Contract, Specification and Quantity

Surveying

Lecture - 3

Project Cost Estimation

And Valuation
Project Cost Estimation
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.
 The possible entrants are:
- Preliminary investigation (project appraisal
costs)
- design and supervision (consultancy cost )
- construction works (contractor’s cost )
- land owning cost, and
- monitoring costs
Purpose of Cost Estimation
The main purpose of costing or estimating are to:
 know the volume of work in reference to the fund
available
 determine actual cost per unit of item
 Identifying engineering estimate of the work for
bidding purpose
 work out economical use of materials , labor and
equipments
 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
1. Correct information of the market price of the
materials at the time of need to be used as a basic
price.
2. Correct information of the rates of various categories
of skilled and unskilled laborers as wage rates to be
used for daily work rate.
3. Output of laborers per day for various types of items
(productivity)
4. Correct information of the rates of various categories
of equipments and tools as rental rates to be used for
major items of rates.
5. Up-to-date knowledge of the construction methods.
Factors affecting cost estimation
1) Type and documentation of the project
2) Construction scheduling
3) Bidding environment
4) Quality and availability of material and labor
5) Construction facilities /tools and method of
construction
6) Location of the site: Transportation charges
7) Proper management
8) Land charges (lease)
9) Nature of subsurface condition
Types of Costing or Estimation
I. Preliminary /approximate costing
Rates are determined either from practical
knowledge or from records of similar previous
works.
This type of cost estimation is required to know
the financial position of the client before costly
detailed designs are carried out.
Examples of approximate cost estimations are
as follows:
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 or sewerage projects = cost per head of
population.
Example – 1. Prepare an approximate estimate or rough cost
estimate of a hospital building for 50 beds. The cost of
construction altogether for each bed is Rs. 60,000.
Determine the total cost of hospital building.
B. Plinth area method – cost per m2
This estimate is prepared on the basis of plinth area
of the building.
The rate per meter square is deduced from the cost
of similar building projects in the locality.
The plinth area shall be calculated based on the roof
area, by taking external dimensions of the building at
the plinth level.
Cubical Content method – cost per m3
The estimate is 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.
Purpose of approximate Estimate;
i) To investigate feasibility
ii) To save time and money
iii) To investigate benefit and comparison of cost
with utility.
iv) Adjustment of Planning.
v) To obtain administrative approval
II. 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.
A detail cost estimate thus requires quantity
surveying and analysis of the different rates for
the quantities prepared.
Composition of Project Price
The total price of a construction project is the sum
of direct costs, contingency costs, and margin.
Direct costs: are the labor, material, and equipment
costs of project construction.
Contingency costs: are those that should be added
to the costs initially calculated to take into account
events, that are likely to occur during the course of
the project and affect overall project cost.
Margin (sometimes called markup): has three
components: indirect (distributable) costs;
company-wide (general & administrative) costs;
and profit.
Indirect costs: are project-specific costs that are not
associated with a specific physical item. They include
the cost of project management, payroll preparation.
Company-wide costs include:
(1) Costs that are incurred during the course of a
project but are not project related.
(2) Costs that are incurred before or after a project.
Profit: is the amount of money that remains from the
funds collected from the client after all costs have
been paid.
Disposition of the Cost Calculation
i) Direct itemized costs:
A. Material costs
Construction/Building material
Operating supplies
Loading, unloading and transportation costs
Wastages
Required information for calculation of material cost:
Quantity of material required to produce a unit
amount of itemized work
Basic price (Prime cost) at the source of material
Transport, loading and unloading to the site
Waste/loss (e.g. Breaking, rupture, defective
material, wastage etc).
B. Labor costs: include
 Standard wages
 Extra and supplementary pay for
o Production bonus
o Long continuity of Service (permanent laborer)
o Over time pay
o Property creating performance
o Less favorable condition
 Social Service payments
 Holiday pay if any
 Health insurance
 Unemployment insurance
 Payment during sickness
Required information for the calculation of labor
cost;
 Number and type of skilled and unskilled
manpower for a particular type of work, (Crew)
 Performance of crew per hour for a unit amount of
work
 Indexed hourly cost of the workman ship.
 Utilization factor of the workmanship. Share of a
particular personal per hour for the specified work.
C. Equipment costs: - All costs for commissioning
/holding and operation of the equipment.
• Ownership of plant
• Hire of plant
- Standing Costs: includes capital sum based on
purchase price and operating cost, maintenance, tax
and insurance.
- Operat
- ing Costs: operators cost, fuel, consumable stores.
Required information:
Type of equipment for a particular item of work.
Performance of equipment per hour for a unit
amount of work (production rate)
D. Costs for sub-contractor:- If the work is to be
Sublette to a nominated subcontractor, the cost shall
be determined and separately established as a sub
contractor fee.
Ex. –Marble cladding
-Supply and fix items (aluminum frames)
-Furniture etc.
ii) Indirect Costs
A. Site over head costs
 Time-independent costs
 Costs for site plant/ site installation
 Cost for site facilities
 Engineering and controlling
 Operation risks
 Special costs
Time-dependent costs
Commissioning /holding costs
Operating costs
Costs for contractor’s agent
B. General overhead costs
C. Risks and profit
Rate Analysis
The process of fixing cost per unit of
measurement for the different item of works.
Cost due to construction (contractor’s cost) is
given special attention here.
In order to facilitate estimation of cost due to
material, it is important to know the quantities
of various materials involved in construction of
various parts of the building or construction
work i.e. material break down is essential.
Different formats, Excel sheets and software’s
are used for rate analysis.
Material Breakdown;
1. Calculating quantity of materials required for brick masonry laid in
1:4 cement mortar;
Quantity of brick masonry = 1m3 (4m2 for 25cm thick brick wall)
Size of one brick = 24x12x6 cm (common in Ethiopia)
Size of one mortared brick = 25x13x7 cm;
Volume of each mortared brick = 0.25x0.13x0.07 = 2.275x10 -3m3
Number of bricks required = 1/ 2.275x10-3m3 = 440 mortared bricks
per m3
Add 2% for breakage = 9
Take 450 bricks per m3 or 450/4 = 112.5 bricks/ m2 ; take 115 bricks/
m2
One nominal (un-mortared) brick = 0.24x0.12x0.06 = 1.728x10 -3m3
Volume of 440 un-mortared bricks = 440x1.728x10-3m3 =
0.76032m3
Volume of wet mortar in 1m3 of wet masonry = 1 - 0.76032 =
0.23968m3
Volume of wet mortar in 1m3 of wet masonry =
0.23968m3
Add 10% for wastage = 0.023968m3
Sum Total = 0.263648 m3
Assume 20% voids in sand (Note that cement fills the
voids b/n sand particles)
Volume of dry base analysis = wet mortar volume +
increment because of voids in sand
= 0.263648 m3 + 20% m3

= 0.31638m3
Cement mortar of 1:4 mix by volume (1+4 = 5)
Quantity of cement required = 1/5 * 0.316 = 0.0632m3
Number of bags of cement = 0.0632m3 /0.035 m3 per bag
= 1.81 bags per m3 of construction; 1.81/4 = 0.45 bags per
m2
Quantity of sand required = 4/5 * 0.316 = 0.253m3/ m3 of
construction = 0.0632m3 /m2.
2. Calculating quantity of materials required for C -25
cement concrete (1:2:3)
Because of the voids in aggregates and wastage, 1.4 to 1.6 times
dry volume of the materials are required to get 1m3 of compact
dense fresh concrete mix.
 Wet (fresh) concrete mix ……….= 1m3
 Quantity for dry base analysis……= 1.5*1.0m3 = 1.5m3
 Volume of cement………………= 1/6*1.5 = 0.25m3
= 0.25m3 /0.035m3 per bag
= 7.1 bags of cement
 Sands ………………………………= 2/6* 1.5
= 0.5m3 of sand
 Coarse aggregate…………..= 3/6 *1.5
= 0.75m3 of coarse aggregate
3. Quantity of Materials required for stone masonry
laid in 1:3 cement mortar
Quantity of stone masonry work …. .....= 1m3
Quantity of undressed stone ……= 1.1m3 (taken
110%)
Quantity of mortar required…....= 0.35m3 (taken
35%)
Quantity of cement ………………. = 1/4 *0.35
= 0.0875m3
=
0.0875/0.035
= 2.5 bags
Quantity of sand required ……= 3/4 * 0.35
4. Materials required for 12mm thick cement plaster in 1:
4 cement mortar;
Around 30% more mortar is required to fill up joints and
uneven surfaces. This total wet mortar is increase by 20% to
convert to dry mortar (for the effect of voids) and wastage
5%.
Area to be plastered = 1m2
Thickness of plaster = 12mm
Volume of the mortar = 1*0.012 = 0.012m3
Volume for dry quantity = 1.55 * 0.012 = 0.019m3
Cement required = 1/5 * 0.019
= 0.0038m3
= 0.11 bags of cement
Sand required = 4/5 * 0.019
= 0.015 m3
5. Materials required for pointing brick in cement mortar of 1:2
with average thickness 20mm.
Area to be pointed = 1m2 [total wall area]
In 1m2 wall area, number of mortared bricks of 25x13x7cm size
(assuming 25cm thick double) is 57
Face area of the 57 nominal bricks = 57*0.24*0.06
= 0.82m2
Area covered by joints (pointed) = 1 – 0.82
= 0.18m2
Volume of wet mortar = 0.02*0.18
= 0.0036m3
Volume for dry quantity .....= 1.55* 0.0036
= 0.006m3
Cement required = 1/3 *0.006
= 0.002m3 (0.05 bags)
Sand required = 2/3 * 0.006
= 0.004m3
Calculation of Unit Price (rate);
I. Cost Calculation with predetermined charges
i. Cost per m2 of 25cm thick brick masonry wall, laid in 1:4
cement mortar
Total cost (TC) = Direct cost (DC) + Indirect cost(IC)
IC = 25% to 35% of DC; Equipment cost (EC) = 5% to 10%
of TC
1. Material cost
Brick: Purchasing Cost + loading Cost + transportation
cost+ unloading Cost
= 115 pc*0.85Br/pc + 115(50Br/1000pc) +
115(350Br/3000pc) + 115(80Br/1000pc)
= 126.12Br/m2
Cement: Purchasing Cost + loading Cost + transportation
cost+ unloading Cost
(Provide 10% allowance for wastage by wind, =
(1.81/4)*1.1= 0.5 bag/m2)
= 0.5 bag/m2 *55Br/bag + 1Br/bag* 0.5bag +
2Br/bag* 0.5bag + 1Br/bag* 0.5bag
= 29.5 Br/m2
Sand: Purchasing Cost + loading Cost + transportation cost+
unloading Cost
= 0.063m3 /m2 *120Br/m3
= 7.56 Br/m2
Total material cost = cost of (brick +cement +sand)
= 126.12 + 29.5 + 7.56 = 163.18 Br/m2
 2. Calculation of Labor cost
Calculation of labor cost for 1m2 of 25cm thick brick
masonry wall, production rate 0.5 m3 /hr

Labour No UF Index hourly Hourly cost

cost (Birr)
Forman 1 1/4 5 1.25
mason 1 1 3.75 3.75
engineer/ 1 1/10 22.7 2.27
manager
Assistance 1 1 2.5 2.5
mason
D. Laborer 2 1 1.25 2.5
Total 12.27
Labor cost (LC) = Cost per unit time/ productivity
= [12.27]Br per hr / [0.5 m2 per hr]
= 24.54Br/m2
DC = MC + LC +EC; take EC = 0.05TC
= 163.18 + 24.54 +0.05TC; but TC = DC + IC, take
IC = 0.25DC; thus
TC = (187.72 + 0.05TC) + 0.25DC
= (187.72 + 0.05TC) + 0.25(187.72 + 0.05TC
= 234.65+ 0.063TC
= 250.30Br per m2
Thus, the unit price for 25cm thick brick masonry wall laid in
1:4 cement mortar is estimated to be 250.30Br/m2
ii. Unit price for C -25 concrete per m3 of work (formwork
and reinforcement measured separately)
1. Material cost
Type of Unit Qty Unit rate Cost/unit
material
Cement Qtl 7.1 225 1597.5
Sand M3 0.5 300 150
Gravel M3 0.75 350 262.5
Water M3 0.3 10 3
Sum 2013

Loss 5%
100.65

Total 2113.65
Birr/m3
2. Calculation of Labor cost
Calculation of labor cost for a m3 of concrete;
production rate 1.25 m3 /hr
Labour No UF Index hourly Hourly cost
cost (Birr)
Forman 1 1/4 5 1.25
mason 1 1 3.75 3.75
engineer/ 1 1/10 22.7 2.27
manager
mixer 2 1 2.5 5
operator
and vibrator

D. Laborer 4 1 1.25 5
Total 17.27

Labour cost = 17.27/0.25 = 69.08/m3

3. Equipment Cost
Mixer - Original cost = 50,000 Birr
Useful life = 3yrs
Interest rate=6.5%
Monthly repair cost with supplies: - 700 Birr
Virbrator- Original cost = 5,000 Birr
Useful life = 7yrs
Repair cost monthly = 50 Birr
Assume 8 working hours per day and 22 days per
month
Hourly equipment cost
i) Mixer
 Depreciation (d) = 50,000 Birr/(3x12(22x8)/hr = 7.89 Birr/hr
 Interest of return (i) = 1/3 [50,000 (1+0.0665) 3 - 50,000] Birr /year
= 3465.83 Birr/year
 Hourly cost 3465.88/(12x8x22) = 1.641 Birr/hr
 Hourly repair cost = 700/8x22 = 3.98 Birr/hr
 Hourly Mixer cost = 7.89 + 1.641+ 3.98 = 13.511 Birr/hr
ii) Virbrator
 Depreciation (d) = 5000/(7x12x8x22) = 0.338 Birr/hr
 Interest returns (i) = 1/7 [ (5000 (1+0.065)7 - 5000] = 395.7
Birr/hr
= 395.7/(12x8x22) = 0.187 Birr /hr
 Repair cost = 50/(8x22) = 0.284 Birr /hr
 Hourly virbrator cost = 0.338+0.187+0.284 = 0.81 Birr/hr
EC = mixer cost + vibrator cost = 14 .321 Birr/hr
Equipment output (productivity) for the work 1.25m3/hr
Equipment cost for (1m3 concrete)
14.321birr/hr/(1.25m3/hr) = 11.46 Birr/ m3
DC = MC + LC +EC
= 2113.65+ 69.08 + 11.46 ; but TC = DC + IC,
take IC = 0.25DC; thus
TC = (DC) + 0.25DC
= (2194.19) + 0.25(2194.19)
= 2742.74Br per m3
2. Cost calculation through the bid Sum
 In this approach, amounts for site overhead costs, general
overhead costs, risk and profit are to be ascertained separately
for each project.
 Here from surcharges on direct itemized costs result with
different amount for each project;
 Four steps for this calculation method:
- Establishing the production costs
- Establishing the bid sum
- Establishing the surcharges on direct itemized costs
- Establishing the unit prices
Direct cost + Site overhead Cost = Production
cost
Production cost +General overhead cost = Self-
costs
Self- costs + Risk& profit = Bid sum
Bid sum + Vat = Bid sum inclusive vat.
Given the following detail for the construction of 50m
long fence around a site.
1/ List of items quantities and direct itemized costs are as given in
the table. Unit Qnt Direct cost
No work

1 Excavation to a depth of 1m M3 40 20

2 50 cm thick masonry wall M3 25 50

3 Concrete for tie beam M3 5 50

4 Dia 14 dc formed ban Kg 245 8.5

5 Dia 8 stirrups Kg 132 4.5

6 Formwork tie beam M2 20 70

7 20cm thick HCB wall m2 90 50

Direct cost 10876.5

2) Site overhead costs
Site facilities (office, store---) -------------------2500 birr
 Electricity, water & telephone --------------------800 birr
 Salary professionals -----------------------------2000 birr
Secretarial service ---------------------------300 birr
3) General overhead cost ----------------10 % production
cost
4) Risk & profit ---------------------------7% of production
cost
Question: Establish bid sum and unit prices for the itemized works.
Step 1: Establish production cost. (Direct cost + Site overhead
cost)
o Direct cost :- 10,876.5 birr
o Site overhead cost :- 5,600 birr
o Production cost 16476.5 birr
Step 2: Establish bid sum [production cost + General overhead
cost + risk & profit]
Production cost -------------------------- 16476.5birr
 General overhead cost = 10%(16476.5)= 1647.65 birr
Risk & profit ---------------7 %(16476.5)= 1153.355 birr
Bid sum without vat = 19277.505birr
vat 15% = 2891.63
 Bid sum with vat = 22169.13 birr
Step 3: Surcharge on direct itemized cost
Surcharge = Bid sum without vat
Direct itemized cost
= 19277.505/ 10876.5 = 1.8
Step 4: Establishing unit prices
Unit price = Surcharge x direct itemized cost
No work Unit Qnt Unit price amount

1 Excavation to a depth of 1m M3 40 36 1440

2 50 cm thick masonry wall M3 25 90 2250

3 Concrete for tie beam M3 5 90 450

4 Dia 14 dc formed ban Kg 245 15.3 3748.5

5 Dia 8 stirrups Kg 132 8.1 1069.2

6 Formwork tie beam M2 20 126 2520

7 20cm thick HCB wall m2 90 90 8100

19577.7

Bid sum without vat 19577.7

Add 15 % vat 2936.656
Bid sum with vat 22,514.355birr
Project Valuation
Valuation is the art of determining present value of a
property such as a building, a factory or other
engineering structure.
By valuation the present value of property is fixed.
The present value of property can be determined on the
basis of rent, or income it may fetch.
It is determined or decided by its selling price.
The value of property depends on its structure, life,
maintenance, location, etc.
Purpose of Valuation
 For rent valuation – valuation of a property is done to fix the
rent. Rent is fixed on the basis of certain percentage of the
valuation. It is generally 6% to 10% per annum.
 For buying or selling – every seller or buyer is willing to sell or
purchase the property up to certain limiting price and that is only
arrived at by valuation
 For Security of loans or mortgage – when it is required to have
loan against the security of any property or when the property is
to be used for collateral for security like performance or advance
payment bond
 Acquisition – when a property is compulsorily acquired by
government, compensation is given to the owner for the
valuation is necessary.
 For Tax assessment – to determine the property tax. House tax,
etc.
Valuation of Building
Valuations of a building depends upon, the type of
building, its structure, shape, size, locality, the quality
of material used and present day prices of the materials.
This also depends upon the height of the building and
plinth area.
Building in market area will have higher value than
building in residential area.
The valuation of a building can be determined after
knowing the contents of each item of work,
specifications and physical condition of the building.
It can also be calculated on its cost of construction at
present day rate after deducting a suitable depreciation
Methods of valuation
 Rent Return Method: based on the net rent value, capitalized for the
future life of the building.
 Valuation on land and building basis: in this method the cost of land
is added on the depreciated cost of the building.
 Valuation on profit basis: suitable for commercial buildings like
hotels, cinemas, etc. In such cases the net profit is calculated after
deducting all outgoings and interest of capital invested. The net profit is
multiplies by future life of the building.
 Valuation on cost basis: in this method the actual cost incurred in
construction of property with due consideration of depreciation, is taken
as the basis to determine the value of the property.
 Development method of valuation: this method is used for properties
that are underdeveloped or partly developed or if the building require
renovations by alteration. The anticipated future net income is
renovated and multiplied with the future life of the property to get the
value.
 Depreciation method of valuation: the property value is determined
based on the book value for the year by deducting the deprecation.
Methods of Depreciation Calculation:
The following are the methods for calculating
depreciation.
Straight line Method
Diminishing Balance Method
The sum of the years digit method
1.Straight line method:
The simplest and best known of the various depreciation
method. A constant depreciation charge is made. The
annual depreciation charge at any year, D,


Where, C - the Initial cost.

S - the scrap value.
N - the Number of years of life. and
D - the depreciation amount per year.
2. Diminishing Balance method:
This is also called “Reducing Balance” Method.
It depreciates rapidly in the early and later-on slowly.
So under this method, the book value of the machine
goes on decreasing as its existence continues.
 In this, let x be the fixed percentage taken to calculate
the yearly depreciation on the book value.

Where, C = initial cost,

S = Scrap Value,
N = No. of the years of life
3. Sum of Year’s Digits method:
Assumes higher rates loss in value in early years.
Larger depreciation charges than straight-line
depreciation during the early years of an asset and
smaller charges as the asset nears the end of its
estimated life.
The depreciation is calculated as the percentage of the
remaining life to the original life.

Where: n in sum of year’s digit formula above is the

reverse of the year (i.e., n for first year or 1 for the last
year)
Example:
Consider an excavator purchased for 3.1 million birr having
a useful life of 5 yrs. Determine the depreciation and book
value for each of the 5 years. Estimated a salvage value of
S = 860,000 birr. Calculate using;
a) Straight line method
b) Sum of years digit method
c) Diminishing balance method