Dr. Khaled HyariDepartment of Civil Engineering

The Hashemite UniversityZarqa, Jordan

1 - Introduction

Construction Cost Analysis and Estimating (0401448)

Introduction1 - 2

• Instructor: Dr. Khaled Hyari

• Office: E 3003

• Phone: Ext. 4768

• Office Hours: Sunday, Tuesday, Thursday: 10:00 a.m. – 12:00 a.m. or by appointment

Syllabus

Introduction1 - 3

• Course Outline

1. Introduction

2. Engineering economic analysis

3. Risk and uncertainty

4. Cost fundamentals

5. Cost estimating

6. Estimating construction labor costs

7. Cost of concrete structures

8. Estimating project costs

Syllabus II

Introduction1 - 4

• Course Outline

9. Estimating Equipment Costs

10.Time/cost trade-off

11.Bid strategies

12.Financial accounting and financial statement analysis

13.Cash flow analysis

14. Project cost control

15.Value engineering and life-cycle costing

Syllabus III

Introduction1 - 5

• Textbook– Ostwald, P (2001) “Construction Cost Analysis

and Estimating” Prentice Hall.

• References– Holm, L.; Schaufelberger, J.; Griffin, D.; and

Cole, T (2005) “Construction Cost Estimating: Process and Practices” Pearson Prentice Hall.

– Gould, F. (2005) “Managing the Construction Process: Estimating, Scheduling, and Project Control” Third Edition, Pearson Prentice Hall.

Syllabus III

Introduction1 - 6

• Grading– First exam 20%

– Second Exam 20%

– Final Exam 50%

– Attendance and Participation 10%

Syllabus IV

Introduction1 - 7

• Exam Dates:– First Exam:12:00 – 1:00 p.m., Tuesday,

November 1, 2005 – Second Exam: 12:00 – 1:00 p.m., Tuesday,

December 6, 2005

Syllabus V

Introduction1 - 8

• Construction is the process that sets up a portable plant, bring material to the site, and on completion of the work moves the plant away, leaving its output standing

• Output: all immobile structures (airports, buildings, dams, roads and tunnels, power plants, municipal treatment plants, pipelines …etc)

Construction

Introduction1 - 9

• The physical nature of the product:– Large, heavy and expensive– Required over a wide geographical area– Customer tailored– A large part of components manufactured

elsewhere

• The ultimate use of the product is:– As a mean to further production– As an addition to or improvement of the

infrastructure of the economy (e.g., roads)– As a social investment (e.g., hospitals)– As an investment for direct enjoyment (e.g.,

housing)

Characteristics of the Construction Industry

Introduction1 - 10

• The demand for the product is:– Determined differently for different types of

products– Largely dependent on governmental policy– Largely dependent on economy cycles

• Unique Industry:– Incorporates small remodeling to giant

international, multibillion-dollar contractors.– Highly competitive.– Low profit margins.

Characteristics of the Construction Industry II

Introduction1 - 11

• The price determination is a discrete process for each project and for each piece of work subcontracted (bidding or negotiations)

• Human resources: Growing shortage of skilled workers and experienced managers due to:– 4D Industry Perception (dull, dirty, demanding,

and dangerous)– Aging workforce– Absence of apparent technology– Requirement to travel

Characteristics of the Construction Industry III

Introduction1 - 12

• Safety:

– Construction accounted for 19.5% of all workplace fatalities in 2000 in the United States (about 5% of the total U.S. workforce)

• Quality control:

– In this competitive age, if you do not provide quality services, someone else will

Characteristics of the Construction Industry IV

Introduction1 - 13

• 2004 Data

– Estimated volume of construction work in 2004 is 1.766 Billion JD including both the public works and the private sector works

• 166 million JD in the public sector

• 1600 million JD in the private sector

– 10 million square meters were licensed by the Jordanian Engineering Association in 2004

– Number of registered contractors is 997 contractor

– Number of Engineering offices and Consultant firms is 1060

– More than 500 registered speculative builders

Jordanian Construction Industry

Introduction1 - 14

• Most common reasons for failure:

– Inadequate sales (35%)

– Competitive weakness (25%)

– Receivables difficulties (16%)

– Large operation expenses (11%)

Some Data About Construction III

Introduction1 - 15

• Industrial, heavy engineering and infrastructure, commercial buildings, residential

• Industrial– Examples: automobile plants, petroleum

refineries, petrochemical plants, steel mills, nuclear plants …etc)

– Dominated by very large engineering and construction firms

– The most technical projects of the construction projects

– Few design firms and constructors are qualified to undertake them

– Privately funded

Construction Projects

Introduction1 - 16

• Heavy Engineering and infrastructure– Examples (airports, bridges, dams, tunnels,

highways, water treatment and distribution, urban rapid transit systems …etc)

– Activities in this category are primarily the domain of civil engineers, but other engineering disciplines have roles

– Equipment intensive and characterized by fleets of large earth movers, heavy trucks, etc)

– Working with massive quantities of basic materials (earth, rock, concrete, steel, pipe)

– Many of those projects are publicly funded

– Projects tend to be long in duration

Construction Projects

Introduction1 - 17

• Commercial Building– Examples (Mosques, churches, government

buildings, hospitals, shopping malls, small retail stores, warehouses…etc)

– Labor and materials intensive

– Interact closely with people

– Private economy finances these structures, with some exceptions

– Design coordinated by architects, who work with engineering specialists (structural, mechanical, electrical)

Construction Projects

Introduction1 - 18

• Residential– Examples (single-family homes, apartments,

condominiums, town houses)

– Largely financed by private investment

– Large number of contractors and subcontractors

– High rate of business failure if demand falls

– Low capital and labor intensive

– Design is done by architects, drafting people, builders, or the home owner (USA)

Construction Projects

Introduction1 - 19

• Public vs. Private Projects

– A private party can award a contract in any way they choose to anyone they choose.

– Private party can make one contract or multiple

– Public party is limited by laws and regulations

– Public party commonly awards bids by competitive bidding.

Construction Projects

Introduction1 - 20

• Traditional

Delivery Approaches to Design and Construction

Owner

Designer General Contractor

Subcontractors Own Work Force

Introduction1 - 21

• Advantages– Fixed price for the project before any work

commences

– Price competition between contractors

• Disadvantages– Contractors/subcontractors have little opportunities

to suggest improvements until after the award is announced

– Difficult to phase or fast-track the project

– Less opportunity for interaction between the significant parties

– Misinterpretation of the drawings and specifications can be difficult to eliminate

Traditional Delivery Approach

Introduction1 - 22

• Design-Build

Delivery Approaches to Design and Construction

Owner

Designer General Contractor

Subcontractors Own Work Force

Engineer-Contractor

Introduction1 - 23

• Advantages– Seamless communication within the single firm

encompassing both design and construction– Contractor is able to improve constructability– Scheduling is more effective, and fast-tracking is

possible– Design changes are simpler

• Disadvantages– Owner may not have a firm fixed price in hand

early– Owner’ knowledge and awareness of the project is

less (Crucial Decision making)– Less checks on contractors’ performance (More

vulnerable)

Design-Build Delivery Approach

Introduction1 - 24

• Construction Management

Delivery Approaches to Design and Construction

Designer

Subcontractors

Construction Manager

Contractors

Owner

Introduction1 - 25

• Advantages– Effective communication between the three

parties– Allow simultaneously phasing various tasks

in the project in coordinated effort– Owner is able to benefit from competitive

bidding by contractors and subcontractors• Disadvantages

– Possible communication problems between parties involved

– Owner must have advanced, professional expertise and abilities

Construction Management Delivery Approach

Introduction1 - 26

• Owner-Builder

Delivery Approaches to Design and Construction

Owner

Contractors

Subcontractors

Own Work Force

Design Department

Construction Department

Introduction1 - 27

• Two fundamental contract families– Fixed price

• Lump sum

• Unit price– Cost reimbursable

• Cost plus

• Guaranteed Maximum Price

Contract Types

Introduction1 - 28

• Lump-sum Contracts

– Total price fixed in advance

– Risk is on the contractor but he can make money by finishing faster

– Benefits owner because they know exactly what they have to pay

– Scope must be fully defined– Generally competitive bid contracts

Contract Types

Introduction1 - 29

Lump-sum Contracts

Introduction1 - 30

• Unit Price Contracts• Used when the amount of units is unknown or risk

is high

– Accommodates quantity adjustments– Disadvantage: estimate vs. actual quantities– Very common with earthwork

• Fixed price with incentives• Target cost and profit• Sharing formula for savings

Contract Types

Introduction1 - 31

• Cost-“plus” contract– Cost plus a percentage fee– Cost plus a fixed fee• Sometimes referred to as “time and materials” contract• Used for projects of experimental design, new materials

or an unusual site that is hard to predict.• Can be bad for the owner if the contractor takes longer

than he should• Often noncompetitive bids– Advantage: start before scope fully defined– Risk is on the owner– Disadvantage: lack of upper boundary, open-book

Contract Types

Introduction1 - 32

Cost-“plus” contract

Introduction1 - 33

• Guaranteed maximum price GMP

– Cost plus fee with guaranteed maximum price

– Can start before scope fully defined, upper boundary

– Difficulty in establishing GMP

Contract Types

Introduction1 - 34

Guaranteed maximum price GMP

Introduction1 - 35

• No major project is ever installed on time, within budget, or with the same staff that started it. Yours will not be the first.

• Projects progress quickly until they become 90% complete, then they remain at 90% complete forever

• When things are going well, something will go wrong– When things just cannot get any worse, they will– When things appear to be going better, you have

overlooked something

Laws of Project Management

Introduction1 - 36

• If project content is allowed to change freely, the rate of change will exceed the rate of progress

Laws of Project Management II

Introduction1 - 37

Managing Trade-Offs: The Primary Task of Project Management

Managing Trade-offs

Introduction1 - 38

• Slow-rapid-slow progress

• Minimal effort is required at the beginning but increasing effort in the early stages of the life cycle will improve the chances of project success

The Project Life Cycle

Introduction1 - 39

• Goals????– Performance early in the life cycle– Cost during the periods of high activity– Schedule during the final stages

The Project Life Cycle II

Introduction1 - 40

Estimate of Project Cost at Project Start: Uncertainty associated with project

cost

Estimates of Project Costs I

Introduction1 - 41

Estimates made at times t0, t1 and t2

Estimates of Project Costs II

Introduction1 - 42

• Business Planning

• Conceptual Design

• Detailed Design

• Procurement

• Construction

• Testing, Start-up & Implementation

• Operations & Utilization

• Decommissioning

Phases of a Project I

Introduction1 - 43

Phases of a Project II

Project Close Out: System Testing, Final Inspection, As-built Drawings

Construction Contractors Administration of Contracts for Physical Work in place

Procurement of Bulk Materials, Special Equipment, Construction Contracts

Final Design of Project: Detailed drawings, Written specifications, and Preparation of contract documents

Owner’s Need for Projects

Request for Engineering Study

Conceptual configurations and alternatives for technical feasibility, Development of cost and schedule for each alternative

Review by Owner: Economic analysis for rate of return, Pay back period, Capital recovery or Benefit/Cost ratios

Owner Request for Further Study of Project Owner Authorizes Project Owner Abandons Project

Introduction1 - 44

• The cost of each phase depends on specifics, but usually the majority of the budget is spent during the production phase

• Most of the budget is committed during the design phase before the actual work takes place

• Pressures to start the “real-work” may lead to high cost due to commitment of resources without adequate planning

Phases of a Project III

Introduction1 - 45

The Level of Influence Concept

Introduction1 - 46

The Level of Influence Concept

Introduction1 - 47

Life Cycle Strategic and Tactical Issues

Introduction1 - 48

• Project Manager:– Charged with on-time, on-cost, on-spec

execution.– Views “on-cost” as a requirement to stay within

the allocated budget, while satisfying a given set of specified conditions (scope), within a required time frame (schedule)

– Commitment to project funds in accordance with a prescribed plan (time based budget)

Perceptions of Project Cost

Introduction1 - 49

• Accounting department:

– Address expenses recognition related to a

project or an organization profit and loss

statement.

– Ultimate goal is reporting profitability, while

positively influencing the firm’s tax liability

Perceptions of Project Cost II

Introduction1 - 50

• Finance department:

– Concerned with the organization’s cash flow

– Responsibility to provide the funds for paying

the bills, and putting the unused or available

money to work for the company

Perceptions of Project Cost III

Introduction1 - 51

Commitments x Expenses x Cash Flow

Introduction1 - 52

• Project Manager must be aware of the different cost

perceptions and the manner in which they are

reported, and also realize that the timing of cost

identification can affect both the project and

corporate finance

• Project Manager can influence the timing of cost to

improve cash flow and the cost of financing the

work, in addition to affecting the revenue and

expense in the P&L statement

Perceptions of Project Cost IV

Introduction1 - 53

The S-Curve and the 3 Perceptions of Cost

Introduction1 - 54

The S-Curve and the 3 Perceptions of Cost

• Actual shape and the degree of lag/lead between curves are a function of:– Project’s labor, material, and subcontractor mix– Firm’s invoice payment policy– Delivery period of major equipment items– Subcontractor performance period and the

schedule of its work– Project schedule (when and how labor will be

expended in relation to equipment procurement)

Introduction1 - 55

Putting Your Understanding of Cost to Work

• Project Cost:– Evaluation of alternative design concepts during the

development phase of the project – Excessive safety factors employed to ensure “on spec”

performance should be avoided– Execution of project work must be controlled– Project manager should control the project contingency

fund – In the procurement of equipment, material, and

subcontract services, the specified requirements should be identified and the lowest priced, qualified supplier found

Introduction1 - 56

Putting Your Understanding of Cost to Work

• Project Cost:– Procurement of material and services based on

partially completed drawings should be avoided– Project schedule (when and how labor will be

expended in relation to equipment procurement)– Changes should not be incorporated in the

project scope without client/management approval

Introduction1 - 57

Putting Your Understanding of Cost to Work

• Financial Cost:– Interest expense can be minimized through the

timing of order placement (use activity floats) – Negotiate purchases with venders to get extended

payment terms– Negotiate progress payments to get early cash

inflows which offset cash outflows– Invoices to the client should be processed quickly

to minimize the lost interest resulting from a delay in receiving payment

– Negotiate retentions to obtain reduction in retention as the project nears completion

Introduction1 - 58

Putting Your Understanding of Cost to Work

• Tax Expense and Profit:

– Management may demand project completion by a given date to ensure inclusion of the project’s revenue and profit within a particular accounting period. Delayed project completion by only a few days could shift the project’s entire revenue and profit from one accounting period to the next

– The need to shift revenue, expenses and profit from one tax period to the next often exists in managing the corporate profit & loss statement