UNIT 4: COST

ESTIMATING

4.1 Cost Estimating

4.2 Cost and Price
4.3 Importance of the early estimates
4.4 Estimating Techniques
4.5 Procurement

Unit 4 :

Project Management (DPV 60332)

UNIT 4: COST ESTIMATING

4.1 Cost Estimating

4.2 Cost and Price
4.3 Importance of the early estimates
4.4 Estimating Techniques
4.5 Procurement
 LEARNING OUTCOMES

After completing the unit, students should be able to:

 Define the definition cost and price

 Describe the importance of early estimate

 List the estimating technique

 Describe procurement management processes

 4.1 Cost Estimating
 Definition: The practice of forecasting the cost of
completing a project with a defined scope.
 The objective of estimating is to predict the most
likely cost of the project.
 Many projects show massive cost and time overrun
caused by underestimates rather than failures of
project management.
 Estimates of cost and time are prepared and
revised at many stages throughout the
development of project.
 The degree of realism and confidence achieve will
depend on the level of definition of the work and
the extent of risk and uncertainty.
 4.1 Cost Estimating
There are some information that should be known before
develop cost estimation;
Location of the project/plant;
Location of the source within the plant;
Design parameters, such as source size or capacity
rating, uncontrolled pollutant concentrations,
pollutant removal requirements, etc.
Rough sketch of the process flow sheet (i.e., the
relative locations of the equipment in the system);
Preliminary sizes of, and material specifications for,
the system equipment items;
 Cont.....
There are some information that should be known before
develop cost estimation;
Approximate sizes and types of construction of any
buildings required to house the control system;
Rough estimates of utility requirements (e.g.
electricity, steam, water, and waste disposal);
Quantity and cost materials consumed in the
process (e.g., water, reagents, and catalyst);
Economic parameters (e.g. annual interest rate,
equipment life, cost year, and taxes.)
Sample Project Stages
 Requirements of estimating

➢ To predict the most probable cost of the

works
➢ To predict the most probable program for
the works
➢ To identify and quantify potential problems
and risks
➢ To state all assumptions and note all
exclusions
➢ To base a forecast of expenditure – the
cash flow based on the project program
 4.2 Cost and Price
➢ Cost definition: Cost directly attributable to
an element of work, including direct
overheads.
➢ Price definition: Cost of an element of work
plus allowance for general overheads,
insurance, taxes, finance (and interest
charges) and profit.
➢ Price = cost estimate + risk + overheads +
profit + mark-up.
 4.2 Cost and Price (cont…)
➢ Traditionally, project use Schedule of Rates
or Bill of Quantities (BoQ) approach is that
costs are proportional to quantities. This is
true only to limited extent.
➢ In reality, the only truly quantity –
proportional costs are those direct costs of
materials in the permanent works, but care
is required.
➢ Often time – related costs are dominant,
but there are others that must be
considered.
 Cost
Cost can be categorized into 2 main categories;
1. Direct cost
❑Labour
❑Material
❑Equipment
❑Others

2. Indirect cost
❑Quality control
❑Security costs
❑Utilities
 4.3 Importance Of Early Estimates
 Early stage cost estimation is a crucial element of
any project because:
➢ it is the basis for releasing funds for further
studies and estimates;
➢ it becomes the marker against which
subsequent estimates are compared.

 The accurate estimation of the early cost will

support the project managers in decision-making
process. It allows the managers to choose
adequate alternatives and to avoid misjudging
of solutions.
 4.3 Importance Of Early Estimates
(Cont…)

The cost of a project is impacted significantly

by the decisions taken at the initial phase. At
this stage, designers use several cost
estimation methods and intuitive judgments
through their experience and data from other
projects.
The accuracy of the cost estimation process
can make or break project success.
 4.3 Importance Of Early Estimates
(Cont…)

 The earliest estimates are primarily quantifications of

risks: there is little reliable data available to the
estimator
 the main sources of risk should be prepared:
1. Promoter 7. Permanent installed plant
2. Host government (mechanical and electrical)
3. Funding 8. Implementation
4. Definition of project 9. Logistics
5. Concept and 10. Estimating data (time and
design cost)
6. Local conditions 11. Inflation
12. Exchange rates
4.4 Estimating Techniques
There are 5 basic estimating techniques
available to meet the project needs;
Global
Factorial
Man-hours
Unit rate
Operational
Global, Factorial and unit rates techniques
rely on historical cost and price data.
 Global

 Cost estimation relies on libraries of achieved costs

of similar projects related to the overall size or
capacity of the asset provided.
 This technique also be known as order of
magnitude, rule of thumb or ballpark estimating.
 Relies on historical data and must be used in
conjunction with inflation and a judgement of the
trends in levels of prices.
 The most reliable data banks are those maintained
for a specific organization where there is
confidence in the management of data.
 Factorial
 These techniques are widely used for process plants,
power stations and also where the core of the
project consists of major items of plant that can
specified relatively easily and current process
obtained for them from potential suppliers.
 It provide factors for a comprehensive list of
peripheral costs such as pipework, electric,
instruments, structure or foundations.
 The estimate cost will be the product of its factor and
the estimate for the main plant items.
 It does not require a detailed program but one
should be prepared to identify problems of
implementation, lead times for equipment deliveries
or planning approval.
 Man-hours
 This techniques is most suitable for labor-intensive
implementation, construction and operations, such as
fabrication and erection of piping, mechanical
equipment, electrical installations and
instrumentation-work; work where there exist reliable
records of the productivity of different trades per
man-hour.
 The total man-hours estimated for a given operation
are then costed at the current labor rates and added
to the costs of materials and equipment.
 The technique is similar to the operational technique.
 Often used without a detailed program on the
assumption that the methods of construction will not
vary from project to project.
 Unit rates
 Based on the traditional bill of quantity approach to
pricing construction work. In its most detailed form,
bill will be available containing the quantities of work
to be constructed, measured in accordance with an
appropriate method of measurement.
 The estimator selects historical rates or prices for each
item in the bill using either information from recent
similar contracts or published information, or ‘built-up’
rates from his analysis of the operations, plant and
materials required for the item measured.
 This technique is most appropriate to building and
repetitive work, where the allocation of costs to
specific operations is reasonably well defined and
operational risks are more manageable.
Operational Cost
 This is the fundamental estimating technique. The total cost
of the work is compiled from a consideration of the
constituent operations or activities revealed by the method
statement and program, and from the accumulated
demand for resources.
 Labor, plant and materials are costed at current rates.
 The most difficult data to obtain are the productivities of
labor, plant and equipment in the geographical location of
the project, and especially in the circumstances of the
specific activity under consideration.
 Claimed outputs of plans are obtainable form suppliers but
these need to be reviewed in the light of actual experience.
 This technique exposes the basic sources of costs, the
sensitivities of the estimate to alternative assumptions or
method can easily be investigated.
 It also provides a detailed current cost and time basis for the
application of inflation forecasts, and hence the
compilation of a project cash flow.
 4.5 Procurement
Procurement means the processes to
purchase or acquire the products,
services, or results needed from outside
the project team to perform the work
Other terms include purchasing and
outsourcing
Why Procurement Management?
 Most all projects will need to acquire some
resources from outside
 Not understanding the different ways to
contract could result in unnecessary risk for
the project

Benefits of Procurement
Procurement makes business easier for
organizations. They can focus on their
core business and outsource the rest.
It helps companies share opportunities,
hire experts, and buy goods or services.
How Do We Manage
Procurement?

Four processes;
Plan Procurements
Conduct Procurements
Administer Procurements
Close Procurements

Administer Close
Plan Conduct
Procurements Procurements Procurements Procurements
 Procurement Management
1. Plan Procurement — The process of documenting
project procurement decisions, specifying the
approach, and identifying potential sellers.
2. Conduct Procurements — The process of obtaining
seller responses, selecting a seller, and awarding a
contract.
3. Administer/Control Procurements — The process of
managing procurement relationships, monitoring
contract performance, and making changes and
corrections as appropriate.
4. Close Procurements — The process of completing
each project procurement.
 Plan Procurements
Scope Baseline Tools & Techniques
Procurement
Requirements
Management Plan
Documentation
Teaming Agreements
Procurement
Inputs
Risk Register ❑Make or Buy Analysis Outputs Statements of Work
Risk-Related Contract
Decisions ❑Expert Judgment Make or Buy
Decisions
Activity Resource ❑Contract Types
Requirements Procurement
Documents
Project Schedule
Source Selection
Activity Cost Estimates Criteria
Cost Performance Baseline Change Requests
Enterprise Environmental
Factors
Organizational Process
Assets
Administer
Plan Conduct Close
Procurements Procurements Procurements Procurements
 Procurement Contract Types
 Any contract between two or more parties to
deliver services or goods is a procurement
contract. Procurement contracts into three types:
1. Fixed Price (Lump Sum) Contracts
2. Cost Reimbursable Contracts
 Cost Plus Award Fee (CPAF)
 Cost Plus Percentage of Cost (CPPC)
 Cost Plus Fixed Fee (CPFF)
 Cost Plus Incentive Fee (CPIF)
3. Time and Material (T&M) Contracts
 Fixed-Price Contract
 Many experts call a Fixed-Price contract a lump-sum
contract.
 Use this contract when the scope of work is fixed.
Once the contract is signed, the seller is
contractually bound to complete the task within the
agreed price and time.
 Therefore, the seller bears most of the risk. There is no
price renegotiation unless the scope of work
changes.
 Since the cost cannot change, this contract is
suitable for controlling costs.
Fixed-Price Contract
 Fixed-Price contracts into three categories:
1. Firm-Fixed-Price contract (FFP)
The seller has to complete the job within an agreed
amount of money and time.
Example: The seller has to paint the whole building for
RM50,000 within 18 months.
2. Fixed Price Incentive Fee contract (FPIF)
Here, although the price is fixed, the seller may receive
an incentive if they perform well.
Example: The contractor will receive an incentive of
RM10,000 if they achieve the first milestone on time.
3. Fixed Price with Economic Price Adjustment Contract
(FP-EPA)
Use when the agreement is multi-year.
 Cost Reimbursable Contract

 We use a Cost Reimbursable contract when

there is uncertainty in the scope, or if the risk is
higher. In this contract, the risk is on the buyer as
they pay for all costs.
 Here, the seller is reimbursed for completed
work plus a fee representing their profit. Often,
sellers get this fee if they meet or exceed the
selected project objectives, completing the task
earlier or saving costs, etc.
 Cost Reimbursable Contract
 Cost Reimbursable Contract into four (4) categories:
1. Cost Plus Fixed Fee Contract (CPFF)
Here, the seller is paid for all incurred costs plus a fixed
fee, regardless of their performance. The buyer bears
the risk.
Example: Total cost plus RM 25,000 as a fee.
2. Fixed Price Incentive Fee contract (FPIF)
In a Cost Plus Incentive Fee contract, the seller will
be reimbursed for all costs plus an incentive fee based
upon achieving certain performance objectives
mentioned in the contract.
Example: If the project is completed under budget, the
seller will receive 25% of the savings.
 Cost Reimbursable Contract (Conti…)

3. Cost Plus Award Fee (CPAF)

Here, the seller is paid for their costs plus an award fee.
This extra will be based on achieving satisfaction
according to specified performance objectives
described in the contract.
Example: If the seller completes the task by meeting or
exceeding quality standards based on their
performance, the buyer may give an award up to
RM10,000.
4. Cost Plus Percentage of Cost (CPPC)
Here, the seller is paid for all costs incurred plus a
percentage of these costs.
Example: Total cost plus 15% of the cost as a fee to the
contractor.
Time and Materials Contract

 This is a hybrid of Fixed-Price and Cost

Reimbursable contracts. Here, both parties share
the risk.
 You use a Time and Materials contract when the
deliverable is “labor hours.” Here, the project
manager will state the required qualifications and
experience to the seller who will provide the staff.
 This contract is used to hire experts or outside
support.
In this contract, the buyer can specify the hourly
rate with a “not-to-exceed” limit.

 Example: You will pay a technician RM20 per hour.

 Conduct Procurements
Tools & Techniques
Project ❑Bidder Conference
Management Plan
Inputs ❑Proposal Evaluation
Procurement Selected Seller
Techniques
Documents Procurement
Outputs
❑Independent Estimates Contract Award
Source Selection
Criteria ❑Expert Judgment Resource Calendars
Qualified Sellers List ❑Advertising Change Requests
Seller Proposals Project Management
❑Internet Search
Project Documents Plan Updates
❑Procurement Negotiations Project Document
Make-or-Buy Decisions
Updates
Teaming Agreements
Organizational Process
Assets

Plan Administer Close

Conduct
Procurements Procurements Procurements
Procurements
Types of Scopes of Work
 Performance
What the project wants, how
accomplished and project needs defined
by seller
 Functional or Detailed
Defines what end product should be as
well as minimum requirements
 Design
Defines exactly what is required and how
to accomplish it
Procurement Documents (Bid Documents)
 Request for Proposal (RFP, sometimes called
Request for Tender)
➢Requests a price, but also a detailed
proposal on how the work will be
accomplished, who will do it, resumes,
company experience, etc.
 Invitation for Bid (IFB, or Request for Bid, RFB)
➢Request one price to do the work
 Request for Quotation (RFQ)
➢Requests a price quote per item, hour or
foot
 Negotiating Tactics
 Attacks – Argue a point  Fair and Reasonable
 Personal Insults – Attack other  Delay – Tabling issues
sides negotiator important to the other
side
 Good Guy/Bad Guy
 Extreme Demands
 Deadline – The offer stands  Withdrawal – Feigning
until… interest
 Lying
 Limited Authority – I need to
check with ____
 Missing Man – She is out
today, I will have to get back
tomorrow

These are all tactics, but not necessarily good

tactics!
 Administer Procurements
Tools & Techniques
Procurement ❑Contract change control
Documents system
Procurement
Project ❑Procurement Documentation
Management Plan
Inputs performance review Outputs Organizational
Contract
❑Inspections and audits Process Assets
Performance Updates
Reports ❑Performance reporting
Change Requests
Approved Change ❑Payment systems Project Management
Requests
❑Claims administration Plan Updates
Work Performance
Information ❑Records management
system

Plan Conduct Administer Close

Procurements Procurements Procurements Procurements
 Contract Closure
Inputs Tools & Techniques
❑Procurement audits Outputs
Project
Management Plan ❑Negotiated Closed Procurments
Settlements
Procurement
Documentation ❑Records management Organizational
Process Assets
system Updates

Plan Conduct Administer Close

Procurements Procurements Procurements Procurements