Controlling Capital Costs Prior to Construction
Don L. Short, II, FCPE
Reprinted with permission of the
American Society of
Professional Estimators
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BIOGRAPHY
Don L. Short, II, is a Fellow of the American
Society of Professional Estimators, a Certified Professional
Estimator, and Past National President of ASPE. He is the President
of Tempest Company, located in Omaha, Nebraska. The firm provides
independent construction cost estimating services in the United
States and at overseas locations for contractors, owners and
designers.
BACKGROUND
Reliable cost estimating methods exist to keep
budgets in line with the expected bid amounts. These methods
are available for use with the decision and design process of
any project. The methodology is to perform construction cost
estimating with historical costs, professional estimators, and
organization and procedures. By adhering to this methodology,
costs can be controlled from project inception.
Decisions to proceed with a project by facility
owners and developers, are made with the intention of attaining
a profit. With a developer, the profit is attained by leasing
or selling the property at a rate that will exceed the cost of
the facility. With an industrial plant owner, profit is attained
by keeping production of the final product at the lowest possible
cost. The decision to proceed with a project is usually made
after preparing feasibility studies that involve several considerations,
among them being construction costs.
All too often, facility owners and developers
rely upon feasibility estimates prepared by "number crunchers" using
common construction cost reference books. This can have the undesirable
effect of establishing a budget that is improper for the project.
In addition, if facility owners and developers
do not dedicate any further time to the construction budget until
bids are received from contractors, it then becomes a case of
too little, too late. Bids may come in substantially higher or
significantly lower than budgeted.
If the result of this is a substantially high
variance from the budget, it can cause the facility to incur
additional costs to keep on schedule, the schedule to slip due
to reworking the design, or the project to be postponed indefinitely.
If there is a significantly low variance from the budget, it
can cause the schedule to slip in order to bring the design up
to budget or an unrelated project to have gone unfunded due to
a priority in the allocation of funds. Both of the above results
are detrimental to the facility owner and developer.
There are resources available to aid the owners
and developers in their quest for attaining reliable budgets
prior to receiving bids. These include the use of historical
cost data and professional estimators along with a method of
organization and procedures to follow for estimating. While the
use of these resources will appreciably reduce the exposure to
budget variances, the variances will not be eliminated entirely.
However, the facility owner and developer will be better prepared
to analyze the cost discrepancies that might occur.
HISTORICAL DATA
Historical cost data, gathered from similar
projects, is one of the best sources to help the estimating effort
early in the life of a project. This data is typically gathered
from bid tabulations or job costing of projects recently completed
or currently under construction. As an example, many of the State
Highway Departments and the Federal Highway Administration use
bid tabulations for estimating similar projects.
The major problem associated with using bid
tabulations alone is that the prices may or may not accurately
reflect the conditions likely to be encountered on your project.
The unit costs may be based upon larger or smaller quantities,
different installation requirements, or even "unbalancing" by
the bidding contractors.
Data gathered from previous and current projects
are the most reliable source of information that can be collected,
if the conditions of the project are known. Valuable information
that can be gleaned from projects underway includes productivity
rates, man-hours of installation time, accurate material and
equipment costs, and overall costs for each of the features of
the project. In many cases, this information is a direct result
of job cost reporting established from the beginning of construction.
There are many techniques to gather reliable
labor and productivity data without committing to a extensive
job costing program. One of the easiest to perform involves direct
observation of the work (i.e. a time and motion study). By measuring
the time and manpower required to install selected work items
and measuring the quantities installed, unit man-hours can be
determined. These man-hours can be compared to other historical
hours. This comparison will yield a current productivity factor
for the project that can be compared to historical data.
Major problems with using historical cost data
are similar to bid tabulations. Whenever any historical cost
data is used, an estimator must adjust the costs to reflect the
conditions on the current project being estimated.
PROFESSIONAL ESTIMATORS
Just what is a professional estimator? As in
any profession, a professional is a person "engaged in a specific
activity as a means of livelihood, possessing great skill or
experience in a field or activity [1]." An estimator is one who
furnishes a opinion or determination as to the cost of construction
projects.
The American Society of Professional Estimators
(ASPE) further defines an estimator as someone having a minimum
five years of full time estimating experience.
Professional estimators are trained to evaluate
cost ramifications. This training is usually performed "on the
job" by working with experienced estimators for a period of time.
The initial training usually covers working as an assistant to
a senior estimator, tracking drawings, performing minor takeoff
duties and other less critical items required in the estimating
process. Once a general understanding to the estimating process
is gained, responsibilities are added until the estimator can
handle the full range of duties.
During the training process the estimator being
trained is exposed to items such as site investigations, contract
terms and conditions, subcontracts, labor relations and agreements,
job costing, value analysis and scheduling . These are in addition
to the necessities normally associated with being an estimator.
Because of the in-depth knowledge required,
as in any profession, a "number cruncher" is considered someone
who "guesses" rather than estimates what it will cost to construct
a facility. References commonly made about WAG (Wild Ass Guess)
and SWAG (Scientific Wild Ass Guess) work products are normally
associated with something prepared by a "number cruncher" rather
than by a professional estimator.
The American Society of Professional Estimators
has a Certification Program which evaluates estimators for their
capabilities. To become an ASPE Certified Professional Estimator
the candidate must have a minimum of five years experience, submit
a technical paper and undergo testing. The program also involves
continuing certification with yearly requirements. The meeting
of these professional requirements leads to re-certification
every three years.
ORGANIZATION AND PROCEDURES
One of the best methodologies to define the
scope and to make use of available historical cost data exists
as a working system today. This system is MasterFormat, developed
by the Construction Specifications Institute (CSI). MasterFormat's
universal applicability is well known. Its merits in organization,
versatility and thoroughness cannot be disputed.
The use of MasterFormat is universally known
in the United States and Canada for organizing specified materials
and equipment. This highly regarded system is used by owners,
developers, designers, suppliers and contractors.
What is less known, or perhaps overlooked, is
MasterFormat's applicability to estimating and project control
applications. MasterFormat is ideally suited to performing cost
comparisons and estimates from the feasibility stage through
final design and bidding.
One of the most common misconceptions, made
by "number crunchers" attempting to prepare construction cost
estimates, is that MasterFormat is too material oriented. That
it is too material oriented is a fallacy that has continued for
too long. There is no doubt that only someone other than a professional
estimator would reach this conclusion. Estimating is detail oriented,
regardless of the level of estimate. MasterFormat, in the hands
of a professional estimator, is a powerful tool because it is
a comprehensive identification system without equal.
MasterFormat identifies more than material and
systems categories. It provides a method by which owners, designers,
contractors, subcontractors and material suppliers can communicate
in broad or specific areas for scope, cost and schedule items.
Due to the applicability of MasterFormat, the
American Society of Professional Estimators (ASPE) adopted MasterFormat
as the preferred estimate format. This was done in 1987, in conjunction
with the issuance of the ASPE Standard Estimating Practice [2].
ASPE's adopting and continued endorsement of the MasterFormat
system was a result of evaluating MasterFormat, Uniformat and
the possibility of developing a "new" format for estimating.
Estimating project costs requires an ability
to monitor and adjust costs from inception through completion.
MasterFormat provides for this capability on virtually all types
of projects and at all levels of the estimate [3].
One must begin with the final result of the
estimate to demonstrate the benefits of using the MasterFormat
system for estimating and project controls applications. The
end result is that prices or bids are received to construct a
project. Whether it is a building, industrial plant, nuclear
power plant or highway, in all probability the bidding documents
are in the CSI MasterFormat divisions (Divisions 1 through 16).
At bid time, material suppliers and subcontractors quote to the
prime contractors in accordance with the MasterFormat specification
sections. These are accumulated by major divisions (Divisions
1 through 16) to arrive at the total bid. At bid time, all costs
are defined by the MasterFormat System.
To evaluate the costs, an independent
estimate is also prepared along the lines of
the MasterFormat system. This is oftentimes
called the "Engineer's Estimate" or "Fair Cost
Estimate." This estimate, usually prepared by
the designer of facility owner, is the last
estimate of a series made from the beginning
of the project, even preceding the design effort.
Evaluations of the bids can range from the simple
examination of the "bottom line" to rigorous evaluations of the
cost on an item by item basis. When performing a comprehensive
evaluation, the cost evaluations typically follow the major CSI
divisions to the subdivisions to the line items contained in
the estimate.
Prior to establishing the "Fair Cost," at least
three estimates are prepared in the pre-design and design phases
of the project. These occur at Feasibility, Schematic Design
and Design Development milestones. The Feasibility Estimate is
usually used to establish the budget. The estimate prepared at
Schematic Design completion is used to determine if the project
is on track for scope and budget. Comparisons are made between
the original budget amounts and the original project scope. The
estimate prepared at the Design Development milestone is also
used to determine if the project scope and budget are according
to plan. Comparisons are made between this estimate and the previous
estimate during this process. When the final estimate is prepared,
it too, is compared to the previous estimate to determine if
any scope and cost changes have occurred.
As indicated, there is a chain of continuity
from pre-design through bid evaluations. The tracking of costs
incurred on a project continues through the completion of the
project. This happens because the prime contract, subcontracts
and material supply contracts are in alignment with the CSI MasterFormat
of the project specifications.
Further information on each of the estimate
types mentioned above can be found in the following paragraphs.
This is derived from professional experience and the American
Society of Professional Estimators' Standard Estimating Practice
[4].
At the inception of a project comes the feasibility
estimate. This estimate is typically prepared with little or
no design information. Costs are developed from intended usage,
type of facility and an approximate size or capacity of the facility.
This estimate is typically prepared from historical cost information
for similar projects and/or information developed specifically
for the project being contemplated. A sample feasibility estimate
format is included in the ASPE Standards [5]. An estimate of
this type and character is normally prepared in a time frame
not exceeding eight hours. The cost history [6] used to develop
the estimated costs for this project have been gathered along
the lines of the CSI MasterFormat.
Another variation on the feasibility estimate
indicated by the ASPE Standard Estimating Practice can be found
in the
attached file (15kb .pdf). In this particular case,
the estimate was prepared from information
relayed by telephone conversations and tele-copied
sketches. Total time involved in estimating
- less than four hours.
A Schematic Design Estimate, prepared typically
from 5% or less design documents is the first highly detailed
construction cost estimate prepared for a project. It is the
first opportunity to influence the estimated costs of the project
once the design effort has started. This estimate is compared
to the original budget and used as a "baseline" for cost studies
occurring prior to the design development estimate. This estimate,
drawing upon historical cost data and material/equipment quotes
should be in accordance with MasterFormat. This will provide
the ability to compare the previous estimate and the estimate
in progress.
A Design Development Estimate is prepared from
design documents with an overall completion status of 35 to 50%
complete. This estimate provides the opportunity to reaffirm
the project budget, analyze any variances, and to determine alternates,
if any. As with the Schematic Design Estimate, this estimate
serves as a baseline for cost studies prior to the next estimate.
The use of MasterFormat, enables each of these
estimates to establish a cost history that relates to the other
estimates and develops a cost history from bid results that can
and should be used when preparing future estimates.
Practical applications of this are known to
everyone in construction. An illustration of this is in the popular
field of cost reference books. These reference works are similar
to those published by Means [7], Richardson [8], and Walkers
[9].
Professional estimators use MasterFormat in
organizing their estimates into a logical Work Breakdown Structure
(WBS) for each project and for the tasks to be estimated. This
starts as early in the life of the project as possible, preferably
with the Feasibility Estimate (ASPE Level 1 Estimate). A WBS
Developed on a project is very unique in that it is developed
specifically to that project. It is a comprehensive statement
of the categories of work for the project. It provides a method
to monitor costs and progress within the total project scope.
Typically, the WBS would identify separate buildings, floors,
site related work, process plant areas or any other relevant
area/item to the project. Within each WBS the estimator works
with MasterFormat to maintain the organization of work.
Keeping an estimate organized is of paramount
importance. An organized estimate keeps errors to a minimum,
provides an ability to compare like scopes of work and enables
other analysis with comparable ease. To illustrate the benefits
of a consistent Work Breakdown Structure, imagine preparing an
estimate based upon combined like materials. Once like materials
are assembled, the estimator cannot readily determine the unit
costs for any item of work, system or area. Combining like materials
is of no importance to the estimator, project manager, cost engineer
or scheduler.
For example, an estimator would typically include
concrete work in MasterFormat's division 3 - Concrete. Two tasks
or items of work for this could well be pad footings and poured
in place walls (or for that matter equipment foundations and
structural mats). The estimate content for these items would
be as indicated in Table
1.
Items in an estimate provide the estimator a
method to determine productivity, based upon the type and location
of work to be performed. It gives the scheduler the ability to
sequence, manpower level and cost load a CPM network diagram.
It provides project management capabilities in progress and performance
analysis.
These capabilities are not reserved for only
concrete on bid level estimates for building construction. They
are applicable for virtually all types of construction under
design build, cost plus, firm price and unit price contract conditions.
They are also applicable for each estimate prepared for the project.
Oftentimes on industrial construction, mechanical
and electrical scopes of work justify having the mechanical or
electrical contractor perform as the prime contractor on the
contract. Under conditions such as this, MasterFormat again provides
the ability to function for estimating.
When estimating mechanical or electrical work,
the procedure is the same, that is to identify the task to be
estimated. In the case of these two divisions, this is done by
system. A typical estimate for mechanical would be organized
as indicated in Table
2.
Breakdowns are needed in estimating and controlling
a project. Estimated costs are needed by type of work and by
system. Systems are used to establish schedules and control budgets.
Historical cost data is gathered by type of work and system for
application on future projects. MasterFormat provides for these
needs in estimating and project controls.
Those who combine "like" materials in an estimate,
without identifying areas, systems or other components, are defeating
the ability to control costs prior to starting construction.
They also do not allow a method for the application of differing
labor units on complex systems.
Similarly, those who use different formats of
estimates between Feasibility, Schematic Design, Design Development
and Construction Documents are breaking a continuity that is
vital to the success of the project for cost, schedule and management.
One of the major formats that this occurs in is Uniformat.
A brief comparison between MasterFormat and
Uniformat shows some significant differences between the two
systems. While this is not all inclusive, it does show problems
associated with the use of Uniformat. One of these is the inability
of Uniformat to monitor costs of the project. If Uniformat is
used, it can easily result in increased costs to the owner of
the facility in order to provide capabilities inherent in MasterFormat.
MasterFormat is applicable and used in virtually
all types of construction projects. Whether new construction
or renovation, MasterFormat works with commercial, industrial,
institutional, power, chemical and other types - at all design
stages. Uniformat is limited and oriented to new building construction
in the very early design stage.
SUMMARY
With construction costs as a major concern for
facility owners and developers, a methodology is needed to aid
in reducing budget variances. The use of historical cost data,
professional estimators, and an organized method by which to
prepare estimates is readily available for owners and developers
who do not have these controls. This requires only a commitment
for implementation.
FOOTNOTES
-
Webster's II New Riverside
University Dictionary, pg. 939
-
American Society of Professional Estimators
Standard Estimating Practice, Copyright 1987, 1988, 1989,
1990
-
ASPE Standard Estimating Practice,
Part One, Section Two, Levels of the Estimate
-
ASPE Standard Estimating Practice,
Part One, Section Three, Scope of the Estimate
-
ASPE Standard Estimating Practice,
Part One, Section Four, Estimating Procedures,
General
-
Cost history being the historical
cost of labor man-hours and rates, materials
and equipment, along with appropriate subcontractor
and/or prime contractor markups.
-
R.S. Means Company, Inc.,
Kingston, Massachusetts
-
Richardson Engineering Services,
inc., Mesa, Arizona
-
Frank R. Walker Company, Lisle,
Illinois
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