This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
Providing accurate estimates for a construction project is imperative for a contractor to gain profit from the project. How accurate the estimate is will affect the profit. Pratt (2004, p.2) states that, "In the early stages of a construction program, the owner needs to estimate the probable cost of construction to assess the financial feasibility of the project." In the case of a contractor tendering for a project, this is especially the case as the amount of their bid will determine amongst other factors whether they acquire the contract for the project by the client.
Improving estimating is relevant to current issues as contractors need accuracy with estimates to ensure profitability to ensure finance for their next project. These objectives are significant as the construction sector is a competitive industry with competition for tender difficult especially if the bid is unsuccessful with tender cost to account for. If a contractor has a contract with the client, it is essential to ensure that their estimate is accurate as possible in order to not under value the project. With the recent economic crisis, cost certainty is as important as ever with increased building costs, material costs, inflation and the risk of liquidation. From Table 1 it can be seen that the percentage of construction companies going into liquidation has been on the increase year by year from 2001. This shows that accuracy is needed to prevent contractors lacking the sufficient funds to account for the cost overrun resulting in not being able to finance their next project.
With estimating, different methods are used at certain phases. Dell'lsola (2002 p.96-97) discusses estimating methods falling in four categories. These are single-rate methods, cost modelling, elemental cost analysis and quantity survey. Single-rate methods are suitable for the pre-planning phase of the project. Cost model estimates are implemented during the early design development. Elemental estimates are used for the development of the design stage and quantity survey based estimates are arranged during bidding and construction. These techniques can be cross checked for the overall cost or for a more specific cost.
As there is a range of estimating methods, there are aspects that may influence the choice. This may include previous similar work done with which records have been kept; the detail of the contract documents; the probability of the contract being awarded to the contractor; the time available to provide the estimate; and the estimating skills.
Methods such as price per square metre/square foot, contingency has to be allowed to take care of unanticipated needs. Estimating by sub-trades are prices requested from sub-contractors. Although the trust and doubt of their capability reflects the contingency sum, with the higher the doubt the higher the contingency. The method of taking off is an accurate method but requires commitment with a proficient estimator exclusive to the estimating. Estimating by elements is not suitable for minor works but suitable for contracts involving similar building (Willoughby, 2005 p.70-71).
1.2.3 Estimating Problems
Burtonshaw-Gunn (2009 p.152) highlights the problems caused by cost estimating. He discusses that cost estimating the estimate cannot be validated as it does not detail assumptions. The estimator's assumptions may be too optimistic as not everything works first time. The estimate may also not reflect the construction project in a particular location as costs differ from location to location. The estimate could contain obsolete factors e.g. labour rates, failure rates, overhead costs etc. The estimator may also fail to include all the costs which may result in an increased final sum to the original estimated.
With Burtonshaw-Gunn (2009) discussing the estimator of being too optimistic, it is important that estimates are not grossly under estimate or over estimate. Kreh (2004 p,204) states that, "when materials are overestimated , the materials that remain must be moved to another job. This results in wasted labour, time and money...underestimating, on the other hand, is also wasteful of time and energy." Materials are a major factor to the project so it is important to accurately predict the amount that will be used during the life of the project to prevent surplus and wastage as well as controlling costs to the project.
Accuracy is important when estimating the cost of a project as it determines the quality of the estimate. Smith (1995 p.91) states that, "estimating is not an exact science: it is as much an art as a science and involves intuition and expert judgement." He discusses further stating the major factors determining the quality of estimates. These factors include the estimating technique used, the availability of reliable cost and design information, the type and size of the project, the extent to which feedback is used and the estimator himself.
The individual estimator i.e. their attributes and abilities play an important part in the accuracy of estimating. The factors that play a part in an estimator having good accuracy include their ability to forecast and interpret trends, their breadth and ability to learn from experience, knowledge and academic background, ability to work instinctively where the design information is limited and personal traits such as motivation, enthusiasm and personality (Smith, 1995 p.91).
According to Potts (2008 p.48-49) citing JDB (1997) estimating accuracy depends on the estimate type and the project stage. The accuracy of the estimate is only as good as the level of detail that is available. The estimate type includes appropriation estimate, to enable the estimator to make enquiries of potential suppliers e.g. availability and price; budget estimate which is produced once the conceptual design has been completed allowing for approximate quantities and guide prices; and definitive estimate which contains the level of detail used in the implementation of projects and preparation of bids. The estimate is built up from specific project information and may contain omission for uncertainties which will be discussed.
Gwang-Hee Kim et al (2004) state that the accuracy of estimation of costs in a construction project is a critical factor in the success of a construction project. It is discussed that, "the cost estimation models, which in the early stage estimate the construction costs with minimum project information, are useful in the preliminary design stage of a construction project...despite the great importance of the task of cost estimation, it is neither simple nor straightforward because of the lack of information in the early stages of the project." Enhanced cost estimation techniques will aid more effective control of time and costs in construction projects although this will depend on the information available as well as many other variables.
1.2.5 Cost Uncertainties
Estimating is a crucial component for a contractor as it advises the client on the cost of the project and allows a budget to be worked with. With regards to cost certainty, the final contract sum can be affected by a number of factors.
Estimation is experience based but there are uncertainties, unknown conditions and incompleteness to take into consideration that affects construction costs as well as the unpredictable as discussed earlier by Kenley (2003). Forecasting techniques exist regarding cost but they only take account of significant factors that can be quantified. Most of the significant factors affecting project costs are qualitative. This would mean that they are difficult to quantify and arrange. This includes client priority regarding time, the procurement method, market conditions and the planning capability of the contractor (Ballal et al, 2005).
Brook (2004, p.68) discusses that the cost of the project that the contractor submitted with the initial tender may be different from the final contract sum due to many reasons. This includes the type of the building, the effect of competition in the market, the amount and quality of historical data available, the amount of design information available, the performance of the design team, changes introduced by the client, the estimator's skill and method used, and the nature of the work place e.g. ground conditions, weather, resource prices and other uncertainties.
Brook (2004) and Ballal et al (2005) discuss uncertainties regarding qualitative data which is why these uncertainties that cannot be quantified need to be incorporated into the cost estimation for the project. Estimating methods such as definitive estimate as previously discussed by Potts (2008 p.48-49) omit uncertainties which need to be quantified to improve accuracy.
The type of building may affect the final contract sum as one type of building may be easier to predict than another. The type of project the contractor has will also affect the contract sum as discussed by Jagger and Smith (2007) as a refurbishment/maintenance project may be difficult to anticipate due to the nature and extent of the repairs.
The client has a responsibility for the estimation of the project with providing enough information as possible in the pre-tender documentation when the contractors are bidding for the contract for the project. The less information available to the estimator may result in a less accurate estimate.
Duration of the project is a factor to consider with regards to estimating. If the project overruns with regards to time then this may have an adverse effect for the contractor if there is a liquidated damages clause in the contract. This may increase the cost to the contractor for the project being delayed.
Chitkara, K (1998, p.88) states that, "In the initial stages of time planning, it is necessary to make a preliminary assessment of the men, machinery and materials required for the execution of each activity. This assessment is used to determine the duration of an activity, to develop a time schedule based on the optimum level of resources or on resource constraints and to evaluate the connected costs."
It is important that the resources are accurately estimated as during the project added cost may incur as a result of activities taking longer than expecting and not having enough resources available.
When accepting a bid, the client has to take many things into consideration. Jackson, B (2010 p.165) states that, "A bid that appears significantly lower than the rest of the quotes should activate an immediate red flag." Therefore the client "...must determine whether the low quote is a result of an error or miscalculation." It may be that the contractor has come up with a legitimate price based on their approach or a strategy regarding buying.
It is up to the client to review the bids to see which tender bid is the most realistic and achievable to accept and carry out the project. With the client receiving the bids, they can assess the accuracy of the estimate as there will be a wide range of estimates from the different contractors. However, Mann (1992 p.25) raises an interesting question stating that, "what really is the target of the estimate - the low bid or the average of the bids submitted for a given project?"
From the clients point of view they have an important decision in accepting the bid they think is most reliable. This is to ensure the project does not go over the estimate or over run. If this is the case, then it could be that another contractor whose bid was not the lowest could have taken the project and completed it on budget and under estimate than the contractor with the lowest bid.
1.3 Design & Build and Traditional Procurement Routes
1.3.1 Design & Build and Traditional Significance
The research of improving estimating specifically for design-build and traditional procurement for contractors has been done as they are the two most used procurements routes therefore highlighting the significance of this research. Design and build represents 42% of the market by value with the traditional procurement method representing 43% whilst the other 15% representing construction management, partnering and management contracting shown in Figure 1 (Cooke and Williams, 2004 p.10 citing RICS).
The role of the client plays an essential role as it is up to them how they approach their project in terms of direction and responsibility. With the traditional method of procurement, the client has the feeling of control with the high scale of documents given to them. However, Hughes and Murdoch (2008 p.48-49) discuss that, "if the price of this control is the difference between hitting cost targets and over-running cost targets, then sometimes it is seen as too expensive." Hughes and Murdoch (2008) discuss further that one of the advantages of design and build for the employer is cost certainty but there is more of a risk because of the fixed price than the traditional method. This would mean increasing the tender to account for the risk.
1.3.2 Design & Build
Greenwood et al (2006 p.126) citing Anumba and Evbuomwam (1997) discusses the advantages and disadvantages of the design and build procurement route. This includes involvement of the contractor in the design process; greater price certainty as opposed to standard contracts; improved communication and reduced construction time. Disadvantages include reduced design quality, high tendering costs and inhibition of changes by clients. It is important to consider that with high tendering costs, this may be recovered through the project if completed under budget compared to another procurement method. The inhibition of changes by clients is highlighted by Hughes and Murdoch (2008 p.50) stating that one of the major disadvantages of design and build is that the client's requirements must be very clear and also unambiguous. With traditional procurement, the brief can be developed in conjunction with the feasibility studies. This would mean that the cost of change early on in the project rather than later would prove beneficial to the contractor as having ambiguous information would lead to such things as design changes later on in the project increasing the cost of the project.
NAO (2001, p.4) citing Graves and Rowe (1999), state that with regards to construction projects of government departments and agencies, the inefficiencies of traditional procurement can be seen with 73% of projects over the tender price, 14% on the tender price and 13% under the tender price. With the time of the project, 70% were delivered late, 20% delivered on time and 10% delivered early. The report suggests that the supply chain has led to the reduced performance in the traditional method with the relationships between the contractor, client, consultant etc. needing to be improved in order to develop the overall scope of the project and increase performance.
Issues arise with the procurement strategy chosen by the client. NAO (2001, p.4), states that, "Traditional forms of contracting - tendering for each key stage in a construction project such as design, selecting the main contractor, appointing subcontractors, and awarding contracts on the basis of lowest price bid does not provide value for money in the longer term." The Office of Government Commerce advises to undertake construction projects using one of three routes. One of these routes includes design and build. This is where a single supplier is responsible for both the design and construction of the facility. Issues arise through traditional forms of contracting. But this does not mean that issues may not arise through design and build as discussed by Greenwood et al (2006), Hughes and Murdoch (2008).
With regards to the category, the research showed that severity rating of consultant and design parameters was the highest with an average severity index of 82%. However, contractor attributes scored the least average severity index of 67%. This would demonstrate that the quantity surveyors distinguish that the design team have more of an influence on projects than contractors. This is substantiated further by Fewings (2005) who indicates that the cost of change increases the further on in the project life cycle as shown in Figure 2.
Figure 2: The cost of change during the project cycle (From Fewings, 2005 p.61)
Other factors that are of interest in the study are, 'Method of procurement (traditional, design and build, project management, etc.)' which had a severity rating of 78.07 and a ranking of 21 and 'Estimation method and previous cost term control technique (accuracy and reliability)' which had a severity of 60.80 and overall ranking of 59.
Regarding cost analysis, Ballal et al (2004) make an interesting point in that the cost factors evaluated in the study are not accounted for in databases such as the Building Cost Information Service (BCIS). It would be of great benefit if information is collected at early stages of the project as shown by Fewings (2005) during the briefing, feasibility & strategy and the initial design stages but this would prove difficult with these variables being subjective and complicated to be shown as data.
1.4.2 Supply Chain Management
A study by Baiden et al (2005) investigated the extent of integration achieved construction project teams managed by award-winning construction managers within successfully completed projects. Nine projects over £45 million were compared. The results from the study showed that the project procured through the design and build approach had the highest level of integration compared with other projects procure through methods such as construction management. However, the study was concluded that fully integrated teams are not necessary for effective project delivery within the industry.
From the study by Baiden et al (2005), fully integrated teams were not necessary but certainly helped in the successful completion of projects. The report by NAO (2001) previously discussed suggested design and build as one of the procurement routes in order to improve performance with the traditional method shown to with 70% delivered late and 73% over the tender price because of the adversarial relationships between the people involved.
Reports such as the Egan Report (1998) chaired by Sir John Egan and the Latham Report (1994) written by Sir Michael Latham identified inefficiencies in the industry. One of the concepts of the Latham report was using teamwork through the industry in order to delight its clients.
Latham (1998 p.62) discusses that, "Partnering includes the concepts of teamwork between supplier and client, and of total continuous improvement. It requires openness between the parties, ready acceptance of new ideas, trust and perceived mutual benefit...We are confident that partnering can bring significant benefits by improving quality and timeliness of completion whilst reducing costs."
Latham identified industry inefficiencies and made recommendations to change the industry such as replacing the intrusive, inefficient and adversarial atmosphere common in projects with an atmosphere characterised by co-operation, loyalty and reciprocated understanding among members of the team.