Construction Cost Analysis and Estimating

(0401448)

1 - Introduction
Dr. Khaled Hyari
Department of Civil Engineering
The Hashemite University
Zarqa, Jordan
 Syllabus

• Instructor: Dr. Khaled Hyari

• Office: E 3003
• Phone: Ext. 4768
• Office Hours: Sunday, Tuesday, Thursday:
10:00 a.m. – 12:00 a.m. or by appointment

1-2
Introduction
 Syllabus II

• Course Outline
1. Introduction
2. Engineering economic analysis
3. Risk and uncertainty
4. Cost fundamentals
5. Cost estimating
6. Estimating construction labor costs
7. Cost of concrete structures
8. Estimating project costs
1-3
Introduction
 Syllabus III

• Course Outline
1. Estimating Equipment Costs
2. Time/cost trade-off
3. Bid strategies
4. Financial accounting and financial
statement analysis
5. Cash flow analysis
6. Project cost control
7. Value engineering and life-cycle costing
1-4
Introduction
 Syllabus III

• Textbook
– Ostwald, P (2001) “Construction Cost Analysis
and Estimating” Prentice Hall.
• References
– Holm, L.; Schaufelberger, J.; Griffin, D.; and
Cole, T (2005) “Construction Cost Estimating:
Process and Practices” Pearson Prentice Hall.
– Gould, F. (2005) “Managing the Construction
Process: Estimating, Scheduling, and Project
Control” Third Edition, Pearson Prentice Hall.

1-5
Introduction
 Syllabus IV

• Grading
– First exam 20%
– Second Exam 20%
– Final Exam 50%
– Attendance and Participation 10%

1-6
Introduction
 Syllabus V

• Exam Dates:
– First Exam: 12:00 – 1:00 p.m., Tuesday,
November 1, 2005
– Second Exam: 12:00 – 1:00 p.m., Tuesday,
December 6, 2005

1-7
Introduction
 Construction

• Construction is the process that sets up

a portable plant, bring material to the
site, and on completion of the work
moves the plant away, leaving its output
standing

• Output: all immobile structures (airports,

buildings, dams, roads and tunnels,
power plants, municipal treatment plants,
pipelines …etc)
Introduction
1-8
 Characteristics of the Construction Industry
• The physical nature of the product:
– Large, heavy and expensive
– Required over a wide geographical area
– Customer tailored
– A large part of components manufactured
elsewhere
• The ultimate use of the product is:
– As a mean to further production
– As an addition to or improvement of the
infrastructure of the economy (e.g., roads)
– As a social investment (e.g., hospitals)
– As an investment for direct enjoyment (e.g.,
Introduction housing)
1-9
 Characteristics of the Construction Industry II

• The demand for the product is:

– Determined differently for different types of
products
– Largely dependent on governmental policy
– Largely dependent on economy cycles

• Unique Industry:
– Incorporates small remodeling to giant
international, multibillion-dollar contractors.
– Highly competitive.
– Low profit margins.
1 - 10
Introduction
 Characteristics of the Construction Industry III

• The price determination is a discrete process

for each project and for each piece of work
subcontracted (bidding or negotiations)
• Human resources: Growing shortage of skilled
workers and experienced managers due to:
– 4D Industry Perception (dull, dirty, demanding,
and dangerous)
– Aging workforce
– Absence of apparent technology
– Requirement to travel
1 - 11
Introduction
 Characteristics of the Construction Industry IV

• Safety:
– Construction accounted for 19.5% of all
workplace fatalities in 2000 in the United
States (about 5% of the total U.S.
workforce)
• Quality control:
– In this competitive age, if you do not
provide quality services, someone else
will
1 - 12
Introduction
 Jordanian Construction Industry
• 2004 Data
– Estimated volume of construction work in 2004 is
1.766 Billion JD including both the public works and
the private sector works
• 166 million JD in the public sector
• 1600 million JD in the private sector
– 10 million square meters were licensed by the
Jordanian Engineering Association in 2004
– Number of registered contractors is 997 contractor
– Number of Engineering offices and Consultant firms is
1060
– More than 500 registered speculative builders
1 - 13
Introduction
 Some Data About Construction III

• Most common reasons for failure:

– Inadequate sales (35%)

– Competitive weakness (25%)

– Receivables difficulties (16%)

– Large operation expenses (11%)

1 - 14
Introduction
 Construction Projects
• Industrial, heavy engineering and
infrastructure, commercial buildings,
residential
• Industrial
– Examples: automobile plants, petroleum
refineries, petrochemical plants, steel mills,
nuclear plants …etc)
– Dominated by very large engineering and
construction firms
– The most technical projects of the
construction projects
– Few design firms and constructors are
qualified to undertake them
– Privately funded 1 - 15
Introduction
 Construction Projects
• Heavy Engineering and infrastructure
– Examples (airports, bridges, dams, tunnels,
highways, water treatment and distribution,
urban rapid transit systems …etc)
– Activities in this category are primarily the
domain of civil engineers, but other engineering
disciplines have roles
– Equipment intensive and characterized by fleets
of large earth movers, heavy trucks, etc)
– Working with massive quantities of basic
materials (earth, rock, concrete, steel, pipe)
– Many of those projects are publicly funded
– Projects tend to be long in duration
1 - 16
Introduction
 Construction Projects

• Commercial Building
– Examples (Mosques, churches, government
buildings, hospitals, shopping malls, small retail
stores, warehouses…etc)
– Labor and materials intensive
– Interact closely with people
– Private economy finances these structures, with
some exceptions
– Design coordinated by architects, who work with
engineering specialists (structural, mechanical,
electrical)
1 - 17
Introduction
 Construction Projects

• Residential
– Examples (single-family homes, apartments,
condominiums, town houses)
– Largely financed by private investment
– Large number of contractors and
subcontractors
– High rate of business failure if demand falls
– Low capital and labor intensive
– Design is done by architects, drafting people,
builders, or the home owner (USA)

1 - 18
Introduction
 Construction Projects

• Public vs. Private Projects

– A private party can award a contract in any
way they choose to anyone they choose.
– Private party can make one contract or
multiple
– Public party is limited by laws and
regulations
– Public party commonly awards bids by
competitive bidding.

1 - 19
Introduction
 Delivery Approaches to Design and Construction

• Traditional

Owner

Designer General
Contractor

Subcontractors Own Work

Force

1 - 20
Introduction
 Traditional Delivery Approach

• Advantages
– Fixed price for the project before any work
commences
– Price competition between contractors
• Disadvantages
– Contractors/subcontractors have little opportunities
to suggest improvements until after the award is
announced
– Difficult to phase or fast-track the project
– Less opportunity for interaction between the
significant parties
– Misinterpretation of the drawings and specifications
can be difficult to eliminate
1 - 21
Introduction
 Delivery Approaches to Design and Construction

• Design-Build
Owner

Engineer-Contractor

Designer General
Contractor

Subcontractors Own Work

Force 1 - 22
Introduction
 Design-Build Delivery Approach

• Advantages
– Seamless communication within the single firm
encompassing both design and construction
– Contractor is able to improve constructability
– Scheduling is more effective, and fast-tracking is
possible
– Design changes are simpler
• Disadvantages
– Owner may not have a firm fixed price in hand
early
– Owner’ knowledge and awareness of the project is
less (Crucial Decision making)
– Less checks on contractors’ performance (More
vulnerable)
1 - 23
Introduction
 Delivery Approaches to Design and Construction

• Construction Management

Owner

Construction
Designer
Manager

Contractors

Subcontractors
1 - 24
Introduction
 Construction Management Delivery Approach

• Advantages
– Effective communication between the three
parties
– Allow simultaneously phasing various tasks
in the project in coordinated effort
– Owner is able to benefit from competitive
bidding by contractors and subcontractors
• Disadvantages
– Possible communication problems
between parties involved
– Owner must have advanced, professional
expertise and abilities
1 - 25
Introduction
 Delivery Approaches to Design and Construction

• Owner-Builder
Owner

Design Construction
Department Department

Contractors Own Work

Force
Subcontractors
1 - 26
Introduction
 Contract Types

• Two fundamental contract families

– Fixed price
• Lump sum
• Unit price
– Cost reimbursable
• Cost plus
• Guaranteed Maximum Price

1 - 27
Introduction
 Contract Types

• Lump-sum Contracts
– Total price fixed in advance
– Risk is on the contractor but he can
make money by finishing faster
– Benefits owner because they know
exactly what they have to pay
– Scope must be fully defined
– Generally competitive bid contracts

1 - 28
Introduction
 Lump-sum Contracts

1 - 29
Introduction
 Contract Types

• Unit Price Contracts

• Used when the amount of units is unknown or risk
is high
– Accommodates quantity adjustments
– Disadvantage: estimate vs. actual quantities
– Very common with earthwork
• Fixed price with incentives
• Target cost and profit
• Sharing formula for savings

1 - 30
Introduction
 Contract Types

• Cost-“plus” contract
– Cost plus a percentage fee
– Cost plus a fixed fee
• Sometimes referred to as “time and materials” contract
• Used for projects of experimental design, new materials
or an unusual site that is hard to predict.
• Can be bad for the owner if the contractor takes longer
than he should
• Often noncompetitive bids
– Advantage: start before scope fully defined
– Risk is on the owner
– Disadvantage: lack of upper boundary, open-book
1 - 31
Introduction
 Cost-“plus” contract

1 - 32
Introduction
 Contract Types

• Guaranteed maximum price GMP

– Cost plus fee with guaranteed maximum
price
– Can start before scope fully defined,
upper boundary
– Difficulty in establishing GMP

1 - 33
Introduction
 Guaranteed maximum price GMP

1 - 34
Introduction
 Laws of Project Management

• No major project is ever installed on time, within

budget, or with the same staff that started it.
Yours will not be the first.
• Projects progress quickly until they become 90%
complete, then they remain at 90% complete
forever
• When things are going well, something will go
wrong
– When things just cannot get any worse, they will
– When things appear to be going better, you have
overlooked something

1 - 35
Introduction
 Laws of Project Management II

• If project content is allowed to change freely,

the rate of change will exceed the rate of
progress

1 - 36
Introduction
 Managing Trade-offs

Managing Trade-Offs: The Primary

Task of Project Management

1 - 37
Introduction
 The Project Life Cycle

• Slow-rapid-slow
progress
• Minimal effort is
required at the
beginning but
increasing effort in
the early stages of
the life cycle will
improve the
chances of project
success 1 - 38
Introduction
 The Project Life Cycle II

• Goals????
– Performance early in the life cycle
– Cost during the periods of high activity
– Schedule during the final stages

1 - 39
Introduction
 Estimates of Project Costs I

Estimate of Project Cost at Project

Start: Uncertainty associated with project
cost

1 - 40
Introduction
 Estimates of Project Costs II

Estimates made at times t0, t1 and t2

1 - 41
Introduction
 Phases of a Project I

• Business Planning
• Conceptual Design
• Detailed Design
• Procurement
• Construction
• Testing, Start-up & Implementation
• Operations & Utilization
• Decommissioning
1 - 42
Introduction
 Phases of a Project II
Owner’s Need for Projects

Request for Engineering Study

Conceptual configurations and alternatives for technical

feasibility, Development of cost and schedule for each alternative

Review by Owner: Economic analysis for rate of return,

Pay back period, Capital recovery or Benefit/Cost ratios

Owner Request for

Owner Authorizes Project Owner Abandons Project
Further Study of Project

Final Design of Project: Detailed drawings, Written

specifications, and Preparation of contract documents

Procurement of Bulk Materials, Special Equipment, Construction Contracts

Construction Contractors Administration of Contracts for Physical Work in place

1 - 43
Introduction Project Close Out: System Testing, Final Inspection, As-built Drawings
 Phases of a Project III

• The cost of each phase depends on

specifics, but usually the majority of the
budget is spent during the production phase
• Most of the budget is committed during the
design phase before the actual work takes
place
• Pressures to start the “real-work” may lead
to high cost due to commitment of
resources without adequate planning

1 - 44
Introduction
 The Level of Influence Concept

1 - 45
Introduction
 The Level of Influence Concept

1 - 46
Introduction
 Life Cycle Strategic and Tactical Issues

1 - 47
Introduction
 Perceptions of Project Cost

• Project Manager:
– Charged with on-time, on-cost, on-spec
execution.
– Views “on-cost” as a requirement to stay within
the allocated budget, while satisfying a given
set of specified conditions (scope), within a
required time frame (schedule)
– Commitment to project funds in accordance
with a prescribed plan (time based budget)

1 - 48
Introduction
 Perceptions of Project Cost II

• Accounting department:
– Address expenses recognition related to a
project or an organization profit and loss
statement.
– Ultimate goal is reporting profitability, while
positively influencing the firm’s tax liability

1 - 49
Introduction
 Perceptions of Project Cost III

• Finance department:
– Concerned with the organization’s cash flow

– Responsibility to provide the funds for paying

the bills, and putting the unused or available
money to work for the company

1 - 50
Introduction
 Commitments x Expenses x Cash Flow

1 - 51
Introduction
 Perceptions of Project Cost IV

• Project Manager must be aware of the different cost

perceptions and the manner in which they are
reported, and also realize that the timing of cost
identification can affect both the project and
corporate finance
• Project Manager can influence the timing of cost to
improve cash flow and the cost of financing the
work, in addition to affecting the revenue and
expense in the P&L statement

1 - 52
Introduction
 The S-Curve and the 3 Perceptions of Cost

1 - 53
Introduction
 The S-Curve and the 3 Perceptions of Cost

• Actual shape and the degree of lag/lead

between curves are a function of:
– Project’s labor, material, and subcontractor mix
– Firm’s invoice payment policy
– Delivery period of major equipment items
– Subcontractor performance period and the
schedule of its work
– Project schedule (when and how labor will be
expended in relation to equipment procurement)

1 - 54
Introduction
 Putting Your Understanding of Cost to Work

• Project Cost:
– Evaluation of alternative design concepts during
the development phase of the project
– Excessive safety factors employed to ensure “on
spec” performance should be avoided
– Execution of project work must be controlled
– Project manager should control the project
contingency fund
– In the procurement of equipment, material, and
subcontract services, the specified requirements
should be identified and the lowest priced,
qualified supplier found
1 - 55
Introduction
 Putting Your Understanding of Cost to Work

• Project Cost:
– Procurement of material and services based on
partially completed drawings should be avoided
– Project schedule (when and how labor will be
expended in relation to equipment procurement)
– Changes should not be incorporated in the
project scope without client/management
approval

1 - 56
Introduction
 Putting Your Understanding of Cost to Work
• Financial Cost:
– Interest expense can be minimized through the
timing of order placement (use activity floats)
– Negotiate purchases with venders to get extended
payment terms
– Negotiate progress payments to get early cash
inflows which offset cash outflows
– Invoices to the client should be processed quickly
to minimize the lost interest resulting from a delay
in receiving payment
– Negotiate retentions to obtain reduction in
retention as the project nears completion 1 - 57
Introduction
 Putting Your Understanding of Cost to Work

• Tax Expense and Profit:

– Management may demand project completion by
a given date to ensure inclusion of the project’s
revenue and profit within a particular accounting
period. Delayed project completion by only a few
days could shift the project’s entire revenue and
profit from one accounting period to the next
– The need to shift revenue, expenses and profit
from one tax period to the next often exists in
managing the corporate profit & loss statement

1 - 58
Introduction