Certified Estimating Professional (CEP)
Certification Study Guide
Second Edition
Charles P. Woodward, PE CCP CEP Emeritus
Neil Opfer, CCP CEP PSP FAACE
2016
CEP Certification Study Guide
Second Edition
Copyright © 2006 – 2016
By
AACE International
1265 Suncrest Towne Centre Drive, Morgantown, WV 26505‐1876, USA
Phone: +1.304.2968444 Fax: +1.304.2915728 Email: education@[Link]
Web: [Link]
1
2
A Publication of
A continuing project of the AACE International Education Board
2015/2016 Education Board Members:
Peter W. Griesmyer, FAACE (Chair)
Dr. Nadia Al‐Aubaidy
Dr. Baabak Ashuri, CCP DRMP
Michael Bensussen
Chris A. Boyd, CCP CEP
Dr. John O. Evans III, PSP
Dr. Makarand Hastak, PE CCP
Marina G. Sominsky, PSP
James G. Zack Jr., CFCC, FAACE AACE Hon. Life, VP – Education Board
Contributing Members:
Nelson E. Bonilla, CCP FAACE
Mark T. Chen, PE CCP FAACE AACE Hon. Life
Clive D. Francis, CCP FAACE AACE Hon. Life
John Jeffrey Hannon, CEP
Katherine Hull
Marlene M. Hyde, CCP EVP FAACE
Donald F. McDonald Jr., PE CCP PSP FAACE
Ekaterina Pujanova
Neil D. Opfer, CCP CEP PSP FAACE
Sunu M. Pillai, Esq. CCP EVP PSP
Stephen O. Revay, CCP CFCC FAACE
Ex‐Officio Members:
John Hines, AACE Manager, Education and Staff Liaison to the Education Board
AACE International Publications Staff:
Formatting and Layout: Marvin Gelhausen, Managing Editor
Cover Design: Noah Kinderknecht, Art Director
3
Associate Editors:
Chris A. Boyd, CCP CEP
Mark T. Chen, PE CCP FAACE AACE Hon. Life
Dr. John O. Evans III, PSP
Clive D. Francis, CCP FAACE AACE Hon. Life
Peter W. Griesmyer, FAACE
Sean T. Regan, CCP CEP FAACE
Rohit Singh, PE CCP
James G. Zack, Jr., CFCC FAACE AACE Hon. Life
Acknowledgments
This guide is the culmination of untold hours of discussion, calculation, and composition.
The following people are recognized for substantial effort given to this guide:
Peter W. Griesmyer
William E. Kraus, PE CCP FAACE
Philip D. Larson, CCP CEP PSP FAACE
Bernie Pietlock, CCP CEP
Sandy Whyte, CCP CEP EVP
4
Table of Contents
Preface ..................................................................................................................................................... 7
Introduction to the CEP Certification Study Guide ................................................................................ 8
CEP Certification Requirements .............................................................................................................. 8
CEP Certification Examination Structure ................................................................................................ 9
Introduction to the Cost Estimating Competency Model .................................................................... 11
Test Your CEP Knowledge ..................................................................................................................... 12
Chapter 1.0 ‐ Supporting Skills and Knowledge ................................................................................... 13
Introduction: The Role of the Cost Estimator ....................................................................................... 15
Section 1.1 Elements of Cost .............................................................................................................. 17
Section 1.2 Elements of Analysis ........................................................................................................ 23
Section 1.3 Enabling Knowledge ........................................................................................................ 29
Chapter 2.0 ‐Cost Estimating Skills and Knowledge ............................................................................. 33
Section 2.1 General Estimating Concepts .......................................................................................... 35
Section 2.1.1 Cost Estimating Terminology .................................................................................... 37
Section 2.1.2 Cost Estimate Classifications .................................................................................... 41
Section 2.1.3 Estimate Variability ................................................................................................... 47
Section 2.1.4 Uncertainty ............................................................................................................... 51
Section 2.1.5 Estimating Algorithms .............................................................................................. 55
Section 2.1.6 Code of Accounts ...................................................................................................... 61
Section 2.1.7 Historical Cost Data .................................................................................................. 65
Section 2.2 Estimating Processes and Practices ................................................................................. 71
Section 2.2.1 Planning the Estimate ............................................................................................... 73
Section 2.2.2 Estimating Methodologies ........................................................................................ 77
Section 2.2.3 Quantification ........................................................................................................... 81
Section 2.2.4 Costing ...................................................................................................................... 85
Section 2.2.5 Pricing ....................................................................................................................... 91
Section 2.2.6 Conditioning ............................................................................................................. 95
Section 2.2.7 Risk Evaluation and Contingency Determination ................................................... 101
Section 2.2.8 Estimate Documentation ........................................................................................ 107
Section 2.2.9 Estimate Reconciliation .......................................................................................... 111
Section 2.2.10 Estimate Review and Validation ........................................................................... 115
Section 2.2.11 Estimate Reporting ............................................................................................... 119
Section 2.2.12 Estimate Closeout ................................................................................................. 123
5
Section 2.3 Other Estimating Issues ................................................................................................. 127
Section 2.3.1 Bidding .................................................................................................................... 129
Section 2.3.2 Budgeting ................................................................................................................ 133
Section 2.3.3 Project and Life Cycle Costing ................................................................................. 137
Section 2.3.4 Cash Flow and Forecasting ..................................................................................... 141
Section 2.3.5 Cost Control Baseline .............................................................................................. 145
Section 2.3.6 Project and Product Costs ...................................................................................... 149
Section 9.1 Internationalization ....................................................................................................... 153
Section 9.2 Building Information Modeling (BIM) ........................................................................... 157
Section 9.3 Change Order Estimating .............................................................................................. 163
Appendices .......................................................................................................................................... 167
Appendix A ....................................................................................................................................... 169
Appendix B ....................................................................................................................................... 173
Appendix C ....................................................................................................................................... 175
Appendix D ....................................................................................................................................... 177
Appendix E ....................................................................................................................................... 179
6
Preface
The AACE International Certified Estimating Professional (CEP) Certification Study Guide has been
developed to accomplish two purposes. First, it is intended to aid aspiring certification candidates by
summarizing the fields of recommended study necessary to prepare for the certification
examination. Second, the intent is to assemble and summarize various topics considered essential
knowledge for a Certified Estimating Professional (CEP), as outlined in the AACE International
Recommended Practice (RP) 46R‐11, Required Skills & Knowledge of Project Cost Estimating and
included in the current edition of the AACE International Skills and Knowledge of Cost Engineering.
Terms and phrases incorporated in the CEP Certification Study Guide are generic to the profession
and listed in RP 10S‐90, Cost Engineering Terminology. The terms and phrases used in industry and
technical software may not always agree precisely with your understanding, therefore consult RP
10S‐90 for the standard definition. The goal of the AACE International Education Board is to
continually improve this publication, making it a living document that will be revised as needed to
support the CEP exam while maintaining the recognized strengths described above. All are
encouraged to offer comments and suggestions for improvements in future editions. Please forward
comments to the Education Board at AACE International.
7
Introduction to the CEP Certification Study Guide
This certification study guide structures the study of recommended reference materials, so that
prospective certificants gain the knowledge essential to earn the Certified Estimating Professional (CEP)
credential. The CEP Competency Model was developed by the CEP Task Force to support the design of
the examination. This Competency Model was later written into Recommended Practice RP 46R‐11,
Required Skills and Knowledge of Project Cost Estimating. The Table of Contents of this study guide
mirrors the skills as they are defined in the Recommended Practice.
As a guide to study, this publication does not provide detailed, fundamental education in cost
estimating. Those seeking the CEP credential should already know the basics. One expects, however,
that even seasoned professionals do not routinely apply all estimating knowledge and skills on a
frequent basis. Recent study of seldom‐used knowledge and techniques in the months before sitting for
the certification examination is prudent. This CEP Certification Study Guide enables efficient and
effective preparation for the CEP examination.
Each section in this CEP Certification Study Guide is addressed with content organized as follows:
Introduction
Learning Objectives
Reference Study Materials
Terms to Know
Key Points for Review
Summary
Sample Questions
Sample Question Answers
This certification study guide primarily uses process industry and building construction projects as the
basis for presenting the knowledge, skills, and abilities required of competent cost estimators.
CEP Certification Requirements
The prospective Certified Estimating Professional (CEP) should know all requirements for earning the
credential. This study guide is designed for the most efficient use of time to improve one’s knowledge,
skills, and abilities to thresholds that industry consensus deems essential for a proficient cost estimator.
For the most current information regarding the eligibility requirements, applications, and payment for
this specialty certification, visit the AACE website at [Link] under the Certification section.
Preparing for the Examination
Generally speaking, a candidate’s education and professional experience are the primary sources that
prepare the individual for the examination; however, there are additional ways to prepare for the
examination:
8
Use the CEP Certification Study Guide as an outline for study.
Study the reference materials identified in this manual.
Learn the estimating terms found in AACE International Recommended Practice 10S‐90, Cost
Engineering Terminology.
Access relevant distance learning opportunities through the AACE International website.
Attend the CEP Certification Review Seminar conducted at the AACE International Annual
Meeting.
Attend CEP Review Courses by local AACE Sections.
Use the AACE Website
The AACE website provides many resources that can help you prepare for the examination. All of the
referenced materials are available on the website, many at no cost. In addition there are Professional
Practice Guides (PPGs), webinars, and other remote learning opportunities available. The Virtual Library
can help you locate hundreds of papers and magazine articles for almost any cost estimating subject you
wish to research. In addition you can find information about section meetings or seminars in your area.
Meeting and talking with other estimators is a great resource to broaden your estimating knowledge.
Passing the Examination
To become a Certified Estimating Professional, an overall passing score must be achieved, as determined
by the Certification Board.
If a candidate has special needs, such as accessibility or handicapped considerations, they must be made
known to AACE International when submitting the CEP certification exam application.
If the candidate has questions unanswered by the general information that has been published about
the examination, they should contact the AACE International, Certification Manager.
Special attention should be given to Certification Requirements. For the latest information and
application forms, please visit AACE International’s website at [Link] or contact AACE
International Headquarters at either 304‐296‐8444.
Maintaining the CEP
The Cost Estimating Professional Certification is valid for three years. At the end of that period you may
renew your certification by professional credits or re‐examination. The most popular choice for re‐
certification is the professional credit plan. The details for this may be found at [Link]
This plan requires 15 earned credits over the three‐year period. Three credits can be earned each year
just by being employed in the Cost Estimating profession. Up to one credit per year can be earned by
attending local section meetings. If you are not near a location where meetings are held, check with the
section to see if they offer on‐line meeting attendance. An additional two credits per year can be earned
by becoming an active officer in your local section. There are many other ways to earn professional
credits that are all identified in the Recertification Application Handbook noted above.
CEP Certification Examination Structure
Introduction
A review of the structure and content of the CEP certification examination is useful for prospective
9
applicants. This study guide provides direction for preparing to meet those requirements.
Examination Basis
AACE International’s Certified Estimating Professional (CEP) certification program is designed to
establish credentials for those individuals working in the cost estimating field. This certification program
will give professionals a means to validate their skills and knowledge. CEP certification will distinguish
you as a Certified Estimating Professional who has the knowledge and skills that impact the bottom line.
CEP Exam Format
The examination is delivered through computer‐based testing (CBT) and consists of multiple‐choice
questions and a written exercise. The topics covered in the examination are the principles and
knowledge of cost estimating as delineated in RP 46R‐11, Required Skills and Knowledge of Project Cost
Estimating.
Recognizing there are many industries and fields within the profession ‐‐ engineering, construction,
manufacturing, process facilities, mining, utilities, transportation, aerospace, environmental, and
government — one can expect some questions from any of those settings.
For the latest information regarding the CEP exam format, visit the AACE website under the Certification
Section.
Understanding and Using the Sample Questions Provided in the CEP Study Guide
The CEP Certification Study Guide includes many sample questions with answers. These questions should
be answered so you know which areas might need additional preparation on your part. The questions
are found at the end of each section.
The questions found in the CEP Certification Study Guide have been developed specifically for those
preparing for the examination and are similar in content and context to the actual exam questions. All of
the questions on the CEP Certification Examination, except the writing requirement, are multiple‐choice
questions. Each has four possible answers with one correct solution, similar to the sample questions in
this Certification Study Guide.
Questions in this study guide are in the following formats:
Simple multiple‐choice questions, similar to what you might find on the CEP Certification
Examination. It is important to recognize that more than one answer to a question may appear
to be correct; the correct answer is the one that is most correct.
Complex multiple‐choice problems. The intent of this question set is to enable the student to
prepare for the complex‐question section of the examination. A complex question sample is
found in Appendix A with some limited examples in some of the other sections.
It is recommended that you use a copy of RP 10S‐90, Cost Engineering Terminology while working with
this guide. Anytime you encounter a term you don’t fully understand you should look up the definition.
It is recommended that you spend time reviewing RP 10S‐90 to help you understand the relationships
between estimators and other disciplines of Cost Engineering. There will be questions on the
examination regarding the interfaces between estimators and other disciplines.
10
Introduction to the Cost Estimating Competency Model
The Competency Model for Estimating is described in Recommended Practice 46R‐11, Required Skills
and Knowledge of Project Cost Estimating. This is a subset of Recommended Practice 11R‐88, Required
Skills and Knowledge of Cost Engineering which was developed from the Total Cost Management
Framework which defines the complete body of knowledge of the fields within Cost Engineering. A
professional estimator should understand not only the field of estimating, but how estimating interacts
with the other cost engineering disciplines such as scheduling, cost control, engineering economics, etc.
Understanding those relationships will help the estimator produce a better estimate that will facilitate
the project through its complete life cycle.
The CEP study guide was organized using the recommended practice for estimating as an outline. As
part of the preparation for the examination, the candidate should read and understand the RP. The
chapters in the CEP study guide are listed below:
Skills & Knowledge of Cost Estimating
2.1 General Estimating Concepts 2.2 Estimating Processes & Practices 2.3 Other Estimating Issues
2.1.1 Cost Estimating 2.2.1 Planning the Estimate 2.3.1 Bidding
Terminology
2.2.2 Estimating Methodologies 2.3.2 Budgeting
2.1.2 Cost Estimate
Classification 2.2.3 Quantification 2.3.3 Project vs. Life Cycle
Costing
2.1.3 Estimate Variability 2.2.4 Costing
2.3.4 Cash Flow and
2.1.4 Uncertainty 2.2.5 Pricing Forecasting
2.1.5 Estimating Algorithms 2.2.6 Estimate Conditioning 2.3.5 Cost Control Baseline
2.1.6 Code of Accounts 2.2.7 Risk Evaluation and 2.3.6 Project vs. Product Costs
Contingency Determination
2.1.7 Historical Data
2.2.8 Estimate Documentation 9.0 Additional Studies
2.2.9 Estimate Reconciliation 9.1 Internationalization
2.2.10 Estimate Review and 9.2 Building Information
Validation Modeling (BIM)
2.2.11 Estimate Reporting 9.3 Change Order Estimating
9.4 Stochastic Estimating
2.2.12 Estimate Closeout Methods
Figure 1—Cost Estimating Competency Model
11
Test Your CEP Knowledge
As a good gauge of CEP knowledge, the candidate is encouraged to answer the following pre‐study
questions. Answers should be recorded, and when studies are complete, the candidate will answer the
same questions again. A close comparison of the results, before and after study, will show the
knowledge gained by using this study guide and references, and what gaps may remain prior to sitting
for the exam.
1. What is estimating?
2. What is the role of the cost estimator?
3. What is budgeting?
4. What is quantification?
5. What are the different classes of estimates?
6. What is the difference between costing and pricing?
7. What are the different types of parametric methodologies?
8. What are codes of accounts and their use?
9. What is Building Information Modeling (BIM)?
10. What are the fundamental considerations for internationalization?
11. What is the difference between accuracy and contingency?
12. What are cost estimating relationships (CER’s)?
13. What are location factors?
14. What are life cycle costs?
15. What are the differences between direct and indirect costs?
16. What is the difference between a Hand Factor and a Lang Factor?
17. What is the difference between a work package and an assembly?
18. What are the keys to cost and scheduling integration?
19. What are some of the challenges for change order estimating?
20. What is the difference between a composite and an average crew rate?
21. What are the differences between bare rates and burdened rates?
22. What is the difference between material unit price and material price?
23. What is the difference between unbalancing and front end loading?
24. What are the different types of work breakdown structures (WBS) and use?
25. What is the difference between labor productivity and a labor productivity factor?
26. How does change order estimating differ from project estimating?
27. What is the importance of project cash flow?
12
Chapter 1.0 ‐ Supporting Skills and Knowledge
To become a competent professional cost estimator requires a strong understanding of the skills and
knowledge that are used to practice the profession. Competent cost estimators routinely integrate their
knowledge of elements of cost, analysis, and other enabling knowledge throughout all of their
estimating activities.
AACE Recommended Practice 10S‐90, Cost Engineering Terminology, defines the term, “project cost
estimator” as follows:
“Project cost estimators predict the cost of a project for a defined scope, to be
completed at a defined location and point of time in the future. Cost estimators assist in
the economic evaluation of potential projects by supporting the development of project
budgets, project resource requirements, and value engineering. They also support
project control by providing input to the cost control baseline. Estimators collect and
analyze data on all of the factors that can affect project costs such as: materials,
equipment, labor, location, duration of the project, and other project requirements.”
As seen in the definition, the project cost estimate is integral with the effort of other cost engineering
disciplines. A project cost estimate becomes the basis for the budget used in project cost control. A
project cost estimate is required for economic evaluation of a project. The resources of the estimate
may be used for resource analysis in the project schedule. As part of supporting skills and knowledge, it
is therefore necessary that the professional project cost estimator understand how the estimate may be
used by other cost engineering disciplines.
Thus, the definition of a cost estimator relates to the duties that are performed by the professional
estimating practitioner (See Figure 1.0).
13
Figure 1.0—Breakdown of Chapter Topics
Figure 1.0—Breakdown of Chapter Topics
14
Introduction: The Role of the Cost Estimator
According to AACE International Recommended Practice 10S‐90, Cost Engineering Terminology, Cost
Estimating is:
“The predictive process used to quantify, cost, and price the resources required by the scope of
an investment option, activity, or project. Cost estimating is a process used to predict uncertain
future costs. In that regard, a goal of cost estimating is to minimize the uncertainty of the
estimate given the level and quality of scope definition. The outcome of cost estimating ideally
includes both an expected cost and a probabilistic cost distribution. As a predictive process,
historical reference cost data (where applicable) improve the reliability of cost estimating. Cost
estimating, by providing the basis for budgets, also shares a goal with cost control of maximizing
the probability of the actual cost outcome being the same as predicted.”
You will see as your study of cost estimating advances, the process of developing an estimate varies
depending on the stage of scope development for the project/product. But regardless of the current
progress of development or the appropriate estimating methodology chosen, at least the following
three common steps are involved.
Step One: Quantification—Whether using a stochastic estimating approach or a more definitive
approach, the elements of scope must first be quantified in order to assign costs.
Step Two: Costing—Once the scope has been translated into measurable items with quantities, costs
can be assigned to those items.
Step Three: Pricing—Once the estimate items are costed, it is time to price the estimate, entailing
making judgments concerning the anticipated economic environment, competitive situation, allowance
for overhead and profit, and other factors to shape the estimate to meet the needs of the parties
involved. Often, once the estimate has been priced, it will still need to be conditioned or adapted to
specific conditions applicable to the project or product being estimated.
Learning Objectives
Understand the role of a cost estimator.
Understand the required skills, knowledge, and abilities of cost estimators.
Understand how the project estimate supports other cost engineering disciplines.
Understand how other cost engineering disciplines support the project estimate.
Terms to Know
Cost Estimate
Cost Estimator
Quantification
Costing
Pricing
Scope Definition
15
Key Points for Review
Project cost estimators predict the cost of a project for a defined scope, to be completed at a
defined location and a point in time.
Cost estimators assist in the economic evaluation of potential projects by supporting the
development of project budgets, project resource requirements, and value engineering.
Cost estimators support project control by providing input to the cost control baseline.
Cost estimators collect and analyze data on all of the factors that can affect project costs such as
materials, equipment, labor, location, duration of the project, and other project requirements.
Methods used by estimators vary.
Project Cost Estimators are most often office‐based, but may visit the construction site or
manufacturing floor at times to witness production.
There is often considerable pressure on estimators as they face deadlines for delivery of
estimates.
Job entry requirements vary by industry, but often require either a bachelor’s degree in a
related field or actual experience in industry.
Required skills and knowledge for estimators often include ability in mathematics, probability,
and statistics, having an analytical aptitude, and good attention to detail. Strong interpersonal
skills, especially those in communication and presentation are important.
16
Section 1.1 Elements of Cost
Introduction
Cost, in project control and accounting, is the amount measured in money, cash expended or liability
incurred, in consideration of goods and/or services received. From a total cost management perspective,
cost may include any investment of resources in strategic assets including time, monetary, human, and
physical resources.
Elements of cost include engineering, design, labor, material, equipment, and any other costs necessary
for delivering the scope of work at an agreed‐upon price. Aggregating these costs to determine a total
cost is necessary to determine pricing to cover other costs associated with being able to perform the
work, and, in most cases, provide a reasonable profit.
Cost estimating is often intertwined with corporate accounting. This is particularly true with the
treatment of expenditures for property records and resulting tax treatment. Expenditures by a company
will fall into either the category of “capital” or “operation and maintenance (O&M)”. Where this is
required it is important that the cost estimator work with the accounting department to make the
determination. Generally a capital expenditure is for new equipment or facility or a significant repair or
replacement of that facility. It will have more than a one‐year life. O&M expenditures are generally
repairs to existing equipment or facilities that represent much less than the value of the items which are
being repaired. These determinations can be very complex and company specific so input from the
accounting department is important.
Two other cost elements that fall within the accounting treatment in a company are demolition and
salvage. At the end of the life of a project the equipment or facility is often removed. The cost of
removing it is demolition cost. Any parts that are sold for scrap or use by others are considered salvage
value.
Costs within an estimate are often categorized into direct and indirect costs.
Direct costs are costs of completing works that are directly attributable to its performance and
are necessary for its completion.
o In construction, the cost of installed equipment, material, labor and supervision directly
or immediately involved in the physical construction of the permanent facility.
o In manufacturing, service, and other non‐construction industries: the portion of
operating costs that is readily assignable to a specific product or process area.
Indirect costs are costs not directly attributable to the completion of an activity, which are
typically allocated or spread across all activities on a predetermined basis.
o In construction, (field) indirects are costs which do not become a final part of the
installation, but which are required for the orderly completion of the installation and
may include, but are not limited to, field administration, direct supervision, capital tolls,
startup costs, contractor’s fees, insurance, taxes, etc.
o In manufacturing, costs not directly assignable to the end product or process, such as
overhead and general purpose labor, or costs of outside operations, such as
17
transportation and distribution. Indirect manufacturing costs sometimes include
insurance, property taxes, maintenance, depreciation, packaging, warehousing, and
loading.
There is another element of cost that helps to define the accuracy of an estimate. During the
development of a project there can often be a continuous effort to purchase the elements to be
installed or the effort to install them. A convenient way to convey this is to assign a field in the estimate
to identify if the element has been estimated, quoted or purchased. Summarizing by these items helps
to identify the potential risk remaining in the estimate.
Cost elements can be categorized into groupings, such as work breakdown structures, in order to better
organize, present, and analyze the estimate. A more detailed presentation of different types of
categories is covered in this study guide in Section 2.1.6 Code of Accounts and Section 1.2 Elements of
Analysis.
Learning Objectives
Describe the various elements of cost and the role they play in comprising total cost.
Understand the different types of cost and how they are treated differently in the estimate.
Describe the process of “rolling up” cost elements into higher groupings.
Identify the characteristics that separate direct from indirect costs.
Understand the importance of identifying capital versus O&M costs.
Terms to Know
Assembly
Capital/O&M Cost
Code of Accounts
Cost Category
Cost Element
Demolition Cost
Direct Cost
Fixed Cost
Variable Cost
Equipment Costs
Indirect Cost
Labor Costs
Material Costs
Salvage Value
Subcontractor Costs
Suppliers
Work Breakdown Structure (WBS)
Key Points for Review
What are the characteristics that distinguish direct versus indirect costs?
How do cost estimate classifications help organize and present the estimate?
What are the characteristics of fixed versus variable costs?
18
How can elements of cost be summarized?
Summary
The elements of cost include the material, labor, equipment, and other miscellaneous items
necessary to perform the prescribed work.
Estimate classifications assist all parties in gaining a mutual understanding of the basis of the
estimate.
Cost elements may be “rolled up” to higher levels of detail.
19
Check on Learning
1. The difference between a cost element and a cost category is best explained by:
A. Cost elements are a grouping of detailed line items
B. Cost categories are subdivided by assemblies
C. Cost elements are a subdivision of a cost category
D. Cost categories are a subdivision of an assembly
2. Which of the following is not an element of the cost of a project?
A. Material
B. Freight
C. Material waste
D. Esteem value
3. Which of the following is an indirect cost of a concrete wall?
A. Material
B. Forming labor
C. Supervisory labor
D. Labor fringe benefits and taxes
4. Variable costs in the manufacture of a product differ from fixed costs in that they____.
A. Can also be termed, “indirect costs”
B. Increase/decrease in proportion to the quantity of product produced
C. Cannot be readily estimated
D. Have unit costs that are variable
5. Unit cost refers to …
A. The cost of one unit where “unit” refers to a dwelling unit such as an apartment
B. The cost of a given unit of a product or service
C. The cost of labor, materials, equipment, and overhead, “united”
D. The cost of one “unit” of labor
6. In a manufacturing environment, variable costs are …
A. Those costs that vary with the value of local currency
B. Labor costs that can vary with the productivity and efficiency of the specific workers assigned to
complete the task
C. Those costs that are a function of production and those processing costs that vary with plant
output
D. Those costs that vary with location
20
7. The term “unit hours” refers to …
A. Work hours per unit of production
B. Hours “on the clock”
C. Crew hours expended toward completion of a direct item of work
D. Overtime spent in completion of an item of work
21
Solutions
1. C Cost elements are a subdivision of a cost category
2. D Esteem value
3. C Supervisory labor
4. B Increase/decrease in proportion to the quantity of product produced
5. B The cost of a given unit of a product or service
6. C Those costs that are a function of production and those processing costs that vary with
plant output
7. A Work hours per unit of production
22
Section 1.2 Elements of Analysis
Introduction
Statistics and probability are a fundamental basis for analysis of projects and costs in that there are
patterns and consistencies that to a certain level can be predicted to have a particular influence on a
cost estimate. The learning‐curve function and Pareto’s Law are two examples.
Economic and financial analysis is a separate process that generally takes a broader view of the project,
but can also be used on a case‐by‐case basis to help determine a project’s viability. Optimization is a
process to determine the most favorable combination of design and/or resources to achieve the most
value for the work scope. Appropriate metrics or benchmarks, based on physical measurements, can be
collected to provide feedback on current cost estimates, as well as be archived for historical purposes.
Learning Objectives
Explain how statistics and probability are used to facilitate analysis of projects.
Understand how elements of cost may be optimized.
Develop techniques for using metrics and benchmarks to evaluate current status of projects,
documenting historical parameters for use in future projects.
Terms to Know
Analysis
Baseline
Certainty
Contingency
Cost Estimating Relationship (CER)
Database
Decision Analysis
Deviation
Learning‐Curve Function
Life‐Cycle Costing
Most Likely Value
Pareto’s Law
Profitability Analysis
Risk Analysis
Standard Deviation
Value Engineering
Variance
Key Points for Review
Understand the use of statistics and probabilities to provide insight and direction in analyzing
estimates.
23
Be familiar with Pareto 80/20 Rule and how to prioritize the time available to maximize the use
of that time.
Understand how the learning curve affects estimates.
Summary
Statistics, probability, and other analytical tools turn the raw data of databases into data usable
in the process of estimating.
Proper analysis of data is essential in order to prepare an estimate that is sensitive to the
context of the project in terms of scope, time, and place.
Analysis estimates can be used to select the best alternative.
24
Check on Learning
The following table shows the data selected from all seven company projects. This table is used for
questions 1.a through 1.e
Project Crew hours / cubic yard Cubic yards placed
1 0.375 1,200
2 0.680 426
3 0.420 391
4 0.481 288
5 0.555 61
6 0.621 55
7 0.587 126
1.a Calculate the average production rate experienced on these projects.
A. 0.531 crew hours / cubic yard
B. 0.620 crew hours / cubic yard
C. 0.533 crew hours / cubic yard
D. 0.465 crew hours / cubic yard
1.b If the total yards placed per project are as shown in the following table, calculate the weighted
average production rate experienced on these projects.
A. 636.8 crew hours / cubic yard
B. 0.531 crew hours / cubic yard
C. 0.465 crew hours / cubic yard
D. 0.0015 crew hours / cubic yard
1.c What does calculating the standard deviation of production rates (0.102) tell us about the data?
A. It provides a test of whether the average is a valid number to use in calculations
B. It provides a measure of the variation of the rates
C. That the production rate decreases as the quantity increases
D. That there is no correlation between production rate and quantity
1.d Another way of expressing the accuracy of the production rates is ______________.
A. 0.465± 0.102
B. 0.429 to 0.633
C. To increase the number of digits
D. To increase the accuracy of timesheets on projects
1.e If one establishes a standard that one only uses production rate data that lies plus or minus one
sigma of the mean, which (if any) data point(s) should be excluded?
25
A. 0.429, 0.633
B. One should exclude the highest and lowest values
C. 0.375, 0.680, 0.420
D. 0.621, 0.680
2. What does using methods of statistical analysis accomplish for the estimator in this instance?
A. It allows the estimator to judge that he or she should use the mean cost in the estimate.
B. It provides a 3‐sigma range of costs to use in the estimate
C. It gives the estimator a sense of the variation of data in the cost database and assists him or her
in judging the cost to be used in the estimate.
D. It is of no particular value in determining the cost to be used in the estimate.
3. An estimator is responsible for reviewing the team’s estimate. Pareto’s Law can be a useful tool in
that ...
A. By carefully selecting the items, the team can review 80% of the cost of the estimate by
checking 20% of the items.
B. The team can be certain that the estimate is 80% accurate.
C. Any 20% of the items reviewed will represent 80% of the cost of the estimate.
D. Approximately 80% of the overrun will occur in 20% of the items in the estimate.
26
Solutions
1.a A 0.531 crew hours/cubic yard
Commentary: The average production rate is calculated simply, as follows:
Project Crew hours/cubic yard
1 0.375
2 0.680
3 0.420
4 0.481
5 0.555
6 0.621
7 0.587
Sum 3.719
Average = sum / # of occurrences = 3.719 / 7 = 0.531 crew hours / cubic yard.
1.b C 0.465 crew hours / cubic yard
Commentary: One can calculate the weighted average production rate as follows:
Project Cubic yards placed Crew hours/cubic yard Total crew hours
1 1200 0.375 450
2 426 0.680 289.68
3 391 0.420 164.22
4 288 0.481 138.528
5 61 0.555 38.855
6 55 0.621 34.155
7 126 0.587 73.962
Sums 2547 1184.400
The weighted average is calculated by 1,184.4 / 2,547 = 0.465 crew hours / cubic yard.
1.c B It provides a measure of the variation of the rates.
Commentary: Please note that calculation of the standard deviation of a population is different than
the calculation of a sampling of a population. It is noted that the table is “all seven of the company
projects” and therefore is a full population. Had this been a sampling of several company projects the
standard deviation would have been 0.110
1.d B 0.428 to 0.634
Commentary: This is the range defined by the mean minus the standard deviation to the mean plus the
standard deviation.
1.e C 0.375, 0.680, 0.420
27
Commentary: One sigma is one standard deviation and so the range in question 1.4
identifies the limits of the range. 0.375, 0.680, 0.420 lie outside the range and so under the defined
standard, should be eliminated.
2. C It gives the estimator a sense of the variation of data in the cost database and assists
him or her in judging the value to be used in the estimate
3. A By carefully selecting the items, the team can review 80% of the cost of the estimate
by checking 20% of the items
28
Section 1.3 Enabling Knowledge
Introduction
Enabling knowledge is about taking what has been learned and being able to use that information
repeatedly for the benefit of society as a whole. The key areas are: Ethics; Leadership; Information
Management; Quality Management; Value Management; Health and Safety. If all of these are practiced
by the Cost Estimator, there will be continuous improvement in the estimating process and the final
project or process that is being produced.
Learning Objectives
Identify the processes that contribute to a quality estimate.
Understand the cost estimating inputs that contribute to making a better project.
Understand how cost estimators can contribute to societal benefits.
Understand how historical databases are developed
Terms to Know
Canons of Ethics
Codes of Accounts
Constructability Analysis
Deming Cycle
Enterprise
Historical Database
Life Cycle Costing
Mentoring
Plan‐Do‐Check‐Act (PDCA)
Strategic Asset
Value Engineering
Key Points for Review
Describe the benefit of having accurate historical data.
Understand the benefit of standardization as it relates to historical data.
Describe the challenges of incorporating new standards as they emerge.
Understand why ethical behavior is important to a Cost Estimator.
Summary
Ethical behavior leads to a more harmonious society.
A well‐developed database leads to a quality estimate.
The input of cost estimating is important to value engineering to provide a more effective
project.
The continuous use of the Deming Cycle (Plan‐Do‐Check‐Act) leads to better estimates.
29
Check on Learning
1. The primary benefit of having accurate historical data for estimating purposes is that...
A. Actual costs can be tracked accurately
B. The estimate can be based on a work breakdown structure instead of the chart of accounts
C. Estimates can be based on costs actually experienced in the past on similar projects
D. The estimate can be tied to current labor rates
2. A chart of accounts and a work breakdown structure are examples of...
A. Historical cost databases
B. Cost element structures used in organizing data
C. Historical cost data
D. Cost trending tools
3. Historical cost data for use in estimates is best obtained from...
A. The organization’s own project experience
B. A nationally recognized cost service such as R.S. Means
C. A database of costs experienced in the specific industry
D. Online
4. Labor should always be recorded in a database...
A. Not as costs but rather as production rates
B. By the accounting staff
C. Periodically throughout the life of the project
D. In dollars and cents
5. The Deming Cycle is ...
A. The cyclical pattern of construction costs, fluctuating with the general economy
B. Life cycle costing
C. Also referred to as “plan‐do‐check‐act” cycle
D. The asset life cycle
6. A cost estimate is a prediction of cost, __________________________, and/or price of resources
required by the scope of a project.
A. formulas
B. equations
C. quantities
D. resources
30
7. The function of Value Engineering is to...
A. Yield the least life cycle cost
B. Provide the greatest value
C. Satisfy performance and other criteria established
D. All of the above
8. Which is NOT an item in the AACE Canon of Ethics. Members should:
A. Extend public knowledge and appreciation of Cost Engineering
B. Only approve documents prepared by their subordinates
C. Avoid all known or potential conflicts of interest with your employers
D. Should be dignified and modest in explaining their work and merit
31
Solutions
1. C Estimates can be based on costs actually experienced in the past on similar projects
2. B Cost element structures used in organizing data
3. A The organization’s own project experience
4. A Not as costs but rather as production rates
Commentary: Labor costs are a function of labor rates which fluctuate with time whereas production
rates should be relatively constant for any given location. Therefore, it is usually deemed more accurate
to use labor production rates in a cost database.
5. C Also referred to as “plan‐do‐check‐act"
6. C Quantities
7. D All of the above
8. B Only approve documents prepared by their subordinates
Commentary: Members should approve only those documents, reviewed or prepared by themselves.
32
Chapter 2.0 ‐Cost Estimating Skills and Knowledge
Cost estimating is a challenging endeavor. With proper judgment, experience, and historical
information, the estimator can prepare an estimate that predicts the range of probable costs of a given
scope to be completed in the future. However, all estimates are associated with some level of
uncertainty. By applying the body of skills and knowledge that has evolved and developed over the
years, estimators can prepare sufficiently accurate estimates to meet project objectives. This subdivision
guides the student’s study of the assorted skills and knowledge that a professional cost estimator must
master to assure professional competence.
Skills & Knowledge of Cost Estimating
2.1 General Estimating 2.2 Estimating Processes & 2.3 Other Estimating
Concepts Practices Issues
2.1.1 Cost Estimating 2.2.1 Planning the Estimate 2.3.1 Bidding
Terminology
2.2.2 Estimating Methodologies 2.3.2 Budgeting
2.1.2 Cost Estimate
Classification 2.2.3 Quantification 2.3.3 Project vs. Life
Cycle Costing
2.1.3 Estimate
Variability 2.2.4 Costing
2.3.4 Cash Flow and
2.1.4 Uncertainty 2.2.5 Pricing Forecasting
2.1.5 Estimating 2.3.5 Cost Control
Algorithms 2.2.6 Estimate Conditioning Baseline
2.1.6 Code of 2.2.7 Risk, Evaluation and 2.3.6 Project vs.
Accounts Contingency Determination Product Costs
2.1.7 Historical Data
2.2.8 Estimate Documentation 9.0 Additional Studies
9.1
2.2.9 Estimate Reconciliation Internationalization
9.2 Building
2.2.10 Estimate Review and Information Modeling
Validation (BIM)
9.3 Change Order
2.2.11 Estimate Reporting Estimating
2.2.12 Estimate Closeout
Figure 2.0—Cost Estimating Skills and Knowledge
33
34
Section 2.1 General Estimating Concepts
The following sections under General Estimating Concepts focus on the fundamentals required to be
able to produce an estimate in a consistent and systematic way so as to maximize efficiency, minimize
redundancy, and optimize the project estimate.
This section addresses the fundamental approaches of cost estimating, including terminology, cost
estimate classifications, codes of accounts, historical cost data, etc. without getting into specific cost
estimating functions covered in the next section of this study guide, (Section 2.2 Estimating Processes
and Practices).
2.1 General Estimating Concepts
2.1.1 Cost Estimating
Terminology
2.1.2 Cost Estimate Classification
2.1.3 Estimate Variability
2.1.4 Uncertainty
2.1.5 Estimating Algorithms
2.1.6 Code of Accounts
2.1.7 Historical Data
Figure 2.1—Breakdown of Chapter Topics
35
36
Section 2.1.1 Cost Estimating Terminology
Introduction
Cost estimating terminology provides the backbone of effective communication through the use of a
common vocabulary. RP10S‐90, Cost Engineering Terminology, is the AACE source for just that, cost
engineering terminology. RP10S‐90 contains terminology from all aspects of cost engineering, including
planning and scheduling, asset management, etc., and is not limited to just estimating. It is
recommended that the examinee take time to review all terms in the publication. The Cost Estimator
will often interface with other Cost Engineering disciplines and must know their terminology for
effective communication.
Learning Objectives
Determine the level of familiarity one has with estimating terminology.
Understand why a common understanding of terms is essential to effective estimating.
Terms to Know
Cost Estimator
Scope
Quantification
Costing
Pricing
Contingency
Key Points for Review
Describe how standards help to refine cost estimating terminology.
Explain the importance of using a common terminology.
Explain why it is important to understand the terminology of other cost engineering disciplines.
Summary
The terminology used in cost estimating comes from a variety of industry and discipline sources.
Some estimating terminology is specific to particular industries and to certain types of projects.
A competent cost estimator will have a firm understanding of the common terminology within
estimating and also the specific terminology of his/her industry.
Terminology may change over time, and the latest version of RP10S‐90 is maintained on the
AACE website. Active membership and involvement in a professional association such as AACE
International is essential to the process of keeping the estimator current in the field.
37
Check on Learning
1. Why is cost estimating terminology an important aspect of estimating?
A. It’s not; estimating is more math and science dependent
B. Poor grammar has gotten to be a common ailment internationally
C. It is vital for the diverse stakeholders on a project to have a common understanding of terms
D. It is essential to a better understanding of costing techniques
2. Why are standards important?
A. Standard is another word for baseline
B. The process of quantity takeoff is standardized
C. The process of pricing is standardized
D. Standards promote consistent communication which aids in mutual understanding
3. What are the challenges with terminology of emerging processes such as Building Information
Modeling (BIM)?
A. Translating the new terminology into other languages
B. Consistent and accurate communication as the standard vocabulary associated with the process
as it evolves
C. Gaining acceptance of the new terms
D. Incorporation of the new terminology into glossaries and other sources
4. What does the term “battery limit” refer to?
A. Geographic boundaries enclosing a plant or unit to specifically identify certain portions of the
plant or unit
B. A boundary beyond which any battery‐powered equipment will not operate
C. The exterior wall of a processing plant
D. A level plane equal in height to the tallest improvement in the project
5. From the contractor’s perspective, which of the following is not a scope change?
A. A prolonged labor strike
B. A force majeure event
C. An error in the concrete take‐off
D. A project delay by the owner
38
Solutions
1. C It is vital for the diverse stakeholders on a project to have a common understanding
of terms
2. D Standards promote consistent communication which aids in mutual understanding
3. B Consistent and accurate communication as the standard vocabulary associated with
the process as it evolves
4. A Geographic boundaries enclosing a plant or unit to specifically identify certain
portions of the plant or unit
5. C An error in the concrete take‐off
39
40
Section 2.1.2 Cost Estimate Classifications
Introduction
Cost estimates are important indicators for the economic evaluation of potential projects. However,
expectations and understandings of the various parties involved vary widely with respect to the
information available to prepare those estimates, the various methods employed during the estimating
process, the accuracy level expected from estimates, and the level of risk associated with estimates. A
strong system for classification of cost estimates provides a means of unifying the expectations of the
various parties interested in the estimates.
The AACE system for classifying estimates is identified in RP 17R‐97, Cost Estimate Classification System,
shown in Table [Link]. It is typical that a series of estimates will be prepared for a project, beginning
with ones based on less project definition, and progressing through Classes 5 to 1 as the level of project
definition increases. An organization may not necessarily prepare all classes of estimates for a single
project.
Table [Link]—Generic Cost Estimate Classification Matrix
In addition to the generic estimate classification system, a more specific version has been created for
the process industries in RP 18R‐97 (Table [Link]). The term “process industries” is intended to include
firms involved with the manufacturing and production of chemicals, petrochemicals, pulp/paper, power
generation, and hydrocarbon processing.
41
Table [Link]—Cost Estimate Classification Matrix for the Process Industries
The goal of estimate classification is to define the technical and project deliverables required to prepare
an effective estimate. As an example, the commonality among the process industry (for the purpose of
estimate classification) is their reliance on a site plan, process flow diagrams (PFDs), piping and
instrument diagrams (P&IDs), and electrical single‐line diagrams as primary scope‐defining documents.
These documents are key deliverables in determining the maturity level of project definition, and
subsequently the estimate class for an estimate involving a process industry project.
AACE has continued to expand the classification system to other industries. New RPs have been written
for Mining and Mineral Processing (RP 47R‐11), Building and General Construction (RP 56R‐08), and
Hydropower (RP 69R‐12). RPs for other industries are currently in the development stage.
Learning Objectives
Understand why scope definition is important for any estimate.
Understand the basis of the AACE International System of classifying estimates.
Understand the relationship between the maturity level of project definition deliverables and its
impact on the potential range of estimate accuracy.
Describe the benefits of an estimate classification system.
Terms to Know
Accuracy Range
Bid/Tender Estimate
Budget Estimate
Concept Study
42
Conceptual Estimate
Confidence Level
Confidence Interval
Contingency
Control Estimate
Cost Estimate Classification System
Definitive Estimate
Detailed Unit Costs
Deterministic (Detailed)
Feasibility
Order of Magnitude (Conceptual) Estimate
Parametric Estimate
Preparation Effort
Probabilistic
Screening
Stochastic
Key Points for Review
Understand the different classes of estimates in the cost estimate classification system and the
characteristics used in classifying estimates.
Understand the differences in the various types of estimating techniques and for which classes
of estimates they are typically used.
Correlate the different classes of estimates to preparation time to perform those estimates.
Summary
The primary parameter for the classification of estimates within RP 17R‐97, Cost Estimate Classification
System, is the maturity level of project definition upon which the estimate is based. Other characteristics
associated with estimate classes include the purpose of the estimate (anticipated end usage of the
estimate), methodology used in development of the estimate, the accuracy of the estimate, and the
relative effort required to produce the estimate.
Recommended Practice 17R‐97, Cost Estimate Classification System, maps the phases and stages of
project estimating with a maturity and quality matrix, providing a common reference point to describe
and differentiate various types of cost estimates. The matrix defines the specific input information (i.e.,
design and project deliverables) that is required to produce the desired estimate quality at each phase
of the estimating process. The matrix defines the requirements for scope definition and indicates
estimating methodologies appropriate for each class of estimate.
43
Check on Learning
1. What class of estimate is an order of magnitude estimate?
A. Class 2
B. Class 5
C. Class 1
D. Class 3
2. Which of the following is recognized as the primary characteristic used in classifying estimates.
A. End usage or purpose of estimate
B. Level of project definition
C. Estimating methodology used in preparation of estimate
D. Expected accuracy range of estimate
3. What class of estimate is a bid/tender?
A. Class 1
B. Class 5
C. Class 4
D. Class 3
4. A good Class 4 estimate can be prepared with the information available at the completion of Phase I
design. An example of information at the end of preliminary design is:
A. Equipment list and specifications
B. Piping spool drawings
C. Drawings released for construction
D. Material invoiced costs
5. You are preparing a Class 5 estimate. You have obtained an equipment quote of $60,000. The Lang
Factor is 3.15 for this type of plant. What is your estimated project cost?
A. $207,900
B. $256,642
C. $201,910
D. $189,000
6. An argument for a consistent system of classification of cost estimates is:
A. To comply with AACE International Recommended Practice 17R‐97, Cost Estimate Classification
System
B. That the system will define the specific input information and level of definition maturity for a
specific class of estimate
C. To be consistent with the work breakdown structure (WBS)
D. To allow the estimate to be used in the future for cost control on the project
44
7. An estimate prepared from well defined engineering data is referred to as a _____________.
A. Range estimate
B. Preliminary estimate
C. Conceptual estimate
D. Definitive estimate
45
Solutions
1. B Class 5
2. B Level of project definition
3. C Class 1
4. A Equipment list and specifications
5. D $189,000
Commentary: Based on an equipment quote of $60,000 and the Lang Factor is 3.15 for this type of
plant, the estimated project cost $189,000 (3.15 * $60,000 = $189,000).
6. B That the system will define the specific input information and level of definition
maturity for a specific class of estimate
7. D Definitive estimate
46
Section 2.1.3 Estimate Variability
Introduction
The same exact activity can be performed in twenty projects and the resulting actual cost may be
twenty different numbers. This is the reason that it is called estimating and not “actualizing.” There are
many reasons the cost of similar activities can vary and the mark of a professional estimator is to be able
to identify the cause of those variables and reflect them in the estimate.
Historical estimating databases are developed by normalizing the information from past projects and
identifying the “most likely value” by plotting a distribution curve. The value in the database is usually
the most likely occurrence, not necessarily the one that should be used in the estimate. To determine
the best number to use you need to understand what causes variability in estimates.
There are few references available to help the cost estimator learn how to determine variability for a
project. Most of that knowledge must come from personal experience and learned from peers. There
are many papers in the AACE transactions regarding labor productivity that have been assembled in
Professional Practice Guide (PPG) #22, Productivity. Labor productivity may be the greatest variable in
estimating and PPG #22 can help you understand the causes and how to adjust for them.
Additional variability can come from location, quantity, waste, overtime, spoilage, loss, market
competition, and even the type of contract. All of these need to be taken into account when developing
an estimate. When developed and evaluated properly these variables should be included in the direct
cost estimate, not as contingency.
In addition to unit price variability, the class of the estimate can have a large impact on the variability of
the estimate. At the Class 5 level, there is only a limited definition of the project deliverables. Since
there is much still unknown, there is a likelihood of a large variance in the estimate. As the project
definition is refined through Class 1, there is more and more known to the point at 100% definition; the
unknowns are likely to reflect a small variability in the estimate.
Learning Objectives
Be able to describe the factors influencing variability in estimates.
Understand realistic steps to be taken to minimize estimate variability, one of which is using
regression analysis in the estimating process.
Understand the difference between an allowance and contingency.
Understand how project definition affects the potential variance in an estimate.
Terms to Know
Accuracy
Allowance
Average
Contingency
Costing
47
Cost Estimating Relationship (CER)
Escalation
Known
Known‐Unknown
Labor Productivity
Learning Curve
Location Factor
Market Value
Most Likely Value
Normal Curve
Pricing
Project Definition
Seasonal Commodities
Risk
Unknown‐Unknown
Weighted average
Key Points for Review
Describe how accuracy of quantities or unit costs affects estimate variability.
Understand how probabilities can affect the accuracy and the variability of estimates.
Understand the factors that can cause variability in an estimate and how to adjust for them.
Understand how to use risk analysis to reduce the impact of potential variables.
Understand how the estimate class affects the potential variability.
Summary
As a project progresses through design development the variability normally lessens.
Variation in unit costs is affected by many factors.
A good professional cost estimator understands how to adjust for any factors that are known to
exist for the project being estimated.
Risk analysis can be used to reduce the impact of factors that may cause variance.
48
Check on Learning
1. As the level of project definition matures on a project, estimate accuracy should __________.
A. Become asymptotic
B. Improve
C. Remain constant
D. Get worse
2. The historical record of unit hours for an item indicate a mean of 1.2 with a sigma of .3. For a
wage rate of $25/hr and a quantity of 50 what is the expected cost.
A. $1500
B. $1875
C. $375
D. $1125
3. In the previous question, what will the cost variance be if the actual unit hour rate increases by one
sigma from the average.
A. $1875
B. $375
C. $650
D. ‐$450
4. The effect that weather will have on a project is considered to be:
A. Known
B. Known‐unknown
C. Unknown‐unknown
D. Contingency
5. The following productivity has been observed for an activity. Assuming the mean method, what rate
would you include in the historical database.
1.7 Hours/CY
1.2 Hours/CY
1.8 Hours/CY
1.4 Hours/CY
A. 1.5 Hours/CY
B. 1.71 Hours/CY
C. 1.525 Hours/CY
D. 1.3 Hours/CY
49
Solutions
1. B Improve
2. A 1500
Commentary: 1.2 hours/unit * 50 units * $25/hour = $1500
3. B $375
Commentary: Actual is synonymous with mean so if the unit rate (1.2) increases by one sigma (0.3), the
actual rate will be 1.2 + 0.3 = 1.5. Then the actual cost will be 1.5 * 50 * $25 = $1875. Since the estimate
was $1500, the variance will be $1875 ‐ $1500 = $375
4. B A known‐unknown
Commentary: It is “known” that weather can impact productivity, but it is unknown what the actual
weather will be and therefore the impact is “unknown.”
5. A 1.5
Commentary: The mean is derived by adding the values together and then dividing by the number of
values. (1.7+1.2+1.8+1.4)/4=1.525 The significant digits must not exceed the source data so the answer
is rounded to one decimal place.
50
Section 2.1.4 Uncertainty
Introduction
In the previous chapter we discussed estimate variability. It is that variability that creates uncertainty in
an estimate. In this chapter we will discuss the impact of uncertainty on the estimate and how it can be
dealt with.
Recommended Practice 10S90, Cost Engineering Terminology, defines "Uncertainty" as
(1) The total range of events that may happen and produce risks (including both threats
and opportunities) affecting a project. (Uncertainty = threats + opportunities.)
(2) All events, both positive and negative whose probabilities of occurrence are neither
0% nor 100%. Uncertainty is a distinct characteristic of the project environment.
What this means is that anything that has a probability of occurring may impact the cost of the estimate
by either increasing or decreasing the cost. A goal of cost estimating is to minimize uncertainty in the
estimate. The methods of determining an allowance or contingency in the estimate to cover these cost
changes will be discussed in Chapter 2.2.7 Risk Evaluation and Contingency Determination. In this
chapter we will study the concept of uncertainty.
Learning Objectives
Understand what uncertainty is and what effect it has on the estimate.
Understand how uncertainty can be both known and unknown.
Understand how the estimate can be adjusted to include cost for uncertainty.
Understand that uncertainty can be both threat and opportunity
Terms to Know
Acts of God
Allowance
Certainty
Contingency
Dependent Variable
Dynamic Risk
Exposure
Management Reserve
Mitigation
Opportunity
Pareto’s Law
Range
Range Estimating
Risk
Risk Management
51
Static Risks
Strategic Risk
Tactical Risk
Threat
Key Points for Review
Uncertainty is reduced as with maturity of project definition.
Uncertainty may pose an opportunity or a threat.
Risk Management is designed to reduce the risk caused by uncertainty.
Cost to cover risks may be included in the estimate as both allowance and contingency.
Summary
Uncertainty in an estimate creates a risk that the final cost will not be achieved as planned. It is a goal of
cost estimating to minimize and properly account for the uncertainty in the estimate to improve the
likelihood of achieving the planned cost. Identification and quantification of risks through proper Risk
Management will help mitigate the threats that can cause a cost overrun. Opportunities identified
through the Risk Management process may even help to bring the project in under budget.
52
Check on Learning
1. Uncertainty in an estimate may include:
A. Threats
B. Opportunities
C. Estimate Error
D. All of the above
2. The formal process for determining the risk probability in an estimate:
A. Contingency Evaluation
B. Range Estimating
C. Pareto’s Law
D. Probabilistic Ranging
3. Costs to allow for uncertainty in an estimate can be applied using:
A. Contingency
B. Allowances
C. Increasing the Direct Cost
D. All of the above
4. Which type of contract includes the greatest risk to the owner?
A. Cost Plus
B. Lump Sum
C. Bonus Penalty
D. Guaranteed Maximum
5. Which class of estimate normally has the greatest uncertainty?
A. Class 1
B. Class 2
C. Class 3
D. Class 4
53
Solutions
1. D All of the above
2. B Range Estimating
3. D All of the above
Commentary: Uncertainty costs may be added to the estimate based on the ability to quantify them. An
item such as concrete waste allowance may be included in the quantity or unit price. An item which is a
known‐unknown such as the type of carpet to be selected by the owner may be put in as an allowance
to be adjusted upon selection. Items which cannot be readily identified may be included as part of the
contingency.
4. A Cost Plus
Commentary: All but Cost Plus have some level of cap on the amount paid to the contractor. A cost plus
contract has no upper limit.
5. D Class 4
Commentary: A Class 4 has the least maturity in project definition. As definition increases, the amount
of uncertainty normally decreases.
54
Section 2.1.5 Estimating Algorithms
Introduction
An algorithm is a procedure that produces the answer to a question or the solution to a problem in a
finite number of steps. Estimating algorithms are tools used generally in the development of conceptual
estimates before detailed drawings and specifications are available and use independent variables.
These variables are not usually direct measures of the detailed elements of the project due to the early
stage of development of the design, but rather mathematical models based on relationships between
costs and other important parameters of the project.
A professional cost estimator should constantly be looking for relationships and shortcuts in the projects
being estimated and performed. This will provide quick checks for reviewing the accuracy of an estimate
against similar projects and also provide methods of preparing check or screening estimates in the early
stages of project definition. Many estimators have made these discoveries and they have been
published in various articles over the years. The references noted in this chapter are a source of many of
those algorithms.
There are five major methods of estimating algorithms:
Factored
End‐Product Unit
Capacity Factor
Physical Dimension
Parametric
Factored Estimates
Ratio or factored estimating methods are used in situations where the total cost of an item or facility
can be reliably estimated from the cost of a primary component. Two of the most popular types of this
method are the Lang and Hand Factors. Both the Lang and Hand Factors are based on the cost of
equipment in a process plant. The Lang Factor is a ratio of the equipment cost to the total installed plant
cost. The Hand Factor is a ratio of the individual equipment item cost to the direct field cost of the
installed item, excluding instrumentation. The Hand Factor does not account for project indirect costs.
End‐Product Unit Estimate
This method is used when the estimator has enough historical data available from similar projects to
relate the end‐product units (capacity units) of a project to its construction costs. Examples of this are
pricing a power plant based on dollars per kilowatt of output, a hotel by the number of rooms, or a
hospital by the number of beds. The estimator needs to have a sound database of similar projects, but
assistance with project examples can often be found in estimating references and trade publications.
Capacity Factor Method
A capacity‐factored estimate is one in which the cost of a new facility is derived from the cost of a
similar facility of a known (but usually different) capacity. It relies on the nonlinear relationship between
capacity and cost. The cost is estimated by the following formula:
55
Cost of New Plant = Cost of Prior Plant * (Capacity of New Plant/Capacity of Prior Plant) ͤ
The exponent (e) represents the impact of economies of scale where normally a larger plant has a lower
cost per unit than a smaller plant. This is often called the “six‐tenth’s rule” as 0.6 has often been used as
the exponent in other projects and found to be accurate. However, many other exponent values have
been used and may be more correct given a particular project.
Physical Dimensions Method
This method uses the physical dimensions (length, area, volume, etc.) of the item being estimated as the
driving factor. Examples of this method are the cost of an office building based on square feet or the
cost of a factory building based on cubic feet. As with the end‐product unit method, the estimator needs
a good database of similar projects, but again these costs per unit are often available in estimating
references and trade publications.
Parametric Method
A parametric estimate comprises cost estimating relationships (CERs) and other parametric estimating
functions that provide logical and repeatable relationships between independent variables, such as
design parameters or physical characteristics and the dependent variable, cost. A very simple example
of this would be a highway where the concrete, reinforcing, and finishing are of constant cross section
and the only input needed to calculate the quantities is length. In an office building, the cost of drywall
partitions may be found to closely correlate to the square footage of the floors in the building.
Estimates using algorithms can be quick and easy methods to use in the preparation of Class 5
estimates, especially when several options are being evaluated in a study. The estimator, however, must
be very familiar with the possible shortcomings of using these methods. For instance the cost of
estimating a hotel based on the number of rooms ignores the cost of common facilities. If the base unit
has a small lobby and no pool, but the new facility does have them, these costs will not be reflected in
the estimate. The particular shape of the hotel tower will impact the quantities of curtain wall and such
factors as a smaller floor plate will result in fewer rooms per floor and a taller building for the same
amount of rooms.
Learning Objectives
Understand the role of algorithms in cost estimating.
Understand the methods of Estimating Algorithms that can be used in cost estimating.
Describe when the use of algorithms is appropriate in the preparation of an estimate.
Understand why and when the use of a specific algorithm is inappropriate.
Terms to Know
Algorithm
Capacity Factor Method
Cost Estimating Relationship (CER)
Escalation
End‐Product Units Method
Factored Estimate Method
Hand Factor
56
Inflation
Lang Factor
Location Factor
Parameter
Parametric Estimate
Physical Dimensions Method
Price Index
Six‐tenths Rule
Key Points for Review
Understand how to perform each type of algorithmic estimating.
Understand the potential error that can be introduced into each type of estimate.
Understand when it is not appropriate to use an algorithmic estimate.
Summary
The process of developing an estimate relies on many different techniques, one of which can be
broadly described as estimating algorithms.
Estimating algorithms exist in many different forms.
Most algorithms are appropriate to certain estimating phases and not appropriate to others.
They are generally used only during the initial stages of a project when little project definition is
available.
57
Check on Learning
1. What is another term for the Capacity Factor Method?
A. Parametric Method
B. Scale of Operations Method
C. End‐Product Units Method
D. Deterministic Method
2. How did the Hand factor elaborate on Lang’s work?
A. Expanding cost to total plant installation
B. Including equipment installation
C. Including indirect costs
D. Proposing different factors for each type of equipment
3. Estimates that have cost estimating relationships between independent variables can be simplified
by developing what?
A. Normal curves
B. Contingency
C. Parametric estimating relationships
D. Waste allowance
4. Given the following information on actual solid process plant costs, what would the Lang factor be?
Total Installed Cost $2,000,000
Direct Cost $1,300,000
Equipment Cost $560,000
A. 3.57
B. 2.32
C. 0.28
D. 1.54
5. Given the following information on actual project costs, what is the average Hand factor for the
given pumps?
Total Installed Cost Direct Cost Pump Cost Pump Capacity
$200,000 $160,000 $36,000 2500 gpm
$150,000 $120,000 $30,000 1800 gpm
$300,000 $240,000 $60,000 3500 gpm
A. 5.16
B. 4.13
C. 5.18
D. 4.15
58
6. What is the capacity factor method?
A. A method of estimating the cost of a new facility by use of the formula C2 = C1 x er where C2 =
capacity of the new facility, C1 = capacity of an existing facility, and exponent r = C2 / C1
B. An estimating method only applicable to assembly halls.
C. A method for deterministically estimating the cost of a new plant facility.
D. An estimating method by which the cost of a new facility is derived from the cost of a similar
existing facility multiplied by a predetermined factor relating the relative capacities of the two
facilities.
59
Solutions
1. B Scale of Operations Method.
2. D Proposing different factors for each type of equipment.
3. C Parametric estimating relationships.
4. A 3.57
Commentary: The Lang Factor can be derived by taking the Total Installed Costs (TIC) of $2,000,000 and
dividing the total equipment cost of $560,000 to get a factor of 3.57 based on the following formula by
Hans Lang:
Total Plant $ = Total Equipment $ * Equipment Factor
5. D 4.15
Commentary: The Hand Factor is derived by taking the direct cost of each type of equipment, then
calculating the factor, and then averaging the factors themselves.
Total Installed Cost Direct Cost Pump Cost Hand Factor
$200,000 $160,000 $36,000 $160,000/$36,000 = 4.44
$150,000 $120,000 $30,000 $120,000/$30,000 = 4.00
$300,000 $240,000 $60,000 $240,000/$60,000 = 4.00
Therefore the average Hand Factor (4.44+4.00+4.00 = 12.44/3) equals 4.15
6. D An estimating method by which the cost of a new facility is derived from the cost of a
similar existing facility multiplied by a predetermined factor relating the relative
capacities of the two facilities.
60
Section 2.1.6 Code of Accounts
Introduction
A Code of Accounts (COA) is a systematic coding structure for organizing and managing scope, asset,
cost, resource, work, and schedule activity information. A COA is essentially an index to facilitate finding,
sorting, compiling, summarizing, or otherwise managing information that the code is tied to. A complete
code of accounts includes definitions of the content of each account. Its only purpose is to provide
information to one of the project stakeholders in a usable form.
There are four attributes that make a good code of accounts:
Usage: The code of accounts must be designed in a way that serves the stakeholders needs.
Content: The amount of content that can be included in a code is limitless, but it must be restricted to a
level that does not become burdensome to the users.
Structure and Format: Structure and format increases usability and providing definitions of all elements
in a reference dictionary or similar document improves clarity.
Standardization: A consistent coding structure on all projects assists users and provides a better
historical record.
The general purpose of a code of accounts is to collect costs of like items. The work breakdown
structure (WBS) was designed to help manage the project. A work breakdown structure is a tree form of
project coding with multiple levels. Each level is designed to group all items below it for the purpose of
management. For instance an Organizational WBS could have levels for area superintendents, which roll
up to the general superintendents, which roll up to the project manager.
Learning Objectives
Understand the need for and benefit of standard codes of accounts.
Understand the need for Work Breakdown Structures (WBS).
Distinguish between the terms Work Breakdown Structure (WBS) and Code of Accounts (COA).
Identify the various structural elements used in preparation of codes of accounts.
Recognize how COA dictionaries define the structure of an estimate and, for that matter, all cost
data on a project.
Terms to Know
Account Code Structure
Account Number
Assets
Codes of Accounts
Contract WBS
Cost Breakdown Structure
Cost Category
Cost Codes
61
Organization Breakdown Structure
Stakeholder
Work Breakdown Structure (WBS)
Key Points for Review
Describe the value of a code of accounts to a stakeholder
Describe different types of codes of accounts and their particular use.
Describe how a WBS is structured and the purpose of the structure.
Explain the value of standardizing a corporate code of accounts.
Explain the difference between a code of accounts and a work breakdown structure.
Summary
The purpose of the code of accounts is to provide usable information to one of the project
stakeholders.
There may be multiple codes of accounts on a project to serve the various stakeholders’ needs.
A Work Breakdown Structure is a tree form of coding with multiple levels to help manage a
project.
62
Check on Learning
1. Which of the following is not an attribute of codes of accounts?
A. Usage
B. Content
C. Timing
D. Standardization
2. A project code of accounts is ________________________________.
A. A means of organizing project costs, resources, and activity categories
B. A substitute for a work breakdown structure (WBS)
C. For use in lieu of a work breakdown structure (WBS)
D. The same as a work breakdown structure (WBS)
3. An essential element of a code of accounts is _____________________________.
A. Activity Based Costing (ABC)
B. A cross reference
C. A dictionary
D. A substitute for a CPM schedule
4. Another term for an index to facilitate finding, sorting, compiling, summarizing, or otherwise
managing information that the code is tied to is __________________________.
A. A code of accounts
B. A cost performance index
C. A criticality index
D. A values index
5. Which is not a use of the code of accounts during the planning phase?
A. Estimating
B. Budgeting
C. Benchmarking
D. Scheduling
63
Solutions
1. C Timing
2. A A means of organizing project costs, resources, and activity categories
3. C A dictionary
4. A A code of accounts
5. C Benchmarking
64
Section 2.1.7 Historical Cost Data
Introduction
Up until now we have discussed many subjects about developing an estimate, but almost none of that
would be possible without a historical cost database to support the development of the estimate. Very
few of us could visualize the effort to perform every element of cost in the project; therefore, we must
rely on records of what it has taken to perform those elements in the past. Unfortunately there are few
reference documents available that describe the process of developing an historical cost database.
Therefore we must rely on what we have learned as professional cost estimators to know what
information is valuable in that database.
For instance we have discussed variability and what causes it. That information needs to be
accounted for in the database so we can apply it to the conditions of the new project.
We have discussed algorithms and so we need to include the parameters in our formulae to
apply them to the new project.
We have discussed the code of accounts so we have learned that the information in the
database must be stored with coding that allows us to find the information we need for the new
project.
The most valuable database is a record of the company’s own projects. This record provides data on
projects performed by its own management, perhaps by its own crews, and perhaps within its own
service area. A company should have good knowledge about the project such as overtime, weather
conditions, and other factors that may have affected the cost and productivity during the project. If the
company has properly collected and normalized its past project cost information then this database will
be key to estimating cost estimates for its own future projects.
Unfortunately many companies do not (or cannot) develop the database of information they may need
to estimate future projects. When that is the situation it is necessary to rely on published databases.
This is an acceptable and potentially accurate method as long as the user has a good understanding of
how these databases have been developed.
Learning Objectives
Identify the potential sources of historical cost data for use in the estimating process.
Describe how to collect, normalize, and analyze historical cost data.
Understand how historical cost data should be used and filtered.
Terms to Know
Benchmarking
Cost Code
Escalation
Location Factors
Method of Measurement
65
Normalizing
Productivity Factors
Unit Cost
Unit Hours
Key Points for Review
There are many potential sources of historical cost data.
Nothing substitutes for the judgment of an experienced estimator in the application and use of
historical cost data in the development of a reliable estimate.
Understand what information beyond just cost should be included in the database.
Understand how data should be screened before it is included in a database.
An historical cost database can be recorded at the project level as well as the cost element level.
Summary
Reliable historical cost data is essential to the production of realistic and reliable cost estimates.
The cost estimator must have a thorough understanding of a third party database before using
it.
Database information must be regularly updated and must be in a useful format in order to be
of use to the estimator.
66
Check on Learning
1. You are assigned to prepare an estimate at the project selection phase for a hospital building to be
constructed four years from now in Location B. Your historical cost database has similar project was
completed by your company four years ago for a cost of $17,400,000. The location index factor for
the location where it was constructed is 0.981 and the location index factor for Location B is 0.890.
The escalation index for the year the project was constructed was 4369 and is projected to be 5210
in four years. Based on the information provided, what would you estimate that the proposed
project will cost?
A. $22,900,000
B. $18,800,000
C. $16,100,000
D. $17,400,000
2. A primary reason that an estimating database containing labor costs should be centered around
production rates and not unit costs is ______________________.
A. Unit costs are a factor of labor rates which vary over time whereas production rates are
relatively constant
B. Unit costs are dependent upon the monetary unit in which they are experienced
C. Unit costs vary with the quantity of work performed
D. Production rates for an individual item of work will always be identical, regardless of the
location or quantity performed
3. There are four unit costs for furnishing and installation of 12” diameter, Class III, reinforced concrete
pipe in your unit cost database, for quantities ranging from 31 to 370 linear feet. Unit costs range
from a minimum of $29.49/linear foot to $125.04/linear foot, with an average unit cost of
$71.43/linear foot. Costs in the unit cost database reflect actual bid unit prices on unit price
contracts. A logical explanation for the variation in unit prices is ___________________________.
A. One or more of the unit prices reflect errors on the part of bidder(s)
B. Unit prices varying from the mean by more than one standard deviation, should be eliminated
from the database
C. One should utilize the mean unit price
D. Actual bid unit prices reflect the influence of many variables such as depth of bury of pipe,
quantity of pipe installed, and unbalancing of bids
4. You are an estimator using a historical database to prepare a conceptual estimate. Why is it
important to isolate direct costs from indirect costs as much as possible in such a database?
A. Data will be more reliable for use in the estimate for a new project, more accurately reflecting
its unique conditions
B. Many direct costs are variable depending on the activity's duration
C. Indirect costs are less sensitive to escalation than direct costs
D. In an activity‐based costing (ABC) scenario, direct costs should stand by themselves and not be
mixed with indirects
67
5. You have just completed construction of a new process plant. The project cost was $12,575,000 and
the equipment portion was $4,375,000. What is the Hand Factor for this plant?
A. 0.35
B. 2.87
C. 3.21
D. It cannot be determined from the given data
68
Solutions
1. B $18,800,000
Commentary: Since both the date and location of the proposed project are different from those of the
historical cost data, the cost of the proposed project can be calculated as the product of the ratio of cost
indices, the ratio of the location factors, and the actual cost of the historical cost, as follows:
(Cost Index When Historical Project Was Constructed) / (Cost Index When Estimated Project Will Be
Constructed) x (Location Factor B / Location Factor A) x $17,400,000 = (0.890 / 0.981) x (5210 / 4369) x
$17,400,000 = $18,824,607 (rounded to $18,800,000).
2. A Unit costs are a factor of labor rates which vary over time whereas production rates are
relatively constant
3. D Actual bid unit prices reflect the influence of many variables such as depth of bury of
pipe, quantity of pipe installed, and unbalancing of bids
4. A Data will be more reliable for use in the estimate for a new project, more accurately
reflecting its unique conditions
5. D It cannot be determined from the given data
Commentary: The Hand Factor is calculated from the direct installed cost for each piece of equipment.
The Lang Factor would be calculated from this information.
69
70
Section 2.2 Estimating Processes and Practices
The following sections encompass the processes, techniques, and methods utilized during estimate
preparation. It is important to properly plan the estimating effort. This involves selection of the
appropriate estimate methodologies to be used. To make this selection, it is important to properly
evaluate the level of scope information upon which the estimate is based, to fully understand the
intended purpose of the estimate, and to establish the format for estimate presentation.
Regardless of the stage of the estimate, the process relies on quantification at some scale. When
quantities are determined, the costs and pricing can be applied. It is important to understand that cost
and price are two different concepts.
Finally, there is the evaluation of uncertainty and development of contingency or other means of risk
mitigation within the estimate. The estimate should be appropriately documented, reviewed, and
validated.
2.2 Estimating Processes &
Practices
2.2.1 Planning the Estimate
2.2.2 Estimating Methodologies
2.2.3 Quantification
2.2.4 Costing
2.2.5 Pricing
2.2.6 Estimate Conditioning
2.2.7 Risk Evaluation and
Contingency Determination
2.2.8 Estimate Documentation
2.2.9 Estimate Reconciliation
2.2.10 Estimate Review and
Validation
2.2.11 Estimate Reporting
2.2.12 Estimate Closeout
Figure 2.2—Breakdown of Chapter Topics
71
72
Section 2.2.1 Planning the Estimate
Introduction
The initial step in estimating is to prepare a plan to go forward. The major steps are to:
Determine the purpose of the estimate
Determine the needs of the stakeholders
Determine the scope
Identify responsibilities
Prepare a timeline.
The details of this effort are defined very well in the attached references. At the end of the estimating
process, the estimate often becomes the baseline budget for the project. Transferring the estimate to
the cost control phase needs to be a major part of the plan. This generally means developing the code of
accounts and/or work breakdown structure that will be used for the project.
Learning Objectives
Identify the requirements of various types of estimates.
Define each of the individual steps that comprise the estimating process.
Understand the objectives in generating an estimate.
Understand how to plan for the transition from estimate to cost control.
Terms to Know
Allowances
Bidding Documents
Basis of Estimate
Benchmarking
Code of Accounts
Commissioning
Definition Phase
Deming Cycle
Estimate Class
Exclusions
Project Life Cycle
Plan
Planning
Planning Session
Project Definition
Project Phases
Project Plan
Scope
Scope Definition
73
Startup
Work Breakdown Structure
Key Points for Review
It is essential to fully plan the process of preparing the estimate before actual estimating has
begun.
A properly developed plan will address the needs of the stakeholders.
The plan must identify what is required to transition the estimate to the project control team.
Discuss the inputs required for the development of an estimate plan.
Summary
Estimating involves more than just the process of counting and costing items.
A plan must be assembled identifying what is to be counted, in what units of measure, who will
be doing the counting, how these are to be organized, and when it must be completed.
The plan for the estimate yields a baseline against which estimating progress and the end
product may be measured.
74
Check on Learning
1. After planning, what is the first process in estimate preparation?
A. Pricing
B. Scoping
C. Quantification
D. Costing
2. Which is not a stage in the estimate process?
A. Quantification
B. Pricing
C. Cash flow
D. Scoping
3. Which of the following would not be a stakeholder requirement for the estimate plan?
A. Code of accounts
B. Property records
C. Project schedule
D. Estimate completion date
4. The purpose of the estimate has been defined as a firm price bid. Which class of estimate does this
relate to?
A. Class 5
B. Class 1
C. Class 4
D. Class 3
5. One element of estimate planning is to determine the ______________ desired or required by the
requesting stakeholder.
A. Total cost
B. Estimate format
C. Costing data source
D. Estimator
75
Solutions
1. B Scoping
Commentary: The first process in estimate preparation is scoping, understanding the project, then
usually followed by quantification, costing, and then pricing.
2. C Cash flow
Commentary: Quantification, pricing, and scoping are all estimating activities; however, cash flow is not
a stage in the estimate process.
3. C Project schedule
4. B Class 1
5. B Estimate format
76
Section 2.2.2 Estimating Methodologies
Introduction
There are many different methodologies utilized in estimating the cost of a project.
AACE International Recommended Practice 17R‐97, Cost Estimate Classification System lists a typical
estimating method as a secondary characteristic used in classifying estimates and lists judgment,
stochastic, and deterministic methods of developing estimates. Selection of the appropriate
methodology is essential for the estimating process to meet budget and schedule requirements as well
as for the estimate to meet the objectives of the project.
Professional judgment is essential regardless of the estimating methodology utilized. However, the
professional judgment of an experienced estimator or estimating team cannot stand alone as an
estimating method for conceptual estimates when little scope development has taken place. The
stochastic and deterministic methods are descriptive of specific types of techniques utilized in
preparation of conceptual and definitive estimates respectively
Stochastic or probabilistic methods are most often used in the preparation of conceptual estimates
where the scope is less developed and estimators rely on their professional judgment, probabilistic
evaluation of historical costs, parametric methods, or a combination of methods. More deterministic
methods are used when scopes are more developed, there are variables which can be measured and
costs assigned, and the data will support more deterministic means of estimating the cost of the product
or project.
The selection of estimating methodologies depends on the level of scope definition, the time available
to prepare the estimate, the purpose of the estimate, and the resources and tools available for the
estimating effort.
Learning Objectives
Identify the appropriate estimating methodologies applicable to the situation.
Understand when specific methodologies are appropriate.
Determine quantities/costs via various estimating methodologies.
Understand why organizations establish a standard for estimating methodology to be used.
Terms to Know
Deterministic
Development Cost
Estimate Class
Maturity Level
Parametric Model
Stochastic
77
Key Points for Review
One chief discriminator to identify estimating methodologies is in the nature of the independent
variables used in execution of the methodology. If the chosen method is primarily stochastic
(probabilistic) in nature, the variables are usually something other than a direct measure of the
units of the item being measured whereas if the subject method is essentially deterministic,
those variables can generally be expected to be straightforward counts or other measurements
of the units of measure of the item described. The various methodologies used in preparation of
a cost estimate may be stochastic or deterministic or may focus on detailed physical
characteristics of the end product or the features of the end product.
The user should always be certain to understand the underlying methodologies used in
estimating software used to create any estimate.
Summary
The choice of an appropriate estimating methodology is essential to the preparation of an
estimate that will meet the objectives of the class of estimate and the needs of the
stakeholders. Methods for preparation of estimates can generally be classified as stochastic
(probabilistic) or deterministic.
Estimator’s professional judgment is an indispensable element of any estimating methodology.
78
Check on Learning
1. An estimate for parking lot lighting is based on the area of the lot. This is an example of a
__________________ estimate.
A. Equipment factored
B. Parametric
C. Definitive
D. Detailed
2. A conceptual estimate is needed for the cost of a grocery warehouse. The estimator is given the
street address and gross area of the land and building and has a database which includes historical
systems costs (substructure, superstructure, exterior wall, mechanical, electrical, etc.) for various
types of buildings. No other information concerning the project is available upon which to base the
estimate. The best approach for the estimator to use in developing the estimate is the:
A. Physical Dimensions Method
B. Parametric Method
C. Capacity Factor Method
D. End‐Product Units Method
3. For which of the following is the use of cost estimating relationships (CERs) applicable?
A. Definitive estimates
B. Parametric estimates
C. Neither definitive nor parametric estimates
D. Both definitive and parametric estimates
4. As asset/project scope becomes better defined, estimating methods become more definitive.
A result is that _______________________________________________.
A. Estimates become more accurate
B. It takes less effort and, therefore, is less costly, to prepare an estimate
C. Estimate cost probability distributions become correspondingly narrower
D. Project durations generally increase, reflecting a corresponding increase in indirect costs
5. You have budgeted the total cost of installed equipment for a solid‐fluid process plant in the
amount of 71,000,000 Euros (EUR). The Lang Factor for this type of plant is 3.63. These
variables can be used by the estimator to derive an estimate of _______________.
A. Total plant cost
B. Inside battery limits cost
C. Total depreciable equipment cost
D. Anticipated utility usage cost
79
Solutions
1. B Parametric
2. A Physical Dimensions Method
3. D Both definitive and parametric estimates
4. C Estimate cost probability distributions become correspondingly narrower
Commentary: Typically, more definitive estimating methods reduce the range of estimate values, and,
thus, the correct answer is C. While it may be (and hopefully, will be) true that the result is a more
accurate estimate, it is not automatic and, therefore, A is incorrect. The opposite of B is actually true
and D is incorrect as well.
5. A Total plant cost
80
Section 2.2.3 Quantification
Introduction
AACE Recommended Practice 10S‐90, Cost Engineering Terminology defines quantification as, “an
activity to translate project scope information into resource quantities suitable for costing”. RP10S‐90
also defines the term “Take‐off” as “a specific type of quantification that is a measurement and listing of
quantities of materials from drawings in order to support the estimate costing process and/or to support
the material procurement process”.
Learning Objectives
Define the accuracy of quantities depending on the nature and level of development of the
scoping documents.
Understand what tools are available to assist the estimator in the process of quantification
Understand what tools are appropriate under which conditions for quantification
Terms to Know
Battery Limit
Bill of Materials
Code of Accounts
Cost Category
Cost Codes
Estimate
Estimate Backup
Facility
Gross Area
Interference
Method of Measurement
Net Area
Procurement
Quantification
Quantity Survey
Quantity Surveyor
Scope
Specifications
Subcontract
Take‐off
Temporary Construction
Work Breakdown Structure
Key Points for Review
The process of quantification translates the scope of work into items of work to which costs can
81
be applied.
Each discipline and/or industry may have specific units of measure inherent to the nature of the
work.
When developing a take‐off you should be evaluating the constructability and making notes for
the costing phase.
Quantification of a Class 1 estimate may become the basis for the bill of materials used in
procurement.
Summary
A take‐off is a specific type of quantification that is a measurement of materials required for the
scope of work.
A bill of materials (BOM) is a detailed quantity take‐off produced in order to facilitate
procurement for a project or product.
In a take‐off produced by measurement from drawings, it is essential to double‐check drawing
scales.
Because of the advance of technology, it is imperative that the cost estimator participate in
some type of continuing education to remain abreast with the latest in tools and techniques for
quantification.
82
Check on Learning
1. In the event that a drawing is noted, “Not to Scale (NTS)” and no dimensions are given, the drawing
scale may be approximated by ______________________________.
A. Asking the drafter for the scale of the drawing
B. Throwing up your hands and faking it
C. Identifying a feature on the drawing of known dimension such as a door and extrapolating the
scale
D. Assuming a scale for the drawing
2. The gross area of a building construction project entails:
A. The total floor area plus any covered exterior areas
B. The sum of all the floor or slab areas of a project that are enclosed by the exterior skin of the
building
C. The area of the site less areas of all paved areas (vehicular and pedestrian) and landscaped areas
D. The ground floor area multiplied by the number of floors above grade
3. A Quantity Survey is:
A. Using a transit to measure quantities
B. Converting the elements of scope into measured units
C. Only done in the United Kingdom
D. A measurement of the materials for a project
4. The documents needed for a quantity survey include:
A. Project drawings
B. General conditions
C. Project specifications
D. All of the above
5. It is normally difficult to perform a detailed take‐off unless the project maturity level has reached at
least what Estimate Class?
A. Class 4
B. Class 3
C. Class 2
D. Class 5
83
Solutions
1. C Identifying a feature on the drawing of known dimension such as a door and
extrapolating the scale
2. B The sum of all the floor or slab areas of a project that are enclosed by the exterior skin
of the building
3. B Converting the elements of scope into measured units
Comment: A quantity survey provides measurement for both material and labor costs.
4. D All of the above
Comment: The general conditions and specifications provide information that supports and clarifies the
drawings.
5. C Class 2
84
Section 2.2.4 Costing
Introduction
Costing, put very simply, is “the application of cost and resources to a quantified scope.” But costing is
not simple, it is the very heart of the project cost estimating process and one of the most difficult to
achieve. The costing process puts a value on all of the items quantified in the previous phase for both
the direct cost items and for the indirect cost items that are required to complete the installation. It
must take into account all aspects of the project that affect the normal cost such as difficulty in
constructability, unique site conditions, interruptions in sequence, and many other factors that can
occur on a project.
In the earlier classes of estimates, the costing may be performed using project parameters and some
form of the estimating algorithms described in Chapter 2.1.5. As the project definition progresses to the
later classes of estimates, the estimate will most likely become the application of cost to every minute
detail of the project. These later estimates can take thousands of hours to develop and cost many
thousands of dollars.
Learning Objectives
Describe the difference between direct and indirect costs.
Differentiate between costing and pricing.
Understand the elements of labor costing.
Describe the process of costing for the different classifications of estimates.
Terms to Know
Algorithm
Allowance
Bonds
Burden
Commissioning
Construction Cost
Consumables
Cost
Cost Codes
Cost Estimate
Cost Estimating
Cost Estimating Relationship (CER)
Cost Estimator
Costing
Daily Crew Output
Demurrage
Development Costs
Distributables
85
General Requirements
General Terms and Conditions
Home Office Cost
Idle Equipment Cost
Indirect Cost
Insurance
Labor
Labor Burden
Labor Cost
Labor Productivity
Labor Rate
Open Shop
Overhead
Small Tools
Taxes
Union Shop
Unit Cost
Unit Hours
Wage Rate
Key Points for Review
The process of costing relies on the estimator’s knowledge of the nature of the scope of work
and the resources available for production.
Cost estimating relationships are effective tools for costing in conceptual estimating situations
as are historical cost databases for definitive estimates.
The project cost may include much more than just installation of the project items.
Understand how the contractor’s price can be the owner’s cost.
Summary
Effective costing is dependent on an accurate scope definition and quantification in the previous
estimate phase. Costing begins by applying a “normal” cost to the cost elements, but then it is the
responsibility of the estimator to identify any variables and adjust, or condition the costs appropriately.
For this reason, costing requires an experienced cost estimator to properly cost the project.
86
Check on Learning
1. Which of the following is not a direct cost?
A. Process piping
B. Permanent building slab
C. Construction trailer footing
D. Plant switchgear
2. Which of the following is the best example of demurrage as a purchasing cost?
A. The cost of wasted materials on a project
B. Indirect costs
C. Additional charge to customers for container rental beyond a set period in the agreement for
unloading
D. Freight
3. A derrick barge will be used to install an offshore platform and the daily rate is $320,000 per day and
a mobilization cost of $200,000 and a de‐mobilization cost of $200,000. The installation time is
expected to be five days. How much will the total cost be to install the offshore platform?
A. $1,600,000
B. $1,160,000
C. $2,000,000
D. $1,800,000
4. The all‐in labor cost of a welder (excluding a welding machine) is $60 per hour. The welding machine
rental cost is $220 per hour. A welding crew is comprised of two (2) welders and one (1) welding
machine. Assume each weld takes two (2) crew hours to complete. What is the cost of completing
20 welds?
A. $680
B. $13,600
C. $3,400
D. $11,200
5. A crew consists of three (3) carpenters, two (2) laborers, and a foreman. The burdened hourly rate
for a carpenter is $30, for a laborer, $20, and for the foreman, $35. What is the weighted‐
composite‐burdened‐hourly crew rate?
A. $85.00/hour.
B. $28.33/hour.
C. $27.50/hour.
D. $165.00/hour.
87
6. An idle construction equipment rental rate or standby rate is the cost of equipment that
remains on site ready for use but is placed in standby basis. The standby rate includes:
A. Some proportion of ownership costs but not operating labor, fuel, or maintenance costs
B. Life cycle cost(ing)
C. Long lead costs
D. All costs except the cost of capital
7. Employees are exempt if _________________________________________.
A. Their duties are such that they are not covered by the minimum wage and overtime provisions
of a country's labor laws that mandate overtime for wage‐and‐hour workers
B. They are ineligible for health, life, and other fringe benefits
C. They are not required to "clock in"
D. They are not required to conform to the dress code
8. The term “field cost” refers to _____________________________________________.
A. Costs associated with greenfield projects
B. All work within battery limits
C. Site grading and compaction
D. Engineering and construction costs associated with the construction site rather than with the
home office
9. Indirect costs are often estimated as a percentage of direct costs. One disadvantage of this approach
is that _________________________________.
A. Indirect costs are mostly a factor of the duration of the project and not readily determined as a
percentage of direct cost
B. Bonds and insurance will not be included
C. The appropriate percentage can vary widely
D. An error in calculation of direct costs will result in a corresponding error in indirect cost totals
88
Solutions
1. C Construction trailer footing
2. C Additional charge to customers for container rental beyond a set period in the
agreement for unloading
3. C $2,000,000
Commentary: The barge has a variable rate based on the number of days required whereas the
mobilization and de‐mobilization are lump sum costs to either be distributed across the number of days
or the value simply as a total cost added to the cost of renting the barge itself.
5 days x $320,000/day = $1,600,000
1 lsum x $200,000/each = 200,000 (mobilization)
1 lsum x $200,000/each = 200,000 (demobilization)
Total Installation = $2,000,000
4. B $13,600
Commentary: 20 welds x 2 hr/weld x ((2 x $60) + $220) = $13,600. Typical errors made by candidates
include misinterpreting some of the given data, such as erroneously interpreting given data as 2
welds/hour which yields the erroneous answer of $3,400, or forgetting to count two welders which
yields another wrong answer of $11,200. Another possible error is to give the answer for one weld
instead of 20, yielding the wrong answer of $680.
5. C $27.50/hour
Commentary: (3 carpenters x $30 / hour) + (2 laborers x $20) + (1 foreman x $35/hour)/6 workers = ($90
+ $40 + $35)/6 = $165/6 = $27.50/hour.
6. A Some proportion of ownership costs but not operating labor or fuel or maintenance
costs.
7. A Their duties are such that they are not covered by the minimum wage and overtime
provisions of a country’s labor laws that mandate overtime for wage‐and‐hour workers
8. D Engineering and construction costs associated with the construction site rather than
with the home office.
9. A Indirect costs are mostly a factor of the duration of the project and not readily
determined as a percentage of direct cost.
89
90
Section 2.2.5 Pricing
Introduction
Pricing is defined as “the amount of money asked or given for a product” (e.g., exchange value). The
chief function of price is rationing the existing supply among prospective buyers. While quantification
and costing are the responsibility of the project cost estimator, pricing is the responsibility of
management. They are the ones who need to decide how aggressively they want to pursue the project.
While there are many tools and techniques available to assist in an analytical approach to pricing, there
is also a strong need for a certain amount of “market savvy” in the pricing of any product or
improvement.
In a project context, pricing is a term used to describe the process of adjusting estimated costs for
specific project terms and conditions and commercial terms or market conditions. The inputs to the
pricing process include individual item costs, knowledge of the organization’s overhead costs and profit
requirements, as well as the current conditions affecting the competitive market situation.
Clearly from the above, whether pricing products or projects, it is imperative for costs to be known first.
That knowledge, along with an understanding of environmental factors, such as the competitive
situation and regulatory environment, will allow determination of pricing objectives (maximization of
short‐term profit, maximization of long‐term profit, market penetration, etc.), and price determination.
Converting the project price from the project cost estimate generally involves setting the profit margin
and the contingency; however, it is management’s prerogative to adjust any costs in the project.
Management may believe they can buy out a piece of equipment below the costed value and reduce the
cost in the estimate. Management may be concerned about labor skills and therefore direct that all
productivity be adjusted. The risk analysis process, which considers these types of risks, will be discussed
in a later chapter.
Learning Objectives
Differentiate between costing and pricing.
Describe the effects of risk, competition, desired rate of return, and cash flow requirements
affect pricing.
Understand the effect on pricing different types of contracts impose on the vendor or
contractor.
Describe concerns about pricing (i.e., risks, competitiveness, cash flow, etc) from an owner or
buyer perspective.
Terms to Know
Contingency
Contract (Types)
Contact Price
Customer Furnished Equipment
Liquidated Damages
General & Administrative Costs
91
Inflation
Learning Curve
Market Value
Net Profit
Price
Pricing
Profit Margin
Sales Price
Uncertainty
Key Points for Review
Effective pricing relies on detailed understanding of project / product‐specific conditions and
current or anticipated market conditions.
Market conditions include anticipated competitor approaches and actions, purchase of
domestically‐produced products, etc.
Strategies for pricing should be established on an organization‐wide basis and then adjusted for
time and context sensitive situations.
Summary
Price determination is highly dependent upon several factors, among them cost, competition,
risk, demand, and seller’s objectives.
While costing is the responsibility of the estimator, pricing is the responsibility of management.
92
Check on Learning
1. Your annual home office costs are $3,600,000. Your annual project cost base for general and
administrative expense (G&A) is $60,000,000. What is your annual G&A rate?
A. 3.0%
B. 4.5%
C. 5.0%
D. 6.0%
2. Your direct cost estimate is $2,000,000. Your organization applies the following markups: general
and administrative expense (G&A) 5%, contingency 10%, profit 7%. The markups are compounded.
What is your total project cost?
A. $2,440,000
B. $2,630,490
C. $3,907,136
D. $2,471,700
3. Management perceives strong competition for the project being bid, but very much wants to be
awarded the contract. As a result what action are they likely to take?
A. Reduce the profit margin
B. Reduce the general and administrative cost
C. Direct the cost to be reduced
D. Any of the above
4. Pricing is normally the responsibility of the:
A. Engineer
B. Manager
C. Cost estimator
D. Customer
5. Management would be likely to reduce the profit margin for which of the following contract
conditions?
A. High liquidated damages
B. Cost‐plus contract
C. Labor market uncertainty
D. Customer‐furnished equipment
93
Solutions
1. D 6.0%
Commentary: The annual G&A rate is calculated by taking the annual home office costs of $3,600,000
and dividing that by the annual project cost base of $60,000,000 ($3,600,000/$60,000,000 = 0.06) which
equals 0.06 or 6.0%.
2. D $2,471,700
Commentary: By taking the direct costs of $2,000,000 and then adding each markup separately,
subtotaling each and then applying the next markup to the previous subtotal will then result in the
grand total project cost.
Direct Costs $2,000,000
G&A @5% $ 100,000
Subtotal $2,100,000
Contingency @10% $ 210,000
Subtotal $2,310,000
Profit @7% $ 161,700
Grand Total $2,471,700
Another way is to simply add each percentage to a base of 1.00 and then multiply each to get a final
factor to multiply against the direct costs. In this case,(1.00 + 5% = 1.05, etc.) 1.05 * 1.10 = 1.115 * 1.07 =
1.23585 * $2,000,000 = $2,471,000.
3. D Any of the above
4. B Manager
5. B Cost‐plus contract
94
Section 2.2.6 Conditioning
Introduction
Conditioning is adjusting the estimate to conform to all contract conditions. Contract conditions define
the rights and obligations of the contracting parties. They include “general conditions” and “special
conditions”. General conditions define requirements that are normally not unique to the project. These
include terms for bond and insurance requirements, force majeure events, dispute settlement and other
rules governing the contractor during the project. Special conditions are provisions in the contract that
are peculiar to the project. These may include the required completion date, conditions defining
completion, availability of utilities, and other conditions unique to the site and project under
consideration. The cost and risk of all of these defined conditions need to analyzed and included in the
estimate.
For example, a construction project may require a remote staging area which will require workers to
park at a remote location from the site where they will work, clock in, be shuttled to the site of the
work, perhaps comply with certain security conditions, and only then begin work. At the end of the
working shift, a similar situation may arise. As a result, it is possible that workers will have less than the
full shift of productive working hours but still be required to be paid for the full shift.
A printing project may require a higher volume of output than the printer’s press and staff are capable
of producing in the required time period. A contract for furnishing fabricated reinforcing steel for a
construction project may require delivery sooner than the fabricator’s shop is capable of providing
without special consideration, such as overtime or subcontracting a portion of the work to another
shop. An addendum to the original bidding documents will contain provisions requiring special
considerations in the estimate.
Terms and conditions of a contract often provide for work required to be performed outside of normal
working hours, either after an operating facility closes down, or on weekends or other unusual times.
Often, terms of construction or manufacturing contracts, while not specifically requiring overtime or
hours outside of regular shifts, allow for a period of performance that is deemed too short to allow for
successful completion without overtime work or other considerations that will add to the cost of
performance.
All of the situations discussed above and many others may be cause for conditioning the estimate.
Learning Objectives
Understand what is meant by “estimate conditioning.”
Identify what to look for that may result in a need to condition your estimate.
Describe the actions that may be taken in order to condition an estimate.
Terms to Know
Bid Bond
Bid Security
Bidding Documents
95
Performance Bond
Bonus‐Penalty
Commissioning
Compound Interest
Contract (Types)
Contract Documents
Liquidated Damages
Deflation
Escalation
Escalator Clause
Front End Loading
General Requirements
General Terms and Conditions
Inflation
Letter of Credit
Owner
Owner Furnished Fixtures and Equipment
Payment Bond
Performance Bond
Qualifications and Assumptions
Risk Drivers
Unbalanced Bid
Key Points for Review
Estimates may be conditioned by factoring, modifying escalation, making specific changes to
recognize specific conditions, or by a multitude of other means of adjustment.
Understand conditions that may affect project risk.
Understand how to adjust the estimate to include costs discovered in Conditioning.
Understand the procedure for conditioning the cost of the contract for escalation to the
required completion date.
Summary
Conditioning an estimate involves making adjustments to the estimate to suit a specific purpose or to
meet certain requirements that have been listed in the general and special conditions in the contract.
96
Check on Learning
1. A purchase order for laboratory fume hoods contains an escalation clause which provides for
payment by the purchaser of the quoted price for fume hoods plus an amount for escalation
calculated as the ratio of the producer price index (PPI) for laboratory equipment on the
scheduled shipping date (December 1, 20XX). Subject PPI was 129.5 on December 1, 20XX
and was 127.0 on January 1, 20XX. The purchase order amount was $241,000. What should
the amount of the final invoice for the fume hoods be?
A. $241,000
B. $245,744
C. $236,347
D. $370,988
.
2. The fundamental difference between a merit or open shop and a union shop is:
A. Workers in a union shop are not eligible for bonuses
B. Workers in a union shop are represented by a collective bargaining unit
C. Workers in a union shop must be members of the union with which the firm has a collective
bargaining agreement in order to be considered for employment
D. Workers in a merit shop are not eligible for overtime
3. What should you look for to determine if a contractor’s bid is unbalanced?
A. Extremely high escalation costs, particularly for those items installed later in the project
schedule
B. Items that will be purchased or installed early that seem to have very high cost values
C. Allowances for overtime that on balance appear to be excessive
D. Errors and omissions concentrated in only a few elements of the work breakdown or cost
account structure
4. Which type of contract creates the most risk for the contractor:
A. Cost plus
B. Firm price
C. Bonus penalty
D. Guaranteed maximum
5. A Performance Bond is:
A. A guarantee that the project will be completed on the terms of the contract
B. A guarantee that the project will perform as defined in the contract
C. A guarantee that the project will be performed per all conditions of the contract
D. All of the above
6. Which of the following contract conditions may create significant risk to the contractor that may
cause a need to increase contingency?
97
A. The requirement for a bid bond
B. The requirement of liquidated damages
C. The requirement of high liability insurance
D. A requirement for the contractor to conform the final cost breakout to the owner’s property
record format
7. A small out‐building was constructed in the past for $100,000. The contract requires a new similar
building to be completed four years after the completion of the first. The escalation rate in those
four years is 2%, 4%, 3%, and 5%. What do you estimate the cost of the new building to be?
A. $114,000
B. $114,725
C. $112,476
D. $110,313
98
Solutions
1. B $245,744
Commentary: The final invoice amount should be equal to the original purchase order amount
multiplied by the ratio of the PPI at the time of invoicing and the PPI at the time of issuance of the
purchase order. Final invoice amount = $241,000 x (129.5/127.0) = $245,744.
2. B Workers in a union shop are represented by a collective bargaining unit.
3. B Items that will be purchased or installed early that seem to have very high cost values.
4. B Firm price
5. D All of the above
6. B The requirement of liquidated damages
7. B $114,725
Commentary: ($100,000*1.02*1.04*1.03*1.05) since escalation or inflation is expressed as a
compounded rate.
99
100
Section 2.2.7 Risk Evaluation and Contingency Determination
Introduction
Development of any product or capital asset involves certain risks which must be recognized, evaluated,
and the estimate conditioned to manage those risks. Often, that is addressed via inclusion of
contingency, which AACE International Recommended Practice 10S‐90, Cost Engineering Terminology
defines as, “an amount added to an estimate to allow for items, conditions, or events for which the state,
occurrence, or effect is uncertain and that experience shows will likely result, in aggregate, in additional
costs”.
Learning Objectives
Describe the means of identifying and evaluating risk.
Understand what contingency is and how it is used to mitigate risk.
Understand the steps that may be taken to manage project risks in an estimate.
Establish project contingencies in a systematic manner.
Understand the methods available for determining appropriate contingency values.
Determine the confidence level of an estimate.
Terms to Know
Accuracy Range
Confidence Level
Contingency
Force Majeure
Management Reserve
Monte Carlo Simulation
Opportunity
Quantitative Risk Analysis
Range
Range Estimating
Risk
Risk Drivers
Stakeholders
Key Points for Review
Risks must be identified, evaluated, and managed.
The risk assessment should identify risks opportunities.
Contingency is often determined using probabilistic methods.
However, professional judgment is just as often relied upon.
Contingency is expected to be expended, but never actually spent.
101
Summary
Risks must be identified and evaluated in order to effectively manage them.
Contingency is an effective and often‐used means of providing for risk management.
102
Check on Learning
1. Contingency is an amount added to an estimate in order to _______________________.
A. Avoid the necessity of accurately assessing estimated final cost
B. Allow for additional scope unforeseen at the time of estimate preparation to be added to the
project
C. Allow for items, conditions, or events for which the effect is uncertain and that experience
shows will likely result, in aggregate, in additional costs
D. Avoid the need for management reserve
2. Management reserve is _______________________________________________.
A. An amount outside the project scope and cost baseline to allow for discretionary management
purposes
B. Another term for "contingency"
C. Reserved for work outside the original scope
D. Usually under the control of the project team
3. Which of the following is NOT a customary means of managing risk?
A. Insurance
B. Contingency
C. Avoidance
D. Revisions to the estimate
4. Which of the following represents the highest risk of cost overrun to the contractor?
A. Lump sum contract
B. Lump sum contract with liquidated damages clause
C. Cost plus contract
D. Guaranteed maximum price
5. The following is the result of the range estimating analysis. If you wish to be 80% certain of not over
running the estimate, how much contingency should you add?
Certainty Contingency
10% $ (152)
20% $ (25)
30% $ 10
40% $ 25
50% $ 75
60% $ 135
70% $ 195
80% $ 328
90% $ 573
103
A. ($25)
B. $80
C. $328
D. It cannot be determined from the table
104
Solutions
1. C Allow for items, conditions, or events for which the state, occurrence, or effect is
uncertain and that experience shows will likely result, in aggregate, in additional costs
2. A An amount outside the project scope and cost baseline to allow for discretionary
management purposes
3. D Revisions to the estimate
4. B Lump sum contract with liquidated damages clause
5. C. $328
105
106
Section 2.2.8 Estimate Documentation
Introduction
Estimate documentation is important to communicate the background information surrounding
preparation of the estimate to the end‐user of the estimate. That background information includes
documentation of the scope upon which the estimate is based, the source of that scope information,
source of costing data, assumptions, inclusions, exclusions, the estimator or estimating team responsible
for estimate preparation, and other information of value to users of the estimate as described in AACE
International Recommended Practice 34R‐05, Basis of Estimate. A well prepared Basis of Estimate (BOE)
will help the user evaluate the risks involved in the estimate and the steps taken to manage the risks.
Quality is an integral part of the organization’s foundation. The estimator’s ability to perform quality
work begins with the care with which all project estimates are developed. Because estimates create
strong budget and performance expectations, clients will hold the organization accountable to provide
cost estimates that are consistent with the project design. The thoroughness and accuracy of estimates
will be a factor in determining the extent of the organization’s financial success on every project
undertaken. For these reasons, a clear and accurate documentation trail is critically important.
In addition to providing background information to the ultimate users of the estimate, documentation of
the estimate serves to facilitate proper review of the estimate by all parties including internal reviewers.
A properly constructed Basis of Estimate forms the prime component of estimate documentation. A
review of the Basis of Estimate is the first step in a thorough review of an estimate.
Learning Objectives
Understand the purposes of estimate documentation.
Understand the importance of the Basis of Estimate (BOE).
Understand the components of clear and accurate documentation of the cost estimate.
Understand the role estimate documentation plays in estimate review.
Summarize the estimate documentation into a clear and concise Basis of Estimate (BOE)
document.
Terms to Know
Addenda
Backup
Basis
Contract Documents
Discovery
Estimate Backup
Qualifications and Assumptions
Scope
Statement of Work
Subcontract
107
Supplier
Key Points for Review
Estimate documentation sets the stage and prepares the audience for presentation of the
estimate.
Estimate documentation identifies what is included in the estimate, but it also discusses what is
excluded and any deficiencies the estimating team found in the scoping documentation.
Summary
Documentation of the cost estimate is critical because it provides an accurate audit of the
project cost history and becomes the basis for change management and dispute resolution.
The Basis of Estimate (BOE) is the primary vehicle for estimate documentation. AACE
International Recommended Practice 34R‐05, Basis of Estimate, describes in detail the contents
and composition of a BOE.
It is essential that estimate documentation address all inconsistencies with standard practice,
conflicts, omissions, and other concerns with scope documents that have not been able to
previously be resolved.
108
Check on Learning
1. Which of the following is not normally included in the Basis of Estimate (BOE) document?
A. Design basis
B. Cost basis
C. Review comments
D. Scope definition
2. How should the detailed estimate backup be organized?
A. By work breakdown structure
B. By specification division
C. By schedule activity
D. By any of the above, as long as the organization is consistent
3. What does the term “estimate backup” refer to?
A. The electronic estimate file saved to an alternate storage medium for purposes of archiving and
emergency access
B. A substitute member of the estimating staff who can fill in for the primary author of the
estimate in the event of an emergency or unforeseen occurrence.
C. Basic data, project objectives, scope, drawings, quotes, estimating data, qualifications, and
assumptions used in preparing the estimate and supporting the basis
D. An alternate but separately developed estimate prepared by a different estimating team
4. A Basis of Estimate (BOE) is _____________________________________.
A. A basic required component of any estimate
B. Not required unless specifically required by the stakeholders
C. Not necessary except for a Class 1 estimate
D. A synopsis of the scope documents upon which the estimate is based
5. Estimate documentation is _________________________________________.
A. An essential component of a well‐prepared estimate
B. Not required if an estimate is well‐prepared
C. A line item‐by‐line item description of what is included in the estimate
D. Signed by the estimator or captain of the estimating team
6. A Basis of Estimate (BOE)...
A. Should not describe the accuracy of the estimate, leaving that up to the independent judgment
of the stakeholders
B. Should not discuss drawbacks or shortcomings of the scoping documents in order to not
antagonize their developer
C. Will describe the primary estimating methodology used in preparation of the estimate
D. Will not address any anomalies or other shortcomings of the estimate or scoping documents
109
Solutions
1. C Review comments
Commentary: The BOE must be updated to reflect changes resulting from the review process, but the
detailed comments, while part of the estimate backup, are not required.
2. D By any of the above, as long as the organization is consistent
Commentary: Consistency is of primary importance here. Many design teams prefer organization by
spec division, while others prefer organization by WBS or process system.
3. C Basic data, project objectives, scope, drawings, quotes, estimating data, qualifications,
and assumptions used in preparing the estimate and supporting the basis
4. A A basic required component of any estimate
5. A An essential component of a well‐prepared estimate
6. C Will describe the primary estimating methodology used in preparation of the estimate
110
Section 2.2.9 Estimate Reconciliation
Introduction
The process of estimate reconciliation consists of resolving or otherwise reconciling variances between
the estimate and any previous versions of the estimate, any alternative expectations of the value of the
estimate, or any estimates based on a similar scope of work. The process of reconciliation identifies any
cost differences due to changes in scope (i.e., quantity), pricing, methods of accomplishment, or risk
between the two versions of the estimate.
Reconciliation also may occur between an estimate and the final costs of a project; in fact, that is the
best way to update an historical cost database. Another example of reconciliation might be as simple as
reconciling an estimated utility meter reading with an actual reading made at another time.
Reconciliation should occur when the differences between two estimates for the same scope of work
are greater than or less than an established threshold; i.e., 10% of total estimated cost.
Learning Objectives
Describe the goals of estimate reconciliation.
Understand the process of estimate reconciliation.
Describe how to report on the results of estimate reconciliation.
Terms to Know
Change in Scope
Cost Index
Code of Accounts
Design Development
Differing Site Conditions
Escalation
Omission
Pareto’s Law
Procurement
Variance
Work Breakdown Structure
Key Points for Review
A well‐prepared estimate variance report will describe any significant differences in scope,
pricing, or risk resulting in differences between any two estimates or an estimate and an
accounting being reconciled.
Estimate reconciliation should take place with the estimate, as well as all supporting information
including the Basis of Estimate (BOE), the schedule upon which it is based, the risk assessment,
and other factors.
Determining the variance between two estimates demonstrates the importance of standard
111
project coding.
Understand how Work Breakdown Structure or structured Code of Accounts can facilitate an
estimate reconciliation
The use of Pareto’s Law can facilitate the estimate reconciliation.
Summary
Reconciliation is an essential process which can add to the reliability and accuracy of any
estimate.
Estimate reconciliation can occur between estimates on the same project prepared at different
phases of development, between estimates on similar but different projects, or between an
estimate and a final accounting of actual costs. In each case, much can be learned by a rigorous
comparison of costs between the estimates.
112
Check on Learning
1. Estimate reconciliation identifies variance between two estimates resulting from:
A. Changes in scope, costing, and pricing from one estimate to the other
B. Different estimators in charge of the two estimates
C. Differences in labor and/or equipment unit costs
D. Differences in labor and/or equipment production rates
2. An estimate variance report describes differences in ______________ between two estimates.
A. Quantities
B. Costs
C. Total cost
D. All of the above
3. A common explanation of differences between two estimates is:
A. The estimator has made a mistake
B. Different estimating software was used in preparation of the two estimates
C. A change has been made in the scope of the project
D. The estimates were prepared at different points in time
4. The main benefit of reconciling an estimate on a project with an accounting of the final costs
incurred on the project is:
A. It provides a basis for reward or penalty for the estimator
B. It provides a basis for reward or penalty for the project manager
C. The lessons that can be learned from the comparison of actual costs with those estimated that
can then be applied to future estimates
D. All of the above
5. An effective tool for reconciliation of two estimates is:
A. The Basis of Estimate (BOE)
B. A comparison of the totals of the two estimates
C. A table of variances between detailed quantities and costs in the two estimates
D. A comparison of the scopes of the two estimates
113
Solutions
1. A Changes in scope, costing, and pricing from one estimate to the other
2. D All of the above
3. C A change has been made in the scope of the project
4. C The lessons that can be learned from the comparison of actual costs with those
estimated that can then be applied to future estimates
5. C A table of variances between detailed quantities and costs in the two estimates
114
Section 2.2.10 Estimate Review and Validation
Introduction
Estimate review and validation are critical elements of the estimating process as an estimate generally
represents a vital factor in the project’s success and the success of each project is important to the
mission of the organization.
An estimate, no matter how large or small, will never be solely the product of one estimator in a well‐
run organization. Review of all of the elements of an estimate by others not associated with preparation
of the estimate is essential. In addition, management of the organization will probably review the
estimate to determine that it effectively meets the purpose for which it was prepared.
It is not the responsibility of the estimator to validate the scope of work for accuracy. This is something
that must be done by other stakeholders.
Learning Objectives
Describe what is meant by estimate validation.
Understand the importance of estimate reviews and validation.
Identify the essential steps in review of an estimate.
Terms to Know
Addendum
Allowances
Basis of Estimate
Bidding Documents
Code of Accounts
Contract Documents
Drawings
Estimate Backup
Contract Conditions
Historic Records
Labor Productivity Factor
Procurement
Qualifications and Assumptions
Risk Analysis
Scope
Subcontracts
Take‐off
Validation
Wage Rates
115
Key Points for Review
A well‐prepared estimate variance report will generally describe any differences in scope, pricing, or risk
resulting in differences between multiple versions of the estimate for the same scope of work.
The essential steps in review of an estimate include:
Review of the Basis of Estimate (BOE).
Thorough review of the estimate documents to assure all addenda, drawings, quotes, and other
items have been included.
Perform random checks of quantity take‐offs, wage rates, unit pricing, etc.
Validation of the estimate, comparing the cost against other project baselines and performing
“sanity checks” of the components and total of the estimate.
Summary
Review is an essential process which can add to the reliability and accuracy of any estimate.
The review process should include the stakeholders and may include management.
Validation of the estimate documentation and random checks of the estimating process will
help assure that the estimate is complete and properly performed.
116
Check on Learning
1. A common approach to an estimate is to leave review of the contract terms and conditions until
after the direct costs have been estimated. One result is that __________________.
A. It is immaterial as direct costs are independent of terms and conditions
B. Estimated costs will not reflect the terms and conditions of the contract
C. Indirect costs are overestimated
D. Terms and conditions are ignored by the contractor
2. If you suspect a contractor’s bid estimate is unbalanced, which of the following best describes what
to look for in an estimate review?
A. Items that will be purchased or installed early and seem to have very high cost values
B. Errors and omissions concentrated in only a few elements of the work breakdown or cost
account structure
C. Allowances for overtime that on balance appear to be excessive
D. Extremely high escalation costs, particularly for those items installed later in the project
schedule
3. The estimate review team should normally consist of:
A. The project manager
B. Anyone who provided significant input to the estimate
C. The Lead Estimator
D. Project engineer
4. Estimate validation may include:
A. Random checks of quantity take‐offs
B. Stochastic cost comparisons of similar projects
C. “Rule‐of–thumb” check
D. All of the above
5. The primary purpose of an estimate review is to:
A. Verify that the total cost is correct
B. Absolve the estimator of responsibility for the validity of the estimate
C. Present the estimate and supporting information in such a manner as to allow the reviewer to
verify that the estimate fulfills its chief purpose
D. Allow the review to ascertain that individual costs are in line with previous historical costs
117
Solutions
1. B Estimated costs do not reflect the terms and conditions of the contract
2. A Items that will be purchased or installed early and seem to have very high cost values
3. B Anyone who provided significant input to the estimate
4. D All of the above
5. C Present the estimate and supporting information in such a manner as to allow the
reviewer to verify that the estimate fulfills its chief purpose
118
Section 2.2.11 Estimate Reporting
Introduction
Estimate reporting is an essential element of estimate preparation, as an estimate provided without an
explanation as to what is included, excluded, assumptions made, what the source of the scope
information was, who participated in preparation of the estimate, and other details is an estimate out‐
of‐context and a poor reflection on those who prepared the estimate.
AACE International Recommended Practice 34R‐05, Basis of Estimate describes in detail the
requirements and composition of a Basis of Estimate (BOE), which is the primary component of a report
to accompany an estimate. In fact, a complete and well‐written BOE should reduce the need to include
additional information in an estimate report.
As important as a written estimate report is, all estimators should be prepared to present an estimate in
person as well, discussing the essential elements of the estimate and being prepared to defend it if
necessary and to answer questions concerning its contents and the details of its preparation. That verbal
report may be to the project team, to internal organization management, or to an external client.
Learning Objectives
Describe the essential components of estimate reporting.
Prepare a Basis of Estimate (BOE).
Present an estimate in person.
Terms to Know
Allowances
Assumptions
Benchmarking
Containments
Contingencies
Cost Basis
Design Basis
Estimate Classification
Estimate Deliverables
Estimate Purpose
Estimate Quality Assurance
Estimating Team
Exceptions
Exclusions
Management Reserve
Management Summary
Methodology
Planning Basis
Reconciliation
119
Reference Documents
Risks & Opportunities
Scope
Key Points for Review
The Basis of Estimate (BOE) forms the centerpiece of estimate reporting.
Estimate summary and, if applicable, detail reports are also appropriate to an estimate report.
As important as what is included in the estimate is a specific description of what is excluded.
Summary
A well‐written and comprehensive estimate report is an essential element of any estimate.
In Total Cost Management, the output of estimating is often the input to cost control. The
estimate report should provide all of the information necessary for the project control team to
take over the project and to help identify what has caused discrepancies between the actual and
estimated cost.
120
Check on Learning
1. Which of the following is NOT an essential element of a Basis of Estimate (BOE)?
A. A list of activities on the schedule critical path
B. Names of individuals involved in preparation of the estimate
C. Benchmarking data
D. Summary estimate report
2. A benchmarking report is important as an element of an estimate report because...
A. It verifies the elevation datum upon which the estimate scoping documents are based
B. It identifies methodologies used in preparation of the estimate
C. It compares costs of similar projects and provides a context for the estimate
D. It provides data upon which other estimators can benchmark their estimates
3. With respect to management reserve, a Basis of Estimate (BOE) should...
A. Only contrast it with contingency
B. Not address it as it is not a part of the estimate
C. Identify the specific purpose and use for which it is intended
D. Describe it as a part of contingency
4. If a previous estimate totaled $55,000,000 and a current estimate, $52,500,000, it can be said that
the $2,500,000 is __________________________________________.
A. Evidence that a mistake was made on one or the other of the estimates
B. To be disregarded an inconsequential
C. Not to be discussed to avoid embarrassment of the estimators
D. To be evaluated and explained in a reconciliation section of the estimate report
121
Solutions
1. A A list of activities on the schedule critical path
2. C It compares costs of similar projects and provides a context for the estimate
3. C Identify the specific purpose and use for which it is intended
4. D To be evaluated and explained in a reconciliation section of the estimate report
122
Section 2.2.12 Estimate Closeout
Introduction
Estimate closeout is the process of organizing and storing all information for an estimate for future use,
to support the development of historical archives, and the development of estimating tools.
In the early chapters of this study guide we discussed the Deming Cycle (Plan‐Do‐Check‐Act). This
process loops several times during the estimating, but at the completion of the estimate process is the
time to review not just the estimate, but also the estimating process itself. It is always a good idea at the
completion to have an estimating team meeting to review how things went during the estimate: What
went well? What went poorly? How can we do it better next time?
The other action at estimate closeout is to update the historical database with whatever information has
been obtained during the estimating process. The major update to the database for actual productivity
and costs will occur at project closeout, but there may items learned from procurement and other
sources that can be used to improve the database at this time.
The final action of the closeout is to assure that all documents are properly filed so that they will be
readily available to all stakeholders who may need them in the later project phases. If the project will
now be moving into the construction phase it would be appropriate to meet with the project control
team to help transition the estimate to the baseline budget and to familiarize them with the estimate,
scope, risks, and opportunities learned.
Learning Objectives
Define the many processes of estimate closeout and what occurs in any of those processes.
Identify the importance of a “lessons learned” session at estimate closeout in order to capitalize
on important estimating elements to be carried forward to future efforts.
Terms to Know
Baseline Budget
Historical Database
Learning Curve
Plan‐Do‐Check‐Act (Deming) Cycle
Procurement
Project Phases
Total Cost Management
Key Points for Review
An estimate team review at closeout can improve the process for the next estimate.
Some information from the estimate may be valuable in the historical database.
Proper filing will assist later project team members with identifying the cause of estimate
deviations.
123
Summary
Estimate closeout is an important element of the estimating process.
At closeout it is time to review the recent estimating process and learn from what has occurred
and identify how the process may be improved in the next estimate.
If the project will now be moving to the construction phase it is important to assure that the
information is readily available to subsequent users to determine the cause of any cost
deviation from the baseline. If the estimate is to become the budget estimate for the project, it
is a good time to meet with the project control team to assure they are familiar with the details
of the estimate and significant information learned during the estimating process.
124
Check on Learning
1. Which is not a step in the Deming Cycle?
A. Plan
B. Do
C. Act
D. Redo
2. The process of posting costs from an estimate to the cost basis of a fixed asset in the organization’s
balance sheet is known as _________________________________.
A. Cost control
B. Cost capture
C. Capitalization
D. Amortization
3. Estimating may be performed during which project phase?
A. Preplanning
B. Design
C. Construction
D. Any of these phases
4. What is the meaning of Learning Curve?
A. The time it takes to learn estimating
B. A method of grading the learning progress
C. A graphic representation of the progress in production effectiveness as time passes
D. The current productivity rate for the project
5. What is a budget estimate?
A. A Class 1 estimate
B. An estimate generally prepared to form the basis for authorization and/or appropriation of
funds
C. An estimate of what the project will cost
D. An allocation of the annual project costs
125
Solutions
1. D Redo
Comment: The last step is Act.
2. C Capitalization
3. D Any of these phases
4. C A graphic representation of the progress in production effectiveness as time passes
5. B An estimate generally prepared to form the basis for authorization and/or appropriation
of funds
126
Section 2.3 Other Estimating Issues
While the previous sections of this Certification Study Guide have dealt with the specific processes,
techniques, and methods used in preparation of estimates, the following sections discuss the
application. This section also discusses the variations in those methods which allow one to produce
estimates for the purposes of bidding and budgeting, cash flow analysis and preparation of estimates
focusing on lifecycle or product costs.
2.3 Other Estimating Issues
2.3.1 Bidding
2.3.2 Budgeting
2.3.3 Project vs. Life Cycle
Costing
2.3.4 Cash Flow and
Forecasting
2.3.5 Cost Control Baseline
2.3.6 Project vs. Product Costs
Figure 2.3—Breakdown of Chapter Topics
127
128
Section 2.3.1 Bidding
Introduction
Bidding is the process of submitting a formal proposal to enter into an agreement to provide a service,
product, or project in return for an identified price. The term “bid” is known as a “tender” in some
countries. The estimate plays a prime role in the process of bidding.
The process of assembling a bid can be quite complex, depending on the project, the terms of the
bidding documents, the available resources, and the timeframe. In addition to the decision whether to
submit a bid, there is the necessity to study and understand the bidding documents, how the estimate
must be assembled. Qualified sources of supply for labor, materials, and equipment must be identified
and solicited, and bids for those commodities as well as subcontracts must be reviewed and negotiated.
Factors involved in bid preparation and analysis include:
the nature of the prospective project
how closely the organization’s resources, abilities, and experience match its requirements
other expected bidders
experience with the owner, architect/engineer, and other parties expected to be involved
the availability of qualified subcontractors and vendors
subjective evaluation of the risk factors of undertaking the project and how well the
organization can manage those risks.
The preparation of a bid is often a time consuming process that is associated with various legal aspects
and adherence to the bidding documents. From the owner’s standpoint, prospective bidders’
qualifications must be evaluated, references checked, and decisions made as to which prospective
bidders are likely to be able to perform and do the best job.
In formulating its bid estimate, a bidder must prepare a bid that meets all of the requirements of the
bidding documents. That typically includes (but is not limited to):
Various certifications
Bid security (bid bond or other security acceptable to the owner)
A list of proposed subcontractors
Resumes and other qualifications of proposed staff
The bid usually must be submitted on a form and in a format prescribed by the bidding documents.
All the factors addressed earlier in this Guide from planning through review and documentation need to
be used in preparing the bid.
Learning Objectives
Understand the advantages and disadvantages for both parties of various forms of contract.
Understand the activities necessary from both the contractor and owner perspectives on
preparing a bid (or a project for bid).
Understand the difference between preparing an estimate for project budgeting versus bidding.
129
Terms to Know
Addenda
Allowances
Backup
Bid
Bidder
Bid Security
Bid Shopping
Bidding Documents
Bidding Requirements
Cash Flow
Contract Types
o Contract‐Cost Plus
o Contract‐Fixed Price
Contract Documents
EPC (Engineer‐Procure‐Construct) Contract
Notice of Award
Owner
Owner Furnished Fixtures and Equipment (FF&E)
Price
Specifications
General Terms and Conditions
Site Visit
Startup Costs
Subcontract
Supplier
Key Points for Review
Among the key factors relating to an estimate for the purposes of submitting a bid is a complete
and accurate assessment of the defined scope of work.
Effective estimating contributes to a bid that minimizes potential risk.
An accurate assessment of market conditions and other risks are also important.
Bid markups are applied to account for the contractor risks.
The owner will condition all bids received to normalize for technical and commercial conditions.
The owner’s estimate attempts to predict the lowest responsive and acceptable bid.
Summary
Developing a bid estimate requires the same activities as any other estimate. The major
difference is in the risk that may result for an incorrect estimate.
The owner has the responsibility of reviewing variances in the bids that have been submitted
and selecting the bidder who provides the best value, not necessarily the lowest cost.
130
Check on Learning
1. You are the chief estimator for a contractor preparing a fixed price/unit price bid for a civil
construction project. In a unit price bid, the price for each bid item in the bid schedule is a function
of its direct cost plus its pro‐rata share of indirect costs and overhead and profit. For the bid item,
Embankment – In Place, the engineer’s quantity is 420,000 cubic yards and the total of your direct
estimated costs is $4,400,000. The total of all direct estimated costs including the embankment is
$17,500,000. The total of indirect costs you have estimated at $2,100,000 and your overhead and
profit amount to be $980,000. What should your bid unit cost for Embankment – In Place be if you
distribute indirect costs and overhead and profit against direct costs in straight pro‐rata fashion?
A. $12.32
B. $5,174,400
C. $12.39
D. $12.81
2. Bidding documents require you to include in your estimate an allowance of $700/thousand for the
material cost of brick including tax and freight. The architect has calculated that a total of 32,000
brick will be required. You estimate 34,000 brick, including waste and allowance for damaged and
non‐conforming brick. What total for the material cost of brick should you include in your estimate?
A. $23,800
B. $23,800,000
C. $22,400
D. $22,400,000
3. Which of the following is NOT a usually‐justifiable reason for a sole‐source bid?
A. It is required to interface with existing equipment/systems
B. The specification was written around the technical parameters of one manufacturer
C. Only one vendor can meet the specification
D. Only one vendor can meet the schedule
4. Bid shopping is ________________________________________.
A. The procurement of materials for a project
B. The unethical practice of a prime contractor providing the low price for a scope of work to other
subcontractors or suppliers in an attempt to get the other subcontractors or suppliers to
underbid the original price quoted
C. The practice of requesting subcontractors’ and vendors’ quotations on a project
D. Illegal
5. An unbalanced bid is _____________________________________.
A. A bid submitted without adequate preparation
B. A bid in which costs are front‐end loaded
C. A bid in which costs are allocated disproportionately to various accounts to achieve an unfair
advantage over the other party
D. A bid much different in total from the other bids submitted
131
Solutions
1. A $12.32
Commentary: The ratio of direct costs of embankment to total direct costs is $4,400,000/$17,500,000
or 25.14%. 25.14% of the sum of total indirect costs and total overhead and profit is $774,400 which,
added to embankment direct costs is $5,174,000 and that divided by 420,000 cubic yards is $12.32/cubic
yard.
$5,174,400 is incorrect for an answer even though it is the correct total price for embankment.
Candidates need to take care to read all questions carefully; in this instance, the question asks for the
correct UNIT price, not TOTAL price. While it may seem like a minor point, in practice, management or a
client may ask similar questions. Likewise, $10.48, the embankment direct unit cost, is incorrect as well
as $12.81, the embankment direct unit cost with prorated OHP (overhead and profit).
2. A $23,800
Commentary: The estimated direct cost is ($700/1000) * 34,000 = $23,800. Forgetting to divide by 1,000
yields the incorrect answer of $23,800,000. Similarly, an erroneous decision to use the architect’s
quantity of 32,000 brick yields the incorrect $22,400 and $22,400,000.
3. B The specification was written around the technical parameters of one manufacturer.
Commentary: It is important for the estimator to carefully study the specifications and fully understand
any “or equal” clauses. The most frequent justification for a sole source specification is the requirement
to interface with existing equipment or systems. However, the estimator should research all potential
vendors in order to obtain the “best” price meeting the requirements of the specifications.
4. B The unethical practice of a prime contractor providing the low price for a scope of work
to other subcontractors or suppliers in an attempt to get the other subcontractors or suppliers to
underbid the original price quoted.
5. C A bid in which costs are allocated disproportionately to achieve an unfair advantage
over the other party.
132
Section 2.3.2 Budgeting
Introduction
AACE International Recommended Practice 10S‐90, Cost Engineering Terminology defines budgeting as
“a process used to allocate the estimated cost of resources into cost accounts (i.e., the cost budget
against which cost performance will be measured and assessed”. That is to say that once we have
completed the estimating process, if the project continues, that estimate become a basis to measure
changes that occur. This new project phase is generally performed by the project “cost control” team. It
is important that the transition of the estimate to a budget and the hand‐off to the new team be part of
the estimate plan from the very beginning. The goal of any budget is to reflect all anticipated costs of
the project in a format that supports monitoring and control. If the estimate was developed properly it
will be a simple transition.
Learning Objectives
Understand the elements of the estimate plan that must be included to eventually support
budgeting.
Understand the steps required to transition from the estimate to the budget.
Terms to Know
Basis of Estimate
Budget
Budget Estimate
Budgeting
Code of Accounts
Project Control
Work Breakdown Structure
Key Points for Review
Understand the requirements needed to transition the estimate to the project control team.
Summary
If a project is approved by management based on the estimate that has been developed it will
move to the subsequent phases of the project. That estimate will then become a budget that is
used to measure progress against. It is normally the project control team that is responsible for
measuring the actual costs against the budget. It is the responsibility of the estimating team to
see that the estimate has been prepared in a way that supports the transition.
133
Check on Learning
1. Which of the following is the most important item for ensuring a smooth transition from the
estimate to the budget?
A. Using the estimate team for project control
B. A good project control plan
C. A consistent code of accounts
D. Moving the project from the home office to the field
2. Two essentials for an effective project control baseline are ___________________.
A. Cash flow and the estimate
B. A resource‐loaded schedule and value engineering plan
C. The schedule and budget
D. The Actual Cost of Work Performed (ACWP) and an updated schedule
3. A budget estimate is typically but not always a Class ___ estimate.
A. 3
B. 1
C. 5
D. 4
4. Which of the following is NOT likely to be an element of a maintenance budget for an apartment
complex?
A. Painting costs
B. Lawn mowing costs
C. Land acquisition costs
D. Cost of a data/telephone wiring maintenance contract
5. In project control, the reference plans in which cost, schedule, scope and other project performance
criteria are documented and against which performance measures are assessed and changes noted.
A. Cash flow
B. Budget
C. Estimate cost
D. Cost Control Baseline
134
Solutions
1. C A consistent code of accounts
2. C The schedule and budget
3. A 3
4. C Land acquisition costs
5. D Cost Control Baseline
135
136
Section 2.3.3 Project and Life Cycle Costing
Introduction
Project and life cycle costing takes estimating into the fourth dimension of time. Simply put, life cycle
costs are the sum of every cost incurred for a particular item (project, product, etc.) over its lifetime
from inception through disposal. It is necessary to estimate these costs over time at an assumed
escalation rate and then convert it to a present‐day value for comparing with other options.
The estimate scope begins with the design, construction and startup costs. In the next phase it is
necessary to determine the cost of operation including raw materials, labor, general and administrative
(G&A), and other factors. It must include anticipated maintenance and perhaps improvement costs over
the life of the plant. The final stage is the dismantling and salvage value of the remaining asset. If the
study is to determine whether to proceed with a product, the estimate will also need to include sales
costs and revenues.
When all of the costs have been estimated, they need to be time‐phased over the complete life of the
asset from inception to disposal and then escalated to the appropriate year of expenditure. These costs
are then converted to a present‐day value by discounting the cash flow. This is done for each option
under consideration and the results are then compared to determine the most economic option.
The engineering economics of life cycle evaluations can become significantly complex and are beyond
the scope here related to the costing process. Therefore we will discuss herein the elements of costs and
terminology of life cycle costing that haven’t been previously covered in project cost estimating.
Learning Objectives
Understanding all aspects of costs over the life cycle of the project.
Describe what is meant by the life cycle of any enterprise.
Apply life cycle cost principles to the selection of system alternatives.
Terms to Know
Annually Recurring Cost
Capacity Utilization Factor
Cash Flow
Constant Dollars
Crude Materials
Current Dollars
Depreciation
Discounted Cash Flow
Discount Factor
First Costs
Fixed Cost
Life Cycle
Life Cycle Costing
137
Life Cycle Cost Method
Life Cycle Value Analysis
Manufacturing Cost
Present Value
Production Rate
Raw Materials
Sales Forecast
Salvage Value
Key Points for Review
It is helpful for the estimator to understand that all costs have a role in the ultimate cost of the
endeavor.
The estimator needs to have an understanding of the time value of money in order to be able to
estimate life cycle costs.
Summary
The life cycle cost of a venture includes much more than just the first cost of constructing the
facility. The additional costs will include operating costs, raw materials, plant maintenance and
supervision, salvage costs and often other additional factors.
The purpose of the life cycle cost process is to determine the viability of a proposed project or
product or to select the best option among several options proposed.
138
Check on Learning
1. Which of the following costs is included in life cycle costing?
A. Design engineering
B. Plant operations
C. Salvage costs
D. All of the above
2. The factory you are estimating can produce 100,000 units per year. The current raw material cost
per unit is $5.00. The expected capacity factor for the factory is 0.85. What is your estimate of
annual raw material cost in current dollars?
A. $500,000
B. $425,000
C. $588,235
D. $475,000
3. The operating cost in the first year is $100,000. Escalation is expected to be 3% per year. What is the
estimated operating cost in the fifth year?
A. $112,551
B. $115,000
C. $112,000
D. $100,000
4. A discount factor is______________?
A. A reduced price for a product
B. A multiplicative number used to convert costs occurring at different times to a common time
C. A ratio of the current cost to a cost in the future
D. A calculation of the future rate of return for a project
5. Fixed cost is __________?
A. A cost that doesn’t change with time
B. A cost independent of short term variations in output
C. A price that is set artificially high by the seller
D. A cost that is preset by a project stakeholder
139
Solutions
1. D All of the above
2. B $425,000
Comment: 100,000*$5.00*0.85 = $425,000
3. A $112,551
Comment: $100,000*1.03*1.03*1.03*1.03 = $112,551 The fifth year is four years after the first and
escalation is compounded.
4. B A multiplicative number used to convert costs occurring at different times to a common
time
5. B A cost independent of short term variations in output
140
Section 2.3.4 Cash Flow and Forecasting
Introduction
There have been studies that state more companies go bankrupt due to cash flow issues than any other
reason. Of course this is talking about the corporate cash flow, but that is driven by the project cash
flow. Before a contractor submits a bid or before a manufacturer begins building a new plant it is
necessary to determine if the company finances can support it.
Cash flow is the marriage of the project estimate with the project schedule. Many scheduling programs
create a project cash flow and therefore it is important that the estimate and schedule be coded in a
way to support the combination of the two. But most scheduling programs will only give you the cost of
the project over time and not the net cost to the corporation. This may be adequate for the owner of
the project, but a contractor needs to take payment terms and profit percentage into account to
determine the true out‐of‐pocket needs of the project.
Learning Objectives
Identify the difference between a project cash flow and a financial cash flow.
Define the elements of a cash flow and how to develop it.
Differentiate between the different methods of contract payment.
Terms to Know
Capital, Working
Cash Flow
Cash Flow Net
Defective
General and Administrative (G&A) Expenses
General Terms and Conditions
Interest Rate
Letter of Credit
Markup
Maximum Out‐of‐Pocket Cash
Milestone Payment
Mobilization Cost
Progress Milestones
Re‐measurement
Retention
S‐curve
Schedule of Values
Substantial Completion
Terms of Payment
141
Key Points for Review
Understand the elements of a cash flow and how it is developed.
Understand how different contract payment terms can affect the cash flow.
Summary
A cash flow is the calculation of the periodic cash out compared with the periodic cash in to
produce the net cash balance for each period and the accumulative cash balance over the life of
the project.
The cash flow net provides the company with information needed to determine the finances
necessary to support the project.
An accurate cash flow is essential to the financial health of a company and should be an
essential part of every project in the decision to proceed.
142
Check on Learning
1. The amount of money held from a payment to assure project completion and compliance is called
________________.
A. Net Cash Flow
B. Terms of Payment
C. Retention
D. Letter of Credit
2. The net cash flow for a project is shown in the following table. What is the maximum out‐of‐pocket
and in which month does it occur.
Net Cash
A. $110 in month 6 Month Flow
B. $60 in month 2 1 ($50)
C. $50 in month 1 2 ($10)
D. $35 in month 3 3 $25
4 $75
5 $50
6 $20
3. A payment method that is based on a series of pre‐defined events is ____________?
A. Progress Payments
B. Milestone Payments
C. Pre‐defined Percent Complete
D. Re‐measurement
4. If retention for a contract is set at 5% and payment is net 30 days from invoice, what will be the
release at the end of the contract for following payment schedule and in which month will it be
paid?
Month Payment
A. $600 in month 6 1 $1500
B. $600 in month 7 2 $2500
C. $650 in month 6 3 $3000
D. $650 in month 7 4 $3000
5 $2000
6 $1000
5. In the previous question, how much will the contractor be paid in month 3?
A. $3000
B. $2500
C. $2375
D. $1425
143
Solutions
1. C Retention
2. B $60 in month 2
Comment: Calculate the accumulative monthly net cash flow to determine the maximum out‐of‐pocket
value.
3. B Milestone Payments
4. D $650 in month 7.
Comment: The retention will be billed at completion (month 6) and be paid 30 days later (month 7).
5. B $2375
Comment: The $2500 will be billed in month 2 with a 5% retention. It will be paid 30 days later in
month 3.
144
Section 2.3.5 Cost Control Baseline
Introduction
The cost control baseline is the marriage of the project budget (approved estimate) to the project
schedule. The costs and resources are applied to the activities in the schedule. This marriage creates the
project control baseline that will be used to measure performance through the remainder of the project.
The baseline differs from a cash flow in that project resources other than cash are included.
As in budgeting, this is the transition from the estimating to the cost control phase and all of the factors
described above in the chapter on budgeting apply here as well. The only difference here is the
introduction of the project schedule and therefore it is necessary that the project cost estimator
understand basic scheduling terminology to assist with the transition.
Learning Objectives
Understand the basic scheduling terminology to assist with application of the estimate to the
schedule to create the baseline.
Terms to Know
Activity
Activity Code
Activity Cost
Code of Accounts
Contingency
Control
Control Account
Cost Baseline
Cost Loading
Critical Path Method (CPM)
Earned Value Management
Hammock Activity
Network
Node
Performance Measurement Baseline
Precedence Diagramming Method (PDM)
Planner
Resource
Resource Code
Work Breakdown Structure
Key Points for Review
Understand what is needed to marry the estimate to the schedule for Earned Value
Management.
145
It is important to understand enough scheduling terminology to work with the planner to merge
the estimate into the schedule.
Summary
The cost control baseline is an extension of the budgeting process that merges the estimate
costs and managed resources into the schedule for Earned Value Management (EVM).
As with budgeting, the estimate planning must consider the elements of the estimate that will
expedite this process.
The most critical factor to success is a code of accounts relationship between the estimate and
schedule coding.
146
Check on Learning
1. The Budgeted Cost of Work Performed is equal to the product of budget for the account and what
other multiplier?
A. Productivity
B. Percent complete
C. Float
D. The labor wage rate
2. The Precedence Diagramming Method is different from the Arrow Diagramming Method in that it
uses ___________.
A. An activity‐on‐arrow
B. An activity‐on‐node
C. Lead‐lag relationships
D. Resource coding
3. The Cost Control Baseline takes the budgeting process one step further by _________.
A. Adding labor to the budget
B. Integrating the estimate with the schedule
C. Spreading cost over time
D. Adding a Work Breakdown Structure
4. A good way to load an indirect cost that is constant from the start to the end of the project is by
adding _________________.
A. A hammock activity
B. An activity on the node
C. An activity on the arrow
D. A network
5. Why are estimated quantities important to earned value analysis?
A. As a basis for determining unit profitability
B. So that an overall value of the project can be determined
C. As a basis for determining progress
D. Only the hour or cost value of planned activities is important
147
Solutions
1. B Percent complete
2. B An activity on node
3. B Integrating the estimate with the schedule
4. A A hammock activity
5. C As a basis for determining progress
148
Section 2.3.6 Project and Product Costs
Introduction
AACE International Recommended Practice 10S‐90, Cost Engineering Terminology defines a project as,
"a temporary endeavor with a specific objective to be met within the prescribed time and monetary
limitations and which has been assigned for definition or execution." A product is one of many outputs
from the execution of a project. Those outputs can be in tangible or intangible form; a product being
one of the possible tangible forms.
Project and product costs share many characteristics. A project cost reflects all costs attributable to the
project, including its share of home office overhead costs and any costs not directly attributable to the
project (indirect costs). Product costs entail all costs attributable to delivery of the product including all
direct costs plus overhead costs. Some product costs are fixed; in other words, costs such as the cost of
land and improvements which do not vary with the number of units produced. Other product costs are
variable, such as material and labor associated specifically with production of the item, that vary with
the number of units produced.
Learning Objectives
Distinguish between “product costs” and “project costs”.
Distinguish between “product direct costs” and “product indirect costs.”
Terms to Know
Activity Based Costing
Direct Production Cost
Raw Materials
Indirect Costs
Distribution Costs
Operating Costs
Indirect Production Costs
General and Administrative (G&A) Costs
Key Points for Review
Understand how the project and product estimating efforts are similar.
Understand the elements of product costing.
Summary
The product costing process follows the same procedures as project costing from planning
through reporting. The primary difference being in the elements of cost.
149
Check on Learning
1. What is the relationship between the product cost and the cost of quality (COQ)?
A. Product plus the increase in cost due to inflation is equal to the cost of quality (COQ)
B. The difference is depreciation
C. The cost of quality should be within six standard deviations (6‐sigma) of the product cost
D. As the cost of quality (COQ) decreases, product cost can be reduced and/or the manufacturer’s
margin can be increased
2. A cost element in product estimating that is not part of capital cost estimating is ________.
A. Direct cost
B. Indirect cost
C. General and administrative (G&A) costs
D. Distribution cost
3. Which of the following is a direct production cost in product estimating.
A. Purchasing
B. Insurance
C. Raw materials
D. Plant utilities
4. In production of Product A, a manufacturer incurs a total of $4,500,000 for direct materials in the
course of a year. Total direct labor expended in manufacture of Product A for the same period
totaled $4,000,000. Total variable manufacturing overhead expenses allocated to Product A totaled
$2,200,000 and fixed manufacturing overhead expenses for Product A totaled $11,650,000. Total
output for the year of Product A was 100,000 units, of which 90,000 were sold. What is the total
product cost per unit of Product A?
A. $248.33/unit
B. $107.00/unit
C. $223.50/unit
D. $118.89/unit
5. Which of the following cost categories is included in project cost but not in construction cost?
A. Contingency
B. Prime contractor’s markups
C. Architectural and/or engineering fees
D. Contractor’s allowances
150
Solutions
1. D As the cost of quality (COQ) decreases, product cost can be reduced and/or the
manufacturer’s margin can be increased.
2. D Distribution cost
3. C Raw materials
4. C $223.50/unit
Commentary: Product cost totals direct materials, labor, and manufacturing overhead, as well as fixed
manufacturing overhead attributed to the product divided by the total number of units produced.
($4,500,000 + $4,000,000 + $2,200,000 + $11,650,000)/100,000 units = $223.50/unit. A common error
would be to mistake the number of units sold for the number produced which would result in the
erroneous number of $248.33/unit. The other erroneous answers result from failing to include the fixed
manufacturing overhead costs.
5. C Architectural and/or engineering fees
151
152
Section 9.1 Internationalization
Introduction
Estimating projects for different locations in a single country is not an easy task, but when you cross
borders to another country, the transition can be extremely difficult. Not only do you experience issues
like productivity of different locations, but now you may be faced with currency exchange rates, import
duties, cultural differences and many other factors that can severely affect the cost of the project.
In the 1990s there was a surge in international projects. At the time there was very little reference
material available to assist with planning and estimating those projects. Fortunately there were many
papers written and a search of the AACE International Archives will provide you with much information.
In the recessions since the year 2000, there has a slowdown in international projects, but with the global
economy expanding, it is likely you will become involved in an international project sometime in your
career and you need to be prepared for it by understanding the differences in international estimating.
Learning Objectives
Identify the specific challenges presented by estimating projects in the global environment.
Understand that these include differing cultures affecting work rules, holidays, and customs,
variations in measurement systems, and in currency.
Define how changes in exchange rates can affect the accuracy of estimates.
Terms to Know
Base Camp
Currency Exchange Rate
Currency Hedge
Free on Board
Freight
Freight Consolidation
Holidays
Import Duties and Fees
Metric System
Value Added Tax
Key Points for Review
Converting to other measurement systems.
Understand how to work with fluctuating currency exchange rates.
Understand the different cost elements encountered when working in a foreign country.
Summary
Preparation of estimates for projects in other than the estimator’s home country takes
experience, knowledge of current conditions affecting cost, and anticipation of potential future
changes.
The logistics of a project are often a major project cost.
153
Check on Learning
1. If one (1) meter is equal to 3.28 feet, how many cubic meters of concrete, rounded to the nearest
cubic meter, are required to pour a foundation that is 15 feet long by 10 feet wide by 6 feet thick,
disregarding waste?
A. 26
B. 34
C. 84
D. 255
2. How does fluctuation of exchange rates influence a bid?
A. It makes it more difficult to employ foreign workers
B. It increases the cost of doing business in foreign countries
C. The cost of imported goods and services fluctuates with the exchange rate
D. Labor productivity decreases
3. An estimator who resides in Europe is responsible for preparation of a conceptual estimate for a US
corporation for the cost of a new line in a manufacturing plant. Although the estimate of 4,000,000
EUR is prepared in Euros (EUR), the plant is to be built in Australia, where the local currency is the
Australian dollar (AUD). The US corporation desires to convert the estimate to US dollars (USD) in
order to compare the estimated cost with its domestic (US) plant improvements. The current
appropriate exchange rates are as follows:
1 EUR = 1.41372 USD
1 USD = 0.932501 AUD
The equivalent costs in Euros and Australian dollars are:
A. 2,829,415 USD and 2,638,432 AUD
B. 3,730,004 USD and 5,273,181 AUD
C. 5,654,880 USD and 5,273,181 AUD
D. 6,064,208 USD and 2,638,432 AUD
4. You are purchasing a piece of equipment to be used on an overseas project. In order to assure that
all freight and risk is to the vendor, what contract terms should be required?
A. Freight included
B. Free on board jobsite
C. Force Majeure
D. Duties and taxes included
5. A piece of equipment was quoted for $US 100,000 at 7.35 Yuan/$US with actual price to be
determined by the exchange rate at time of delivery. The exchange rate at the time of delivery was
7.18 Yuan/$US. What is the price at delivery of the equipment in $US?
154
A. $US 100,000
B. $US 102,368
C. $US 97,687
D. Yuan 735,000
155
Solutions
1. A 26
Commentary: The volume of concrete is 15’ x 10’ x 6’ = 900 cubic feet. Since 1 meter = 3.28 feet, solve
the problem by 900/ (3.28)3 = 25.50 which rounded to the nearest cubic meter is 26.
2. C The cost of imported goods and services fluctuates with the exchange rate.
3. C 5,654,880 USD and 5,273,180 AUD
Commentary:
4,000,000 EUR x (1.41372 USD/EUR) = 5,654,880;
4,000,000 EUR x (1.41372 USD/EUR) x (0.932501 AUD/USD) =5,273,181 AUD (rounded to 5,273,180)
The incorrect answers involve various incorrect combinations of the correct numbers which represent
errors often made by careless candidates who don’t check their calculations during the exam.
4. B Free On Board jobsite
5. C $US 97,687
Commentary: $US 100,000 * Yuan 7.18/7.35 = $97,687
156
Section 9.2 Building Information Modeling (BIM)
Introduction
Building Information Modeling (BIM) refers to a digital representation of the physical and functional
characteristics of a facility. A BIM is a shared knowledge resource for information about a facility
forming a reliable basis for decisions during the facility’s life‐cycle. A BIM is a shared resource for
stakeholders to insert, extract, update or modify information in the BIM to support or reflect the roles of
that stakeholder.
A comprehensive representation of a facility includes multiple dimensions of data‐rich intelligent
objects. The dimensions for modeling the information and geometry about a facility are: 3D graphical
modeling, 4D time modeling, and 5D cost modeling. Graphical representations with associated object
information are combined for the 3D content of a BIM. A facility’s 4D view includes 3D plus time. 5D is
the 4D view plus cost.
As with traditional facility information, cost estimating a project in BIM begins with classifying the cost
estimate to be completed. This activity relies on the level of project definition, which in BIM is known as
the Level of Detail/Level of Development (LOD). The LOD is a taxonomy that includes the design model
content and subsequent authorized uses for 4D scheduling and 5D cost estimating. LOD 100 is the
lowest and is authorized for 4D total project construction duration and 5D conceptual cost allowance.
LOD 500 is the as‐built BIM and is authorized for 5D record costs.
BIM is evolving in both the technology and methodology aspects, especially in terms of how a facility’s
cost estimate is produced from a BIM. As a result the estimator’s role in BIM is evolving as capabilities
expand across the dimensions in BIM.
Learning Objectives
Identify the multiple dimensions of BIM and the interrelationship of each with cost estimating in
BIM.
Cross reference the cost estimate classification by BIM Level of Detail.
Identify key terms associated with BIM.
Terms to Know
3D models
4D models
5D models
Assembly
BIM methodology
Building Information Modeling (BIM)
Cost Estimate Classifications
Integration
Intelligent objects
Interoperability
157
Level of Detail
Key Points for Review
What are the dimensions in BIM and how does each impact cost estimating in BIM?
What does the term “intelligent object” mean and how do intelligent objects affect a cost
estimate using a BIM?
How does each Level of Detail in a BIM relate to the cost estimate?
How is object information exchanged from the design model to the estimating model?
Summary
BIM is 3D, 4D, and 5D data‐rich representations of a facility created with intelligent objects.
Information for cost estimating in BIM is extracted directly from the design model through
technology that is either interoperable or it is integrated between the technologies.
The Level of Detail in a design model guides the cost estimating activities for which that BIM
may be used.
The classification of a cost estimate in BIM is associated with the level of project definition as
defined by the Level of Detail.
References
The following references are suggested for your study of Building Information Modeling:
1. Organizing the Development of a Building Information Model, Bedrick, Jim (2009). [Link]
[Link]/IPD%20Tools%20and%[Link]
2. National Building Information Modeling Standard, Version 1‐ Part 1: Overview, Principles, and
Methodologies, National Institute of Building Sciences (2007),
[Link]
3. General Buildings Information Handover Guide: Principles, Methodology and Case Studies.
National Institute of Standards and Technology (NIST), NISTIR 7417 (2007
[Link]
158
Check on Learning
1. A cost estimate generated from a LOD 400 BIM is authorized for ________________.
A. Conceptual cost allowance purposes
B. Buyout purposes
C. Record cost purposes
D. Preliminary cost purposes
2. A 4D BIM is 3D plus ____________________.
A. Cost
B. Data
C. Time
D. Geometry
3. Interoperability is _________________________________.
A. Integrated software applications for BIM
B. Complex computer code for representing geometric properties in BIM
C. Achieved with a network server coordinating multiple models
D. Seamless data exchange between BIM software applications
4. 3D BIM is a digital representation created using data rich ______________ objects.
A. Intelligent
B. Simple
C. Scaled
D. Unique
5. The Model Progression Specification includes ______________ Levels of Detail.
A. Ten
B. Seven
C. Three
D. Five
6. 5D modeling includes the following, __________, as well as the traditional X, Y, and Z dimensions.
A. Cost and price
B. Cost and time
C. Time and effort
D. Time and resources
159
7. A cost estimate generated from a LOD 200 is a cost estimate based on __________________.
A. Validated design model
B. Measurement of generic elements
C. Conceptual cost allowances
D. Complete and specific assemblies
8. According to the National BIM Standard, a BIM serves as a shared resource for information about a
facility for decision during its ________________ from inception forward.
A. Construction
B. Design
C. Life‐cycle
D. Closeout
9. BIM is a critical element in reducing industry _____________________.
A. Overhead and profit
B. Time for construction
C. Lack of innovation
D. Waste due to inefficiencies
10. 4D scheduling models are authorized for use in fabrication and assembly detail, including
construction means and methods, at a LOD of ______.
A. 400
B. 100
C. 500
D. 300
160
Solutions
1. B Buyout purposes
2. C Time
3. D Seamless data exchange between BIM software applications
4. A Intelligent
5. D Five
6. B Cost and time
7. B Measurement of generic elements
8. C Life‐cycle
9. D Waste resulting from inefficiencies
10. A 400
161
162
Section 9.3 Change Order Estimating
One probably cannot say that no project has ever been completed as planned, but it is very rare. When a
contractor submits a bid to the owner, it is based on the conditions as defined in the contract. If an
event occurs that causes those conditions to change in a way that increases or decreases the cost to the
contractor to perform that change, there is likely to be a change order prepared and negotiated
between the parties to adjust the cost of the contract. The project cost estimator is normally responsible
for preparing that estimate.
The process of preparing a change order follows many of the same methods as a project estimate. You
must still evaluate the scope, quantity, cost, price, document, review, and report. There are a couple
major differences in the process, however. First the scope is not based just on the work performed, but
is based on the difference in that work as contracted and as to be performed. Second there are likely
terms in the contract that define how the estimate will be costed and priced. The estimator must be
familiar with these contract conditions.
Learning Objectives
Understand the difference in estimating methods between project and change order estimating.
Understand the procedures in the change order process.
Understand what constitutes an allowable change order.
Terms to Know
Arbitration
Baseline Estimate
Burden of Proof
Causation
Change in Scope
Change Order
Claim
Contract Type
o Firm Price
o Cost Plus
Delay
o Compensable
o Concurrent
o Excusable
o Inexcusable
Equitable Adjustment
Forensic Estimating
General Conditions
Indirect Cost
o Field Overhead
o Home Office Overhead
o General and Administrative (G&A)
163
o Fees/Profit
Lost Productivity
Re‐baselining
Stop Work Order
Key Points for Review
What are the conditions that create the need for a change order?
The value of the change order is the net cost of what was contracted and what was or will be
incurred.
What happens when the contractor and owner cannot come to agreement on the cost and
terms of the change order request?
How can the contract conditions be written to improve the change order process?
Summary
Change orders are likely to occur on almost every project and the cost estimator must
understand how they are developed.
The change order estimate must identify clearly the activities that were affected and the
resulting change in the cost.
Whether the change order request came from the owner or the contractor, the burden of proof
is the responsibility of the requester.
164
Check on Learning
1. The estimated direct cost for an activity was $25,000. A compensable change in the project caused
the cost of the activity to increase to $32,000. The general conditions of the contract allow the
addition of 18% for field indirect costs, 5% for G&A costs, and 6% for profit. What is the estimated
value of the change order.
A. $9,030
B. $42,027
C. $9,193
D. A change order is not allowed for a compensable change.
2. The owner temporarily stopped work on the project for a change in the owner’s management. As a
result the contractor should receive ________.
A. No compensation since no work was performed during the shutdown
B. Reasonable compensation for any cost incurred by the delay
C. An increase in site overhead for the extended time
D. An increase in lost productivity cost
3. If the owner and contractor cannot come to agreement on the cost and terms of the change order,
the reasonable solution is _______________.
A. Stop the project
B. The contractor should sue the owner
C. The owner should sue the contractor
D. Arbitration
4. An equitable adjustment is ___________.
A. The value of the change order
B. A contract adjustment in of amount to compensate the affected party for cost and/or time
incurred
C. An allowance for profit on losses incurred
D. What the owner must pay the contractor to compensate for a change in scope or time in the
project
5. An activity has been added to the project that was not in the contract. The cost of the activity
including allowable overheads profit is $25,000. The additional activity will add five days to the
project. It was written in the contract general conditions that delays to the contractor will be
compensated by $2,000 per day. What is the value of the change order?
A. $25,000
B. $10,000
C. $35,000
D. $15,000
165
Solutions
1. C $9,193
Commentary: ($32,000‐$25,000)*1.18*1.05*1.06 = $9,193.
2. B Receive reasonable compensation for any cost incurred by the delay
3. D Arbitration
Commentary: Certainly any of the first three are options, but the most reasonable way is to hire a 3rd
party arbitrator to resolve the suit. Most contracts today include the use of an arbitrator in the general
conditions of the contract.
4. B A contract adjustment of an amount to compensate the affected party for cost and/or
time incurred
5. C $35,000
Commentary: $25,000 + (5 * $2000) = $35,000
166
Appendices
Appendix A: Complex Problems
Appendix B: Recommended References and Resources
Appendix C: Estimating Professional Terminology and Definitions
Appendix D: AACE International Canons of Ethics
Appendix E: CEP Exam Written Memorandum
167
168
Appendix A:
Complex Problems
Example: Scenario Questions #1
You are an estimator for Leaky Tub Moving and Storage, a commercial relocation contractor. You
estimate that it will take a packing/unpacking crew a total of 22 crew‐hours to pack the contents of a
home for a move. The packing/unpacking crew consists of one foreman and three journeyman packers.
Signatory to a collective bargaining agreement with the United Group of Lackeys and Yokels (UGLY), you
employ journeyman packers at a base rate of $17.40/hour. Foremen earn journeyman’s wages plus
$2.10/hour. Fringe benefits and payroll taxes and insurance amount to 45% of the base rate for
journeymen and foremen.
Your company has an estimating standard for the cost of shipping supplies (boxes, sealing tape, and
miscellaneous supplies) of $75/crew hour for the packing/unpacking crew.
Leaky Tub transports its packing/unpacking crew from the office to the site of work in a crew van and
charges the project $20/crew hour for the total duration of packing, loading, unloading, and unpacking
for the van, fuel, insurance, and maintenance and repairs.
Loading is estimated at four hours and is performed by a packing/unpacking crew with the substitution
of a moving van driver for a foreman. The driver is paid a base rate of $27.50/hour and fringes, payroll
taxes, and insurance for the driver amount to 28% of the base rate of pay. The estimate must include
the cost of the moving van during the loading and unloading operations and is charged at a rate of
$75/hour.
The actual moving of the household is expected to take a total of 3.5 days based on an estimated
distance of 1,750 miles and an assumption of 500 miles/day. The driver is prohibited by regulation to be
behind the wheel more than eight hours in any 24‐hour period. The driver is paid an allowance for meals
and lodging of $100/ day for any day or fraction thereof while behind the wheel. Required permits are
estimated to add a total of $475 to the moving cost.
Unloading is estimated at four hours and unpacking is estimated to take 75% of the amount of time
loading is estimated for. The same crews are used for unloading as for loading, and for unpacking as for
packing.
Leaky Tub will add 4.75% of its total costs for overhead and profit.
1. What is the fully‐burdened hourly labor rate for a packer?
A. $25.23/hour
B. $17.40/hour
C. $26.43/hour
D. $18.23/hour
169
2. Would state unemployment insurance normally already be included in this estimate or does it need
to be added?
A. No, it would not be included and would need to be added
B. It depends upon the state
C. It would already be included in the estimate as a part of labor burden
D. Insufficient information is given in order to be able to answer
3. What AACE estimate classification would this estimate fall into?
A. Class 2
B. Class 1
C. Class 3
D. Definitive
4. Which category of resource cost (labor, material, equipment, and miscellaneous expense) is typically
the most volatile (most susceptible to under/over estimating of its quantity)?
A. Labor
B. Material
C. Deterministic Method
D. Miscellaneous expense
5. Which category of resource cost in this estimate bears the most risk as a percentage of total
estimated cost?
A. Labor
B. Material
C. Deterministic Method
D. Miscellaneous expense
6. If the driver were awarded a premium of $0.55/hour for the moving part of this move only, what
would be the total impact on the contractor’s bid?
A. +$15.40
B. +$19.71
C. +$20.65
D. No impact
7. What is the total bid for this move?
A. $13,057.87
B. $11,475.31
C. $12,934.56
D. $13,898.10
170
Solutions
1. A $25.23/hour
Commentary: The fully burdened rate for packers is the base rate of $17.40 + 45% for fringes, payroll
taxes, and insurance or $17.40 x 1.45 = $25.23/hour.
2. C It would already be included in the estimate as a part of labor burden
3. B Class 1
Commentary: A Class 1 estimate is a bid/tender estimate.
4. A Labor
5. A Labor
6. C +$20.65
Commentary: The moving part of this move consists of 3.5 days x 8 hours/day x ($0.55/hour x 1.28) x
1.0475 = $20.65.
7. D $13,898.10
Commentary: Burdened packing/unpacking crew cost = ((3 x $17.40) + ($17.40 + $2.10)) x 1.45 =
$103.97/hour. Burdened loading/unloading crew cost = ((3 x $17.40 x 1.45) + ($27.50 x 1.28) =
$110.89/hour. Burdened driver cost = $27.50 x 1.28 = $35.20/hour.
Labor:
Packing – 22 hrs x $103.97 = $2,287.23
Unpacking – 16.5 hrs x $103.97 = $1,715.42
Loading – 4 hrs x $110.89 = $443.56
Unloading – 4 hrs x $110.89 = $443.56
Moving – 28 hrs x $35.20 = $985.60
Total labor $5,875.37
Equipment:
Moving van – 36 hrs x $75 = $2,700.00
Crew van – 46.5 hrs x $20 = $930.00
Total equipment $3,630.00
Expenses:
Meal allowance – 4 days x $100 = $400.00
Permit $475.00
Supplies – 38.5 hrs x $75 = $2,887.50
171
Total expenses $3,762.50
Total cost $13,267.87
Overhead and profit @ 4.75% $630.22
Total bid $13,898.10
172
Appendix B:
Recommended References and Resources
Primary Reference Materials
The primary reference materials have been identified in each chapter of the study guide along with the
reference section or chapter of the reference as appropriate.
Secondary Reference Materials
CCP Certification Study Guide, 2nd Edition, AACE International
Professional Practice Guides (PPGs):
Professional Practice Guide #6: Construction Cost Estimating, 2nd Edition, Douglas D. Gransberg PE CCE
and Carla Lopez del Puerto CCC. AACE International. (2006).
Professional Practice Guide #8: Contingency, 3rdEdition,Kul B. Uppal PE. AACE International. (2010).
Professional Practice Guide #13: Parametric and Conceptual Estimating, 2nd Edition, Douglas W. Leo
CCC, Larry R. Dysert CCC, and Bruce Elliott CCC. AACE International. (2004).
Cost Estimating, 2nd Edition, Rodney D. Stewart, Wiley‐InterScience.
Cost Estimator’s Reference Handbook, 2nd Edition, R. Stewart, R. Wyskida, R. Johannes, John Wiley &
Sons.
The Engineer’s Cost Handbook, R. Westney, Marcel Decker.
Project and Cost Engineer’s Handbook, 4th Edition, McGraw‐Hill.
Parametric Estimating Handbook, Department of Defense.2nd Ed. (1999).
Construction Cost Estimating for Project Control. Neil, J., Prentice‐Hall. (1981). (Book is out of print, but
a limited number are available at [Link]).
Construction Cost Analysis and Estimating. Ostwald, P., Prentice‐Hall. (2001).
Estimating Construction Costs. Peurifoy, R. and Oberlender, G., McGraw‐Hill. (2001).
Control and Management of Capital Projects, 2nd Edition, AACE International.
Jelen’s Cost and Optimization Engineering, 3rd Edition, McGraw‐Hill (Out of print, used copies available
at [Link]).
173
174
Appendix C:
Estimating Professional Terminology and Definitions
As described in this study guide, the terminology of any discipline defines the essential communication
vehicle through the use of a common vocabulary. Cost estimating is no exception and as is often the
case, many terms are used primarily in the discipline of cost estimating or in project controls.
Recommended Practice 10S‐90, Cost Engineering Terminology includes the essential terminology of
project controls. While many of those terms are not directly related to the practice of estimating, it is
still recommended that the certification candidate review the entire list of definitions. Many of these
terms relate to the interface between the estimator and other cost engineering disciplines and are
necessary for sound communication. In addition it is important to know the basic terminology of the
other disciplines to facilitate the working interface between the disciplines. Recommended practices
including RP 10S‐90 are available at no cost under the “Study Material” heading at
[Link]
175
176
Appendix D:
AACE International Canons of Ethics
AACE members and those certified by AACE International agree to be bound by the terms of the AACE
International Canons of Ethics, a criterion that says all individuals will practice their profession in a
manner that meets fundamental ethical standards. The Canons of Ethics can be found at the association
website at [Link]
177
178
Appendix E:
CEP Exam Written Memorandum
The communication competency portion of the CEP Exam requires the candidate to demonstrate writing
skills and general knowledge around the Project Cost Estimating competency. The candidate is required
to write a memorandum demonstrating their ability to communicate effectively their knowledge on a
selected decision and risk management subject.
The exam consists of a sample question in addition to any on‐screen instructions given during the exam.
Question:
The question will identify your position, description of the project and general scope of the question.
You should review the documentation required in the listing and prepare the memo as required.
MEMO
To: John Doe, Project Manager
From: John Smith, Risk Manager
Date: August 31, 2017
Subject: Appropriate Subject Based on the Question
Paragraph One should introduce the scope of the question.
Paragraph Two should identify the purpose and the relevant procedures or process.
Paragraph Three should identify the application of the project cost estimating process.
Paragraph Four should be a detailed conclusion of the process based upon Paragraphs One thru Three.
179
Common questions
Powered by AIEstimate review and validation are critical in managing project cost risks because they ensure that all assumptions, cost inputs, and methodologies are thoroughly scrutinized for accuracy and completeness. This process helps identify potential errors or oversights before actual project execution, allowing for the adjustment of cost projections and contingency plans. Validating estimates against historical projects and performing sanity checks mitigate the risk of unexpected cost overruns .
Effective strategies for integrating contingencies into estimating processes include conducting risk assessments to identify potential cost impacts and using historical data to determine adequate contingency levels. Allocating contingencies at different project levels based on potential risks and establishing a structured review process to update contingency values in response to changing project conditions can enhance contingency management. Using such methods ensures that contingency reserves are appropriate and reflective of project uncertainty .
Stakeholder needs influence the planning and execution of cost estimates by determining the requirements and constraints that must be incorporated into the estimate plan. Meeting stakeholder expectations involves understanding their objectives, risk tolerance, and preferred levels of detail in the estimate, which guides the selection of methodologies and the scope of the estimate. Engaging stakeholders in the planning phase ensures that the estimate is aligned with their priorities and minimizes the risk of overlooked requirements .
Estimating methodologies impact both the classification and accuracy of project estimates by determining the level of detail and precision that can be achieved. For example, deterministic methods provide detailed, precise estimates but may require more time and information, whereas stochastic methods offer quicker estimates with confidence intervals, suited for early project phases with less detail. The choice of methodology directly influences the classification of the estimate and its appropriateness for different project stages and requirements .
Differentiating between direct and indirect costs is essential in project cost estimates to ensure accurate allocation of costs to specific project activities and overall budget accuracy. Direct costs can be directly attributed to a project, like labor and materials, while indirect costs are overheads that support project operations but are not directly tied to a single activity, such as administration costs. This differentiation helps in precise budget tracking and cost control .
Historical cost data provides a basis for developing estimates by allowing estimators to learn from previous projects and apply this knowledge to current estimates. It serves as a benchmark and reference point to validate current cost assumptions and predictions, helping to ensure more accurate and reliable cost projections .
Estimate documentation enhances project control and management by providing a detailed record of all assumptions, methodologies, and data used to construct the estimate. It serves as a comprehensive reference that can be used to track project performance, identify deviations, reconcile differences, and support decision-making. A well-prepared estimate report allows the project control team to understand the basis of cost predictions and adjust management strategies accordingly .
Inadequate cost estimate reconciliation can lead to significant discrepancies between estimated and actual costs, resulting in budget overruns and misallocated resources. Reconciliation helps ensure all versions of an estimate reflect the same scope and assumptions, reducing the chance of downstream financial discrepancies. Failure to perform thorough reconciliation may cause project delays, increased financial risks, and diminished stakeholder confidence due to unaddressed cost variances .
Understanding market conditions enhances the accuracy of pricing in project estimates by providing insights into supply and demand dynamics, competitive bids, and price trends, which allow cost estimators to set realistic and competitive prices. Awareness of market conditions ensures that pricing strategies reflect external economic factors, improving the accuracy of cost forecasts and final price determination. This knowledge helps in making informed decisions about markups and profit margins to ensure project profitability .
The scoping process is crucial to the accuracy of a cost estimate because it defines the project in detail, identifying what is to be estimated and setting the foundation for all downstream estimating activities. Without a clear scope, subsequent steps such as quantification, costing, and pricing can be misaligned, leading to inaccuracies. A well-defined scope establishes what exactly needs to be accounted for, which directly impacts the reliability of the final cost estimate .
You might also like
- CCP-Certification Study Guide 2nd Edition100% (11)CCP-Certification Study Guide 2nd Edition265 pages
- Planning & Scheduling Professio - AACE International WWW - Aacei.or92% (12)Planning & Scheduling Professio - AACE International WWW - Aacei.or301 pages
- Development of Cost Estimate Plans - AACE International100% (5)Development of Cost Estimate Plans - AACE International30 pages
- AACE International September 2023 InsightsNo ratings yetAACE International September 2023 Insights43 pages
- 25r-03 AACE EStimating Lost Labor Productivity in Construction Claims100% (10)25r-03 AACE EStimating Lost Labor Productivity in Construction Claims35 pages
- AACE International July/August 2023 Insights100% (1)AACE International July/August 2023 Insights37 pages
- AACE International March/April 2023 Insights100% (3)AACE International March/April 2023 Insights43 pages
- 60R-10 - Developing The Project Controls Plan100% (4)60R-10 - Developing The Project Controls Plan24 pages
- 79r-13 Level of Effort and Execution On Earned Value Projects Within The Framework Eia 748100% (1)79r-13 Level of Effort and Execution On Earned Value Projects Within The Framework Eia 74811 pages
- Skills & Knowledge of Cost Engineering, 5th Edition100% (2)Skills & Knowledge of Cost Engineering, 5th Edition66 pages
- CCP Certification Technical Paper GuideNo ratings yetCCP Certification Technical Paper Guide15 pages
- AACE International Recommended Practices 10-90No ratings yetAACE International Recommended Practices 10-9024 pages
- AACE Recommended Practice Level of Schedule50% (2)AACE Recommended Practice Level of Schedule13 pages
- AACE Education Board - Skills & Knowledge of Cost Engineering - A Project of The Education Board, AACE-American Association of Cost Engineers (1992)No ratings yetAACE Education Board - Skills & Knowledge of Cost Engineering - A Project of The Education Board, AACE-American Association of Cost Engineers (1992)168 pages
- 101r-19 Roles and Responsibilities of A Cost Estimating PractitionerNo ratings yet101r-19 Roles and Responsibilities of A Cost Estimating Practitioner30 pages
- AACE 36R-08 (2019) Cost Estimate Plans EPC For Process Industries100% (2)AACE 36R-08 (2019) Cost Estimate Plans EPC For Process Industries45 pages
- AACE International May/June 2023 JournalNo ratings yetAACE International May/June 2023 Journal37 pages
- 19R-97 Estimate Preparation Costs For The Process Industries88% (8)19R-97 Estimate Preparation Costs For The Process Industries18 pages
- 031 42r-08 Risk Analysis and Contingency Determination Using Prametric Estimating100% (2)031 42r-08 Risk Analysis and Contingency Determination Using Prametric Estimating18 pages
- 72R-12 - Developing A Project Risk Management Plan100% (2)72R-12 - Developing A Project Risk Management Plan14 pages
- 10S-90 - 2014-Cost Engineering Terminology PDF100% (3)10S-90 - 2014-Cost Engineering Terminology PDF120 pages
- 008 18r-97 Cost Etimate Classification System - in EPC For Process Industries100% (7)008 18r-97 Cost Etimate Classification System - in EPC For Process Industries23 pages
- 40r-08-Contingency Estimating General Principles100% (1)40r-08-Contingency Estimating General Principles10 pages
- AACE International Recommended Practices 11R-88No ratings yetAACE International Recommended Practices 11R-8824 pages
- 65R-11 - Integrated Cost and Schedule Risk Analysis and ...100% (2)65R-11 - Integrated Cost and Schedule Risk Analysis and ...13 pages
- Cost Engineering - January-February 2016No ratings yetCost Engineering - January-February 201656 pages
- AACEI RP 27R-03 - Schedule Classification PDF100% (2)AACEI RP 27R-03 - Schedule Classification PDF11 pages