Construction Cost Estimating Guide

TPD – Project & Portfolio Manangement

Introduction
This Reference Guide provides instruction for the creation and management of construction cost estimates for roadway
and bridge projects. This guide provides a framework of recognized and accepted processes and tools that each TxDOT
district can adapt and use as appropriate for their situation.

The Reference Guide was developed to:

• Achieve accuracy, accountability, and consistency in cost estimation, and cost management efforts during the
Planning and Programming, Preliminary Design, and Design phases of project development as well as in
consrtuction
• Acknowledge that uncertainty exists in all projects and how to account for and present the impact of those
uncertainties within a cost estimate
• Define a process framework relating to cost estimating, and cost estimate management that can be
consistently applied to ensure that TxDOT is thorough and transparent in the development of roadway and
bridge projects
• Follow a framework based on national research and recommended best practices from other state
departments of transportation and federal guidelines
• Include discussions and tools to address projects of different complexity/rigor levels

Components of a Cost Estimate:

Base Estimate: Will be developed and documented by the districts, engineering judgement will be applied.
They will be developed and based on the best information known at the time and the phase of the project.
Allowances: Items known to be required on the project but at a particular project development stage are not
yet known or quantifiable.
Contingencies: Costs for unknowns and uncertainties should be documented and included in the engineer’s
estimate.

Contingency
Unknowns

Allowances
Unquantifiable
Areas of Work
Allowances

Quantifiable
Base Estimate
Knowns

Known
Quantities and Pricing
Risk and Contingency:
Cost estimation considers uncertainties and related risks early and often in the project
development process. Management uses identified risks and uncertainties to structure Contingency is meant
procedures that mitigate, eliminate, or account for the possible variation in the to protect the project
outcomes. against cost increases
• Contingency is needed in an estimate to account for the second type of that may arise when
known unknowns. risks become reality,
• Risk management practices and tools can assist in the calculation of not to cover overruns,
inflation, or allow for
appropriate contingencies to account for these costs.
scope creep.
By their very nature, risks have a probability of occurring and if they do occur, will
impact the project in a positive or negative way. A Project Contingency is used to
capture the cost impacts associated with risks.
Contingency funds are incorporated into a cost estimate to account for the risks
associated with the project.

Project Development Phases:

Project Phase: The current project phase is used to identify necessary steps in
developing the cost estimate. As shown in Figure 1: Project Development Process
Phases, each phase builds on the previous phase’s information. Items listed for the
Planning and Programming Phase are also used in the Preliminary Design and Design
Phases.
Figure 1: Project Development Process Phases
Construction Cost Estimate Development and Project Phase:
Project Cost Maturity is how the project cost develops over time with the project, the more developed a project
is, the cost estimate becomes more defined. Until the final engineer’s estimate just prior to letting, an estimate
is compiled with various levels of known and unknown information. Figure 2: Project Cost Maturity, combines
the concept of accounting for the Base Estimate and Contingencies separately throughout project
development as well as the idea that an estimate can fluctuate due to unknowns, risks, and variability. Notice
how contingency reduces as the design matures because assumptions are resolved, risks are managed, and
fewer unknowns remain in the estimate. As a project moves through the development process, the proportion
of “knowns” to “unknowns” change so that, ideally, the project goes to letting with little contingency.
• An estimate at any given point is made up of a base estimate, allowances, and contingency
component. As the project progresses in development, the contingency and allowance amounts are
expected to decrease because the project information is refined. The base estimate increases as
some of the project contingency and allowances are realized and included as part of the base
estimate.

Figure 2 : Project Cost Maturity

Cost Estimating Framework
The framework for the cost estimating process presented provides a systematic approach for determining anticipated project
costs, as shown in Figure 3: Cost Estimating Framework. The description of the steps are generic and applicable to the cost
estimating process across each development phase. These steps convey the idea of a structured approach to cost estimation.
The operational manner in which the steps are performed will vary depending on project development phase. (The level of
completeness in the project scope and refinement of project design will drive these variations.)

Figure 3: Cost Estimating Framework

Developing a Cost Estimate:

Key Activities PURPOSE Every project,

regardless of size or
A. Review project definition Collect and review relevant project information to gain complexity, needs an
and requirements. knowledge of the project in order to identify the proper up-to-date Project
items and inputs that will serve as an accurate basis of Estimate File. Based
the estimate and its updates. on the maturing of
project design and/or
B. Review site Helps the Estimator gain knowledge get a holistic the amount of time
characteristics. perspective as well as, insight, and a better understanding that has passed since
of the project site characteristics and their impact on cost. the previous estimate,
Ex amples of cost increase –work adjacent to historic a completely new
structures, environmentally sensitive or hazardous sites, estimate may be
and limited work space. Site Constraints that require a warranted.
large amount of equipment or if the contractor will need to
mobilize several times.
Ex ample of cost decrease- green field consruction, limited
traffic control devices.
Document all
C . Determine and quantify Determine the categories and quantities for the known assumptions and
estimate elements for items in the base estimate at the time. Be certain to state changes.
k nown items for the base and document any assumptions in determing pricing and Documentation of
estimate. quantities at the time. assumptions and
methods for
• Three point estimating will be done for determing identifying and
the base estimate. Three point estimating is the accounting for
utilization of three estimates (current or allowances and
historical). This method will assist to improve the contingency within an
accuracy of a single-point estimate by considering estimate is critical so
price variability and takes into account contingency is not
uncertainty and risk, by evaluating the optimistic, double-counted.
most lilkely, and pessimistic cost outcomes. This
provides an estimator to tailor the estimate costs
to their location and have a more holistic
approach to the pricing. Three point estimating Getting input from
defines a cost range for an activity's durations as others avoids
well as item’s quantities. unnecessary or
inaccurate
• Appendix A details how to conduct a three point assumptions.
estimate.
D. Determine areas of known Develop/update allowances for each category of work.
w ork but are not yet Document any assumptions that are made for the project Design alternatives
quantifiable for the in determing the cost of the allowancs at that time. need a documented
allowances. Allowances can be determined for category of items for base estimate, list of
the project such as: roadway, pedestrian, safety assumptions, and a list
items….etc. based on the appropriate price unit. Appendix of considered risks for
B will go into detail on determining allowances. which the contingency
For example: If a bridge is part of the project is derived. This
requirements, all bridge elements will not be individually information should be
detailed. The bridge cost can be estimated based on consistent with the level
square foot of bridge deck area or based on historical bids of information available
from similar types of bridges. at the time of each
estimate.
E. Determine contingency Develop/update contingency based on the project phase
When assessing a risk
based on the project’s of development. Document any assumptions that are
and determining a
stage of development. made for the project in determing the contingency at that contingency amount to
time and project phase. Contingency funds are carry in the estimate,
incorporated into a cost estimate to account for the risks base the analysis and
associated with the project. calculations on the
Contingency is meant to protect the project against information you know
cost increases that may arise when risks become reality. at the time. You can
Contingency is not for overruns, inflation, or allow for revise and update as
scope creep. There are different methods in determinging the project design
the contingency for a project. matures.
1. Letting Contingency – A set percentage applied to
the overall project cost to determine the Total
Construction Cost Estimate. Contingency will
default to Financial Management Division
Engineering and Contingency data sheet For risks that are
(examples include safety contingency, change frequently identified
orders, etc. ) based on project class. for similar projects, it
may be more efficient
2. Risk Based Contingency- An element of to develop some
uncertainty is inherent in any cost estimate. In standard
order to account for as much of the uncertainty documentation to
associated with a project cost estimate as is explain and support
practical, project teams will use a risk analysis to the risk analysis and
estimate the contingency amount to be included determined
in the Total Construction Cost Estimate. Appendix contingency value.
C will go into detail in determing a Risk Based Additionally, districts
Contingency. and divisions may
determine ways to
F Review documented State the decisions and assumptions used in the estimate programmatically
estimate assumptions, for communication to management in a structured format. respond to common,
inputs, and calculations. Accumulate and organize all details, summaries, and recurring risks.
assumptions made in completing the estimate.

G. Communicate Estimate Estimates can be communicated and shared with

confidence to internal and external stakeholders. This will
reduce perception of cost increase as a project develops.
Discussion of project cost and needs can be
communicated in a confident and transparent manner
with the public and our planning partners.
Appendix A : Three Point Estimating
Utilization of three estimates is to define an approximate range for an activity's durations, quantities, and costs to improve upon
the accuracy of a single-point estimate by considering uncertainty and risk. Concept originated from the Program Evaluation and
Review Technique (PERT).

 PERT Beta Distribution Estimation Equation:

(𝑂𝑂 + 4𝑀𝑀 + 𝑃𝑃)

𝐸𝐸 =
6
 Most Likely (M): Most realistic expectations of activity durations/quantities/costs
 Optimistic (O): Best-case scenario of activity durations/quantities/costs
 Pessimistic (P): Worst-case scenario of activity durations/quantities/costs

Standard Deviation σ: A quantity calculated to indicate the extent of deviation from the mean.

(𝑃𝑃 − 𝑂𝑂)
σ=
6
 Optimistic (O): Best-case scenario of activity durations/quantities/costs
 Pessimistic (P): Worst-case scenario of activity durations/quantities/costs

C onfidence Level: The probability that the value for the activity falls within a specified range of values.

 68% confidence level = +/- 1 σ

 90% confidence level = +/- 1.645 σ
 95% confidence level = +/- 2 σ
 99.7% confidence level = +/- 3

99.73
95.45
68.27
135

165
195
45
15

75

10
A tool to assist with the calulations and determination of the estimate confidence level is available at the following link:
https://txdot.sharepoint.com/:x:/r/sites/office-epmo/intranet/_layouts/15/Doc.aspx?sourcedoc=%7B802E7503-E4A7-4E44-9D37-
D940CD7DEC5B%7D&file=Risk-Based%20Cost%20Estimation.xlsx&action=default&mobileredirect=true

The following image is a snap shot of the tool that will assit with the three point estimating and determining the base estimate.
In this tool the known and identified items will be be entered at each phase of the project’s development. There are tabs for the
each stage to document the estimate.

Note: Considerations in determining the bid prices : geographic location, quantity of item, item availability, type of qty pricing
such as lump sum.
Appendix B : Determining Allowances:
Allowances are for the known items that you have that are not yet quantifiable. For example, it is known that a project will need
some traffic items ( pavement markers, signs, lighting); however those items are not just yet quantified. We will apply the same
concept of the most likely, optimistic outcome, and pessimistic outcome as we did in the Three Point for the Base Estimate.
The same tool that is used to determine the Base Estimate also has a section for determining the allowances as well. Below is a
snap shot of the tool being utlilzed to determine the allowancs for a project.

Tool to determine allowances: https://txdot.sharepoint.com/:x:/r/sites/office-epmo/intranet/_layouts/15/Doc.aspx?sourcedoc=%7B802E7503-E4A7-

4E44-9D37-D940CD7DEC5B%7D&file=Risk-Based%20Cost%20Estimation.xlsx&action=default&mobileredirect=true

Figure 1 : Determining Allowances

Appendix C : Risk Based Contingency
Evaluating the risk and applying the contingency formally and consistently will create a cost estimate that builds in all costs to
match what you end up paying, not what you end up bidding.

Risk and Impact to Construction Cost:

Key Activities PURPOSE

Tools:
Determine Level of Risk Understanding the level of risk analysis needed for this Project Estimate File
M anagement Needed project will help identify who needs to be involved in risk
management and the level of effort anticipated. Tailor as Design Summary
needed and determine which elements will be used and Report
not used within the Risk Register Annual Scope and
Estimate
Identify Any Known Risks All projects—regardless of size and complexity—contain
Documntation Form
elements of uncertainty. These uncertainties can pose
risks to meeting the project’s objectives including being Typical Sections on
delivered on budget. Identifying risk throughout project a per Mile Basis
development helps TxDOT to eventually monitor and
Similar Projects.
control those risks.
Historical Bids.
Determine Cost of Risks The key purpose of this activity is to figure out the costs of
your Event driven risks in order to determine the amount of Parametric
contingency that should be carried in the estimate to cover Estimating.
these potential risks. Cost Estimate
Spreadsheet
Template.
Determine Probility of Each Confidence level probability to associate the cost to the
Risks risk that is associated with the risk tolerance of your
district administration.
C alculate Estimate Total Estimate = Base + Allowances+ Risk Based Contingency
Determing Cost Associated with Event Driven Risk:
Event Driven Risks are identified risks that, when triggered, result in the predicted impacted event. To figure out the
contingency needed for these unknown costs, you will figure out the probability and impact of these risks (P x I). Figure 1, has
the the Probability Rating to determine the risk based contingency.
Event Driven Risk Example:
 Problems with utility relocations
 If problems with negotiating with utility companies occurs, then there will be delay to the project schedule and change
orders.
 You will figure out the P x I for this as well as the contingency plan and cost.

Figure 2, Risk Based Contigency Register, identifies the risk associated with the project that will have an impact to the
construction cost. Determine the probability of each Event Driven risk in the risk register. This accounts for the probability and
impact of that risk. The cost associated with the risk is then used to determine the contingency on a project. Like the Three
Point Estimating, we will look at the :
 Most Likely (M) Outcome
 Optimistic (O): Best Outcome
 Pessimistic (P): Worst Outcome
The following spreadsheet tool can be used to determine the expected value of the risk. This tool is deivided out to assist with
developing the Risk Based Contingency for the different stages of project development.
The Link to Risked Based Contigency Tool: https://txdot.sharepoint.com/:x:/r/sites/office-
epmo/intranet/_layouts/15/Doc.aspx?sourcedoc=%7B802E7503-E4A7-4E44-9D37-D940CD7DEC5B%7D&file=Risk-
Based%20Cost%20Estimation.xlsx&action=default&mobileredirect=true

Figure 2 : Risk Based Contingency Register

Calculating Total Construction Cost Estimate with Risk Based Contingency:
Now, that the Base Estimate, Allowances, and Risk Based Contingency are determine, the total Total Construction Cost Estimate
can be caluculated. Based on the assumptions of the most likely, optimistic outcome, and pessimistic outcome we will
determine the probability and confidence level of the entire construction cost estimate with the cost estimating tool.
Below in Figure 3: Probability Density Function, you will see the values of the estimate at the P10, which is a 10% confidence
level of the estimate and the P90, which is a 90% confidence level. At the P50, this is the most likey expected outcome of the
construction estimate. This will assist with determining the estimate that is used to request funding and entered for the project.

Figure 3: Probability Density Function