Introduction to Engineering Project Cost Estimation
Why you Should Have an Interest
The estimation of costs for a new project can be a very daunting activity, but if engaged with can provide a valuable new perspective for many engineers. Great engineering design requires several perspectives and very often engineers spend the majority of their careers without having experienced all of the perspectives directly. These perspectives include, but are not limited to the core technical design disciplines involved, the cost that designs take to construct, how designs are constructed and how they are commissioned and operated. I believe being able to use these various lens perspectives is essential to estimation and also makes us better Engineers. Other items that are useful to understand are the project procurement strategy, project delivery method, and contract type.
What is a Cost?
A cost is the amount of money required to purchase, produce, or maintain something. In the context of an engineering construction project, it represents the expenses incurred to achieve a deliver the project to achieve its objectives. Project costs generally fall into the following categories:
Direct Costs: Expenses that can be directly traced to a specific project, product, or service. These costs are clearly identifiable and attributable to a particular activity, such as materials and labor directly involved in construction or production. The majority of the costs are likely to fall into this category. and some examples are; labour for undertaking the design, equipment and materials for the construction and any contingencies sought required.
Indirect Costs: Expenses that are not directly linked to a specific project, product, or service but are Over Heads (OH) necessary for the overall operation of your business. These costs support multiple activities and cannot be easily traced to one specific output, such as utilities, rent, or administrative salaries.
What Level of Accuracy for Cost Estimation is Needed?
Generally multiple cost estimates will be produced over the course of a construction project from its initial conception to construction and final completion. The amount of information available to undertake these estimates varies as the project progresses and this tends to reflect the accuracy of the estimates produced. As the project progresses and more details become available, the accuracy of the estimates improves. The project will pass through various decision gates from concept - feasibility - construction - completion and the accuracy range achieved at each state reduces as it progresses.
Here are the typical levels of accuracy for cost estimates used for a Design - Bid - Build (DBB) type of delivery model and when they are produced:
1. Rough Order of Magnitude Estimate (Conceptual ROM)
Accuracy Range: -50% to +100%
When Produced: Early in the project, during the conceptual or feasibility phase.
Purpose: To provide a high-level estimate to evaluate the project's viability and to determine whether further detailed planning is justified.
Information Available: Minimal design information; based on previous similar projects or broad assumptions.
2. Preliminary Estimate (Feasibility Estimate)
Accuracy Range: -30% to +50%
When Produced: During the feasibility study or early design phase, after initial project approval but before detailed design.
Purpose: To refine the project’s budget and assess the feasibility of the project with more detailed information.
Information Available: Basic design information, site conditions, and a preliminary understanding of the scope of work.
3. Budget Estimate (Design Development Estimate)
Accuracy Range: -15% to +30%
When Produced: During the design development phase, once the basic design and engineering work have been completed.
Purpose: To establish a more accurate budget based on more detailed designs and specifications.
Information Available: Detailed drawings, preliminary specifications, and initial bills of quantities (BOQ).
4. Definitive Estimate (Detailed or Control Estimate)
Accuracy Range: -10% to +15%
When Produced: During the detailed design phase, before construction begins.
Purpose: To provide a highly accurate estimate for project budgeting, cost control, and tendering purposes.
Information Available: Complete set of drawings, detailed specifications, detailed BOQ, and firm vendor quotes.
5. Final Estimate (Tender or Bid Estimate)
Accuracy Range: -5% to +10%
When Produced: Just before the construction phase, during the tendering or bidding process.
Purpose: To submit a final bid or tender for the project and serve as the baseline for contract negotiations.
Information Available: Fully detailed designs, finalized BOQ, confirmed vendor prices, and detailed site information.
6. Control Estimate (Execution or Working Estimate)
Accuracy Range: -5% to +5%
When Produced: Throughout the construction phase up to completion
Purpose: To monitor and control costs during the execution of the project, comparing actual costs against the planned budget.
Information Available: Ongoing cost data from project execution and actual expenditure records.
These levels of accuracy reflect the progression from rough, high-level estimates to precise, detailed estimates as the project matures and more detailed information becomes available.
What are the Methods of Estimation?
1. Analogous Estimation
Description: Use historical data from similar projects to estimate costs. If you have records of previous projects with similar site installation work, you can use this data as a reference.
Application: Compare the scope, location, size, and complexity of the current project with past projects. Adjust for any differences in scale, location, or market conditions.
Advantages: Quick and easy to implement, especially in the early stages when detailed information is lacking.
Disadvantages: Less accurate if the current project has significant differences from previous ones.
2. Parametric Estimation
Description: Use statistical relationships between historical data and other variables to estimate costs. Develop cost models based on key parameters such as area, volume, number of installations, or type of work.
Application: Identify relevant cost drivers (e.g., square footage, type of installations, complexity) and apply cost per unit rates derived from past projects or industry standards.
Advantages: More accurate than analogous estimation when suitable parameters and data are available.
Disadvantages: Requires a robust dataset and understanding of the factors influencing costs.
3. Expert Judgment
Description: Rely on the experience and insights of professionals who have worked on similar projects. Engage with internal experts or external consultants with relevant experience in site installation work.
Application: Gather input from various experts, including estimators, project managers, and subcontractors, to develop a cost estimate based on their knowledge and experience.
Advantages: Provides valuable insights and practical considerations that data alone might not reveal.
Disadvantages: Subject to bias and variability in individual judgments.
4. High-Level Bottom-Up Estimation
Description: Break down the project into major components or work packages even with minimal design detail. Estimate the cost of each component based on known quantities or assumptions.
Application: Identify major site installation activities (e.g., foundation work, utilities installation, site preparation) and estimate costs based on assumed quantities or unit costs. Adjust these estimates as more detailed information becomes available.
Advantages: Allows for detailed tracking and updating as more design details become available.
Disadvantages: Can be time-consuming and may require frequent revisions.
5. Use of Quotations from Subcontractors & Suppliers
Description: Obtain preliminary quotes from potential subcontractors who would perform the installation work. These quotes can provide real-world pricing based on their experience and current market conditions.
Application: Prepare a high-level scope of work or request for quotation (RFQ) and reach out to multiple subcontractors for preliminary quotes.
Advantages: Provides market-based cost estimates and insights into subcontractor availability and interest.
Disadvantages: The accuracy of quotes may vary based on subcontractors’ assumptions and understanding of the limited scope.
6. Benchmarking Against Industry Standards
Description: Use industry standards or benchmarks for site installation work to guide your estimates.
Application: Refer to standard cost databases, industry publications, or cost estimation tools that provide typical unit rates or cost ranges for similar work.
Advantages: Offers a quick reference point based on widely accepted data.
Disadvantages: May not fully account for unique project-specific conditions or recent market fluctuations.
Conclusion
There are many types of estimation techniques available and their selection will depend upon considerations such as;
Sought accuracy range. The range required will depend on specific business requirements, but its likely that each project will require an estimate in the feasibility stage, at the point of tender and control various points during project delivery.
Availability of Information. Some companies may offer products as part of the project that have detail design available immediately in the feasibility stage, but also have a proportion of the project with minimal available information. In this sense a proportion of the project is bespoke and uncertain and part is well known and defined. The estimate of the defined section can likely rely on good quality bills of materials that can immediately be used to create a full bottom up estimate.
Delivery model for the project. The role your business is taking in the project is important. For example you maybe tendering for a Design & Build (D&B) project under a fixed price agreement or a reimbursable contract. The levels of risk and therefore sought accuracies could vary.
Ultimately each business has its own unique requirements and may offer a different number of services, with each requiring different estimating strategy. Promethean Engineering can work with you and your business to develop specific tools and with defined estimation techniques to suite the variety of services you offer.
