Percentaage
residencee cost Price deflator real cost changee
year (1972=1 100) (1972=100 0) (1972=100) per yeaar

1970 77 92 74
1980 203 179 99 +3.4%
%
1990 287 247 116 +1.7%
%

Source: Statistical
S Ab
bstract of thee United Sta
ates. GNP deeflator is useed for the priice deflator
index.

Back to top
 5.9 Applications of Cost Indices to Estimating
In the screening estimate of a new facility, a single parameter is often used to describe a cost
function. For example, the cost of a power plant is a function of electricity generating capacity
expressed in megawatts, or the cost of a sewage treatment plant as a function of waste flow
expressed in million gallons per day.

The general conditions for the application of the single parameter cost function for screening
estimates are:

1. Exclude special local conditions in historical data

2. Determine new facility cost on basis of specified size or capacity (using the methods
described in Sections 5.3 to 5.6)
3. Adjust for inflation index
4. Adjust for local index of construction costs
5. Adjust for different regulatory constraints
6. Adjust for local factors for the new facility

Some of these adjustments may be done using compiled indices, whereas others may require
field investigation and considerable professional judgment to reflect differences between a given
project and standard projects performed in the past.

Example 5-13: Screening estimate for a refinery

The total construction cost of a refinery with a production capacity of 200,000 bbl/day in Gary,
Indiana, completed in 2001 was $100 million. It is proposed that a similar refinery with a
production capacity of 300,000 bbl/day be built in Los Angeles, California, for completion in
2003. For the additional information given below, make an order of magnitude estimate of the
cost of the proposed plant.

1. In the total construction cost for the Gary, Indiana, plant, there was an item of $5
million for site preparation which is not typical for other plants.
2. The variation of sizes of the refineries can be approximated by the exponential
rule, Equation (5.4), with m = 0.6.
3. The inflation rate is expected to be 8% per year from 1999 to 2003.
4. The location index was 0.92 for Gary, Indiana and 1.14 for Los Angeles in 1999.
These indices are deemed to be appropriate for adjusting the costs between these
two cities.
5. New air pollution equipment for the LA plant costs $7 million in 2003 dollars (not
required in the Gary plant).
6. The contingency cost due to inclement weather delay will be reduced by the
amount of 1% of total construction cost because of the favorable climate in LA
(compared to Gary).

On the basis of the above conditions, the estimate for the new project may be obtained as
follows:
 1. Typical cost excluding special item at Gary, IN is

$100 million - $5 million = $ 95 million

2. Adjustment for capacity based on the exponential law yields

($95)(300,000/200,000)0.6 = (95)(1.5)0.6 = $121.2 million

3. Adjustment for inflation leads to the cost in 2003 dollars as

($121.2)(1.08)4 = $164.6 million

4. Adjustment for location index gives

($164.6)(1.14/0.92) = $204.6 million

5. Adjustment for new pollution equipment at the LA plant gives

$204.6 + $7 = $211.6 million

6. Reduction in contingency cost yields

($211.6)(1-0.01) = $209.5 million

Since there is no adjustment for the cost of construction financing, the order of magnitude
estimate for the new project is $209.5 million.
Example 5-14: Conceptual estimate for a chemical processing plant
In making a preliminary estimate of a chemical processing plant, several major types of
equipment are the most significant parameters in affecting the installation cost. The cost of
piping and other ancillary items for each type of equipment can often be expressed as a
percentage of that type of equipment for a given capacity. The standard costs for the major
equipment types for two plants with different daily production capacities are as shown in Table
5-11. It has been established that the installation cost of all equipment for a plant with daily
production capacity between 100,000 bbl and 400,000 bbl can best be estimated by using linear
interpolation of the standard data.

TABLE 5-11 Cost Data for Equipment and Ancillary Items

Cost of ancillary items
Equipment Equipment Cost ($1000) as % of equipment cost ($1000)
type
100,000 bbl 400,000 bbl 100,000 bbl 400,000 bbl
Furnace 3,000 10,000 40% 30%
Tower 2,000 6,000 45% 35%
Drum 1,500 5,000 50% 40%
Pump, etc. 1,000 4,000 60% 50%
 A neew chemical processing plant
p with a daily producction capacitty of 200,0000 bbl is to be
construccted in Memmphis, TN in four years. Determine thhe total prelliminary costt estimate off the
plant in
ncluding the building and
d the equipm
ment on the ffollowing baasis:

1. The installaation cost forr equipment was based oon linear inteerpolation frrom Table 5--11,
and adjustedd for inflatio
on for the inttervening fouur years. Wee expect inflaation in the ffour
years to bee similar to th
he period 19990-1994 andd we will usse the GNP D Deflator indeex.
2. The location index for equipment
e in
nstallation iss 0.95 for Memphis, TN,, in comparison
with h the standarrd cost.
3. An addition nal cost of $5500,000 wass required foor the local cconditions inn Memphis, T TN.

The solu
ution of this problem can
n be carried out
o accordinng to the stepps as outlineed in the probblem
statement:

1. The
T costs of the equipmeent and ancilllary items fo for a plant wiith a capacitty of 200,0000 bbl
can be estiimated by lin
near interpolation of thee data in Tabble 5-11 and the results aare
sho
own in Tablee 5-12.

TABLE 5-12 Resullts of Linear Interpolatioon for an Estiimation Exaample

Eq
quipment Equipment
E Co ost Percentage for
type (in $1,000)) ancillary iteems
Furrnace $3
3,000 + (1/3))($10,000-$3
3,000) = $5,3333 40% - ((1/3)(40%-300%) = 37%
Tower $2
2,000 + (1/3))($6,000-$2,000) = $3,3333 45% - ((1/3)(45%-355%) = 42%
Dru
um $1
1,500 + (1/3))($5,000-$1,500) = $2,6667 50% - ((1/3)(50%-400%) = 47%
Pum
mps, etc. $1
1,000 + (1/3))($4,000-$1,000) = $2,0000 60% - ((1/3)(60%-500%) = 57%

2. Hence,
H the to
otal project cost
c in thousands of currrent dollars is given by E Equation (5.88) as:
3. ($5,333)(1 1.37) + ($3,3
333)(1.42) +(($2,667)(1.447) + ($2,0000)(1.57) =
= $2,307 + $4,733 + $3,9920 + $3,1400 = $ 19,0000
4. The corresp
ponding cost in thousand ds of four yeear in the futture dollars uusing Equatiion
(5.16) and Tablee 5-9 is:

($19,10
00)(105/94) = $21,335

5. The total cost of the project

p after adjustment ffor location is

(0.9
95)($21,335,000) + $5000,000 $20,8800,000

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5.10 Estim
mate Ba
ased on Engineeer's Listt of Quaantities
 The engineer's estimate is based on a list of items and the associated quantities from which the
total construction cost is derived. This same list is also made available to the bidders if unit
prices of the items on the list are also solicited from the bidders. Thus, the itemized costs
submitted by the winning contractor may be used as the starting point for budget control.

In general, the progress payments to the contractor are based on the units of work completed and
the corresponding unit prices of the work items on the list. Hence, the estimate based on the
engineers' list of quanitities for various work items essentially defines the level of detail to which
subsequent measures of progress for the project will be made.

Example 5-15: Bid estimate based on engineer's list of quantities

Using the unit prices in the bid of contractor 1 for the quantitites specified by the engineer in
Table 5-2 (Example 5-3), we can compute the total bid price of contractor 1 for the roadway
project. The itemized costs for various work items as well as the total bid price are shown in
Table 5-13.
TABLE 5-13: Bid Price of Contractor 1 in a Highway Project

Items Unit Quantity Unit price Item cost

Mobilization ls 1 115,000 115,000
Removal, berm lf 8,020 1.00 8.020
Finish subgrade sy 1,207,500 0.50 603,750
Surface ditches lf 525 2.00 1,050
Excavation structures cy 7,000 3.00 21,000
Base course, untreated, 3/4'' ton 362,200 4.50 1,629,900
Lean concrete, 4'' thick sy 820,310 3.10 2,542,961
PCC, pavement, 10'' thick sy 76,010 10.90 7,695,509
Concrete, ci AA (AE) ls 1 200,000 200,000
Small structure cy 50 500 25,000
Barrier, precast lf 7,920 15.00 118,800
Flatwork, 4'' thick sy 7,410 10.00 74,100
10'' thick sy 4,241 20.00 84,820
Slope protection sy 2,104 25.00 52,600
Metal, end section, 15'' ea 39 100 3,900
18'' ea 3 150 450
Post, right-of-way, modification lf 4,700 3.00 14,100
Salvage and relay pipe lf 1,680 5.00 8,400
Loose riprap cy 32 40.00 1,280
 TABLE 5-13: Bid Price of Contractor 1 in a Highway Project

Items Unit Quantity Unit price Item cost

Braced posts ea 54 100 5,400
Delineators, type I lb 1,330 12.00 15,960
type II ea 140 15.00 2,100
Constructive signs fixed sf 52,600 0.10 5,260
Barricades, type III lf 29,500 0.20 5,900
Warning lights day 6,300 0.10 630
Pavement marking, epoxy material
Black gal 475 90.00 42,750
Yellow gal 740 90.00 66,600
White gal 985 90.00 88,650
Plowable, one-way white ea 342 50.00 17,100
Topsoil, contractor furnished cy 260 10.00 2,600
Seedling, method A acr 103 150 15,450
Excelsior blanket sy 500 2.00 1,000
Corrugated, metal pipe, 18'' lf 580 20.00 11,600
Polyethylene pipe, 12'' lf 2,250 15.00 33,750
Catch basin grate and frame ea 35 350 12,250
Equal opportunity training hr 18,000 0.80 14,400
Granular backfill borrow cy 274 10.00 2,740
Drill caisson, 2'x6'' lf 722 100 72,200
Flagging hr 20,000 8.25 165,000
Prestressed concrete member
type IV, 141'x4'' ea 7 12,000 84,000
132'x4'' ea 6 11,000 66,000
Reinforced steel lb 6,300 0.60 3,780
Epoxy coated lb 122,241 0.55 67,232.55
Structural steel ls 1 5,000 5,000
Sign, covering sf 16 10.00 160
type C-2 wood post sf 98 15.00 1,470
24'' ea 3 100 300
30'' ea 2 100 200
 TABLE 5-13: Bid Price of Contractor 1 in a Highway Project

Items Unit Quantity Unit price Item cost

48'' ea 11 200 2,200
Auxiliary sf 61 15.00 915
Steel post, 48''x60'' ea 11 500 5,500
type 3, wood post sf 669 15.00 10,035
24'' ea 23 100 2,300
30'' ea 1 100 100
36'' ea 12 150 1,800
42''x60'' ea 8 150 1,200
48'' ea 7 200 1,400
Auxiliary sf 135 15.00 2,025
Steel post sf 1,610 40.00 64,400
12''x36'' ea 28 100 2,800
Foundation, concrete ea 60 300 18,000
Barricade, 48''x42'' ea 40 100 4,000
Wood post, road closed lf 100 30.00 3,000
Total $14,129,797.55

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5.11 Allocation of Construction Costs Over Time

Since construction costs are incurred over the entire construction phase of a project, it is often
necessary to determine the amounts to be spent in various periods to derive the cash flow profile,
especially for large projects with long durations. Consequently, it is important to examine the
percentage of work expected to be completed at various time periods to which the costs would be
charged. More accurate estimates may be accomplished once the project is scheduled as
described in Chapter 10, but some rough estimate of the cash flow may be required prior to this
time.

Consider the basic problem in determining the percentage of work completed during
construction. One common method of estimating percentage of completion is based on the
amount of money spent relative to the total amount budgeted for the entire project. This method
has the obvious drawback in assuming that the amount of money spent has been used efficiently
for production. A more reliable method is based on the concept of value of work completed
which is defined as the product of the budgeted labor hours per unit of production and the actual
 numbeer of production units com mpleted, andd is expresseed in budgeteed labor houurs for the woork
complleted. Then, the percentaage of complletion at anyy stage is thee ratio of the value of woork
completeed to date an
nd the value of work to beb completedd for the entiire project. RRegardless oof the
meth
hod of measu urement, it iss informativee to understaand the trendd of work proogress durinng
construction forr evaluation and control..

In generaal, the work on a constru uction projecct progressess gradually ffrom the time of mobilizzation
until itt reaches a pllateau; then the work slo
ows down grradually andd finally stopps at the timee of
completion. The ratte of work do one during various
v time periods (exppressed in thhe percentagge of
project cost
c per unit time) is sho own schemattically in Figgure 5-10 in which ten tiime periods hhave
been assumed. The solid s line A represents
r th
he case in whhich the ratee of work is zzero at time t = 0
and inccreases lineaarly to 12.5%% of project cost
c at t = 2,, while the raate begins too decrease frrom
12.5%% at t = 8 to 0%0 at t = 10. The dotted line B repre sents the casse of rapid m mobilization by
reaching 12.5% of prroject cost att t = 1 while beginning tto decrease ffrom 12.5% aat t = 7 to 0% % at t
= 10. Th he dash line C represents the case of slow mobiliization by reaching 12.5% % of projectt cost
at t = 3 while
w beginnning to decreease from 122.5% at t = 9 to 0% at t = 10.

Figure 5-10
0: Rate of Work
W Progresss over Projeect Time

The vallue of work completed at a a given tim

me (expresseed as a cumuulative percenntage of projject
costt) is shown schematically y in Figure 5-11.
5 In eachh case (A, B or C), the vaalue of workk
completeed can be reppresented by
y an "S-shapeed" curve. T
The effects off rapid mobiilization andd slow
mobilizzation are ind
dicated by th
he positions of curves B and C relatiive to curve A, respectivvely.
 Fiigure 5-11: Value of Work
W Compleeted over Prooject Time

Whilee the curves shown in Fiigures 5-10 anda 5-11 reppresent highlly idealized ccases, they ddo
suggest the latitude for adjusting g the scheduules for varioous activitiess in a projectt. While the rate
of worrk progress may
m be chang ged quite draastically witthin a single period, suchh as the channge
from rap pid mobilizattion to a slow
w mobilizatiion in periodds 1, 2 and 3 in Figure 5--10, the effect on
the value of worrk completed d over time will
w diminish in significcance as indicated by thee
cumulaative percenttages for lateer periods in Figure 5-111. Thus, adjuustment of thhe schedulingg of
some activities maay improve thet utilizatioon of labor, mmaterial and equipment, and any dellay
causeed by such addjustments for
f individuaal activities iis not likely to cause prooblems for thhe
eventual prrogress towaard the comppletion of a pproject.

In addition to the sp
peed of resouurce mobilizzation, anoth er importantt consideratiion is the oveerall
duration
n of a projecct and the ammount of resoources applieed. Various strategies m may be applieed to
shorten
n the overall duration of a project succh as overlappping designn and construuction activiities
ncreasing thee peak amounnts of labor and equipmeent working on a
(as descrribed in Chaapter 2) or in
site. Howwever, spatial, manageriial and techn nical factors will typicallly place a m
minimum limiit on
oject duratio
the pro on or cause costs
c to escallate with shoorter durationns.

Ex
xample 5-16
6: Calculation of Valuee of Work C
Completed
 From the area of work progress in Figure 5-10, the value of work completed at any point in
Figure 5-11 can be derived by noting the area under the curve up to that point in Figure 5-10.
The result for t = 0 through t = 10 is shown in Table 5-14 and plotted in Figure 5-11.

TABLE 5-14 Calculation of Value of Work Completed

Time Case A Case B Case C

0 0 0 0
1 3.1% 6.2% 2.1%
2 12.5 18.7 8.3
3 25.0 31.2 18.8
4 37.5 43.7 31.3
5 50.0 56.2 43.8
6 62.5 68.7 56.3
7 75.0 81.2 68.8
8 87.5 91.7 81.9
9 96.9 97.9 93.8
10 100.0 100.0 100.0

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5.12 Computer Aided Cost Estimation

Numerous computer aided cost estimation software systems are now available. These range in
sophistication from simple spreadsheet calculation software to integrated systems involving
design and price negotiation over the Internet. While this software involves costs for purchase,
maintenance, training and computer hardware, some significant efficiencies often result. In
particular, cost estimates may be prepared more rapidly and with less effort.

Some of the common features of computer aided cost estimation software include:

• Databases for unit cost items such as worker wage rates, equipment rental or material
prices. These databases can be used for any cost estimate required. If these rates change,
cost estimates can be rapidly re-computed after the databases are updated.
• Databases of expected productivity for different components types, equiptment and
construction processes.
• Import utilities from computer aided design software for automatic quantity-take-off of
components. Alternatively, special user interfaces may exist to enter geometric
descriptions of components to allow automatic quantity-take-off.
 • Export utilities to send estimates to cost control and scheduling software. This is very
helpful to begin the management of costs during construction.
• Version control to allow simulation of different construction processes or design changes
for the purpose of tracking changes in expected costs.
• Provisions for manual review, over-ride and editing of any cost element resulting from
the cost estimation system
• Flexible reporting formats, including provisions for electronic reporting rather than
simply printing cost estimates on paper.
• Archives of past projects to allow rapid cost-estimate updating or modification for similar
designs.

A typical process for developing a cost estimate using one of these systems would include:

1. If a similar design has already been estimated or exists in the company archive, the old
project information is retreived.
2. A cost engineer modifies, add or deletes components in the project information set. If a
similar project exists, many of the components may have few or no updates, thereby
saving time.
3. A cost estimate is calculated using the unit cost method of estimation. Productivities and
unit prices are retrieved from the system databases. Thus, the latest price information is
used for the cost estimate.
4. The cost estimation is summarized and reviewed for any errors.

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5.13 Estimation of Operating Costs

In order to analyze the life cycle costs of a proposed facility, it is necessary to estimate the
operation and maintenance costs over time after the start up of the facility. The stream of
operating costs over the life of the facility depends upon subsequent maintenance policies and
facility use. In particular, the magnitude of routine maintenance costs will be reduced if the
facility undergoes periodic repairs and rehabilitation at periodic intervals.

Since the tradeoff between the capital cost and the operating cost is an essential part of the
economic evaluation of a facility, the operating cost is viewed not as a separate entity, but as a
part of the larger parcel of life cycle cost at the planning and design stage. The techniques of
estimating life cycle costs are similar to those used for estimating capital costs, including
empirical cost functions and the unit cost method of estimating the labor, material and equipment
costs. However, it is the interaction of the operating and capital costs which deserve special
attention.

As suggested earlier in the discussion of the exponential rule for estimating, the value of the cost
exponent may influence the decision whether extra capacity should be built to accommodate
future growth. Similarly, the economy of scale may also influence the decision on rehabilitation
at a given time. As the rehabilitation work becomes extensive, it becomes a capital project with
 all the implications of its own life cycle. Hence, the cost estimation of a rehabilitation project
may also involve capital and operating costs.

While deferring the discussion of the economic evaluation of constructed facilities to Chapter 6,
it is sufficient to point out that the stream of operating costs over time represents a series of costs
at different time periods which have different values with respect to the present. Consequently,
the cost data at different time periods must be converted to a common base line if meaningful
comparison is desired.

Example 5-17: Maintenance cost on a roadway [6]

Maintenance costs for constructed roadways tend to increase with both age and use of the
facility. As an example, the following empirical model was estimated for maintenance
expenditures on sections of the Ohio Turnpike:

C = 596 + 0.0019 V + 21.7 A

where C is the annual cost of routine maintenance per lane-mile (in 1967 dollars), V is the
volume of traffic on the roadway (measured in equivalent standard axle loads, ESAL, so that a
heavy truck is represented as equivalent to many automobiles), and A is the age of the pavement
in years since the last resurfacing. According to this model, routine maintenance costs will
increase each year as the pavement service deteriorates. In addition, maintenance costs increase
with additional pavement stress due to increased traffic or to heavier axle loads, as reflected in
the variable V.

For example, for V = 500,300 ESAL and A = 5 years, the annual cost of routine maintenance per
lane-mile is estimated to be:

C = 596 + (0.0019)(500,300) + (21.7)(5)

= 596 + 950.5 + 108.5 = 1,655 (in 1967 dollars)
Example 5-18: Time stream of costs over the life of a roadway [7]

The time stream of costs over the life of a roadway depends upon the intervals at which
rehabilitation is carried out. If the rehabilitation strategy and the traffic are known, the time
stream of costs can be estimated.

Using a life cycle model which predicts the economic life of highway pavement on the basis of
the effects of traffic and other factors, an optimal schedule for rehabilitation can be developed.
For example, a time stream of costs and resurfacing projects for one pavement section is shown
in Figure 5-11. As described in the previous example, the routine maintenance costs increase as
the pavement ages, but decline after each new resurfacing. As the pavement continues to age,
resurfacing becomes more frequent until the roadway is completely reconstructed at the end of
35 years.
 Figure 5--11: Time Stream
S of Co
osts over the Life of a Hiighway Paveement

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5.14 Referen
R ces
1. Ahuja, H.N N. and W.J. Campbell,
C Estimating:
E F
From Conceppt to Compleetion, Prentice-
Hall, Inc., Englewood
E C
Cliffs, NJ, 19987.
2. Clark, F.D.,, and A.B. Lorenzoni, Ap pplied Cost EEngineeringg, Marcel Deekker, Inc., N
New
York, 19778.
3. Clark, J.E., Structural Concrete
C Cosst Estimatingg, McGraw-Hill, Inc., N
New York, 19983.
4.
4 Diekmann n, J.R., "Pro
obabilistic Esstimating: M
Mathematics aand Applicaations," ASCE E
Journal of Construction Engineerin ng and Manaagement, Vool. 109, 19833, pp. 297-3008.
5. Humphreys,
H K.K. (ed.) Project
P and Cost Engineeers' Handboook (sponsorred by Amerrican
Associattion of Cost Engineers), 2nd Ed., Maarcel Dekkerr, Inc., New York, 1984.
6. Maevis, A.C., "Consstruction Cost Control byy the Ownerrs," ASCE Joournal of thee
Constrruction Divission, Vol. 1006, 1980, ppp. 435-446.
7. Wohl, M. an nd C. Hendriickson, Tran nsportation IInvestment aand Pricing P
Principles, JJohn
Wiley & Sons, New York, 1984.

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 5.15 Problems
1. Suppose that the grouting method described in Example 5-2 is used to provide a grouting
seal beneath another landfill of 12 acres. The grout line is expected to be between 4.5 and
5.5 feet thickness. The voids in the soil layer are between 25% to 35%. Using the same
unit cost data (in 1978 dollars), find the range of costs in a screening estimate for the
grouting project.

2. To avoid submerging part of U.S. Route 40 south and east of Salt Lake City due to the
construction of the Jardinal Dam and Reservoir, 22 miles of highway were relocated to
the west around the site of the future reservoir. Three separate contracts were let,
including one covering 10 miles of the work which had an engineer's estimate of
$34,095,545. The bids were submitted on July 21, 1987 and the completion date of the
project under the contract was August 15, 1989. (See ENR, October 8, 1987, p. 34). The
three lowest bids were:

1) W.W. Clyde & Co., Springville, Utah $21,384,919

2) Sletten Construction company, Great Falls, Montana $26,701,018
3) Gilbert Western Corporation, Salt Lake city, Utah $30,896,203

3. Find the percentage of each of these bidders below the engineer's cost estimate.

4. In making a screening estimate of an industrial plant for the production of batteries, an

empirical formula based on data of a similar buildings completed before 1987 was
proposed:

C = (16,000)(Q + 50,000)1/2

where Q is the daily production capacity of batteries and C is the cost of the building in
1987 dollars. If a similar plant is planned for a daily production capacity of 200,000
batteries, find the screening estimate of the building in 1987 dollars.

5. For the cost factor K = $46,000 (in 1968 dollars) and m = 0.67 for an aerated lagoon
basin of a water treatment plant in Table 5-4 (Example 5-6), find the estimated cost of a
proposed new plant with a similar treatment process having a capacity of 480 million
gallons (in 1968 dollars). If another new plant was estimated to cost $160,000 by using
the same exponential rule, what would be the proposed capacity of that plant?

6. Using the cost data in Figure 5-5 (Example 5-11), find the total cost including overhead
and profit of excavating 90,000 cu.yd. of bulk material using a backhoe of 1.5 cu.yd.
capacity for a detailed estimate. Assume that the excavated material will be loaded onto
trucks for disposal.

7. The basic costs (labor, material and equipment) for various elements of a construction
project are given as follows:
 Excavation $240,000
Subgrade $100,000
Base course $420,000
Concrete pavement $640,000
Total $1,400,000

8. Assuming that field supervision cost is 10% of the basic cost, and the general office
overhead is 5% of the direct costs (sum of the basic costs and field supervision cost), find
the prorated field supervision costs, general office overhead costs and total costs for the
various elements of the project.

9. In making a preliminary estimate of a chemical processing plant, several major types of

equipment are the most significant components in affecting the installation cost. The cost
of piping and other ancillary items for each type of equipment can often be expressed as a
percentage of that type of equipment for a given capacity. The standard costs for the
major equipment types for two plants with different daily production capacities are as
shown in Table 5-15. It has been established that the installation cost of all equipment for
a plant with daily production capacity between 150,000 bbl and 600,000 bbl can best be
estimated by using liner interpolation of the standard data. A new chemical processing
plant with a daily production capacity of 400,000 bbl is being planned. Assuming that all
other factors remain the same, estimate the cost of the new plant.

Table 5-15
Equipment cost ($1,000) Factor for ancillary items
Equipment type
150,000 bbl 600,000 bbl 150,000 bbl 600,000 bbl
Furnace $3,000 $10,000 0.32 0.24
Tower 2,000 6,000 0.42 0.36
Drum 1,500 5,000 0.42 0.32
Pumps, etc. 1,000 4,000 0.54 0.42

10. The total construction cost of a refinery with a production capacity of 100,000 bbl/day in
Caracas, Venezuela, completed in 1977 was $40 million. It was proposed that a similar
refinery with a production capacity of $160,000 bbl/day be built in New Orleans, LA for
completion in 1980. For the additional information given below, make a screening
estimate of the cost of the proposed plant.
1. In the total construction cost for the Caracus, Venezuela plant, there was an item
of $2 million for site preparation and travel which is not typical for similar plants.
2. The variation of sizes of the refineries can be approximated by the exponential
law with m = 0.6.
 3. The inflation rate in U.S. dollars was approximately 9% per year from 1977 to
1980.
4. An adjustment factor of 1.40 was suggested for the project to account for the
increase of labor cost from Caracas, Venezuela to New Orleans, LA.
5. New air pollution equipment for the New Orleans, LA plant cost $4 million in
1980 dollars (not required for the Caracas plant).
6. The site condition at New Orleans required special piling foundation which cost
$2 million in 1980 dollars.

11. The total cost of a sewage treatment plant with a capacity of 50 million gallons per day
completed 1981 for a new town in Colorado was $4.5 million. It was proposed that a
similar treatment plant with a capacity of 80 million gallons per day be built in another
town in New Jersey for completion in 1985. For additional information given below,
make a screening estimate of the cost of the proposed plant.
1. In the total construction cost in Colorado, an item of $300,000 for site preparation
is not typical for similar plants.
2. The variation of sizes for this type of treatment plants can be approximated by the
exponential law with m = 0.5.
3. The inflation rate was approximately 5% per year from 1981 to 1985.
4. The locational indices of Colorado and New Jersey areas are 0.95 and 1.10,
respectively, against the national average of 1.00.
5. The installation of a special equipment to satisfy the new environmental standard
cost an extra $200,000 in 1985 dollar for the New Jersey plant.
6. The site condition in New Jersey required special foundation which cost $500,00
in 1985 dollars.

12. Using the ENR building cost index, estimate the 1985 cost of the grouting seal on a
landfill described in Example 5-2, including the most likely estimate and the range of
possible cost.

13. Using the unit prices in the bid of contractor 2 for the quantitites specified by the
engineer in Table 5-2 (Example 5-3), compute the total bid price of contractor 2 for the
roadway project including the expenditure on each item of work.

14. The rate of work progress in percent of completion per period of a construction project is
shown in Figure 5-13 in which 13 time periods have been assumed. The cases A, B and C
represent the normal mobilization time, rapid mobilization and slow mobilization for the
project, respectively. Calculate the value of work completed in cumulative percentage for
periods 1 through 13 for each of the cases A, B and C. Also plot the volume of work
completed versus time for these cases.
 Figure 5-113

15. The
T rate of work
w progresss in percent of completioon per periood of a constrruction projeect is
shhown in Figu ure 5-14 in which
w 10 tim
me periods haave been asssumed. The cases A, B aand C
represent
r thee rapid mobillization timee, normal moobilization aand slow mobbilization foor the
project,
p respeectively. Callculate the vaalue of workk completed in cumulativve percentagge for
periods 1 through
t 10 for
fo each of th he cases A, B and C. Alsso plot the voolume of woork
completed versus
v time for these casses.

Figure 5-114

16. Suppose thaat the empiriical model foor estimatingg annual cosst of routine maintenancee in
Example
E 5-117 is applicaable to sectio
ons of the Pe nnsylvania TTurnpike in 1985 if the E
ENR
 building co
ost index is applied
a to in
nflate the 19667 dollars. E
Estimate the annual cost of
maintenance
m per lane-mile of the tunnrpike for whhich the trafffic volume oon the roadw
way is
750,000 ES SAL and the age of the pavement is 4 years in 19985.

17
7. The initial constructionn cost for a electric
e roweer line is knoown to be a ffunction of tthe
cross-section n cm2) and th
nal area A (in he length L ((in kilometerrs). Let C1 bbe the unit coost of
construction
c p cm3). Theen, the initiaal constructioon cost P (inn dollars) is ggiven
(in dollars per
by

P = C1AL(1105)

The
T annual op
perating cosst of the pow
wer line is asssumed to be measured bby the powerr loss.
The
T power lo oss S (in kwhh) is known to be

where
w J is th
he electric cu
urrent in amp peres, R is thhe resistivityy in ohm-cenntimeters. Leet C2
be the unitt operating cost (in dollaars per kwh).. Then, the aannual operaating cost U ((in
do ollars) is givven by

Suppose th
hat the powerr line is expeected to last n years and the life cyclle cost T of tthe
pow
wer line is eqqual to:

T=P+U
UK

where K is a discount faactor dependding on the uuseful life cyycle n and the discount raate i
(to
( be explain ned in Chapter 6). In dessigning the ppower line, aall quantititees are assumeed to
be known except
e A whiich is to be determined.
d If the ownerr wants to m minimize the life
cycle co
ost, find the best
b cross-seectional area A in terms oof the knownn quantities..

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5.16 Footnottes
1. This example waas adapted with
w permission from a paaper, "Foreccasting Indusstry Resourcces,"
presennted by A.R. Crosby at th
he Institution
n of Chemiccal Engineerrs in Londonn, Novemberr 4,
1981. (Back)
2. This example is adapted from a cost estimate in A.L. Tolman, A.P. Ballestero, W.W. Beck and
G.H. Emrich, Guidance Manual for Minimizing Pollution from Waste Disposal Sites, Municipal
Environmental Research Laboratory, U.S. Environmental Protection Agency, Cincinatti, Ohio,
1978. (Back)

3. See "Utah Interstate Forges On," ENR, July 2, 1987, p. 39.(Back)

4. This and the next example have been adapted from P.M. Berthouex, "Evaluating Economy of
Scale," Journal of the Water Pollution Control Federation, Vol. 44, No. 11, November 1972, pp.
2111-2118. (Back)

5. See H.T. Johnson and R.S. Kaplan, Relevance Lost: The Rise and Fall of Management
Accounting, Harvard Business School Press, Boston, MA 1987, p. 185. (Back)

6. This example is adapted from McNeil, S. and C. Hendrickson, "A Statistical Model of
Pavement Maintenance Expenditure," Transportation Research Record No. 846, 1982, pp. 71-
76. (Back)

7. This example is adapted from S. McNeil, Three Statistical Models of Road Management
Based on Turnpike Data, M.S. Thesis, Carnegie-Mellon University, Pittsburgh, PA, 1981.
(Back)