What is Cost Estimating?

What is Cost Estimating?

Cost estimating is the art of predicting the cost of a project.

One purpose for developing a cost estimate is to determine the project funding requirements. Another purpose is to establish a cost to use as a baseline for comparison of bids for the project contract, or as a baseline to compare historical changes to the project cost.

It is essential that one understands our definition of a project. According to the PMI Lexicon[1], a project is defined as:

“A temporary endeavor undertaken to create a unique product, service, or result.”

By temporary, we mean that the project has a defined start and finish state. By unique, we mean that the project has a specific scope. The specific scope is defined by the project documents (e.g. plans and specifications).

Early Stages of a Project

The early stages of a project are generally focused on planning. Scope definition evolves and matures throughout the course of a project. At the initial stage of a project, the scope may be defined by a general statement, such as “construction of a 100,000 SF multi-story commercial office building and attached underground parking structure with capacity for 200 personal vehicles.” At the end of the planning stage (= beginning of construction stage), the project scope definition will have matured to the extent that the project documents are suitable to be issued for construction, and may consist of thousands of pages of drawings and specifications.

At the initial stage of a project, the maturity level of project definition is 0%. At the end of the planning stage, the maturity level of the project definition is 100%. The accuracy of an estimate is dependent upon the maturity level of the project definition, as well as other factors outside the control of planning.

Total Project Cost consists of two components:

Total Project Cost = Contract Cost + Other Costs

The Contract Cost is the portion of the cost that is managed in the project planning process, and contains the construction contract scope. Other Costs are not managed by the project planning process, and may include market escalation, or contingency to account for risks, and other miscellaneous project fees.

There are two approaches to developing the Contract Cost: detailed estimating methodology, and parametric estimating methodology. Both methods leverage the same arithmetic relationship:

Cost = quantity x price

Quantities have a unit-of-measure (UOM), such as feet, square feet, cubic feet, or pounds. UOMs are also referred to as “metrics.”

The scope of the project is managed with a hierarchical classification structure, known as a Work Breakdown Structure (WBS). The WBS captures all of the scope identified in the project documents. One type of WBS, commonly used for construction contracts, is known as a CLIN (Contract Line Item Number) system. Each Contract Line Item consists of a numeric ID, a name, a quantity, a metric, and a price. For example, a contract with earthwork excavation may have CLIN 1 Excavation, with 10,000 BCY. For a project that has a 100% maturity, the quantity of 10,000 BCY may be determined from survey of the project documents. The price per BCY may be determined by market research, or proposed by a bidder for the project contract.

Prices for most commodities are readily available from costbooks, which are available from various construction industry sources. CostPro utilizes the PT&C Costbook.

The Contract Cost is the sum of the costs of each of the CLINs. The documentation of the cost estimate consists of the Quantity Takeoff for all of the CLINs, and the pricing basis for each CLIN.

The detailed estimating methodology approach is often referred to by the nickname “bottoms-up estimating.” Quantities are as indicated in the project documents, and represent the many commodities that one might find in the constructed project (e.g. number of electrical outlets, linear feet of 14-gauge three-wire electrical conductor and conduit). It may require a significant effort to quantify all of the commodities. When a project has a 100% maturity, this is the most accurate and straightforward estimating methodology.

The accuracy of a bottoms-up estimate is dependent upon the accuracy of the quantities, which is in turn dependent upon the maturity of the planning. During early planning stages, the project documents may not capture a low enough level of detail to practically utilize a bottoms-up methodology. For example, specification of the number of electrical outlets, or overall length of 14-gauge three-wire electrical conductor and conduit, may not be reflected in the project documents until late in the planning process.

The lack of detailed quantity definition, which is generally the case for projects that are less than about 65% maturity, utilizing a parametric estimating methodology. Parametric estimating may be thought of as “top-down” estimating.

An analogy to parametric estimating is commonly found in residential and commercial real estate markets. For example, if one wanted to quickly estimate the purchase price of a 3,000 SF 3-bedroom 2-bath home in suburban Sacramento, CA, one could perform a quick review of internet websites, such as Trulia or Zillow. One might determine an average cost of $600,000 based on 20 homes currently listed for sale, and establish a parametric unit price = $600,000/3,000 SF = $200/SF. One may then estimate the cost of a similar 3,500 SF home to be 3,500 SF x $200/SF = $700,000.

Further study of those real estate databases would reveal other trends, such as a dependence of SF unit price upon the distance the home is located downtown or from other services, the quality of the home construction, the size of the lot, etc. The parametric estimate may be modified to utilize cost factors which account for other variables.

In construction estimating, the parametric methodology leverages the concept of assemblies, and commonalities of assemblies across different types of construction. The constructed space consists of complexes of assemblies, such as structural framing, architectural finishes, electrical wiring, electrical lighting, ventilation ductwork, etc.

The interior space that forms an architect’s office has a lot in common with the interior of any other professional’s office, such as a government supervisor. Similar to the real estate example, if one has a database of prior estimates or historical cost data for SF unit prices of various building space types (such as office spaces, laboratories, classrooms, hallways, hospital patient rooms, hospital operating rooms, libraries, warehouses, machine shops, etc.), then one can develop a top-down estimate using that information.

For much of the constructed space, SF unit costs are the most convenient and well-documented metric. Some construction specialties use other metrics, such as $/kW for solar panel systems, or $/BTU for heating and air-conditioning systems (these two examples are known as capacity parametrics).

Assembly unit prices are also available from various construction industry sources, but on a more limited basis than for commodity costbooks. CostPro has the ability to save assembly unit costs from prior estimates as a library for use in developing parametric estimates.

The following table[2] identifies AACE’s estimate classification system, which is ranked from Class 5 (least mature) to Class 1 (most mature). Typical end usage, estimating methodology, and expected accuracy range are listed for each estimate class.

The following graph[3] indicates the relationship between maturity of project definition and expected estimate accuracy. Note that the asymptote (0%) may be thought of as the actual contract cost.

About the Author

Chris Thomson is a Senior Professional Engineer for Acuity Engineering and Consulting.  By applying sustainable business practices, proven project management techniques, and effective cost analysis and engineering principles, Acuity Engineering and Consulting helps our clients manage costs, risks, and schedules.