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Cost estimating is very important step in project management where to achieve the goal targeted by client. A cost estimate representing the initial line of the project cost at different stages of development. A cost estimate at a given stage of project development represents a prediction provided by cost estimators or engineers on the data available.
To achieve the goal stated, all cost estimation can performed according to one or some combination of the following basic approaches:
Production function: In the construction field, the production function may be expressed by the relationship between the volume of construction and a factor of production such as capital or labor. A production function related to the amount or volume of output to the various input of labor, material and equipment. Therefore, for a specified level of output, it should be attempt to search a set of value for input factor to minimize the production cost.
Empirical cost inference: The role of statistical inference is to estimate the best parameter values or constants in an assumed cost function. Generally, this is accomplished by means of regression analysis techniques.
Unit costs for bill of quantities: A unit cost is assigned to each of the facility components or tasks as represented by the bill of quantities. There are consists of few task in determined bill of quantities. Once those tasks are defined and quantities representing these task are assessed, a unit cost is assigned to each and then the total cost is determined by summing the costs incurred in each task.
Allocation of joint costs: Allocations from cost from existing account may be used to develop cost function of an operation. The basic step of this method is that each expenditure item can be assigned to particular characteristic of the operation. This approach also related to the category of basic costs in allocation process. The account of basic costs may be classified according to labor, material, construction equipment and tools, construction supervision and general office overhead in construction project.
In preparation of costing information, there are two basic approaches. One of the approaches is bottom-up costing where the estimates of each level in the work breakdown structure are compiled and added together by each level of supervision in the project hierarchy as would be the case for reimbursable contracts. Another approaches is top-down costing where someone allocated a certain amount of money to complete the project activities and this has to be split between the subproject. The allocation is based on either senior management estimates or use of target costing.
Costs fixed externally to project
Project manager allocates budgets to sub-projects
Cost set by the project
Project manager collates estimates
The advantage of bottom-up costing is the estimates are prepared by the people who will carry out the activities or their supervisor. This give some notion of commitment to achieving these figures if the costs are accepted unmodified by the project manager. Thus, this method is not particularly good at generating accurate estimates. For top-down costing involves the allocation of the costs to the sub-activities. This create a degree of competition between the supervisors of the activities for resources which many view as being beneficial. The methods for putting numbers to these elements are discussed, leading on to how it accumulated into a final cost estimate.
Construction cost estimates may be viewed from different perspective because it require different institution. A construction cost estimate serves one of the three basic function, there are design estimates, bid estimates and control estimates.
Design Estimates - For client or design professional, the types of cost estimates encountered run parallel with the planning and design as below:
Engineer's estimates based on plans and specifications
Bid Estimates - A bid estimate submitted to the client either for bidding or negotiation consists of direct construction cost including field supervision and a markup to cover overhead and profit for the contractor. The direct cost of construction for bid estimates commonly derived from following approaches:
Control estimates - For monitoring the project during construction where a control estimate is decided from existing information :
Budget estimate for financing
Budgeted cost after contracting but prior to construction
Estimated cost to completion during the progress of construction
In the process of planning and design stages, various design estimates reflect the progress of the design. At the early stage, the screening estimate is generally made before the facility is designed and it rely on the cost data of similar facilities built in the past.
Preliminary estimate of future construction expenditures is made during the project planning and design stage are necessary approximate. It is because they are complied before the project is completely defined. Making this conceptual estimates is an art quite different from determining the final detailed estimate of whole construction costs. In short, this estimation is based on the conceptual design of the facility at the state when the basic technology for the design are known.
Detailed estimate is made when the scope of works are clearly defined and the detailed design is in progress so that the essential features of facility are identifiable. Lastly is the engineer's estimate is based on the completed plans and specification when there are ready for the client to solicit bids from the construction contractors.
The cost associated with a facility may be decomposed onto hierarchy of levels that are appropriate of cost estimation. The level of detail and information in decomposing the facility into tasks depends on the types of cost estimate to be prepared.
The contractor bid estimate often reflect the desire of the contractor to secure the job as well as estimating tools at its disposal. Since only the lowest bidder will be the winner of the contract in most bidding contests, any effort devoted to cot estimating is a loss to the contractor who is not a successful bidder. Thus, the contractor may put in the least amount of possible effort for making a cost estimate.
For both client and contractor must adopt same base line for cost control during construction. Owner need budget estimate for planning long term financing of the facility. For contractor , the bid estimate usually regarded as the budget estimate, which will used for control purposes as well as for planning construction financing. the budgeted cost also should be updated always to reflect the estimated cost to completion as well as to insure adequate cash flow for completion of the construction project.
3.2 Cost Control
At the period of execution of a project, procedures for project control and record keeping become indispensable tools to managers and other participants in the construction process. These tools serve the dual purpose of recording the financial transaction that occur as well as giving managers an indication of the progress and problem associated with a project.
Project control procedures are primarily intended to identify deviations from the project plan rather than to suggest possible area for cost savings. This characteristic reflect the advanced stage at which project control become important. During actual construction, changes are likely to delay the project and cause inordinate cost increase. In addition, project manager must synthesize a comprehensive view from different reports on the project plus their own field observation.
The purpose of cost control on the project is to :
Giving the client good value of money.
Achieving the require balance of expenditure between the various parts of the building.
Keeping expenditure within the amount allowed by the client.
Most organizations require manager to perform budgetary analysis at least annually and project managers are in a perpetual cycle of seeking approval and then allocating funds. Generally found in budget application or grants are categories below:
For cost control on a project, the construction and the associated cash flow estimates can provide the base line reference for subsequent project monitoring and control. Progress on individual activities and the achievement of milestones completion can compare with the project schedule to monitor the progress of activities. For contract and job specifications provide the criteria by which to assess and assure the required quality of construction. The final cost estimate provide base line for the assessment of financial performance during the project. To the extent that costs are within the final cost estimate, then the project is thought to be under financial control.
For control and monitoring purpose, the original detailed cost estimate is typically converted to a project budget and the it is subsequently used as a guide for management. Those specific item stated in the detailed cost estimate become job cost element. Expenses incurred during the course of a project are recorded in specific job cost account to be compared with the original cost estimates in each category. Therefore, the individual job cost generally represent the basic unit for cost control.
In addition, the cost amount, information on material quantities and labor input within each job account also typically retained in the project budget. Those information that have where actual material usage and labor employed can be compared to the expected requirements. Thus, cost overruns or savings on particular item can be identified as due to changes in prices, labor productivity or in the amount of materials consumed.
During construction, cost accounting methods are applied to obtain the actual production rates and costs as they occur. This management by exception cost system immediately identify for the project manager where production costs are unsatisfactory and management action is needed. If the project manager takes timely and suitable corrective measures, cost overruns often can be minimized and future expenditures are brought into line with budget estimates.
For both cost control and estimating method, a construction project must be broken down into standardized and categorized building blocks, usually called as cost codes, work types, or Work Breakdown Structure element. Thus, cost information gathered during the construction phase must be tracked using same cost codes that will be used in producing future estimates.