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Costing Construction

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By Rory Woolsey, CEP

Let’s start with a little bit of sarcasm. Imagine an advertisement for the latest construction estimating software; “….. with click and drag speed you can choose from thousands of line items of unit cost national average data and build accurate cost estimates….blah, blah, blah! ” This is not a real advertisement; I made it up to make a point. Thrifty, speedy estimating software coupled with unit cost construction data does NOT an accurate estimate make! 

There is No Time
Let’s be honest: we all get lazy, particularly when we are pressed for time. We are always looking for shortcuts in our “means” to get to an “end” - just like the facilities manager is already strapped for time with another demanding tenant, along with tight timelines, on-going operations, and emergency fixes.

Budgetary estimating is just another pesky necessity that gets in the way of progress. The problem is that decisions on facilities issues are generally made based on cost considerations. There always seems to be someone asking “how much is it going to cost?” The budget estimate is just another task that takes from the already-limited time in an estimator’s day.

The truth is that when time is tight, we take shortcuts. Sadly, some budgets are derived from a “click and drag speed” application of software. Unit pricing is thrown at a project from a data source with little thought given to the nuances of the project. It is then “ipso-presto” and another budget cost estimate is produced - ready to wreak havoc on a project when reality shows up.

Just because your data comes from a “published resource” and is “well-known” it does not necessarily make it correct for your project. Choosing, clicking, and dragging is not construction estimating. Much like the old adage “you always get what you pay for,” - accurate budget estimators know that the adage really means “you get the accuracy from published data from the accuracy you put into it.”

The Consequences
Starting a project with a poorly thought-out project cost plan is simply setting the project up for budget overruns, under runs and “run away froms”.

Failing to plan is planning to fail! In the long run it is much easier to put the time in up front to establish a correct budget than it is to deal with the project in a crisis mode as the job unfolds.

The first crisis will occur when the contractor bids are greater than your budget estimate. Oops! It is here that you can ask the customer to cut scope or return to the funding source and ask for more money. Good luck on either option.  Accurate budgetary estimating requires a thought-out effort of building the project in your mind, before the project is built. All scope, quantities and unit pricing must reflect the realities of the project or suffer the consequences.

Construction Costing
The process of construction cost estimating starts with scope and ends with the pricing of the project quantities.

Pricing the project is a lot more than a spreadsheet and unit prices from an average cost database. Contractors have other proprietary pricing sources - such as vendors, subcontractors, suppliers and their own historical costs.

Contractors are usually secretive about these prices because they reflect their own discounts and productivity…the things that make them competitive.

Budgetary estimators must rely on their own sources, such as the internet, select vendors and published cost data. Published costs are not generally site specific and they reflect an average job, with average productivity and average hassles. This is typically not your project.

Unit costs will have to be adjusted away from an average to fit the realities of your project. Unit costs for direct activities include material, labor and equipment. These are the direct costs: directly attributable to the physical final project. Then there are the indirect costs; these are all the cost items that support the direct activities.

Direct Costs
Direct construction costs are those costs that are attributable to any of the direct activities or tasks required to put the components of the project together. The hard costs for construction materials, labor and equipment are direct costs. Many of the national average published data unit costs are focused only on direct costing of construction in a place of average productivity in an average context working environment.

“Average” is the starting point. The estimator will have to make necessary adjustments to the average unit construction costs to fit the complex specifics of the project being estimated. These adjustments come from knowledge of the average of the database and how this particular project deviates from that average.

Then there is the issue of bare costing or total direct costing. “Bare” is exactly that: it is the bare cost of the direct activities less any markups for labor burden, taxes, bond, overhead and profit. The total unit direct costs should then include all the direct additions to labor, materials and equipment.

Labor is adjusted for necessary “burdens” such as social security (FICA), federal and state unemployment (FUTA, SUTA).

All direct costs are then adjusted to include home office overhead and profit for the installing contractor. All these adjustments to bare direct construction costs can get complicated and must be understood as applied to the specific job but also understood in the published unit cost data.

Are they included in the data or do they need to be added? The adjustments to very bare direct costs can be 40% to 50% higher, depending on the mix of labor and material. The misunderstanding of direct costs and published cost data is usually where the first mistakes are made in construction costing.

Indirect Costs
Indirect costs are those project costs that are indirectly attributable to all the direct costs. For instance, site specific indirect costs include site superintendent, site trailers, permits, temporary utilities and other support for all the direct activities. Site overhead costs can be 5% to 15% of the overall project cost.

Other indirect costs include performance bonds, payment bonds, sales taxes, contingencies and markups for overhead and profit for the general contractor. This markup is over and above what a subcontractor will markup for overhead and profit on direct costs. This double markup of overhead and profit is the reality of construction and construction costing.

You can see that a simple application of unit costs from a national average cost database of a quickly applied software module is not construction estimating. Costing construction is much more than just an application of unit prices. Don’t get me wrong, estimating software is great and helpful. Published construction cost data is also very helpful for budgetary estimating and for checks and balances in bidding. It is in the application of the software and unit costs where some budgetary estimates go very wrong.

Rory Woolsey has worked in management and engineering for the construction industry for 33 years, starting as a construction laborer in Billings, Montana in 1972.

He has since held positions as a field engineer, project manager, MIS manager, testing laboratory manager, estimator, senior editor, designer, structural engineer, and general contractor.  He is formerly the President of The Wool-Zee Company, Inc., construction consultants. Rory is currently an Account Manager for The Gordian Group the parent company to RSMeans. 

Mr. Woolsey has also held positions with some of the leaders in the construction industry, such as Bechtel, H.J. Kaiser Constructors, and the R.S. Means Company, and has worked on projects ranging from heavy, military, industrial, commercial and residential.

He has given over 7,000 classroom hours of instruction nationally to architects, engineers, contractors, and facility managers on topics of project management, CPM scheduling, construction estimating, facility maintenance, partnering, and leadership. Rory is a Certified Estimating Professional (CEP) through AACE International.

This article was taken from a post on his blog: woolseyestimating.blogspot.com

Tags: Costs, Estimating Construction



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