Section G
Estimates and Budget
When we mean to build, we first survey the plot, then draw the model; And when we see the figure of the house, then must we rate the cost of erection; Which if we find outweighs ability, what do we then but draw anew the model in fewer offices, or at least desist to build at all?
Shakespeare, Henry IV, part 2, Act 1, Scene 3
For which of you, intending to build a tower, does not first sit down and count the cost, whether he has enough to complete it? Otherwise, when he has laid a foundation and is not able to finish, all who see it begin to mock him, saying, ‘this man began to build and was not able to finish.’
Luke 14:28–30
Both of the above quotations emphasize the need to define the scope. Yet it took eleven years (whilst it was being built) before the scope of the British Library was defined, Costs rose from an estimated £116m to over £550m, and it was ten years late!
Each element of the P&WBS is costed (using the best available data) and summated to determine How Much the total cost estimate for the project will be. At various phases throughout the project, estimates are updated and formally reviewed by management. They can be given various names as they develop, namely:
| Trend base estimate | Prepared at time of project award or not later than six weeks afterwards. |
| Preliminary estimate | Normally used in jobs where the scope of work is very unclear at job award and a series of optimisation studies have to be carried out. Once the optimisation studies are completed, the trend base estimate is updated and renamed the preliminary estimate. |
| Semi‐definitive estimate | This is prepared once the major items of equipment have been defined and approximate material quantities developed. This gives the estimator sufficient information to tighten the accuracy of the estimate. |
| Definitive estimate | Prepared when quantities of materials are accurately known and engineering design is well developed. |
See also Part V, Section E Estimating and Contingency.
At the start of a project, the possibility of making an accurate estimate is, in most cases, remote. For example, you never really know how much a project will cost until you are out of the ground. Consequently, a contingency must be added. The client and contractor should reach an agreement regarding the most reasonable level for the contingency of scope of areas not yet fully defined.
As the project develops, materials and equipment are more accurately defined. The estimating department obtains this more accurate information from the cost/schedule manager who, in turn, gets their information from the trend meetings (see Section L Variations/Changes/Claims, subsection 2).
1 Establishing the Estimate(s)
1.1
Review the estimate included in the tender or proposal. How detailed is it? How accurate is it? How firm is it?
1.2
Review the estimate with the contract payment terms. How much is fixed, and how much is reimbursable?
1.3
Agree on the number of estimates to be prepared throughout the job. Try and keep the number of formal estimates to a minimum.
1.4
Schedule when each estimate is to be prepared and what input is required from each department.
1.5
Review the estimates in the following order with:
- Your own management
- The client or owner.
1.6
Set up a cost code and ensure items are correctly coded.
2 Trend Programme
2.1
If the proposal estimate is vague, it is vital to do a trend base estimate.
2.2
Use a trend programme to keep estimates up to date and reduce the time it takes to produce new estimates. See Section L Variation/Changes/Claims.
3 Allowances
3.1
Bulk material, equipment, and subcontract prices should, wherever possible, be based on tendered prices. However, allowances should be added to allow for:
- Materials: cut and waste, overbuying, and the accuracy of the take‐off
- Equipment: changes to scope – scope creep
- Subcontracts: the degree of completion of the subcontract scope and the estimated quantities to be installed. Get the construction manager to review the proposed allowances.
3.2
Labour is priced on actual costs plus allowances for future increases and overhead. However, the big issue here is productivity and how good the historical data for this aspect is.
3.3
An allowance should be considered to take into account a client’s attitude. Evaluate how the client involvement in the project will influence the estimate. How bureaucratic are they? How complex or time consuming are approval procedures? A bureaucratic client will increase costs: “This is our base price, but if you wish to be involved, the price is double!”
4 The Budget
4.1
When the contract is signed or (depending on the contracting circumstances), the estimate is agreed with the client or senior management, the trend base estimate (or preliminary estimate) becomes the budget for the project.
4.1.1
Remember, the tender or proposal should have been prepared by a group of people who were motivated by wanting to win. Consequently, they may have been more interested in reducing the price than in ensuring that the estimate was correct.
4.2
You, then, have two or three days (a week at the very most) to protest at any deficiencies or errors in the estimate. After that, you will be deemed to have accepted the estimate as the budget, and any adjustments will have to be made using the contingency.
4.3
When the components of the estimate are allocated to the various discipline groups, set the budgets for the groups at 5 to 10 per cent below the contract level. This allows for in‐house variations or design changes.
4.4
Plot the budget usage line (see Section K, Project Control, subsection 3, Figure IV.K.1).