CHAPETR 3

PROJECT COST ESTIMATION &

VALUATION
 OUTLINE 2

 Introduction

 Project Cost Estimation

 Unit Rate Analysis

 Introduction 3
 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.

 Cost estimation is the determination of the probable cost of a

project.

 Project Cost includes:

 Land owning cost;

 Preliminary investigation (project appraisal costs);

 Design and supervision (consultancy cost);

 Construction works (contractor’s cost), and

 Monitoring costs
 Introduction
4
 An estimate serves a number of different functions, depending on the stage of the
project, as shown below :

 Feasibility: Initially feasibility of the project need to be determined → Feasibility

Estimate (Conceptual).

 Schematic Design (Conceptual design): Sketches are prepared. Major elements

are defined → Use a preliminary method to estimate cost,(cost plan).

 Design Development: Progressively the scope of the project is defined → A
series of preliminary estimates are done during this phase.

 Contract Document: Finalize drawings and Specifications: Designer’s estimate to

anticipate and check contractor’s bid prices.

 Bidding Phase: Contractors prepare detailed estimate to submit bids.

 Construction Phase: Estimates are prepared for cost Control and for change
order evaluations.
 Introduction 5
Feasibility Estimate (Conceptual Estimate):
 Needed to make decision to go or no go with project.

 Costs include the following items:

 Land,

 Financing cost,

 Consultations/Studies,

 Engineering,

 Project Management,

 Construction, and

 Operation and Maintenance.

 Introduction 6
Preliminary Estimates and Cost Planning
 The Conceptual Estimate found during feasibility becomes the initial
project budget.

 Subsequent design development should remain within the limit of

this budget.

 Preliminary estimates assign cost to various assemblies (elements)

of the project (Cost Plan) i.e. substructure, superstructure, interior
partitions & doors, exterior cladding ..etc.

 Preliminary estimates allow for Value Analysis – Compare value of

an element with its cost → Consider alternatives → Select desired
option.
 Introduction 7
Objective of Cost Estimate

 Over all the main purpose of cost estimation can be summarized as

follows:

 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 equipment's;

 Determine the extra cost to be incurred in cases of variations ; and

 When there is escalation, to work out the Cost escalation.

 Introduction 8
Information Required for Cost Estimation

 The following information is required to define cost per unit of work:

 Correct information of the market price of the materials at the time

of need to be used as a basic price;

 Correct information of the rates of various categories of skilled and

unskilled laborers as wage rates to be used for daily work rate;

 Output of laborers per day for various types of items (productivity);

 Correct information of the rates of various categories of equipment

and tools as rental rates to be used for major items of rates; and

 Up-to-date knowledge of the construction methods.

 Introduction 9
Knowledge and Managerial Skill for Cost Estimation

 The following knowledge, managerial talents, and degree of

construction experience make a good estimator.

 Ability to read and understand contract documents,

 Ability to accurately take off the quantities of construction work

for which he or she is preparing the detail estimate.

 Ability to visualize the future building from drawings, which

usually requires some years of construction site experience.

 Knowledge of arithmetic, basic geometry, and statistics.

 Introduction 10
Knowledge and Managerial Skill for Cost Estimation

 Familiarity with estimating software in depth and with available

building cost databases.

 Knowledge of building construction methods.

 Knowledge of labor productivity, crew composition, and

impacts of various forecasted site conditions on crew output.

 Possession of office managerial skills in organizing project-

related cost information.

 Ability to work under pressure and to meet all bid requirements

and deadlines.
 Introduction 11
Factors Affecting Cost Estimation

 Factors which affect the cost estimation are summarized as follow:

 Type and documentation of the project;

 Construction scheduling;

 Bidding environment;

 Quality and availability of material and labor (given in specification);

 Construction facilities/tools and method of construction;

 Location of the site: Transportation charges;

 Proper management;

 Land charges (lease); and

 Nature of subsurface condition

… 12

….
 Project Cost Estimation 13
Types of Costing or Estimation

 Estimation can be broadly classified as preliminary

(approximate) and detailed.
Preliminary /approximate costing

 This type of cost estimation is required to know the

financial position of the client before costly detailed
designs are carried out.

 Such estimates are based on practical knowledge and

cost of similar previous works.
 Project Cost Estimation 14
Types of Costing or Estimation

 Estimation can be broadly classified as preliminary

(approximate) and detailed.
Preliminary /approximate costing

 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.
 Project Cost Estimation 15
Types of Costing or Estimation
 Preliminary /approximate costing

 B. Plinth Area method – cost per m2

 Based on Plinth Area - roof area or external dimensions at the plinth

level (Courtyard and open area shall not be included).

 The rate per meter square is deduced from the cost of similar
building projects in the locality.

 C. Cubical Content method – cost per m3

 Based on cubical contents of various buildings, i.e. Plinth area of

the building * height * 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.
 Project Cost Estimation 16
Types of Costing or Estimation

 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.

 Project Cost Estimation 17
Basic Cost Components of Construction Project

 Construction Cost: the sum of all costs, direct and indirect,

inherent in converting a design plan for material and
equipment into a project ready for start-up, but not
necessarily in production operation.

 Direct costs: which include the direct cost of materials, labor as

well as equipment's; and

 Indirect costs: which include but not limited to head office and
site overhead costs.
 Project Cost Estimation 18
Basic Cost Components of Construction Project

 Direct costs:- the Cost of installed equipment, material and

labor directly involved in the physical construction of the
permanent facility; costs incurred directly in the performance
of an activity.

 which can be attributed to a single task of construction

work. These costs are usually associated with a
construction labor crew performing a task using specific
equipment and materials for the task.
 Project Cost Estimation 19
Basic Cost Components of Construction Project

 Indirect costs:- all costs which do not become a final part of

the installation or constructed facility, but which are required
for the orderly completion of the installation; costs incurred
indirectly for the accomplishment of the project.

 are all costs, which can not be directly booked under a

specific activity in a construction project but required to
keep the whole project operational.
 Project Cost Estimation 20
Basic Cost Components of Construction Project

 Indirect costs:- These costs are also called overhead costs, which
mainly include the head office and site overhead costs

 Head office overhead costs:- all costs required to run the

whole operation of the construction company, which
usually administers different projects at a time.

 These costs are not usually associated with specific

project but rather shared proportionally by all projects
under the company.

 Site overhead costs:- all costs required to run the whole

operation of a specific construction project at site level
 Project Cost Estimation 21
Basic Cost Components of Construction Project

 Risk Allowance:- Usually contractors incorporate risk

allowances in their tender prices to compensate the
negative impacts of different risks such as contractual,
technical, political and economic risks.

 Profit and Income Tax: Construction projects are executed

by contractors whereby these contractors will commit to
invest their capital to get maximum possible profit from the
contracts to be performed.

 A profit margin entirely depends on the market competitiveness

and company strategies.
 Project Cost Estimation 22
Basic Cost Components of Construction Project

 Some of the checklists for basic cost components of

construction project

 Total Construction Cost = Direct Cost + Indirect Cost +

Risk Cost + Profit & Income Tax
… 23

…
Rate Analysis 24

 Rate Analysis is the process of fixing cost per unit of

measurement for the different item of works.

 Construction cost estimation formats and procedures shall

also serve as the basis for different purposes

 Construction planning; Project cash flow preparation;

Productivity data collection; Material consumption data
collection; Construction monitoring; …
Rate Analysis_ Direct Cost 25
Rate Analysis 26

Direct Material Unit Cost (E)

 Direct material cost is the total cost of construction materials
required to execute a unit of specific activity in a project.

 In estimating the direct material cost, the contractor shall obtain

the quantity and quality of materials required to produce the
specific unit of an activity

 Direct Material Cost = σ 𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 ∗ 𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍 𝑼𝒏𝒊𝒕 𝑪𝒐𝒔𝒕

Rate Analysis 27
Direct Material Unit Cost (E)
Rate Analysis
28
Direct Material Unit Cost (E)
 The contractor shall add the following costs to the material supplier’s price to get
the material unit cost at the project site:

 Loading expenses at the supplier’s place of delivery;

 Transportation costs to the project site;

 Insurance charges during transportation to the project site; and

 Unloading expenses at the project site.

 Coarse Aggregate (20mm):

A. Material Sources Legehar

B. Material Price at legehar 140.00 Birr/m3

C. Loading cost 8.00 Birr/m3

 Transportation cost with dump truck 50.00 Birr/m3

 Coarse Aggregate unit cost = B + C + D

 Coarse Aggregate unit cost = 140 + 8 + 50 = 198 Birr/m3

 Rate Analysis 29
Direct Material Unit Cost (E)

 Unless otherwise stated on the contract conditions and investment

incentives, contractors shall add the following costs.
▪ Port clearance; ▪ Clearing Agent’s fee;

▪ Duty; ▪ Transportation cost from Port

to the project site;
▪ Excise tax; ▪ Insurance, if required, during
transportation; and
▪ Value Added Tax; ▪ Unloading expenses at the
project site.

▪ Customs clearance;
Rate Analysis
Direct Labor Unit Cost (F)
30

 In calculating the direct labor cost, contractors need to calculate the

direct labor hourly cost which is the total hourly cost of labor crew
required to execute a specific activity in the project.

 In estimating the direct labor hourly cost, the contractor

shall obtain the following inputs:

 Number of labor;

 Skill and labor utilization factor (UF);

 Labor basic salary; and

 Labor index from his previous records and the labor market.
 Direct labor hourly cost = σ 𝑵𝒐. 𝒐𝒇 𝒍𝒂𝒃𝒐𝒓 ∗ 𝑩𝒂𝒔𝒊𝒄 𝑺𝒂𝒍𝒂𝒓𝒚 ∗ 𝑳𝒂𝒃𝒐𝒓 𝒊𝒏𝒅𝒆𝒙 ∗ 𝑼𝑭
 Direct labor cost = σ 𝑫𝒊𝒓𝒆𝒄𝒕 𝒍𝒂𝒃𝒐𝒓 𝒉𝒐𝒖𝒓𝒍𝒚 𝒄𝒐𝒔𝒕/𝑯𝒐𝒖𝒓𝒍𝒚 𝒄𝒓𝒆𝒘 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚
Rate Analysis
31
Direct Labor Unit Cost (F)
 Labor Index is a multiplying factor of the basic salary which
represents the additional benefits whereby a worker gets from the
contractor such as:

 Severance pay;

 Annual leave;

 Occupational accident expenses;

 Occupational disease expenses;

 Overtime pay;

 Occupational safety, health and working environment; and

 Benefits resulting from collective agreements.

Rate Analysis
32
Direct Labor
Unit Cost (F)
 Labor Index
Calculation
Rate Analysis
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Direct Labor Unit Cost (F)
 Labor Index Calculation
Rate Analysis
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Direct Equipment Unit Cost (G)

 In order to calculate the direct equipment cost, contractors need to

calculate the direct equipment hourly cost which is the total hourly cost
of equipment crew required to execute a specific activity in a project.

 In estimating the direct equipment hourly cost, the contractor shall

obtain:

 The number of equipment's;

 Capacity and equipment utilization factor(UF); and

 The equipment hourly cost.

 Direct Equipment cost = σ 𝑁𝑜. 𝑜𝑓 𝑒𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡 ∗ 𝐻𝑜𝑢𝑟𝑙𝑦 𝑐𝑜𝑠𝑡 ∗ 𝑈𝐹

 Direct Equipment cost = σ 𝐷𝑖𝑟𝑒𝑐𝑡 𝑒𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡 /𝐻𝑜𝑢𝑟𝑙𝑦 𝑐𝑟𝑒𝑤 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦

Rate Analysis
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Direct Equipment Unit Cost (G)

 Direct unit cost = Direct material cost + Direct labor cost + Direct
equipment cost

 Where

 Direct Material Cost = σ 𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 ∗ 𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍 𝑼𝒏𝒊𝒕 𝑪𝒐𝒔𝒕

 Direct labor cost = σ 𝑫𝒊𝒓𝒆𝒄𝒕 𝒍𝒂𝒃𝒐𝒓 𝒉𝒐𝒖𝒓𝒍𝒚 𝒄𝒐𝒔𝒕/𝑯𝒐𝒖𝒓𝒍𝒚 𝒄𝒓𝒆𝒘 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚

 Direct Equipment cost = σ 𝑫𝒊𝒓𝒆𝒄𝒕 𝒆𝒒𝒖𝒊𝒑𝒎𝒆𝒏𝒕 /𝑯𝒐𝒖𝒓𝒍𝒚 𝒄𝒓𝒆𝒘 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚

Rate Analysis
36
Site Overhead Cost (I)

 It is easier to express the site overhead costs as a percentage of

the direct unit cost of an activity.

 Let k1 = total site overhead cost / Total project direct cost

site over head cost = k1*total project direct cost

 Head Office Overhead Cost (J)

 Let k2 = Annual head office overhead cost /Average annual

direct cost turnover

Head office overhead cost = k2*Direct unit cost

 Indirect unit cost = Site overhead cost + Head office overhead

cost
Rate Analysis
37
Risk Allowance (L)

 Let’s assume the following factors represent the percentage cost

increment of each cost component and the risk allowance will
be calculated as follows:

 Let

 R1 Risk allowance for Direct material cost (E)

 R2 for Direct labor cost (F)

 R3 for Direct equipment cost (G)

 R4 for site overhead cost (I)

 R5 for Head office overhead cost (J)

 Therefore Risk Allowance = R1*E + R2*F + R3*G + R4*I + R5*J

Rate Analysis
38
Gross Profit (M)

 As an illustration, if the net profit margin is assumed to be P% of the

breakeven cost (direct costs + indirect costs + risk allowances), the
gross profit (net profit + income tax) can be calculated as follows, which
is X% of the breakeven cost

 Let, Q be the breakeven cost

 Gross profit = X%*Q; Net profit = P%*Q

 Income tax = 30% Gross profit; Gross profit = Net Profit + income Tax

 X%*Q = P%*Q + 0.30*X%*Q

 X% = P% +0.30*X%

 X% = (P/0.7)%

 Gross profit = (P/0.7)% * Breakeven Cost

 Rate Analysis
39
Total Unit Price without VAT (N)

 If the contractor is registered for VAT but the contract is VAT exempted,
the contractor’s unit price in his tender is the sum of direct unit cost (H),
indirect unit cost (K), risk allowance (L) and gross profit (M).

 Total unit Price without VAT = H + K + L + M

Total Unit Price with VAT

 Total unit Price without VAT (N) = H + K + L + M

 Value Added Tax (O) = 0.15*N

 Total Unit Price With VAT = N + O

Rate Analysis
40
 Unit Rate Analysis Format Examples
Rate Analysis
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 Unit Rate Analysis Format Examples
Rate Analysis
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 Unit Rate Analysis Format Examples
Rate Analysis
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 Unit Rate Analysis Format Examples
Rate Analysis
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 Unit Rate Analysis Format Examples
… 45

……
46
 Rate Analysis

 Example: Material Break Down for 1m3 C-25 concrete

(1:2:3 mix)

 Wet (fresh) concrete mix … = 1m3

 Quantity for dry base analysis…= 1.55m3

 Volume of cement…= 1/6*1.55 = 0.258m3 = 0.258m3/0.035m3

per bag = 7.4 bags of cement

 Sands ……………...= 2/6* 1.55 = 0.517m3

 Coarse aggregate….= 3/6 *1.55 = 0.775m3

 Water ………….= 0.16 m3 (0.62*0.258) ( assuming w/c 0.62)

 Rate Analysis

48m3
Example: - Calculate the Unit price for C -25 concrete per
of work (formwork and reinforcement rated separately).
Assume 15% overhead and 20 % profit.
Solution: -
 Total cost (TC) = Direct Cost (DC) + Indirect Cost(IC)
 IC = (15% + 20%) of DC = 35 % of DC
 Direct Cost (DC) = Material Cost (MC) + Labour Cost (LC) +
Equipment Cost (EC)
 Material cost (MC)
Rate Analysis 49
 Labor cost (LC)
 Assuming the crew consists of a site engineer, foreman,
mason, and four daily labourers and a productivity of 0.50 m3
per hr:
 Equipment Cost (EC)
 Assuming a mixer with an hourly rate of 20.00 Birr / Hr and
productivity of 0.5 m3 per hour:
 Rate Analysis 50

 DC = MC + LC +EC

 DC = 681.50 + 47.56 + 40.00 = 769. 06 Birr/m3

 IC = 35/100 * 769.06 = 269.17 Birr/m3

 TC = (769.06 + 267.17) Birr/m3 = 1,038.23 ≅1, 040.00

Birr/m3

 C – 25 Concrete = 1, 040.00 Birr/ m3

 Summary 51
1. SUBSTRUCTURE

 Excavation and earthworks (mandatory)

• Site clearance

• Excavation (bulk excavation)

• Fill / Embankment (Back fill, Borrow fill, Disposal)

 Concrete works (can be neglected sometimes)

• Concrete (Cast in situ concrete, Prefabricated concrete, Pretension (Post tensioned)

Concrete)

• Formwork – measured in m2

• Reinforcement

 Masonry works (mandatory)

• stone for facing works

• stone for below ground work

 Summary 52
2. SUPERSTRUCTURE

 Concrete works

• Concrete

• Formwork

• Reinforcement

 Masonry works – measured by volume

• Stone wall concealed

• Roughly dressed stone wall

• Dressed stone wall facing

 Hollow and solid concrete blocks

• Stabilized soil block wall

• Bricks
 Summary 53
3. Roofing and wall cladding

 Galvanized corrugated iron sheet

 Galvanized ribbed sheets

 Aluminium corrugated sheet for roofing and cladding

 Roof clay tiles

4. Carpentry and joinery works

 Carpentry

 Purlins

 Joinery

 Ceiling

 Doors, Windows and Wall Panels

 Summary 54
5. STEEL STRUCTURAL and METAL WORKS WORK

6. FINISHING WORK

✓ Plastering and Pointing works

7. GLAZING

8. PAINTING WORKS

9. SANITARY WORKS

10. ELECTRICAL INSTALLATION

… 55

End of the c/c…

…10Q…