CONSTRUCTION PROJECT COST ESTIMATION

SITUATION
a) Bid for construction project – commercial complex
b) Organization worked previously on similar project which one was the third size of this one
c) Similar project in the past, one third size of the current one, was completed with the cost
overrun 20%
1) Determine cost technique to use for the project
2) Discuss advantages and disadvantages of chosen technique
COST TECHNIQUES
Wysocky (2010, p33) defining that cost management is enveloping both and planning and control,
where planning part is including budget and mapping costs into project schedule and same time
that is enabling us to control consumption of budgeted funds across the time.

In his book Project engineering: the essential toolbox for young engineers, Plummer (2007, p.22)
stating that at the moment schedule starts taking the shape, budgeting starts where ‘cost
engineers consolidate the engineering, procurement, and construction estimates for each activity
into the control (baseline) estimate.’

Accurate cost estimation is helping with completion of project on-budget. Numerous software
programs for cost estimation are in use which helping project manager to plan and establish project
costs.

Sanghera (2010, p.167) in his book discussing three techniques for cost estimation:
1) Analogous estimation
2) Parametric estimation
3) Bottom-up estimation

Analogous Estimation Technique – using cost-related variables (rates, parts costs, activities
costs etc.) used in the similar projects in the past for measurement of the same variables in the
current project. Technique is useful in the cases when small number of component information is
available and in general this technique is less costly, shorter in duration. Shortcoming of this
technique is that it is less accurate than some other techniques.

Goebel (2005, p.2) in his paper says that the simplest and quite often fastest way for estimation is
to recall an equivalent historical project (or event) and use the associated historical costs in order
to predict the costs of planned project. Further, in his conclusion on analogous estimation
techniques he is establishing that ‘formal or rigorous application of analogous estimating requires
an additional investment of time and energy’. Additional investment is occurring when tracking and
maintaining historical cost data and requires time investment in interpretation and rationalization
of analogous projects which are selected as the models for the prediction’.

Parametric Estimation Technique – is using parameters and statistical relationship between

similar projects and as per Sanghera (2007, p.167) ‘can generate quite accurate results depending
on the accuracy of the quantity of resources and other data that goes into estimation’.

In his paper Goebel (2005, pp.2-4) writing that ‘with additional effort, it should be possible to study
our historical data and distill from it some general predictive equations’. The key challenge may be
that data collection not occurred previously and that may create need and cost for performing
additional historical research. In some cases when the projects are very unique, ‘it is difficult to
capture enough data observations for each narrowly defined and easily compared project type to
effectively perform linear regression analyses.

Bottom-up estimation Technique – uses estimation of the part of a component cost and then
with aggregation costs obtained that way in order to calculate cost of the complete component.
Technique can generate accurate results which ones enable project manager to make better
estimate.
As per Goebel (2005, pp.4-5) when organization is lacking sufficiently precise historical data or
there is no available good analogies bottom-up estimation is best strategy which can be applied. It
is in theory theoretically straightforward approach: creating detailed inventory for the project’s
component costs and obtaining cost data or estimation of the cost for each individual element.
In conclusion he is stating that ‘significant advantage of bottom-up decomposition of the project is
that it reduces the need to find directly comparable historical data for projects that match the
overall project being estimated. Instead the project can be decomposed into subsets of deliverables
with well-understood parameters that subject matter experts can easily and confidently estimate,
or are comparable as subsets to historically collected data’.

In addition to the above techniques Sanghera (2010, p.168) saying that three-point estimation used
to establish time duration estimation can be applied here.

Research (Milosevic, 2003 cited in Goebel, 2005, p.5) shows that typical accuracies as follows:
a) Analogous estimation -30% to +50%
b) Parametric estimation -30% to +50%
c) Bottom-up estimation -10% to +15%

CHOSEN COSTS TECHNIQUE AND DISCUSSION

Analyzing techniques in works mentioned in this paper for this particular project – commercial
complex, I will use Bottom-up estimation Technique.

Advantages of bottom-up technique:

a) Taking all costs in account, even those incurred by the smallest units.
b) Offers easy reporting and costs tracking
c) Relying on the input from the people who will actually perform the given task, which
increases their commitment in completing the tasks within the pre-set budget

Disadvantages of bottom-up technique:

a) Taking a lot of time and effort to implement
b) Too little information is likely to be available on the beginning of the project in order to have
accurate estimations

References
Wysocki, R.K. (2009), ‘Effective Project Management: Traditional, Agile, Extreme’, 5th ed.,
Indianapolis, USA, Wiley Publishing Inc.

Plummer, F.B. (2007), ‘What Do Project Engineers Do?’ in Project engineering: the essential toolbox
for young engineers, Butterworth-Heinemann/Elsevier,
http://www.sciencedirect.com.ezproxy.liv.ac.uk/science/book/9780750682794, EBSCOhost,
(Accessed: 21 May 2011)

Sanghera, P. (2010), PMP® in depth: project management professional study guide for the PMP®
exam. 2nd ed. Boston: Course Technology/Cengage Learning.

Goebel, C.J. (2005), ‘Estimation Is Not An Event, It’s A Process!’ PMI Global Congress-Latin America ,
Project Management Institute, Panama, Panama, pp.1-7