PRINCIPLES AND TECHNIQUES OF COST ESTIATING

The primary function of cost estimation is to produce an accurate and reliable cost forecast of a
construction project. However the costs to be forecasted depend on the requirements of a client
and also upon the information and data available to develop the model. For instance, a client or
contractor may need to know the lowest tender price at one stage and/ or the final project cost at
completion stage.

There are different techniques currently used for project cost estimation at different stages of the
project development process and even within the same stage. The attractiveness of each of these
methods includes its:

1. Ease of application
2. Familiarity of the user
3. Speed at which it can give results
4. Its tolerable level of accuracy
5. Its reliability

A. The following are the main models used by consultants in the construction industry:-

1. Functional Unit- Also referred to as cost per place or unit method

2. Cube Method-
3. Superficial Method- Also known as cost per metre of floor areas.
4. Storey Enclosure-
5. Approximate Quantities Method
6. Elemental Analysis Method

The data used in these models are usually derived from historical records of already completed
buildings

B. Contractors when preparing bids or tenders normally use resource analysis method. This
includes the analysis of major resource constituents or inputs such as:-

1. Materials
2. Labour
3. Plant
4. Overheads
5. Profits

The above units are normally considered so as to arrive at unit rates

 Unit rate

Labour Materials Plant Profits

Operating
Tradesmen Labourers Apprentices costs/ running Fixed costs
/artisan costs

Cost Waste Transport Head office Site

Ex- overheads (general Overheads
works overheads)

COST MODELLING TECHNIQUES OF COST ESTIMATION METHODS

Functional Unit

This method relies on the fact that there exist a relationship between the cost of a building and
the number of functional units which it accommodates. These units are expressed in terms of
intended use of the building

These may constitute for example:-

1. For hospital cost per bed

2. For school cost per student space
3. For cars cost per parking space
4. For cinema halls cost per seat, etc.

By costing a single functional unit, rather than say floor area, the designer gets area flexibilities
which allow him choice of quality as well as quantity of accommodation of the building during
design.

This method is considered unreliable because every building is unique on account of the
following factors

1. Site conditions
2. Price levels set by market conditions at a given time
3. Specifications levels variations
 4. Different access and circulation arrangement
5. Client characteristics
6. Consultant and design characteristic
7. Contractor characteristics
8. Project characteristics
9. Contract procedure and procurement methods etc.

Consequently these factors render the method unreliable.

THE CUBE METHOD

This method of estimation involves multiplying the plan area measured over the external wall
with the height measured from the top of foundation to halfway the roof height if pitched. If the
roof is flat, an allowance of 0.6 m is made as extra over roof height. Chimneys lifts, dormers,
turrets, lantern lights are measured separately and added as a lump-sum cost. Thus from historic
records i.e. costs of previous buildings, cost per cube is obtained and this is used for obtaining
costs of new projects.

This method is not reliable on account of the following factors

1. All the factors disqualifying the unit methods
2. The cost of a building is more related to its floor area than its cubic capacity
3. The allowance for pitched roofs or flat roofs are arbitrary abstract and shed no light to the
real cost items
4. The method would give the wrong view of costs if the foundations were deep and
extensive.

Hence, its only virtue is uniformity.

SUPERFICIAL METHOD

This method bases its estimation on the fact that the building cost is much more closely related to
floor area. The method entails measurement of total floor area within, the internal perimeter of
walls and is measured over all partitions, staircases, internal columns etc.

Where there are no external walls but instead columns exist, measurement is done from the
external perimeter of the columns. Lifts, chimney stacks etc. are assessed separately and their
cost added as a lump sum.

The advantage of this method is that it expresses costs in terms of accommodation required. This
is more meaningful to the client. Sometimes when estimates are required at the initial stages of a
project the only available information is floor areas then it becomes a very useful tool.

However, most of the factors causing unreliability cites under unit method apply as well.
STORY ENCLOSURE METHOD

It involves measurement of areas of floors between internal faces of external walls, roofs and
containing walls, each of which are weighted by different percentages and the resultant figures
totaled to give the number of Storey enclosure units.

The recommended weightings are as follows:

a) Basement x 3.00
Ground floor x 2.00
1st floor x 2.15
2nd floor x 2.30
3rd floor x 2.45
Etc.

b) Area of roof measured flat on plan to the extremities of the eaves x1

c) The area of external walls x1
d) Any part of an enclosing wall below ground level x2

Lifts and other engineering services and external works are measured separately and costs
calculated and added as a lump sum.

Advantage

An advantage of this method is that it performs better as far as reliability is concerned because:

1. it takes into consideration the plan shape

2. it takes into consideration the Storey heights

Disadvantages

1. It relies on weightings which are abstract.

2. The costs are represents in terns which are less meaningful to clients
3. It requires a lot of information to be of use to the design team at the initial stages of a
project.
4. The rules do not apply equally to all buildings
5. It also suffers all the other unreliability setbacks as cited in the unit method.
 COST IN USE

Building costs in normal parlance refers to the capital costs of providing a new building.
However, once a building has been put up it continues to incur costs such as:

1. maintenance
2. decorations
3. heating
4. cleaning
5. repairing
6. from time to time, fairly expensive renovations
7. Also, each year the interest in capital costs will have to be found and a sinking fund paid
into it.

Consequently, the terms:

a) Cost-in-use
b) life-cycle costing
c) ultimate cost
d) total cost

were coined to describe a form of modeling technique to cope with this mixture of capital and
running costs. Hence cost in use can be defined to mean both initial construction costs and all
running costs, and include maintenance costs.

BREAKDOWN OF TOTAL COSTS

Total cost: Cost in use, life cycle cost, ultimate

cost

Initial cost: Land,

construction, professional fee

Occupational charges: Rates, Running Cost:

insurance, modifications and Maintenance, operating
alterations, estate control services (operating and
(management) cleansing), Fuel and power

The segments can be explained as follows:

 a) Initial costs: the capital or initial expenditure on an asset when first provided
b) User costs: these are synonymous with future costs and comprise both running costs and
occupational charges.
c) Maintenance: this defined as work undertaken in order to keep or restore every facility
i.e. every part of a site, building and its contents, to an acceptable standard.
d) Operating services: these embrace cleaning, caretaking, operation of plant and
equipment and other allied activities
e) Fuel and power: these represent the energy costs for heating, lighting, air-conditioning
and the like
f) Modifications and alterations: these are new works required to improve or adopt an
asset.

COST-IN-USE TECHNIQUE

Most cost budgets for construction projects only target initial capital cost of land, construction
and professional fees consequently, materials and construction processes have been selected
which are low in initial costs but which require frequent expenditure on maintenance and repair
during the life of a building.

Ideally it is argued that if the architect were allowed to spend more money initially on better
materials, running costs and some occupational charges would be lowered and in the long run
pay for themselves.

EXAMPLE

Advising a client on alternatives for windows:

a) Softwood window casting $ 1600 initially but requiring painting at the cost of $2000
every 5 years
b) Hardwood costing $1000 initially but requiring treatment every 10 years at the cost of
$2000
c) Aluminum at $ 1600 initially and requires no maintenance throughout the life of the
building.

The life of the building is 40 years. Assume 14% interest rate.

1. Alternative A
Cost PVF Amount ($)
Initial cost 800.00
 PV of painting 5th year 0.519
10th year 0.270
15th year 0.140
20th year 0.073
25th year 0.038
30th year 0.020
35th year 0.010
1.070x$50 53.50
Cost in use 853.50

2. Alternative B
Cost PVF Amount
Initial cost 1000
PV of painting 10th year 0.270
20th year 0.073
30th year 0.020
0.363x $20 7.26
Cost in use 1007.26

3. Alternative C
Remains at $ 1600

Therefore,

A costs $853.50

B costs $1007.26

C costs $1600.00

Consequently, comparatively alternative A proves to be cheaper both initially and in future.

DIFFICULTIES OF ASSESSING COST IN USE

There is reluctance by professionals in the construction industry to use cost-in-use techniques to

provide cost advice to clients because:

1. Lack of reliable historical data and the predicting useful life of materials leads to
inaccurate assessment of maintenance and running costs of different materials, processes
and systems.
2. There are three types of payments, initial, annual and periodic. These must be brought to
a common basis for comparison purposes. This requires mastery of discounted cash
techniques.
3. Income tax has a bearing on maintenance costs and needs consideration as it can reduce
the impact of maintenance costs. Taxation rates and allowances are subject to
considerable variation over the life of the building
4. The selection of suitable interest rates for calculations involving periods of up to 60 years
is extremely difficult.
5. Inflationary tendencies may not affect all costs in a uniform manner, thus distorting
significantly the results of cost in use calculations.
6. Where projects are to be sold as an investment on completion, the building client may
show little interest in securing savings in maintenance and running costs
7. Where the initial funds available to the building client are severely restricted, or his
interest in the project is short-term, it is of little consequence to him to be told that he can
save large sums in the future by spending more on the initial construction stage.