4.1.1 General
All estimates comprise:
• dividing the project into sufficiently small elements so as to allow a single rate or unit cost to be applied to each element;
• extending the quantities and rates to determine a cost for each element;
• summing the resulting elemental costs and, finally,
• applying indirect costs to give a complete estimate.
The cost structure of a typical project is illustrated in Figure 4.1.
Figure 4.1 Project Cost Structure
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4.1.2 Direct Job Costs
Each activity within the standard work breakdown structure (WBS) is sub-divided into sub-activities or tasks according to the processes needed to complete the work. These work activities are usually detailed in the project specification (and as per detailed scope definition). For example, concrete in a bridge deck is typically subdivided into formwork, reinforcement steel, concrete supply and placement, finishing and curing. To determine the direct cost of the activity, resources such as plant, labour and materials are then allocated to the scheduled quantity of work according to their capacity to meet the requirements of the project, resource availability, production rates and unit costs The sum of the activity direct costs gives the Direct Job Costs (DJC) of the project.
Costs included in direct job costs are expressed in current dollar terms and are summarized in Table 4.1.
Table 4.1 Examples of Direct Job Costs (in current dollar terms)
Cost Category Components Sub-components
Gross wages and salaries
Award allowances (for example construction worker allowance, construction camp allowance, overtime loading, annual leave loading, site-specific allowances and severance allowance)
Superannuation
Fuels, oils, consumables and ground engaging tools of plant items Plant
Transport of plant items
Permanent material incorporated in the final works (for example supply and delivery of pavement materials, supply only of RC pipe & box culverts, supply of bridge expansion joint, etc)
Materials
Temporary materials not incorporated in the final works (for example, traffic barriers, sheet piling, formwork, silt fences, setting-out pegs, etc) Direct job costs
Sub-contract Components of the work (permanent or temporary) sub-contracted by the head contractor (for example erection of deck units, installation of sheet piling etc), and including subcontractors’ indirect job costs and offsite costs
Subcontract plant hired on a “wet” hire basis (for example plant including fuels and oils, expendables, ground engaging tools and operator)
4.1.3 Indirect Job Costs
Indirect Job Costs include the allowances that contractors require to manage the project, and cover their risk, corporate overheads and margins. Estimates prepared by MR and its service providers must show specific line items for each of the indirect cost categories.
Options include:
• separate schedule item for indirect costs
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• indirect costs distributed through the schedule activities, either as a uniform percentage mark-up on direct job costs or allocated to specific activities.
Contractors preparing detailed estimates for tenders normally adopt the basic cost method. It is the most accurate estimating method, but relies on a high level of scope definition for best results.
On-site indirect costs, often referred to as on-site overheads, are summarised in Table 4.2.
Table 4.2 Examples of Contractor’s On-site Indirect Job Costs
Cost Category Component Sub-component
Project Manager
Office rentals (for example accommodation, facsimile, photocopier, computer hardware and software)
Service utility charges (for example telephone, power, water and sewerage)
Site facilities
Cleaning charges (for example office cleaning, septic pumping, refuse disposal, etc.)
Plant and equipment Site staff vehicles
Job truck (general purpose) Pumps and generators Floating plant and loose tools Stationery
Consumables
Miscellaneous materials
Insurance and permits State government and local government permit fees, insurances required by the contractor, bank guarantees and financial charges
On-site indirect job cost Overheads (recurring)
Travel Travel costs not included in wages and salaries Site establishment Transport and erection of site facilities
On-site Overheads indirect job costs (fixed)
Mobilisation Mobilisation, site offices and amenities for contractor, client’s team and in some cases, subcontractors
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Off-site indirect costs, often referred to as off-site overheads, are summarised in Table 4.3.
Table 4.3 Examples of Contractor’s Off-site Indirect Job Costs
Cost Category Component Sub-component
Business unit costs Local area costs associated with the management of operations, finance, human resources and business systems
Off-site indirect job costs, corporate overheads
(recurring) Corporate costs Costs associated with strategy and policy development, business development, finance, human resources, business systems, technical advice, and contract advice
Off-site allowances (fixed)
Contingencies and
Risk allowances An amount to cover the costs of unforeseen factors related to the delivery of the project objectives which are not provided for elsewhere in the total job costs
Margin Profit margin Provision for profit often applied as a percentage of the total job costs (direct job cost plus on-site overheads)
4.1.4 Principal’s Costs
These are the costs of the project attributable to the Principal during the project lifecycle. The estimator must allow for these costs as separate line items in the estimate. Care needs to be taken in the proper allocation of escalation to these costs. Note also that although the Contract Costs will attract a margin percentage, the Principal’s Costs will not.
Table 4.4 Examples of Principal’s Costs
Cost Category Component Sub-component
Establishment Costs
Planning, design, land acquisition,
administration
Planning, community consultation, land acquisition, MR staff costs, geotechnical surveys, cadastral & engineering surveys, Principal Arranged Insurance, Principal’s Risks not included in the Contract risks, contract administration and so on
Contingencies and risk allowances
An amount to cover the costs of unforeseen factors related to the delivery of the project objectives which are not provided for elsewhere in the total job costs
Project allowances
Design growth and standards growth
Increase in costs due to the change in design and construction specifications and community expectations over the life of the project
4.1.5 Unmeasured (Unidentified) Items
In addition to the items listed in the pricing schedule for the Strategic, Concept and Detailed estimates for items which have not been identified during the quantity take-off process, the estimator shall allow the following lump sum price amounts in the contract works contingency register:
• Detail Design Estimate => 1% to 3%, of total construction cost
• Concept Estimate =>3% to 5% of total construction cost
• Strategic Estimate => 5% to 7% of total construction cost
4.1.6 Inflation
Inflation is the increase in project costs over time due to rise and fall and applies to the whole of the estimated costs.
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Table 4.5 Inflation
Cost Category Component Sub-component
Project
The basic difference between different methods of estimating is the degree to which a project is divided into elements and the method used to apply rates and additional costs. The more rigorous the process used, the greater will be the certainty of estimate outcomes/the “accuracy” of the estimate.
4.2.1 Global Estimate (Benchmark rates)
Global estimating, or “Order of Magnitude” estimating, describes an approximate or low order method of estimating involving the use of “all in” or “global” composite rates. The project could be considered as consisting of one estimating element only and the estimate prepared on this basis (approximately a Level 2 WBS). Examples are road cost per km and bridge costs per square metre of deck area.
Note: Global estimating has been found to be unreliable in achieving the level of estimating accuracy required by MR, even for strategic estimates. Consequently, global estimating must not be used for budgeting purposes or for media releases.
4.2.2 Unit Rate Estimate
Unit rate estimating calculates the cost of each element of the project by multiplying the quantity of work by historical unit rates. The project cost is then determined by the sum of the elemental costs. The unit rate is normally determined from a careful analysis of unit costs of a number of recently completed projects of the same type, allowances being made for project differences. It is important that the project analysis recognises that the rates may include indirect costs such as contractor's management, risk, overheads and margins, which must be adjusted when converting a unit rate to the direct cost rate.
Adjustments to be considered include:
• inflation
• site conditions (mountainous or flat terrain)
• market conditions
• on-site and off-site overheads and profit
• scale of works (large or small quantities)
• site location (urban or remote)
• design complexity (unique or routine)
• risk profile ground type
• construction methods (specialised or conventional)
• specification of materials and finishes (for example architectural or plain finish).
Unit rate estimating is a relatively quick method of estimating but lacks precision, especially in the interpretation of what exactly is provided for in the unit rate. Accuracy of an estimate requires emphasis on scope, reflected in a comprehensive schedule of work items that is unique to the project. Unit rates can vary from project to project, but the use of the historical unit rate, adjusted by an experienced estimator and applied to a detailed schedule, produces a more accurate estimate than a global estimate.
With a sufficient level of information in terms of the scope of the project, the work breakdown, quantities and careful selection of appropriate historical rates, the unit rate method of estimating is capable of producing estimates suitable for all project stages through to detailed design.