Detailed Estimating Practices of Constru
Detailed Estimating Practices of Constru
Farrukh Arif
Department of Civil Engineering, NED University of Engineering and Technology, Karachi, Pakistan
[email protected]
Syed M. Ahmed
Department of Construction Management, Florida International University, Miami, Florida, USA
[email protected]
Sarosh H. Lodi
Department of Civil Engineering, NED University of Engineering and Technology, Karachi, Pakistan
[email protected]
Abstract
The cost estimate is considered one of the most important and critical phases of a construction project.
Preparing reliable and accurate estimates to help decision makers is the most challenging assignment that
cost engineers and estimators face. Pakistan, a developing country supplemented by fast growing
population, needs adequate and careful allocation of funding for projects of basic amenities and
infrastructure. Cost estimating practices play a vital role in procuring the necessary funding for these
projects as well to undertake these endeavors successfully. This research presents the results of a
questionnaire survey, based on the responses of 46 local construction contracting firms in Pakistan, to
assess the current cost estimating practices followed by the contracting firms in Pakistan, along with
identifying their cost estimating needs, requirements, considerations, procedures, information items
needed for estimating, problems hindering the abilities of estimators, and use of information technology
to produce accurate cost estimates. The paper identifies the need for a professional construction
management information system to provide timely, accurate and consistent project costing, the need for
good communication with subcontractors and material suppliers to keep pace with market trends, and a
need to replace the current low bid project procurement environment by a performance based award
system for the local construction industry.
Keywords
Detailed estimating, Information items, Computerized estimation, Contractors, Pakistan.
1. Introduction
Detailed cost estimating is the process whereby the contractor arrives at an expenditure of resources
necessary to complete a construction project in accordance with plans and specifications (Stewart, 1986).
Detailed cost estimating process is extremely important since it enables construction companies to
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determine what their direct costs will be, and to provide a `bottom line’ cost below which it would not be
economical for them to carry out the work (Smith, 1995). The preparation of a detailed cost estimate for a
particular construction project requires collecting, retrieving, and manipulating massive amounts of
independent, but related, cost and non-cost data and information (AI-Harbi et al., 1994). Accurate
prediction of construction costs is heavily dependent upon the availability of quality historical cost data,
strong estimating procedures, the level of professional expertise and extent of use of information
technology among other things (Liu and Zhu, 2007). The judgment of these factors is of prime importance
for measuring the strength of cost estimating systems and procedures of any construction industry.
However, such measurements available for developing countries cover limited aspects only.
Pakistan is a developing country that is currently enjoying relatively strong growth in construction
activities. After the lost decade of the 1990s, Pakistan’s economy has bounced back and has been
exhibiting growth rates of above seven percent in recent years (Economic Survey of Pakistan, 2006-07).
This, coupled with population growth rates of over two percent (Economic Survey of Pakistan, 2006-07),
places an acute demand on basic and advanced infrastructure, which in turn needs adequate and careful
allocation of funding for projects of basic amenities and infrastructure. Cost estimating practices play a
vital role in procuring the necessary funding for these projects as well to undertake these endeavors
successfully.
This research is an effort to assess the current cost estimating practices of construction firms in Pakistan
along with identifying cost estimating needs, considerations, estimating procedures, issues that hinder the
abilities of estimators and use of information technology to produce accurate cost estimates by the
contracting firms in Pakistan. Remaining competitive implies efforts to continuously implement quality
improvement in contractor activities, including the estimating process. As a result of this study, a set of
recommendations has been put forward to improve the current systems and procedures of cost estimation.
2. Context
Most construction contracts are fixed price contracts with incentives for cost saving and early completion
as well as penalties for cost overrun and delays. Central to cost-based competition is the capability to
accurately predict the cost of delivering a project. For constructors, successful bidding is critical for
survival and this depends to a large extent on estimates of project cost to the constructor (Skitmore,
1989). Overestimated cost could result in misjudgment for the feasibility of a project or loss of a contract
to competitors. On the other hand, an underestimated cost could lead to a situation where a contractor
incurs significant losses. This, coupled with the fact that the profitability in the construction industry is
generally low as compared to other industries (Akintoye and Skitmore, 1991), can be financially
devastating to a contractor organization. As succinctly stated by Hicks (1992), “without an accurate cost
estimate, nothing short of an act of God can be done to prevent a loss, regardless of management
competence, finance strength of the contractor.”
To be competitive, a contractor must be able to create a cost estimate as part of the bid in a way that
enables him, on a regular and repetitive basis, to provide a lower price than other contractors, but still be
able to recognize a profit. Cost estimating process can be described as “the technical process or function
undertaken to assess and predict the total cost of executing an item(s) of work in a given time using all
available project information and resources” (Kwakye, 1994). In general terms, a cost estimate in the
construction industry is simply a value developed by a contractor that is believed to be adequate to
construct a given project. Cost estimates serve many purposes, all of which are important in the planning
and construction of a project.
Typically, estimation of project effort needs to be made at various stages of a project. At the conceptual
stage, a ballpark figure is needed to ascertain whether the feasibility of the project should be investigated.
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Similarly, budget estimates are generated in the schematic design phase to help an owner to determine the
proper scope and suitability of his plan. The budget estimate will help an owner define or redefine his
scope, and apply for and secure the necessary funding for the project. These initial estimates, although not
carrying any direct financial risk, must still be sufficiently accurate and complete to provide an owner the
needed information on which he or she will base decisions. Later at the bidding and construction stages,
fairly reliable and detailed estimates are needed for bidding and budget control purposes. Due to
differences at different project stages in estimation objectives and in the availability of information
required for using various estimation methods, effective estimation at different project stages is likely to
depend on different sets of factors at each stage. For example, clear scope definition and specification of a
project could have more significant effect on the level of estimate accuracy in the early stage than in the
later stages.
Cost estimating effort is largely up to the estimator in charge, but it is the contractor’s responsibility, as a
business organization, to secure the talent necessary that will produce responsible and competitive bids.
The ability to attract and retain this talent is paramount to the contractor’s success and growth. Having an
experienced, knowledgeable, and dedicated estimator is mandatory to a contractor’s ability to compete
and succeed in the marketplace.
3. Research Objectives
The core objective of the research was to assess the detailed project cost estimating practices in the
construction firms in Pakistan. The study target was various types of construction contracting firms,
including general contractors, specialty contractors, construction management contractors and design-
build contractors. Assessment of practices included identifying cost estimating needs, requirements,
considerations, information items needed, and procedures. Furthermore, issues that hinder the abilities of
estimators were also diagnosed, as well as extent of usage of information technology to produce more
accurate cost estimates was also evaluated.
4. Methodology
1. A thorough literature review was done as well as expert opinions were taken from a selected
cross-section of local industry experts to identify the key elements of a survey that may provide a
good means of judging the local cost estimation practices.
2. A questionnaire was developed to elicit information about the detailed cost estimating practices
of local contracting firms.
3. A structured survey was conducted via postal mail.
4. Validation of survey was done via personal interviews with selected personnel.
5. Assessment of feedback from survey was made.
6. Relevant conclusions and recommendations were drawn.
The methodology is explained as follows. In the first step, a thorough literature review was performed to
identify the key elements of a survey that may provide a good means of judging the local cost estimation
practices. The literature review was done through books, conference proceedings, internet, and leading
construction management and engineering journals. Most useful works studied included: AI-Harbi et al.,
(1994); Hicks (1992); Liu and Zhu (2007); Skitmore (1989); Smith (1995); and Stewart (1986).
Following the identification of the key elements of the survey, expert interviews were conducted from a
selected cross-section of local construction industry experts, including representatives from general
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contracting organizations, specialty contracting contractors, design-build contractors, construction
management professionals and project owners. The objective was to verify the key elements as well as
identify any further elements relevant to the local construction industry cost estimating practices and
issues. As a result of the interviews, the components and constituent elements of the survey were
finalized.
In the next step, a structured questionnaire consisting of two parts was designed – parts A and B. Part A
consisted of requesting respondent’s personal information (e.g. work experience, experience as cost
estimator, etc.) and company information (e.g. type of organization, types of construction works
performed, years in business, annual volume of work, number of permanent employees, cities of
operation etc.). Part B consisted of requesting information about the detailed cost estimating practices of
local contracting firms. This included collecting data on the following aspects: cost estimation
requirements, considerations and setup in the responding organizations; cost estimation procedures and
issues in the responding organizations; and computerized estimation process – extent of use and issues.
Part B of the questionnaire is explained in more detail in section 5.
The data of this study were collected from the participants through postal survey. The questionnaire was
circulated among general contractors, specialty contractors, construction management contractors, and
design-build contractors. The surveys were aimed to be filled by the cost estimating personnel in the
target organizations. Few unstructured interviews with selected respondents from the various groups of
contractors were also conducted to clarify their responses, to discuss the survey results and to validate the
survey. The survey response details are given in section 6.
In the final steps, based on all the gathered information, a descriptive analysis was performed as to the
current cost estimating practices of construction firms in Pakistan along with identifying cost estimating
needs, considerations, estimating procedures, issues that hinder the abilities of estimators and use of
information technology to produce accurate cost estimates by the contracting firms in Pakistan. The
analysis of results is given in section 7.
Based on the survey results and analysis, relevant conclusions and recommendations were drawn and are
as given in sections 8 and 9.
5. Survey Design
A structured questionnaire consisting of two parts was designed – parts A and B. As identified and
explained in section 4, part A consisted of requesting respondent’s personal information and company
information.
Part B consisted of three sections. The first section was titled cost estimation requirements,
considerations and setup in the responding organizations. This section contained questions about
estimators and their firms, including required years of experience for estimators, language of
communication between contractor and the owner or owner’s representative, management level at which
the firm's bidding prices are settled, and method of allocating company overhead, project overhead, and
profit.
The second section was titled cost estimation procedures and issues in the responding organizations. In
this section, the participants were asked about the methods of detailed estimating usually used, and their
assessment of their own past estimates. Sixteen important information items were needed to make the
detailed estimates, and 21 problems that may face estimators were listed for evaluation. The participants
were asked to rate both information items and problems, according to their importance on a five-point
scale (0 = very low; 1 = low; 2 = medium; 3 = high; and 4 = very high).
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The third section was titled computerized estimation process – extent of use and issues. This section was
provided to help assess whether the estimator used a computer in developing cost estimates, and the
reasons if the answer was "no." If the answer was "yes," the participant was asked to state the type of
estimating software used, benefits of computerized estimation, and whether the computer was being used
to perform other management functions such as accounting and project scheduling.
6. Survey Response
6.1 Response Rate
The response rate for the survey is shown in Table 1. This response rate (54%) is considerably good for a
construction industry questionnaire survey. In similar construction industry surveys, Farooqui et al.
(2008) received a response rate of 57%, and Ahmed and Azhar (2004) received 30.4%. Baker (1998)
reported that statistically reliable conclusion can be obtained from a sample size of 20 or more.
The respondents included estimators working with these organizations. The average total work experience
of the responding personnel was almost eleven (11) years, while the average work experience related to
cost estimation or cost engineering was almost eight (8) years. Almost 56% of the respondents had at least
a bachelor’s degree in civil engineering or related discipline.
In line with the format of the questionnaire, the results are reported in three sections. The companies’
responses are indicated as a percentage of total responses.
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7.1 Cost Estimation Requirements, Considerations and Setup in Contractor Organizations
In this section of the survey, the respondent contracting firms were asked about the basic cost estimation
requirements, their considerations in the estimation process and their firm’s cost estimation setup. The
results are illustrated in the following sub-sections.
The respondents were asked about minimum experience required by firms to hire cost estimators. The
results showed that almost 22% of the firms had no particular requirement of experience for hiring cost
estimators, while only 26% of the firms required an experience of more than five years. Almost 69% of
the organizations required at least three years of experience for estimating employment. A breakup of the
results is shown in Table 2.
The results show that an appreciable proportion of firms (31%) place little or no emphasis on estimator’s
experience during the hiring process. This may indicate that these firms do not necessarily consider
experience of estimator as a significant factor contributing towards more accurate estimation. This, in a
way, shows weakness of, as well as lack of adequate emphasis on the cost estimation setup of
construction contracting firms.
The respondents were asked about the language used in developing cost estimates. Responses indicated
that almost seventy percent (69.6%) of the firms developed their cost estimates in English, while the
remaining (30.4%) used both Urdu and English to develop their estimates. The firms were also asked
about the official language used for communication among the stakeholders regarding estimates. Almost
forty eight percent (48%) of the firms used English only as the official communicating language while the
remaining fifty two percent (52%) of the firms used both Urdu and English as the official communicating
language. Urdu was not being used alone for developing as well as communicating estimates, because
many materials and equipment were imported from outside the country, with English names and
specifications. The above inconsistency in the use of one language for developing and communicating
estimates indicates a lack of formalized approach towards the cost estimating process in the industry,
which may be a contributing reason leading to cost related disputes.
The firms were inquired as to whether project management and/ or functional management input was
customarily sought while settling bid prices. Most of the firms (65.2%) were found to settle their bid
prices at the top management level only without any involvement of project and/ or functional
management. This lack of consideration of project technical and managerial requirements and issues
shows that bid estimates are usually produced with the objective to win bids rather than to accurately
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estimate the real cost of the project, since the earlier is usually the primary concern of top management.
This provides a major reason of ending up with unrealistic project cost estimates, specifically in a low bid
work environment like Pakistan. A breakup of the results is shown in Table 3.
Percent of
Management Level
Responses
Project management 21.3%
Functional/ Departmental management 13.5%
Top/ Executive management 65.2%
The firms were inquired about their method of allocating overheads – project and company. With respect
to project overheads, the results show that most firms (69.56%) do breakup assessment for allocating the
overhead, whereas the remaining firms (30.43%) use a fixed percentage of total estimated direct project
cost that usually varies (according to nature of the project) between 5% to 40%. The large variation in
project overhead percentage shows an evident lack of cost control mechanisms on projects.
With respect to company overheads, results indicate that more than one-third of the firms (36.85%) do
breakup assessment to allocate yearly company overhead to projects. Also, an almost similar proportion
of firms (35.05%) allocate these overheads to projects proportionally based on project’s monetary value
and schedule (estimated time of completion) that usually varies between 2% to 5%. The remaining firms
(28%) allocate these overheads equally to all projects currently in hand or are in the planning stage.
To overcome the project risk, a number of firms (36.84%) allocate contingency allowance as a fixed
percentage of total direct cost of project. This fixed percentage usually varies between 1% and 3%. Also a
number of firms (26.32%) allocate contingency allowance as a fixed percentage of total estimated project
cost, while the remaining firms do not allocate any contingency allowance for overcoming project risks.
Allocating contingency as a fixed percentage in a project shows lack of usage of a structured risk
management approach or rather a lack of usage of proactive risk management strategy on projects. Zero
contingency allocation by a few firms indicates a lack of appreciation of the need to fund projects from
reserve accounts to cater for unfavorable, unforeseen or changed conditions.
As far as profit allocation is concerned, most of the firms (65.2%) were found to estimate profit based on
many subjective factors such as nature of the job, job need for the company, resource commitment on the
job, job schedule, type and nature of client, etc. The result shows that there is a good level of
understanding among the contracting firms for the consideration of the above-mentioned factors in order
to achieve a successful profitable project.
In this section, the respondent firms were asked about the basic cost estimation procedures, the process
they follow, information needed to develop estimates and issues and obstacles involved in the process.
The results are discussed in the following sub-sections.
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7.2.1 Methods of Detailed Estimating
The detailed estimates for lump sum projects are usually prepared using unit cost estimates (67.8% firms),
which are based on material, labor and equipment prices, and man-hour production rates. Most of the
remaining firms (22.4%) use schedule-based estimation performed by resource/ cost loading via
computerized methods/ software (such as Microsoft Project, Primavera Project Planner). The remaining
firms (9.8%) use manual procedures for developing estimates of lump-sum projects. Unit cost estimation
is the usual method used by firms for unit priced projects and cost reimbursable projects (85.2% firms and
80.6% firms respectively).
Bid unbalancing concept is not mentioned to be very often utilized, while developing the detailed
estimates. Also, it is rather shocking to know that the subcontractors, material suppliers and
manufacturers are not usually thoroughly involved in the estimate preparation.
A list of probable information items required for the development of detailed bid estimates was developed
through literature review and expert opinion. The construction firms were asked to rank the degree of
importance of these information items on a five point likert scale (1 = very low; 2 = low; 3 = medium; 4 =
high; and 5 = very high).
The importance index of each information item was calculated using the following formula:
With respect to the input provided by the survey participants, the mean ranking of information items
based on degree of importance is shown in Table 4, in descending order of importance.
Table 4: Mean Rank of Information Items needed for Detailed Cost Estimates
Bid documents have come out to be the prime source of information for the preparation of detailed cost
estimates. Historical data and historical profit information have been considered as the least important
information items. In Pakistan, there are no published construction cost indices or average costs to help
the estimator to know cost trends. Also, there is only a rare trend in the construction industry to build
strong databases or historical profiles to be used as the reference for the future. Hence the above finding
indicates: 1) a lack of structured database system for cost estimating, and 2) a lack of trust of
organizations over their own estimation procedures since they do not consider the historical data of cost
estimation as reliable. The latter is more alarming and signifies a drastic need for improvement of cost
estimating practices.
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7.2.3 Most Critical Problems Faced in Estimation
A list of potential problems in the development of detailed estimates was developed through literature
review and expert opinion. The surveyed construction firms were asked to rank the severity of these
potential problems on a five point likert scale (1 = very low; 2 = low; 3 = medium; 4 = high; and 5 = very
high). The severity index of each potential problem item (problem severity index) was calculated using
the following formula:
Problem Severity Index = Σ (Problem severity score X Response frequency at that severity score)
Number of Responses
The mean ranking of problems based on severity index is shown in Table 5, in descending order of
severity.
Table 5: Mean Ranking of Problems in Detailed Cost Estimations
Tough competition, changes in material prices, and incomplete drawings and specifications have been
identified as the three most significant problems faced by cost estimators in estimation process. Tough
competition calls for competitive bidding prices, which in turn call for accurate cost estimates to win jobs.
Tough competition in Pakistan can be attributed to the low bid culture in the construction industry that
compels contractors to produce as low estimates as possible in order to obtain the work. Fluctuating
material prices is a common trend in the country owing to large dependency on imports, inconsistent
government policies with respect to import restrictions and duties, as well as lack of price control.
Incomplete drawings and specifications is a direct consequence of lack of focus on developing clear,
complete and detailed bid documents.
A low proportion of the firms (38%) indicated that they consider their past estimates to be satisfactory.
The survey results revealed that the cost estimates of these firms were more or less precise - the actual
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project cost was, on average, within 5% of the total estimated cost in most cases for these firms. However,
an appreciable proportion of firms (32%) found their estimates to be mostly on the low side
(underestimated). In such cases, the actual project cost was found to be more than 10% of the estimated
cost. Few firms (9%) indicated that they usually find their estimates over-estimated (usually in the range
of 10%), while the remaining firms (21%) were unable to judge the preciseness of their estimates. The
latter either indicates a lack of focus on the significance of cost estimating and control mechanism in the
organizations or the lack of a good cost engineering system in the organizations. An appreciable
percentage of estimates (almost 41%) are inaccurate, which may be the driving cause of many project
disputes.
In this section, the state of use of computer and information technology in cost estimation process by the
construction firms of Pakistan has been assessed. The survey results show that a major proportion of the
estimation process in most firms (78% firms) is done via some form of computers. All of the firms that
use computers (78%) primarily use spreadsheets for the estimation process, while still an appreciable
proportion of firms (56.5%) also use professional scheduling software such as Microsoft Project or
Primavera Project Planner for the costing process. However, a thorough assessment of the extent of usage
of these scheduling software indicated that these are in most cases used for presentation purposes only.
Use of over-the-counter estimating software such as Precision Estimator, Win Estimator Pro etc. is almost
non-existent. Further assessment indicated that although these software are available in the market, lack
of training and software installation/ usage support by the vendors is a major reason for companies not
opting for these pre-fabricated cost estimation software, but rather resorting to custom-made excel
spreadsheets. Lack of computing skills has been termed as the major reason for not using computerized
estimation by the remaining 22% firms.
8. Conclusions
The study has resulted in drawing valuable information about the cost estimation practices in the
construction industry of Pakistan. The major conclusions drawn from the study are as follows.
1. There is a minimum of three to five years of cost estimation experience generally required for cost
estimators in the construction industry of Pakistan. However, few firms do not necessarily consider
experience of estimator as a significant factor contributing towards more accurate estimation. This, in
a way, shows weakness of, as well as lack of adequate emphasis on the cost estimation setup of
construction contracting firms.
2. English is being used as the primary official language both in preparation of cost estimates and in
communication. However, use of both Urdu and English for developing and communicating estimates
is also predominant in the industry, which indicates a lack of formalized approach towards the cost
estimating process in the industry.
3. The bidding prices are mostly settled at the top management level, with little input from project and/
or functional management. This shows that only business point of view of estimates (that is winning
the bids only) is more influential. The result is unrealistic bids due to low bid trend in Pakistan.
4. Breakup assessment is the most utilized way to allocate project and company overheads. Project
overheads usually vary according to the size and nature of the project between 5 to 40%. The large
variation in project overhead percentage shows an evident lack of cost control mechanisms on
projects.
5. The risk contingency percentage varies from 1% to 3% of total direct cost of the project in
construction projects of Pakistan. Zero contingency allocation by a few firms indicates a lack of
appreciation of the need to fund projects from reserve accounts to cater for unfavorable, unforeseen or
changed conditions.
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6. Profit margin is directly linked to nature of job, job need for the company, resource commitment and
the type and nature of client.
7. Detailed estimates are usually prepared using unit cost estimates, which are based on material, labor
and equipment prices, and man-hour production rates. Schedule-based estimation using software is
also used in the industry, particularly for lump sum projects.
8. The subcontractors, material suppliers and manufacturers are not usually indicated as being involved
in the estimate preparation. Also bid unbalancing concept is not very often utilized.
9. Bid documents have come out to be the prime source of information for the preparation of detailed
cost estimates.
10. There is very low trend or culture of utilizing past record and data as the means for future estimating
exercises. This is a direct consequence of the non-availability of commercially available cost
databases. Also, reliability on the own estimation process seem to be on the lower side. A low
proportion of the firms indicated that they consider their past estimates to be satisfactory.
11. Tough competition created most of the time owing to low bid culture creates a major problem in
developing accurate estimates.
12. Spreadsheets, Microsoft Project and Primavera Project Planner are being used for costing purposes
which is a good sign.
9. Recommendations
Based on the conclusions from the study, following are major recommendation to further improve the cost
estimation process and thus the accuracy of cost estimates in construction industry of Pakistan.
1. Communications between estimators and project owner, and/or the consultant, should be established
or improved during the estimating process.
2. The firms require experienced cost estimators. They should also be considering the development of
new and better estimators through training. This can be done by assigning a zero experience estimator
with an experienced one. The training should involve the skill of using software for costing as well.
3. The settling of bidding prices should also involve major input from the engineers, project managers
and other experts as well. This will result in more realistic and accurate estimates, since, the technical
and managerial complexities involved in a project are better understood by the project engineers,
project managers etc.
4. Allocating risk contingency percentage without prior risk analysis is a reactive approach. Proper risk
analysis should be done for each project to reduce the chances of risks and thus the contingency
percentage.
5. Good communication should be maintained with subcontractors and material suppliers to keep pace
with market trends. The subcontractors, material suppliers and manufacturers should be thoroughly
involved in the estimate preparation to prepare more accurate and realistic estimates.
6. Well-organized historical cost data should be maintained in a single suitable location accessible to
cost estimators.
7. Historical records for all possible competitors should be maintained, and a bidding strategy based on
available information should be developed.
8. There is a strong need of a very elaborate and broad database of past project records for the
construction industry. This database could easily be developed by the collaboration of local academia
and the construction industry. This will be helpful for the industry in not only providing standard
estimating procedures but also providing a means, especially for new entrants in the industry, to
develop precise cost estimates. In this regards, universities can provide the technical human resource
and industry can come up with other required resources such as finance, access to the projects and
access to their documents, etc.
9. Low bid culture should be discouraged because it has created negative competition and has resulted in
cost overruns and delays in many projects. Performance based award system should be adopted for
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the construction projects procurement processes. This will stress upon the contracting firms to
develop more accurate estimates and for that purpose the firms will have to refine their procedures,
setup and resources of cost estimation.
10. Computer estimating should be encouraged as a productivity tool in the estimating process.
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