Cost Estimating
Concepts
Goal
to provide an overview of cost estimating (CE)
concepts in order to
review CEs prepared by others or to create
alternative CEs
Why?
financial assurance provision based upon detailed third-
party contractor costs is
required by regulations
Outline
• Part 1 - cost estimating definitions, phases & methodologies
• Part 2 – estimate development and format
• Part 3 – key elements of a cost estimate
• Part 4 – cost estimating over time
Part 1
Cost Estimating
Definitions, Phases &
Methodologies
working definition
a cost estimate is a
documented summary of all dollar costs based upon a
well-defined scope.
3 cost estimate phases
site characterization
conceptual design
final design
+100% to -50%
+50% to -30%
+15% to -10%
3 cost estimating methods
• benchmark – based upon data from past projects factored to new projects
• parametric – based upon more specific parameters and more precise pricing
• detailed – a bottoms-up estimate based upon a more extensive breakdown of
the required activities
Benchmark Cost Estimate Examples
1 – Cap 10 acres @ $200K/ac = $2M
2 – Construct 1,500 LF of 25-foot deep slurry wall @ $250/LF = $375K
benchmark comparisons
• The age of a past project should be
taken into account when comparing cost estimates.
• The scale of the project should be considered.
• The complexity of a project will also influence the costs.
Parametric Cost Estimating
• RACER is focused on remedial actions and corrective actions
• CostPro is for closures & post closures
• Both build cost estimates based upon parameters such as acreage, depth to groundwater, tonnage, volume, etc.
Detailed Cost Estimates
basis of quantity calculations unit prices & sources
extended costs
work rate assumptions
crew & equipment assumptions disposal assumptions
other documentation
definition of detailed CE
• regulations do not define “detailed”
• 1986 FR notice preamble states:
– the cost estimates must contain sufficient detail to allow them to be evaluated
– the agency expects the detailed CEs to support the detailed activities
described in the closure/post-closure plans
Closure/Post Closure CEs
• 3rd-party costs – no parents or subsidiaries
• most expensive option – maximum quantities
• salvage value of wastes not allowable
• economic value of wastes not allowable
• must adjust for inflation annually during active life of the facility
Corrective Action CEs
• 2003 Interim Guidance
• no detailed regulations
• regulatory flexibility & discretion
• CE and FA at remedy select
• FA can be required prior to CA 400
• incremental CEs and FA
• good idea to adjust annually
Summary – Part 1
• Definitions
• three CE phases (100%, 50%, 15%)
• three general methodologies
(benchmark, parametric, detailed)
• Regulatory requirements
Part 2
Estimate Development
and Format
a well-developed cost estimate involves:
Scoping Pricing
Documenting
Scoping
a scope begins with a permit, order,
investigation and/or
design
Work Breakdown Structure
use a Work Breakdown Structure (WBS) when
developing or defining the
scope
WBS Example No. 1
Storage Unit Closure
Remove/Dispose
Waste Materials Clean Building Surfaces
Conduct Confirmation
Sampling
Analytical Costs Sampling
Labor Reporting
Packaging and
Labeling Loading Transportation Disposal
Level 1
Level 2
Level 3
WBS Example No. 2
Facility
A
Activity 1 Capping
Activity 2 Slurry Wall
Activity 3 GW
Extraction
wbs example no. 2 – cont’d
Activity 1 Capping
Year 1 Cap
Construction
Annual Sampling &
Analysis
Annual
Inspection &
Maintenance
Pricing (quantification)
first – specified number of units: how many items/events, etc.
second – conversions, work rates, frequency, crews, etc.
third – unit pricing & extended costs
Quantities
• may be obtained from plans, specs, etc.
• or calculated by estimator from other specified quantities (e.g., tons derived from cubic yards)
• or inferred by estimator – performance-
based design, for example
Documenting basis of quantities
calculations & conversions crew configurations
work rates (productivity) unit pricing sources
other assumptions
Why Document the Cost Estimate?
1. To create a defensible and transparent cost estimate.
2. To make future updating easier.
3. To allow for easier use of cost estimate or individual elements by others in the future.
Summary – Part 2
three basic CE essentials:
scoping (including WBS)
pricing
documenting
Part 3 - Basic CE Elements
• units of measure
• unit pricing
• productivity
• direct costs
• indirect costs
• contingencies
Units of Measure (UOM) UOMs provide definition to
activities and determine their pricing sources (e.g., tons,
cubic yards, gallons, linear feet, lump sum, hours, days, each,
acres, etc.)
UOMs must match the activity
For example, soil excavation and loading costs are may be based on
cubic yards, while soil
transportation & disposal costs
may be based on tonnage.
Unit Pricing Sources
• RCRA & CERCLA files
• Prior Estimates
• Bids
• Contracts
• Vendor quotes
• Catalogs and on-line sources
unit pricing is affected by:
– locality factors – work rates
– safety levels
– site conditions
Location Factors
location factors adjust unit pricing to account for the variability in prices across
geographic areas
work rate (productivity) is a function of:
• labor quantity
• equipment quantity and type
Safety Factor
• May be appropriate at some sites or for some activities (e.g., tank cleanout).
• Unit costs found in R.S. Means and other sources will likely assume a Safety Level D.
site conditions
• confined spaces vs. open areas
• topography
• active facility vs. closed
• geology
Direct Costs (DCs)
Direct costs consist of the labor, equipment and material
directly related to a specific
activity.
Indirect Costs
Indirect costs represent site- wide costs which are not
specifically attributable to a work activity
Indirect Costs
Facility operators may inadvertently exclude some or all indirect costs (i.e., procurement, utilities, security, planning,
mobilization, travel, bonds, insurance, site management) because these costs
often are internal costs to the facility, and are not easily tracked and
quantifiable.
other terms for indirect costs:
Engineering Expenses Administrative Costs Site Management Costs
Overhead Costs
Construction Mgmt. Costs
General Conditions
Indirect Costs
• Typically calculated as a % of DCs.
• Variable for site complexity & volumes.
• Applied to the entire cost estimate or only portions (e.g., capital versus O&M).
• Some DCs already may be “burdened”.
Indirect Cost factors include:
• Construction/Project Management
• Engineering during construction
• G&A costs (home office costs)
• Change Orders
• Insurance/bonds/permits
• Profit
• Project Management during O&M
site-wide indirect cost and profit
• EPA Region 4 removal projects range from 19% to 25%.
• RSMeans cost data range from
10% to 25%.
Construction Management/
Project Management
• Bidding, planning, permitting, contract administration, reporting, etc.
• Mobilization, crew travel expenses,
review of plans, construction inspection, engineering surveys, change orders,
subcontractor oversight, O&M manual
preparation, security, IDW disposal, etc.
G&A/Overhead
Overhead are the costs incurred by an employer over and above direct salaries and benefits paid to employees working on a project (e.g., insurance, office rent, office equipment costs, and administrative costs including support staff salaries).
Contractor Profit
• Calculated as a % of contractor DCs & OH.
• Applied to both capital and O&M costs.
• Sub profit ranges from 5 to 12% of DC & OH.
• General contractor profit: 4 to 15% for their own work and 4 to 8% for subs.
O&M Project Support
• Provided during O&M activities to monitor, evaluate, and report the progress of the activities.
• May be full-time or part-time.
• Typically ranges from 10 to 20% of the total annual O&M costs.
Contingencies
• Contingencies account for errors of
omission and unforeseen circumstances
• Actual factor applied depends on the
complexity of the site, detail level of the estimate, and stage of project planning.
• Typically 10 to 25% of total cost.
Summary – Part 3
• units of measure
• unit pricing
• productivity
• direct costs
• indirect costs
• contingencies
Part 4 – Cost Over Time Inflation
Present Value (discounting)
Nominal vs. Real Discount Rates Excel Calculations
Perpetual Care Value
Decision Tree
Inflation
• Inflation measures the change in the cost of goods and services over time.
• Implicit Price Deflator for GDP is a
measure of the change in prices of all
new, domestically produced, final goods and services and is published by the
Bureau of Economic Analysis (BEA).
Inflation of Past Costs
Unit price in 2003: $125.00 Current Year: 2008
Inflated 2008 Price =
Year GDP Deflator 2003 106.404 2004 109.462 2005 113.000 2006 116.567 2007 119.664 2008 121.313
51 .
142 404 $
. 106
313 .
00 121 .
125
$
Inflating Future Costs
• Important to select a realistic inflation rate for future costs.
• Reasonable to use the average inflation rate for a period in the past.
• For example, the average GDP inflation rate for the past 20 years is 2.39%.
• Cost in Year X =
Cost in Year Y * (Inflation Rate)(Y-X)
Inflation Example
2008 Unit Cost = $10,000
Assumed Future Inflation Rate = 2.39%
Anticipated Unit Cost in 2015 = $10,000 * (1+0.0239)(2015-2008) = $11,798
Inflating Future Cost
Employ the latest
Congressional Budget Office’s (CBO) Economic
forecast
Post Closure Costs
• Multiply estimated one-year costs by the number of years remaining in the post- closure care period to obtain the total post-closure cost estimate.
• Post closure regulations do not
recognize the time value of money.
present value analysis:
• projects long-term costs in present-day terms
• compares alternative remedies by stating the costs current dollars
• recognizes the time value of money and is not used for post-closure projections
Present Value
The present value of a future amount is the present principle
figure that must be deposited
today at a given interest rate to
yield the desired future amount.
Nominal vs. Real Discount Rates
• Nominal discount rates are used with data that has been inflated
prior to applying the nominal rate.
• Real discount rates are used with
data that has not been adjusted for
inflation (out-years not inflated).
Present Value Calculations
• Present values are determined by using discount rates (interest rates) which are presumed to have long-term validity.
• OMB in Circular A-94, Appendix C,
indicates a 30-year “real” discount rate of 2.8% and a 30-yr “nominal” discount rate of 4.9% (January, 2008).
Present Value Calculation
• Basic Present Value Calculation is:
Future Payment
(1 + Annual Discount Rate)n
• Cost in 2011 = $10,000
• Annual Discount Rate = 2.8%
• n = number of years = 2
• Present Value in 2009$ =
$10,000/(1.028)2 = $9,463 PV =
Excel Calculations
• Excel has a Present Value function (PV) and a Net Present Value (NPV)
function.
• The PV function is used with constant annual cash flows.
• The NPV function is used with irregular annual cash flows.
Excel Present Value Function
PV(rate,nper,pmt)
• Rate is the annual discount rate in decimal format (2.8% = 0.028 or 7% = 0.07)
• Nper is the total number of payments (10 yrs)
• Pmt is the annual payment ($10,000/yr)
• Assumes payments are made at the end of each year
• Undiscounted cost of $100,000 ($10,000*10 yrs)
• PV(0.028,10,-10000) = $86,179
• PV(0.07,10,-10000) = $70,236
Excel Net Present Value Function
NPV(rate,value1,value2,…)
• Each value can vary and is entered individually
• Use if annual costs fluctuate and you want to calculate in one function.
• Annual discount rate of 2.8%
• Assume undiscounted capital costs of $1,200,000
– Year 1: $100,000 - Year 3: $400,000 – Year 2: $500,000 - Year 4: $200,000
• NPV(0.028,-100000,-500000,-400000,-200000) = $1,117,692
Excel Present Value
• If the base year of the O&M is different than the base year of the cost estimate you have to discount the PV function to the base year.
• Example: Calculate the PV of O&M
costs of $10,000 per year for 10 years starting in 2015 for a cost estimate with a base year of 2010.
PV(0.028,10,-10000)/(1.028)5 = $75,065
Perpetual Care Value for FA
To calculate an investment target for
Facilities where the long-term care term (period of operation) is indefinite:
Annual Cost /Interest rate =
Perpetual Care Value
example: $100K/.03 = $3.333 Million
Decision Tree Analysis
• develop an estimate for each alternative remedy.
• assign a probability to each alternative remedy and multiply by the cost of each to develop target cost estimate at any point in the remedy selection process.
Example Decision Tree
Soil Disposal 3,000 cy
Probabilistic Result ($142.50/cy) = $427,500
Low Landfill Tipping Fee
$91.50/cy = $274.5K
Medium Landfill Tipping Fee
$135.00/cy = $405K
High Landfill Tipping Fee
$208.50/cy = $625.5K
25%
50%
25%
