Estimating
Abstract
This chapter describes the four main methods of estimating and their approximate levels of accuracy. These methods are: subjective (+/– 20%–40%), parametric (+/– 10%–20%), comparative (+/– 10%), and analytical (+/– 5%). The need to always allow a contingency is stressed and a diagram shows how the accuracy percentage improves as the project moves from the concept phase to the production phase.
Keywords
Estimating; subjective estimating; parametric estimating; comparative estimating; analytical estimating; contingency allowance
Chapter Outline
Estimating is an essential part of project management, since it becomes the baseline for subsequent cost control. If the estimate for a project is too low, a company may well lose money in the execution of the work. If the estimate is too high, the company may well lose the contract due to overpricing.
As explained in the section on work breakdown structures, there are two basic methods of estimating: top down and bottom up. However, unfortunately in only a few situations are the costs available in a form for simply slotting into the work package boxes. It is necessary therefore to produce realistic estimates of each package and indeed the entire project before a meaningful cost estimate can be carried out. In most estimates that require any reasonable degree of accuracy the method used must be bottom up. This principle is used in bills of quantities, which literally start at the bottom of the construction process, the ground clearance, and foundations and work up through the building sequence to the final stages such as painting and decorating.
Estimating the cost of a project requires a structured approach, but whatever method is used, the first thing is to decide the level of accuracy required. This depends on the status of the project and the information available. There are four main estimating methods in use, varying from the very approximate to the very accurate. These are:
1. Subjective (degree of accuracy +/– 20% to 40%)
2. Parametric (degree of accuracy +/– 10% to 20%)
Subjective
At the proposal stage, a contractor may well be able to give only a ‘ballpark figure’ to give a client or sponsor an approximate ‘feel’ of the possible costs. The estimating method used in this case would either be subjective or approximate parametric. In either case the degree of accuracy would largely depend on the experience of the estimator. When using the subjective method, the estimator relies on his or her experience of similar projects to give a cost indication based largely on ‘hunch’. Geographical and political factors as well as the more obvious labour and material content must be taken into account. Such an approximate method of estimating is often given the disparaging name of ‘guesstimating’.
Parametric
The parametric method would be used at the budget preparation stage, but relies on good historical data-based past jobs or experience. By using well-known empirical formulae or ratios in which costs can be related to specific characteristics of known sections or areas of the project, it is possible to produce a good estimate on which firm decisions can be based. Clearly such estimates need to be qualified to enable external factors to be separately assessed. For example, an architect will be able to give a parametric estimate of a new house once he or she is given the cube (height × length × depth) of the proposed building and the standard of construction or finish. The estimate will be in ≤/cubic metre of structure. Similarly, office blocks are often estimated in ≤/square metre of floor space. The qualifications would be the location, ground conditions, costs of the land, etc. Another example of a parametric estimate is when a structural steel fabricator gives the price of fabrication in ≤/tonne of steel, depending on whether the steel sections are heavy beams and columns or light latticework. In both cases the estimate may or may not include the cost of the steel itself.
Comparative (By Analogy)
As an alternative to the parametric method, the comparative method of estimating can be used for the preparation of the budget. When a new project is very similar to another project recently completed, a quick comparison can be made of the salient features. This method is based on the costs of a simplified schedule of major components that were used on previous similar jobs. It may even be possible to use the costs of a similar-sized complete project of which one has had direct (and preferably recent) experience. Due allowance must clearly be made for the inevitable minor differences, inflation, and other possible cost escalations. An example of such a comparative estimate is the installation of a new computer system in a building when an almost identical (and proven) system was installed six months earlier in another building. It must be stressed that such an estimate does not require a detailed breakdown.
Analytical
Once the project has been sanctioned a working budget estimate will be necessary against which the cost of the project will be controlled. This will normally require an analytical estimate or bill of quantities. This type of estimate may also be required where a contractor has to submit a fixed price tender, since once the contract is signed there can be no price adjustment except by inflation factors or client-authorised variations.
As the name implies, this is the most accurate estimating method, but it requires the project to be broken down into sections, subsections, and finally individual components. Each component must then be given a cost value (and preferably also a cost code) including both the material and labour content. The values, which are sometimes referred to as ‘norms’, are usually extracted from a database or company archives and must be individually updated or factored to reflect the present-day political and environmental situation.
Examples of analytical estimates are the norms used by the petrochemical industry where a value exists for the installation of piping depending on pipe diameter, wall thickness, material composition, height from ground level, and whether flanged or welded. The norm is given as a cost/linear metre, which is then multiplied by the meterage including an allowance for waste. Contingencies, overheads, and profit are then added to the total sum.
Quantity surveyors will cost a building or structure by measuring the architect’s drawings and applying a cost to every square metre of wall or roof, every door and window, and such systems as heating, plumbing, electrics, etc. Such estimates are known as bills of quantities and together with a schedule of rates for costing variations form the basis of most building and civil engineering contracts. The accuracy of such estimates are better than plus or minus 5%, depending on the qualifications accompanying the estimate. The rates used in bills of quantities (when produced by a contractor) are usually inclusive of labour, materials, plant, overheads, and anticipated profit, but when produced by an independent quantity surveyor the last two items may have to be added by the contractor.
Unfortunately such composite rates are not ideal for planning purposes as the time factor only relates to the labour content. To overcome this problem, the UK Building Research Station in 1970 developed a new type of bill of quantities called ‘operational bills’ in which the labour was shown separately from the other components, thus making it compatible with critical path planning techniques. However, these new methods were never really accepted by industry and especially not by the quantity surveying profession.
To assist the estimator a number of estimating books have been published which give in great detail the materials and labour costs of nearly every operation or trade used in the building trade. These costs are given separately for labour based on the number of man-hours required and the materials cost per the appropriate unit of measurement such as the metre length, square metre, or cubic metre. Most of these books also give composite rates including materials, labour, overhead, and profit. As rates for materials and labour change every year due to inflation or other factors, these books will have to be republished yearly to reflect the current rates. It is important, however, to remember that these books are only guides and require the given rates to be factorized depending on site conditions, geographical location, and any other factor the estimator may consider to be significant.
The percentage variation at all stages should always be covered by an adequate contingency allowance that must be added to the final estimate to cover for possible, probable, and unknown risks, which could be technical, political, environmental, administrative, etc., depending on the results of a more formal risk analysis. The further addition of overheads and profit gives the price (i.e., what the customer is being asked to pay).
It must be emphasized that such detailed estimating is not restricted to the construction (building or civil engineering) industry. Every project, given sufficient time, can be broken down into its labour, material, plant, and overhead content and costed very accurately.
Sometimes an estimate produced by the estimator is drastically changed by senior management to reflect market conditions, the volume of work currently in the company, or the strength of the perceived competition. However, from a control point of view, such changes to the final price should be ignored, which are in any case normally restricted to the overhead and profit portion and are outside the control of the project manager. Where such a price adjustment was downward, every effort should be made to recover these ‘losses’ by practising value management throughout the period of the project.
Computer systems and software preparation, which are considerably more difficult to estimate than construction work due to their fundamentally innovative and untried processes, may be estimated using:
1. Function point analysis, where the number of software functions such as inputs, outputs, files, interfaces, etc., are counted, weighted, and adjusted for complexity and importance. Each function is then given a cost value and aggregated to find the overall cost.
2. Lines of code to be used in the program. A cost value can be ascribed to each line.
3. Plain man-hour estimates based on experience of previous or similar work, taking into account such new factors as inflation, the new environment, and the client organization.
While it is important to produce the best possible estimate at every stage, the degree of accuracy will vary with the phase of the project, as shown in Figure 13.1. As the project develops and additional or more accurate information becomes available, it is inevitable that the estimate becomes more accurate. This is sometimes known as rolling wave estimating, and while these revised costs should be used for the next estimating stage, once the actual final budget stage has been reached and the price has been accepted by the client, any further cost refinements will only be useful for updating the monthly cost estimate, which may affect the profit or loss without changing the price or control budget as used in earned value methods.
When estimating the man-hours related to the activities in a network programme, it may be difficult to persuade certain people to commit themselves to giving a firm man-hour estimate. In such cases, just in order to elicit a realistic response, it may be beneficial to employ the ‘three time estimate’ approach, t = (a + 4m + b)/6, as described in Chapter 20. In this formula, t is the expected or most likely time, a is the most optimistic time, b is the most pessimistic time, and m is the most probable time.
In most cases m, the most probable time, is sufficient for the estimate, as the numerical difference between this and the result obtained by rigorously applying the formula is in most cases very small.