Cost Engineers Handbook v5 5

Cost Engineering Handbook
Manual Number: V5.5
Date: 30/3/12
Manual Owner: Highways Agency Commercial Services

Division
AMENDMENT CONTROL SHEET
This document is subject to review and amendment from time to time with amendments to be recorded on this
Amendment Control Sheet.
All individuals seeking to rely on, or implement, the Highways Agency Cost Engineering Handbook have a duty to
ensure they are familiar with the most recent amendments.
Amend Effective Approved Update

Subject Date
No. Date By d by
5.0 Initial draft for review by HA Head of TCM n/a MR n/a 15.4.2011
5.1 Incorporation of HA Head of TCM 20.5.2011 MR LF 20.5.2011

comments on initial draft; Part D summary
added
5.2 Incorporation of hyperlinks provided by 20.9.2011 MR JS/LF 6.9.2011
Commercial Services Division
5.3 Commercial Services Division naming; links 20.01.2012 MR LF 6.12.2012
and information sources moved to summary
section for ease of reference
5.4 Changes made to document as per 30.1.2012 MR DM 30.1.2012
suggestions on WWW email sent
25/01/2012.
5.5 Changes made to reflect rebasing to Q2, 12.04.2012 MR LF 30.03.2012
2011 and Commercial Services Division
Organogram updated
Highways Agency
Contents
AMENDMENT CONTROL SHEET ............................................................................................................................. 2
Preface ........................................................................................................................................................................ 8
PART A: Introduction and Cost Engineering Fundamentals ............................................................................ 11
FUNDAMENTALS OF COST ENGINEERING ........................................................................................................ 12
1 Introduction .................................................................................................................................................... 12
1.1 Background ........................................................................................................................................... 12
1.1.1 Cost Engineering and Its Importance ................................................................................................. 12
1.1.3 The AACEI and Total Cost Management Framework ........................................................................ 14
1.1.4 Outline of Cost Engineering Processes, Skills and Knowledge ...................................................... 17
1.2 Background, DfT and HA Structures ................................................................................................... 19
COST ........................................................................................................................................................................ 21
2 Introduction .................................................................................................................................................... 21
2.1 Background ........................................................................................................................................... 21
2.1.1 Typical Cost Structures: Direct, Indirect, Fixed and Variable Costs ............................................... 23
2.1.1.1 Direct Costs ........................................................................................................................................... 23
2.1.1.2 Indirect Costs ........................................................................................................................................ 24
2.1.1.3 Fixed Costs ............................................................................................................................................ 24
2.1.1.4 Variable Costs ....................................................................................................................................... 24
2.1.2 Cost Accounting .................................................................................................................................... 24
2.1.2.1 Codes of Accounts and Activity Based Costing ................................................................................ 25
2.1.2.2 Classifying Costs Using a Work Breakdown Structure .................................................................... 25
ECONOMIC ASSESSMENT .................................................................................................................................... 26
3 Introduction .................................................................................................................................................... 26
3.1 Timing and Types of Cost in Economic Assessment ....................................................................... 26
3.1.1 Opportunity Costs ................................................................................................................................. 26
3.1.2 Sunk Costs ............................................................................................................................................. 27

Highways Agency
3.1.3 Book Costs ............................................................................................................................................ 27
3.1.4 Incremental Costs ................................................................................................................................. 27
3.2 Economic Cost Change ........................................................................................................................ 27
3.2.1 Inflation .................................................................................................................................................. 28
3.2.2 Deflation ................................................................................................................................................. 28
3.2.3 Escalation .............................................................................................................................................. 28
3.2.4 Currency Variation ................................................................................................................................ 28
3.3 Economic Assessment Techniques .................................................................................................... 28
3.3.1 Net Present Value Method .................................................................................................................... 29
3.3.2 Capitalized Cost Method ...................................................................................................................... 29
3.3.3 Average Annualised Cost or Benefit ................................................................................................... 29
3.3.4 Rate of Return Analysis ........................................................................................................................ 29
3.3.5 Benefit-Cost Ratio Analysis Method ................................................................................................... 29
3.3.6 Payback Period Method ........................................................................................................................ 30
3.4 Equivalence, Interest Rates and Discounting .................................................................................... 30
3.4.1 Interest ................................................................................................................................................... 30
3.4.2 Discount Factors ................................................................................................................................... 30
3.5 The Importance of Assessing Whole Life Costings .......................................................................... 30
4 Further Information and Bibliography ................................................................................................ 34
4.1 Sources of Information ......................................................................................................................... 34
4.2 External Resources ............................................................................................................................... 34
PART B: Cost Planning, Estimating and Investment Appraisal ....................................................................... 35
COST ESTIMATING................................................................................................................................................. 36
5 Introduction .................................................................................................................................................... 36
5.1 The Project Lifecycle and Classification of Estimates ...................................................................... 37
5.2 Estimate Accuracy and the Project Lifecycle .................................................................................... 40
5.3 Cost Estimating Methodologies .......................................................................................................... 40
5.3.1 Analogy Cost Estimating Method ........................................................................................................ 42
5.3.2 Engineering Build-Up Cost Estimating Method ................................................................................. 43
Highways Agency
5.3.3 Parametric Cost Estimating Method ................................................................................................... 44
5.4 Three-Point Estimating ......................................................................................................................... 45
5.4.1 Monte Carlo Analysis ............................................................................................................................ 49
6 The Cost Estimating Process .............................................................................................................. 51
6.1 Initiating the Cost Estimate .................................................................................................................. 53
6.2 Determining Estimate Purpose, Level of Detail and Scope .............................................................. 54
6.3 Planning the Estimate Work ................................................................................................................. 57
6.4 Defining the Project / Programme Characteristics ............................................................................ 58
6.5 Determine Estimate Structure and Work Breakdown Structure ...................................................... 59
6.6 Identifying Ground Rules, Assumptions, Exclusions and Sensitivity............................................. 62
6.7 Developing the Base Estimate (Probabilistic & Deterministic) ........................................................ 63
6.8 Conducting Risk and Uncertainty Analysis ....................................................................................... 65
6.8.1 Optimism Bias ....................................................................................................................................... 67
6.9 Applying Inflation .................................................................................................................................. 67
6.10 Documenting the Basis of the Estimate ............................................................................................. 68
6.11 Reviewing the Estimate and Assurance of Outputs .......................................................................... 69
6.12 Presenting the Estimate for Investment Decision Support .............................................................. 70
7 Further Information and Bibliography ................................................................................................ 71
7.1 Sources of Information ......................................................................................................................... 71
PART C: Contractor Selection and Award of Contract ...................................................................................... 73
CONTRACTOR SELECTION AND AWARD ........................................................................................................... 74
8.1 Background ........................................................................................................................................... 74
8.2 Basic Types of Contract ....................................................................................................................... 74
8.3 Project Delivery Methods ..................................................................................................................... 76
8.3.1 Design-Tender-Build ............................................................................................................................. 76
8.3.2 Design-Build (Engineer-Procure-Construct - EPC) ......................................................................... 77
8.3.3 Design-Build-Finance-Operate ............................................................................................................ 77
9 The ECI Form of Contract ............................................................................................................................. 78
9.1 Introduction ........................................................................................................................................... 78
Highways Agency
9.2 Background to the ECI Form of Contract ........................................................................................... 78
9.3 Procurement of Design and Other Services ....................................................................................... 78
9.4 Tracking Cost and Scheduled Performance and Contract Administration..................................... 79
TARGET COST NEGOTIATION AND VALIDATION PROCESS ........................................................................... 80
10 Introduction .................................................................................................................................................... 80
10.1 Background ........................................................................................................................................... 80
10.2 Mechanism ............................................................................................................................................. 80
10.3 Background - Highways Agency Major Projects Context ................................................................. 81
10.4 Purpose .................................................................................................................................................. 81
10.5 Process .................................................................................................................................................. 82
10.5.1 Pre-Target Submission – Brief Explanation of Concepts ................................................................. 82
10.5.2 Post-Target Submission – Brief Explanation of Concepts ............................................................... 83
10.5.3 Key Elements – Definitions/Scope ...................................................................................................... 85
10.5.4 Assumptions and Exclusions .............................................................................................................. 85
10.5.5 Construction costs................................................................................................................................ 85
10.5.6 Quantum Check – Supervisor/External Consultant ........................................................................... 85
10.5.7 Overview of proposed solution, on Design Assumptions ................................................................ 86
10.5.8 Pricing and rates check, sub-contractors and proposed pricing levels ......................................... 86
10.5.9 Programme ............................................................................................................................................ 88
10.5.10 Project /Preliminaries - Overview of Staff Cost on the Programme ................................................. 88
10.5.11 Project Overhead Cost Review ............................................................................................................ 89
10.5.12 Method Related Costs........................................................................................................................... 90
10.5.13 Design Costs - Detailed Design & Site Supervision .......................................................................... 90
10.5.14 Risk and Opportunity ............................................................................................................................ 91
10.5.15 Inflation .................................................................................................................................................. 92
10.6 Pre-Negotiation – Brief Explanation of Concepts .............................................................................. 93
10.7 Negotiation – Brief Explanation of Concepts ..................................................................................... 94
10.8 Post Negotiation – Brief Explanation of Concepts ............................................................................ 95
PART D: Project Controls and Performance Management ............................................................................... 96
Highways Agency
PROJECT CONTROLS AND PERFORMANCE MANAGEMENT .......................................................................... 97
11 Introduction ................................................................................................................................................... 97
11.1 HA Major Projects Context ................................................................................................................... 98
11.2 Baselines ................................................................................................................................................ 99
11.3 Measuring Progresses and Statussing ............................................................................................. 100
11.4 Earned Value Management ................................................................................................................ 101
PART E: Continuing Professional Development .............................................................................................. 104
CONTINUING PROFESSIONAL DEVELOPMENT ............................................................................................... 105
12 Best Practice and Professional Certification ............................................................................................ 105
12.1 AACE International (Association for the Advancement of Cost Engineering) ....................... 105
12.1.1 Best Practice Guidance ...................................................................................................................... 105
12.1.2 Distance Learning Courses and Education ...................................................................................... 105
12.1.3 Professional Certification ................................................................................................................... 106
12.2 ACostE (Association of Cost Engineers) ....................................................................................... 106
12.3 SCEA (Society of Cost Estimating and Analysis) .......................................................................... 107
12.4 ICEC (International Cost Engineering Council) ............................................................................. 108
12.5 RICS (Royal Institution of Chartered Surveyors) ............................................................................. 108

uk
12.6 EC (Engineering Council United Kingdom) ................................................................................. 108
12.7 ISPA (The International Society of Parametric Analysts) .............................................................. 109
12.8 V-CES (Virtual Cost Engineering Studio)......................................................................................... 109
12.9 Cranfield University ............................................................................................................................ 110
PART F: Glossary and Reference Information ................................................................................................. 111
13 INTERNAL & EXTERNAL INFORMATION RESOURCES ......................................................................... 112
Reference Documents ..................................................................................................................................... 118
Publications ...................................................................................................................................................... 120
14 Terminology and Glossary of Terms ........................................................................................................ 121
Highways Agency
Preface
Welcome to the Commercial Services Division’s Cost Engineer’s Handbook
This Cost Engineer‘s Handbook (CEH) provides useful information on cost engineering for the Commercial
Services Division community. It is intended to be both an informative introduction for the new cost engineer and a
useful reference document.
The CEH provides a synopsis of the fundamental concepts and techniques of cost engineering to the Commercial
Services Division personnel in the context of Major Projects‘ systems and environment. This handbook is a top-
level overview of cost engineering as a discipline, not an in-depth examination of each and every aspect of the
entire discipline of cost engineering.
The CEH is designed to be an electronic resource. It is not intended to be read cover-to-cover, but instead to be
an easy to use reference guide facilitating topic searches with stand-alone sections.
The CEH is separated into the following distinct parts:
 Part A: Introduction and Cost Engineering Fundamentals

 Part B: Cost Planning, Estimating and Investment Appraisal
 Part C: Contractor Selection and Award of Contract
 Part D: Project Controls and Performance Management
 Part E: Continuing Professional Development
 Part F: Glossary and Reference Information
We have tried to strike a balance between documenting processes and providing basic resources for cost
engineers from the beginner to the experienced. The CEH refers to several documents containing detailed
information of Major Projects‘ processes. These include the following principal documents:
 The MP Project Control Framework
 Commercial Services Division Cost Estimation Manual
 The MP Risk Management Guide
 MP Manual of Contract Administration
 HA Value For Money Manual
We hope the CEH will be useful not just for cost engineers, but also for those who interact with Commercial
Services Division and need to be aware of cost engineering processes. These include Highways Agency Project
Managers, DfT Project Sponsors, Programme Services Group, Finance, Procurement and others.
Highways Agency
Cost engineering is a combination of engineering, science, art, experience and judgement. There are many well-
defined processes within the cost engineering discipline. There is also a subjective element that makes the
discipline an art form learned over time and through experience. The more understanding and credibility we gain
with our customers in the Agency, DfT and beyond, the more we will drive better decisions and better value for
money projects.
Feedback and/or suggested improvements are welcomed. Please send your comments and feedback on the
CEH to Commercial Services Division at [email protected]
Highways Agency
PART A:
Introduction and Cost Engineering Fundamentals
Highways Agency
Highways Agency Major Projects Directorate – Commercial Services Division
Fundamentals of Cost Engineering
FUNDAMENTALS OF COST ENGINEERING
1 Introduction
This section provides an introduction to the subject of cost engineering and the fundamental
building blocks of knowledge required to apply cost engineering in the real world. This
chapter covers the following topics:
 The definition of Cost Engineering
 The origins of Cost Engineering
 The Total Cost Management Framework
 The objectives of cost engineering
 The typical areas where cost engineering is applied
1.1 Background
1.1.1 Cost Engineering and Its Importance

The Association for the Advancement of Cost Engineering International (AACE) defines cost
engineering as,
“The application of scientific principles and techniques to problems of cost estimation;

cost control; business planning and management science; profitability analysis; and
project management, planning and scheduling.”
Note ―business planning and management science‖ and ―project management, planning and
scheduling‖ were added into the AACE‘s original definition relatively recently. While cost
engineering is crucial to support these activities, they are huge subjects in their own right that
extend beyond the limits of cost engineering.
Cost and financial aspects are critically important to the management managing major
programmes and projects but assessing and controlling costs can be particularly difficult.
There is a long history of cost overruns and waste crippling major capital works and cost is a
constant source of concern throughout the lifecycle of any project, for example when:
 considering different technical options to select the optimum solution
 trading-off cost and technical aspects to deliver best value for money
Highways Agency Page 12

 establishing budgets so that affordable plans can be set
 evaluating price proposals to ensure best value for money
 preparing for contract negotiations to maximise profitability
 assessing the cost impact of changes to existing designs and contract agreements.
Cost engineering tries to capture practical experience and analyse it in order to develop tools
and models which, together with expert judgement, can accurately estimate – predict the
likely costs of projects – and assess whether proposed costs are reasonable. An
assessment of the likely cost (and risks) is made, often taking account of past similar
activities and associated trends, and of any changes in working practices and productivity.
But cost engineering is not just about estimation and assessment of cost because these
capabilities are used in a wide range to activities to achieve cost-effective results and good
project management. Awareness of cost is a key factor in the choice of design solutions, but
establishing those designs and assessing the related costs have often been separated.
Typically, the designer produces a design solution, which is then passed to other functions
such as geotechnical and environmental to add input, and this information finally ends up
with the estimator to calculate the cost of implementing this solution. Unfortunately, this is
likely to be too late for estimators to add a lot of the value that they could provide if they were
involved earlier in the process. For example, an estimator can find that a proposed solution
is too expensive at the end of the design process and therefore the design process has to be
repeated. Time pressures often mean that is not done in a controlled way. The cost
engineer should therefore be regularly involved in the design process and throughout the
lifecycle of a project. Cost is a critical a factor in project success and should be considered
at every step.
The alternative offered by cost engineering is to have cost information available when design
choices are being made, so that they will be made in the knowledge of approximately what
the different potential solutions are likely to cost. This awareness of the likely cost is essential
Cost engineering encompasses a wide range of cost-related aspects of engineering and programme
management, but in particular cost estimating, cost analysis/cost assessment, design-to-cost,
schedule analysis/planning and risk assessment. These are fundamental tasks which are undertaken
throughout the project life-cycle by trained professionals utilising appropriate techniques, cost
models, tools and databases in a rigorous way, and applying expert judgement with due regard to
specific circumstances and the information available. In many instances, the output of a cost
engineering exercise is not an end in itself but rather an input to a decision making process

to be able to make effective cost/benefit trade-offs. In other circumstances where cost is a

critical factor, a design-to-cost approach can be applied whereby firmly limited budget directly
drives the choice of solution. Cost engineering therefore embraces many facets of
engineering, project management and supply chain management.
1.1.2 The Origins of Cost Engineering

The term ―Cost Engineering‖ was first used in the United States in the 1920s and defined as
“the science of cost finding by analysis of the processes and expenses of production, and the
charging of particularized expense factors, through process unit rates, in the exact rate of
utilisation.” (Robert S. Denham, The A-B-C of Cost Engineering, 1919)
“The day of haphazard and makeshift methods has passed. The manufacturer who wishes to stay in
business must fix his prices upon provable facts, otherwise he is not deserving of the confidence of
his customers or of the community. “Selling prices are fairest when they include not only a
reasonable profit above cost of manufacture, but the elements of efficiency of production and
management which assure the buyer that the cost has not been inflated through careless or
extravagant business methods.” Robert S. Denham
Cost Engineering has largely evolved as a discipline from the manufacturing industry. The
more controlled conditions in manufacturing and production lines enabled a more scientific
approach. This scientific approach is being applied more and more to other industries
including construction and software development.
1.1.3 The AACEI and Total Cost Management Framework

The Association for the Advancement of Cost Engineering International (AACE) was formed
in America in the 1950s. In 2006, AACE published the Total Cost Management (TCM)
Framework which outlines ―an integrated process for applying the skills and knowledge of
cost engineering to manage assets and deliver projects, programmes and portfolios of work‖.
The TCM Framework has become a recognised framework for the application of cost
engineering. It is in essence a series of process maps for each area of cost engineering. It
ties all the Cost Engineering skills and knowledge areas together into a single process and it
establishes Cost Engineering as a unique discipline that supports business and project
management alike.

The AACE defines Total Cost Management as;

“The effective application of professional and technical expertise to plan and control
resources, costs, profitability and risk. Simply stated, it is a systematic approach to managing
cost throughout the life cycle of any enterprise, program, facility, project, product, or service.
This is accomplished through the application of cost engineering and cost management
principles, proven methodologies, and the latest technology in support of the management
process.
“Total cost management is that area of engineering practice where engineering

judgment and experience are used in the application of scientific principles and techniques to
problems of business and program planning; cost estimating; economic and financial
analysis; cost engineering; program and project management; planning and scheduling; cost
and schedule performance measurement, and change control.
“In summary, the practice areas [shown above] are collectively called cost engineering;
while the "process" through which these practices are applied is called Total Cost
Management or TCM.”
TCM is effectively a quality management process from the perspective of cost. Like Total
Quality Management (TQM) and ISO 9001 quality management systems, it is based on the
Deming Cycle of Plan-Do-Check-Assess (and Improve). It will therefore fit with other quality
management systems.
TCM covers the management of assets and the delivery of projects and programmes.
Projects and programmes of work are considered to be embedded within a wider Strategic
Asset Management (SAM) process. In other words, projects and programmes (i.e. a related
group of projects) may be implemented to create, modify or otherwise affect an asset.
This is described in Figure A2 with the Strategic Asset Management process on the left hand
side and its sub-set of Project and Programme implementation on the right hand side.
The TCM Framework covers the entire asset and project/programme lifecycle from inception
of ideas through design/development, construction / execution, operation and maintenance
and closure/decommissioning.

Figure A1
Figure A2

Figure A3
Further details about the AACE and accessing the Total Cost Management Framework are
contained at the end of this chapter.
1.1.4 Outline of Cost Engineering Processes, Skills and Knowledge

Following the definitions in section 1.1.3, Figure A4 provides a summary of the principal cost
engineering processes, organised by function, together with the supporting skills and
knowledge areas required for the successful application of cost engineering.

Figure A4 High Level Outline of Cost Engineering Process, Skills and Knowledge

1.2 Background, DfT and HA Structures

Cost Engineering activities in the context of Highways Agency Major Projects involve
numerous areas within the Department for Transport (DfT), the Highways Agency and its
supply chain. Sources of further information about the DfT and HA organisational structures,
strategies and business plans can be found in the further information and bibliography
section at the end of Part A.
The HA Major Projects Commercial Division was created in 2008 in response to the Nichols
Review into cost estimating and project management of major highways projects and the
growing need to deliver efficiencies. The division was restructured following the combining
of Major Projects and Network Development and Delivery commercial staff in late 2011
forming the Agency-wide Commercial Services Division. The Commercial Services Division
structure as at 10th March 2012 is shown in Figure A5.
In 2009, the then Commercial Division launched a phased programme to implement Total
Cost Management principles and rigorous cost engineering processes. This programme has
been led by the Commercial Services Division‘s Estimating Team and its initial focus has
been the improvement of cost estimating, challenge of contractors‘ cost submissions and the
capture of cost intelligence.

Figure A5 – Commercial Services Division Structure (as at 10th March 2012)
Commercial Services Division Regional

Directors
Director
BIRMINGHAM Commercial Services Division
Post No 21700830
Cost Centre 3021 = Cost Centre 3840 = David Hall
6 posts 9 Posts BEDFORD
Cost Centre 3022 = Cost Centre 3020
1 x Community 1 x Head of Supply 1 x Head of Contract
19 posts Management PB7
= 1 post
Officer Chain Development
PB5 (PB8) Chelliah Yogamoorthy
Symon Toon Simon Diggle 21704009 Cost Centre 3023
1 x Head of TCM
25085193 21701212 1 x TCM Policy & PB8 Birmingham = 4 posts
Leeds Leeds Strategy
Mark Gripton
Co-rordinator
1 x Performance Manager
PB6
21700847
PB7
Elizabeth Kenny
Mike Bennett 1 x Risk & Value Manager
25075747
21701213 PB7
Birmingham Gary Thomas
1 x Estimating Manager PB7 21700845 Regional Finance Team
3 x Performance Analysts
Mark Rowley 1 x CIM Manager PB7 7X Regional Commercial Managers PB6 Lisa Hardwick 3013 6620
PB6 1 x Assistant Risk & Value
Post No 21700833 Mick Joy Nicola Oxley-Harrison (NW) Manchester
Karl Anderson Manager PB6
21700841 Post No. 25077124
25085181 Andrew Hobson
*8 x Cost Engineers PB6 Richard Li (YNE) Leeds
Leeds 25085192
1. AT Mike Alflatt 21700840 1x RIB Super User Post No 25072714
Terenjit Singh
1. CS Ashfaq Hussain Data Analyst PB6 Graham Keeney (SW) Bristol 1 x PA to DD
25085180
2. .AT Bal Barard 25075750 Roland Kelly Post No. 21704021 (PB 2)
Birmingham
2. CS Mike Alflatt 21700848 Zbigniew Twarowski (EM) Birmingham Charlotte Gray
Lisa Osborne
3.AT Tej Bahia 25075751 Hans Ram Post No. 25077123 21700831
25085182
3. CS Darren Burton Noel Hunt (SE) Dorking
Bedford
4. AT David Mountford 25075516 1 x Cost Capture Post No. 21704011
4. CS Maninder Bahia Coordinator Analyst
1 x Business Manager Cost Centre 3024
VACANCY (E) Bedford PB4
5. AT Richard Hirst 25075517 PB5 Post No. 21704016 VACANCY
= 6 posts
5. CS Bal Barard Shahjahan Ahmed VACANCY (WM) Birmingham
6. AT Robert Kausitz 21700853 21700855
2579680 Post No. 25077250
Programme Works 6. CS Stephen Booth Commercial Manager –
Performance Manager 7. CS Stephen Cox 2508189 1 x Cost Intelligence Contracts and
PB7 8. VACANCY 2085188 Officer PB4 Disputes PB7
Tom Smailes James Graham QS Graduate Trainee PB3 David Raby Regional Commercial
21701215 2 x Assistant CE PB4 21700851 Sanjiv Luther 21700832 Manager (Mids & SW)
Birmingham 1. James Smalley 25102867 Post No. 25093168 Saqib Mir PB7
Programme Works
1. john Ellard PB3 Dorking BIRMINGHAM Regional Commercial 25085186
2. Jack Shelley 25106416. CIM Team VACANCY
Performance Analyst PB6 Manager (Central) PB7 (Birmingham)
2. Paul Chappell 25110905 Programme Works
VACANCY AT Alan Tombs
1 x Review Coordinator PB4 Sameer Sharmar PB6
21701216 25073655 Regional Commercial
Arshad Hussain Birmingham
Birmingham CS Mark Delaney Manager (South)
25079641 Michael Gatward PB6
Robert Baker PB7
Birmingham
21700835
Assistant Commercial (Bedford/Dorking)
COMMERCIAL PROGRAMME WORKS Manager (Central) PB6
Paul Frost 21700836 Regional Commercial
Manager (North)
Gary Hough PB7
21700834
(Leeds/Manchester)
Commercial Support
Commercial Management of Sus
(call off as required, reporting to scheme PM)
(call off as required, reporting to scheme PM)
Bill Hughes
James Aldous-Ball Commercials Services Division
Mo Hasoun KEY
Duncan Hurwood 45 posts
Tim Hess
Paul Moore
2x PB8
2 x PB5 45 ADMIN posts of which:-
40 STAFF in post PayBand 8 PayBand 7 PayBand 6
Project Commercial Project Manager MOCA X1
Managers X5 PB7 Benchmark Staff covered are paid 10 x PB7 5 x PB4 VACANT POSITIONS
Colin Evans (A46 Newark) Pos Pos No 25072756 Doug by programme and therefore not PB6 Regional Commercial Manager (E) PayBand 5 PayBand 4 PayBands 3 & 2
No 21700837 Roberts illustrated. PB6 Regional Commercial Manager (WM)
Cark Klan (A45 Tollbar) 22 x PB6 2xPB3 PB4 Cost Intelligence Officer
Alun Jones (A46 Newark) PB4 Business Manager Non Civil Servants
Clive Carter (A46 Newark) PB3 CIM Team
Mo Hasoun (A46 Newark)
1 SCS 1 x PB2
Agency Temp (AT) to be replaced
by recruited Civil Servant (CS)
Liz Kenny
Version: 4

COST
2 Introduction
This chapter of the handbook sets out the definition of cost, how it is classified and the ways in which
cost is most commonly presented, focussing on the HA Major Projects context.
Cost is one of the most frequent ways by which we measure and compare activities and assets. But
because the word ―cost‖ is so commonly used and generally related to monetary value, its true meaning
and importance as a cost engineering concept are often missed.
Concepts covered in this chapter are:

 what makes up cost—i.e. the basic resources ( labour, plant, materials, etc...) that are needed to
perform an activity or deliver a project
 drawing the distinction between direct and indirect costs i.e. the cost elements that are directly
applied to an asset and those that are indirectly applied
 relating cost elements to the project (or asset) lifecycle – design, acquisition, operation, and
disposal
 how cost is measured and presented to arrive at the total activity and/or project cost
 the difference between cost and price
2.1 Background
Cost is one of the three fundamental attributes associated with performing an activity, delivering a
project or acquiring an asset. These are:
 The cost of the activity or asset (which is closely related to the price)
 The quality or performance of the asset or activity
 When the asset is available or the activity can be carried out (i.e. the schedule)
Put simply, cost is the value of an activity, project or asset. Generally, this value is determined by the
cost of the resources that are expended, that is the labour, plant, material and ―other‖ resources.
Although money and time are sometimes thought of as resources, they are really ways that implement
or constrain the use of these physical resources.

Figure A6 illustrates this process by which resources are converted (via a ―project‖) to an asset or
activity.
The final activity or asset produced depends on what can be afforded given the money and time given
to the project.
Materials resources are not just the physical materials that make up the asset or works. The value of
the asset will include cost elements such as scrap material or spares, temporary works, construction
form work, the cost of transporting the material to the work site and materials to keep construction safe
and protect the environment.
Labour is the value of the human resources needed to complete the activity or asset, not just those
resources directly involved in the completion of an activity on site but also, for example, the work of the
design engineer, the foreman supervising the site work, or the technician sampling materials.
In addition, other resources are needed to carry out the activity and/or support the asset. This is not
only the ―Plant‖ tools and equipment but other resources such as electricity, taxes, and maintenance
resources necessary to keep the facility available for use.
The value of an asset or activity can also depend on intangible costs. For example, the value of
prestige building project can be related to the name and reputation of the architect. When evaluating
alternatives, the value of each alternative should be assessed in terms of the expected benefits if it is
selected and the negatives that could be suffered if it is not. An intangible benefit might be an avoided
cost if the alternative is selected. An intangible negative consequence might be the cost of missing an
opportunity because resources were invested in another alternative instead of the more beneficial one.
Types of cost to produce an asset vary depending on whether one is the producer or consumer of an
activity or asset. The cost categories listed above are those that the producer typically faces. The
consumer has additional costs that add to the value of the asset being acquired. One of these costs is
the profit for the producer. Profit is generally determined by market competition and regulation and is a
key difference between the terms ―Cost‖ and ―Price‖.

―Cost‖ and ―Price‖ are often interchangeable. But there is an important difference between the two:
 Costing applies unit costs to the quantities of items in a cost estimate. For a detailed estimate,
this is usually in the form of labour hours, wage rates, material costs, and perhaps subcontract
costs. These costs may come from a variety of sources such as an estimating database (either
in-house or commercial), vendor quotes, the procurement department, estimating experience,
etc… Pricing, on the other hand, is adjusting the costs that have been applied for specific
project conditions, market conditions and commercial terms.
 Pricing adjusts to cost to allow for overhead and profit, to improve cash flow, or for other
reasons benefiting the business interests of the party preparing the estimate.
For example, to a contractor preparing a bid for a defined scope of foundation work, his costs will
include the direct material and labour costs associated with installing the foundations. However, the
price reflected by his bid will include not only his costs, but also an allowance for his overhead and
profit; so the price reflected in his bid is higher than his cost.
Pricing also includes adjustments to costs for specific project conditions. Depending on the specific
cost information used in preparing the estimate, material costs may need to be adjusted for location,
materials of construction, or to account for differences between the item being installed and the item
you may have an available cost for. Labour hours may require productivity adjustments for a variety of
conditions such as weather, amount of overtime, interferences from production, material logistics,
congestion, the experience of the labour crews, the level of contamination control, etc... Labour rates
may also need to be adjusted for location, hardship postings, union agreements, etc… and to ensure
the right mix of experience and specialist skills.
2.1.1 Typical Cost Structures: Direct, Indirect, Fixed and Variable Costs
It is important to structure the cost elements within the material, labour, plant and other resource
categories in order to understand how they influence total cost and understand how they can be
controlled. The structure most commonly used sorts the cost elements into direct costs, indirect costs,
fixed costs, and variable costs. In practice, some costs can fall into more than one of these groups.
2.1.1.1 Direct Costs

Direct costs are those resources that are spent solely to complete the activity or asset. In other words,
“Any cost that is specifically identified with a particular final cost objective, but not necessarily
limited to items that are incorporated in the end product as material or labour”.

Direct costs are tied to individual items or sections of work. The direct cost of a foundation for a house
includes trenching for the footings, the formwork (if not reused), the concrete, and the labour to place
and finish the concrete.
2.1.1.2 Indirect Costs

Indirect costs are those resources that are needed to support the activity or asset but are also
associated with other activities and assets. In other words,
“Any cost not directly identified with a single final cost objective but identified with two or more final
cost objectives …”
Indirect costs also may be referred to as ―overhead costs‖ or ―burden costs.‖ Indirect costs are often
general administrative activities associated with operating the business, costs for providing and
maintaining field equipment, and expenses utilities, taxes, legal services, etc...
2.1.1.3 Fixed Costs

Fixed costs are those cost elements that have to be provided independent of the volume of work or
production that they support. These can be either direct or indirect costs. The set-up of a static
manufacturing line producing metalwork items is a direct fixed cost that is incurred whether 100 or
1,000 units are produced. The tools used to finish a concrete foundation are an indirect fixed cost since
they can be reused on other concrete finishing work.
2.1.1.4 Variable Costs

Variable costs are required cost elements that are dependent on the volume of work activity or asset
production. Again, these can be either direct or indirect costs. An example of a direct variable cost is
the material used to form the metalwork since the amount varies with the quantity produced. An indirect
variable cost would be the electricity used to operate the machinery since it also varies with the quantity
produced but is considered to be an overhead cost.
2.1.2 Cost Accounting

Cost accounting is defined as “the historical reporting of disbursements and costs and expenditures on
a project”. When used in conjunction with a working estimate, cost accounting can give the precise
status of the project to date – recording how much of the estimated resources have been spent to that
date. Historical costs recorded in a proper structure can also provide a sound basis for forecasting and
budgeting costs of future activities and assets.
While detailed methods used for cost accounting vary from business to business and from project to
project, all accounting systems include the three basic steps of recording, classifying, and summarizing
cost element data in terms of money expended with time. The recording of cost information is simply
the organised gathering of data in a routine manner. There are a variety of methods to achieve this.
Generally, it‘s accomplished with time sheets for labour and invoices for subcontracts and procured
items. Other costs are gathered from sources such as utility bills, expense reports, tax bills, etc...
2.1.2.1 Codes of Accounts and Activity Based Costing

Every business has an established approach for classifying and summarizing costs that is organized
around their business practices. This approach is a ―code of accounts‖ by which all recorded cost
elements are classified. A code of accounts is a systematic numerical method of classifying various
categories of costs incurred in the progress of a job i.e. for major projects it is the segregation of
engineering design, procurement, construction, and associated project costs for accounting purposes.
A company‘s code of accounts is configured to support the recording of cost data in the general ledger.
Classifying costs in accordance with the general ledger does often not provide the visibility needed to
manage project work or to make informed forecasts of the cost of new jobs. An alternate method of cost
element classification is called activity-based costing (―ABC‖). In the ABC approach, resources that are
used are assigned to activities that are required to accomplish a cost objective. So instead of just
recorded costs to account codes set up for say, ―Midlands labour‖, ABC records the costs of the labour
undertaking a specific activity e.g. foundations design.
ABC generally makes cost accounts more understandable and useful as it reveals which resources and
activities are the most significant contributors or drivers of cost.
2.1.2.2 Classifying Costs Using a Work Breakdown Structure

Another approach to classifying costs that is similar to ABC accounting is using a work breakdown
structure (―WBS‖) to group cost elements. It has become a common practice for a WBS to be a
required project management tool on most contracts – more detail on WBS is provided in Section 4,
Cost Estimating. A WBS provide a framework for planning, estimating and controlling the resources
needed to carry out work and facilitates a summary of project data on cost and schedule performance.
Regardless of how cost elements are classified and grouped, this needs to be done in a manner that is
consistent with the way future work is estimated and budgeted. Historical cost records can be analysed
to determine whether improvements have been made and what the future trends of costs may be.

ECONOMIC ASSESSMENT
3 Introduction
Ultimately projects have an owner or client and require funding. They need to be economically feasible
to construct. This chapter provides a brief overview of principal methods of economic assessment that
determine whether funding is recommended or not.
Cost Engineers are frequently called on to support decisions on the comparison of alternatives and
economic assessment techniques are applied to select the optimum project or solution. The following
concepts are introduced:
 net present value
 annual cash flow analysis
 rate of return analysis
 benefit-cost analysis
3.1 Timing and Types of Cost in Economic Assessment

Cost engineering professionals must make sensible decisions in the arena of economic costs. Often
this task is complicated by the fact that certain elements of these decisions, such as costs, revenues,
and benefits, occur at different times in the life cycle of a project. Effective analysis of the totality of
economic costs results in better value decisions. Recognition of the impact of various factors of
economic costs leads to more rational decision processes by cost engineers.
Elements of economic costs may be outside the ability of the cost engineering professional to control.
Taxation policies and the respective rates of taxation are set by political entities responding to their
often-diverse constituencies. Depreciation rules, again, are enacted by political entities. Currency
variations may be outside even the control of the particular political entity and, instead, are influenced
by the actions and inactions of governments and currency traders around the world. Some aspects of
inflation may be the result of government actions as the government expands the money supply with
the result that too much money chases too few goods and services. While some elements of economic
costs may be outside the control of any one decision maker, one still cannot ignore their potential
impact on investment decisions.
3.1.1 Opportunity Costs

Economic decision makers need to consider the impact of opportunity costs. An opportunity cost
represents the foregone benefit by choosing one alternative over another. A student upon graduation

from high school has many choices including work, military service, and further education. If the student
decides to pursue further education, the costs of this endeavour represent not only tuition, books, and
living costs, but also wages or salary foregone from work opportunities.
Thus, a total cost calculation will include the lost salary or wages given up in favour of the further
education decision. Similarly, other economic decisions need to consider foregone benefits for an
accurate analysis.
3.1.2 Sunk Costs

Sunk costs represent funds already spent by virtue of past decisions. Since these expenditures are in
the past, by definition, they should not influence current decisions. While a past investment may still be
yielding benefits from an income stream, these current and future benefits are relevant. The past
expenditure, however, is considered to be a sunk cost and is ignored in current and future decision-
making.
3.1.3 Book Costs

Assets are carried on the firm‘s books at original cost less any depreciation. Book costs represent the
value of an item as reflected in the firm‘s books. Books costs do not represent cash flows and thus are
not taken into account for economic analysis decisions except for potential depreciation impacts for tax
consequences. Conservative accounting principles dictate that if the market price for financial assets,
such as a stock, is lower than the original price, this asset will be carried at the lower of cost or market
value. The underlying land values may have significantly escalated over a period of years; however, the
asset will still be carried at its original or book costs. For the firm to be a going concern, the sale of the
land at a higher market price would not make sense unless this was part of a strategy to dispose of
surplus assets.
3.1.4 Incremental Costs

In economic analysis decisions, focus must be on incremental costs or those cost differences between
alternatives. As an example, in the comparison between two alternative pieces of processing
equipment, if both units have the same yearly annual maintenance costs, there is no incremental
difference and maintenance costs can be excluded from the analysis. If another alternative has annual
maintenance costs of £1,500, then there is an obvious incremental cost difference of £1,000, which
then must be considered in the analysis between the three alternatives.
3.2 Economic Cost Change

Changes in costs occur for a number of reasons in the economy most commonly due to the following
concepts:
 inflation
 deflation
 escalation
 currency variation
3.2.1 Inflation
Inflation is defined as ―a rise in the price level of a good or service or market basket of goods and/or
services.‖ Inflation must have a driving force behind it – usually one of the following four effects:
 money supply – influenced by government / central bank monetary policy
 exchange rates – impacting import and export prices
 demand-pull inflation – where excessive quantities of money are chasing limited supplies of
goods / services i.e. a ―seller‘s market‖
 cost-push inflation - where product producers encounter higher costs and then push these costs
down through the production chain through higher prices.
3.2.2 Deflation
Deflation is the opposite of inflation with a fall in the general price level for goods and services or a
representative market basket of goods and services. The same aforementioned factors of money
supply, exchange rates, demand-pull, and cost-push factors operate but in the opposite direction with a
resultant decrease in prices.
3.2.3 Escalation
Escalation is a technique to accommodate price increases or decreases during the life of the contract.
An escalation or de-escalation clause is incorporated into the contract so that the purchaser will
compensate the supplier in the event of price changes. These escalation and de-escalation clauses
help to shield both the supplier and the purchaser from unpredictable cost changes. Without such
clauses, suppliers would include contingency amounts that might later be found to be unrealistically
high.
3.2.4 Currency Variation

Currency changes can have a significant cost impact both on those inside the country as well as those
outside the country. Currency prices are set in markets around the world and change on a constant
basis as the result of daily trading fluctuations and moves by central banks.
3.3 Economic Assessment Techniques

There are a variety of economic analysis techniques available to enable accurate choices between
competing alternatives to select the alternative with the highest return. Note ultimately the highest
economic return is only one criteria that decisions will be based upon e.g. other criteria such as
sustainability and safety will be considered too. This range of criteria is assessed to define the value
for money of the alternative (value being defined by the investment decision makers and not just
confined to quantifiable aspects).
The time value of money is a key area in economic cost analysis. The fundamental requirement is that
of equivalence – so that alternatives are considered on an equivalent basis. Different alternatives will
have differing amounts of cash income and cash expenses over their lifetime. In order to compare
these different alternatives on the same basis, these cash amounts of income and expenditure must be
set to equivalent terms.
3.3.1 Net Present Value Method
A common basis is needed when comparing alternatives. Alternatives typically will have different costs
and benefits over the analysis period. The net present value (NPV) method provides the platform to
resolve alternatives into equivalent present consequences.
3.3.2 Capitalized Cost Method
In some cases, problems have an infinite analysis period. The need for a structure such as a road or a
bridge, for example, is perpetual. With these types of situations, the capitalized cost method is chosen.
Capitalized cost (CC) represents the present sum of money that needs to be set aside now, at some
interest rate, to yield the funds required to provide the service indefinitely.
3.3.3 Average Annualised Cost or Benefit
For some types of analysis, it may be preferable to resolve the comparison to annual cash flow
analysis. The comparison may be made on the basis of Average Annualised Cost (AAC) or Benefit (or
the difference between these costs and benefits)
3.3.4 Rate of Return Analysis
Many organizations in making investment choices often set hurdle rates. The hurdle rate is the
benchmark rate of return that a capital investment decision must achieve to be acceptable. A rate of
return (ROR) is computed from the projected cash flows of the project. ROR values provide a ready
basis for the comparison of alternatives. In the case where capital investment funds are limited, projects
with the highest ROR values can be selected for the organization.
3.3.5 Benefit-Cost Ratio Analysis Method
Benefit Cost Ratio (BCR) Analysis involves the simple comparison between benefits and costs of a
proposed action. Benefits are placed in the numerator and costs are placed in the denominator. If the

ratio of benefits to costs is greater than one, the project is viable. Comparisons can be made between
projects to select those projects with the highest BCR.
3.3.6 Payback Period Method
Payback period is the period of time necessary for the benefits of the project to pay back the associated
costs for the project. This is a very simple method and can prove inaccurate. A project with a payback
period of three years may be selected over a similar project with a five-year payback period.
Differences in the timing of cash flows are not considered nor are benefits and costs beyond the
payback period. Payback period analysis is approximate and may not yield the same result as with
other more precise methods such as NPV or AAC criteria.
3.4 Equivalence, Interest Rates and Discounting

As stated above, it is essential that any cost comparisons are carried out with costs presented on an
equivalent basis. This is the principle of equivalence and most commonly assessment uses either the
NPV method or the ―Equivalent Annual Cost‖ (EAC). The EAC is often used as a decision making tool
when comparing investment projects of unequal lifespans. For example if project A has an expected
lifetime of 7 years, and project B has an expected lifetime of 11 years it would be improper to simply
compare the net present values (NPVs) of the two projects. EAC is calculated by dividing NPV of a
project by an annuity factor
3.4.1 Interest
When money is used over a substantial period of time there is usually a cost associated with the use of
that money. Cash is a valuable asset, which people are willing to pay to have available. The AACEI
uses the analogy of paying rent for the use of money just as one would pay rent for the use of an
apartment. With money, the charge for its use is termed ―interest‖. Simple interest is interest applied
only to the principal amount made available – or only to the part of that amount currently owed.
Compound interest is where interest is applied to the principal amount and added to it so that future
interest is applied to both the principal amount and the interest accrued over time.
3.4.2 Discount Factors

Whatever economic assessment technique is used to appraise, it should be on the basis of Whole-Life
Costs. This is set out in the HM Treasury ―Green Book‖ on public sector procurement.
3.5 The Importance of Assessing Whole Life Costings

Whatever economic assessment technique is used to appraise, it should be on the basis of Whole-Life
Costs. This is set out in the HM Treasury ―Green Book‖ on public sector procurement.

The whole-life costs of an asset are the costs of acquiring it (including consultancy, design and
construction costs, and equipment), the costs of operating it and the costs of maintaining it over its
whole life through to its disposal – that is, the total cost of ownership (COO) as shown in Figure A7.
The UK Office of Government Commerce provides guidance on Whole Life Costing for Construction
procurement:
“Long-term costs over the life of the asset are more reliable indicators of value for money than the
initial construction costs. This is because: money spent on a good design can be saved many times
over in the construction and maintenance costs. An integrated approach to design, construction,
operation and maintenance with input from constructors and their suppliers can improve health and
safety, sustainability, design quality; increase buildability; drive out waste; reduce maintenance
requirements and subsequently reduce whole-life costs. It is important to take a whole-life approach to
the asset, whether or not the same team is responsible for design, construction, operation and
maintenance investment in a well-built project can, in turn, achieve significant savings in running costs.‖
(Source: OGC Achieving Excellence in Construction, 2007)
Figure A7 – Whole Life Costs

The balance of acquisition, operation and decommissioning / disposal costs in Figure A7 is

representative for construction. The US Government Accounting Office figures for this balance for
public funded construction projects are as follows:
Figure A8
This means that the Highways Agency should be prepared to consider higher costs at the design and
construction stages in the interests of achieving significant savings over the life of the facility. It is
essential to consider long-term maintenance very early in the design stage; most of the cost of running,
maintaining and repairing assets is fixed through design decisions made during the early part of the
design process. To promote this, there are the following initiatives:
 The HA‘s Design for Maintenance Toolkit
 Appointment of ―Senior Users‖ to review and approve PCF products – typically Network
Development and Delivery Stakeholders will assess PCF products to ensure that operation and
maintenance considerations have been addressed by designs.
The key principle of equivalence is applied through the economic assessment techniques outlined
above to provide accurate decision support for investment appraisals. Again cost is only one measure
of value. Just as investment decisions should be based on the assessment of costs over the whole
project lifecycle, so they should be based on the assessment of benefits and value over the whole
lifecycle. The holistic appraisal of costs and value has been termed ―Combined Operational
Effectiveness Investment Appraisal‖ and is summarised in Figure A9. It requires the accurate
definition of value by the client i.e. correctly identified and prioritised criteria aligned with objectives.

Figure A9 - Combined Operational Effectiveness Investment Appraisal

4 Further Information and Bibliography
4.1 Sources of Information
Item Information Source

DfT Vision and Priorities http://www.dft.gov.uk/about/
DfT Organisation Charts http://www.dft.gov.uk/about/
DfT Business Plan 2011 - 2015 http://www.dft.gov.uk/about/publications/business
DfT Commercial Strategy http://www.dft.gov.uk/about/commercial-strategy
DfT Procurement Strategy http://www.dft.gov.uk/about/procurement/
HA Strategic Plan http://www.highways.gov.uk/aboutus/136.aspx
HA Organisation Charts http://www.highways.gov.uk/aboutus/documents/
S100311_HA_Organisation_Chart_Feb_2011_Final.pdf
HA Business Plan http://www.highways.gov.uk/aboutus/136.aspx
HA Procurement Strategy http://www.highways.gov.uk/aboutus/28854.aspx
DfT-HA Framework Document http://www.highways.gov.uk/aboutus/136.aspx
4.2 External Resources
Item Information Source

Association for Advancement of http://www.aacei.org/
Cost Engineering
Cost Engineering Fundamentals http://www.aacei.org/mbr/whatIsCE.shtml
Total Cost Management See http://www.aacei.org/

Framework
Economic Assessment Chapter 5, HM Treasury Green Book
http://www.hm-treasury.gov.uk/data_greenbook_index.htm
Whole Life Costing – Constructing http://www.constructingexcellence.org.uk/pdf/fact_sheet/wholel
Excellence Factsheet ife.pdf

PART B:
Cost Planning, Estimating and Investment
Appraisal

Cost Planning, Estimating and Investment Appraisal
COST ESTIMATING
5 Introduction
The objective of this chapter is to provide an introduction and background to cost estimating practice
within Major Projects. Detailed processes and procedures for cost estimating within Major Projects are
contained in the Major Projects Cost Estimation Manual and Commercial Services Division‘s Major
Projects information management procedures.
Therefore, this chapter sets out the following established cost estimating concepts:
 Classifications of estimates and the project lifecycle
 Accuracy of estimates and the project lifecycle
 Cost estimating methodologies - historical analogy, parametric, expert opinion, extrapolation

and learning-curves and detailed engineering estimating from first principles (―bottom-up‖)
 Deterministic and Probabilistic Estimating using Three-Point Estimating and Monte Carlo
simulation
The chronological steps in production of cost estimates are then considered with comprehensive
directions to Major Projects Cost Estimating guidance, procedures and other sources of information.
These steps are structured as follows:
1. Initiating an estimate
2. Determine the estimate‘s purpose, required level of detail and overall scope
3. Planning the estimating work
4. Defining the project / programme characteristics
5. Determining the estimate structure and Work Breakdown Structure to be applied
6. Identifying ground rules, assumptions and exclusions
7. Developing the Base Estimate (deterministic point estimate and probabilistic output)
8. Conducting risk and uncertainty analysis
9. Applying Inflation
10. Documenting the basis of the estimate
11. Reviewing the estimate and assurance of outputs
12. Presenting the estimate for approval and decision support

The AACE defines cost estimating as
“The predictive process used to quantify, cost, and price the resources required by the scope of
an investment option, activity, or project. The output of the estimating process, the cost estimate, may
be used for many purposes, such as
 Determining the economic feasibility of a project,

 Evaluating between project alternatives,
 Establishing the project budget, and
 Providing a basis for project cost and schedule control.”
Cost estimating may be used to quantify, cost, and price any project through the same fundamental
steps:
 Understanding the scope of the project to quantify the required resources
 Quantifying the costs to implement those resources
 Applying pricing adjustments
 Presenting the outputs in a structured way for decision-making
It is therefore the cornerstone of cost engineering. Before describing the steps in producing a cost
estimate, this document considers the typical timing and classifications of estimates during the project
lifecycle.
5.1 The Project Lifecycle and Classification of Estimates

As potential projects progress through the lifecycle, there are many decision points at which to decide
whether a specific project should be continued to be developed. Each subsequent decision-making
point during the project life cycle typically requires cost estimates of increasing accuracy. Estimating is
thus an iterative process that is applied in each phase of the project life cycle as the project scope is
defined, modified, and refined.
Estimate classifications are commonly used to indicate the overall maturity, accuracy, precision and
quality for the various types of estimates that may be prepared. Most organisations use some form of
classification system to identify and categorize the various types of project estimates that they may
prepare during the life cycle of a project. Different industries and organisations have different lifecycles
and there is a lack of consistency of estimate classification systems and terminology. Estimate
classifications are generally driven by the different approval stage-gates of an organisations project
lifecycle.

The AACE standard estimate classification system is as follows:
AACE identifies five classes of estimates. A Class 5 Estimate is associated with the lowest level of
project definition (or project maturity), and a Class 1 Estimate is associated with the highest level of
project definition. Five characteristics are used to distinguish each class of estimate from another. The
five characteristics used in the AACE recommended practice are
 degree of project definition
 end use of the estimate
 estimating methodology
 estimating accuracy
 effort required to produce the estimate
The degree of project definition is the primary (or driving) characteristic used to identify an estimate
class. The other characteristics are ―secondary,‖ with their value typically determined by the level of
project definition.

Highways Agency Commercial Services Division has implemented an estimate classification system
aligned with the Major Projects Project Control Framework as follows:
Figure B1
Therefore, the Major Projects Estimate Classifications are:
Estimate Classification Decision Supported by Estimate

Order of Magnitude Estimate Entry into Major Projects Lifecycle
Options Estimate Identification of Viable Alternatives

Selection of Optimal Alternative
Preliminary Estimate Approval to Issue Draft Orders and Environmental Statement
Initial Estimate Reconciliation of Contractors Initial Target Cost Submission
Developing Estimate Approval to Progress to Final Target Cost Submission
Final Estimate Reconciliation of Contractors Final Target Cost Submission

Approval of Start of Construction
Cost to Complete Estimate Outturn Cost Budgeting and Tracking
The Major Projects Cost Estimation Manual contains details of each estimate‘s characteristics and
requirements.
The Major Projects Lifecycle is controlled by the MP Project Control Framework (PCF). This defines
the lifecycle stages shown in Figure B1 above and the stage-gates between each of the 7 stages. A
defined set of reviewed and approved Products are required to be in place at each stage-gate. These

PCF Product Descriptions and full details of the PCF can be found on the Highways Agency Major
Projects intranet.
The Cost Estimate required at each stage is just one of a number of Commercial Products (these
include risk registers, opportunities registers and value management products for example). The PCF
Product Descriptions for Cost Estimates, and related Products, should be read and requirements
confirmed by the MP Cost Engineers.
5.2 Estimate Accuracy and the Project Lifecycle

Cost estimates tend to become more certain as projects progress towards construction and there is
increased definition or certainty about the characteristics of the project. The AACE classification
system above includes guidelines on the relative levels of accuracy of estimates at the various stages
of project definition. This typical maturity of cost is indicated in Figure B2:
5.3 Cost Estimating Methodologies

The three principal methods for estimating costs are:
 Analogy
 First principles build-up
 Parametric
An analogy uses the cost of a similar item of work or project to estimate the new project and adjusts for
differences. Estimating from first principles is a detailed engineering build-up method that develops the
cost estimate at the lowest level of the WBS, one piece at a time, and the sum of the pieces becomes

the estimate. The parametric method relates cost to one or more technical, performance, cost, or
project parameters, using a statistical relationship.
The following table summarises the advantages and disadvantages of these three methods and when
they are typically used in a project lifecycle.
In practice, a variety of methods can be used in combination for any estimate to suit the estimate
requirements and the availability of information, time and resources.
Other cost estimating methods include

 Expert opinion, which relies on subject matter experts to give their opinion on what an element
should cost. Expert opinion, also known as engineering judgment, is often applied to fill gaps in
a relatively detailed WBS where there is no hard source of data
 Extrapolating, which uses actual costs and data from prototypes to predict the cost of future
elements
 Learning curves, which is a common form of extrapolating from actual costs based on the
principle that productivity increases as activities are carried out more and more times due to
learning efficient ways to perform the activity.

Figure B3 shows a typical learning curve example.
5.3.1 Analogy Cost Estimating Method
An analogy takes into consideration that no new program, no matter how state of the art it may be
technologically, represents a totally new system. Most new programs evolve from programs already
fielded that have had new features added on or that simply represent a new combination of existing
components. The analogy method uses this concept for estimating new components, subsystems, or
total programs. That is, an analogy uses actual costs from a similar project with adjustments to account
for differences between the requirements of the existing and new systems. A cost estimator typically
uses this method early in a program‘s life cycle, when insufficient actual cost data are available but the
technical and project definition is good enough to make the necessary adjustments.
Adjustments should be made as objectively as possible, by using factors (sometimes scaling

parameters) that represent differences in size, performance, technology, or complexity. The cost
estimator should identify the important cost drivers, determine how the old item relates to the new item,
and decide how each cost driver affects the overall cost. All estimates based on the analogy method,
however, must pass the ―reasonable person‖ test—that is, the sources of the analogy and any
adjustments must be logical, credible, and acceptable to a reasonable person. In addition, since
analogies are one-to-one comparisons, the historical and new systems should have a strong parallel.
Analogy relies a great deal on expert opinion to modify the existing system data to approximate the new
system. If possible, the adjustments should be quantitative rather than qualitative, avoiding subjective
judgments as much as possible. An analogy is often used as a cross-check for other methods. Even
when an analyst is using a more detailed cost estimating technique, an analogy can provide a useful
sanity check.
The analogy method has several advantages:

 It can be used before detailed project requirements are known.
 If the analogy is strong, the estimate will be defensible.
 An analogy can be developed quickly and at minimum cost.
 The tie to historical data is simple enough to be readily understood.
Analogies also have several disadvantages:

 An analogy often relies on a single data point and there is not an adequate sample size of past
projects that are similar to the proposed project
 Frequently the past project‘s technical and project issues are not fully understood
 It is often difficult to find the detailed cost, technical, and project data required for analogies
 There is a tendency to be too subjective about analogies and adjustment factors – it is relatively
easy to produce an analogy and they can tend to be used too often. Many of the largest cost
overruns result from analogy estimates where the detail of the proposed project was not
considered sufficiently.
5.3.2 Engineering Build-Up Cost Estimating Method
The engineering build-up cost estimating method builds the overall cost estimate by summing or ―rolling
up‖ detailed estimates done at lower levels of the WBS. Because the lower-level estimating associated
with the build-up method uses industrial engineering principles, it is often referred to as engineering
build-up and is sometimes referred to as a grass-roots or bottom-up estimate.
An engineering build-up estimate is done at the lowest level of detail and consists of labour, plant and
materials costs that have overhead and fee added to them. The labour, plant and materials (and any
supplier/sub-contractor aggregated items) are allocated to the lowest WBS level, based on how the
work will be accomplished. In addition, quantity and schedule have to be considered in order to capture
the effects of learning. Typically, cost estimators work with engineers to develop the detailed estimates.
An engineering build-up method is normally used during the latter stages of the lifecycle when detailed
estimates are required – the build-up method is used when a cost engineer has enough detailed
information about the project and its construction process.
The several advantages to the build-up technique include

 the estimator‘s ability to determine exactly what the estimate includes and whether anything was
 overlooked,
 its unique application to the specific project and manufacturer,
 that it gives good insight into major cost contributors, and
 easy transfer of results to other programs.
Some disadvantages of the engineering build-up method are that

 it can be expensive to implement and it is time consuming,
 it is sometimes not flexible enough to answer what-if questions,
 new estimates must be built for each alternative,
 the product specification must be well known and stable,
 all product and process changes must be reflected in the estimate,
 small errors can grow into larger errors during the summation, and
 some elements can be omitted by accident
5.3.3 Parametric Cost Estimating Method
In the parametric method, a statistical relationship is developed between historical costs and program,
physical, and performance characteristics. The method is sometimes referred to as a top-down
approach. Types of physical characteristics used for parametric estimating are weight, power, and
lines of code. Other project and performance characteristics include site deployment plans for
information technology installations, maintenance plans, test and evaluation schedules, technical
performance measures, and crew size. These are just some examples of what could be a cost driver
for a particular project.
Sources for these cost drivers are often found in the technical baseline, cost analysis requirements
document or cost analysis data requirement. The important thing is that the attributes used in a
parametric estimate should be cost drivers of the project. The assumption driving the parametric
approach is that the same factors that affected cost in the past will continue to affect future costs. This
method is often used when little is known about a project except for a few key characteristics like
weight or volume.
Using a parametric method requires access to historical data, which may be difficult to obtain. If the
data are available, they can be used to determine the cost drivers and to provide statistical results and
can be adjusted to meet the requirements of the new project. Unlike an analogy, parametric estimating
relies on data from many programs and covers a broader range. Confidence in a parametric estimate‘s
results depends on how valid the relationships are between cost and the physical attributes or
performance characteristics. Using this method, the cost estimator must always present the related
statistics, assumptions, and sources for the data.
The goal of parametric estimating is to create a statistically valid cost estimating relationship using
historical data. The parametric CER can then be used to estimate the cost of the new project by
entering its specific characteristics into the parametric model. CERs established early in a program‘s
life cycle should be continually revisited to make sure they are current and the input range still applies
to the new project. In addition, parametric CERs should be well documented, because serious
estimating errors could occur if the CER is improperly used.
Parametric techniques can be used in a wide variety of situations, ranging from early planning
estimates to detailed contract negotiations. It is always essential to have an adequate number of
relevant data points, and care must be taken to normalize the dataset so that it is consistent and
complete. Because parametric relationships are often used early in a program, when the design is not
well defined, they can easily be reflected in the estimate as the design changes simply by adjusting the
values of the input parameters.
It is important to make sure that the project attributes being estimated fall within (or, at least, not far
outside) the CER dataset.
To develop a parametric CER, cost estimators must determine the cost drivers that most influence cost.
After studying the technical baseline and analysing the data through scatter charts and other methods,
the cost estimator should verify the selected cost drivers by discussing them with engineers. The CER
can then be developed with a mathematical expression, which can range from a simple rule of thumb
(for example, kg per pound) to a complex regression equation.
The more simplified CERs include rates, factors, and ratios.

 A rate uses a parameter to predict cost, using a multiplicative relationship. Since rate is defined
to be cost as a function of a parameter, the units for rate are always pounds per something. The
rate most commonly used in cost estimating is the labour rate, expressed in pounds per hour.
 A factor uses the cost of another element to estimate a new cost using a multiplier. Since a
factor is defined to be cost as a function of another cost, it is often expressed as a percentage.
For example, travel costs may be estimated as 5 per cent of project management costs.
 A ratio is a function of another parameter and is often used to estimate effort. For example, the
cost to build a component could be based on the industry standard of 20 hours per
subcomponent. Rates, factors, and ratios are often the result of simple calculations (like
averages) and many times do not include statistics.
5.4 Three-Point Estimating

For any activity a range of outcomes is to be expected. Three point estimates are used to define a
range of possible outcomes, in numerical terms, so that quantitative risk analysis and subsequent
sensitivity analysis may be carried out to better inform decisions.
A three point estimate is an estimate of the range of possible out-turns from a minimum to a maximum;
with the most likely out-turn appropriately located between these two extremes. It is a methodology for
describing the valuation of risk and the limits of variability of uncertainty that surround forecasts in a
format suitable for further useful analysis.
The three figures needed are defined as follows:

 Minimum - This is an optimistic view of what might happen, assuming that everything goes
almost as well as possible.
 Most Likely - This is the most likely out-turn appropriately located between the two extremes.
 Maximum - This is a pessimistic extreme, assuming that the worst tends to happen, but
excluding the very remote - e.g. "Acts of God".
It is important to understand what is defined as the ―most likely‖ figure, or ―mode‖, and how this differs
from the definitions of mean and median.
 Mode – the value in a distribution with the greatest frequency, in other words, the most likely
single value.
 Mean - the numerical average. It is obtained by summing all the values in a distribution and
dividing by the number of values. This is also referred to as the ―expected value‖.
 Median – the 50th percentile value. The median splits the area in half i.e. it is the value that has
below it half of the measurements in the distribution – the ―mid-point‖.
It is clear that subjective judgment is called for in order to generate sensible maximum and minimum
estimates. There is always scope for argument over the choice of the three values. However, we shall
almost certainly end up with a more realistic picture than if we were to rely on a single point estimate.
Three point estimates may also reveal something of the quality of the input data since a wide range of
values generally means less confidence in the final figure than an estimate with a narrow range of
predicted outcomes.
A three point estimate is, however, not really complete unless the full shape of the variation from
minimum, and through most likely, to maximum is specified. This is achieved by selecting a particular
type of probability distribution. The most commonly used in cost modelling are:
 Triangular Distribution – This distribution allows skewed estimates to be modelled, e.g.
estimates that display a disproportionately high maximum in relation to the most likely and
minimum values.
 Pert (or Beta) and Normal Distributions – These distributions are more sophisticated than the
triangular, but equally as flexible. Their shape has a flatter portion around the most likely, which
places more confidence around the most likely estimate than the triangular distribution.
The table below contains a summary of probability distributions commonly used in construction cost
estimating (in alphabetical order, not order of importance).

The three point estimates form an input for quantitative risk analysis. They allow risk and uncertainty to
be described statistically thereby allowing a number of individual estimates to be aggregated. The aim
of aggregating individual estimates is to derive a more realistic overall figure for cost, schedule or
performance with a measure of its variability. The aggregation method used in the vast majority of
computer models is random simulation; more commonly termed ‗Monte Carlo‘ simulation.
One of the most common forms of model output is the Histogram. All simulation ―slices‖, from a Monte
Carlo analysis, are combined to give a graphical output as depicted in Figure B4. This output
represents the variation of total project schedule or cost, with the x-axis depicting total project
duration/cost and the y-axis depicting the relative frequency of each discrete value of total project
duration/cost.
Figure B4: Graph showing 10%, 50% & 90% confidence figures, most likely (mode), median and
mean.
Common Probability Distributions in Cost Estimating


Probabilistic Three-Point Estimates are prepared by the Commercial Services Division‘s estimating
software system, Benchmark, which provides output for each WBS section level and overall simulation
to produce a project cost probability distribution as indicated in Figure B5 below.
Detailed guidance on three-point estimating, and quantitative risk analysis is provided in ―Quantitative
Risk Analysis – Process Guide for Risk Practitioners‖, produced by the MoD and available from the
Ministry of Defence Acquisition Operating Framework (www.mod.uk/aof). MoD has made the
Acquisition Operating Framework accessible only to registered users.
5.4.1 Monte Carlo Analysis

The MP cost estimating system Benchmark uses Monte Carlo analysis to simulate potential outturn
cost scenarios using probability distributions of possible values for key inputs. This process carries out
a high number of iterations randomly to combine different input values selected from the probability
distributions specified. The results consist of a set of probability distributions showing how uncertainties
in key inputs might impact on key outcomes.
The following example is adapted from ―Measuring costs and benefits – a guide on cost benefit and
cost effectiveness analysis‖ National Audit Office (NAO) and Vose, D (1996)
Example - Allowing for uncertainty in an analysis of costs
The table below gives the costs of various parts of a construction project, broken down into drainage
(D), earthworks (E), pavement (P), structure (S) and Landscape and Ecology (L). All costs are assumed
to be independent of each other. The model for total cost is therefore:
Total cost = D + E + P + S + L

Costs for Construction of Project (£)
Minimum Best Guess Maximum

Drainage 30,500 33,200 37,800
Earthworks 23,500 27,200 31,100
Pavement 56,200 58,500 63,700
Structures 172,000 178,000 189,000
Landscape and Ecology 29,600 37,200 43,600
TOTAL (aggregate) 311,800 334,100 365,200
From this information the ―best guess‖ for the total cost of the project is £334,100. However, the
information also indicates a possible range from £311,800 to £365,200. Suppose the project would not
go ahead unless the total cost is unlikely to exceed £350,000; how much assurance can we take from
these figures that the total cost will be less than £350,000?
By undertaking a Monte Carlo analysis, we can simulate many possible values of the input variables,
weighted so that the ‗best guess‘ value is more likely than the extreme values. The total cost is
calculated for each simulation, giving a distribution of values for total cost. The precise weighting
depends on the probability distributions specified for each variable.
Using triangular distributions, it can be concluded that the most likely total cost is £334,000; and that
the chance of total cost exceeding £350,000 is less than 1%.

6 The Cost Estimating Process
For detailed information on the cost estimating process for Major Projects Directorate, readers should
refer to the Major Projects Cost Estimation Manual and Commercial Services Division Information
Management procedures. This chapter provides a summary of the concepts behind the MP cost
estimating process, the key stakeholders and links to further information and guidance. The following
steps in the production of cost estimates (and other cost analysis) have been identified adapted from
AACE and NASA standards:
1. Initiating an estimate
2. Determine the estimate‘s purpose, required level of detail and overall scope
3. Planning the estimating work
4. Defining the project / programme characteristics
5. Determining the estimate structure and Work Breakdown Structure to be applied
6. Identifying ground rules, assumptions and exclusions
7. Developing the Base Estimate (deterministic point estimate and probabilistic output)
8. Conducting risk and uncertainty analysis
9. Applying Inflation
10. Documenting the basis of the estimate
11. Reviewing the estimate and assurance of outputs
12. Presenting the estimate for approval and decision support
This document should be read in conjunction with the MP Cost Estimating Manual and the referenced
Commercial Services Division procedures. An overview of the MP Cost Estimating Process can be
found within the Division‘s Cost Estimate Report Template (CERT). Figure B6 shows the process
overview from the CERT file.

Figure B6 – CERT Cost Estimating Process Overview

6.1 Initiating the Cost Estimate

Cost estimates and analysis are generally provided to inform decisions on projects, programmes and
asset management. (Commercial Services Division has been established partly to create an
independent team for the preparation of unbiased, objective estimates for investment appraisals.)
Estimates are therefore usually requested from internal and external customers to suit project stage
gates and other decision points. The primary customers for Major Projects cost estimates are the MP
Divisions‘ project teams that require cost estimates for their schemes to complete the required products
for the Project Control Framework Stage Gate Assessment Reviews. The MP Divisional structure can
be found via the link in the further information section at the end of Part B.
DfT will also commission cost estimates and analysis, particularly at the ideation or ―Pre-Options‖ stage
when evaluating whether projects should enter the MP project lifecycle. Benefits assessment and
engineering design work will usually be required and commissioned from MP project teams in this case.
There is a wide range of other internal stakeholders that may request estimates / analysis such as HA
Procurement Category Management, Lean Division, Managed Motorways Delivery Office, Network
Development and Delivery, etc…
In all cases there is a need to capture the request for estimating work and essential details prior to
planning the work. Stakeholders requesting estimating work from Commercial Services Division must
fill out the division‘s Request for Estimate Form (ref. CE200). This form must be completed a minimum
of 12 weeks before the estimate output is required.
There are several sources of information that enable cost engineers to take a proactive forward look at
future requirements for estimates without waiting for Project Managers to complete Estimate Request
Forms. These include:
 The MP Master Scheme Tracker – an excel tracker of Major Projects schemes and assumed
delivery programme maintained by Programme Services Group
 Power Steering – a central programme information system that lists schemes and their planned
milestones
 Commercial Services Division MP Estimate Tracker – an excel tracker capturing estimate
requests and known future estimate requirements maintained by the Division
Completed Request for Estimate Forms are submitted to Commercial Services Division and logged on
the division‘s Estimate Tracker and reviewed by the MP Estimating Manager who, if the request is valid,
will assign the estimate to a Cost Engineer.

6.2 Determining Estimate Purpose, Level of Detail and Scope

A cost estimate is much more than a forecast of the monetary cost of a project or programme. It must
be tailored to help answer the decisions faced in a satisfactory level of detail and accurately reflect the
proposed scope of works.
The purpose of a cost estimate is determined by its intended use and determines the required scope
and detail. Purposes such as the evaluation of affordability, selection of alternative solutions or
hypothesis testing will require different levels of detail and scope of estimating work. Regardless of
why the cost estimate is being developed, it is important that the estimate links to goals and objectives
and the cost engineer must identify the customer‘s needs. The Request for Estimate Form captures
some initial details but a more thorough understanding of these needs, estimate purpose, scope and
detail is required.
Commercial Services Division Cost Engineers are required to complete the Estimate Scoping
Document to capture this information once estimating work is assigned to them by the MP Estimating
Manager. The form is completed following an estimate inception meeting with the relevant project team
or stakeholders and forms part of the CERT.
The availability of information is a key consideration in assessing how far the customer‘s requirements,
goals and objectives can be met. A checklist of typical information required at each estimate stage is
included in overleaf. The Scoping Document records the information requested from project teams and
stakeholders at the estimate inception meeting.

MP COMMERCIAL DIVISION COST ESTIMATES
SCHEDULE OF INFORMATION REQUIRED BY ESTIMATE CLASSIFICATION
Project Title:
HA Project Manager:
Lead Cost Engineer:
HA's Employer's Agent:
ECI Contractor (If applicable):
Contractor's Designer (If applicable):
Information Description (for each option requiring estimate) Conventional Works MM/Technology Works
Order of Magnitude
Estimate Request Form CE200  
Notification of the Appointment of HA Cost Engineer Form CE202  
Scheme Brief / Clients Scheme Requirements & Phase Remit (if CSR available)  
Estimate Scoping Document (prepared by CE for HA PM / Estimating Manager approval)  
103 Form - New Construction Estimate Information Form  Not Applicable
104 Form Longsection Input Form (if applicable)  Not Applicable
105 Form Longsection Input Form - Schemes with Widening (if applicable)  Not Applicable
109 Form Project Information - Schemes including Widening (if applicable)  Not Applicable
Completed 203 MM/DHS Project Information Form Not Applicable 
Scheme Feasibility Report  
Assessment of likely Statutory Process requirements (Orders, ES, PI, Section Agreements, etc…)  
Statutory Undertakers Apparatus - Preliminary C2 Details  
Historical spend to date (to all scheme PINs) - CMDAL data verified via FS Oracle records  
HA PM forecast of Options and Development spend by PCF stage and FY  
Current Lands Cost Estimates and HAL output - note LCEs must not be out of date  
Project Risk Register where available (Generic Risk Register to be populated if not)  
Project Schedule (PCF milestone dates minimum)  
Scheme drawings - Layout Plans @ scale not greater than 1:2500 in pdf format  
Proportion of works outside existing boundary (by value) - Non-Recoverable VAT %  
Third Party Costs and Contributions  
Change Control documentation vs. previous estimate (if applicable)  
Cost estimate feedback form - Form 100  
Options Estimate
Clients Scheme Requirements & Phase Remit  
103 Form - New Construction Estimate Information Form  Not Applicable
104 Form Longsection Input Form (if applicable)  Not Applicable
105 Form Longsection Input Form - Schemes with Widening (if applicable)  Not Applicable
109 Form Project Information - Schemes including Widening (if applicable)  Not Applicable
Completed 203 MM/DHS Project Information Form Not Applicable 
Bulk Purchase 1286 Form (draft, if available)  
Draft Technical Appraisal Report (SGAR1) or Scheme Assessment Report (SGAR2)  
Statutory Undertakers Estimates C3 (where available, C2 details if not)  
HA PM forecast of Options and Development spend by PCF stage and FY  
Project Risk Register (Qualitative assessment if quantitative assessment is not available)  
Project Schedule (PCF milestone dates & key activities)  
Scheme drawings incl. standard cross sections & longsection - layout plans at scale 1:2500 in pdf format  
Draft Orders and Environmental Statement requirements  
Departures from Standards Register  
Change Control documentation vs. previous estimate ( if applicable)  
Preliminary Estimate
Scheme Assessment Report and draft Preliminary Design (see PCF Product)  
Preliminary design drawings - layout plans at 1:1000 scale in pdf format  
Departures from Standards Register  
Schedule of quantities for key cost drivers (prepared / reviewed by CE from Preliminary Design)  
Completed 203 Form for MM/DHS Projects Not Applicable 
Bulk Purchase 1286 Form (draft or current)  
NRTS Scope and Quotation (if available)  
MM Auxilliary Costs (incl. RCC upgrades to scheme PIN) Not Applicable 
Statutory Undertakers Estimates C3  
HA PM forecast of Development spend by PCF stage and FY  
Project Risk Register (full quantitative assessment incl. opportunities and issues)  
Project Schedule (see PCF Product)  
Confirmed Third Party Costs and Contributions  
Change Control documentation vs. previous estimate  

MP COMMERCIAL DIVISION COST ESTIMATES
SCHEDULE OF INFORMATION REQUIRED BY ESTIMATE CLASSIFICATION
Project Title:
HA Project Manager:
Lead Cost Engineer:
HA's Employer's Agent:
ECI Contractor (If applicable):
Contractor's Designer (If applicable):
Information Description (for each option requiring estimate) Conventional Works MM/Technology Works
Initial Estimate
Initial Target Cost Submission  
Current Preliminary Design (see PCF Product)  
Outline specification for key cost drivers  
Schedule of quantities for key cost drivers (reviewed by CE)  
Completed 203 Form for MM/DHS Projects (optional, depending on level of design development) Not Applicable 
Departures from Standards register  
HA PM forecast of Development spend by PCF stage and FY  
Developing Estimate
Contractors current estimate in WBS format  
Completed 203 Form for MM/DHS Projects (optional, depending on level of design development) Not Applicable 
Outline specification for key cost drivers  
Schedule of quantities for key cost drivers (reviewed by CE)  
HA PM forecast of remaining Development spend by PCF stage and FY  
Confirmation of Third Party Costs and Contributions  
Final Estimate
Clients Scheme Requirements  
ECI Contract Documents  
Contractor Final Target Cost Submission (base date confirmed)  
Full FTC drawing submission in pdf format  
Contractor's priced schedule in WBS format  
Specification  
Assumptions and Exclusions Register  
Sub-Contractor quotations  
Contractor and Employer Risk Register (full Quantitative Assessment)  
Confirmed Bulk Purchase 1286 Form  
Confirmed NRTS Scope and Quotation  
HA PM forecast of remaining Development spend by PCF stage and FY  
Confirmation of Third Party Costs and Contributions  

6.3 Planning the Estimate Work

Once the cost engineer knows the context of the estimate and the customer‘s needs, he/she is able to
develop, and tailor, an estimate plan whose scope coincides with data availability and the estimate‘s
ultimate use. For projects at early stages of development, such as for Order of Magnitude estimates,
the scope might be confined to reporting at a higher level of the Work Breakdown Structure (WBS,
discussed in section 2.5). As the project progresses through the lifecycle, more detail and granularity is
expected. The estimate plan serves as an agreement between the customer and cost estimating team.
It must clearly reflect the approved approach and should be captured in the Estimate Scoping
Document which is to be distributed and signed by the relevant Project Manager.
Regardless of an estimate‘s ultimate use and its data availability, time can become an overriding
constraint on its detail and scope. When defining the elements to be estimated and when developing
the plan, the cost estimating team must consider its time constraints relative to team staffing. Without
adequate time to develop a competent estimate, the team may be unable to deliver a product of
sufficiently high quality. For example, a rough-order-of-magnitude estimate could be developed in days,
but a first-time budget-quality estimate requires many weeks. The key milestone dates for the estimate
work schedule are recorded in the Scoping Document.
After the customer has defined the task, the resources required for delivery of the estimate must be
determined considering the scope of work, detail and estimate methodology. The resulting cost
estimating team should create a detailed schedule that includes realistic key decision points or
milestones and that provides margins for unforeseen, but not unexpected, delays. The team must
ensure that the schedule is not overly optimistic. If the team wants or needs to compress the schedule
to meet a due date, compression is acceptable as long as additional resources are available to
complete the effort that fewer analysts would have accomplished in the longer period of time. If
additional resources are not available, the estimate‘s scope must be reduced. The essential point is
that the team must attempt to ensure that the schedule is reasonable. When this is not possible, the
schedule must be highlighted as having curtailed the team‘s depth of analysis and the estimate‘s
resulting confidence level. The estimating team will need to ensure that the required range of
disciplines is covered.
The output is a plan for the smooth delivery of the estimating work. Figure B7 shows four groups of
essential questions to be answered before commencing a cost estimate:

Figure B7 – Four Critical Elements of Cost Estimate Plans
Source: NASA, 2008
6.4 Defining the Project / Programme Characteristics

Once a plan is in place for the estimate, a baseline must be defined for the scheme or alternative that is
being estimated. The objective of this baseline is to provide in a single document a common definition
of the project from which the cost estimates will be derived. In other words, the characteristics of the
project, or each alternative, have to be clearly defined and documented so that the cost engineer and
project team have a common, clear understanding of exactly what is being estimated. This is not just to
define the technical characteristics of the scheme as set out in design drawings and specifications
(which should be clearly referenced); it is to include any aspect that impacts on the cost of the scheme
e.g.:
 Project location
 Site characteristics such as earthworks, terrain, hydrology, etc…
 Environmental aspects
 Technical characteristics as set out in the design standards, drawings and specifications
 The complexity of the project
 The project stakeholders
 Schedule
 Construction methodology and sequencing (if available)
 Form of contract
 Procurement strategy (for example, is the HA to use bulk purchase arrangements)
 Acquisitions such as land, properties, etc…

 The statutory process for delivery of the scheme
 Third party works (statutory undertakers, local authorities, etc…)
 Funding arrangements and contributions (and currency exchange if required)
 Tax and insurance liabilities
 Identified risks, issues and opportunities
 The operational and maintenance regime (for whole life cycle costs / appraisal)
 Future replacements, renewals and / or incremental developments (for whole life cycle costs /
appraisal)
 Decommissioning and disposal methods (for whole life cycle costs / appraisal)
Every estimate, regardless of size, needs to define exactly what is being estimated. The type of
document used to record this project baseline description depends on the time available to conduct the
estimate, the size of the project, the information available, and the phase of the life cycle.
Projects that are smaller in size or earlier in their project lives may only require relatively simple data
records. For projects progressing through the Project Control Framework, the PCF products will
provide much of the information forming the project baseline.
Commercial Services Division has established a single document to capture the project baseline
description. This is the Commercial Master Data and Assumptions List (CMDAL) which is contained
within the Cost Estimate Report Template (CERT).
The project baseline documented in the CMDAL (and CERT) must be maintained as the project
progresses through the lifecycle. Without explicit documentation of the basis of a project‘s estimates, it
is difficult to update the cost estimate and provide a verifiable trace to a new baseline as key
characteristics change during the course of the project‘s life.
6.5 Determine Estimate Structure and Work Breakdown Structure

The objective of this task is to provide a consistent work breakdown structure that includes all elements
of the project that the cost estimate will cover. A Work Breakdown Structure (WBS) is an exhaustive,
hierarchical (from general to specific) tree structure of deliverables and tasks that need to be performed
to complete a project.

Figure B8 – An Example Work Breakdown Structure
A WBS is a required project management tool for many organisations, for example NASA states that
WBS ―is a key element of project management. The purpose of a WBS is to divide the project into
manageable pieces of work to facilitate planning and control of cost, schedule, and technical content. A
WBS ensures that all work to be performed on the project is organized and aligned in accordance with
the total scope [of the project] using a hierarchical structure. This structure becomes the cost
estimator‘s framework for ensuring full coverage of the project.‖ Figure B8 shows part of an example
WBS.
While there is no universal standard for the development of WBS, there are several principles to be
observed when designing a WBS:
 The 100% Rule – the WBS must cover 100% of the scope of work required to deliver a project
or asset. The rule applies at all levels within the hierarchy: the sum of the work at the lower
level must equal 100% of the work represented by the parent work package and the WBS
should not include any work that falls outside the actual scope of the project, that is, it cannot
include more than 100% of the work.
 Appropriately structure work packages – the WBS needs to be divided to enable identification
and ring-fencing of key cost and schedule data that is required for proper project estimating,
management control, review and accounting.
 Appropriate level of detail – the WBS should stop dividing work pages once an appropriate level
of detail is reached. This is a key question to address along with determining appropriate work
package structure.

 Mutually exclusive work packages – the work packages at the same level of the WBS cannot
overlap i.e. the same item of work cannot fall into two such work packages (to avoid double
counting). Where work package names are ambiguous, there should be a ―WBS dictionary‖ to
clarify what work should fall into each package.
 WBS Coding – the levels and work packages of a WBS should be coded. Often this will be co-
ordinated with codes of accounts for budgeting / capturing costs.
Commercial Services Division has implemented a standard WBS for all major projects based on the
Manual of Contract Documents for Highways Works (MCDHW) Standard Method of Measurement.
This Work Breakdown Structure is maintained by the Major Projects WBS Working Group and forms a
core structure for:
 Cost Estimating
 Data for forward planning (e.g. procurement of required resources)
 Capture of Tender and Actual Cost
 Cost and Schedule Performance Measurement
 Risk Classification
 Compensation Event Tracking
The WBS is aligned with the MP Cost Estimate Summary Sheet within the CERT and other MP Cost
estimating documentation. Full guidance on the Major Projects WBS is available via the links below
and also from the MP Cost Intelligence Manager.
Whereas the WBS breakdown a project by a hierarchical work structure, it is also possible to
breakdown the project by a hierarchical structure of all the resources required to deliver the project –
labour, plant, materials and subcontracted resource categories (where subcontract work cannot be
broken down due to lack of information). This is known as a Resource Breakdown Structure (RBS) and
can be used to quantify the demand for each type of resource. The interaction between the WBS and
RBS is shown in Figure B9.

Figure B9 – Interaction between WBS and RBS
WBS
Project
Onsites Offsites
Crude Unit Hydrocracker
Labour
RBS Concrete
Construction Material
Project Earthwork
Engineering Cost Centre
6.6 Identifying Ground Rules, Assumptions, Exclusions and Sensitivity

Cost estimates are typically based on limited information and therefore require a number of ground
rules and assumptions that establish the estimate‘s scope and baseline conditions. Ground rules are
common estimating standards that are applied to all estimates, for example the use of a common price
base for all estimates and the application of a consistent MP Inflation Profile. Other assumptions will be
required that are specific to the project or programme being estimated and it may be necessary to
confirm any works or scenarios that are excluded from the estimate.
The Commercial Data Master Assumptions List form is to be completed to capture these ground rules,
estimate assumptions and exclusions so that there is a clear understanding of the project baseline (see
section 2.4) and the basis of the estimate. The resulting estimate may be sensitive to key assumptions.
This sensitivity should be assessed where there is a significant chance that an assumption may not
reflect the actual project outcome.
The AACE state that ―sensitivity analysis is the substitution of variables in a risk model to test the
effects of these changes. This is easily accomplished with the wide availability of electronic tools, such
as spread sheets. Sensitivity analysis is also referred to as ‗what if‘ analysis. For example, in cost
items, one can substitute various quantities and unit costs to test the ‗sensitivity‘ of risk items to
changes. Concern would be raised if small changes result in large effects on the costs.‖

Table showing sensitivity analysis example
Base 1,000 units labour £1 per unit labour £1 per unit Total £2,000
material
Sensitivity 1 1,200 units +20% £1 per unit labour £1 per unit Total £2,400
Additional 200 material +20%
units
Sensitivity 2 1,000 units £1.50 per unit £1 per unit Total £2,500
Labour at £1.50 labour +50% material +25%
The US Government Accountability Office suggests that ―a credible sensitivity analysis typically has five
steps:
1. Identify key cost drivers, ground rules, and assumptions for sensitivity testing;
2. Re-estimate the total cost by choosing one of these cost drivers to vary between two set
amounts – for example, maximum and minimum or performance thresholds; *
3. Document the results;
4. Repeat 2 & 3 until all factors identified in step 1 have been tested independently;
5. Evaluate the results to determine which drivers affect the cost estimate most.
*The ranges should be documented during data collection and cost estimating
Many assumptions profoundly influence cost; the subsequent rejection of even a single assumption by
management could invalidate many aspects of the estimate. Therefore, it is imperative that cost
estimators communicate and document all assumptions well, so that the conditions the estimate was
structured on are clearly understood.
6.7 Developing the Base Estimate (Probabilistic & Deterministic)

The base estimate is the estimate for the defined project baseline, ground rules, assumptions and
exclusions. It therefore is the estimate for a fixed scope of works and baseline and excludes
consideration of the risks and opportunities that might occur to alter the scope and baseline conditions.
The MP Cost Estimation Manual and Information Management procedures describe the process for the
production of base estimates for each of the estimate classifications set out in section 1.1 of this
chapter.
The output of the base estimate at a WBS section level (second level) is recorded in the Commercial
Services Division‘s Cost Estimate Summary Sheet pro forma. This enables consistent presentation of
estimates and a check that costs have been estimated for all WBS sections. The Cost Estimate
Summary Sheet is part of the CERT file.

There are a range of tools used in the production of base estimates in Commercial Services Division
including:
 Benchmark Estimating Software – the Major Projects cost estimating software for production of
bottom-up estimates at all stages of the project lifecycle containing the MP database of
estimated resources and items of works. The software produces both deterministic point
estimates and probabilistic range estimates. Benchmark outputs costs estimates to a range of
media including an export to the MP Cost Estimate Summary Sheet within the CERT file.
 The Roadworks Estimator – a parametric model for the estimation of off-line and on-line
highways projects up to and including Preferred Option Selection which operates in conjunction
with Benchmark. The Roadworks Estimator exports schedules of items to MS excel for import to
Benchmark so that probabilistic estimates can be produced in Benchmark.
 MP Managed Motorways Cost Model – a bespoke parametric model for the cost estimation of
Managed Motorways schemes (hard shoulder running and controlled motorway schemes) which
operates in conjunction with Benchmark. The Managed Motorways model exports schedules of
items to MS excel for import to Benchmark so that probabilistic estimates can be produced in
Benchmark.
 MP Cost Intelligence Model – the Major Projects database of tender and actual costs captured
from tender / Final Target Cost submissions and contractors‘ details of actual outturn costs
stored in a RIB database in the MP WBS format
Further details of these tools, including user manuals, are contained in the information sources listed at
the end of this handbook.
The Commercial Services Division Cost Build includes an allowance for unscheduled items, the
Unscheduled Items Allowance. This is technically part of the base estimate as Unscheduled Items are
part of the fixed scope of works covered by the base estimate – they are inherent requirements of the
fixed scope.
For a fixed project scope, the schedule of items required to deliver that project will be incomplete at the
earlier stages of design development. Experience has shown that, alongside project scope changes, a
major cause of cost overruns is the omission from the budget estimate of more detailed items of work
that are inherently required to deliver the project scope – ―unscheduled items‖. The Unscheduled Items
Allowance is a function of the level of design development and will therefore decrease as a project
progresses through its lifecycle and more detail is known.
Commercial Services Division makes provision within its MP cost estimates for these unscheduled
items required to deliver a fixed project scope through an Unscheduled Items Allowance. This
allowance can be defined as,
“Budgetary provision for the proven tendency of the schedule of items required to deliver a fixed
project scope to increase through normal design development alone”
The Cost Estimate Report Template (CERT) contains guidance on the application of Unscheduled
Items Allowance. Note that the Unscheduled Items Allowance is not designed to cover gross errors or
omissions in the estimate.
6.8 Conducting Risk and Uncertainty Analysis

Anderson et al, 2008 defined the Cost Estimating Process as shown in Figure B10 (from Guidance for
Cost Estimation and Management for Highway Projects during Planning, Programming, and
Preconstruction, Anderson et al., 2007).
Figure B10 – Risk and Uncertainty in the Cost Estimating Process
Cost Estimating Step Description

Determine estimate Document project type and scope including:
basis  scope documents;
 drawings that are available (defining % engineering/design completion);
 project design parameters;
 project complexity;
 unique project location characteristics; and
 disciplines required to prepare the cost estimate
Prepare base estimate Prepare estimate, including:
 documentation of estimate assumptions, types of cost data, and
adjustments to cost data;
 apply appropriate estimating techniques, parameters, and cost
 data consistent with level of scope definition;
 coverage of all known project elements;
 coverage of all known project conditions; and
 check to ensure that estimate is consistent with past experience
Determine risk and Identify and quantify areas of risk and uncertainty related to
uncertainty and set  project knowns and unknowns;
contingency  potential risks associated with these uncertainties; and
 appropriate level of contingency congruent with project risks.
Review total cost Review estimate basis and assumptions, including
estimate  methods used to develop estimate parameters (e.g., quantities) and
 associated costs;
 completeness of estimate relative to project scope;
 application of cost data, including project-specific adjustments;
 reconcile current estimate and baseline estimate (explain differences)
 preparation of an estimate file that compiles information and data used to
prepare the project estimate

So, for project cost estimates to be comprehensive, the uncertainties and risks in the delivery of a
project must be analysed and an appropriate estimate of the potential costs of these risks and
uncertainties should be included – measured against the baseline of the base estimate. This also
applies to opportunities, which can be considered as negative value risks.
There are distinct levels of risk management within the Major Projects Risk Framework:
 Strategic – risks and uncertainties which affect the core aims and objectives of the Department
for Transport (DfT) and the HA. By their nature, the occurrence of strategic risks would change
the very nature of the Roads Programme and agreed Business Plans. Such risks can be
identified, monitored and managed if they occur, but are not costed in project budgets.
 Portfolio – risks and uncertainties which affect many projects and which need to be considered
across the portfolio of the Roads Programme for consistency of assessment. They fall into three
main categories:
o Changes imposed by third parties, that may or may not be beneficial to customers;
o Value adding opportunities selected by the HA and DfT to enhance the value of the
Roads Programme to their customers;
o Time – certain types of risk outside the HA‘s control which affect the durations of
projects
 Programme – Similar to Portfolio Risk and Uncertainty except that these risks will affect
designated programmes within the portfolio of the ―Roads Programme‖ e.g. the Managed
Motorways programme
While un-costed in project risk registers, a risk allowance is added centrally to each project
budget to cover this Portfolio and Programme types of risk.
 Project – risks and uncertainties affecting individual projects and specific to those projects
Commercial Services Division makes an important distinction between ―Risk‖ and ―Uncertainty‖. This
distinction was established by Frank Knight (Risk, Uncertainty and Profit, 1921) and essential is as
follows:
 Risks (and opportunities) can be readily quantified
 Uncertainties cannot be readily quantified
The 2007 Nichols Review identified that risk assessments often concentrated on items that were
quantifiable to the exclusion of potentially serious events or factors that could not be easily described or
the impacts quantified. HA Major Projects responded to this by introducing an allowance for
Uncertainty into estimates‘ cost-build. (This allowance may be negative or positive in value.)
Uncertainty allowances are therefore by definition more subjective and imprecise than quantified risk
assessments.
Project risks and uncertainties are assessed by cost engineers on the basis of information provided by
the project teams and appropriate estimated costs input to the Cost Estimate Summary Sheet within
the CERT file. Allowances for Portfolio and Programme risks are added centrally with inflation using
the ―Range Estimating Tool‖. This is described in more detail in Section 2.9 below. [Check statements
on Portfolio and Programme Risk with Mark]
Detailed guidance for the management of risk within Major Projects and how risk and uncertainty this is
treated by cost engineers are contained in the following documents:
 Major Projects Risk Management Manual
 The Treatment of Cost & Schedule Risk & Opportunities – A guide for Cost Engineers.
Further guidance can also be obtained from the MP Risk Manager. Risk Assessment and Management
are required throughout the lifecycle and monitored through a defined set of the MP PCF Products for
Risk Management. These product descriptions are available from the PCF web-pages. Commercial
Services Division also uses risk modelling software @Risk to assist in the assessment of risk
6.8.1 Optimism Bias

The procedures for inclusion of allowance for the above risks and uncertainties in the MP cost
estimates have superseded the application of Optimism Bias, with the agreement of HM Treasury.
Optimism Bias is the demonstrated, systematic tendency for people to be overly optimistic about the
costs and benefits of plans, particularly with regard to delivery of capital projects. HM Treasury‘s Green
Book, Appraisal and Evaluation in Central Government (2003) requires the application of a factor to
cost estimates in order to take account of this tendency of project promoters and advocates being
overly optimistic. The concept of Optimism Bias was introduced by Flyvbjerg – more details can be
found in the information sources provided in the further information and bibliography section at the end
of Part B.
6.9 Applying Inflation

Chapter 3, Economic Analysis, provides a background to inflation: the general rise in prices measured
against a standard level of purchasing power, by comparing two sets of goods at two points in time, and
calculating the increase in cost.
In Major Projects, cost estimates are prepared at a common price base. Inflation is then applied
centrally using a bespoke inflation profile developed for DfT – ―The MP Inflation Profile‖. This produces
an estimate of outturn costs, i.e. estimated cost represented as the total budget years‘ pounds.

Currently, estimates are produced to a price base of Q2, 2011. All outputs from estimating tools, the
Cost Estimate Summary Sheet and Cost Estimate Report Template contain figures at this price base.
Inflation, and Portfolio / Programme Risk, are applied to these estimates at Q2, 2011 using the MP
―Range Estimating Tool‖. The table below shows the current MP Inflation Profile (at November 2011).
MP Inflation Profile Assumption
2006/2007
2007/2008
2008/2009
2009/2010
2010/2011
2011/2012
2012/2013
2013/2014
2014/2015
2015/2016
2016/2017
2017/2018
2018/2019
HA Forecast
5.4% 4.4% 4.3% 4.4% 4.0% 4.5% 4.5% 4.4% 4.3% 4.2% 4.1% 4.0%
(%)
Factor 1.000 1.054 1.100 1.148 1.198 1.246 1.302 1.361 1.421 1.482 1.544 1.607 1.672
Roads Programme schemes extend many years into the future and therefore sensitive to changes in
inflation profile. A new inflation profile is planned to be implemented during 2011.
Detailed guidance for the Range Estimating Tool is available from the MP Estimating Manager. Further
information on inflation is also available from the MP Risk and Inflation Manager.
Guidelines for the Cost-Benefit Appraisal of transport schemes are set out in the DfT‘s WebTAG
documents. This uses the Net Present Value (NPV) method to compare monetised benefits and
estimated costs. NPV allows the comparison of different alternative‘s costs and benefits as it indicates
a potential investment‘s net value in today‘s pounds. All costs and benefits are adjusted to "Present
Value" by using discount factors to account for the time value of money, making costs and benefits
occurring in different years commensurable. More details can be found in DfT WebTAG, a link can be
found in the further information and bibliography section at the end of part B.
6.10 Documenting the Basis of the Estimate

Documenting the comprehensive basis of a cost estimate is the final step in production of a cost
estimate prior to review and management approval. A documented basis of estimate will:
 Record the overall project scope
 Communicate the estimator‘s understanding of scope and schedule as it relates to cost
 Alert stakeholders to potential cost risks and opportunities
 Record key communications made during estimate preparation
 Record all documents used to prepare the estimate
 Provide ease of reference during management review / decision-making
 Establish the baseline scope, quantities, cost, risk and uncertainty and inflation to assess trends
during the project‘s development
 Facilitate the review and validation of the cost estimate
 Identify the project stakeholders, estimators and contact details
The AACE provides guidance on the contents of the basis of estimate documentation including the
following aspects:
 Purpose of the Project
 Project Scope Description – ideally organised to align with the project‘s WBS
 Estimating Methodology
 Estimate Classification
 The Technical Design Basis for the Project e.g. the engineering and design deliverables,
standards and technical assumptions
 The Planning Basis - project management, statutory process, procurement and schedule
 Cost Basis – the methods and data sources used for determining all resource and subcontract
pricing and contractor‘s profit levels
 Inflation and any market or location escalation adjustments
 Allowances
 Assumptions and Exclusions
 Exceptions – any approved deviation from standard estimating practice
 Risks and Opportunities
 Uncertainty Adjustments
 Management Reserve – effectively Portfolio / Programme Risk
 Reconciliation with Previous / Other Estimates
 Benchmarking e.g. comparisons with established metrics such as cost / km
 Estimate Quality Assurance
 The Estimating Team
The Cost Estimate Report Template collects up this information in a single file and can be
supplemented with other documentation as required.
6.11 Reviewing the Estimate and Assurance of Outputs

Prior to release from Commercial Services Division, all estimates are required to be reviewed by the
Estimating Manager and Commercial Services Director or Senior Manager. An approval record, or
―sign-off sheet‖, is included in the Cost Estimate Report Template for this purpose.
Estimates are also required to be reviewed and signed-off by the HA Project Manager requesting the
estimate. An approved cost estimate is a required PCF Product at Stage Gate Assessment Reviews
for the projects to progress to the next stage of the PCF lifecycle.

6.12 Presenting the Estimate for Investment Decision Support

Estimates are released to the relevant HA Project Manager after review and approval. Results will
usually be used to complete cost-benefit appraisal by the project teams before being submitted to
investment appraisal boards as part of the business case for further development / construction of the
scheme. The principal HA investment decision boards are:
 Programme Investment Control Group (PICG)
 Highways Investment Board
Details of the wider investment appraisal process can be found at

http://www.dft.gov.uk/pgr/economics/
The HA follows the arrangements, for the approval of schemes, that is set out in the Department‘s
Investment Appraisal Framework (IAF). The Agency‘s Investment Control Framework (ICF) sets out in
a single overarching Framework, principles and procedures for investment decisions, and the control of
income and expenditure in the Agency. The ICF integrates fully with the Department‘s IAF. The
Agency will provide the Department with such information as it requires for scheme appraisals or the
evaluation of pilot projects.

7 Further Information and Bibliography
7.1 Sources of Information
Information Source Description

MP Cost Estimation Manual Describes processes for each MP estimate classification
Cost Estimate Report Template (CERT) The standard MP estimate template in MS Excel
Estimate Scoping Document Document to record the estimate scope in the CERT file
MP CMDAL Estimate data and assumptions register in the CERT
Cost Estimate Summary Sheet A single page estimate summary in the CERT file
Unscheduled Items Allowance Criteria Guide on the allowance for unscheduled items for
various stages of design contained in the CERT file
Cost Estimate Sign-Off Sheet Sheet to record formal Commercial Services Division
approval of an estimate (stored in the CERT)
Request for Estimate Form Form completed to request an estimate from
Commercial Services Division (stored in the CERT)
Commercial Services Division Estimate Register of completed, planned and current MP
Tracker estimates available from the MP Estimating Manager
Power Steering Programme Information Programme Management software system for Major
System Projects
MP Project Control Framework Handbook setting out the MP project lifecycle
Major Projects WBS Standard WBS available from the MP Cost Intelligence
Manager
MP WBS Working Group Working Group for maintenance of the MP WBS
MCDHW Method of Measurement http://www.dft.gov.uk/ha/standards/mchw/vol4/index.htm
Sensitivity Analysis Guidance http://www.dft.gov.uk/webtag/documents/expert/unit3.5.9.php
Benchmark Professional Manual User manual available in Benchmark Help section
Roadworks Estimator Manual User manual available in Roadworks Estimator software
Managed Motorways Cost Model Parametric model for estimating MM works available in
Benchmark software
The Treatment of Cost & Schedule Risk & Major Projects Risk Management Manual
Opportunities – a guide for Cost Engineers
@Risk Manual User Manual for @Risk software
MP Risk Register Template Template available from MP Risk and Value Manager
The Nichols Report 2007 Report into cost overruns of HA‘s Major Projects
HM Treasury Green Book, Appraisal and http://www.hm-
Evaluation in Central Government treasury.gov.uk/data_greenbook_index.htm
Procedures for Dealing with Optimism http://flyvbjerg.plan.aau.dk/0406DfT-
Bias in Transport Planning (DfT, 2004) UK%20OptBiasASPUBL.pdf

Information Source Description
Range Estimating Tool Excel file for the application of Programme Risk and
Inflation to estimates
Range Estimating Tool Guidance Document available from the MP Estimating Manager
MP Risk and Value Manager Mr Gary Thomas, HA Bedford, GTN: 3013 6280
UK Inflation (Office for National Statistics) http://www.statistics.gov.uk/CCI/nugget.asp?ID=19
DfT WebTAG http://www.dft.gov.uk/webtag/index.php
AACE Basis of Estimate Recommended http://www.aacei.org/aaceonly/rps/34R-05.pdf
Practice

PART C:
Contractor Selection and Award of Contract

Contractor Selection and Award
CONTRACTOR SELECTION AND AWARD

8 Introduction
This section provides background information of the processes used to identify and select
contractors for the delivery of project development and construction following investment
appraisal and approvals.
The topics covered are:
 A summary of the various forms of contract available to the Highways Agency
 An introduction to the Early Contractor Involvement contract. This is currently the

most commonly used for HA Major Projects
 Contractor Selection
8.1 Background
Regardless of the type of contract, or the nature of the contractual arrangements, the
following basic elements of a contract must be in place:
 Offer – There must be a clearly communicated, unequivocal offer to perform the work
or services by one party.
 Acceptance – Once an offer has been clearly communicated, the other party, or
someone authorized to act on its behalf, must clearly accept the offer for a contract to
be formed.
 Legality of Purpose – to be an enforceable contract, the work or service to be
performed must involve legal activities.
 Competent Parties – All parties to the contract must be competent and have the
legal authority to make / accept offers.
 Consideration – there must be consideration from both parties to the contract i.e.
one party demands and receives consideration in exchange for the work or services
performed by the other party.
8.2 Basic Types of Contract

Generally, there are four basic types of contracts, each with a numerous variations, used on
construction projects. NB: detailed information on contract types is outside the scope of this
handbook and readily available from the information sources listed at the end of the chapter.

Fixed-Price/Lump-Sum Contracts
Under this contractual arrangement, the scope of work and risks are well defined. The prices,
and usually the schedule, are fixed. The contractor is generally free to select their own
means and methods to perform the work provided that the final result conforms to the
technical, quality, and cost requirements of the contract. This results from the fact that under
a fixed-price contract, the contractor assumes risk for the fixed price. That is, if the bidding
documents are accurate but the fixed price too low, it is the contractor who suffers the
penalty. To balance this out somewhat, contractors are most often allowed the freedom to
select their own means and method of performing the work. Some variations of lump-sum,
fixed-price contracts follow:
 Fixed Price with Economic Adjustment – some portions of the fixed price may be
adjustable under certain conditions.
 Fixed Price with Incentives – the base price of the contract itself is fixed, but certain
incentive clauses may be inserted into the contract related to time, cost savings,
performance, etc.
 Fixed-Price/Unit-Price Contracts – the price is fixed for each unit of work rather than
the entire scope of work.
Cost Reimbursable Contracts

Cost reimbursable contracts are not fixed but the contractor is paid on the basis of actual
cost incurred in performing the work, plus a stipulated amount for profit. Costs are usually
classified as either direct or indirect under such contracts.
Cost reimbursable contracts may be incentivised for meeting or exceeding selected project
objectives – usually based on time or costs.
Target Contracts
Target contracts are generally intended to provide an economic incentive to the contractor to
entice completion of work at the lowest possible cost and in the least amount of time. Often,
the contractor will perform the early part of the work i.e. planning and design, on a cost
reimbursable basis. A detailed estimate, with not-to-exceed cost and time of performance,
will, at some point, be prepared by the Contractor and negotiated with the owner. Once
agreement on time and cost is reached, these become the contractor‘s targets. The
contractor‘s actual costs are then compared to target cost. Underruns, if any, are shared
between the owner and the contractor on the terms and conditions set out in the contract.

Similarly, overruns may be shared unless caused by client changes intervention or other
excusable events set out in the contract.
Cost as an Independent Variable is a process used to try and counter cost overruns. This
practice is typically identified as ―target costing‖ or ―target pricing.‖ The cost of a project is
considered to be fixed and contractors are generally set time, performance and quality
objectives and criteria which must be met for the fixed cost. This places great reliance on
accurate estimating but has been used to successfully drive down purchasing costs by
informed clients.
8.3 Project Delivery Methods

There are many methods for delivering projects which are used by the Highways Agency.
There are three primary methods
1. Design-Tender-Build
2. Design-Build
3. Design-Build-Finance-Operate
8.3.1 Design-Tender-Build
This is the method in which the Agency contracts, with separate entities, for the phases
shown in figure C1:
There are various issues with this method that should be kept in mind including:
 Because the Contractor is bought in at a later stage, post Project Design stage, there
is less opportunity for their input and possible effective alternatives.
 Pressures may be exerted on the Design and Construction teams.
 Design Team could have out-dated construction costs.
There are also various benefits in using the Design-Tender-Build method including:
 The Design team is impartial and acts on behalf of the Client and in their interests.
 Helps to ensure fairness for the companies tendering and can improve decision
making as there is a range of options available.
 Can assist the owner in establishing realistic prices for the Project.

8.3.2 Design-Build (Engineer-Procure-Construct - EPC)

In this model the construction team is known as the design-builder. They are responsible for
taking the concept, developed by the owner, and completing the detailed design. After this,
pending the owner's approval on the design, they will then proceed with construction.
Figure C2
There are various advantages to using the Design-Build form of contract including:
 The construction team is motivated to work with the design team to develop a design
with constructability in mind. For this reason it is possible for the team to reduce the
prices due to the increased constructability of the design
 There is the possibility of improving the timings and schedule. By letting out as a
Design-Build contract, there is the option for early mobilisation of the project and
some construction activities can proceed concurrently with the design.
8.3.3 Design-Build-Finance-Operate
While most Major Projects contracts are for construction of a capital asset, DBFO model is
also used. The Highways Agency lists the following reasons for using the DBFO model:
 To ensure that the project road is designed, maintained and operated safely and
satisfactorily so as to minimise any adverse impact on the environment and maximise
benefit to road users;
 To transfer the appropriate level of risk to the private sector;
 To promote innovation, not only in technical and operational matters, but also in
financial and commercial arrangements;
 To foster the development of a private sector road-operating industry in the UK; and
 To minimise the financial contribution required from the public sector.

9 The ECI Form of Contract
9.1 Introduction
Currently, the Early Contractor Involvement (ECI) form of contract is the most commonly
used for delivery of Major Projects Roads Programme schemes. The project lifecycle and
cost estimate classifications are aligned with this model. However, ECI is no longer a default
choice and the range of contract types is to be considered to achieve best value for any
given project. This section provides the background to ECI and gives some further
information. In particular, HA Procurement should be consulted as the owner of ECI contract
templates.
9.2 Background to the ECI Form of Contract

There has been an evolution, over time, towards Early Contractor Involvement (ECI). This
has happened as various other phases have come and gone in terms of contract award.
Figure C3
Re- Design and More
measurement Build ECI / DBFO Collaborative
Methods?
1980s 1990s 2000s Future 1985
ECI however is no longer the preferred choice of contract award. Other, more collaborative
methods are being discussed and may be of more interest in the future. The ECI is derived
from the New Engineering Contract (NEC) suite of contract documents which can cover
Highways Agency procurement of works, services and supply for Major Projects through to
minor works and maintenance. The NEC suite covers a wide range of options condering
aspects includingEmployers Agent, Contractor, Designer structure
 Target Cost
 Gain / Pain sharing
 Open Book Accounting
 Stakeholders and sources of information
9.3 Procurement of Design and Other Services

Major Projects has an established framework for procurement of project development prior to
a contractor being appointed. This is the Project Support Framework, which is divided into
five lots as follows:
Lot 1 - Design services
Lot 2 - Technology
Lot 3 - Commercial Support
Lot 4 - Project and Programme Management
Lot 5 - Traffic Modelling
9.4 Tracking Cost and Scheduled Performance and Contract

Administration
Once the contract is awarded and baseline targets and plans are set, project controls are
established to monitor and manage performance against these plans and targets as part of
the contract management and administration. The subject of project controls, performance
management and contract administration is wide ranging and outside the scope of this
handbook.
Commercial Services Division has developed a Manual of Contract Administration (MoCA)

for this purpose. There is an established performance measurement team using Earned
Value Management and other techniques to monitor and assess performance.
Both the performance measurement team and the Manual of Contract Administration should
be consulted for further information on these essential elements of cost engineering and cost
management post-award of contracts.

TARGET COST NEGOTIATION AND VALIDATION PROCESS
10 Introduction
The purpose of this chapter is to outline the process for the agreement of Target costs. The
scope will cover the pre-negotiation period through to the issue of the Commercial Services
Division‘s estimate and report to the project manager outlining the negotiation
recommendations.
10.1 Background
Target cost is an increasingly popular form of contract. It is now widely used and has been
embraced by the leading contract bodies such as the NEC Engineering and Construction
Contract, the Institute of Civil Engineers (ICE) and the JCT (Joint Contracts Tribunal) as well
as bespoke forms.
Its main aim is to negate the adversarial approach of other forms of contract by creating an
‗open book‘ philosophy, paying the contractor for his actual cost incurred plus a fee for
overheads with a clear mechanism for adjusting the target (incentive) and limitation on
exposure to financial losses for both parties (Pain/Gain).
10.2 Mechanism
The basic mechanism of Target Cost contracts is outlined below:
 The Target cost for the project is proposed by the contractor. This is checked and
agreed by the Employer. This target forms the basis for the pain/gain share to be
calculated and at the end of the works a Final (Target) Cost is established which
takes into account any adjustments due to compensation events (positive and
negative).
 The pain or gain share is calculated based on the difference between this final target
cost and the actual defined cost.
 At award, the risks that the employer wishes to own are separated from the project
risk register and, if realised and executed by the contractor, usually give entitlement
to a compensation event, the financial and time implications of which are added to the
target cost.

 Usually, all other risks remain the liability of the contractor, including those not
necessarily identified in his risk register.
 Payment of the actual cost of the work as it is incurred is made based on the
definitions of actual cost contained in the contract.
 The Contractor receives a fee for his services, the amount of which is related to his
services against the agreed targets. This fee allows for his profit and overheads.
 Other bonus mechanisms, in addition to the pain/gain mechanism can be
incorporated, for example, to share the benefit of design gains.
10.3 Background - Highways Agency Major Projects

Context
The majority of Highways Agency Major Projects Contracts are currently delivered using ECI
target cost and pain/gain share mechanisms.
Prior to the establishment of the Commercial Services Division the agreement of the target
cost was usually carried out by the works supervisor. There was no formal procedure to the
process of agreement and little in the way of recording the validation process. As different
contracts often employed supervisors from different organisations the consistency and the
approach to the process varied.
Agreement of the Target Cost sum is now the remit of the Commercial Services Division and
all target cost negotiations are required to be validated and agreed through the division.
There is a formal procedure in place outlined in the document entitled - Target Cost
Negotiation Process - 27st August 2010 - Major Projects Commercial Division (Estimating).
This enables a clear and consistent approach to be adopted and knowledge and experience
to be retained within the HA.
This section of the manual identifies the purpose of and the approach to the process.
10.4 Purpose
The purpose of the Target Cost Negotiation and Validation process is to enable the
Commercial Services Division, specifically the negotiation team, to make a recommendation

to the HA Project Manager that the Target Price represents Value for Money for the
Highways Agency and the Tax payer.
It also serves to document key commercial information relevant to the scheme and to ensure
that the principals and key decisions and assumptions adopted during the negotiation phase
are conveyed to the project teams to assist in the administration of the contract, in particular
change control, during the construction phase (and beyond).
10.5 Process
The process of validation and agreement is carried out in a consistent way and the roles and
responsibilities of the contributing organisations are clearly defined in the document - Target
Cost Negotiation Process - 27st August 2010 - Major Projects Commercial Division
(Estimating) details the process
A separate ‗Negotiation Pack‘ of information, including expected behaviours, is issued

separately by the lead negotiator.
The key elements of the process are summarised below.
10.5.1 Pre-Target Submission – Brief Explanation of Concepts
The Target Cost Agreement process commences with a request for estimate from the PM. A
Cost Engineer (CE) is appointed and an inception meeting is held with the HA estimating
team and the PM to gain an understanding of the status of the scheme and to establish the
key deliverables. Reference is made to the document Target Cost Negotiation Process –
27th August 2010 - Major Projects Commercial Division (Estimating) and the requirements of
the proposed external consultants should be discussed and understood.
A scoping document is then compiled and the appropriate supporting resources to undertake
reports for the key elements such as Risk, Programme, Quantities, Rates, and Inflation are
agreed.
An initial meeting is held, usually at the Contractors‘ site offices, and this is an opportunity for
the contractor to make a presentation to the negotiation team outlining specific information

relevant to the scheme, their pricing methodology etc. and for the HA to outline the process
for agreement and the requirements for sufficiency of the submission to ensure that a
compliant/acceptable target cost submission is provided.
The requirements for this meeting are detailed on page 4 of the Target Cost Negotiation
Process - 27st August 2010 - Major Projects Commercial Division (Estimating). (TCNP)
10.5.2 Post-Target Submission – Brief Explanation of Concepts
The Contractor submits his proposed Target Cost to the HA PM. The Contractor should
submit his price using the standard cost build template to ensure that the cost build and
summary is recognised and approved during the negotiation. This starts a validation period
during which the HA negotiation team ensures that the submission is of sufficient quality and
is in accordance with agreed acceptance criteria. To establish this reference should be
made to the TCNP document and to any agreements made at the initial meeting. The
submission is then either accepted or rejected.
If the submission is rejected the PM is notified and a brief report is issued outlining the
reasons for rejection.
It is important to note that all notices and correspondence should be issued through the HA
PM.
If the submission is deemed acceptable a programme detailing the timeline for the
agreement process is issued, preferably using the Microsoft Project FTC Programme
template. A sample programme is included in the TCNP document. This programme is a key
document and should be monitored regularly with feedback provided to the HA PM to ensure
that the dates for negotiation can be achieved.
A meeting is held with the Cost Engineer, Project Manager, Estimating Manager and
Supervisor to discuss and agree the scope for the provision of the key elements for each of
the parties during the pre-negotiation phase. These key elements are summarised below
and explained in more detail later:
 Assumptions and Exclusions

 Construction Costs
o Quantum Check
o Overview of the proposed solution
o Pricing Rates Check

o Review of proposed subcontractors/direct resources
o Overview of proposed pricing levels.
 Programme
 Projects Costs/Preliminaries
o Overview of Staff Cost contained on the Programme
o Project Overhead Cost Review
 Method Related Costs
 Design Costs
 Risk and Opportunity
 Inflation
A meeting is held, usually at the Contractors site premises, with the HA Negotiation Core
Team usually comprising of:
 Risk Manager
 Project Manager
 Supervisor
 Contractor Team
 External Consultants (if appointed)
 Commercial Services Division Director (for schemes over £100m).
Invitations are also issued to Contractor‘s Director and HA Division Director
The purpose of this meeting is for the Contractor to formally present the Target Cost
Submission and Programme to the entire HA Team. The requirements for the meeting are
that:
The Contractor must:
 Describe the Assumptions and Exclusions.

 Explain the Pricing Strategy.
 Explain the Risk and Inflation Strategy.
The Contractor's presentation should include a summary of the value added through the
Development Phase.
The HA will present the Target Cost Negotiation Pack to the Contractor and this will include.

 An overview of the approach that will be taken to the review of Risk and Opportunities
 An overview of the approach that will be taken to the review of Inflation.
 A presentation by the Cost Engineer of the Target Cost agreement timeline
 A Behaviours paper detailing what is expected of the parties during the negotiation.
 A describe of the roles and responsibilities
 Meeting venues / requirements will be agreed for the entire Negotiation process.
Formal minutes of the meeting are to be issued.
10.5.3 Key Elements – Definitions/Scope

The following is a guide to the scope of the processes required for the key elements
identified on page 5 together with key points to note/be aware of.
A report from the supervisor and any relevant consultant will be required to support some or
all of these:
10.5.4 Assumptions and Exclusions

Assumptions and exclusions should be kept to a minimum. Generally, anything that could
have a cost implication should be in the risk register, or within the base price. Care should
be taken to ensure that any assumptions that do not appear to be a risk that could occur or
appear to be of no relevance are removed to avoid ambiguity.
10.5.5 Construction costs
10.5.6 Quantum Check – Supervisor/External Consultant
An independent and complete quantity check is required with findings presented in report
format identifying any differences, any actions taken to resolve any differences and
recommendations relevant to the negotiation. The purpose of the quantity check is:
 To ensure that the Commercial Team has confidence in the quantities proposed.
 To highlight where any assumptions have been made in the absence of design
information.
This is important so that a view can be taken as to the level of risk that has either been
included in the base pricing or is, or should be, included in the risk registers. This is a

requirement to ensure that risk is not included twice, i.e. within the base quantities and rates
and in the risk register.
During this phase, once the CE has been made aware of any irregularities, and if it is
decided by the HA team that it is appropriate, these will subsequently need to be discussed
and agreed with the contractor/their representative and, where agreement cannot be
reached, a recommendation is to be included in the report highlighting the cost and any other
implications to the project..
10.5.7 Overview of proposed solution, on Design Assumptions
An independent and complete review of the elements with the key cost drivers (usually the
earthworks, drainage, structures and retaining solutions sections) is required and the findings
presented in report format. This is required to:
 Ensure that the HA has confidence in the robustness or otherwise of the proposed
design.
 Enable an informed opinion to be made on whether the supervisor or consultant
considers the design proposed is overstated (or understated) and therefore enable a
view to be taken on the level of value engineering (opportunity) that may be possible.
The report should also consider recommendations for alternative designs and associated
quantities, if appropriate, highlight any potential savings that could be derived and any impact
on the scheme deliverables.
10.5.8 Pricing and rates check, sub-contractors and proposed pricing levels
It is important to note that all rate challenges should be evidence based and fully supported
by logic that will be suitable for use in a negotiation environment. Care should be taken to
ensure confidentiality is maintained.
Where rate information and commentary from the Supervisor/External Consultant is of

particular relevance is where it can draw upon the knowledge and experience gained in the
role as supervisor/consultant on the scheme, during the ECI stage.
Some key criteria/processes to be used in the validation of rates are:

Where rates are derived from Subcontract quotations:
 Quotations are obtained from at least three subcontractors.

 Where that is not the case that the quotations proposed compare favourably with
market rates. Evidence of this is required, usually by way of the contractor providing
rates on a project on which he was the lowest tenderer where there were a significant
number of other tenderers.
 For a proposed subcontractor that the proposed rates incorporate any terms and
conditions that are relevant, i.e. discount/retention and that any scheme specific
attendances or constraints are included.
 That the CE and the Supervisor/Consultant Identifies where significant value
engineering could take place and the potential effect on price.
 That the supervisor/Consultant provides recommendations/implications as to the
strategies/procurement options that should be reviewed, for example form and basis
of subcontract, risk.
 Highlight any other considerations that are appropriate.
Where rates are proposed using in-house or direct resources:
 That labour and plant rates proposed are consistent with company policy/rates and
that any proposed allowances are appropriate. Usually this is confirmed by audit.
 That plant rates are competitive and that betterment (the purchase of new plant etc.
that will be written off over successive projects and clients) and duplication of fee
(intercompany divisions with their own fee structures/additions) is avoided.
 That appropriate outputs are used in the compilation of rates to ensure that the
project makes efficient use of resources and that they are not kept on site longer than
is required.
 That these compare favourably with market place rates, this is a fundamental check.
The CE will also make use of the RIB database to gain an appreciation for the pricing levels
that are being seen across similar schemes, again observing confidentiality during
negotiation.

10.5.9 Programme
An independent review of the proposed construction programme is required. This should not
seek merely to validate the contractor‘s assumptions but should be a ‗bottom up‘
independent programming exercise so that the HA Commercial Services Division team can
compare the durations derived and form an opinion on the implications for the negotiation.
As the construction programme could be of significant size the most useful approach is
considered to be that of a review of the top 3 critical paths. In summary the first critical path
is identified and then one of the significant elements of this is reduced to an arbitrary short
period which then highlights the second critical path. The process is repeated for the third
critical path. Once these three critical paths have been identified a detailed review of only
the items identified on all of the critical paths should be undertaken.
A report relating to the Contractors proposed Construction period and durations of the key
elements identified in the analysis above should be produced
The programme analysis and report should, amongst other things, identify where risk has
been included in the base programme and highlight where lead-in periods are not in
accordance with quotations obtained from Utility Providers (Stats).
The consultant should provide details of the experience of who will be carrying out the
review.
10.5.10 Project /Preliminaries - Overview of Staff Cost on the Programme
The staff cost element is a significant cost driver.
A report should be prepared by the Supervisor/Consultant with commentary and supporting

evidence. Reference should be made to page 8 of the document -TCPM.
The following should be considered a minimum requirement for the report:
 A review of Contractors staffing levels and formulating alternative proposal.

 A review of the proposed staff rates including how these have been derived with
reference to any audits that have been carried out to validate the build-up of cost.

Commentary should be included where global allowances have been incorporated

such as travelling/subsistence which should be consistent with any company issued
policies. The report should highlight any proposed contributions to pension shortfall
so that a view can be taken as appropriate. An alternative proposal should be
provided.
 Commentary should be included where bonus payments are proposed, including
reference to actual bonus payments made in preceding years.
 The report should make reference to the overall level of staff pricing compared to
similar schemes.
 Particular reference should be made to the pricing policy for computers and the
purchase of software licences on the project and to mobile phone allowances.
Experience has demonstrated that computer costs can form a significant cost element
and that approaches to how these are priced varies considerably from contractor to
contractor.
10.5.11 Project Overhead Cost Review
A comprehensive review of the Contractors Project Overheads is required. The Review

should include (but not be confined to):
 Clarification of processes undertaken in considering Contractors proposal and

developing any Supervisors proposals.
 A Review of Office / Mess and other accommodation provision and alternative
proposal.
 Assessment of all Time Related Elements.
 Assessment of Consumable elements
 The assessment of quantum of support staff.
 Transport allowances including the proposed method of procurement should be
assessed.
 Hard standing; car parks; temporary access road etc., these must also be assessed
for construction depth, area and price.
 All remaining elements
In addition to the checks and processes outlined above prices will also be checked using HA
historic data and by first principles estimating techniques.

10.5.12 Method Related Costs
A detailed assessment of the Contractors proposed Method Related cost items should be
carried out adopting the principles highlighted above. The review should include:
 A review of the Contractors Temporary Works provision and cost, including

sufficiency, best use of existing facilities and utilisation of power supplies, i.e. the use
of generators versus temporary supplies.
 A review of Traffic Management methodology / cost including commentary on
compliance with the works information/ the implications of any constraints.
 Assessment of the General Plant provision, consideration should be given to the
philosophy of hiring plant versus purchase specifically with reference to the use of
internal plant companies.
 Assessment of any other Method Related element.
Method Related costs will be part of the discussion during the meetings as outlined above.
Utilising information from the reports and the meetings a recommendation is incorporated
into the HA Cost Build spread sheet demonstrating the HA position.
The FTC programme makes provision for meetings with the Contractor to fully understand
the basis of his cost build for these elements. These meetings are necessary to gain a full
understanding of the pricing philosophy and to develop an alternative proposal as
appropriate. Normally the CE and the Subject Matter Expert will undertake these meetings
supported by the Supervisor if appropriate.
Utilising information from the reports and the meetings highlighted above a recommendation
is incorporated into the HA Cost Build spread sheet demonstrating the HA position for the
negotiation.
10.5.13 Design Costs - Detailed Design & Site Supervision
It is important to try to ascertain the current status of the design to ensure that the proposed
Target Cost does not include for works that have already been carried out and paid for under
an earlier phase of the project.

It may be that some of the detailed design was carried out during the ECI phase and any
implications for adjustment of recovery, for example due to different fee structures, should be
reviewed.
A review of the Design Programme should be carried out and this should be benchmarked
against similar schemes. Any proposed adjustments to the Construction Programme should
also be accounted for in the Design Programme review exercise.
The level of staff that proposed to carry out the design work should be reviewed; particular
attention should be paid to the apportionment/allocation of senior staff to junior staff and the
number of administrative or support staff that are proposed.
The inclusion of site vehicles should also be reviewed, with reference to the company car
policy for the use of vehicles on site.
It is important to check and confirm that the Principle Designer overhead has not been
applied where fee is allowed and that the rates used on the design activity programme are in
accordance with the Schedule of Cost Components.
10.5.14 Risk and Opportunity
The risk registers should be provided in accordance with the Major Projects Risk
Management Manual and presented in the current version of the required risk template.
At this stage the HA and Contractors risks should be separated from the project risk register
and particular attention should be paid to the Contractors‘ risk register.
The following is a guide to some of the key checks that should be made. This should be a
minimum.
 Ensure that there is no duplication with items that have been assumed to be within
the base cost section of the cost build and that there is no ambiguity with the
assumptions and exclusions and/or with the HA risks. An example of this is ‗soft
spots‘, usually measured in the earthworks BQ and ‗poor ground conditions‘ often
seen in risk registers.

 Risks should be well defined and their quantification and valuation should be in as
much detail as the main bills of quantities.
 Consideration should be given to separating/re-defining risks if the range of likely

mitigation measures is not consistent/too varied.
 Care should be exercised to ensure that generic probability percentages have not
been applied and that the probability utilised is representative of then likelihood of the
risk occurring.
 Each risk should have a value assigned for minimum, most likely and maximum.
A proposed alternative contractors risk register should be compiled by the CE/negotiation

team with detailed reasons listed to support any proposed adjustments.
When proposing that risks should be removed from the register and inserted in the base cost
build, consideration should be given to the perception of the overall risk figure expressed as
a percentage of the total cost. Often Contractor board level approval/negotiation tolerance
will be based on a lower percentage limit to the perceived risk figure. Whilst this approach
fails to give due consideration to the maturity of the risk management process undertaken
during the ECI phase of the scheme such behaviour has been consistently observed in
negotiations.
In view of this consideration should be given to the implications of treatment of any risks with
a probability greater than 70% in the usual manner, i.e. where they would become issues
attracting a 100% probability score with a 30% opportunity.
The CE/negotiation team should also compile an opportunities register utilising the same
principles as those used for the risk register.
10.5.15 Inflation
The proposed inflation figure should be presented in such a way as to enable the cost build
to be analysed at component level against the propose/agreed programme.
Resource based breakdowns are useful for this level of analysis, so labour plant and
materials split down into the key cost driver elements should be sought.

Careful consideration should be given to external factors affecting materials such as bitumen
based products, which are affected by oil prices, and steel prices, affected by world demand
and to the timing of increases usually observed in the industry.
Care should be taken not to confuse fixed price allowances with inflation. A fixed price
quotation is effectively a risk mitigation measure against inflation, paid for by the increased
rates associated with fixing costs. Consequently elements with significant fixed price periods
should attract less inflation risk.
Reference should be made to the latest approved HA Inflation figures, as well as relevant
industry standard indices to validate the Contractors‘ proposed inflation percentages, if it is
considered advantageous a review of the proposed strategy should be sought from Gary
Thomas, the HA‘s Risk and Value Manager.
The inflation calculation should be capable of tracking in real time the changes to the cost
build during the negotiation.
10.6 Pre-Negotiation – Brief Explanation of Concepts
A minimum of 2 weeks prior to the negotiation the HA negotiation team is confirmed.
Requests are made for the names of the Contractor‘s representatives and all dates for the
agreement are confirmed together with the proposed venue. The behaviours document is
issued again. The Contractor will be asked to confirm the agreement to the quantitative risk
exercise and the principals relating to the agreement of inflation
So that the HA team can consider fully the best negotiating strategy the CE will compile a
complete cost build in a standard format linked into the CERT. The Contractor should submit
his price using this template to ensure that the document is recognised and approved during
the negotiation. The purpose and format of this cost build spread sheet is to:
 Present to the negotiating team the financial position, including all HA costs, and
enable discussion on the best strategy for the negotiation.
 Identify any shortcomings in the reports compiled during the pre-negotiation phase
and establish a best way forward and any immediate actions to rectify.

 Enable the agreements reached during the following negotiation phase to be

incorporated in real time and the effects on the final target cost understood and to
enable the team to fully consider the cost implications of any scenarios proposed.
 To enable the preparation of a summary sheet to be signed by the Contractor and the
head of TCM at the end of the negotiation.
 To enable the estimate to be completed promptly following the negotiation and in

accordance with the current procedure and programme in the standard format CERT
following the negotiation.
In the days before the negotiation a meeting is to be held with the integrated team to make
them aware of the HA‘s considered position in relation to the Contractor Submitted Target
and the HA Current Estimate and finalise a negotiation position and strategy
Prior to departure for the negotiation the Negotiation Team is to ensure that they have all the
information and equipment required to successfully undertake the negotiations. This should
include the likes of:
 All necessary documentation, including a copy of the Contract.

 Equipment, including radio, extension power cables, projector, printer etc.
 Travel Arrangements, Hotel Bookings
10.7 Negotiation – Brief Explanation of Concepts
Agreement is carried out, usually at the contractor premises and comprises of the HA
negotiation team and representatives from the contractor, importantly a director that is able
to agree to the price is required.
An agenda and further details for the agreement process can be found in the Target Cost
Negotiation Process document. A separate document will be issued by the lead negotiator
detailing the rules appertaining to the proposed negotiation, including the processes to follow
should an agreement not be reached, together with a behaviours paper.
The negotiation takes place over a period of three to four days. The process is intensive and
it is important that the CE incorporates, in real time, the implications of all agreements
reached on the final target cost to enable the team to fully consider the cost implications of

any scenarios proposed and to record relevant information to enable the Contractor to
validate the agreements reached.
The negotiation culminates in the preparation of a summary sheet to be signed by the

Contractor and the head of TCM at the end of the negotiation as representing the
agreements reached in respect of price.
It is important to note that this does not constitute agreement of the target cost, only the HA
PM has the remit to do this. The summary represents a position that the negotiation team
considers represents value for money and it is a recommendation to the HA PM that the
Target Price is agreeable.
On leaving the contractor‘s premises care should be taken to remove all documentation, and
in particular anything confidential, that has been used.
10.8 Post Negotiation – Brief Explanation of Concepts

Following the negotiation it is important to promptly carry out any immediate actions that
were noted during the negotiation, such as the forwarding and receipt of any outstanding
information.
Within 12 days of completing the negotiation a Final Target Cost Report, including all
appendices, shall be issued to the HA Project Manager.
The key aim of the report is to document the agreements made showing clearly the build up
to the cost adjustments and to provide a recommendation from the head of TCM for HA
Commercial to the Project Manager.
It should include in appendices copies of all information relevant to the target cost and
consideration should be given, although not the intention, to its use by other team members
to carry out the required post contract administration.

PART D:
Project Controls and Performance
Management
Project Controls and Performance Management
PROJECT CONTROLS AND PERFORMANCE MANAGEMENT
11 Introduction
Procedures for control of projects during their execution are essential. However accurate
project plans, estimates and forecasts may be, there will inevitably be some deviation during
execution of project. Project controls are intended to identify these deviations, control them
and enable management to intervene as required. In addition, project controls play a key
role as follows:
 Providing adequate governance and assurance during project execution
 Providing regular forecasting of outturn cost, time and other performance criteria
 Control of change to project scope and delivery during project execution
 Ensuring value for money by policing the tendency for projects to take as much
resources as allowed within the budget and project schedule
 Gathering intelligence from the project execution stage in accordance with the
Deming cycle of Plan-Do-Check-Assess (and Improve).
Project controls apply equally to any defined, baselined project regardless of its position in
the project lifecycle. Within Highways Agency Major Projects Directorate, project controls
are particularly focussed on the Construction Phase given that this phase accounts for the
major proportion of Major Projects‘ expenditure.
It is worthwhile to emphasise that the primary objective of project controls is to deliver

projects in line with the project plan rather than to realise cost savings. The time at which
major cost savings can be achieved is during planning and design for the project. During the
actual construction, changes are likely to delay the project and lead to inordinate cost
increases. As a result, the focus of project control is on fulfilling the original design plans or
controlling deviations from these plans, rather than seeking out significant improvements and
cost savings. Value management and value engineering, risk management, requirements
management, estimates and schedules should all have been carried out to produce a clear
baseline prior to the execution of the project. Project controls therefore require a clearly
defined baseline, not only in terms of budget and schedule but also in terms of quality,
environment, health and safety and other criteria.

The data obtained from project controls process is the cornerstone of managing the
performance of the HA‘s projects and supply chain. Project controls ascertain the status of
the project execution compared with planned performance. The assessment of this data
enables benchmarking of projects and supply chain performance and action to realise
improvements.
11.1 HA Major Projects Context

The Commercial Services Division contains the following teams concerned with project
controls and performance management:
 Performance Management – project tracking and supplier performance
 Commercial Management – commercial management of schemes, variations and
disputes via a team of Regional Commercial Managers
 Cost Intelligence Management – capture of tender and actual cost data
For projects in construction, the Employers Agent and HA site staff carry out site-based
project controls activities.
Detailed processes and procedures for project controls and performance management are
owned by the above teams and are outside the scope of this handbook. They are available
from the following contacts:
 Commercial Services Division MP Performance Manager
 MP Senior Commercial Manager
 MP Cost Intelligence Manager
The following documents and sources of information are particularly relevant:

 MP Manual of Contract Administration (MoCA) – setting out the procedures for
contract administration and commercial management of projects in execution
 MP Commercial Reporting and Monitoring System (CRaMS) – setting out the cost
and schedule tracking and other statussing of projects in execution
 MP Motivating Success Toolkit (MST) – setting out the performance measurement
process for suppliers
 MP Cost Capture Process
Cost Engineers should refer to the above sources of information and contacts for further
details. Therefore, this part of the Cost Engineers Handbook provides background

information only for the following foundations of project controls and performance
management:
 Establishing Baselines
 Measuring Progress and Statussing
 Earned Value Measurement
 Productivity Analysis
11.2 Baselines
As stated above, a clear baseline is essential for effective project controls and performance
measurement. The HA Cost Engineering function will primarily deal with the following types
of baselines:
 Budget Baseline – An output of the estimating process described in Part B; the
budget baseline should also cover the baseline quantities, rates and productivity upon
which the estimate is based.
 Financial Control Baseline – It is important to differentiate between financial control
and cost control. Cost control is obviously important and is exercised against the
Budget Baseline. Financial control must be in accordance with accounting guidelines
and regulations e.g. taxation, project capitalisation, and this often results in a need to
measure receipts and expenditures against additional financial baselines, not just
against the project‘s budget baseline. Also the financial control baseline will always
contain a planned baseline expenditure profile whereas budget baseline may not
always be time-scaled.
 Schedule Baseline – The schedule baseline is the master schedule used for control
of the project and should be in a time-scaled Critical Path Method (CPM) format at a
level of detail that can be clearly understood.
 Control Account Baselines – Control accounts are specific work packages where
management requires specific control and reporting within a project, e.g. Statutory
Undertakers Works. They should ideally align with the Work Breakdown Structure.
Note by using a common work breakdown structure, it is possible to integrate the budget
baseline, schedule baseline and control account packages. Matching this work breakdown
structure to a code of accounts enables further integration with the financial control baseline
and job-costing (i.e. mapping receipts and expenditure transactions to work activities and
outputs to determine their actual cost).

11.3 Measuring Progresses and Statussing

Having established the basis for control, project controllers are then in a position to exercise
that control by measuring actual progress and costs and comparing them to the baselines
stated above. The AACE describes six generic methods for the measurement of progress:
1. Units Completed – This method is applicable to tasks that involve repeated
production of easily measured pieces of work, when each piece requires
approximately the same level of effort e.g. linear meters of cable to be pulled through
a duct.
2. Incremental Milestones – This method is applicable to any control account that
includes tasks that must be handled in sequence with identifiable milestones at the
end of these tasks e.g. demolition of a bridge requiring road closures, demolition,
clearing and removal of traffic management
3. Start/Finish – tracking progress of the start and finish times of defined tasks that lack
readily definable intermediate milestones or those for which the effort/time required is
very difficult to estimate. In the start/finish approach, a percentage complete is
arbitrarily assigned to the start of a task, and 100 percentage is recorded when the
task is finished.
4. Expert Opinion - simply using experience and knowledge to make a judgment of
percentage complete. This is a subjective approach and should be used only for
relatively minor tasks e.g.dewatering, landscaping.
5. Cost Ratio - applicable to tasks that involve a long period of time or that are
continuous during the life of a project, and which are estimated and budgeted on bulk
allocations of money and hours rather than on the basis of production. Project
management, quality assurance, contract administration, and project controls are
areas where the cost ratio method is often applied. With the cost ratio method,
percentage complete is found as follows:
6. Weighted or Equivalent Units – applicable when the task being controlled involves
a long period of time and is composed of two or more overlapping tasks, each with a
different unit of work measurement. Structural steel erection provides a good example
of where this method may be applied. Structural steel is normally estimated and
controlled by using tons as the unit of measure. Each task can be weighted according
to the estimated level of effort (usually workhours) that is required for that task. These
weights are called ―rules of credit.‖ As quantities of work are completed for each task,
the quantities are converted into equivalent tons.

In practice, progress is often measured through a combination of the above methods to

determine the status of the work for each item, control accounts and in turn for the entire
project. Earned Value Analysis is the most commonly used technique to convert these
measurements of progress to an overall picture of status, and forecasts of how the project
will outturn compared with the baselines in the project plan. This method is employed by the
Commercial Services Division led by the Division‘s Performance Manager.
11.4 Earned Value Management

Earned Value Management (EVM) is an established method used to monitor and improve
project execution performance through regular cost and schedule performance information
and understanding the status against schedule and budget goals. It is applicable throughout
all stages of the project lifecycle.
EVM provides key information on cost and schedule performance with indicators forecasting
the outturn performance to inform decision making and identify where management
intervention is required. EVM in project-based management was first adopted by the United
States Department of Defence in 1967 and is now a core part of project controls worldwide
across many industries.
In simple terms, Earned Value is the contracted (or authorised) budget value of work
accomplished on a project, typically to date. Earned Value is generally expressed in
monetary terms even where concerned with schedule and other parameters. However, it is
important to note that EVM is a project management technique rather than a financial
management tool. EVM metrics are all converted to a single unit of measure (i.e. £s) so that
both cost and schedule performance can be understood together rather than looking at these
key goals separately.
EVM is a key part of the MP Performance Management function to preventing scope creep,
improving visibility of project performance for stakeholders; reduce risk of overruns, more
accurate tracking and forecasting of project outturns during execution of projects. For further
details of HA EVM, cost engineers should refer to the Commercial Services Division
Performance Team‘s processes and procedures but to summarise the following data points
form the inputs and outputs of the EVM process, each based on a specific time at which the
EVM measure is performed on the project:

 Budget at Completion (BAC), the total cost of the project.
 Budgeted Cost for Work Scheduled (BCWS) / Planned Value (PV), the
amount expressed in Pounds (or hours) of work to be performed as per the
schedule plan.
o PV = BAC * % of planned work.
 Budgeted Cost for Work Performed (BCWP) / Earned Value (EV), the
amount expressed in Pounds (or hours) on the actual worked performed.
o EV = BAC * % of Actual work
 Actual Cost of Work Performed (ACWP) / Actual Cost (AC), the sum of all
costs (in £s) actually accrued for a task to date
For example, where a project should have completed £1600 pounds of work by a set date
according to the baseline plan but actual measured progress is £1400 worth of work, the
BCWP is £1400 and the BCWS is £1600. The amount actually paid at that date is difference
again e.g. it may be £1500 then ACWP = £1500.
a. Cost Forecasting:
 Estimate At Completion (EAC), the expected total cost required to finish
complete work
o EAC = BAC / CPI
o = AC + ETC
o = AC + ((BAC - EV) / CPI) (typical case)
o = AC + (BAC - EV) (atypical case, assuming similar variances will
not occur in the future)
 Estimate to complete (ETC), the expected cost required to finish all

remaining work
o ETC = EAC - AC
o = (BAC / CPI) - (EV/CPI)
o = (BAC - EV) / CPI
b. Variances:
 Cost Variances (CV), extent of under (+ve) or over budget (-ve)
o CV = EV-AC

 Schedule Variances (SV), extent ahead (+ve) or behind schedule (-ve)

o SV = EV-PV
 Variance At Completion (VAC), the variance between total cost of the work
and expected cost
o VAC = BAC – EAC
c. Performance Indices:
 Cost Performance Index
o CPI = EV / AC
o Over (< 1) or under (> 1) budget.
 Schedule Performance Index

o SPI = EV / PV
o Ahead (> 1) or behind (< 1) schedule.

PART E:
Continuing Professional Development

CONTINUING PROFESSIONAL DEVELOPMENT
12 Best Practice and Professional Certification

This section contains details of the main professional institutions in the field of cost
engineering, sources of continuing professional development and training resources. The
following information was correct at time of writing, October 2009 and is to be used as a
guide only. Please contact the individual organisations for current information.
12.1 AACE International

(Association for the Advancement of Cost Engineering)
AACE International is the leading cost engineering professional body

serving the entire field of cost management professionals worldwide.
The association is American and provides for cost estimators, cost engineers, schedulers
project managers, and project control specialists. AACE provides the following information
and services:
 Best practice guidance
 Distance learning courses
 Professional certification
12.1.1 Best Practice Guidance

AACE owns and maintains the Total Cost Management framework, which is an industry
standard framework integrating cost management with Portfolio, Programme and Project
Management
The association offers distance learning via internet, CD or traditional correspondence.
Courses offered range from construction estimating, project management and cost
engineering. AACE publishes Recommended Practices (RPs) and Professional Practice
Guides (PPGs) which support the TCM Framework. Copies of these documents are available
from the AACE web-site and are stored on Commercial Services Division‘s SHARE folders.
AACE also publishes the Cost Engineering Journal and an e-Newsletter.
12.1.2 Distance Learning Courses and Education

AACE offers a range of distance learning via internet, CD-ROM or traditional
correspondence. The course schedule can be found on the AACE website,
www.aacei.org/educ/. These courses include the ―Skills & Knowledge of Cost Engineering‖
series which covers the following topics:
 Cost
 Cost Estimating
 Planning & Scheduling
 Progress and Cost Control
 Project Management
 Economic Analysis
 Statistics, Probability and Risk Management
12.1.3 Professional Certification

AACE offers the following professional certifications which are exam-tested:
 Certified Cost Engineer (CCE)
 Certified Cost Consultant (CCC)
 Certified Cost Technician (CCT)
 Certified Estimating Professional (CEP)
 Earned Value Professional Certification (EVP)
 Planning & Scheduling Professional Certification (PSP)
Information on the requirement for each type of certification can be found on the AACE
website, www.aacei.org/certification.
Contact:
P. +1 304 296 8444
w. www.aacei.org
m. AACE membership costs $115 p.a. at October 2009.
12.2 ACostE
(Association of Cost Engineers)
ACostE is a UK professional body for those involved in cost engineering in the engineering,
manufacturing and construction industries. The ACostE is an affiliate of the Engineering
Council and may propose suitably qualified members for the award of Chartered Engineer
and Incorporated Engineer.
The association offer internationally recognised qualifications in cost estimating and

management in four levels from Entry to Certified Cost Engineer:
Professional
Qualification Description
Description
Designed for new starters into the profession and is particularly suited to
Entry
NVQ Level 2 persons in company training schemes.

Aimed at practitioners who are establishing themselves in the profession

Foundation
NVQ Level 3 and typically have about two year‘s experience.
Designed to recognise persons who are fully competent in all aspects of

Professional NVQ Level 4
their project control discipline.
Is based on an applicant attaining NVQ in Project Controls and NVQ

Certified
Level 4 in Estimating, Cost Engineering or Planning, or a comparable
Certified Cost
alternative. The program is accredited by the International Cost
Engineer
Engineering Council (ICEC).
ACostE has online training facilities for its members. Each course consists of approximately
17 hours of education in the tools and techniques required to manage projects of varied
sizes. These courses are CPD qualified and offer CBD credits. They include:
 Planning & Scheduling
 Cost Planning and Control
 Estimating
 Risk Analysis & Management
 Resource Management
Details of these courses can be found on the AcostE website at:

http://www.acoste.org.uk/content_R.php?page_id=338&track=Online_Training.
The ACostE also have Special Interest Groups (SIGs) and publishes a periodical, ―The Cost
Engineer‖.
Contact:
a. Lea House
5 Middlewich Road
Sandbach, Cheshire
CW11 1XL
p. +44 (0)1270 764798
w. www.acoste.org.uk
m. Individual membership of the ACostE costs £95 with an additional £20 application fee.
12.3 SCEA
(Society of Cost Estimating and Analysis)
SCEA is a US non-for-profit organisation dedicated to improving cost-estimating and analysis
in government and industry with a focus on manufacturing, defence, space, environment and
transportation.
SCEA offers certification for Cost Estimators/Analysts, at two levels: professional

(foundation) and Certified (advanced). SCEA‘s training programme is set out in the SCEA
Cost Estimating Body of Knowledge (CEBOK) which prepares candidates for the Certified
Cost Estimator /Analyst examination. Requirements of the SCEA Certification programme
are available on the SCEA website, www.sceaonline.org/certification.

Contact:
P. +1 703 938 5090
w. www.sceaonline.net
12.4 ICEC
(International Cost Engineering Council)
The ICEC is an international umbrella organization for cost

engineering bodies. ICEC‘s objective is ‗to promote cooperation between cost engineering,
quantity surveying and project management organizations and support the worldwide
exchange of cost engineering and project management information and experiences‘.
ICEC member societies are located in more than 40 countries, and have chapters or sections
in many additional countries.
The Council participates in international events related to the practice of cost engineering,
quantity surveying and project management. They also encourage the development of
professional certification programs in the field.
Contact:
P. +44 161 972 3100
e. www.icoste.org
12.5 RICS
(Royal Institution of Chartered Surveyors)
RICS is the leading professional body for qualifications and
standards in land, property and construction.
The Institution offers practice standards, codes, technical guidance, professional

accreditation and a wide range training and development.
Contact:
p. +44 (0)870 333 1600
w. www.rics.org
12.6 ECuk
(Engineering Council United Kingdom)
The Engineering Council UK is an organisation set up by Royal Charter to regulate the
engineering profession in the UK. It operates as the umbrella organisation for UK
engineering institutions, regulating the standard for assessment, education programmes and
professional development.
ECuk facilitate the Chartered Engineer (CEng) registration.

Contact:
a. 246 High Holborn
London, WC1V7EX
p. 02032060500
w. www.engc.org.uk
12.7 ISPA
(The International Society of Parametric Analysts)
ISPA is a professional society committed to the enhancement and promotion of parametric
cost modelling techniques, risk analysis, design to cost and cost management. ISPA is
affiliated with the SCEA (Society of Cost Estimating and Analysis).
ISPA provides a forum that encourages the professional development of its members
through the interchange of ideas and perspectives. They facilitate the registration of Certified
Parametric Practitioner (CPP) and they run conferences and seminars, predominately in the
USA.
Their purpose is to ‗leverage the limited resources of [their] respective organisations by

providing information on techniques, tools, and methodologies for enhancing the
management decision-making process‘.
SCAF, Society of Cost Analysis and Forecasting, was originally started by UK members of
the International Society of Parametric Analysis (ISPA). They run seminars and workshops in
Cost Estimating, Analysis & Forecasting, however these tend toward defence oriented
industries.
SCAF‘s website address is www.scaf.org.uk.
Contact:
ISPA/SCEA Joint Office
a. 527 Maple Avenue East, Suite 301
Vienna, VA 22180
p. +17039385090
w. www.ispa-cost.org
e. [email protected]
12.8 V-CES
(Virtual Cost Engineering Studio)
Virtual Cost Engineering Studio is a web based service comprising of three components:
 e-Mentor - assists professionals to create cost estimates using the bottom up,
parametric or analogy based techniques.
 e-Training - in cost engineering concepts.
 e-community - to create interaction in the professional community.
V-CES hopes to ‗strengthen Europe‘s competitive position by developing collaborative

technologies and best practice methodologies for extended product development
approaches, leveraging advanced information society‘. The website is currently is

construction.
Contact:
w. www.v-ces.com
12.9 Cranfield University

Cranfield University have a Postgraduate Certificate (PgCert) in Cost Engineering, developed
with industry collaboration. The course is suitable for existing and early career engineers,
and suitable practitioners who seek recognition of their cost engineering profession.
The university also run individual modules; however all its courses currently tend toward
manufacturing, process or defence industries.
Contact:
p. 01234754086
w. www.cranfield.ac.uk/students/course/page1268.jsp
e. [email protected]

PART F:
Glossary and Reference Information

13 INTERNAL & EXTERNAL INFORMATION RESOURCES

Department for Transport and the Highways Agency
Ref Organisation Description Web link / Contact
1 DfT Organisational Structures http://www.dft.gov.uk/about/dft

organisationchart/
2 HA Organisational Structures http://www.highways.gov.uk/a

boutus/documents/
S100311_HA_Organisation_C
hart_Feb_2011_Final.pdf
3 DfT Business Plans http://www.dft.gov.uk/about/pu

blications/business/
4 HA Business Plans http://www.highways.gov.uk/a

boutus/26993.aspx
5 DfT & HA Framework Agreement http://www.highways.gov.uk/a

boutus/24186.aspx
6 DfT DfT Home Page http://www.dft.gov.uk/
7 HA HA Home Page http://www.highways.gov.uk/
Commercial Services Division (Major Projects Work)
1 MP Commercial Organisational Chart http://share/Share/llisapi.dll?func=

ll&objaction=overview&objid=127
86781&viewType=1
2 HA Major Projects The Nichols Report, 2007 http://www2.dft.gov.uk/pgr/r

oads/nicholsreport/
3 HA Major Projects National Audit Office Report. 2007 http://www.nao.org.uk/publi

Estimating and Monitoring the Costs of cations/0607/department_f
Building Roads in England or_transport.aspx
HA Major Project Lifecycle
1 HA Major Projects Project Control http://portalweb/minisite/hawww/www/MP/PC

Framework handbook F_Mockup_2/M070282%20The%20Project%
20Control%20Framework%20Handbook%20
April%202008.pdf

Highways Design and Construction
1 HA and DfT DMRB http://www.dft.gov.uk/ha/stand

ards/dmrb/index.htm
2 HA and DfT MCHW http://www.dft.gov.uk/ha/stand

ards/mchw/index.htm
3 HA and DfT IANs http://www.dft.gov.uk/ha/stand

ards/ians/index.htm
4 Chartered Institute CIHT Home Page http://www.ciht.org.uk/

of Highways &
Transportation
5 Institution of Civil ICE Home Page http://www.ice.org.uk/

Engineers
Cost Estimating
1 Commercial Cost Estimation Manual http://share/Share/llisapi.dll?fu

Services Division nc=ll&objaction=overview&obji
d=9426180&viewType=1
2 HA Major Projects Land Costs Estimates Guidance http://share/sharedav/nodes/1
204194/MP%20Estimates%20
Guidance%20for%20Project%
20Teams%20Version%204%
20Final%20(WwW).doc
3 Commercial Cost Estimating Report Template http://share/Share/llisapi.dll?func=
Services Division ll&objaction=overview&objid=122
13802&viewType=1
4 Washington State Cost Estimating Home Page http://www.wsdot.wa.gov/Proj
DoT ects/ProjectMgmt/RiskAssess
ment/
5 Washington State Strategic Analysis and Estimating http://www.wsdot.wa.gov/Desi
DoT Home Page gn/SAEO/
6 California DoT Cost Estimating Home Page http://www.dot.ca.gov/hq/oppd

/costest/costest.htm
7 US Federal Cost Estimating Home Page http://www.fhwa.dot.gov/ip

Highway d/project_delivery/tools_pr
Adminstration ograms/cost_estimating/
8 US Transportation TRB Home Page http://www.trb.org/Main/Public
Research Board /Home.aspx
9 Montana State Highway Project Cost Estimating and http://www.mdt.mt.gov/othe

DoT Management Report r/research/external/docs/re
search_proj/project_cost/fi
nal_report.pdf
10 Transportation TEA Home Page http://tea.cloverleaf.net/

Estimators
Association
11 US Government GAO Cost Estimating and Assessment http://www.gao.gov/new.items

Accountability Guide, 2009 /d093sp.pdf
Office
12 Transit New Transit NZ, Cost Estimation Manual - http://www.nzta.govt.nz/res

Zealand Index ources/cost-estimation-
manual/cost-
estimation.html
Risk and Uncertainty
1 HA Major Projects Risk Management Manual http://share/Share/llisapi.dll?fu

nc=ll&objaction=overview&obji
2 HA Major Projects The Treatment of Cost & Schedule http://share/Share/llisapi.dll?fu
Risk & Opportunities – a guide for Cost nc=ll&objaction=overview&obji
Engineers d=12085789&viewType=1
3 HA Major Projects Risk and Value Manager Mr Gary Thomas, HA Bedford,

GTN: 3013 6280
4 HM Treasury Green Book, Appraisal and Evaluation http://www.hm-
in Central Government treasury.gov.uk/data_greenbo
ok_index.htm
5 DfT Procedures for Dealing with Optimism http://flyvbjerg.plan.aau.dk/04

Bias in Transport Planning 06DfT-
UK%20OptBiasASPUBL.pdf
Investment Appraisal
1 DfT Investment Appraisal Framework http://www.dft.gov.uk/pgr/ec

onomics/
2 HA Investment Control Framework Available from MP Finance

Procurement
1 New Engineering NEC Home Page http://www.neccontract.com/in

Contract dex.asp
2 HA DBFO http://www.highways.gov.uk/ro
ads/3009.aspx
3 Institution of Civil Civil Engineering Standard Method of http://www.ice.org.uk/topics/la

Engineers Measurement wandcontracts/Civil-
Engineering-Standard-
Method-of-Measurement-(
4 HA Major Projects ECI Model Form of Contract HA Procurement Division
5 HA Major Projects Procurement Strategy http://www.highways.gov.uk/a

boutus/28854.aspx
6 HA Procurement http://www.highways.gov.uk/a
boutus/28854.aspx
7 HA Major Projects Project Support Framework http://www.highways.gov.u

k/business/6174.htm
Cost Accounting and Cost Analysis
1 HA Major Projects Commodity Price Data Commercial Services Division

Cost Intelligence Manager
2 Washington State Cost Capture & Monitoring http://www.wsdot.wa.gov/biz/c

DoT onstruction/constructioncosts.
cfm
3 CALTRANS Construction Cost Index http://www.dot.ca.gov/hq/esc/

oe/contract_progress/index.ht
ml

Contract Management and Project Controls
1 HA Major Projects Manual of Contract Administration

Sub Contractors Acceptance <http://Share/Share/LLISA
Process DRAFT v0.2.doc: PI.dll/Open/8245031>
Risk and Opportunity Management <http://Share/Share/LLISA

Process DRAFT v0.2.doc: PI.dll/Open/8243644>
Reporting and Forecasting <http://Share/Share/LLISA

Process DRAFT V0.2.doc: PI.dll/Open/8245720>
Programme and Planning <http://Share/Share/LLISA

Management Process DRAFT V PI.dll/Open/8243642>
0.2.doc:
Payment and Audit Process <http://Share/Share/LLISA

DRAFT v 0.2.doc: PI.dll/Open/8243918>
Commercial Close Out Process <http://Share/Share/LLISA

DRAFT v 0.2.doc: PI.dll/Open/8244740>
Change Management Process <http://Share/Share/LLISA
DRAFTv 0.2.doc: PI.dll/Open/8242356>
2 HA Major Projects HA EVM Guidance http://portal/portal/server.pt?o

pen=space&name=Communit
yPage&id=2&cached=true&in
_hi_userid=17570&control=Se
tCommunity&PageID=0&Com
munityID=914&WG_link=http:/
/portalweb/minisite/hawww/w
ww/MP/PCF_Mockup_2/PCP/
Performance_Management.ht
ml
3 HA Major Projects Motivating Success Toolkit http://www.highways.gov.u
k/business/15098.aspx
4 HA Major Projects Performance Management Mr. Mike Bennett, Commercial

Services Division, Birmingham

Cost Engineering Internet Resource
1 AACE AACE Home Page www.aacei.org

International
2 ACostE ACostE Home Page www.acoste.org.uk
3 SCEA SCEA Home Page www.sceaonline.org
4 ICEC ICEC Home Page www.icoste.org
5 RICS RICS Home Page www.rics.org
6 ECUK ECUK Home Page www.engc.org.uk

7 ISPA ISPA Home Page www.ispa-cost.org
8 V-CES V-CES Home Page www.v-ces.com
9 Cranfield Cost Engineering PgCert http://www.cranfield.ac.uk/stu

University dents/courses/page1268.html
10 IPMA IPMA Home Page www.ipma.ch
11 Earned Value Home Page http://www.acq.osd.mil/pm/

Management

Reference Documents
Information Source Link

MP Cost Estimation Manual http://share/Share/llisapi.dll?func=ll&objaction=overview&obji
MP Cost Estimate Report http://share/Share/llisapi.dll?func=ll&objaction=overview&objid=1221
3802&viewType=1
Template
Estimate Scoping Document See worksheet with MP CERT file above
MP CMDAL See worksheet with MP CERT file above
Cost Estimate Summary See worksheet with MP CERT file above
Sheet
Unscheduled Items See worksheet with MP CERT file above
Allowance Guidance
Cost Estimate Sign-Off See worksheet with MP CERT file above
Sheet
MP Divisional Structure http://share/Share/llisapi.dll?func=ll&objaction=overview&objid=1278
6781&viewType=1
Request for Estimate Form http://portalweb/minisite/hawww/www/MP/PCF_Mockup_2/Estimate_

products/Request%20for%20Estimate%20V1%202.xls
MP Master Scheme Tracker http://share/Share/LLISAPI.dll/Open/12361637
Power Steering Programme http://halacppsw001/HA/Home.page
Information System
Commercial Services Division MP http://share/Share/livelink.exe/overview/13147493
Estimate Tracker
MP Project Control http://portal/portal/server.pt?open=space&name=Com
Framework munityPage&id=1&cached=true&in_hi_userid=600753
&control=SetCommunity&PageID=0&CommunityID=74
7&WG_link=http://portalweb/minisite/hawww/www/MP/
PCF_Mockup_2/Product_Groups/New_Groups/Matrix_
Select.html
Estimate Information See MP Cost Estimation Manual
Requirements
Major Projects WBS http://portal/portal/server.pt?open=space&name=CommunityPage&id
=1&psname=Opener&psid=0&cached=true&in_hi_userid=1208746&
control=SetCommunity&PageID=0&CommunityID=747&WG_link=htt
p://portalweb/minisite/hawww/www/MP/PCF_Mockup_2/Product_Gro
ups/New_Groups/../../Estimate_products/Work%20Breakdown%20St
ructures%20V3.2/Work_Breakdown_Structures_V3.2.html
MP WBS Working Group See MP Cost Intelligence Manager

Information Source Link

MCDHW Method of http://www.dft.gov.uk/ha/standards/mchw/vol4/ind
Measurement ex.htm
Sensitivity Analysis http://www.dft.gov.uk/webtag/documents/expert/unit3.5
Guidance .9.php
Benchmark Professional Available from within Benchmark Estimating
Manual Software
Roadworks Estimator http://share/Share/llisapi.dll?func=ll&objaction=overview&objid=1064
5473&viewType=1
Manual
Managed Motorways Cost http://share/Share/llisapi.dll?func=ll&objaction=ov
Model erview&objid=13222345&viewType=1
Major Projects Risk http://share/Share/llisapi.dll?func=ll&objaction=overview&obji
Management Manual
MP Risk and Opportunities http://share/Share/llisapi.dll?func=ll&objaction=overview&obji
Guide
@Risk Manual Available from within @Risk software
MP Risk Register Template Current version available from MP Risk and Value
Manager
The Nichols Report http://www2.dft.gov.uk/pgr/roads/nicholsreport/
HM Treasury Green Book, http://www.hm-
Appraisal and Evaluation in treasury.gov.uk/data_greenbook_index.htm
Central Government
Procedures for Dealing with http://flyvbjerg.plan.aau.dk/0406DfT-
Optimism Bias in Transport UK%20OptBiasASPUBL.pdf
Planning (DfT, 2004)
Range Estimating Tool http://share/Share/llisapi.dll?func=ll&objaction=overview&objid=1221
2505&viewType=1
Guidance
MP Risk and Value Manager Mr Gary Thomas, HA Bedford, GTN: 3013 6280
UK Inflation (Office for http://www.statistics.gov.uk/CCI/nugget.asp?ID=1
National Statistics) 9
DfT WebTAG http://www.dft.gov.uk/webtag/index.php
AACE Basis of Estimate http://www.aacei.org/aaceonly/rps/34R-05.pdf
Recommended Practice

Publications
Books:
1. Forrest D. Clark and A. B. Lorenzoni, Applied Cost Engineering – Third Edition, New
York, Marcel Dekker, 1997
ISBN: 0-8247-9800-7.
2. Kenneth K. Humphreys, Project and Cost Engineers’ Handbook - Fourth Edition, New
York, Marcel Dekker, 2005.
ISBN: 0-8247-5746-7.
3. Kenneth K. Humphreys and Sidney Katell, Basic Cost Engineering
4. James H. Black, Cost Engineering Management Techniques
5. Anghel Patrascu, Construction Cost Engineering Handbook
6. Hans J Lang, Cost Analysis for Capital Investment Decisions
7. George Stukhart, Construction Materials Management
8. Henry C Thorne and Julian A Piekarski, Techniques for Capital Expenditure Analysis
9. Kurt Heinze, Cost Management of Capital Projects
10. Del L Younker, Value Engineering: Analysis and Methodology
Journal Articles and Reports
1. TRB, Cost Contingencies, Development Basis, and Project Application, 2009.

http://pubsindex.trb.org/view.aspx?id=880618
2. TRB, Cost Estimate Quality Control and Quality Assurance Checks using Formal Review
Tools, 2009.
3. TRB, Guidance for Cost Estimation and Management for Highway Projects During
Planning, Programming, and Preconstruction, 2007.
http://www.trb.org/Main/Public/Blurbs/158464.aspx
4. TRB, Implementing Organizational Change for Cost Estimating and Cost Estimate
Management, 2008.

14 Terminology and Glossary of Terms
@RISK Risk Analysis and simulation add-in for Microsoft Excel® or Lotus® 1-2-3. @RISK uses
Monte Carlo simulation that uses repeated random sampling of uncertain variables to
compute results. The outcomes illustrate what could happen in a given situation, and
how likely they are to happen.
AACE / AACEI The Association for the Advancement of Cost Engineering International. AACE
International is the largest organisation serving the entire field of cost management
professionals worldwide.
Action Something done or implemented that is intended to influence the direction of a

project.
Activity An action or process consuming time and possibly resources (except in the case of -
dummy activities). An activity is a component of work that must be performed in order
to complete a project.
Acts of God A direct, sudden and overpowering interruption by a nature cause such as a flood,
hurricane, earthquake or other natural catastrophe. In this occurrence, neither the
client nor contractor has any control.
Actual [Duration, Schedule information that illustrates what has in fact occurred. For example, the Actual
Start, Finish, Logic, Start Date for an activity is the day in which it actually began and Actual Cost is the
ETC.] total expenditure to date.
Actual Costs / Generally, Actual Costs refers to the total expenditure incurred by a project to present
Defined Costs date. For further definition of Actual Costs/Defined Costs, refer to either the base
contract document being used prior to tender, or the accepted tender document for
existing contracts.
Actual Cost of Work In Earned Value Management, an evaluation of the actual cost that has been spent on
Performed (ACWP) work performed in a specific time period, rather than the budgeted amount. Includes

materials, labour, overheads and other direct costs.
Allocation 1) In planning and scheduling, the process of distributing or delegating specific

resources to an activity.
2) In cost estimating and budgeting, the method of allocating or assigning the cost of
an item or activity (often an indirect cost or overhead) to particular cost or budget
accounts.
Allowances Resources allocated to allow for the costs of known but undefined elements of a
(Estimating) project. This includes the possibilities of modifying circumstances in activities, work
items or accounts.
Analysis of Broadly examines multiple elements of project or program alternatives including

Alternatives (AoA) technical risk and maturity, and costs. AoAs are intended to illuminate the risk,
uncertainty, and the relative advantages and disadvantages of the alternatives being
considered; show the sensitivity of each alternative to possible changes in key
assumptions; and aid decision makers in judging whether or not any of the proposed
alternatives offer sufficient operational and/or economic benefit to be worth the cost.
Assumption A supposition on the current situation or a presupposition on a future course of events.

In either present or future, an assumption maybe required where there is an absence
of absolute truth. In cost estimating, assumptions are required in the process of
planning, estimating, scheduling, and budgeting.
Application Area Projects, activities or subjects which share specialised components that logically define
work by user, product or production technology.
Base Cost Estimate The Base (Works) Cost Estimate comprises the cost of the Sections which add together
to give the Works Total. This includes the cost of construction works, ancillary costs,
Statutory Undertakers Diversionary works, Network Rail, Local Authorities and
Highways Agency costs. These are costs both pre and post contract.
Base Date Project costs expressed in the latest time base date set by the Programme Team.
E.g.Q2/2011

Base Line (1) Clearly defined starting point where items are reviewed, implemented or
compared.
(2) A specific value or values that can serve as a comparison or control such as schedule
milestones, technology application and budget, including contingency, approved in the
program and project plans.
(3) A basic standard or level; guideline.
Base Year (BY) A term used to define a year that is: (1) The economic base for pound amounts in a
proposal estimate, (2) The base for rate calculation or projection, or (3) The starting
point for the application of inflation factors.
Benchmarking A measurement of the quality of a projects practices, processes and strategies and
their comparison with the standard measurement (i.e. the benchmark) with the
objective to improve performance. Measures are based on best practice and include
estimated costs, actual costs, schedule durations, resource quantities, etc.
Benchmark Parametric cost estimating software distributed by Benchmark Estimating that

Estimating software streamlines the operation of producing consistent and accurate estimates and quotes.
See: Tool-Driven Software Estimation.
Benefit to Cost Ratio The ratio of the benefits of a project or proposal, relative to its costs, expressed in
(BCR) monetary terms. The BCR indicates the discounted amount of benefits the project
creates for each pound it costs. The benefits are divided by the costs, where both are
discounted to a present value or equivalent uniform annual value.
Best Practices Practical techniques gained from experience that are believed to be more effective or
have shown to produce best results.
Beta Curve The probability distribution of parametrically derived cost estimates. The Beta Curve’s
shape is modified by adjusting either the fraction of peakedness parameters. Beta
curves are often used for R & D projects where the distribution is slow in the initial
phase and intensifies during the middle of the contract.

Biases A tendency or inclination toward a particular perspective, tendency or result. A

predictable relationship between an opinion, statement or action and the overall
knowledge or prejudiced perspective. Bias may refer to an individual, body of people or
system.
Bill of Quantities Document used in tendering which provided a descriptive and quantitative list of
(BOQ) materials, supplies, parts, and labour. A BOQ ideally details the terms and conditions of
construction and itemises all work to enable a contractor to price the work for which
he/she is bidding. Also typically includes a description of the associated ‘Method of
Measurement’.
Blight Reduction in property value resulting from proximity to proposed route.
Budgeted Cost of The budgeted cost of work actually performed for a scheduled activity within a specific
Work Performed time period. The BCWP represents the value of work completed rather than the actual
(BCWP) work performed. In Earned Value Management System, it is referred to as “Earned
Value” (EV).
Budgeted Cost of The approved budget required to complete a scheduled work within a specific time
Work Scheduled period. In Earned Value Management System usage, it is referred to as “Planned Value”
(BCWS) (PV).
Capital Project A project in which the cost of the end result or product is capitalized (i.e., cost will be
depreciated). The product is usually a physical asset such as property, real estate or
infrastructure, but may include other assets that are depreciable.
Capitalised Cost (1) The present worth of a uniform series of periodic costs that continue for an
indefinitely long time (hypothetically infinite).
(2) The value at the purchase date of the asset of all expenditures to be made in
reference to this asset over an indefinite period of time. This cost can also be regarded
as the sum of capital which, if invested in a fund earning a stipulated interest rate, will
be sufficient to provide for all payments required to maintain the asset in perpetual
service.

Change Control (1) A formal process whereby changes to a product or system are introduced in a
controlled and coordinated manner.
(2) Process of accepting or rejecting changes to a projects baseline to avoid Scope
Creep. See: Scope Creep.
(3) Procedures for assessing and implementing changes to prevent project delays or
failure.
(4) Risk abatement strategies for accepting or rejecting changes to a projects baselines,
based on predetermined criteria. See Change Management.
Change in Scope A modification in the required outcome of a project, in particular reference to a change
in the defined deliverables or resources required to achieve them.
Change The formal process where changes to the project plan are identified, assessed,
Management reviewed, approved and introduced.
Commissioning The process of assuring that all systems and components function as designed. May
include performance tests on mechanical equipment, control systems or electrical and
safety checks. Commissioning normally occurs following mechanical completion and
ends with initial operation or start-up.
Commitment to Under ECI contracts this is the notice to proceed to construction. For other Contract
Construct forms it is the formal acceptance of the Contractor construction target.
Commodity In price index nomenclature, a good and sometimes a service which there is demand,
but which is supplied without qualitative differentiation across the market.
Compounding Process of going from today’s values, or Present Values (PVs), to Future Values (FVs).
Concurrency Simultaneous occurrence of independent activities. Degree to which phases, stages or

activities may be, or are performed at the same time (fully or partially).
Concurrent Delay (1) Two or more delays that take place or overlap during the same period, either of
which occurring alone would have affected the ultimate completion date. In practice, it
can be difficult to apportion damages when the concurrent delays are due to the

owner and contractor respectively.

(2) Concurrent delays occur when there are two or more independent causes of delay
during the same time period. The “same” time period from which concurrency is
measured, however, is not always literally within the exact period of time. For delays to
be considered concurrent, most courts do not require that the period of concurrent
delay precisely match. The period of “concurrency” of the delays can be related by
circumstances, even though the circumstances may not have occurred during exactly
the same time of period.
(3) True concurrent delay is the occurrence of two or more delay events at the same
time, one an employer risk event, the other a contractor risk event and the effects of
which are felt at the same time. The term ‘concurrent delay’ is often used to describe
the situation where two or more delay events arise at different times, but the effects of
them are felt (in whole or in part) at the same time. To avoid confusion, this is more
correctly termed the ‘concurrent effect’ of sequential delay events.
(4) Concurrent delay occurs when both the owner and contractor delay the project or
when either party delays the project during an excusable but non-compensable delay
(e.g., abnormal weather). The delays need not occur simultaneously but can be on two
parallel critical path chains.
(5) The condition where another delay-activity independent of the subject delay is
affecting the ultimate completion of the chain of activities.
Constant (Base) Year The benefit cost ratio measures the discounted amount of benefits that the project
Pounds generates for each pound of cost. Fundamentally, the computation of the benefit/cost
ratio is done within the construct of the following formula: Benefits/Cost.
Constructive Cost A parametric software cost estimating tool developed and described by Dr. Barry
Model (COCOMO) Boehm in his book Software Engineering Economics.
Consumables Supplies and materials able or meant to be used. Includes utilities, fuels and lubricants,
welding supplies and worker’s supplies.
Contingency An amount provided for in an estimate that allows for items, conditions or events for
which the state, occurrence, or result is uncertain and that past experience shows will
likely result in additional costs. A contingency often provides for planning and

estimating errors and omissions, minor price fluctuations (excluding general

escalation), minor design developments changes in scope, and variations in market and
environmental conditions. It usually excludes major scope changes, extraordinary
events such as natural disasters, management reserves and escalation and currency
effects.
Contract Legal agreement between two or more parties, which may be of the types enumerated
below:
Cost Plus - In cost plus contracts the contractor agrees to furnish to the client services
and material at actual cost, plus an agreed upon fee for these services. This type of
contract is employed most often when the scope of services to be provided is not well
defined.
Cost Plus Percentage Burden and Fee - the client will pay all costs as defined in the
terms of the contract, plus "burden and fee" at a specified percent of the labour costs
which the client is paying for directly. This type of contract generally is used for
engineering services. In contracts with some governmental agencies, burden items are
included in indirect cost.
Cost Plus Fixed Fee - the client pays costs as defined in the contract document. Burden
on reimbursable technical labour cost is considered in this case as part of cost. In
addition to the costs and burden, the client also pays a fixed amount as the
contractor's "fee".
Cost Plus Fixed Sum - the client will pay costs defined by contract plus a fixed sum
which will cover "non-reimbursable" costs and provide for a fee. This type of contract is
used in lieu of a cost plus fixed fee contract where the client wishes to have the
contractor assume some of the risk for items which would be reimbursable under a
cost plus fixed fee type of contract.
Cost Plus Percentage Fee - the client pays all costs, plus a percentage for the use of the
contractor's organization.
Fixed Price - Types of contracts are ones wherein a contractor agrees to furnish services
and material at a specified price, possibly with a mutually agreed upon escalation
clause. This type of contract is most often employed when the scope of services to be
provided is well defined.
Lump Sum - contractor agrees to perform all services as specified by the contract for a

fixed amount. A variation of this type may include a turn-key arrangement where the
contractor guarantees quality, quantity and yield on a process plant or other
installation.
Unit Price - contractor will be paid at an agreed upon unit rate for services performed.
For example, technical work-hours will be paid for at the unit price agreed upon. Often
field work is assigned to a subcontractor by the prime contractor on a unit price basis.
Guaranteed Maximum (Target Price) - a contractor agrees to perform all services as
defined in the contract document guaranteeing that the total cost to the client will not
exceed a stipulated maximum figure. Quite often, these types of contracts will contain
special share-of-the-saving arrangements to provide incentive to the contractor to
minimize costs below the stipulated maximum.
Bonus Penalty - a special contractual arrangement usually between a client and a
contractor wherein the contractor is guaranteed a bonus, usually a fixed sum of money,
for each day the project is completed ahead of a specified schedule and/or below a
specified cost, and agrees to pay a similar penalty for each day of completion after the
schedule date or over a specified cost up to a specified maximum either way. The
penalty situation is sometimes referred to as liquidated damages.
Contract Completion The date for completion of all or part of total works, as specified in the contract. This
Date date maybe expressed as a calendar date or as a number of days/weeks/months after
the commencement date.
Contract Cost Contract cost analysis is the traditional method for analysing a contractor's proposal. It
Analysis is the analysis of the separate cost elements and profit of (1) an offeror's cost and
pricing data and (2) the judgmental factors applied in projecting from the data to the
estimated costs. The analyst does this to form an opinion on the degree to which the
proposed costs represent what the contract should cost.
Contract Documents Legally binding documents which constitute the agreed scope and responsibilities of a
project. It may be in the form of an agreement, addenda (which relate to the contract
documents), contractor’s bid (including documents which accompanied the bid, along
with any post-bid documentation) the bonds, the general and supplementary
conditions, specifications and drawings, together with all amendments, modifications
and supplements issued after the agreement date.

Contractor A person or organisation who agrees to furnish supplies or perform services at a

specified price or rate.
Contractor Estimate Where contractors and their subcontractors submit formal cost or pricing data in
support of their proposal.
Correlation Correlation – a statistical technique used to determine the degree to which two or
more variables are related or associated. Correlation does not prove or disapprove a
cause-and-effect relationship.
Cost Benefit Analysis An analytic technique that compares the costs and benefits of investments, programs,
(CBA) or policy actions in order to determine which alternative or alternatives maximize net
profits. Net benefits of an alternative are determined by subtracting the present value
of costs from the present value of benefits. CBA is comprised of 8 steps: analysis of the
current environment, perform gap analysis, identify alternatives, estimate costs,
perform sensitivity analysis, characterise and value benefits, determine net value of
each alternative, and perform risk analysis.
Cost Capture System The Cost Capture System stores Target Costs and Actual Cost of activities, respectively,
in the prescribed Work Breakdown Structure and Cost Breakdown Structure.
Cost Centre Resources or activities isolated or arranged in order to allocate and assign cost more
easily.
Cost Characteristics Cost Characteristics are those factors that determine the cost of an item, element or
activity.
Cost to Complete The Cost to Complete Estimate outlines the expected cost to complete the remaining
Estimate work. It is produced by both the Contractor during the construction phase and the
Highways Agency, post-completion. It is prepared on a regular basis, enabling change
to be documented and understood.
Cost of Construction The sum of all costs, direct and indirect, which contribute to the overall cost of a

construction project ready for start-up, however not necessarily in production

operation. These costs include, but are not restricted to, labour, supervision,
administration, equipment, temporary sheds, materials and subcontracts.
Cost Control Monitoring expenditures and performance against progress and measure variance
from authorised budgets to allow for necessary action to be taken to achieve minimum
costs. Cost control can help to highlight and rectify inefficient practices.
Cost Driver A unit of an activity that causes a cost to be incurred or an input variable that will have
a considerable effect on the final cost.
Cost Element The framework used to cost a program or project that includes every unit of costs to
Structure (CES) perform a task or to acquire an item.
Cost Estimate A prediction of quantities, cost, and/or price of resources required by the scope of an
asset investment option, activity, or project. As a prediction, an estimate must address
risks and uncertainties. Estimates are used primarily as inputs for budgeting, cost or
value analysis, decision making in business, asset and project planning, or for project
cost and schedule control processes. Cost estimates are determined using experience
and calculating and forecasting the future cost of resources, methods, and
management within a scheduled time frame.
The estimation of a project’s costs, time-phased by fiscal year, based on the description
of a project or system’s technical, programmatic, and operational parameters. A cost
estimate may also include related analyses such as cost-risk analyses, cost-benefit
analyses, schedule analyses, and trade studies.
Cost Estimating The determination of quantity and the predicting and forecasting, within a defined
scope, of the costs required to the construct and equip a facility. Costs are determined
utilizing experience and calculating and forecasting the future cost assessment and an
evaluation.
Cost Estimation The process of analysing each cost element, the build-up, integration and test of these
elements, and the operation of the system over some specified life cycle (including
disposal of the asset), with respect to the cost associated with the total effort.

Cost Estimating A mathematical algorithm or formula that shows a resource, such as cost, quantity or
Relationship (CER) time, as a function of one or more parameters such as performance, scope, operating
characteristics or other defining elements. CER’s can be used in either parametric or
definitive methods and can be designed to show not only the most likely resource
value but also provide the probability distribution for the resource value.
Cost of Capital A term, usually used in capital budgeting, to identify the return necessary to make a
capital budget project worthwhile. Cost of capital is expressed as an interest rate
percentage of the overall estimated cost of investment capital at a given point in time,
including both the cost of debt and equity.
Cost Overruns Is defined as the excess of actual costs over those budgeted. Cost overruns may also
refer the amount a contractor exceeds or expects to exceed the estimated costs and/or
the ceiling (limitation) of the contract. Cost overruns are also called “cost increase”,
“cost escalation” or “budget overrun”. However if cost escalations and increases are
included as a in the original budget, these do not necessarily result in cost overruns.
Cost Performance / Systemic, interdisciplinary examination of the factors affecting the cost of a system to
Schedule Trade find methods for meeting system requirements at an acceptable cost. This is achieved
Study by analysing numerous system concepts to find ways to attain necessary performance
while balancing essential requirements that must be satisfied for the system to be
successful. The objective of the cost performance trades is not to minimize the cost of
the system, but to achieve a specified level of cost reduction established by the target
costing system.
Cost Performance Determined by measuring the ratio of earned value (EV) to actual costs (AC) therefore
Index/Indicator (CPI) expressed as the equation CPI = Budgeted Cost of Work Performed (BCWP) / Actual
Cost of Work Performed (ACWP). If costs are running under budget, than the CPI will be
more than 1. Subsequently, a CPI less than 1 indicates that costs are running over
budget. CPI is often used to predict magnitude of a potential cost overrun by dividing it
into the original cost estimate (original cost estimate / CPI = projected cost at
completion).
Cost Risk Risks due to statistical uncertainty in the cost estimate, technical parameter

uncertainty, economic factors, rate uncertainty, schedule uncertainty, or programmatic

& technological factors.
Cost Spreading Spreads the point-estimate derived from a parametric cost model over the project’s
Model schedule. This model contributes to the project’s annual phasing requirements.
Cost Variance The difference between the Earned Value (EV) and Actual Cost (AC), expressed as the
formula; Cost Variance = Budgeted cost of work performed (BCWP) - actual cost of
work performed (ACWP). A Cost Variance less than 1 indicates the project is running
over budget.
Crew Hour An hour of effort performed by a crew of workers. For example is a crew consists of 5
people, a crew hour is comprised of 5 labour hours. See: Labour Hour.
Crew Rate Total labour costs per crew hour for a given crew. Labour costs may include only wages
or wages plus benefits, burdens and possibly an allowance for the cost of equipment
used by the crew during the work.
Critical Path The longest sequence of activities (may be more than one path) which determines the
minimum overall project duration. An activity on the critical path cannot be started
until its predecessor activity is complete. Therefore if an activity is delayed by a day, it
stands to follow that the entire project will be delayed one day unless the subsequent
activity or activities can make up that time. The critical path by definition has no
“float.”
Critical Path Method Techniques used to predict project duration by of complex project plans with a large
(CPM) number of activities by analysing which activities have the least amount of scheduling
flexibility.
Early finish dates are determined by a forward pass using a specific start date and late
dates are determined by a backward pass starting from a completion date.
Damages, Liquidated See: Damages, Liquidated.

Date Constraint A fixed start and finish date imposed on an activity. A Date Constraint overrides the
logic of the schedule however can if incorrectly used, cause unintended results.
Day Work Account Payment required for work not included in the original scope but which the contractor
is asked to perform at the request or direction of the owner. Usually paid for on a unit-
price or cost-plus terms.
Decision Tree A graphic representation of the decision sequence of a specific activity or operation,
where each branch requires that some type of logical decision be made.
A graphic representation of the decision process of a specific activity or operation.

Sequential decisions are arranged in a tree like diagram, stemming from an initial
decision point and extending outwards until final outcomes are reached. Each path
represents a separate series of decisions and probabilistic events.
Delay To impede the process or progress of work or some portion of the work, and
subsequently cause the start or finish date to occur later than scheduled.
Delphi Technique A forecasting technique where a consensus view is reached by consultation with a
panel of experts. The selected experts answer an array of anonymous questionnaires
where after each round a facilitator provides a summary of the panel’s forecasts. The
panel then rethinks their answer based on the previous rounds answers. When
forecasts converge toward a single answer, the forecasting process is complete.
Departure from Standards prescribe the technical requirements that have to be met in the design
Standard Roads Service schemes. Where these Standards cannot be met and there is no
provision in the Standard for a lesser requirement (a Relaxation), a Departure from
Standard must be sought.
Depreciation (1) Decline in value of a capitalized asset due to usage, time, wear and tear etc.
(2) Method of attributing the purchase cast of an asset across its lifespan, roughly
correlating to the wear and tear. When a property has a life span of longer than one
year, a portion of its cost can be periodically charged to current operations as a form or
capital recovery.

Descriptive Statistics Mathematical methods that summarise and interpret properties of a collection of data,
in quantitative terms.
Statistical summaries common to descriptive analyses include:
Measures of central tendency – standard deviation, median, mode, etc.
Measures of Dispersion – range, variance, etc.
Measures of association (the shape of the distribution) - moments, kurtosis, skewness,
etc.
Development Phase Stage of a Project Lifecycle. The phase starts with the preliminary design, formed on
the preferred route and covers the development of the scheme through to the start of
works on site.
Developed Design The Developed Design is the design resulting at the end of the Development Phase.
Developing Estimate A Developing Estimate is an estimate produced by the Contractor post Initial Target
Cost. This reflects the cost of the current design. These will be named DE 1, DE 2 etc to
identify progression.
Direct Cost / Price of The actual costs necessary for a projects completion and which directly contribute to
Work Done to Date its overall performance. For example, the cost of equipment, material and labour.
(PWDD) Refer to the contract definitions, including Actual Cost, exclusive of all margins and
corporate overheads.
Discounting Technique for converting forecasted amounts to economically comparable amounts at

a common point or points in time, considering the time value of money.
Discount Cash Flow A cash flow summary that has been adjusted to reflect the time value of money.
(DCF)
Discount Factor Is used to convert pound amounts in different time periods to a common line time and
is found by calculating the discount formula for a given discount rate and interest
period.

The Discount factor can be used to calculate the Present Value, Present Discounted
Value (PDV) or Future Value (FV), where PV=1/(1+r)^n) and FV=(1+r)^n. See: Discount
Rate
Discount Rate The interest rate reflecting an investor’s time value of money. The discount rate can be
expressed as nominal or real and is used to determine the discount factor which
converts cost and benefit amounts in different time period to a single base time. See:
Discount Factor
Duration The continuance in time required to complete an activity. In the time scale in a
schedule this may be represented in hours, days, weeks, etc.
Economic Analysis Systematically identifies the costs and benefits of each suitable future course of action.
(EA) An EA specifies the objectives and assumptions, addresses appropriate alternative
courses of action, includes cost of the alternatives, and describes benefits and/or
effectiveness of each alternative.
Earned Value The measure of how much work has been accomplished against the amount of work
Analysis (EVA) planned to be accomplished, within a specific timeframe.
Earned Value A management technique for measuring a projects progress. EVM combines scope,
Management (EVM) schedule and cost, which constitute the measurement baseline. EVM uses original
estimates and progress-to-date to determine the project is on budget and ahead or
behind the baseline plan.
Efficiency Defines output based on a proportion of the whole.
Efficiency Factor Used in a work measurement system, an Efficiency Factor measures the overall
performance by dividing the standard time it takes to perform a particular task by the
real time.
Escalation An additional allowance to cover for increasing costs due to inflation throughout the
life of the project.

Estimate A calculated prediction of the amount of money required to undertake a specified

scope of work for the base year in which it was prepared.
Estimate at Actual cost of work completed to date plus the predicted costs and schedule for
Completion finishing the remaining work. It can also be the expected total cost of an activity, a
group of activities, or of the project when the defined scope of work is completed.
Estimate Types There are five primary estimates performed throughout the life of a project, these
include:
Order of Magnitude Estimate
Options Estimate
Preliminary Estimate
Initial Target Cost Estimate
Final Target Cost Estimate
See individual headings for estimate descriptions.
Estimating Manager The Estimating Manager is the authorised representative of the Highways Agency
Commercial Services Division. The Estimating Manager works with respect to the
discharge of estimating functions.
External Constraint Something outside the project network which impedes that project from achieving its
aims and objectives.
Expected Value This is the P50 value.
Factor Cost Estimate Cost Factors are factors and percentages used to represent elements of the project or
program which must be included in the cost estimate, however are largely undefined in
the early design stages, for example the contractors fees.
Final Estimate The Final Estimate is an estimate of the Works, produced by the Contractor, based on
the Developed Design. The Highways Agency Project Manager will provide an estimate
for all non-construction costs.
First Principles An estimating method which applies detailed breakdowns of prices for plant, labour,

Estimating materials and subcontractors to develop Direct Costs for Items. Similarly, Indirect Costs
can be calculated using First Principles methods. First Principles Estimating is used
when accurate costs are required.
Final Target Cost The Final Target Cost is the price at which the contract proceeds to construction and is
Estimate the Contractor’s best and final estimate built up on a Bill of Quantities.
Fiscal Year The year (12 month period) over which a Company or Organization budgets it’s
spending, i.e. April 1st 2010 to March 31st 2011.
Fixed Costs Costs independent on the short term product or service output of the project. These
costs include maintenance, administration, plant overhead and selling and research
expenses. Although these costs are incurred regardless of output, the original fixed
costs are often determined by controllable factors such as design and scope.
Float In projects, the amount of time that an activity may be delayed without causing a delay
in the subsequent tasks and project completion date.
Forecast The process of estimation and prediction of either unknown situations or future
conditions and events. The process is based on information and knowledge available at
the time of forecast.
Full Time Equivalent The total number of hours worked (including annual leave, sick leave and approved and
(FTE) compensatory time-off) divided by the maximum number of compensable hours
(defined by law) in a work year. For example if a working year is comprised of 2,080
hours and a full-time employee fulfils these hours, they then consume one FTE. An
employee working 1040 hours would consume half an FTE.
Function Point A standard methodology for measuring software development and maintenance using
Analysis (FPA) function points. Function point is a standardized metric that describes a unit of work
product suitable for quantifying software that is based on the end-user’s point of view.
FPA can be used to determine SLOC for software cost estimating purposes.
Functional Economic Economic Analysis type that documents the review of an entire functional process or

Analysis (FEA) sub-process, such as the use of alternative launch vehicles, etc. It requires a risk
assessment of each alternative solution, requesting a high and low estimate for each
cost element and subsequent probability distribution of expected costs.
Future Value (FV) This is the value of a sum of money at a specified time in the future, assuming a certain
interest rate and the time value of money.
Gant Chart A time-scaled bar chart that illustrates the project schedule.
Grass Roots Cost A cost estimating method involving the computation of the cost of a WBS element by
Estimating estimating the labour hours/years and materials required for the specific WBS line
item. It is also referred to as “bottom’s-up” or engineering build-up estimating.
Ground Rules and Ground rules and assumptions are external circumstances or events that are believed
Assumptions (GR&A) likely to happen. Ground rules and assumptions are based on the operation,
maintenance and support of the system. Ground rules and assumptions generally
include: the O&M period, base year of pounds, type of pounds, inflation indices, costs
to be included or excluded, guidance on how to interpret the estimate properly, and
clarification to the limit and scope in relation to acquisition milestones.
Haul Distance Is the average distance material is moved by a vehicle. It is the distance measured
along the centre line or most direct practical route between the centre of the mass of
excavation and the centre of mass finally placed.
Historical Rates These are rates obtained from the Cost Capture System for similar projects, and for
similar items of work within those projects. For historical rates to be used there must
be three (3) rates analysed.
Idle Equipment Cost The cost equipment incurs, generally ownership or rental costs, while on site in standby
mode.
Idle Time Unproductive time spent by a worker, equipment of both due to factors beyond their
control.

Independent Cost An Independent project cost estimate prepares by an office or other entity that is not
Estimate (ICE) under the supervision, direction, advocacy, or control of the project (or its chain of
command) that is responsible for carrying out the development or acquisition of the
program/project. An ICE is conducted with objectivity and the preservation of integrity
of the cost estimate. ICE’s are generally developed using parametric approaches.
A life cycle cost estimate developed outside normal channels that generally includes
representation from cost analysis, procurement, production management, engineering
and project management.
Independent Life
Cycle Cost Estimate A life cycle cost estimate developed outside normal channels which generally includes
representation from cost analysis, procurement, production management, engineering
and project management.
Indirect Costs Indirect Costs are those Project costs that, typically due to their incurrence for common
or joint objectives, are not allocated to construction activities within the Project. These
are defined within the Highways Agency Work Breakdown Structure.
Inflation A persistent increase in the general level of consumer prices related to an increase in
the volume of money and credit relative to available goods and services. The result is a
persistent decline in the purchasing power of money and is often caused by
governmental monetary policy, to allow government dept to be repaid more cheaply.
Inflation Allowance An allowance applied to reflect inflationary effects. This will be applied by the
Highways Agency Major Projects Programme Office in accordance with the Project’s
position within the Major Roads Programme. The Inflation Allowance only applies to
the Options Phase and Development Phases, as inflation is to be incorporated within
the Construction Phase estimates.
Initial Estimate The Initial Estimate is an estimate produced by the Contractor for the purpose of
establishing the Initial Target Cost. It is based on the Tender information. These will be
named IE 1, IE 2 etc.

Initial Target Cost The Initial Target Cost is the amount agreed by the Highways Agency with the
Estimate Contractor on the basis of the Tender information.
Interest Sometimes referred to as the time value of money, interest is the cost for the use of
capital.
Internal Rate of The Internal Rate of Return (IRR) is another ROI metric used to measure an investment.
Return (IRR) The IRR is defined as the rate at which a bond's future cash flows, discounted back to
today, equal its price. It is also defined as discount rate at which the NPV equals zero.
IRR can be estimated using the formula:
IRR = NPV = PV Benefits - PV Costs = 0.
Just-in-time A 'pull' logistical system driven by actual demand. The goal is to produce, provide or
deliver parts or supplies just in time for the next operation. The approach reduces stock
inventories or storage costs, but leaves no room for error. As much a managerial
philosophy as it is an inventory system.
Key Cost Drivers These are the Sections of work for which the cost is significant in relation to the total
project cost. These are agreed, on a Project by Project basis, with the Highways Agency
Estimating Manager.
Key Performance A set of quantifiable measures to gauge or compare performance in terms of meeting
Indicators (KPI) strategic or operational goals. These indicators:
Are determined at commencement of the project and are listed in order of priority.
Based on key project objectives (goals).
Provide basis for trade-off decisions throughout the project.
State relevant measures to confirm project success and acceptability.
Can be reasonably measured in some way at any time, with sufficient confidence.
Known, A method of classifying risks according to the amount of information available.

Known-Unknown,
Unknown-Known
Labour The combined of all human physical or mental effort used in the production of goods or

services, expanded by people for wages or salary.

Labour is classified as either direct or indirect, where direct is labour which meets
project objectives, used in costing, pricing, and determining profit and indirect labour is
a factor of Indirect costs, such as administration or overheads.
Labour Cost (1) Bare Labour: Gross direct wages paid the workers.
(2) Burdened Labour: Gross direct wages paid to the worker, plus labour burden.
(3) All in Labour: Gross direct wages paid to the worker, plus labour burden, plus field
indirect, plus general & administrative cost, plus profit.
Labour Productivity The ratio of a volume measure of output to a volume measure of input. In cost
estimating, for example hours/quantity, the lower values reflect higher productivity or
efficiency. Labour productivity is improved by increasing production for each work hour
spent or decreasing the amount of hours it takes to do the job.
Labour Rate Labour Cost expressed on a per/ unit of labour effort basis (e.g. labour costs/labour
hours).
Learning Curve Learning curves, sometimes referred to as improvement curves or progress functions,
are based on the concept that resources required to produce each additional unit
decline as the total number of units produced increases. The term learning curve is
used when an individual is involved and the terms progress function or an
improvement curve is used when all the components of an organization are involved.
The learning curve concept is used primarily for uninterrupted manufacturing and
assembly tasks, which are highly repetitive and labour intensive.
Level of Effort (LOE) Effort of a general or supportive nature which does not produce definite end products
or results, i.e., contract for man-hours.
Levels of Schedules The level of schedule is differentiated by the degree of detail in the schedules. The
three main levels of scheduling are the following: Management Summary, Project
Level, and Control Level.
1. MANAGEMENT SUMMARY SCHEDULE (LEVEL 1 SCHEDULE) – The level of schedule
containing the least amount of detail, typically including major functions, milestone

objectives, master schedules, and bar chart summaries of project status. Used by
management and the client to monitor all aspects of the project. It is a roll up of the
project level schedule (level 2).
2. PROJECT LEVEL SCHEDULE (LEVEL 2 SCHEDULE) – An activity- and deliverable-
centred schedule containing a middle amount of detail in time-scaled network
diagrams or bar charts. It integrates the project’s engineering, procurement, and
construction activities by network logic, identifies critical path and key project dates,
and provides measurement of accomplishments against established objectives. The
CPM (critical path method) scheduling technique is used to develop the project level
schedule. The status of the detail activities summarizes to the management summary
schedule (level 1 schedule).
3. CONTROL LEVEL SCHEDULE (LEVEL 3 SCHEDULE) – Represents detail and individual
work tasks, which summarize at the project level II activities and deliverables. Clearly,
shows work by discipline or responsibility, and usually presented in bar chart or tabular
form. Maintained by each discipline / contractor in the engineering phase and by
superintendents and contractors in the construction phase. Immediate term schedules,
also referred to as weekly work schedules, and should provide enough detail to
manage work at the foreman level.
Life Cycle The stages, or phases that occur during the lifetime of an object or endeavour. A life
cycle presumes a beginning and an end with each end implying a new beginning. In life
cycle cost or investment analysis, the life cycle is the length of time over which an
1
investment is analysed (i.e., study period). The following are typical life cycles:
1. Asset Life Cycle – The stages or phases of asset existence during the life of an asset.
Asset life cycle stages typically include ideation, creation, operation, modification, and
termination.
2. Product Life Cycle − Complete history of a product through its concept, definition,
production, operation, and obsolescence or disposal phases. The distinction between
product life cycle and project life cycle is that the latter does not include the last two
phases.
3. Project Life Cycle – The stages or phases of project progress during the life of a
project. Project life cycle stages typically include ideation, planning, execution, and
1
ASTM Standard No E833. (Reprinted, with permission, from the Annual Book of ASTM Standards,
copyright American Society for Testing and Materials, 1916 Race Street, Philadelphia)
closure.
Life Cycle Costs (LCC) Consideration of the costs in all phases of a project or system, including concept,
development, production, implementation, start-up, maintenance and dismantling. It
can be used to help make decisions between alternatives.
Linear Regression A statistical technique used to illustrate how a linear relationship between two
variables (namely X and Y) can be quantified using appropriate data. It is also referred
to as Simple Regression.
Liquidated Damages A sum of money written into a contract which states the financial responsibility a
contractor is obliged to for failure to complete work by the designated time(s).
Liquidated damages can also apply to contract defined output performance.
Long Lead Items Components or equipment required by a project for which the times it takes from
design to fabricate is extensive. Early orders or commitment to funds may be necessary
to avoid project delays.
Manual Software Manual software estimation typically utilizes a simple, straightforward methodology to
Estimation derive effort, cost, and schedule. This includes analogy, engineering build-up, or cost
estimating relationship (CER) factors.
Mark-up Used in construction estimating, a mark-up is added onto the overall cost of the project
as a percentage in the form of profit, overheads and/or indirect costs.
Margin Allowances used in the budget, projected schedules, and technical performance .
Maximum Plausible The Maximum Plausible Outcome is the value calculated through statistical analysis
Outcome where there is only a 10% chance of being exceeded. This is defined as the P90 value.
Method of The Procedure, usually standardized, according to which the quantities of work
Management expressed in a Bill of Quantities (BOQ), shall be measured. See: Bill of Quantities
Milestone A zero duration activity which marks the completion of a work package or phase and is

often used for management progress reporting. In addition to signalling a key

deliverable, a milestone may also denote an important decision or the derivation of a
critical piece of information which affects the project.
Minimum Plausible The Minimum Plausible Outcome is the value calculated through statistical analysis
Outcome where there is only a 10% chance of being less. This is defined as the P10 value.
Monte Carlo These are a class of computational algorithms that use repeated random sampling of
Simulation each “uncertain” variable from the input variable distributions to compute the results.
Monte Carlo simulations are particularly useful when dealing with significant
uncertainty, such as calculation or risk. The method can be applied to cost estimates
and schedules when they are expressed as a model (i.e. in a spread sheet or scheduling
system).
Net Present Value Is defined as the sum of the present value (PV) of the estimated future benefits minus
(NPV) the present value (PV) of the initial investment/cash outflows. It is a standard method
of using the time value of money to assess long-term projects. See: Present Value
Nominal Discount Rate of return used to calculate the present value for costs/benefits that are expressed
Rate: in nominal pounds.
Non Developmental Non- Developmental Items (NDI) are items, other than real property, that are
Item (NDI) customarily used for Non- Government purposes.
Non-quantifiable Are benefits which cannot be reduced to measurable values. Non-quantifiable benefits
Benefits include adherence to statutory and regulatory requirements, enhanced modernisation
and enhancement of best practices.
Non Recoverable The area of the Works, where VAT is not recoverable. This is generally applied to land,
VAT which is to be utilised during and after construction works, and is outside the Highways
Agency boundary.
Normalisation The method of adjusting data so that it conforms to a standard or norm. For example
cost data is often normalised to remove effects of inflation or to conform to a common
basis in time, currency or location.

Operating and Operating expenditures incurred in the everyday function of a project including
Maintenance Costs operating, maintaining, updating and support costs. O&M costs are a subset of
(O&M) recurring costs.
Operation an Those operating expenditures incurred in the normal course of business to operate,
Support Costs (O&S) maintain, support and update the system.
Options Estimate/s The Options Estimate/s is/are prepared by the Highways Agency during the Option
Selection stage. These will be named OE 1, OE 2 etc.
Order of Magnitude An estimate prepared by the Highways Agency, on behalf of the DfT, for the purpose of
(OoM) Estimate Strategy Shaping and Prioritisation.
Options Estimate An estimate prepared by the Highways Agency during the Option Selection stage.
Out-turn Cost These costs include all actual costs. The only exclusions are VAT and the Highway’s
Agency administration and overhead costs. HA managed costs should be included in
Out-turn Costs, which include all project costs incurred by the HA that are not managed
by the consultant and that are not part of the HA’s administrative costs.
Overhaul The distance in excess of the stated haul distance to transport excavated material. See:
Haul Distance
Overhead (1) An ongoing expense of operating a business, also known as operating expenses such
as rent gas/electricity or wages.
(2) A cost or expense inherent in the performing of an operation which because of its
nature, cannot be identified with a particular piece of work, product or asset and must
be allocated across the board or handled as a business expense.
P90 A value calculated through statistical analysis with a 90% probability of not being
exceeded. Similarly a P50 has a 50% probability etc.
Parametric Estimate An estimating methodology using statistical relationships between historical costs and

other project variables such as manpower loading or system performance

characteristics. It describes estimating algorithms or cost estimating relationships that
are highly probabilistic in nature and may include gross unit costs, factoring techniques
and cost models. Also referred to as “top-down” estimating.
Payback Period The payback period is the time required for the cumulative value of savings to be equal
to the cumulative value of investment. The payback period measures the number of
years needed to recover the investment or break even. The accept-reject criterion for
this financial indicator is the ability of the program to equal or better the organization’s
required payback period.
Preliminary Estimate An estimate prepared by the Highways Agency on the basis of the Preliminary Design.
Pareto Analysis Is a statistical technique in decision making that is used for selection of a limited
number of tasks that produce significant overall effect. It uses the Pareto principle –
the idea that by doing 20% of work, 80% of the advantage of doing the entire job can
be generated. Or in terms of quality improvement, a large majority of problems (80%)
are produced by a few key causes (20%). With regard to construction project
expenditure the Pareto Analysis defines 20% of the construction project will
encompass 80% of the project costs.
PERT (Project Along with CPM, PERT is a probabilistic technique designed to analyse and evaluate the
Evaluation and progress of complex programs. It considers pessimistic, optimistic and best-guess
Review Technique) estimates to determine the time required to complete all tasks involved.
Phase Remit To set out the Department for Transport’s requirements and scope of work for the
Phase. This includes high level work activities, outputs and constraints. It also includes
the authorisation of the Phase budget.
Planned Value (PV) A measure of the value of work scheduled to have been completed at the date of
analysis (data date). The budgeted cost of work scheduled (BCWS) maybe a more
appropriate term. In comparison to Earned Value (EV), PV measures the performance
in regards to both time and cost expended.

Plant Overhead A cost or expense inherent in the performing of a plant, that are not directly
attributable to any one production or processing unit and are distributed on an
arbitrary basis. Plant Overhead costs include plant management salaries, local
purchasing and accounting.
Point Estimate An estimate with a single point result, rather than a probabilistic estimate with a cost
range.
Portfolio A number of projects, programs or other valuable and revenue-producing items, which
are grouped for management convenience or strategic purpose.
Preliminary Design This is the design developed by the Highways Agency during the Options Phase, prior to
tender invitation. It is the design which is intended to form part of the Tender
information.
Preliminary Estimate An estimate prepared by the Highways Agency on the basis of the Preliminary Design.
Present Value The value of a benefit or cost found by discounting future cash flows to the base time.
It reflects in today’s terms the value of future cash flows discounted to reflect the time
value of money. Also, the method can be used for comparing proposed investments,
which involves discounting each option at a known interest rate in order to choose the
alternative which has the highest present value per unit of investment.
President’s Budget The final budget request sent to Congress usually in late January or early February.
President’s The PMA identifies government-wide and program initiatives.

Management
Agenda (PMA)
Price The assigned numerical monetary value for a good, service or asset as the result of a
trade (e.g. exchange value).
Probabilistic Dependencies between activities that indicate alternative sequences of logic that have

Dependencies probabilities attached to them.
Probabilistic Network containing alternative paths with which probabilities are associated rather
Network than deterministic relationships between activities.
Probability Density A function that represents a probability distribution and describes the density of
Function (PDF) probability at each point in the sample space. Also referred to as a probability
distribution function can be informally considered as a “smoothed out” version of a
histogram.
Procedure A prescribed method for proceeding; a way of performing or effecting specified work.
Process A systematic series of actions or activities required to achieve an output.
Procurement A process for establishing contractual relationships to accomplish project objectives.

Typically, the acquisition (and directly related matters) of equipment, material, and
non-personal services (including construction) by such means as purchasing, renting,
leasing (including real property), contracting, or bartering, but not by seizure,
condemnation, or donation. Includes preparation of inquiry packages, requisitions, and
bid evaluations; purchase order award and documentation; plus expediting, in-plant
inspection, reporting, and evaluation of vendor performance. The assembly, tendering
and award of contracts or commitment documents. Specific procedures should be
established for the procurement process.
Production Rate The amount of work, which may be accomplished in a set unit of time.
Productivity A measure of output from a production process, relative to input. For example the
labour productivity is measured as the ratio of output per labour-hour (input).
Therefore to increase productivity, or efficiency, greater output is required per labour-
hour consumed, or the input may be reduced for any given output. See: Labour
Productivity.
Productivity Paradox The productivity paradox is a phenomenon where the programming language that
seems to have the best productivity metrics (e.g. effort per SLOC), actually results in

the highest total cost because the language is less efficient than other, more modern
programming languages.
Profit Generally the difference between price and cost and is derived from Latin meaning “to
make progress”.
1) Gross Profit: The difference between revenue and cost, after direct and project
indirect costs have been deducted, for a given period.
2) Net Profit: Actual profit made from earnings or income after deducting overheads,
interest payable, federal income tax from operating profit and other miscellaneous
expenses.
3) Operating Profit: Earnings or income after all expenses, including selling,
administrative and depreciation costs have been deducted from gross profit.
Program A set of projects with common strategic goals, usually managed using a master
schedule. The term ‘program’ may also refer to a network schedule.
Program Objective Phase in which resources are mated to requirements, done in even numbered years.
Memorandum
(POM)
Program Review Phase in which resources are mated to requirement, done in odd numbered years
Programme Risk Risks and uncertainties which affect many projects and need to be considered across
the portfolio of the Major Roads Programme, or elements therein.
Project Usually involving time and monetary limitations, a project is a collaborative endeavour
that is carefully planned to achieve a specific objective.
Project Cost The Project Cost is the total cost of providing the Project.
Project Phases The main elements of a project life cycle. Project Phases include Pre-Options, Options,
Development and Construction. Each Project progresses through these phases during
its lifecycle.
Project Schedule The Project Schedule shows activities for the delivery of the Project, including

Construction. It is generally in the form of a Gantt chart.
Project Stages The stages are defined by the Project Control Framework. These include Option
Identification, Option Selection, Preliminary Design, Statutory Procedures & Powers,
Construction Preparation, Construction and Handover & Closeout. See: Life Cycle
Quantifiable Benefits Benefits which can be measured or assigned a numeric value, such as time, revenue or
percentage change. Quantifiable benefits are calculated by subtracting the cost of an
alternative from the cost of baseline operations over the period of the estimate.
Quantification An activity to translate project scope information into resource quantities suitable for
costing. For example, a take-off is a specific type of quantification that is a
measurement and listing of quantities of materials from drawings.
Quantum Quantum refers to the quantity of work and will generally be the quantity of the WBS
Items for the Project.
Range Estimate A risk analysis technology which combines Monte Carlo sampling, focus on the few
keys variables, and heuristic (rules of thumb) to rank critical risk elements. This
approach is used to establish the range of the total project estimate and define how
contingency should be allocated among the critical elements.
Real Discount Rate Expressed in terms of present-day money values, with no allowance for inflation used
to discount constant year pounds or real benefits and costs.
Rate Options The real options approach is a financial technique for valuing investment alternatives.
Approach This approach is primarily a decision tool that indicates whether or not to proceed with
an investment after pre-established decision points are reached. This approach
integrates NPV techniques with a decision-tree framework to determine the whether a
project should proceed or be terminated.
Reality Check A verification of the appropriateness of rates, quantities and assumptions used in an
estimate.

Regression Analysis A quantitative technique used to establish a line-of-best-fit through a set of data to
establish a relationship between one or more independent variable and a dependent
variable. That line is then used with a projected value of the independent variable(s) to
estimate a value for the dependent variable.
Relationship A logical connection between two or more activities.
Re-measurement A type of contract that provides for the use of quantity surveys to measure progress.
Contractor’s periodic payment is from a detailed survey of the actual work in place and
not on milestone payments or other methods. Places a larger degree of cost risk on the
owner than lump sum or milestone based compensation schemes.
Request for Proposal A formal invitation containing a scope of work, which seeks a formal response
(RFP) (proposal) describing both methodology and compensation to form the basis of a
contract. The Request For Proposal consists of a Solicitation Letter, Instructions to
Bidders, Evaluation Criteria, Statement of Work, and a System Specification. The
provider issues an RFP to potential subcontractors.
Reserve A provision in the project plan to mitigate cost and/or schedule risk. Often used with a
modifier (e.g., management reserve, contingency reserve) to provide further detail on
what types of risk are meant to be mitigated.
Residual Risk Exposure to remaining other known risks of a project or activity after management acts
as willing and able to counter, factor in or eliminate risks.
Resilient Rates Resilient Rates should be derived from the Cost Capture System and verified by three
(3) sources of rates from similar types of application.
Resource Any economic or productive factor (except time) required to accomplish an activity, for
example land, labour, capital.
From a total cost and asset management perspective, resources may include any real
or potential investment in strategic assets including time, monetary human, and
physical. A resource becomes a cost when it is invested or consumed in an activity or
project.

Resource Level A specified quantity of resource units required by an activity per time unit.
Retention A sum of money, usually a percent of contract value, retained by the client until work is
finished and testing is satisfactorily competed.
Return on The strict meaning of ROI is "Return on Invested Capital." Most business people,
Investment (ROI) however, use "ROI" simply to mean the incremental gain from an investment, divided
by the cost of the investment. ROI is the net benefit expressed as a percentage of the
investment amount:
ROI = NPV / PV Investment
Request for estimate A form to be completed by the Project Manager in order to engage a Cost Engineer to
produce an estimate.
Risk Risk is defined as uncertainty of outcome, whether positive opportunity or negative

threat, of actions and events which could affect the objectives of an organisation,
schedule or project.
Risk-Project-Specific A risk taxonomy designation used to classify project risks for the purposes of selecting a
quantification method (i.e., contingency determination). Project-specific risks are
uncertainties (threats or opportunities) related to events, actions, and other conditions
that are specific to the scope of a project. (e.g., weather, soil conditions, etc.). The
impacts of project-specific risks are more or less unique to a project. The historically
inconsistent project-specific nature of the risk-to-impact relationship favours the use of
more deterministic methods of quantification such as expected value calculations. In
this taxonomy usage, it is the opposite of “systemic” risks. See: Risk, Risk-Systemic
Risk-Systemic A risk taxonomy designation used to classify project risks for the purposes of selecting a
quantification method (i.e., contingency determination). Systemic risks are
uncertainties (threats or opportunities) that are an artefact of an industry, company or
project system, culture, strategy, complexity, technology, or similar over-arching
characteristics. The historically consistent nature of the systemic risk-to-impact
relationship favours the use of methods such as empirically-based parametric

modelling for quantification. In this taxonomy usage, it is the opposite of “project-

specific” risks. See: Risk, Risk-Project-Specific.
Risk Analysis A risk management process step, which includes quantifying the effect of all risks areas
on a project. Involves, identifying each risk and its probability of occurrence and
severity of impact. The impact maybe expressed as a range of values, confidence level
or as a probability distribution.
Risk Analysis Method The method of analysing all risks identified on a project. The specific topics in risk
analysis include:
Qualitative – based on historical data
Risk models – representation of risks in part or whole of the project.
Probabilistic models – combining risks systems such as Monte Carlo simulation,
decision tree or influence diagrams.
Risk Assessment A risk management process step, which includes identifying and analysing the risks or
uncertainties which may impact a project.
Risk Control A risk management process step which includes the implementation of the risk
management plan.
Risk Management All of the steps (phases) associated with managing risk (including risk assessment, risk
analysis, risk mitigation and risk control).
Risk Management The product of risk mitigation which includes a list of the action steps to:
Plan 1) Eliminate or reduce the probability of a threat occurring; and/or
2) Eliminate or reduce the impact of the threat if it does occur (mitigate the threat);
and/or
3) Assure or increase the probability of an opportunity occurring; and/or
4) Increase the impact of an opportunity if it does occur. The plan includes predefined
action steps to be taken and the "trigger points" that will indicate when they are to be
executed to mitigate risks. The plan also defines what to monitor to determine the
"trigger points". The steps may include, holding portion of funds and/or scope in
reserve, until outcome is more certain; trading cost risk for schedule or quality risk;

and/or buying "insurance" (such as lump sum, firm price subcontracts).
Risk Mitigation A risk management process step that includes developing a risk management plan. It
essentially attempts to reduce, transfer or eliminate risk.
Risk Register A Register that documents risks and mitigation measures, throughout the life of a
project.
Roadworks The Roadworks Estimator is a software programme designed to help prepare fast and
Estimator accurate estimates for major road projects where limited information is known. The
Roadworks Estimator can be used for projects at the Order of Magnitude and Options
stages of life cycle of the project. The Roadworks Estimator can estimate Greenfields
road projects and also incorporate road widening
Savings to The NPV of the savings divided by the NPV of the investment. The savings is the
Investment Ratio difference in the recurring costs between the status quo alternative and the proposed
(SIR) alternative. When the SIR equals one then discounted payback occurs.
Schedule (1) A description of when each activity in a project can be accomplished and must be
finished so as to be completed timely. The simplest of schedules depict in bar chart
format the start and finish of activities of a given duration. More complex schedules,
general in CPM format, include schedule logic and show the critical path and floats
associated with each activity.
(2) A time sequence of activities and events that represent an operating timetable. The
schedule specifies the relative beginning and ending times of activities and the
occurrence times of events. A schedule may be presented on a calendar framework or
on an elapsed time scale.
Schedule (1) Duration added to a schedule activity to allow for the probability of possible or
Contingency unforeseen events. Use in this manner is not recommended as the contingency is
hidden and may be misused.
(2) A unique activity used to model specific float available to a project phase. Used in
this manner gives ownership of float to those activities and or responsibility entity.

Schedules, Level of The level of schedule is differentiated by the degree of detail in the schedules. The
three main levels of scheduling are the following: Management Summary, Project
Level, and Control Level.
1. MANAGEMENT SUMMARY SCHEDULE (LEVEL 1 SCHEDULE) – The level of schedule
containing the least amount of detail, typically including major functions, milestone
objectives, master schedules, and bar chart summaries of project status. Used by
management and the client to monitor all aspects of the project. It is a roll up of the
project level schedule (level 2).
2. PROJECT LEVEL SCHEDULE (LEVEL 2 SCHEDULE) – An activity- and deliverable-
centred schedule containing a middle amount of detail in time-scaled network
diagrams or bar charts. It integrates the project’s engineering, procurement, and
construction activities by network logic, identifies critical path and key project dates,
and provides measurement of accomplishments against established objectives. The
CPM (critical path method) scheduling technique is used to develop the project level
schedule. The status of the detail activities summarizes to the management summary
schedule (level 1 schedule).
3. CONTROL LEVEL SCHEDULE (LEVEL 3 SCHEDULE) – Represents detail and individual
work tasks, which summarize at the project level II activities and deliverables. Clearly,
shows work by discipline or responsibility, and usually presented in bar chart or tabular
form. Maintained by each discipline / contractor in the engineering phase and by
superintendents and contractors in the construction phase. Immediate term schedules,
also referred to as weekly work schedules, and should provide enough detail to
manage work at the foreman level.
Scheduling Process of determining a general or outline plan for a project specifying duration,
activities, predecessor relationships, resource availability and target completion date.
Scope The required outcome for the Project as agreed with the DfT and Network Strategy.
Generally documented in project planning stage, the scope includes the sum of all that
is to be or has been invested into a project and what the expected deliverables and
performance of an activity or project are.
Scope Change See: Change in Scope.

Scope Creep Gradual changes, usually additions, to a projects scope. The sum of these often minor
requirements or client requests, can add up resulting in possibly cost or schedule
overruns.
Service Cost Service costs are costs that cannot be specifically and immediately identified to a
project, but can subsequently be traced or linked to a project and are assigned based
on usage or consumption. Examples of services costs include automatic data processing
and fabrication.
Senior Responsible The Senior Responsible Owner is the individual responsible and accountable for
Owner (SRO) ensuring the project remains focused on achieving its objectives and that the
anticipated benefits can be achieved. The SRO is responsible for approvals and
decisions that affect project progress and delivery.
Sensitivity The relative magnitude of the change in one or more elements of an engineering
economy, estimate, schedule or other planning analysis that will reverse a decision
among alternatives.
Sensitivity Analysis A method of modelling risks of a project, for example the potential impact from cost,
economic, and financial factors, on the overall success. A high level of sensitivity can
signal areas which require effort to minimise the impact of the potential risks.
Should Cost Analysis A study of a projects contract price, which reflects reasonably achievable contractor
value for planned work. Usually produced by a team of procurement, contract
administration, audit and engineering representatives with the purpose to form a
realistic price objective for negotiation purposes.
Stakeholder One who has a stake or an interest in the process and outcome of a Project. Also one
who is affected by a Project.
Standards Prescribe the technical requirements that have to be met in the design Roads Service
schemes
Status Quo System The system as it currently exists.

Strategic Risk Strategic Risks are those which would change the nature of the Major Roads
Programme and therefore can be identified but not valued. These risks will be
monitored by the Major Projects Risk Manager.
Subcontractor One that enters into a subcontract and assumes contractual obligations of the primary
contractor
Sunk Costs Costs that have already been incurred which have no salvage value or realisable value,
such as design, investigation or research costs. Sunk costs are not included in economic
evaluations and should not be considered in making new investment decisions.
Supply Chain This is the group of organisations contracted to the appointed Contractor in order to
assist in the delivery of the Project.
Synthesis The assembling of separate or subordinate parts into a whole
Take-off A specific form of quantification that measures and lists quantities of materials from
design drawings.
Tangibles Things with physical existence or that can be quantitatively measured or valued, such
as items of cost.
Target Cost The Target Cost is the amount agreed by the Highways Agency, with the Contractor, on
the basis of the Developed Design. It is on this Target Cost that notice to proceed to
construction under the ECI contract is given.
Then-Year-Pounds Pounds that are escalated into the time period of performance of a contract.
(TY) Sometimes referred to as escalated costs, inflated costs, or nominal year pounds.
Three Point Estimate A range of projected costs from the ‘lowest’ cost to the ‘most likely’ cost and the
‘highest’ cost.
Time Value of The time value of money refers to the fact that a pound in hand today is worth more

Money than a pound promised at some future time. By compounding and discounting, the
time value of money adjusts cash flow to reflect the increased value of money when
invested. The time value of money also reflects that benefits and costs are worth more
if they are realized earlier.
Tool-Driven Software Parametric tools that use data gathered from a large quantity of actual project. The
Estimation inputs the algorithms are based on are derived from personnel capabilities and
experience.
Total Cost (1) The ACCE International defines TCM as ‘the effective application of professional and
Management (TCM) technical expertise to plan and control resources, costs, profitability and risks.’
TCM is the methodical approach to managing costs of a project, program or product
throughout its life-cycle through the use of cost engineering and cost management
principles.
(2) Considered investment in its portfolio of strategic assets.
Traffic Forecast Report presenting traffic forecasts which are used as part of appraising a road option
Report and documenting the methods and assumptions used in preparing them.
Trend (1) In project control; a general tendency of events, conditions or performance.

(2) In a change management system; the first indication of potential change, of which
should be monitored necessarily actioned.
(2) In statistics; a pattern in a series of data points to move in a certain directions over
time.
Trend Analysis Mathematical method of studying time series data to analyse the comparison of the
same item over a period of time. Trend analysis is used to detect the general pattern of
associated factors or variables and to predict future patterns.
Regression analysis techniques can be used for predicting cost/schedule trends using
historical data.
Uncertainty All situations, both positive and negative, where the outcome is subject to an
uncontrollable event, stemming from an unknown probability distribution, and whose
probabilities of occurrence are neither 0% nor 100%.

Unit Hours Work Hours per unit of production.
Unit Rate The cost of a given unit of a product or service.
Validation Assessment of an action, decision, plan or transaction to establish it satisfies its

intended use or outcome.
Value Engineering A cost reduction methodology which is aimed at reducing the life-cycle costs, or
provides greatest value, of a product or service. It is targeted at the design of the
product or service, and is achieved through elimination, alteration, modification, or
substitution of items ensuring to satisfy all performance and other criteria.
Variable Costs Costs of an activity, such as production, assembly, manufacturing or maintenance that
relates to the cost of the product of service being produced and therefore fluctuates
with the product or service output. These costs may be direct or indirect and may
include raw materials costs, by-product credits, packaging and utilities.
Variance (1) A measure of the degree of difference between expected and actual.
(2) A measure of the tendency of individual values to vary from the mean value. It is
computed by subtracting the mean value from each individual value, squaring the
differences, adding the results together and dividing the resulting sum by the number
of values added. This provides the arithmetic mean of these squares.
Variation Additional work or deductions resulting from errors or omissions in design

documentation and/or specifications.
Verification Testing to validate that a product or service meets specifications.
‘What if ‘ Analysis The process of evaluating alternative solutions.
Work Breakdown An organised method of defining tasks which need to be carried out as activities or sub-
Structure (WBS) activities using a hierarchical tree structure. This allows quantification and cost inputs
to be compared. The Highways Agency Work Breakdown Structure is given in available

from the MP Cost Intelligence Manager
Total Obligation The pounds alternative strategies. The Department of Navy may obligate in a given
Authority (TOA) period (usually a year).
Total Ownership The TOC is comprised of all costs to research, develop, acquire, own, operate, and
Cost (TOC) dispose of assets, including all abortive costs, other equipment and real property, the
costs to recruit, train and retain staff and otherwise support the asset throughout it’s
entire life.
WBS A technique for representing all the components, software, services and data
contained in the project scope statement. It establishes a hierarchical structure or
product oriented "family tree" of elements. It is used to organize, define and
graphically display all the work items or work packages to be done to accomplish the
project's objectives.
“What-If” Analysis The process of evaluating.
Works – Total The sum of all costs associated with delivering the Project.


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Cost Engineering Handbook

Manual Number: V5.5

Manual Owner: Highways Agency Commercial Services

Amend Effective Approved Update

5.1 Incorporation of HA Head of TCM 20.5.2011 MR LF 20.5.2011

PART A: Introduction and Cost Engineering Fundamentals ............................................................................ 11

FUNDAMENTALS OF COST ENGINEERING ........................................................................................................ 12

1.1 Background ........................................................................................................................................... 12

1.1.1 Cost Engineering and Its Importance ................................................................................................. 12

1.1.3 The AACEI and Total Cost Management Framework ........................................................................ 14

1.1.4 Outline of Cost Engineering Processes, Skills and Knowledge ...................................................... 17

1.2 Background, DfT and HA Structures ................................................................................................... 19

2.1 Background ........................................................................................................................................... 21

2.1.1.1 Direct Costs ........................................................................................................................................... 23

2.1.1.2 Indirect Costs ........................................................................................................................................ 24

2.1.1.3 Fixed Costs ............................................................................................................................................ 24

2.1.1.4 Variable Costs ....................................................................................................................................... 24

2.1.2 Cost Accounting .................................................................................................................................... 24

2.1.2.1 Codes of Accounts and Activity Based Costing ................................................................................ 25

2.1.2.2 Classifying Costs Using a Work Breakdown Structure .................................................................... 25

ECONOMIC ASSESSMENT .................................................................................................................................... 26

3.1 Timing and Types of Cost in Economic Assessment ....................................................................... 26

3.1.1 Opportunity Costs ................................................................................................................................. 26

3.1.2 Sunk Costs ............................................................................................................................................. 27

3.1.4 Incremental Costs ................................................................................................................................. 27

3.2 Economic Cost Change ........................................................................................................................ 27

3.2.1 Inflation .................................................................................................................................................. 28

3.2.2 Deflation ................................................................................................................................................. 28

3.2.3 Escalation .............................................................................................................................................. 28

3.2.4 Currency Variation ................................................................................................................................ 28

3.3 Economic Assessment Techniques .................................................................................................... 28

3.3.1 Net Present Value Method .................................................................................................................... 29

3.3.2 Capitalized Cost Method ...................................................................................................................... 29

3.3.3 Average Annualised Cost or Benefit ................................................................................................... 29

3.3.4 Rate of Return Analysis ........................................................................................................................ 29

3.3.5 Benefit-Cost Ratio Analysis Method ................................................................................................... 29

3.3.6 Payback Period Method ........................................................................................................................ 30

3.4 Equivalence, Interest Rates and Discounting .................................................................................... 30

3.4.1 Interest ................................................................................................................................................... 30

3.4.2 Discount Factors ................................................................................................................................... 30

3.5 The Importance of Assessing Whole Life Costings .......................................................................... 30

4 Further Information and Bibliography ................................................................................................ 34

4.1 Sources of Information ......................................................................................................................... 34

4.2 External Resources ............................................................................................................................... 34

PART B: Cost Planning, Estimating and Investment Appraisal ....................................................................... 35

5.1 The Project Lifecycle and Classification of Estimates ...................................................................... 37

5.2 Estimate Accuracy and the Project Lifecycle .................................................................................... 40

5.3 Cost Estimating Methodologies .......................................................................................................... 40

5.3.1 Analogy Cost Estimating Method ........................................................................................................ 42

5.3.2 Engineering Build-Up Cost Estimating Method ................................................................................. 43

5.4 Three-Point Estimating ......................................................................................................................... 45

5.4.1 Monte Carlo Analysis ............................................................................................................................ 49

6 The Cost Estimating Process .............................................................................................................. 51

6.1 Initiating the Cost Estimate .................................................................................................................. 53

6.2 Determining Estimate Purpose, Level of Detail and Scope .............................................................. 54

6.3 Planning the Estimate Work ................................................................................................................. 57

6.4 Defining the Project / Programme Characteristics ............................................................................ 58

6.5 Determine Estimate Structure and Work Breakdown Structure ...................................................... 59

6.6 Identifying Ground Rules, Assumptions, Exclusions and Sensitivity............................................. 62