Four BT, LLC

Efficient and best management practice construction cost estimating and ongoing construction project/program management is impossible without proper early and ongoing planning, inclusive of the collaborative and competent involvement of all construction project participants and stakeholders.  

 

LEAN Collaborative Construction Practices Construction Cost Estimating – Within this structure the Real Property Owner must demonstrate appropriate leadership skills and manage the appropriate selected team of internal and external service providers and stakeholders without excessive control.   Continuous monitoring, process improvement, and resource development should be a central focus.

In general terms are an actionable construction cost estimate should reflect approximate costs developed for a complete schedule of detailed construction line item tasks/activities after consideration of all physical and functional requirements and possible cost variations.  

Thus the process of generating an actionable construction cost estimate can be defined as a quantitative assessment process generates a detailed line item construction cost estimate.

There are multiple alternative forms of estimates including conceptual, square foot, building, system, life-cycle, etc.   The primary focus here is upon detailed line item construction cost estimates as they should be considered mandatory before any final construction project is approved and begun.

A few general principles greatly assist in the development of actionable construction cost estimates:

·         Early and ongoing participation of all stakeholders (designers, architects, engineers, construction contractors, facilities management, building users, oversight groups, etc.)

·         Full line item descriptions in plain English using industry standard terms.

·         Organization by standard data architecture (Uniformat, MasterFormat, Omniclass etc.)

·         Full details of specific labor, material, and equipment costs and type.

·         Transparency, sharing, and collaboration among all stakeholders

·         Independently and objectively locally researched cost information (Note: Do not rely exclusively upon national average cost data, even data with localization factors.  Do not rely exclusively upon subcontractor costs.

·         Assure all cost information is updated to current location, time, requirements, and conditions.

General review of the Cost Types associated with LEAN Collaborative Construction Practices Construction Cost Estimating

Variable Cost – Any cost that changes with the amount of production or the amount of work. Examples: cost of materials, power, water, labor

Fixed Cost – Cost that does not change as production changes is a fixed cost. Examples: mobilization/set up cost, rental or rental of equipment or machinery.

Direct Cost- Costs are directly attributable to the work on the project. Example: team travel, team wages, recognition, and costs of materials used on the project.

Indirect Cost – Overhead items or costs incurred for the benefit of more than one project are indirect costs. Example: Corporate Tax, Fringe Benefit Tax.

Opportunity Cost – Cost associate by choosing a particular method or project over another an opportunity cost.

Sunk Cost – Costs are the ones which were already spent on the project earlier and generally not considered when future decisions are made.

Types of Estimating and Associated Key Terms

Analogous Estimating – Using the actual cost of previous or similar projects as the basis for estimating the cost of the current project.

Researched Costs/Cost Rates – Actual per unit labor and material resource rates are that are collated or estimated.  May include subcontractor quotes, current/previous relevant contracts, and commercial cost databases.

Bottom-up Estimating (also detailed line item estimating- Individual schedule activities, and/or task, that are estimated to the smallest reasonable level of detail to provide the greatest level of confidence.  All costs are then aggregated and used for reporting, tracking and control purposes. Individual activity/task cost consciousness is of prime importance.

Parametric Estimating – This technique uses historical cost with current project variables that are determined. This is a highly accurate method as it requires clarity in current project variables.

Cost Estimating Software – Widely Available cost estimation applications can be used for faster estimation of alternatives.  At a minimum capabilities should include the ability to house, store, and recall a construction cost database, provide a collaborative environment, create, report, and export (excel, PDF), detailed line item cost estimates, track source of line time, and have ability to include notes at line item level.

Vendor Bid Analysis / Contractor/Subcontractor Quote Analysis: A method used to benchmark costs. If a project is won in a competitive bid, more details should be considered for cost estimation and control purposes.

Contingency or Reserve Analysis – Allowances used to deal with uncertainty or “knowns-unknowns” and these are added to the cost estimates, thus sometimes overstating construction project costs. Options vary between grouping similar activities and assigning a single contingency reserve for that group to a zero duration activity.

Cost of Quality – Cost of quality can also be used to prepare the schedule activity cost estimate.

Cost Aggregation – Schedule activity cost estimates are aggregated and grouped by work packages, which may be then grouped by higher levels as per levels set by the WBS, then finally by the entire project.

Parametric Estimating – Using construction project characteristics (parameters) in a mathematical model to predict total project costs. Both the cost and accuracy of parametric models vary widely. They are most likely to be reliable when: the historical information used to develop the model is accurate, the parameters used in the model are readily quantifiable, and the model is scalable (it works within the range of likely construction sizes to be finalized).

Funding Limit / Budget Reconciliation – Funds are reconciled and based on the results and new limits are set and WBS components are adjusted. This may impact allocation of resources to the project. If costs are used in the schedule development process, the process is repeated with new constraints and a new baseline is derived.

Primary Causes of Cost Variation

Project / Program / Contract Execution Plan and//or Operations Manual – In addition to the Construction Delivery Method, likely the most important item relevant to improving outcomes. A written, detailed, and agreed upon document defining roles, responsibilities, documents, costs data types/formats, specifications. Outcomes, deliverables, processes, workflows, approvals/approval levels, etc., tools associated with the cost management plan.

Collaborative Construction Cost Estimating and Project Tracking System – Cloud based system that enables transparent creation, modification, use, updating, and storage.  Inclusive of construction cost line item database.

Key Performance Indicators, KPIs, Performance Measurement Analysis – Performance measurement methods, metrics, techniques to help to assess the magnitude of any variance that will invariably occur with any construction estimate, or construction project/program.   For example, the earned value technique (EVT) compares the cumulative value of the budgets cost of work scheduled (planned) to the actual cost control, resource management, and production. An important part of cost control is to determine the variance, the magnitude of the variance, and to decide if the variance requires corrective action. The earned value technique uses the cost control contained in the project management plan to assess project progress and the magnitude of any variations that occur. The earned value technique involves developing these key values for each schedule activity, work package, or control account.

Planned value (PV) – PV is the budgeted cost for the work scheduled to be completed on an activity or WBS component up to a given point in time.

Earned value (EV) – EV is the budgeted amount for the work actually completed on the schedule activity or WBS component during a given time period.

Actual cost (AC) – AC is the actual cost incurred in accomplishing work on the schedule activity or WBS component during a given time period. This AC must correspond in definition and coverage to whatever was budgeted for the PV and the EV (e.g. direct hours only, direct cost only, or all costs including indirect costs).

Estimate to complete (ETC) and estimate at completion (EAC) – The PV, EV, and AC values are used in combination to provide performance measures of whether or not work is being accomplished as planned at any given point in time. The most commonly used measures are cost variance (CV) and schedule variance (SV). The amount of variance of the CV and SV values tend to decrease as the project reaches completion due to compensating effect of more work being accomplished. Predetermined acceptable completion can be established in the cost management plan.

Cost Variance (CV) – CV equals earned value (EV) minus actual cost (AC). The cost variance at the end of the project will be the difference between the budget at the completion (BAC) and the actual amount spent. Formula: CV=EV-AC

Schedule Variance (SV) – SV equals earned value (EV) minus planned value (PV). Schedule variance will ultimately equal zero when the project is completed because all of the planned values will ultimately equal zero when the project is completed because all of the planned values will have been earned. Formula: SV=EV-PV   The values CV and SV, can be converted to efficiency indicators (KPIs) to reflect the cost and schedule performance of any project.

Cost performance index (CPI) – A CPI value less than 1.0 indicate accost overrun of the estimates. A CPI value greater than 1 indicates a cost under-run of the estimates. CPI equals the ratio of the EV to the AC. The CPI is the most commonly used cost-efficiency indicator. Formula: CPI=EV/AC

Cumulative CPI (CPI^c) – The cumulative CPI is widely used to forecast project costs at completion. CPIC equals the sum of the periodic earned values (EV^c) divided by the sum of the individual actual costs (AC^c). Formula: SPI=EV/PV   The earned value technique in its various forms is a commonly used method of performance measurement. It integrates project scope, cost (or resource) and schedule measures to help the project team assess project performance.

Forecasting –  Making estimates or predictions of conditions in the project’s future based on the information and knowledgeable available at the time of the forecast. As the project progresses, the forecasts are adjusted.  The earned value technique parameters of BAC, actual cost (AC^c) to date, and the cumulative CPI^c efficiency indicator are used to calculate ETC and EA, where the BAC is equal to the total PV at completion for a schedule activity, work package, control account, or other WBS component.  Forecasting technique parameters to assess the cost or the amount of work to complete schedule activities is called the EAC. Forecasting techniques also help to determine the ETC, which is the estimate for completing the remaining work for a schedule activity, work package, or control account. While the earned value technique of determining EAC and ETC is quick and automatic, it is not as valuable or accurate as a manual forecasting technique based upon the performing organization providing the estimate to complete.  ETC is based on the new estimate. ETC equals the revised estimate for the work remaining as determined by the performing organization. This more accurate and comprehensive completion for all the work remaining considers the performance estimate to complete all the work remaining and the performance or production of the resource to date.  Alternatively, to calculate ETC using value data, one of the two formulas is typically used: ETC based on atypical variances. This approach is most often used when current are seen as atypical and the project management team expectations are that similar variance will not occur in the future. ETC equals the BAC minus the cumulative earned value to date (EVC). Formula: ETC= (BAC – EVC)

ETC based on typical variances – This approach is most often used when current are seen as typical of future variances. ETC equals the BAC minus the cumulative EVC (the remaining PV) divided by the cumulative cost performance index (CPIC). EAC using a new estimate. EAC equals the actual costs to date (AC^c) plus a new ETC is provided by the performing organization. Formula: EAC=AC^c + ETC