3 types of construction cost estimating

Let’s look at one of the challenges of the cost engineer: estimating construction costs. Generally, direct project costs include construction work, material supply and equipment. Often, construction costs prove to be the most difficult part of the estimate.

Construction costs vary according to a complex series of relationships. Direct labor wages can vary from location to location, sometimes as much as fifty percent. Once wages are considered, labor productivity drives the cost of construction work. High productivity results in lower construction cost, while low productivity increases cost. However, it is not uncommon for productivity to be very low when direct labor rates are also very low, resulting in a relatively high cost per unit despite low wages. Conditions of the construction work, particularly with renovation, affect productivity as well, such as accessibility, lay-down/staging areas, dust, dirt, and general job clean-up requirements, as well as the working space available. Scheduling requirements may force multiple work activities to be carried out at the same place or at the same time. How efficiently sharing of equipment and services are managed will also affect productivity.

We can identify 3 estimating techniques to work with these problems:

1. Estimating with unit rates

A unit-rate contains the average amount of resources you need to install one unit (piece, meter, kg, etc.) you can find on an MTO. By multiplying all unit-rates by the quantities from all MTOs, a very detailed estimate of the project resources is obtained. This amount of granularity allows you to adjust productivity per work activity. Assigning each activity to a section of the work breakdown structure used for scheduling, a resource distribution is obtained that allows the business to actively trace and control on productivity.

2. Resource-based estimating

When an MTO is available it makes sense to use unit-rates for your estimates. If a schedule is available then resource-based estimating is also an option. With this technique, you are not looking at the average number of hours you use for the installation of materials and equipment. Instead, you plan the resource you need using calendars and schedules. All hour related items in your estimate are created using their respective calendar to determine the amount of time a resource will be used throughout the duration of the work activity. By adjusting the number of productive hours in a calendar, productivity is taken into account over the duration of the activity.

3. Factor estimating

Factor estimating is used when no MTO or schedule is available yet. Typically, this is the case in early phases of the project. By using material costs as a basis, construction costs can be factored in. This works because there is often a strong relation between the cost of your materials and the effort it requires to install them. While this is useful upfront, the downside is that it provides considerable fewer options to adjust the estimate for productivity.

A cost engineer should have the capability to carry out one or more of these techniques. Depending on the level of project definition and type of project you determine which technique suits you best.


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