Cost Estimating and Pricing

Cost estimating involves developing an approximation (estimate) of the costs of the resources needed to complete project activities. When a project is performed under contract, care should be taken to distinguish cost estimating from pricing. Cost estimating involves developing an assessment of the likely quantitative resulthow much will it cost the performing organization to provide the product or service involved. Pricing is a business decision - how much will the performing organization charge for the product or service - that uses the cost estimate as but one consideration of many. A wide range of techniques exist for the forecasting of construction costs and prices, ranging from, simple unit cost based predictions, to complex analytical estimating techniques. Accuracy of estimating will mainly depend on the quality and amount of information available at the time. The major techniques in common use, in increasing order of potential accuracy, are as follows, 1. Cost per functional unit This method uses the unit cost from historical data obtained from a similar kind of a building. The unit cost is calculated by dividing the total cost of building by the number of functional units. For example: A hospital bed will be the functional unit of a hospital and a room will be the unit for a hotel. This is only an approximate estimating technique. 2. Cost per unit of floor area This method uses historical data from earlier comparable schemes in terms of the cost per unit area of floor space. The floor area of a building is defined as that measured at each floor level using the internal dimensions without making deductions for walls or stair case. 3. Elemental cost estimating The method depends on reliable data being available for comparable projects where the actual cost for each building element is known. The breakdown of costs of a previous building can be applied to a second building proportionately for each building element. 4. Analytical Estimating - The first three methods have relied mainly on the use of historical cost data to attempt to predict likely costs at an early stage of design. As the design develops, contractor will try to use analytical estimating methods using current cost data as a base. Analytical Estimating Unit rate estimating is one of the commonly used method for estimating cost. The rates of Labour, Plant and Material will be used to determine the cost per Unit (m, m2, m3 , Ltr etc. ) for some measured items of work, and this unit rate is then set against a total measured quantity. A unit rate for an item of work is built up basically in three stages:

Stage 1- The establishment of all-in rates for the key items that will be incorporated. It includes: A rate per hour for the employment of labour Different rates will be established for each categories of labour. An operating rate per hour ( or per day or per week or per month) for an item of plant This is for plant supplied with or without operator, with or without fuel and the rates are established from the contractors own data or from quotations received. A cost per unit of material delivered and unloaded at the site- This involves prices received through quotations or by any other means. Stage 2 The selection of methods and production standards from the contractors data banks or other sources. These standards are then used in conjunction with the all-in rates calculated in stage 1 to calculate net unit rates which are set against the items in the bills of quantity. Stage 3 The incorporation of rates from specialist trade contractors including those offering labour only services, either producing the whole or the part of the work.

The Cost of Labour Accurate assessment of the cost of labour is very important to the accuracy of estimate. Labour may be either directly employed by the contractor or may be employed on subcontract basis. In the case of subcontract labour, appropriate labour rate can be simply included in the calculations. In the case of directly employed labour, the situation is rather complex, and in that the total labour cost for a given piece of work will consists of a combination of the all in hourly rate and the estimated production rate. The all in hourly rate is defined as the total hourly cost of employing labour, and will therefore include any additional costs for which the employer is responsible in addition to the basic rate. The following factors are to be considered in preparation of labour rate, Overtime Payments Public holidays Bonus payments Attraction payments Training contributions Tool and clothing allowances Annual holiday with pay scheme Traveling time, fares and lodging allowances Injury and sickness benefits Inclement weather allowance Insurances

There are three stages in the calculations;

1. Determine the number of working hours that a labourer expected to work during the one year period. 2. Calculate the cost per year for wages and other expenses listed above. 3. Summarize the above cost and calculate the all-in rate per hour by dividing the total costs by the number of hours. In addition to the all in hourly labour rate, the labour productivity, that assessment of the time required for a labour to complete the various items of work is also very important in preparing estimates. For this, the estimator can use their own data base or some standard norms. Cost of materials Cost of materials will be derived from current quotations obtained specifically for a particular project. Number of suppliers will be requested to quote their prices for materials and best quotations will be selected. Cost of plant The plants may be belonging to the contractor or he may be hiring plants. In case of their own plants, they will have to prepare an internal rate for each plant. In the case of plant hired from outside firm, the estimator will have to decide what additional costs need to be added to the basic hire rates to make up the all in cost. The estimator can add together all plant, labour and material costs and prepare the unit rate. However, accuracy of the prepared rates will depend on skills, knowledge and experience of the estimator.

Pricing
Pricing is a cost we fix to buy or sell something. Pricing uses a set of tools and techniques to fix a price for project/business. To fix a price for a product, services, or anything, we need key inputs like historical information, competitors information, Cost Estimation etc.,. Pricing strategies should be based on the given situation. When one is bidding for a project, there can be two situations: Acquisition is to win the project and perform it successfully and profitably. Acquisition aims to win the project to get a foot hold in the industry. In competitive tendering, pricing involves making an assessment of the highest price that the contractor can quote and still get the work. The price must be both high enough to cover the contractors costs together with an acceptable profit, and yet be pitched at a level which will persuade the client to accept the offer in preference to any of others. In pricing, the basic cost, overheads, profit and risk factors have to be considered. If the contract is not entitled for price escalation, that also should be taken in to account.

Overheads and profit factors Over head costs include such costs that cannot be considered as direct productive work on the job. These may be generally grouped as follows. a) Job overheads ( Site Overheads ) That varies with and is caused directly to the individual job.

(b) General overheads Which include costs of maintaining an office, work shop and yard in which to do business whether or not there is a job under way and such expenses are continuous. Job overheads (Site overheads) 1. Supervision of work (wages of work) 2. Supervision of labour (wages of Gangers) 3. Temporary works a. Access Road & maintenance b. Site building for accommodation of part of labour c. Central stores building, Stock Yards d. Fencing & protection e. Provision of water, lights etc. f. Clearing & tidying up 4. Accommodation of staff 5. General Labour, Watchers for field stores & security of sites 6. Setting out & measure part 7. Employers Requirements 8. Transportation of supervisory staff 9. Site offices, Furniture, Stationary, supplies, Water, Lights, etc. 10. Mechanical Plants eg. Crane 11. Non- Mechanical plants eg. Scaffolding 12. Safety and quality assurance procedures General Overheads 1. 2. 3. 4. Head office and rent, lights, telephone, stationary supplies, furniture, etc., Salaries of head office manager, Engineers, Technical Assistants, Transportation of Head office staff Legal expenses and consultancy fees

Operational Estimating

The traditional Unit Rate method of estimating is not particularly compatible with much of the resource based information generated by the pre-contract planning process and estimators may wish to price some parcels of work as a whole package rather than as a series of separate items. This method is termed as operational estimating. Operational estimating technique therefore involves forecasting the cost of completing an entire construction operation, which may consists of one or more bill items, based up on the resource information gathered from the project plan, rather than attempting to forecast the cost of work by formulating separate unit rates for each measured item of work.