## 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 **

**documented summary of all**

**dollar costs based upon a**

** well-defined scope. **

**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 **

**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 **

**Indirect costs represent site-**

**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% **