Produce Estimated Project Costs

It is now time to take all the gathered data on the costs of materials, consumables, and off-site production (and its delivery charges) and compile them into one place. Like most of the procedures, this process will vary between organisations. Access and review your organisation's procedures for compiling project costs.

Most organisations now use digitally based applications to make compiling costs more manageable and more precise. These applications usually require that you specify which construction works the materials, consumables, and off-site production costs are associated with to calculate unit costs, which will be introduced later. 

Reviewing and compiling costs are the last steps before producing the estimated costs of the construction project. When reviewing the materials, consumables, and off-site production costs you identified in topic 3, ensure that all details are correct, such as the quantity of the materials and consumables, their specifications, and delivery charges of building elements produced off-site. Using digital applications to maintain records will help you streamline this process by keeping all relevant documents in a single, convenient space. Examples of digital applications that can help with this include Evernote, Dropbox, and Lemon.

To improve your efficiency, make sure to compile costs into your organisation's software as you review them and categorise costs accordingly. These practices will help you keep track of what costs have already been reviewed and compiled and will lessen the possibility of you missing an item.
 

The next costs to compile are the identified labour costs. Labour costs should include the contractors and sub-contractors' project rates, the employee's work rates, and their entitlements. This process will vary between organisations, so you must access your organisation's procedures for compiling project costs.

Review the appropriate work rates, project rates, and entitlements specified in your organisation's policy for hiring labour and input the data in the appropriate fields of whatever software your organisation uses to compile costs.

Take note of the entitlements that must be provided to workers on a construction site. The National Employment Standards outlines ten minimum entitlements that employers must provide to all employees in Australia. These entitlements are:

The final costs to compile are the physical resources costs, including the operational and transportation costs associated with each physical resource. Again, access and review your organisation's procedures for compiling project costs.

Review the itemised list of physical resources and their associated costs that you made in Chapter 3. Make sure that all costs associated with the operation of the physical resources have been accounted for. Input the data in the appropriate fields of whatever software your organisation uses to compile costs.
 
 

The materials, consumables, labour, and physical resources are not the only costs considered when producing the project's estimated cost. You must also consider the costs that your organisation makes when running their business, including rent for their office, utilities, supplies, time spent during take offs, and other things that cannot be directly added to the bill. These are called overhead costs. Organisations typically want to make an overhead margin to make up for these costs. They often apply a set mark-up percentage to their quoted prices called the overhead recovery rate to achieve this margin. The overhead margin is the percentage difference between the direct costs (i.e. material, labour, physical resources) and the total project cost that an organisation wants to meet to make up for its overhead costs.

Suppose your organisation makes use of digital software to produce project costs. In that case, the organisational overhead recovery rate and margin can be automatically applied to the resulting estimated project cost once the direct costs have already been inputted. Nevertheless, it is crucial to confirm these rates with your organisation and check whether they have already been applied to the produced estimated cost yourself. Without applying these rates, you might be producing an estimated project cost that results in a loss instead of a profit for your organisation.

Example: 

John's organisation applies an overhead recovery rate of 5 per cent to all construction costs in a construction project to cover their overhead costs. John applies this to all previously identified costs. For example, if the labour cost of laying the foundation for building ABC is $23,228.52, to cover the overhead cost, the cost is increased to $24,389.95.
 

Now that all the costs, both direct and overhead, necessary for the construction project have been compiled, it is time to produce the estimated project cost for the tender or bill. In building and construction, the tender is a document containing an organisation's offer to supply construction services to a client who has invited them to make the offer. This document will include all the specifically identified materials, construction methods, human and physical resources needed for the construction project, and the associated costs for each item required.

The estimated project cost is the sum of all the estimated costs of the resources needed to complete the construction project with allowance to account for price fluctuations. 

Project costs may also be produced by getting the sum of all the unit costs of a construction project. Unit costs refer to the cost of each construction activity in a construction project. Calculating for unit cost involves getting the sum of the material, labour, and physical resources costs of a construction activity and dividing the sum by the length, depth, area, or other forms of measurement covered by the construction activity. 

Examples of unit costs and how to calculate for them include:
 

Although the procedure for calculating the estimated cost of a construction project will vary between organisations, it is common for organisations to use a software program to make the calculations for this. Examples of such programs include Measure Manage, CostX, and Construction Master Pro.
 
Carefully following your organisational procedure for producing a construction project's estimated cost, including the proper usage of your organisation's cost estimating software, is essential to producing an estimated project cost that is both accurate and competitive. The estimated project cost included in a tender or bill is essentially your organisation's bid for a project. If it is too low, the client may have questions about the quality of service they will receive from your organisation. If it is too high, they may decline the bid. The estimated project cost must be enough to cover all the project's expenses, variations due to price fluctuations, and profit. 

Example

John wants to know how much the laying of a mat foundation per metre is for the construction of building ABC. To get this unit cost, he first identifies the material cost associated with laying the foundation for building ABC. He inputs this data into the cost estimating program used by his organisation. A summary of the data is in the table below.

Next, he identifies the labour costs associated with laying the foundation of building ABC. Eight workers will be laying the building's foundation, with one of the workers acting as supervisor. Supervisors have an hourly rate of $32.60 while the rest of the construction workers have an hourly rate of $15.40. The expected time to finish laying the foundation is 107.8 hours or 14 days, daily on-costs of $45.60 and $63.70 for the construction workers and supervisor respectively, and daily worker insurance costs of $24.40 for all the workers. He inputs all of this data into the cost estimating program used by his organisation. 

A summary of the data is in the table below.
 

Next, he identifies the physical resources costs associated with laying the foundation of building ABC. He inputs the physical resources required for laying the foundation of building ABC, together with their associated costs, into the cost estimating program used by his organisation. A summary of the data is in the table below.

Finally, John inputs the depth of the mat foundation of building ABC, which is 4.5 metres, into the cost estimating program. The program calculates the cost to lay the foundation of building ABC per metre using the formula below:

= "Sum of Material,Labour,and Physical Resource Cost of Laying the Foundation" /"Depth of Mat Foundation in Metres" 
= "$3,913.30 + $23,228.52 + $1,008.50" /"4.5 metres" 
= "$28,150.32" /"4.5 metres" 
= "$6,255.62667" ⁄"metre" 
= "$6,255.63" ⁄"metre" 

John concludes that the cost of laying the foundation of building ABC per metre is $6,255.63.
 

You have now produced the estimated cost for the construction project. However, there are several risks associated with the long process of estimation. Thankfully, there are ways to manage and mitigate these risks.

Risks to estimating costs include unreliable data, over-optimism, and unrealistic assumptions. These risks may come from underestimating how much of a resource is needed to complete a project. For example, if a cost estimator estimates that a construction task will only need 72 hours to finish, but in fact, it takes 90 hours, it will result in an estimate that is lower than it is. If these risks are not mitigated, the produced estimate project cost may result in a loss instead of a profit. 

You can manage these risks by merely following your organisation's procedures for estimating project costs. Your organisation's policies and procedures are likely based on historical data from previous projects. These historical data enable the organisation's estimators to make better estimates as these are data based on objective facts. The software that your organisation uses to estimate quantities and calculate project costs also mitigates the risk of over-optimism by reducing reliance on manual calculations that are prone to human error.

Another way to manage risks associated with estimating project costs is to have a thorough understanding of the construction project. Understanding what the project needs, and how and when it needs them make for more precise data for a more accurate cost estimate. Understanding the risks associated with the construction project and contingencies required to put in place for these risks allows for a cost estimate that is more ready to accommodate variations that the project cost may take.