Contract, Specification

And
Quantity Surveying

Chapter 3:
Project Cost Estimation

Instructor: Welday T.
1
Introduction
Project Cost estimation is the process of valuing on
monetary expression, including the cost of all possible
entrants necessary for the planning, implementing and
monitoring stages of the proposed project under
consideration.
Cost estimation is the determination of the probable cost of a
project.
Project Cost includes:
Preliminary investigation (project appraisal costs)
Design and supervision (consultancy cost )
Construction works (contractor’s cost )
Land owning cost, and
Monitoring costs
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Preliminary Estimates and Cost Planning
The Conceptual Estimate found during feasibility
becomes the initial project budget.
Subsequent design development should remain within
the limit of this budget
For that purpose, several preliminary estimates are
performed as more details become available through the
design.
Preliminary estimates assign cost to various assemblies
(elements) of the project (Cost Plan). {substructure,
superstructure, interior partitions & doors, exterior
cladding ..etc.}
Preliminary estimates allow for Value Analysis –
Compare value of an element with its cost Consider 3
alternatives Select desired option.
Over all the main purpose of cost estimation can be
summarized as follow:
 know the volume of work in reference to the fund
available
 determine actual cost per unit of item
 identifying engineering estimate of the work for
bidding purpose
 work out economical use of materials, labor and
equipments
 in cases of variations to determine the extra cost to
be incurred
 when there is escalation, to work out the escalation
in cost
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Information required for cost estimation
The following information is required to define cost per
unit of work
 Correct information of the market price of the
materials at the time of need to be used as a basic
price
 Correct information of the rates of various categories
of skilled and unskilled laborers as wage rates to be
used for daily work rate
 Output of laborers per day for various types of items
(productivity)
 Correct information of the rates of various categories
of equipments and tools as rental rates to be used for
major items of rates
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 Up-to-date knowledge of the construction methods.
Knowledge and managerial skills for cost estimation

The following knowledge, managerial talents, and degree

of construction experience make a good estimator.
 Ability to read and understand contract documents,
with special skills in reading construction drawings
for all specialties and related specifications.
 Ability to accurately take off the quantities of
construction work.
 Ability to visualize the future building from
drawings, which usually requires some years of
construction site experience.
 Knowledge of arithmetic, basic geometry, and
statistics.
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The following knowledge, managerial talents, and degree of
construction experience make a good estimator.
 Familiarity with estimating software in depth and with
available building cost databases.
 Knowledge of building construction methods.
 Knowledge of labor productivity, crew composition,
and impacts of various forecasted site conditions on
crew output.
 Possession of office managerial skills in organizing
project-related cost information.
 Ability to work under pressure and to meet all bid
requirements and deadlines.

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Factors Affecting Cost Estimation
Factors which affect the cost estimation are summarized
as follow:
Type and documentation of the project
Construction scheduling
Bidding environment
Quality and availability of material and labor
(given in specification)
Construction facilities /tools and method of
construction
Location of the site: Transportation charges
Proper management

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Types of Costing or Estimation
Estimation can be broadly classified as preliminary
(approximate) and detailed.
I. Preliminary /approximate costing
 This type of cost estimation is required to know the financial
position of the client before costly detailed designs are
carried out.
 Such estimates are based on practical knowledge and cost of
similar previous works. Examples of approximate cost
estimations are as follows:
A. Cost per functional unit
Hospital =cost per bed, Dormitory = cost per student,
Cinema or theatre = cost per seat, residential buildings = cost
per area, road works = cost per kilometer length, culverts or
bridges = cost per meter span, water supply or sewerage 9
projects = cost per head of population.
B. Plinth area method – cost per m2
 Based on Plinth Area- roof area or external dimensions
at the plinth level (Courtyard & open area shall not be
included)
 The rate per meter square is deduced from the cost of
similar building projects in the locality.
C. Cubical Content method – cost per m3
Based on cubical contents of various buildings, i.e. Plinth
area of the building x height x cubic content rate.
Height should be taken from the top of flat roof (or
halfway of the sloped roof) to the top of concrete in
foundation.
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II. Detailed Cost Estimate (Based on Item Rate)
This is the most reliable and accurate type of estimate.
The quantities of items are carefully prepared from the
drawings and the total cost worked out from up to date
market rates.
A detail cost estimate thus requires:
- Quantity surveying and
- Analysis of the different rates for the quantities
prepared.

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Fundamental approach to construction cost Estimation
Efficient construction cost estimates shall address properly
the required project quality, time for completion of works
and of course the construction cost of the project.
In deciding to participate in the intended project tender,
the contractor shall carefully assess the impact of the
following key factors:
Type of project
Method of tendering
Type of construction contract
Number and progress of contracts already at
hand
Resource availability i.e. skilled manpower, plants
and machineries 12

Financial position
 Once decision is made to participate in the intended
tender, the contractor shall give due attention to the
following major items listed below
General and particular conditions of contract
contained in the bidding documents
Technical specifications
Drawings
Estimated bill of quantities
Method of measurement
Supporting documents such as information regarding
geological formations and hydrological data
Site visits
Construction method statements 13
Fundamental approach to construction cost Estimation
A. General and particular conditions of contract
Proper understanding of the general and particular
conditions of contract is mainly important for
construction cost estimation in identifying the
responsibilities and cost implications on the project
- Amount and type of performance security
- Time for completion of the whole project
- Limit of liquidated damages
- Claims and disputes settlement

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B. Technical Specification
Technical specifications specify the following crucial
information to the contractor and it is the sole basis both
for the construction methods to be adapted and the
construction cost of the project.
- Quality of materials
- Quality of machineries and plants
- Quality of workmanship
- Erection and installation methods
- Test and inspection requirements and methods

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C. Drawings
The contractor mainly understands from the drawings what
type of construction methods to be adapted during cost
estimation as well as construction of the project.
some of the construction methods which need to be
addressed during cost estimation of this building project
are:
Concrete production
Concrete transportation and placement
Transportation of construction materials to different floors
Methods and type of scaffolding
Types and methods of shuttering works
Erection and installation of glazing works
Temporary access for manpower working at different floors
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Skilled manpower requirement
D. Estimated Bill Quantities
- Estimated quantities of work are also the basis to
determine the type and number of resources to be
deployed during construction of the project.
- Moreover, construction methods shall be selected in such
a way the given quantity of works can be executed during
the completion time of the project.

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Based on the estimated quantity of works, the contractor
shall decide the method of construction to be adapted
during executing of the project such as:
Type and size of crushing plants
Type and size of mechanical mixers or batching
plants
Type, size and number of machineries such as
dozers, graders, loaders, rollers, dump trucks and so
on.
Skill and number of manpower requirement
Type and quantity of construction materials and so
on

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E. Supporting Documents
 Supporting documents such as geological formations,
hydrological data and other technical reports like socio-
economic studies are usually provided by the owner to
contractors for their own interpretations for heavy
construction projects.
 Therefore, the contractor shall have the technical ability
and experience in interpreting the technical data provided
to determine construction methods to be adapted which
directly affects the construction cost estimates.

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F. Site Visit
 In order to prepare competent and reasonable
construction cost estimates, the contractor must visit the
project site unless the site is familiar to the contractor
with previous reliable site information.
 Site visits are critically important especially when the
contractor is working with heavy construction project
cost estimates such as road works and hydropower
projects.
 The contractor shall prepare his own checklists during the
site visit which shall address, but not limited to, the
following issues which have direct impact on the
construction costs of the intended project.
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F. Site Visit
i. Location of the site:
 It helps to determine the mobilization and
demobilization costs.
 It also helps to determine the transportation cost of
materials from main material suppliers.
 Availability and expected wages of daily labors can be
fairly estimated based on the location of the site.
 Site location also helps to determine the type of camp
facilities required to be constructed such as project offices,
living areas, food accommodations and so on.
 Having proper understanding of site location and local
weather condition helps the contractor to determine
salaries and benefits of staffs, skilled manpower and daily
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laborers.
ii. Location of local construction material
 The contractor shall identify the location and quality of
local construction materials such as quarry area for gravel
production, sand, selected material, water as well as sub
base and base course materials in the case of road projects.
 Moreover, the contractor shall have the general
understanding of the site layout for different plants such
as batching and crushing plants.
iii. Access Roads
 Site access roads to the main works, quarry areas, water
supply, sand, and the like shall be identified which incurs
additional construction and maintenance costs. These
costs are extremely high, incase of heavy construction
sites such as road works, hydropower projects and so on. 22
iv. Water and power supply
v. Communication facilities
vi. Environmental protection
vii. Existing facilities
G. Method of measurement
Contractors shall thoroughly understand the method of
measurement incorporated within the bidding documents
before starting any cost breakdown calculations.
- BaTCoDA Technical specification and method of
measurement
- ERA standard specifications
- Civil Engineering Standard Method of Measurement
(CESMM) 23
H. Construction Method Statements
 Construction method statements give the clear picture of
each project activity execution during the construction
phase of the project.
 The required quality of works as per the specifications,
estimated quantity of works, safety standards, as well as
time for completion are the sole basis in determining the
construction method statements of a project.

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H. Construction Method Statements
Construction method statements shall clearly indicate the
following crucial construction issues:
Skill and number of manpower required
Type and specification of equipments required
Quantity and quality of materials required
Proposed working crews
Estimated crew productivity
Estimated duration for completion
Expected defects and remedial measures

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Basic Cost Components of a construction project
Basically the cost of any construction project comprises
Direct costs, which include the direct cost of materials,
labor as well as equipments and
Indirect costs, which include but not limited to head
office and site overhead costs.
A. Direct Construction Cost
Direct construction costs are all costs that can be
specifically booked with an activity in a project.
The current trend is to assign as much as possible costs to
direct costs as these costs can be budgeted, monitored and
controlled far more effectively than the indirect costs.

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A. Direct Construction Cost
The direct costs mainly include material, labor, equipment
and subcontract costs as described below.
Direct material costs – These costs referring to the cost
of materials, consumables and components used for
executing an activity.
Direct labor costs – All costs related to the workers
working on a specific activity such as carpenters,
masons, erectors, painters, plumbers and so on.
Direct equipment costs – These costs referring to the
costs of machineries and plants used in executing a
specific activity.
Subcontract costs – In case some specific activities are
subcontracted, the subcontract price will be considered
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as the direct cost of the activities to be executed by the
subcontractor.
B. Indirect Construction Cost
- Indirect construction costs are all costs, which can not be
directly booked under a specific activity in a construction
project but required to keep the whole project
operational.
- These costs are also called overhead costs, which mainly
include the head office and site overhead costs.
I. Head office overhead costs
- Head office overhead costs are all costs required to run
the whole operation of the construction company, which
usually administers different projects at a time.
- These costs are not usually associated with specific project
but rather shared proportionally by all projects under the
company.
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B. Indirect Construction Cost
I. Head office overhead costs
Some of the checklists for head office overhead costs are
given below with further clarifications.
-Senior management costs – These refer to costs related
with salaries and benefit packages of the senior
management in the head office.
-Indirect labor costs – Staffs other than the senior
management members working at the head office such as
the technical, administrative, marketing, finance and
supply staffs.
-Head office building costs – In both cases, costs are
incurred in such a way either rental costs will be paid, if
the building is rented and building depreciation will be 29
considered, if the building is owned.
I. Head office overhead costs
-Bidding Expenses – These costs are usually associated with
bid document purchases, site visit expenses, bid bonds and
so on. These costs are sometimes called sunk costs.
-Expertise service costs – These costs will be incurred when
professional services are required such as the services of
external auditors, lawyers, management consultants and
external trainings.
-Office furniture and equipments – Different office
furniture and equipments are required depending on the
size and standard of the company.
-Office running expenses – The head office operation
requires lots of miscellaneous expenses such as telephones,
fax, internet services, stationery, mail services and so many
others. 30
B. Indirect Construction Cost
I. Head office overhead costs
-Workshops, garages and warehouses – Costs related to
central workshops, garages and warehouses such as the
depreciation costs of the buildings or rental expenses.
-Bank charges – It is very natural that companies may
borrow money from banks. Therefore, the interest to be
paid on the borrowed capital shall be considered under the
head office costs.
-Insurance charges – Employees medical insurance, office
building and small vehicles insurance.
-Transportation and travel expenses –costs related to
transportation and living expenses.
-Sundry expenses – These are miscellaneous expenses such 31
as advertisement expenses, reception parties and
donations.
B. Indirect Construction Cost
II. Site overhead costs
Site overhead costs are all costs required to run the whole
operation of a specific construction project at site level.
These costs are not associated with specific activity in a
project but rather shared proportionally by all activities
within the project. Some of the site overhead costs are listed
below with further clarifications.
-Site management costs – These costs refer to costs
related with salaries and benefit packages of the site
management members in the project site.
-Indirect labor costs – salaries and benefits of staffs other
than the site management members working at the
project site such as site engineers, office engineers, finance 32
staffs, data collectors and so on.
B. Indirect Construction Cost
II. Site overhead costs
-Mobilization and demobilization costs –These costs are
mainly transportation costs.
-Site offices –site offices are constructed from different
materials such as corrugated iron sheets, prefabricated
materials, material packing steel containers, steel
structure and normal hollow concrete blocks.
-Expertise service costs – These costs will be incurred
when professional services are required at the project site
such as lawyers, claim experts and so on.

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B. Indirect Construction Cost
II. Site overhead costs
-Office furniture and equipments – Different office
furniture and equipments are required depending on the
size and location of the project.
-Office running expenses - The site office operation
requires different expenses such as telephones, fax,
internet service, mail service and stationery.
-Radio communications - If the coverage area of the
construction project is vast, hand held and stationed
radio communications may be used within the site and
with the head office.

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B. Indirect Construction Cost
II. Site overhead costs
-Camp facilities – The costs of construction and
operation of other facilities such as restaurants,
recreational centers and playgrounds are also included
under the camp facilities.
-Access roads – Depending on the topography and
location of the project site, different access roads may be
required to construct such as detour roads, access roads to
quarry and disposal areas, etc.
-Water and power supply – All the site offices, camp
facilities, the construction itself requires water and power
supply for operating the whole project properly.
-Workshops garages and warehouses, Bank charges,
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Transportation and travel expenses, Insurance charges,
etc…
C. Risk Allowance
Usually contractors incorporate risk allowances in their
tender prices to compensate the negative impacts of
different risks such as contractual, technical, political and
economic risks.
Contractual risks are usually stemming from the
contract agreements with the project owner,
subcontractors and suppliers.
Technical risks are associated usually with the
clarification of the technical specifications, working
drawings, construction technology and difficulties in
understanding new method of constructions.
Political and economic risks reflect the impact of
political situations, stability of economic policies, 36
inflation and price escalation on the execution of the
intended construction project.
D. Profit and Income Tax
construction projects are executed by contractors
whereby these contractors will commit to invest their
capital to get maximum possible profit from the contracts
to be performed.
A profit margin entirely depends on the market
competitiveness and company strategies.
Any construction company operating a profitable
business in Ethiopia shall pay 30% of its gross profit as an
Income Tax as per the Income Tax proclamation No.
286/2002.
If the contractor is registered for VAT, which is usually the
case, the contractor’s construction cost estimate shall also
include Value Added Tax which is 15% of the tender
amount in accordance with the Value Added Tax
proclamation No. 285/2002. 37
Unit Rate Analysis
Rate Analysis is the process of fixing cost per unit of
measurement for the different item of works.
 Total cost per unit of work (TC): Direct cost (DC) +
Indirect cost (IC)
 Direct Cost (DC) includes cost due to material (MC),
cost due to labor (LC), cost due to equipment (EC)
 Indirect Cost (IC) covers overhead costs, and
contractor’s profit.
 In order to facilitate estimation Material break down is
essential
 Different formats, Excel sheets and software (like
CONMIS) are used for rate analysis.
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Unit Rate Analysis

I. Direct Material Unit Cost (E)

- Direct material cost is the total cost of construction
materials required to execute a unit of specific activity in a
project.
- In estimating the direct material cost, the contractor shall
obtain the quantity and quality of materials required to
produce the specific unit of activity

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I. Direct Material Unit Cost (E)
In order to have a better material cost estimation, contractors
shall develop their own material price database and the
database should contain, but not limited to, the following
information:
Material price at place of delivery
Supplier’s address such as telephone, fax web site and
email address
Supplier’s contact person
Supplier’s credit facility
Country of origin
Material delivery time
Place of delivery such as at the supplier’s shop, project site,
Addis Ababa air port or Djibouti port 41
Transportation charges usually per ton-km as well as
transporters
I. Direct Material Unit Cost (E)
The contractor shall add the following costs to the material
supplier’s price to get the material unit cost at the project
site:
 Loading expenses at the supplier’s place of delivery
 Transportation costs to the project site
 Insurance charges during transportation to the
project site
 Unloading expenses at the project site

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II. Direct Labor Unit Cost (F)
In calculating the direct labor cost, contractors need to
calculate the direct labor hourly cost which is the total hourly
cost of labor crew required to execute a specific activity in the
project.
In estimating the direct labor hourly cost, the contractor
shall obtain the:
- Number of labor,
- Skill and Labor utilization factor (UF)
- Labor basic salary and
- Labor index from his previous records and the labor
market.

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II. Direct Labor Unit Cost (F)
Labor index is a multiplying factor of the basic salary which
represents the additional benefits whereby a worker gets
from the contractor such as:
o Severance pay
o Annual leave
o Occupational accident expenses
o Overtime pay
o Occupational safety, health and working
environment
o Benefits resulting from collective agreements

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Labor Index Calculation
25.71 days/ mth
1. Regular Salary = = 1.00
25.71 days/ mth

2.0 days/ mth

2. Annual Leave = = 0.078
25.71 days/ mth

0.92 days/ mth

3.Public Holidays = = 0.036
25.71 days/ mth

1.5 days/ mth

4. Miscellaneous Leave = = 0.058
25.71 days/ mth

5 Benefits

0.08 days/ mth

5.1. Closing & supplies = = 0.003
25.71 days/ mth

3.43 days/ mth

5.2. Avg Annual Increase = = 0.133
25.71 days/ mth

5 days/ mth
6. Rainy Season Salary = 25.71 days/ mth = 0.1945

Sub Total 1.50

Contingency ( for work injury, dispute & labor union)

5 % of the total indexed cost = .05*1.50 0.08

Grand Total Indexed Factor 1.58

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Labor Index Calculation

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Labor Index Calculation

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III. Direct Equipment Cost (G)
- In order to calculate the direct equipment cost,
contractors need to calculate the direct equipment
hourly cost which is the total hourly cost of equipment
crew required to execute a specific activity in a project.
- In estimating the direct equipment hourly cost, the
contractor shall obtain
 The number of equipments,
 Capacity and equipment utilization factor (UF),
and
 The equipment hourly cost.

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III. Direct Equipment Cost (G)

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III. Direct Equipment Cost (G)

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III. Direct Equipment Cost (G)

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IV. Site Overhead Cost (I)
It is easier to express the site overhead costs as a percentage
of the direct unit cost of an activity.

V. Head Office Overhead Cost (J)

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VI. Risk Allowance (L)
Let’s assume the following factors represent the percentage
cost increment of each cost component and the risk
allowance will be calculated as follows:

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VII. Gross Profit (M)
As an illustration, if the net profit margin is assumed to be
P% of the breakeven cost (direct costs + indirect costs + risk
allowances), the gross profit (net profit + income tax) can
be calculated as follows, which is X% of the breakeven cost.

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VIII. Total unit price without VAT
If the contractor is registered for VAT but the contract is
VAT exempted, the contractor’s unit price in his tender is
the sum of direct unit cost (H), indirect unit cost (K), risk
allowance (L) and gross profit (M).

IX. Total unit price with VAT

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Unit Rate Analysis

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Unit Rate Analysis

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Unit Rate Analysis

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Unit Rate Analysis

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Unit Rate Analysis

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Unit Rate Analysis

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Unit Rate Analysis

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Unit Rate Analysis

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