Estimating Direct Costs

Methods for preparing an estimate of direct costs may be based on either or both of two approaches: industry, or facility, approach, and discipline, or trade, approach.
For any project, the approach that may be selected depends on user preference and client requirements. If used properly, the two approaches should yield the same result.
Industry or Facility Approach. Industry in this case refers to the specific commercial or industrial use for which a project is intended. For example, a client who wishes to build a factory usually is more concerned with the application to which the factory will be put than with the details of its construction, such as bricks, mortar, joists, and rafters. The client is interested in the specific activities that will be carried out and the space that will be needed. When information about these activities has been obtained, the designers convert this information into a total building design, including work spaces, corridors, stairways, restrooms, and airconditioning equipment. After this has been done, the estimator uses the design to prepare an estimate.
Discipline or Trade Approach. This takes the point of view of the contractor rather than the client. The job is broken into disciplines, or trades, of the workers who will perform the construction. The estimate is arrived at by summing the projected cost of each discipline, such as structural steel; concrete; electrical; heating, ventilating, and air conditioning (HVAC); and plumbing.

Types of Estimates

Typical types of estimates are as follows: feasibility, order of magnitude, preliminary, baseline, definitive, fixed price, and claims and changes. These do not represent rigid categories. There is some overlap from one type to another. All the types can be prepared with an industry or discipline approach, or sometimes a combination of them.

Feasibility Estimates. These give a rough approximation to the cost of the project and usually enable the building owner to determine whether to proceed with construction.
The estimate is made before design starts and may not be based on a specific design for the project under consideration. For example, for a power plant, the estimate may involve only a determination of the energy density of the fuel;
the altitude of the plant, which determines the amount of oxygen in the air and hence the efficiency of combustion; the number of megawatts to be produced; and the length of the transmission line to the grid. The feasibility estimate is inexpensive and can be made quickly. Not very accurate, it does not take into account creative solutions, new techniques, and unique costs. It can be prepared by the owner, the lender, or the designer.
Order-of-Magnitude Estimates. These are more detailed than feasibility estimates, because more information is available. For example, a site for the building may have been selected and a schematic design, including sketches of the proposed structure and a plot of its location on the site, may have been developed. Like the feasibility estimate, the order-of-magnitude estimate is inexpensive to prepare. Generally made by the designer, it is prepared after about 1% of the design has been completed.
Preliminary Estimates. These reflect the basic design parameters. For this purpose, a site plan and a schematic design are required. The schematic should show plans and elevations plus a few sections through the building. For buildings such as power plants and chemical refineries, it should also contain a process diagram, major equipment list, and an equipment arrangement diagram. Preliminary estimates can reflect solutions, identify unique construction conditions, and take into account construction alternatives. Usually, this type of estimate does not reveal design interferences.
Generally prepared by the designer, preliminary estimates are made after about 5 to 10% of the design has been completed. Several preliminary estimates may be made for a project as the design progresses.
Baseline Estimates. These are final preliminary estimates. For most buildings, requirements for preparation of an estimate include plans, elevations, and sections.
For process plants, also necessary are complete flow diagrams, process and instrumentation diagrams (P&ID) in outline form, and a list of equipment selected and the location of the equipment. Subsequent changes in the estimate are measured with respect to the baseline estimate. Identifying all cost components, the estimate provides enough detail to permit price comparisons of material options and is sufficiently detailed to allow equipment quotations to be obtained.
The baseline estimate is generally prepared by the designer. It is made after about 10 to 50% of the design has been completed.
Definitive Estimates. From a definitive estimate, the client learns what the total project cost should be and the designers overall intent. The estimate is based on plans, elevations, and sections; flow diagrams, P&IDs, and equipment and instrument lists (for process plants); design segments for each discipline; and outline specifications. It identifies all costs. It is sufficiently detailed to allow quotes to be obtained for materials, to order equipment, and to commit to material prices for approximate quantities.
This type of estimate is generally prepared by the designer and represents the end of the designers responsibility for cost estimates. It is made after about 30 to 100% of the design has been completed.

Fixed-Price Estimates. Prepared by a general contractor, a fixed-price estimate, or bid, represents a firm commitment by the contractor to build the project. It is based on the contractors interpretation of the design documents. It requires detailed drawings for each discipline, equipment lists, P&IDs, wiring diagrams, and specifications.
A fixed-price estimate is highly accurate. It should be in sufficient detail to enable the contractor to obtain quotes from suppliers and to identify possible substitutes for specific items. It is made after 70 to 100% of the design has been completed.
Claims and Changes Estimates. These are prepared when a difference arises between actual construction and the project as specified in the original contract. This type of estimate should identify the changes clearly and concisely. It should specify, whenever possible, the additional costs that will be incurred and provide strong and compelling support for the price adjustments requested. Generally, the estimate is reviewed by all parties involved (designer, contractor, and building owner) as soon as the need for change is identified. Claims and change estimates can be prepared by any or all of the parties to the contract.

Estimating Techniques

There are three estimating techniques: parametric, unit price, and crew development.
In general, the parametric technique is the least expensive, least time-consuming, and least accurate. The crew development technique is the most expensive, most time-consuming, and most accurate. Of the three techniques, the parametric requires the most experience and the unit-price technique, the least. During the course of a typical project, all three of these techniques may be used.
Parametric Technique. For every type of project, there are certain key parameters that correlate strongly with cost; for example, for power plants, altitude, and hence the amount of oxygen in the air, is such a parameter. The parametric technique takes such a correlation into account. It is usually employed for preparing feasibility or order-of-magnitude estimates. Sometimes, it is used for preparing preliminary or baseline estimates or small portions of definitive or fixed-price estimates. It is often used for checking high-level estimates, such as definitive, fixed price, and claims and changes, that have been developed by the unit-price or crew development technique.
The parametric technique derives data from proprietary tables that incorporate historical data, or standard tables, or experience. Historical tables are compilations of data from numerous projects of various types. There are historical tables, for example, for the amount of pipe needed to process a barrel of oil in a refinery, the volume of fuel storage necessary for a given size of airport, and the optimum airconditioning system for a given building size. Proprietary tables are updated as required. Standard tables may be either historical or calculated and tend to be updated more frequently than historical tables.
The industry approach to development of a feasibility cost estimate for a warehouse using the parametric technique typically proceeds as follows: The client supplies a list of the items to be stored in the warehouse, sizes of the items, and the number of types of items. The client also indicates the turnover, or shelf life, of each item. Given the preceding information, the estimator calculates the amount of storage volume and circulation area and obtains the total costs of materials, labor, and equipment from historical tables.

The discipline approach to development of a feasibility or preliminary cost estimate for a warehouse using the parametric technique generally proceeds as follows: Given the spacing between roof supports and the ceiling heights that are specified in the design, the estimator looks up the cost per square foot of ceiling in standard tables. (Disciplines involved are structural steel and concrete work.)
From the design, the estimator determines the height and area of the exterior and interior walls. From the weather conditions for the location, the insulating properties
required for the exterior walls and roof are determined using standard tables. From the preceding information, the estimator calculates the costs of the walls and roofs using standard tables. (Disciplines involved are carpentry, masonry, and roofing.)
Also, from the design, the estimator computes the exterior area and volume of the building, the amount of sunlight falling on the building, and the internal lighting levels required and determines the cost of the mechanical and electrical work. (Disciplines involved are mechanical and electrical.) Finally, the preceding costs are added to arrive at the cost of materials, labor, and equipment for the warehouse.
Unit-Price Technique. This relates directly to specific physical entities in the design square feet of office area, cubic yards of concrete, number of fixtures in rest rooms. Unlike the parametric technique, which often involves information that is not in the drawings (for example, barrels of oil to be processed) and may not pertain to a specific design, the unit-price technique is tied directly to the contract documents. The estimator employs the quantities given in these documents to determine costs.
The unit-price technique is frequently used for preparation of cost estimates. It can be used for any level of estimate but does require that some design be performed.
Data for the technique are obtained from commercially available handbooks of unit prices, which are usually updated at least once a year.
The industry approach to development of preliminary or higher-level cost estimates for a warehouse using the unit-price technique usually proceeds as follows:
The warehouse is divided into categories, for example, loading dock, storage facilities, aisles, restrooms, and offices. The special equipment required, such as cranes, crane rails, and docks, is listed. Then, the estimator looks up in a unit-price book the cost of each of the items specified above. For each category, the unitprice book gives the total cost of materials, labor, and equipment to construct an item. For instance, for a loading dock, the unit price would be specified as either the cost per linear foot or the cost per truck accommodated by the dock; for rest rooms, the unit price would be specified as the total cost of all the fixtures needed or as the total cost per square foot. Finally, the estimator sums the preceding costs to arrive at the total cost of the warehouse.
The discipline approach to development of a preliminary or higher-level cost estimate for a warehouse using the unit-price technique typically proceeds as follows:
From the design documents, the estimator determines the ground area the building
occupies (the footprint of the building). The costs of grading and the building
floor slab are obtained from a unit-price handbook. With information from the
contract documents, the estimator calculates the amount and cost of the structural materials and finishes needed. The unit cost of illumination and air-conditioning are also obtained from a unit-price handbook. Finally, the estimator adds the preceding costs to arrive at the total costs.
Crew Development Technique. This is used to prepare the estimate based on the costs for the specific personnel and equipment that would be needed to complete each item during each phase of construction. The crew development technique differs from the unit-price technique, where the activity is priced without assignment of specific workers and equipment.

For a specific project, the size and mix of crew selected depend on project needs.
If early completion is the key consideration, a large crew working multiple shifts and much overtime might be advisable. If access to a site is difficult, a small crew might be necessary. Size and mix of crew can also vary during the course of construction. For example, for a typical high-rise structure, construction may start with personnel and equipment that provides the lowest cost per unit of production.
As work progresses and access to work areas grows more difficult, a smaller crew using more equipment may be used. In the final construction stages, when the investment in the building is large and interest costs are high, the contractor may employ a large crew working shifts and overtime to finish as soon as possible, thereby minimizing total project costs.
Estimators tend to use the crew development technique for high-level estimates, the definitive and above. Unlike the unit-price technique, the crew development technique is based on the way the facility actually will be erected. Consequently,
it is the most accurate of the estimating techniques. Hence, it is the principal technique for fixed-price estimates; where accuracy is critical.
The crew development technique is based on data from production handbooks.
These may be organized in accordance with the use of a facility or by building trades.
The industry approach to development of a definitive cost estimate for a warehouse using the crew development technique generally proceeds as follows:
From the contract documents, the estimator determines the volume and footprint of the warehouse and the uses to which each area would be put, for example, offices, rest rooms, and loading docks. Assuming that one crew will be used to build the shell of the building and other crews to construct the interior areas, the estimator obtains the unit rates of production from standard production handbooks. (The production handbooks for facilities change only with the introduction of new equipment or materials.) Next, for each item taken off the contract documents, the estimator determines the unit costs of materials, labor, and equipment. Then, each unit cost is multiplied by the corresponding quantity of the item to be used. Finally, the estimator adds the products to obtain the total cost of materials, labor, and equipment for the warehouse.
Estimators tend to use the industry approach with the crew development technique where labor costs are low or differences between costs of different crafts are slight.
The discipline approach to preparation of a definitive cost estimate for a warehouse using the crew development technique usually proceeds as follows: From the contract documents, the estimator determines the exact quantities of materials for example, for piping, linear feet of pipe, number of the various types of fittings, and amount of insulation; for electrical work, the number of fixtures and devices and linear feet of conduit and wire. Assuming the size and composition of the crew by trade (personnel plus equipment), the estimator obtains from production handbooks, for each discipline, the productivity of the crew and the length of time required for installation of the materials. Then, for each item taken off the contract documents, the estimator determines the unit costs of materials, labor, and equipment. Next, each unit cost is multiplied by the corresponding quantity of the item to be used.
Finally, the estimator adds the results to arrive at the total cost of materials, labor, and equipment for the warehouse.
Estimators tend to use the crew development technique and discipline approach where labor costs and differences between the costs of the different crafts are high.

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