Chapter 5 - Cost Estimation
Chapter 5 - Cost Estimation
Cost Estimation
5.1 Costs Associated with Constructed Facilities
The costs of a constructed facility to the owner include both the initial capital cost and the
subsequent operation and maintenance costs. Each of these major cost categories consists of a
number of cost components.
The capital cost for a construction project includes the expenses related to the inital
establishment of the facility:
The operation and maintenance cost in subsequent years over the project life cycle includes the
following expenses:
The magnitude of each of these cost components depends on the nature, size and location of the
project as well as the management organization, among many considerations. The owner is
interested in achieving the lowest possible overall project cost that is consistent with its
investment objectives.
It is important for design professionals and construction managers to realize that while the
construction cost may be the single largest component of the capital cost, other cost components
are not insignificant. For example, land acquisition costs are a major expenditure for building
construction in high-density urban areas, and construction financing costs can reach the same
order of magnitude as the construction cost in large projects such as the construction of nuclear
power plants.
From the owner's perspective, it is equally important to estimate the corresponding operation and
maintenance cost of each alternative for a proposed facility in order to analyze the life cycle
costs. The large expenditures needed for facility maintenance, especially for publicly owned
infrastructure, are reminders of the neglect in the past to consider fully the implications of
operation and maintenance cost in the design stage.
Contingent amounts not spent for construction can be released near the end of construction to the
owner or to add additional project elements.
In this chapter, we shall focus on the estimation of construction cost, with only occasional
reference to other cost components. In Chapter 6, we shall deal with the economic evaluation of
a constructed facility on the basis of both the capital cost and the operation and maintenance cost
in the life cycle of the facility. It is at this stage that tradeoffs between operating and capital costs
can be analyzed.
The resources demands for three types of major energy projects investigated during the energy
crisis in the 1970's are shown in Table 5-1. These projects are: (1) an oil shale project with a
capacity of 50,000 barrels of oil product per day; (2) a coal gasification project that makes gas
with a heating value of 320 billions of British thermal units per day, or equivalent to about
50,000 barrels of oil product per day; and (3) a tar sand project with a capacity of 150,000 barrels
of oil product per day.
For each project, the cost in billions of dollars, the engineering manpower requirement for basic
design in thousands of hours, the engineering manpower requirement for detailed engineering in
millions of hours, the skilled labor requirement for construction in millions of hours and the
material requirement in billions of dollars are shown in Table 5-1. To build several projects of
such an order of magnitude concurrently could drive up the costs and strain the availability of all
resources required to complete the projects. Consequently, cost estimation often represents an
exercise in professional judgment instead of merely compiling a bill of quantities and collecting
cost data to reach a total estimate mechanically.
Cost
2.5 4 8 to 10
($ billion)
Basic design
(Thousands of 80 200 100
hours)
Detailed
engineering 3 to 4 4 to 5 6 to 8
(Millions of hours)
Construction
20 30 40
(Millions of hours)
Materials
1 2 2.5
($ billion)
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Virtually all cost estimation is performed according to one or some combination of the following
basic approaches:
Production function. In microeconomics, the relationship between the output of a process and
the necessary resources is referred to as the production function. In construction, the production
function may be expressed by the relationship between the volume of construction and a factor
of production such as labor or capital. A production function relates the amount or volume of
output to the various inputs of labor, material and equipment. For example, the amount of output
Q may be derived as a function of various input factors x1, x2, ..., xn by means of mathematical
and/or statistical methods. Thus, for a specified level of output, we may attempt to find a set of
values for the input factors so as to minimize the production cost. The relationship between the
size of a building project (expressed in square feet) to the input labor (expressed in labor hours
per square foot) is an example of a production function for construction. Several such production
functions are shown in Figure 3-3 of Chapter 3.
Empirical cost inference. Empirical estimation of cost functions requires statistical techniques
which relate the cost of constructing or operating a facility to a few important characteristics or
attributes of the system. The role of statistical inference is to estimate the best parameter values
or constants in an assumed cost function. Usually, this is accomplished by means of regression
analysis techniques.
Unit costs for bill of quantities. A unit cost is assigned to each of the facility components or
tasks as represented by the bill of quantities. The total cost is the summation of the products of
the quantities multiplied by the corresponding unit costs. The unit cost method is straightforward
in principle but quite laborious in application. The initial step is to break down or disaggregate a
process into a number of tasks. Collectively, these tasks must be completed for the construction
of a facility. Once these tasks are defined and quantities representing these tasks are assessed, a
unit cost is assigned to each and then the total cost is determined by summing the costs incurred
in each task. The level of detail in decomposing into tasks will vary considerably from one
estimate to another.
Allocation of joint costs. Allocations of cost from existing accounts may be used to develop a
cost function of an operation. The basic idea in this method is that each expenditure item can be
assigned to particular characteristics of the operation. Ideally, the allocation of joint costs should
be causally related to the category of basic costs in an allocation process. In many instances,
however, a causal relationship between the allocation factor and the cost item cannot be
identified or may not exist. For example, in construction projects, the accounts for basic costs
may be classified according to (1) labor, (2) material, (3) construction equipment, (4)
construction supervision, and (5) general office overhead. These basic costs may then be
allocated proportionally to various tasks which are subdivisions of a project.
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1. Design Estimates. For the owner or its designated design professionals, the types of cost
estimates encountered run parallel with the planning and design as follows:
o Screening estimates (or order of magnitude estimates)
o Preliminary estimates (or conceptual estimates)
o Detailed estimates (or definitive estimates)
o Engineer's estimates based on plans and specifications
For each of these different estimates, the amount of design information available
typically increases.
2. Bid Estimates. For the contractor, a bid estimate submitted to the owner either for
competitive bidding or negotiation consists of direct construction cost including field
supervision, plus a markup to cover general overhead and profits. The direct cost of
construction for bid estimates is usually derived from a combination of the following
approaches.
o Subcontractor quotations
o Quantity takeoffs
o Construction procedures.
3. 3. Control Estimates. For monitoring the project during construction, a control estimate
is derived from available information to establish:
o Budget estimate for financing
o Budgeted cost after contracting but prior to construction
o Estimated cost to completion during the progress of construction.
Design Estimates
In the planning and design stages of a project, various design estimates reflect the progress of the
design. At the very early stage, the screening estimate or order of magnitude estimate is usually
made before the facility is designed, and must therefore rely on the cost data of similar facilities
built in the past. A preliminary estimate or conceptual estimate is based on the conceptual design
of the facility at the state when the basic technologies for the design are known. The detailed
estimate or definitive estimate is made when the scope of work is clearly defined and the detailed
design is in progress so that the essential features of the facility are identifiable. The engineer's
estimate is based on the completed plans and specifications when they are ready for the owner to
solicit bids from construction contractors. In preparing these estimates, the design professional
will include expected amounts for contractors' overhead and profits.
The costs associated with a facility may be decomposed into a hierarchy of levels that are
appropriate for the purpose of cost estimation. The level of detail in decomposing the facility into
tasks depends on the type of cost estimate to be prepared. For conceptual estimates, for example,
the level of detail in defining tasks is quite coarse; for detailed estimates, the level of detail can
be quite fine.
As an example, consider the cost estimates for a proposed bridge across a river. A screening
estimate is made for each of the potential alternatives, such as a tied arch bridge or a cantilever
truss bridge. As the bridge type is selected, e.g. the technology is chosen to be a tied arch bridge
instead of some new bridge form, a preliminary estimate is made on the basis of the layout of the
selected bridge form on the basis of the preliminary or conceptual design. When the detailed
design has progressed to a point when the essential details are known, a detailed estimate is made
on the basis of the well defined scope of the project. When the detailed plans and specifications
are completed, an engineer's estimate can be made on the basis of items and quantities of work.
Bid Estimates
The contractor's bid estimates often reflect the desire of the contractor to secure the job as well as
the estimating tools at its disposal. Some contractors have well established cost estimating
procedures while others do not. Since only the lowest bidder will be the winner of the contract in
most bidding contests, any effort devoted to cost estimating is a loss to the contractor who is not
a successful bidder. Consequently, the contractor may put in the least amount of possible effort
for making a cost estimate if it believes that its chance of success is not high.
If a general contractor intends to use subcontractors in the construction of a facility, it may solicit
price quotations for various tasks to be subcontracted to specialty subcontractors. Thus, the
general subcontractor will shift the burden of cost estimating to subcontractors. If all or part of
the construction is to be undertaken by the general contractor, a bid estimate may be prepared on
the basis of the quantity takeoffs from the plans provided by the owner or on the basis of the
construction procedures devised by the contractor for implementing the project. For example, the
cost of a footing of a certain type and size may be found in commercial publications on cost data
which can be used to facilitate cost estimates from quantity takeoffs. However, the contractor
may want to assess the actual cost of construction by considering the actual construction
procedures to be used and the associated costs if the project is deemed to be different from
typical designs. Hence, items such as labor, material and equipment needed to perform various
tasks may be used as parameters for the cost estimates.
Control Estimates
Both the owner and the contractor must adopt some base line for cost control during the
construction. For the owner, a budget estimate must be adopted early enough for planning long
term financing of the facility. Consequently, the detailed estimate is often used as the budget
estimate since it is sufficient definitive to reflect the project scope and is available long before
the engineer's estimate. As the work progresses, the budgeted cost must be revised periodically to
reflect the estimated cost to completion. A revised estimated cost is necessary either because of
change orders initiated by the owner or due to unexpected cost overruns or savings.
For the contractor, the bid estimate is usually regarded as the budget estimate, which will be used
for control purposes as well as for planning construction financing. The budgeted cost should
also be updated periodically to reflect the estimated cost to completion as well as to insure
adequate cash flows for the completion of the project.
One of the methods of isolating a landfill from groundwater is to create a bowl-shaped bottom
seal beneath the site as shown in Figure 5-0. The seal is constructed by pumping or pressure-
injecting grout under the existing landfill. Holes are bored at regular intervals throughout the
landfill for this purpose and the grout tubes are extended from the surface to the bottom of the
landfill. A layer of soil at a minimum of 5 ft. thick is left between the grouted material and the
landfill contents to allow for irregularities in the bottom of the landfill. The grout liner can be
between 4 and 6 feet thick. A typical material would be Portland cement grout pumped under
pressure through tubes to fill voids in the soil. This grout would then harden into a permanent,
impermeable liner.
The work items in this project include (1) drilling exploratory bore holes at 50 ft intervals for
grout tubes, and (2) pumping grout into the voids of a soil layer between 4 and 6 ft thick. The
quantities for these two items are estimated on the basis of the landfill area:
8 acres = (8)(43,560 ft2/acre) = 348,480 ft2
(As an approximation, use 360,000 ft2 to account for the bowl shape)
The number of bore holes in a 50 ft by 50 ft grid pattern covering 360,000 ft2 is given by:
The average depth of the bore holes is estimated to be 20 ft. Hence, the total amount of drilling is
(144)(20) = 2,880 ft.
The unit prices for different items of work submitted for this project by (1) Ball, Ball &
Brosame, Inc. and (2) National Projects, Inc. are shown in Table 5-2. The similarity of their unit
prices for some items and the disparity in others submitted by the two contractors can be noted.
TABLE 5-2: Unit Prices in Two Contractors' Bids for Roadway Construction
Unit price
Items Unit Quantity
1 2
Mobilization ls 1 115,000 569,554
Removal, berm lf 8,020 1.00 1.50
Finish subgrade sy 1,207,500 0.50 0.30
Surface ditches lf 525 2.00 1.00
Excavation structures cy 7,000 3.00 5.00
Base course, untreated, 3/4'' ton 362,200 4.50 5.00
Lean concrete, 4'' thick sy 820,310 3.10 3.00
PCC, pavement, 10'' thick sy 76,010 10.90 12.00
Concrete, ci AA (AE) ls 1 200,000 190,000
Small structure cy 50 500 475
Barrier, precast lf 7,920 15.00 16.00
Flatwork, 4'' thick sy 7,410 10.00 8.00
10'' thick sy 4,241 20.00 27.00
Slope protection sy 2,104 25.00 30.00
Metal, end section, 15'' ea 39 100 125
18'' ea 3 150 200
Post, right-of-way, modification lf 4,700 3.00 2.50
Salvage and relay pipe lf 1,680 5.00 12.00
TABLE 5-2: Unit Prices in Two Contractors' Bids for Roadway Construction
Unit price
Items Unit Quantity
Loose riprap cy 32 40.00 30.00
Braced posts ea 54 100 110
Delineators, type I lb 1,330 12.00 12.00
type II ea 140 15.00 12.00
Constructive signs fixed sf 52,600 0.10 0.40
Barricades, type III lf 29,500 0.20 0.20
Warning lights day 6,300 0.10 0.50
Pavement marking, epoxy material
Black gal 475 90.00 100
Yellow gal 740 90.00 80.00
White gal 985 90.00 70.00
Plowable, one-way white ea 342 50.00 20.00
Topsoil, contractor furnished cy 260 10.00 6.00
Seedling, method A acr 103 150 200
Excelsior blanket sy 500 2.00 2.00
Corrugated, metal pipe, 18'' lf 580 20.00 18.00
Polyethylene pipe, 12'' lf 2,250 15.00 13.00
Catch basin grate and frame ea 35 350 280
Equal opportunity training hr 18,000 0.80 0.80
Granular backfill borrow cy 274 10.00 16.00
Drill caisson, 2'x6'' lf 722 100 80.00
Flagging hr 20,000 8.25 12.50
Prestressed concrete member
type IV, 141'x4'' ea 7 12,000 16.00
132'x4'' ea 6 11,000 14.00
Reinforced steel lb 6,300 0.60 0.50
Epoxy coated lb 122,241 0.55 0.50
Structural steel ls 1 5,000 1,600
Sign, covering sf 16 10.00 4.00
type C-2 wood post sf 98 15.00 17.00
24'' ea 3 100 400
30'' ea 2 100 160
48'' ea 11 200 300
Auxiliary sf 61 15.00 12.00
TABLE 5-2: Unit Prices in Two Contractors' Bids for Roadway Construction
Unit price
Items Unit Quantity
Steel post, 48''x60'' ea 11 500 700
type 3, wood post sf 669 15.00 19.00
24'' ea 23 100 125
30'' ea 1 100 150
36'' ea 12 150 180
42''x60'' ea 8 150 220
48'' ea 7 200 270
Auxiliary sf 135 15.00 13.00
Steel post sf 1,610 40.00 35.00
12''x36'' ea 28 100 150
Foundation, concrete ea 60 300 650
Barricade, 48''x42'' ea 40 100 100
Wood post, road closed lf 100 30.00 36.00
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Let x be a variable representing the facility capacity, and y be the resulting construction cost.
Then, a linear cost relationship can be expressed in the form:
(5.1)
where a and b are positive constants to be determined on the basis of historical data. Note that in
Equation (5.1), a fixed cost of y = a at x = 0 is implied as shown in Figure 5-2. In general, this
relationship is applicable only in a certain range of the variable x, such as between x = c and x =
d. If the values of y corresponding to x = c and x = d are known, then the cost of a facility
corresponding to any x within the specified range may be obtained by linear interpolation. For
example, the construction cost of a school building can be estimated on the basis of a linear
relationship between cost and floor area if the unit cost per square foot of floor area is known for
school buildings within certain limits of size.
A nonlinear cost relationship between the facility capacity x and construction cost y can often be
represented in the form:
(5.2)
where a and b are positive constants to be determined on the basis of historical data. For 0 < b <
1, Equation (5.2) represents the case of increasing returns to scale, and for b ;gt 1, the
relationship becomes the case of decreasing returns to scale, as shown in Figure 5-3. Taking the
logarithm of both sides this equation, a linear relationship can be obtained as follows:
Figure 5-3: Nonlinear Cost Relationship with increasing or Decreasing Economies of Scale
(5.3)
Although no fixed cost is implied in Eq.(5.2), the equation is usually applicable only for a certain
range of x. The same limitation applies to Eq.(5.3). A nonlinear cost relationship often used in
estimating the cost of a new industrial processing plant from the known cost of an existing
facility of a different size is known as the exponential rule. Let yn be the known cost of an
existing facility with capacity Qn, and y be the estimated cost of the new facility which has a
capacity Q. Then, from the empirical data, it can be assumed that:
(5.4)
where m usually varies from 0.5 to 0.9, depending on a specific type of facility. A value of m =
0.6 is often used for chemical processing plants. The exponential rule can be reduced to a linear
relationship if the logarithm of Equation (5.4) is used:
(5.5)
or
(5.6)
The exponential rule can be applied to estimate the total cost of a complete facility or the cost of
some particular component of a facility.
The empirical cost data from a number of sewage treatment plants are plotted on a log-log scale
for ln(Q/Qn) and ln(y/yn) and a linear relationship between these logarithmic ratios is shown in
Figure 5-4. For (Q/Qn) = 1 or ln(Q/Qn) = 0, ln(y/yn) = 0; and for Q/Qn = 2 or ln(Q/Qn) = 0.301,
ln(y/yn) = 0.1765. Since m is the slope of the line in the figure, it can be determined from the
geometric relation as follows:
For ln(y/yn) = 0.1765, y/yn = 1.5, while the corresponding value of Q/Qn is 2. In words, for m =
0.585, the cost of a plant increases only 1.5 times when the capacity is doubled.
Example 5-5: Cost exponents for water and wastewater treatment plants[4]
The magnitude of the cost exponent m in the exponential rule provides a simple measure of the
economy of scale associated with building extra capacity for future growth and system reliability
for the present in the design of treatment plants. When m is small, there is considerable incentive
to provide extra capacity since scale economies exist as illustrated in Figure 5-3. When m is
close to 1, the cost is directly proportional to the design capacity. The value of m tends to
increase as the number of duplicate units in a system increases. The values of m for several types
of treatment plants with different plant components derived from statistical correlation of actual
construction costs are shown in Table 5-3.
TABLE 5-3 Estimated Values of Cost Exponents for Water Treatment Plants
Source: Data are collected from various sources by P.M. Berthouex. See the references in his
article for the primary sources.
Example 5-6: Some Historical Cost Data for the Exponential Rule
The exponential rule as represented by Equation (5.4) can be expressed in a different form as:
where
If m and K are known for a given type of facility, then the cost y for a proposed new facility of
specified capacity Q can be readily computed.
TABLE 5-4 Cost Factors of Processing Units for Treatment Plants
1. Liquid processing
Oil separation mgd 58,000 0.84
Hydroclone degritter mgd 3,820 0.35
Primary sedimentation ft2 399 0.60
Furial clarifier ft2 700 0.57
Sludge aeration basin mil. gal. 170,000 0.50
Tickling filter ft2 21,000 0.71
Aerated lagoon basin mil. gal. 46,000 0.67
Equalization mil. gal. 72,000 0.52
Neutralization mgd 60,000 0.70
2. Sludge handling
Digestion ft3 67,500 0.59
Vacuum filter ft2 9,360 0.84
lb dry
Centrifuge 318 0.81
solids/hr
Source: Data are collected from various sources by P.M. Berthouex. See the references in his
article for the primary sources.
The estimated values of K and m for various water and sewage treatment plant components are
shown in Table 5-4. The K values are based on 1968 dollars. The range of data from which the K
and m values are derived in the primary sources should be observed in order to use them in
making cost estimates.
As an example, take K = $399 and m = 0.60 for a primary sedimentation component in Table 5-
4. For a proposed new plant with the primary sedimentation process having a capacity of 15,000
sq. ft., the estimated cost (in 1968 dollars) is:
y = ($399)(15,000)0.60 = $128,000.
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For design estimates, the unit cost method is commonly used when the project is decomposed
into elements at various levels of a hierarchy as follows:
For bid estimates, the unit cost method can also be applied even though the contractor may
choose to decompose the project into different levels in a hierarchy as follows:
1. Subcontractor Quotations. The decomposition of a project into subcontractor items for
quotation involves a minimum amount of work for the general contractor. However, the
accuracy of the resulting estimate depends on the reliability of the subcontractors since
the general contractor selects one among several contractor quotations submitted for each
item of subcontracted work.
2. Quantity Takeoffs. The decomposition of a project into items of quantities that are
measured (or taken off) from the engineer's plan will result in a procedure similar to that
adopted for a detailed estimate or an engineer's estimate by the design professional. The
levels of detail may vary according to the desire of the general contractor and the
availability of cost data.
3. Construction Procedures. If the construction procedure of a proposed project is used as
the basis of a cost estimate, the project may be decomposed into items such as labor,
material and equipment needed to perform various tasks in the projects.
Suppose that a project is decomposed into n elements for cost estimation. Let Qi be the quantity
of the ith element and ui be the corresponding unit cost. Then, the total cost of the project is given
by:
(5.7)
where n is the number of units. Based on characteristics of the construction site, the technology
employed, or the management of the construction process, the estimated unit cost, ui for each
element may be adjusted.
A special application of the unit cost method is the "factored estimate" commonly used in
process industries. Usually, an industrial process requires several major equipment components
such as furnaces, towers drums and pump in a chemical processing plant, plus ancillary items
such as piping, valves and electrical elements. The total cost of a project is dominated by the
costs of purchasing and installing the major equipment components and their ancillary items. Let
Ci be the purchase cost of a major equipment component i and fi be a factor accounting for the
cost of ancillary items needed for the installation of this equipment component i. Then, the total
cost of a project is estimated by:
(5.8)
where n is the number of major equipment components included in the project. The factored
method is essentially based on the principle of computing the cost of ancillary items such as
piping and valves as a fraction or a multiple of the costs of the major equipment items. The value
of Ci may be obtained by applying the exponential rule so the use of Equation (5.8) may involve
a combination of cost estimation methods.
Consider the simple case for which costs of labor, material and equipment are assigned to all
tasks. Suppose that a project is decomposed into n tasks. Let Qi be the quantity of work for task i,
Mi be the unit material cost of task i, Ei be the unit equipment rate for task i, Li be the units of
labor required per unit of Qi, and Wi be the wage rate associated with Li. In this case, the total
cost y is:
(5.9)
Note that WiLi yields the labor cost per unit of Qi, or the labor unit cost of task i. Consequently,
the units for all terms in Equation (5.9) are consistent.
The concept of decomposition is illustrated by the example of estimating the costs of a building
foundation excluding excavation as shown in Table 5-5 in which the decomposed design
elements are shown on horizontal lines and the decomposed contract elements are shown in
vertical columns. For a design estimate, the decomposition of the project into footings,
foundation walls and elevator pit is preferred since the designer can easily keep track of these
design elements; however, for a bid estimate, the decomposition of the project into formwork,
reinforcing bars and concrete may be preferred since the contractor can get quotations of such
contract items more conveniently from specialty subcontractors.
TABLE 5-5 Illustrative Decomposition of Building Foundation
Costs
Contract elements
Design
elements
Formwork Rebars Concrete Total cost
Example 5-8: Cost estimate using labor, material and equipment rates.
For the given quantities of work Qi for the concrete foundation of a building and the labor,
material and equipment rates in Table 5-6, the cost estimate is computed on the basis of Equation
(5.9). The result is tabulated in the last column of the same table.
TABLE 5-6 Illustrative Cost Estimate Using Labor, Material and Equipment Rates
Formwork 12,000 ft2 $0.4/ft2 $0.8/ft2 $15/hr 0.2 hr/ft2 $3.0/ft2 $50,400
Rebars 4,000 lb 0.2/lb 0.3/lb 15/hr 0.04 hr/lb 0.6/lb 4,440
Concrete 500 yd3 5.0/yd3 50/yd3 3 3
15/hr 0.8 hr/yd 12.0/yd 33,500
Total $88,300
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One common application is found in the allocation of field supervision cost among the basic
costs of various elements based on labor, material and equipment costs, and the allocation of the
general overhead cost to various elements according to the basic and field supervision cost.
Suppose that a project is decomposed into n tasks. Let y be the total basic cost for the project and
yi be the total basic cost for task i. If F is the total field supervision cost and Fi is the proration of
that cost to task i, then a typical proportional allocation is:
(5.10)
Similarly, let z be the total direct field cost which includes the total basic cost and the field
supervision cost of the project, and zi be the direct field cost for task i. If G is the general office
overhead for proration to all tasks, and Gi is the share for task i, then
(5.11)
Finally, let w be the grand total cost of the project which includes the direct field cost and the
general office overhead cost charged to the project and wi be that attributable task i. Then,
(5.12)
and
(5.13)
Example 5-9: Prorated costs for field supervision and office overhead
If the field supervision cost is $13,245 for the project in Table 5-6 (Example 5-8) with a total
direct cost of $88,300, find the prorated field supervision costs for various elements of the
project. Furthermore, if the general office overhead charged to the project is 4% of the direct
field cost which is the sum of basic costs and field supervision cost, find the prorated general
office overhead costs for various elements of the project.
The reliance on labor expenses as a means of allocating overhead burdens in typical management
accounting systems can be illustrated by the example of a particular product's standard cost
sheet. [5] Table 5-8 is an actual product's standard cost sheet of a company following the
procedure of using overhead burden rates assessed per direct labor hour. The material and labor
costs for manufacturing a type of valve were estimated from engineering studies and from
current material and labor prices. These amounts are summarized in Columns 2 and 3 of Table 5-
8. The overhead costs shown in Column 4 of Table 5-8 were obtained by allocating the expenses
of several departments to the various products manufactured in these departments in proportion
to the labor cost. As shown in the last line of the table, the material cost represents 29% of the
total cost, while labor costs are 11% of the total cost. The allocated overhead cost constitutes
60% of the total cost. Even though material costs exceed labor costs, only the labor costs are
used in allocating overhead. Although this type of allocation method is common in industry, the
arbitrary allocation of joint costs introduces unintended cross subsidies among products and may
produce adverse consequences on sales and profits. For example, a particular type of part may
incur few overhead expenses in practice, but this phenomenon would not be reflected in the
standard cost report.
TABLE 5-8 Standard Cost Report for a Type of Valve
Source: H. T. Johnson and R. S. Kaplan, Relevance lost: The Rise and Fall of
Management Accounting, Harvard Business School Press, Boston. Reprinted with
permission.
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Construction cost data are published in various forms by a number of organizations. These
publications are useful as references for comparison. Basically, the following types of
information are available:
Historical cost data must be used cautiously. Changes in relative prices may have substantial
impacts on construction costs which have increased in relative price. Unfortunately, systematic
changes over a long period of time for such factors are difficult to predict. Errors in analysis also
serve to introduce uncertainty into cost estimates. It is difficult, of course, to foresee all the
problems which may occur in construction and operation of facilities. There is some evidence
that estimates of construction and operating costs have tended to persistently understate the
actual costs. This is due to the effects of greater than anticipated increases in costs, changes in
design during the construction process, or overoptimism.
Since the future prices of constructed facilities are influenced by many uncertain factors, it is
important to recognize that this risk must be borne to some degree by all parties involved, i.e.,
the owner, the design professionals, the construction contractors, and the financing institution. It
is to the best interest of all parties that the risk sharing scheme implicit in the design/construct
process adopted by the owner is fully understood by all. When inflation adjustment provisions
have very different risk implications to various parties, the price level changes will also be
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A price index is a weighted aggregate measure of constant quantities of goods and services
selected for the package. The price index at a subsequent year represents a proportionate change
in the same weighted aggregate measure because of changes in prices. Let lt be the price index in
year t, and lt+1 be the price index in the following year t+1. Then, the percent change in price
index for year t+1 is:
(5.14)
or
(5.15)
If the price index at the base year t=0 is set at a value of 100, then the price indices l1, l2...ln for
the subsequent years t=1,2...n can be computed successively from changes in the total price
charged for the package of goods measured in the index.
The best-known indicators of general price changes are the Gross Domestic Product (GDP)
deflators compiled periodically by the U.S. Department of Commerce, and the consumer price
index (CPI) compiled periodically by the U.S. Department of Labor. They are widely used as
broad gauges of the changes in production costs and in consumer prices for essential goods and
services. Special price indices related to construction are also collected by industry sources since
some input factors for construction and the outputs from construction may disproportionately
outpace or fall behind the general price indices. Examples of special price indices for
construction input factors are the wholesale Building Material Price and Building Trades Union
Wages, both compiled by the U.S. Department of Labor. In addition, the construction cost index
and the building cost index are reported periodically in the Engineering News-Record (ENR).
Both ENR cost indices measure the effects of wage rate and material price trends, but they are
not adjusted for productivity, efficiency, competitive conditions, or technology changes.
Consequently, all these indices measure only the price changes of respective construction input
factors as represented by constant quantities of material and/or labor. On the other hand, the
price indices of various types of completed facilities reflect the price changes of construction
output including all pertinent factors in the construction process. The building construction
output indices compiled by Turner Construction Company and Handy-Whitman Utilities are
compiled in the U.S. Statistical Abstracts published each year.
Figure 5-7 and Table 5-9 show a variety of United States indices, including the Gross Domestic
Product (GDP) price deflator, the ENR building index, and the Turner Construction Company
Building Cost Index from 1996 to 2007, using 2000 as the base year with an index of 100.
TABLE 5-9 Summary of Input and Output Price Indices, 1996-2007
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Turner Construction
- Buildings 84.9 88.2 92.3 95.8 100.0 103.0 104.0 104.4 110.1 120.5 133.3 143.5
ENR - Buildings 90.5 95.0 95.8 97.6 100.0 101.0 102.4 104.4 112.6 118.8 123.5 126.7
GDP Deflator 94.0 95.6 96.8 98.0 100.0 102.3 104.2 105.9 107.2 108.6 110.2 112.0
Note: Index = 100 in base year of 2000.
Since construction costs vary in different regions of the United States and in all parts of the
world, locational indices showing the construction cost at a specific location relative to the
national trend are useful for cost estimation. ENR publishes periodically the indices of local
construction costs at the major cities in different regions of the United States as percentages of
local to national costs.
When the inflation rate is relatively small, i.e., less than 10%, it is convenient to select a single
price index to measure the inflationary conditions in construction and thus to deal only with a
single set of price change rates in forecasting. Let jt be the price change rate in year t+1 over the
price in year t. If the base year is denoted as year 0 (t=0), then the price change rates at years
1,2,...t are j1,j2,...jt, respectively. Let At be the cost in year t expressed in base-year dollars and At'
be the cost in year t expressed in then-current dollars. Then:
(5.16)
Conversely
(5.17
)
If the prices of certain key items affecting the estimates of future benefits and costs are expected
to escalate faster than the general price levels, it may become necessary to consider the
differential price changes over and above the general inflation rate. For example, during the
period between 1973 through 1979, it was customary to assume that fuel costs would escalate
faster than the general price levels. With hindsight in 1983, the assumption for estimating costs
over many years would have been different. Because of the uncertainty in the future, the use of
differential inflation rates for special items should be judicious.
Future forecasts of costs will be uncertain: the actual expenses may be much lower or much
higher than those forecasted. This uncertainty arises from technological changes, changes in
relative prices, inaccurate forecasts of underlying socioeconomic conditions, analytical errors,
and other factors. For the purpose of forecasting, it is often sufficient to project the trend of
future prices by using a constant rate j for price changes in each year over a period of t years,
then
(5.18)
and
(5.19)
Estimation of the future rate increase j is not at all straightforward. A simple expedient is to
assume that future inflation will continue at the rate of the previous period:
(5.20)
A longer term perspective might use the average increase over a horizon of n past periods:
(5.21)
More sophisticated forecasting models to predict future cost increases include corrections for
items such as economic cycles and technology changes.
Figure 5-9 shows the change of standard highway costs from 1992 to 2002, and Table 5-10
shows the change of residential building costs from 1970 to 1990. In each case, the rate of cost
increase was substantially above the rate of inflation in the decade of the 1970s.. Indeed, the real
cost increase between 1970 and 1980 was in excess of three percent per year in both cases.
However, these data also show some cause for optimism. For the case of the standard highway,
real cost decreases took place in the period from l970 to l990. Unfortunately, comparable indices
of outputs are not being compiled on a nationwide basis for other types of construction.
Figure 5-9 Producer Prices of Highway and Street Construction (Producer Price Index:
Highways and Streets-monthly data).
1970 77 92 74
1980 203 179 99 +3.4%
1990 287 247 116 +1.7%
Source: Statistical Abstract of the United States. GNP deflator is used for the price deflator index.
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The general conditions for the application of the single parameter cost function for screening
estimates are:
Some of these adjustments may be done using compiled indices, whereas others may require
field investigation and considerable professional judgment to reflect differences between a given
project and standard projects performed in the past.
The total construction cost of a refinery with a production capacity of 200,000 bbl/day in Gary,
Indiana, completed in 2001 was $100 million. It is proposed that a similar refinery with a
production capacity of 300,000 bbl/day be built in Los Angeles, California, for completion in
2003. For the additional information given below, make an order of magnitude estimate of the
cost of the proposed plant.
1. In the total construction cost for the Gary, Indiana, plant, there was an item of $5
million for site preparation which is not typical for other plants.
2. The variation of sizes of the refineries can be approximated by the exponential
rule, Equation (5.4), with m = 0.6.
3. The inflation rate is expected to be 8% per year from 1999 to 2003.
4. The location index was 0.92 for Gary, Indiana and 1.14 for Los Angeles in 1999.
These indices are deemed to be appropriate for adjusting the costs between these
two cities.
5. New air pollution equipment for the LA plant costs $7 million in 2003 dollars (not
required in the Gary plant).
6. The contingency cost due to inclement weather delay will be reduced by the
amount of 1% of total construction cost because of the favorable climate in LA
(compared to Gary).
On the basis of the above conditions, the estimate for the new project may be obtained as
follows:
Since there is no adjustment for the cost of construction financing, the order of magnitude
estimate for the new project is $209.5 million.
Example 5-14: Conceptual estimate for a chemical processing plant
In making a preliminary estimate of a chemical processing plant, several major types of
equipment are the most significant parameters in affecting the installation cost. The cost of
piping and other ancillary items for each type of equipment can often be expressed as a
percentage of that type of equipment for a given capacity. The standard costs for the major
equipment types for two plants with different daily production capacities are as shown in Table
5-11. It has been established that the installation cost of all equipment for a plant with daily
production capacity between 100,000 bbl and 400,000 bbl can best be estimated by using linear
interpolation of the standard data.
1. The installation cost for equipment was based on linear interpolation from Table 5-11,
and adjusted for inflation for the intervening four years. We expect inflation in the four
years to be similar to the period 1990-1994 and we will use the GNP Deflator index.
2. The location index for equipment installation is 0.95 for Memphis, TN, in comparison
with the standard cost.
3. An additional cost of $500,000 was required for the local conditions in Memphis, TN.
The solution of this problem can be carried out according to the steps as outlined in the problem
statement:
1. The costs of the equipment and ancillary items for a plant with a capacity of 200,000 bbl
can be estimated by linear interpolation of the data in Table 5-11 and the results are
shown in Table 5-12.
2. Hence, the total project cost in thousands of current dollars is given by Equation (5.8) as:
3. ($5,333)(1.37) + ($3,333)(1.42) +($2,667)(1.47) + ($2,000)(1.57) =
= $2,307 + $4,733 + $3,920 + $3,140 = $ 19,000
4. The corresponding cost in thousands of four year in the future dollars using Equation
(5.16) and Table 5-9 is:
($19,100)(105/94) = $21,335
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In general, the progress payments to the contractor are based on the units of work completed and
the corresponding unit prices of the work items on the list. Hence, the estimate based on the
engineers' list of quanitities for various work items essentially defines the level of detail to which
subsequent measures of progress for the project will be made.
Using the unit prices in the bid of contractor 1 for the quantitites specified by the engineer in
Table 5-2 (Example 5-3), we can compute the total bid price of contractor 1 for the roadway
project. The itemized costs for various work items as well as the total bid price are shown in
Table 5-13.
TABLE 5-13: Bid Price of Contractor 1 in a Highway Project
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Consider the basic problem in determining the percentage of work completed during
construction. One common method of estimating percentage of completion is based on the
amount of money spent relative to the total amount budgeted for the entire project. This method
has the obvious drawback in assuming that the amount of money spent has been used efficiently
for production. A more reliable method is based on the concept of value of work completed
which is defined as the product of the budgeted labor hours per unit of production and the actual
number of production units completed, and is expressed in budgeted labor hours for the work
completed. Then, the percentage of completion at any stage is the ratio of the value of work
completed to date and the value of work to be completed for the entire project. Regardless of the
method of measurement, it is informative to understand the trend of work progress during
construction for evaluation and control.
In general, the work on a construction project progresses gradually from the time of mobilization
until it reaches a plateau; then the work slows down gradually and finally stops at the time of
completion. The rate of work done during various time periods (expressed in the percentage of
project cost per unit time) is shown schematically in Figure 5-10 in which ten time periods have
been assumed. The solid line A represents the case in which the rate of work is zero at time t = 0
and increases linearly to 12.5% of project cost at t = 2, while the rate begins to decrease from
12.5% at t = 8 to 0% at t = 10. The dotted line B represents the case of rapid mobilization by
reaching 12.5% of project cost at t = 1 while beginning to decrease from 12.5% at t = 7 to 0% at t
= 10. The dash line C represents the case of slow mobilization by reaching 12.5% of project cost
at t = 3 while beginning to decrease from 12.5% at t = 9 to 0% at t = 10.
The value of work completed at a given time (expressed as a cumulative percentage of project
cost) is shown schematically in Figure 5-11. In each case (A, B or C), the value of work
completed can be represented by an "S-shaped" curve. The effects of rapid mobilization and slow
mobilization are indicated by the positions of curves B and C relative to curve A, respectively.
Figure 5-11: Value of Work Completed over Project Time
While the curves shown in Figures 5-10 and 5-11 represent highly idealized cases, they do
suggest the latitude for adjusting the schedules for various activities in a project. While the rate
of work progress may be changed quite drastically within a single period, such as the change
from rapid mobilization to a slow mobilization in periods 1, 2 and 3 in Figure 5-10, the effect on
the value of work completed over time will diminish in significance as indicated by the
cumulative percentages for later periods in Figure 5-11. Thus, adjustment of the scheduling of
some activities may improve the utilization of labor, material and equipment, and any delay
caused by such adjustments for individual activities is not likely to cause problems for the
eventual progress toward the completion of a project.
In addition to the speed of resource mobilization, another important consideration is the overall
duration of a project and the amount of resources applied. Various strategies may be applied to
shorten the overall duration of a project such as overlapping design and construction activities
(as described in Chapter 2) or increasing the peak amounts of labor and equipment working on a
site. However, spatial, managerial and technical factors will typically place a minimum limit on
the project duration or cause costs to escalate with shorter durations.
0 0 0 0
1 3.1% 6.2% 2.1%
2 12.5 18.7 8.3
3 25.0 31.2 18.8
4 37.5 43.7 31.3
5 50.0 56.2 43.8
6 62.5 68.7 56.3
7 75.0 81.2 68.8
8 87.5 91.7 81.9
9 96.9 97.9 93.8
10 100.0 100.0 100.0
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Some of the common features of computer aided cost estimation software include:
Databases for unit cost items such as worker wage rates, equipment rental or material
prices. These databases can be used for any cost estimate required. If these rates change,
cost estimates can be rapidly re-computed after the databases are updated.
Databases of expected productivity for different components types, equiptment and
construction processes.
Import utilities from computer aided design software for automatic quantity-take-off of
components. Alternatively, special user interfaces may exist to enter geometric
descriptions of components to allow automatic quantity-take-off.
Export utilities to send estimates to cost control and scheduling software. This is very
helpful to begin the management of costs during construction.
Version control to allow simulation of different construction processes or design changes
for the purpose of tracking changes in expected costs.
Provisions for manual review, over-ride and editing of any cost element resulting from
the cost estimation system
Flexible reporting formats, including provisions for electronic reporting rather than
simply printing cost estimates on paper.
Archives of past projects to allow rapid cost-estimate updating or modification for similar
designs.
A typical process for developing a cost estimate using one of these systems would include:
1. If a similar design has already been estimated or exists in the company archive, the old
project information is retreived.
2. A cost engineer modifies, add or deletes components in the project information set. If a
similar project exists, many of the components may have few or no updates, thereby
saving time.
3. A cost estimate is calculated using the unit cost method of estimation. Productivities and
unit prices are retrieved from the system databases. Thus, the latest price information is
used for the cost estimate.
4. The cost estimation is summarized and reviewed for any errors.
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Since the tradeoff between the capital cost and the operating cost is an essential part of the
economic evaluation of a facility, the operating cost is viewed not as a separate entity, but as a
part of the larger parcel of life cycle cost at the planning and design stage. The techniques of
estimating life cycle costs are similar to those used for estimating capital costs, including
empirical cost functions and the unit cost method of estimating the labor, material and equipment
costs. However, it is the interaction of the operating and capital costs which deserve special
attention.
As suggested earlier in the discussion of the exponential rule for estimating, the value of the cost
exponent may influence the decision whether extra capacity should be built to accommodate
future growth. Similarly, the economy of scale may also influence the decision on rehabilitation
at a given time. As the rehabilitation work becomes extensive, it becomes a capital project with
all the implications of its own life cycle. Hence, the cost estimation of a rehabilitation project
may also involve capital and operating costs.
While deferring the discussion of the economic evaluation of constructed facilities to Chapter 6,
it is sufficient to point out that the stream of operating costs over time represents a series of costs
at different time periods which have different values with respect to the present. Consequently,
the cost data at different time periods must be converted to a common base line if meaningful
comparison is desired.
Maintenance costs for constructed roadways tend to increase with both age and use of the
facility. As an example, the following empirical model was estimated for maintenance
expenditures on sections of the Ohio Turnpike:
For example, for V = 500,300 ESAL and A = 5 years, the annual cost of routine maintenance per
lane-mile is estimated to be:
The time stream of costs over the life of a roadway depends upon the intervals at which
rehabilitation is carried out. If the rehabilitation strategy and the traffic are known, the time
stream of costs can be estimated.
Using a life cycle model which predicts the economic life of highway pavement on the basis of
the effects of traffic and other factors, an optimal schedule for rehabilitation can be developed.
For example, a time stream of costs and resurfacing projects for one pavement section is shown
in Figure 5-11. As described in the previous example, the routine maintenance costs increase as
the pavement ages, but decline after each new resurfacing. As the pavement continues to age,
resurfacing becomes more frequent until the roadway is completely reconstructed at the end of
35 years.
Figure 5-11: Time Stream of Costs over the Life of a Highway Pavement
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5.14 References
1. Ahuja, H.N. and W.J. Campbell, Estimating: From Concept to Completion, Prentice-
Hall, Inc., Englewood Cliffs, NJ, 1987.
2. Clark, F.D., and A.B. Lorenzoni, Applied Cost Engineering, Marcel Dekker, Inc., New
York, 1978.
3. Clark, J.E., Structural Concrete Cost Estimating, McGraw-Hill, Inc., New York, 1983.
4. Diekmann, J.R., "Probabilistic Estimating: Mathematics and Applications," ASCE
Journal of Construction Engineering and Management, Vol. 109, 1983, pp. 297-308.
5. Humphreys, K.K. (ed.) Project and Cost Engineers' Handbook (sponsored by American
Association of Cost Engineers), 2nd Ed., Marcel Dekker, Inc., New York, 1984.
6. Maevis, A.C., "Construction Cost Control by the Owners," ASCE Journal of the
Construction Division, Vol. 106, 1980, pp. 435-446.
7. Wohl, M. and C. Hendrickson, Transportation Investment and Pricing Principles, John
Wiley & Sons, New York, 1984.
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5.15 Problems
1. Suppose that the grouting method described in Example 5-2 is used to provide a grouting
seal beneath another landfill of 12 acres. The grout line is expected to be between 4.5 and
5.5 feet thickness. The voids in the soil layer are between 25% to 35%. Using the same
unit cost data (in 1978 dollars), find the range of costs in a screening estimate for the
grouting project.
2. To avoid submerging part of U.S. Route 40 south and east of Salt Lake City due to the
construction of the Jardinal Dam and Reservoir, 22 miles of highway were relocated to
the west around the site of the future reservoir. Three separate contracts were let,
including one covering 10 miles of the work which had an engineer's estimate of
$34,095,545. The bids were submitted on July 21, 1987 and the completion date of the
project under the contract was August 15, 1989. (See ENR, October 8, 1987, p. 34). The
three lowest bids were:
3. Find the percentage of each of these bidders below the engineer's cost estimate.
C = (16,000)(Q + 50,000)1/2
where Q is the daily production capacity of batteries and C is the cost of the building in
1987 dollars. If a similar plant is planned for a daily production capacity of 200,000
batteries, find the screening estimate of the building in 1987 dollars.
5. For the cost factor K = $46,000 (in 1968 dollars) and m = 0.67 for an aerated lagoon
basin of a water treatment plant in Table 5-4 (Example 5-6), find the estimated cost of a
proposed new plant with a similar treatment process having a capacity of 480 million
gallons (in 1968 dollars). If another new plant was estimated to cost $160,000 by using
the same exponential rule, what would be the proposed capacity of that plant?
6. Using the cost data in Figure 5-5 (Example 5-11), find the total cost including overhead
and profit of excavating 90,000 cu.yd. of bulk material using a backhoe of 1.5 cu.yd.
capacity for a detailed estimate. Assume that the excavated material will be loaded onto
trucks for disposal.
7. The basic costs (labor, material and equipment) for various elements of a construction
project are given as follows:
Excavation $240,000
Subgrade $100,000
Base course $420,000
Concrete pavement $640,000
Total $1,400,000
8. Assuming that field supervision cost is 10% of the basic cost, and the general office
overhead is 5% of the direct costs (sum of the basic costs and field supervision cost), find
the prorated field supervision costs, general office overhead costs and total costs for the
various elements of the project.
Table 5-15
Equipment cost ($1,000) Factor for ancillary items
Equipment type
150,000 bbl 600,000 bbl 150,000 bbl 600,000 bbl
Furnace $3,000 $10,000 0.32 0.24
Tower 2,000 6,000 0.42 0.36
Drum 1,500 5,000 0.42 0.32
Pumps, etc. 1,000 4,000 0.54 0.42
10. The total construction cost of a refinery with a production capacity of 100,000 bbl/day in
Caracas, Venezuela, completed in 1977 was $40 million. It was proposed that a similar
refinery with a production capacity of $160,000 bbl/day be built in New Orleans, LA for
completion in 1980. For the additional information given below, make a screening
estimate of the cost of the proposed plant.
1. In the total construction cost for the Caracus, Venezuela plant, there was an item
of $2 million for site preparation and travel which is not typical for similar plants.
2. The variation of sizes of the refineries can be approximated by the exponential
law with m = 0.6.
3. The inflation rate in U.S. dollars was approximately 9% per year from 1977 to
1980.
4. An adjustment factor of 1.40 was suggested for the project to account for the
increase of labor cost from Caracas, Venezuela to New Orleans, LA.
5. New air pollution equipment for the New Orleans, LA plant cost $4 million in
1980 dollars (not required for the Caracas plant).
6. The site condition at New Orleans required special piling foundation which cost
$2 million in 1980 dollars.
11. The total cost of a sewage treatment plant with a capacity of 50 million gallons per day
completed 1981 for a new town in Colorado was $4.5 million. It was proposed that a
similar treatment plant with a capacity of 80 million gallons per day be built in another
town in New Jersey for completion in 1985. For additional information given below,
make a screening estimate of the cost of the proposed plant.
1. In the total construction cost in Colorado, an item of $300,000 for site preparation
is not typical for similar plants.
2. The variation of sizes for this type of treatment plants can be approximated by the
exponential law with m = 0.5.
3. The inflation rate was approximately 5% per year from 1981 to 1985.
4. The locational indices of Colorado and New Jersey areas are 0.95 and 1.10,
respectively, against the national average of 1.00.
5. The installation of a special equipment to satisfy the new environmental standard
cost an extra $200,000 in 1985 dollar for the New Jersey plant.
6. The site condition in New Jersey required special foundation which cost $500,00
in 1985 dollars.
12. Using the ENR building cost index, estimate the 1985 cost of the grouting seal on a
landfill described in Example 5-2, including the most likely estimate and the range of
possible cost.
13. Using the unit prices in the bid of contractor 2 for the quantitites specified by the
engineer in Table 5-2 (Example 5-3), compute the total bid price of contractor 2 for the
roadway project including the expenditure on each item of work.
14. The rate of work progress in percent of completion per period of a construction project is
shown in Figure 5-13 in which 13 time periods have been assumed. The cases A, B and C
represent the normal mobilization time, rapid mobilization and slow mobilization for the
project, respectively. Calculate the value of work completed in cumulative percentage for
periods 1 through 13 for each of the cases A, B and C. Also plot the volume of work
completed versus time for these cases.
Figure 5-13
15. The rate of work progress in percent of completion per period of a construction project is
shown in Figure 5-14 in which 10 time periods have been assumed. The cases A, B and C
represent the rapid mobilization time, normal mobilization and slow mobilization for the
project, respectively. Calculate the value of work completed in cumulative percentage for
periods 1 through 10 for each of the cases A, B and C. Also plot the volume of work
completed versus time for these cases.
Figure 5-14
16. Suppose that the empirical model for estimating annual cost of routine maintenance in
Example 5-17 is applicable to sections of the Pennsylvania Turnpike in 1985 if the ENR
building cost index is applied to inflate the 1967 dollars. Estimate the annual cost of
maintenance per lane-mile of the tunrpike for which the traffic volume on the roadway is
750,000 ESAL and the age of the pavement is 4 years in 1985.
17. The initial construction cost for a electric rower line is known to be a function of the
cross-sectional area A (in cm2) and the length L (in kilometers). Let C1 be the unit cost of
construction (in dollars per cm3). Then, the initial construction cost P (in dollars) is given
by
P = C1AL(105)
The annual operating cost of the power line is assumed to be measured by the power loss.
The power loss S (in kwh) is known to be
Suppose that the power line is expected to last n years and the life cycle cost T of the
power line is equal to:
T = P + UK
where K is a discount factor depending on the useful life cycle n and the discount rate i
(to be explained in Chapter 6). In designing the power line, all quantitites are assumed to
be known except A which is to be determined. If the owner wants to minimize the life
cycle cost, find the best cross-sectional area A in terms of the known quantities.
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5.16 Footnotes
1. This example was adapted with permission from a paper, "Forecasting Industry Resources,"
presented by A.R. Crosby at the Institution of Chemical Engineers in London, November 4,
1981. (Back)
2. This example is adapted from a cost estimate in A.L. Tolman, A.P. Ballestero, W.W. Beck and
G.H. Emrich, Guidance Manual for Minimizing Pollution from Waste Disposal Sites, Municipal
Environmental Research Laboratory, U.S. Environmental Protection Agency, Cincinatti, Ohio,
1978. (Back)
4. This and the next example have been adapted from P.M. Berthouex, "Evaluating Economy of
Scale," Journal of the Water Pollution Control Federation, Vol. 44, No. 11, November 1972, pp.
2111-2118. (Back)
5. See H.T. Johnson and R.S. Kaplan, Relevance Lost: The Rise and Fall of Management
Accounting, Harvard Business School Press, Boston, MA 1987, p. 185. (Back)
6. This example is adapted from McNeil, S. and C. Hendrickson, "A Statistical Model of
Pavement Maintenance Expenditure," Transportation Research Record No. 846, 1982, pp. 71-
76. (Back)
7. This example is adapted from S. McNeil, Three Statistical Models of Road Management
Based on Turnpike Data, M.S. Thesis, Carnegie-Mellon University, Pittsburgh, PA, 1981.
(Back)