Approaches to Cost Estimation

Approaches to Cost Estimation

Cost estimating is one of the most important steps in project management. A cost estimate establishes the base line of the project cost at different stages of development of the project. A cost estimate at a given stage of project development represents a prediction provided by the cost engineer or estimator on the basis of available data. According to the American Association of Cost Engineers, cost engineering is defined as that area of engineering practice where engineering judgment and experience are utilized in the application of scientific principles and techniques to the problem of cost estimation, cost control and profitability.

Virtually all cost estimation is performed according to one or some combination of the following basic approaches:

Ø  Production function: - In microeconomics, the relationship between the output of a process and the necessary resources is referred to as the production function. In construction, the production function may be expressed by the relationship between the volume of construction and a factor of production such as labour or capital. A production function relates the amount or volume of output to the various inputs of labour, material and equipment.

Ø  Empirical cost inference: - Empirical estimation of cost functions requires statistical techniques which relate the cost of constructing or operating a facility to a few important characteristics or attributes of the system.

Ø  Unit costs for bill of quantities A unit cost is assigned to each of the facility components or tasks as represented by the bill of quantities. The total cost is the summation of the products of the quantities multiplied by the corresponding unit costs For design estimates, the unit cost method is commonly used when the project is decomposed into elements at various levels of a hierarchy as follows:

1.      Preliminary Estimates. The project is decomposed into major structural systems or production equipment items, e.g. the entire floor of a building or a cooling system for a processing plant.

2.      Detailed Estimates. The project is decomposed into components of various major systems, i.e., a single floor panel for a building or a heat exchanger for a cooling system.

3.      Engineer's Estimates. The project is decomposed into detailed items of various components as warranted by the available cost data. Examples of detailed items are slabs and beams in a floor panel, or the piping and connections for a heat exchanger.

A.    Subcontractor Quotations. The decomposition of a project into subcontractor items for quotation involves a minimum amount of work for the general contractor. However, the accuracy of the resulting estimate depends on the reliability of the subcontractors since the general contractor selects one among several contractor quotations submitted for each item of subcontracted work.

B.     Quantity Takeoffs. The decomposition of a project into items of quantities that are measured (or taken off) from the engineer's plan will result in a procedure similar to that adopted for a detailed estimate or an engineer's estimate by the design professional. The levels of detail may vary according to the desire of the general contractor and the availability of cost data.

C.     Construction Procedures. If the construction procedure of a proposed project is used as the basis of a cost estimate, the project may be decomposed into items such as labour, material and equipment needed to perform various tasks in the projects.