The validity of a construction cost estimate is often overlooked, resulting in billions of dollars of waste every year.
A construction cost estimate must be independently validated.
Key Principles
There are key principles that should be adhered to when preparing a construction cost estimate.
Integrity: Cost estimates must be calculated through an open and transparent process. Any uncertainties should be explained in an easily understood manner in laymen’s terms. Avoiding false precision and early optimism. The use of consultants to prepare estimates must be carefully structured and reviewed, to make sure that no conflicts of interest exist from a Government-Contractor relationship aspect. The contracting agency should have procedures that address conflict of interest issues in all solicitations.
Contents of a Cost Estimate: The cost estimate should be considered the equivalent of the total project purchase price. As such, it should include all costs and the value of any resources needed to complete the work. The cost estimate should be detailed, i.e. line item, and presented in a clear, standardized manner. Labor, material, and equipment costs, as well as productivity information should be provided and all based upon current local market conditions. Lump sum quotes from contractors or subcontractors are unacceptable as they do not provide cost visibility or cost transparency and can not be independently verified.
Year-of-Expenditure Dollars: After the cost estimate is prepared, it should be expressed in year-of-expenditure dollars if there are multiple construction contracts. Make certain that the selected year-of-expenditure reflects a realistic scenario, taking into account project planning and development durations, as well as construction. Clearly specify how inflation is considered in the estimate and clearly state that the estimate is expressed in year-of-expenditure dollars.
Basis of a Cost Estimate: Estimates should be developed using the best information available. At a MIMINUM, a current, local market line item cost database should be leveraged to validate contractor and contractor quotes as well a prepared an independent government estimate (IGE) as appropriate. Professional expertise and judgement must be applied with leveraging any cost data source. Historical data for similar project will rarely be of any practical use due do variations in local market labor, material, and equipment pricing as well as productivity.
Risk and Uncertainty: Costs should be determined for uncertainties within an estimate. All elements of the project must be reduced to a cost that can be accounted and budgeted at a line item level. There should be a disciplined and comprehensive method of assessing and reassessing project risk and uncertainty. Costs that are unknown and costs associated with potential risks can be included in the form of a contingency amount. Contingencies should be expressed in terms that can be easily presented to and understood by the public. The appearance of false precision must be avoided.
Project Delivery Phase Transitions: Estimates should be tracked throughout the life of the project and assumptions and estimate information must be well documented, including changes and what is and what is not in the estimate. Appropriate notes should be added to line items to track changes throughout the planning, procurement, and project delivery phase. The documentation should be in a form that can be understood, checked and verified. A formal version control system must be incorporated and not a simple file based system with multiple documents.
Team of Professionals: A skilled, interdisciplinary team should produce estimates. Estimates should be developed using a clearly identified scope of work. Estimates should be based on consultation and not be developed in a vacuum. The estimating team should be composed of experienced personnel, with the requisite technical, managerial, leadership, and communication cost estimating skills. The team should also have a thorough understanding of the project’s scope, including the ability to determine and evaluate critical issues and risks. If resources are available, others experienced in estimating who have not been extensively exposed to the project should also provide input. This can bring a new independent analysis regarding items that may have a major impact on the cost estimate. Core competencies for cost estimating and a formalized training program to meet these competencies should be established. In addition, an estimating process manual should be in place. An experienced person who is well trained in major project estimating should lead the process.
Validation of Estimates: A competent unbiased team should validate the cost estimates using a current, local market construct task cost database. Periodic reviews of estimates are important for several reasons. First, conditions and underlying assumptions for original and subsequent estimates often change, thus estimates need to be refreshed to account for these changes.
Release of Estimates and Estimating Information: Careful consideration must be given to the context surrounding the release and potential use for the information provided in the estimates. While estimates may have been developed for a specific and unique purpose they may be subject to misuse by those who do not understand the applicable context. Cost estimates should not be released until they have been thoroughly reviewed and found to be consistent with the project scope and are valid and complete indicators of project costs.
Construction Estimate. The total cost of physically constructing the project in the time required based on current costs for labor, materials, equipment, mobilization, bonds, and profit. In preparing a cost estimate, a value analysis must be performed concurrently to establish the appropriate selection, means, and methods of each tasks to ensure the lowest possible life-cycle cost per the approved detailed scope of work. Note: Under no circumstanced should “price indexing” or “cost factoring” be used to adjust a construction cost estimate. The use of economic factors, location factors, or area cost factors as a means to update the total cost of an estimate does not provide adequate cost visibility versus updating actual line items for labor, material, and equipment variation due to time.
The validity of a construction cost estimate is critical to any repair, reno, maintenance, or new build activity.
Construction Cost Estimate Checklist
- Estimate is escalated to year of expenditure dollars for each element of the project.
- Process includes risk-based assessments of unknown and all uncertain costs.
- Estimate is well documented
- Estimate has been independently validated.
- Estimate is consistent with project scope.
- Estimate includes all initial preliminary engineering costs and final design costs.
- Estimate includes all right-of-way and administrative costs.
- Estimate includes all third party (e.g. utility, railroad) costs.
- Estimate includes all construction costs.
- Estimate includes construction contingencies.
- Estimate includes construction administration.
- Estimate includes public outreach cost.
- Estimate includes a management reserve.
- For planning or conceptual estimates, consideration was given to expressing the estimate as a range.
- For projects under design, estimates include a design contingency at each stage of design.
