4 CHAPTER 4- PROJECT COST ESTIMATION

4.1 Introduction

Project Cost estimation is the process of valuing on monetary expression, including the cost of
all possible entrants necessary for the planning, implementing and monitoring stages of the
proposed project under consideration. Cost estimation is the determination of the probable cost
of a project.

Project Cost includes:

• Preliminary investigation (project appraisal costs)

• Design and supervision (consultancy cost)
• Construction works (contractor’s cost)
• Land owning cost, and
• Monitoring costs

An estimate serves a number of different functions, depending on the stage of the project, as
shown below:

• Feasibility: Initially feasibility of the project need to be determined; the Feasibility

Estimate is Conceptual.

• Schematic Design (Conceptual design): Sketches are prepared. Major elements are defined;
Use a preliminary method to estimate cost. Cost of each element is established (cost plan).

• Design Development: Progressively the scope of the project is defined; A series of

preliminary estimates are done during this phase to assure adherence to cost plan.

• Contract Document: Finalize drawings & Specifications; Designer’s estimate to anticipate

and check contractor’s bid prices.

• Bidding Phase: Contractors prepare detailed estimate to submit bids.

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 • Construction Phase: Estimates are prepared for cost for cost Control and for change order
evaluations.

Feasibility Estimate (Conceptual Estimate)

• Needed to make decision go/no go with project

• Costs include:

• Land
• Financing cost
• Consultations/Studies
• Engineering
• Project Management
• Construction
• Operation & Maintenance

Preliminary Estimates and Cost Planning

• The Conceptual Estimate found during feasibility becomes the initial project budget

• Subsequent design development should remain within the limit of this budget

• For that purpose, several preliminary estimates are performed as more details become
available through the design.

• Preliminary estimates assign cost to various assemblies (elements) of the project (Cost
Plan). {substructure, superstructure, interior partitions & doors, exterior cladding ..etc.}

• Preliminary estimates allow for Value Analysis – Compare value of an element with its
cost Consider Alternatives Select desired option.

Over all the main purpose of cost estimation can be summarized as follow:

• know the volume of work in reference to the fund available

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 • determine actual cost per unit of item

• identifying engineering estimate of the work for bidding purpose

• work out economical use of materials, labor and equipment

• in cases of variations to determine the extra cost to be incurred

• when there is escalation, to work out the escalation in cost

4.2 Information required for cost estimation

The following information is required to define cost per unit of work

• Correct information of the market price of the materials at the time of need to be
used as a basic price

• Correct information of the rates of various categories of skilled and unskilled

laborers as wage rates to be used for daily work rate

• Output of laborers per day for various types of items (productivity)

• Correct information of the rates of various categories of equipment and tools as

rental rates to be used for major items of rates

• Up-to-date knowledge of the construction methods.

4.3 Knowledge and managerial skills for cost estimation

The following knowledge, managerial talents, and degree of construction experience make a
good estimator.

• Ability to read and understand contract documents, with special skills in reading
construction drawings for all specialties and related specifications.

• Ability to accurately take off the quantities of construction work for which he or she is
preparing the detail estimate.

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 • Ability to visualize the future building from drawings, which usually requires some
years of construction site experience.

• Knowledge of arithmetic, basic geometry, and statistics.

The following knowledge, managerial talents, and degree of construction experience make a
good estimator.

• Familiarity with estimating software in depth and with available building cost
databases.

• Knowledge of building construction methods.

• Knowledge of labor productivity, crew composition, and impacts of various forecasted

site conditions on crew output.

• Possession of office managerial skills in organizing project-related cost information.

• Ability to work under pressure and to meet all bid requirements and deadlines

4.4 Factors Affecting Cost Estimation

Factors which affect the cost estimation are summarized as follow:

• Type and documentation of the project

• Construction scheduling

• Bidding environment

• Quality and availability of material and labor (given in specification)

• Construction facilities /tools and method of construction

• Location of the site: Transportation charges

• Proper management

• Land charges (lease)

• Nature of subsurface condition

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NB: Cost due to construction is given special attention here; it includes cost due to material, cost
due to labor, cost due to equipment, overhead costs and contractor’s profit. In order to facilitate
estimation of cost due to material, it is important to know the quantities of various elements
involved in construction of various parts of the building work i.e. material break down is
essential. Construction cost includes

• Cost due to material,

• Cost due to labor,
• Cost due to equipment,
• Overhead costs and contractor’s profit.

Material Break Down -In order to facilitate estimation of cost due to material, it is important to
know the quantities of various elements involved in construction of various parts of the building
work

Example: Material Break Down for 1m3 C-25 concrete (1:2:3 mix)

Wet (fresh) concrete mix = 1m3

Quantity for dry base analysis= 1.55m3

Note: -1.5 to 1.6 times dry volume of the materials is required to get 1m3 of compact dense fresh
concrete mix.

Volume of cement = 1/6*1.55 = 0.258m3

= 0.258m3/0.035m3 per bag

= 7.4 bags of cement

Volume of Sand= 2/6* 1.55 = 0.517m3

Volume of Coarse aggregate= 3/6 *1.55 = 0.775m3

Volume of water=0.62*0.258=0.1599m3 =0.16m3(assuming w/c 0.62)

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4.5 Purposes of Cost Estimation

• Determine actual cost per unit of item

• Identifying engineering estimate of the work for bidding purpose
• Work out economical use of materials, labor and equipment
• In cases of variations to determine the extra cost to be incurred
• When changes in cost due to legislation happens, to work out the escalation in cost

The following information is required to define cost per unit of work

➢ Correct information of the market price of the materials at the time of need to be
used as a basic price

eg. 1qntl cement=200-240 birr; 1m3 sand =550birr

1m3 aggregate = 490 birr, I kg of reinforcement bar = 23birr

• Correct information of the rates of various categories of skilled and unskilled laborers
as wage rates to be used for daily work rate.

eg. Forman: 9000birr/month; daily laborer: 80 birr/ day

• Output of laborers per day for various types of items (productivity)

Eg. Productivity=0.5 m3/hr

• Correct information of the rates of various categories of equipment and tools as

rental rates to be used for major items of rates

Eg. mixer= 500 birr/day; loader= 450 birr/hr; vibrator= 100 birr/day

• Up-to-date knowledge of the construction methods.

4.6 Types of cost estimation

Estimation can be broadly classified as preliminary (approximate) and detailed.

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4.6.1 Preliminary /approximate costing

This type of cost estimation is required to know the financial position of the client before costly
detailed designs are carried out.

Such estimates are based on practical knowledge and cost of similar previous works.

Examples of approximate cost estimations are as follows: cost per functional unit, Plinth area
method -cost per m2, Cubical Content method –cost per m3.

A. Cost per functional unit

Hospital =cost per bed, Dormitory = cost per student, Cinema or theatre = cost per seat,
residential buildings =cost per area, road works = cost per kilometer length, culverts or bridges =
cost per meter span, water supply sewerage projects = cost per head of population.

B. Plinth area method cost per m2

Based on PLINTH AREA -roof area or external dimensions at the plinth level (Courtyard &
open area shall not be included)

The rate per meter square is deduced from the cost of similar building projects in the locality.

Eg: 1m2=7500 birr (construction cost estimate for an appartment)

C. Cubical Content method –cost per m3

Based on cubical contents of various buildings, i.e. Plinth area of the building x height x cubic
content rate.

Height should be taken from the top of flat roof (or halfway of the sloped roof) to the top of
concrete in foundation.

4.6.2 Detailed cost estimate (based on item rate)

This is the most reliable and accurate type of estimate. The quantities of items are carefully
prepared from the drawings and the total cost worked out from up to date market rates.

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A detail cost estimate thus requires:

• Quantity surveying and

• Analysis of the different rates for the quantities prepared.

4.7 Basic Cost Components of a Construction Project

Basically the cost of any construction project comprises

• Direct costs, which include the direct cost of materials, labor as well as equipment and

• Indirect costs, which include but not limited to head office and site overhead costs.

A. Direct Construction Cost

Direct construction costs are all costs that can be specifically booked with an activity in a
project. The direct costs mainly include material, labor, equipment and subcontract costs

• Direct material costs – These costs referring to the cost of materials, consumables
and components used for executing an activity including the allowances for scrap and
wastages.
• Direct labor costs – All costs related to the workers working on a specific activity
such as carpenters, masons, erectors, painters, plumbers and so on.
• Direct equipment costs – These costs referring to the costs of machineries and plants
used in executing a specific activity.
• Subcontract costs – In case some specific activities are subcontracted, the subcontract
price will be considered as the direct cost of the activities to be executed by the
subcontractor.

B. Indirect Construction Cost

Indirect construction costs are all costs, which cannot be directly booked under a specific activity
in a construction project but required to keep the whole project operational.

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These costs are also called overhead costs, which mainly include the head office and site
overhead costs.

i. Head office overhead costs

Head office overhead costs are all costs required to run the whole operation of the construction
company, which usually administers different projects at a time.

These costs are not usually associated with specific project but rather shared proportionally by all
projects under the company

Some of the head office overhead costs are

• Senior management costs and Indirect labor costs – salaries and benefit package for
senior Management, technical, administrative, marketing, finance and supply staffs.

• Head office building costs – Rental or depreciation cost

• Bidding Expenses

• Expertise service costs – external auditors, lawyers, management consultants and external
trainings.

• Office furniture and equipment

• Office running expenses – expenses such as telephones, fax, internet services, stationery,
mail services and so many others.

• Transportation and travel expenses - costs related to transportation, per diem and living
expenses.

ii. Site overhead costs

Site overhead costs are all costs required to run the whole operation of a specific construction
project at site level.

Some of the site overhead costs are

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 • Site management costs and Indirect labor costs – salaries and benefit packages of the site
management members, general foremen, site engineers, office engineers, administrative
and finance staffs, data collectors in the project site.

• Mobilization and demobilization costs

• Site offices

• Office furniture and equipments

• Office running expenses - expenses such as telephones, fax, internet service, mail service
and stationery for the site office

• Water and power supply; Access roads etc…

C. Risk Allowance

Usually contractors incorporate risk allowances in their tender prices to compensate the negative
impacts of different risks such as contractual, technical, political and economic risks.

D. Profit and Income Tax

construction projects are executed by contractors whereby these contractors will commit to
invest their capital to get maximum possible profit from the contracts to be performed.

A profit margin entirely depends on the market competitiveness and company strategies.

Income tax=30% of gross profit

VAT= 15% of the construction cost

4.8 Rate analysis

Rate Analysis is the process of fixing cost per unit of measurement for the different item of
works.

Total cost per unit of work (TC): Direct cost (DC) + Indirect cost (IC)

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DC includes cost due to material (MC), cost due to labor (LC), cost due to equipment (EC), IC
covers overhead costs, and contractors profit.

In order to facilitate estimation, Cost break down is essential.

Example: -Calculate the Unit price for C -25 concrete per m3 of work (formwork and
reinforcement rated separately). Assume 15% overhead and 20 % profit.

Solution: -

Total cost (TC) = Direct Cost (DC) + Indirect Cost(IC)

IC = (15% + 20%) of DC = 35 % of DC

Direct Cost (DC) = Material Cost (MC) + Labour Cost(LC) + Equipment Cost (EC)

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 Material cost (MC)

Cement 7.4 bags * 100birr/ bag 740 birr/m3

Sand 0.517m3 * 550 birr/m3 284.35 birr/m3

Aggregate 0.775m3 * 490 birr/m3 379.75 birr/m3

Water 0.16m3 * 3 birr/m3 0.48 birr/m3

Labour cost (LC)

Assuming the crew consists of a foreman, mason, four daily laborers, mixer operator and
Vibrator operator and assuming a Crew productivity of 0.50 m3 per hr:

Personnel Salary per hr Indexed hr rate Utilization factor Lc/hr

(120%)
Forman 9000birr/month/(26days/month* 51.92 =1/4 =0.25 (assuming 4 12.98
8hrs/day) = 43.27 birr/hr crew under him)
Mason 100birr/day / ( 8hrs/day) = 12.5 birr/hr 15 1 15
Daily laborers 4* 80birr/day / (8hrs/day) = 40 birr/hr 48 1 48
(4)
Mixer operator 75 birr/day /(8hrs/day) = 9.375birr/hr 11.25 1 11.25
Vibrator 75 birr/day / (8hrs/day) = 9.375 birr/hr 11.25 1 11.25
operator
Total (Birr/hr) 98.48
Total LC (birr/M3) 98.48/0.5
= 196.96

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Equipment Cost (EC)

Assuming a mixer with a daily rental rate of 500Birr/hr and a vibrator with a daily rental rate of
100 birr/hr and equipment productivity of 0.5 m3 per hour:

Equipment Hourly rental rate Utilization factor EC/hr

mixer 500birr/day/ (8hrs/day)= 62.5 1 62.5 birr/hr

birr/hr

vibrator 100 birr/day /(8hrs/day)= 25 1 25 birr/hr

birr/hr

Total= 87.5 birr/hr/(0.5 m3/hr) =

175 birr/m3

DC = MC + LC +EC

DC = 1404.58+ 196.96+ 175 = 1776.54 Birr/m3

IC= 35/100 * 1776.54 = 621.789 Birr/m3

TC = (1776.54 + 621.789) Birr/m3 = 2398.325

≅ 2400 Birr/m3

The unit rate of C25 concrete = 2400 birr/m3

Example: If the quantity of C25 concrete was found to be 110 m3 from the takeoff; the total cost
of concrete would be

=> 2400birr/m3 * 110 m3 = 264,000 birr

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REFERENCE

1. Estimating and Tendering for Construction Work, Martin Book, 3rd Edition, 2004.

2. Civil Engineering, Estimating and Costing (Including Quantity Surveying Valuation and
Contracting), V.N. Vazirani & S.P. Chandola, 4th Edition, Khana Publisher.

3. Contract, Specification and Quantity Survey, Lecture notes by Nasir Bedewi, School of
Civil Engineering, FOT, AAU.

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