CCP-Technical Paper 29July2014-1032

1. Estimate costs in fragile and transitional contexts
23 July 2014
205680

2. b
Table of Contents
List of Tables ........................................................................................................................................iii
List of Figures ....................................................................................................................................... iv
List of Equations.................................................................................................................................... v
Abstract................................................................................................................................................. 1
Introduction .......................................................................................................................................... 2
Estimates Costs within Fragile and transitional contexts..................................................................... 3
Cost Effectiveness................................................................................................................................. 3
Estimate Accuracy................................................................................................................................. 4
Three-point estimating technique application into a fragile and transitional context ........................ 7
Assumptions...................................................................................................................................... 8
Risk.................................................................................................................................................... 8
Three-Point Estimates Application ................................................................................................... 9
Conclusion........................................................................................................................................... 11
Bibliography ........................................................................................................................................ 11

3. iii
List of Tables
Table 1, “Administrative costs comparison” 4

4. iv
List of Figures
Figure 1 “Relationship Between Estimate Accuracy and Engineering Progress” 5

5. v
List of Equations
Equation 1 “Triangular Distribution” 6
Equation 2 “Beta Distribution” 7

6. 1
Abstract
The methods of cost estimation and techniques are very important for the development and
humanitarian sector, especially within fragile and transitional contexts. For the funding agencies
and for implementing partners these calculations are essential to the process of large funding.
This work presents the issues of estimating cost within the fragile and transitional contexts. Explain
how to define the three point estimating technique and its characteristics. Apply the three-point
estimating technique into the fragile and transitional context using Sudan context as an example.
Conclusions are presented to reflect the important application of this technique.

7. 2
Introduction
Planning and developing constructions project within a fragile and transitional context is not easy
for a planning team. ‘‘The three-point estimating technique considers estimation uncertainty and
risk and using three estimates to define an approximate range of activity’s cost, which could
significantly improve the single point activity cost estimates’’ [2].
Within development and humanitarian sector, challenging contexts are defined by unpredictable
post conflict environment, lack of capacity, weak infrastructure, and limited provision of basic
services, all of these factors together cost money. In addition, unstable economy including inflation,
currency fluctuation and market stagnation would also impact cost. In such situations cost
effectiveness of constructions projects appears to be more expensive compared to its counterparts.
This work presents part of the solution during the development phase since there are several root
causes of the problem of project cost management of constructions projects in fragile and
transitional context, which can be addressed separately. For example, protracted decision-making
process within an organization could affect cost management negatively. However, estimate costs
during the development phase considered as the most significant part of the solution. Accurate
estimate costs in the early development phase can affect positively on the project cost
effectiveness.
It’s significant for a planning team and an implementing team under such circumstances and
contexts, to have accurate calculations during estimating cost. Using the three-point estimating
technique is simple yet can be of more accurate result and impact into the cost. While describing
the technique in details with examples, practical application will be examined.

8. 3
Estimates Costs within Fragile and transitional contexts
Fragile and transitional contexts are characterized by unpredictable post conflict environment
which can trigger new violence. In addition, lack of capacity, weak infrastructure, limited provision
of basic services, unstable economy including inflation, currency fluctuation and market stagnation.
In such contexts a construction project can easily deviate from its plan, a deviation that cots money
or time and could result on negative consequences. These negative consequences appear to be the
result of insufficient analytical work prior to project design, the lack of baseline data, poor project
design. Therefore, under this circumstances estimate costs during the development phase should
consider these challenges. Unfortunately in the real life most of this factors and challenges that
affect the costs are being neglected and they are only faced during the implementation, where a
high cost extension will be requested, to address the uncertainty and the risks. While if it was
considered in the first place it would have cost less money and less time.
Cost Effectiveness
‘‘Cost effectiveness is a measure of how economically resources or inputs have been converted into
results. Of particular importance is whether alternative approaches would have achieved the same
results with fewer resources’’ [3]. The level of cost effectiveness can indicate how accurate the cost
estimates have been performed. The cost effectiveness of many construction projects within fragile
and transitional contexts found to be more expensive than their counterparts. Most of the time in
the real life estimating cost at the development phase for these projects uses limited techniques
like, expert judgment or analogous estimating which both rely on historical data of similar projects.
These methods are less costly and less time consuming than other techniques, but they are also
generally less accurate.
Table 1 show a comparison between the administration costs of two programs program A and
program B implemented in the same context. The last column shows higher administration costs
for program A compared to program B administration costs.

9. 4
Administrative costs comparison (Source – 2012, Independent Evaluation of the World Bank Administered Multi-Donor Trust Fund in
Sudan Final Evaluation Report)
Using proper estimates costs technique can improve the accuracy of estimating costs, by
considering estimation of uncertainty and risk, which address the fragile and the transitional
contexts cost issues.
Estimate Accuracy
Since estimate cost is a prediction of future expenses its accuracy will not be precise.
‘’An estimate is a prediction of the expected final cost of a proposed project (for a given scope of
work). By its nature, an estimate is associated with uncertainty, and, therefore, is also associated
with a probability of overrunning or underrunning the predicted cost’’ [1].
Estimate cost is an iterated process gets more accurate by getting better picture of the project
overtime. ‘’cost estimate should be reviewed and refined during the course of the project to

10. 5
reflect additional detail as it becomes available and assumptions are tested. The accuracy of a
project estimate will increase as the project progress through the project lifecycle’’ [2].
‘’Estimate accuracy tends to improve (i.e., the range of probable values narrows) as the level of
project definition used to prepare the estimate improves. Generally, the level of project definition
is closely correlated with engineering progress; thus, as the level of engineering progresses,
estimate accuracy improves. This is shown in Figure 1.’’ [1]
Source (2012, Skills and Knowledge of Cost Engineering)

11. 6
Three-point estimating technique
‘‘Project cost management is primarily concerned with the cost of the resources needed to
complete project activities. The cost management planning effort occurs early in project planning
and sets the framework for each of the cost management processes’’ [2]. The Project Management
Body of Knowledge (PMBOK GUIDE) defines Estimate costs as the process of developing an
approximation of the monetary resources needed to complete project activities.
Three-point estimating technique: ‘’use three estimates to define an approximate range for an
activity’s cost considering estimation of uncertainty and risk’’[2].
For example:
If we ask Mohammed the followings:
Q. Mohammed how long does it take you to excavate a ditch?
A. Mohammed first answer, it takes me exactly (40 minutes)
Q. Then if we press Mohammed a little bit further what the longest it has ever taken you?
A. Mohammed in this case may say, well the worst ever took me 2hrs and 20 minutes – during
heavy rains, that would be (140 minutes)
Q. And if we push him further what the quickest you’ve ever done your excavation?
A. He might say 25 minutes and that was during a very soft soil (25 minutes)
So now we have three estimates that Mohammed has given us for his ditch excavation. He gave us
3 separate estimates:
- Exactly 40 minutes
o This is Mohammed’s Most Likely estimate as per the three-point estimating
technique.
- The worst case of 140 minutes. Again the three point estimating technique refer this as
o His PESSIMISTIC estimate.
- And the best case the twenty five minutes that he gave us – in very soft soil. (25 minutes)
o This is his Optimistic estimate.
How would we use these estimates? Let us assume that Mohammed’s ditch excavation is an
activity within a project with plenty of other tasks that rely on this one. What is the best time we
should put in the schedule 40 minutes or 140 minutes or the 25 minutes. Three-point estimating
could help us with that. Two commonly used formulas are triangular and beta distributions.

12. 7
The first formula adds optimistic to most likely to pessimistic and divides them by 3.
- Triangular Distribution. cE = (cO + cM + cP) / 3
cE = Cost Estimates
cO = Cost Optimistic
cM = Cost Most likely
cP = Cost Pessimistic
Mohammed commuting time = (25 + 40 + 140)/3
= 68 minutes
Remember when we first asked Mohammed about his excavation time he said 40 minutes and
Mohammed is the expert of his excavation. To give additional weighting to what Mohammed came
out with as most likely estimate. We use a second formula that adds optimistic to most likely
multiplied by 4 to pessimistic and divides them by 6.
- Beta Distribution (from traditional PERT analysis). cE = (cO + 4cM + cP) / 6
cE = Cost Estimates
cO = Cost Optimistic
cM = Cost Most likely
cP = Cost Pessimistic
Mohammed commuting time = (25 + (40X4) + 140)/6
= 54 minutes
This answer is closer to what Mohammed has given us as most likely. This technique of cost
estimation considers the uncertainty estimates like heavy rains, soft soil or hard soil, and any risk
occurrence like the appearance of huge rock while excavation.
Three-point estimating technique application into a fragile and transitional context
Again this work presents part of the solution since there are several root causes of the problem of
constructions projects costs management in fragile and transitional contexts that can be addressed
in a separate work. This work will handle estimate costs during the development phase which
considered being significant part of the solution, since it involves analysis that address uncertainty
and risk at the early stages of a project, which would improve the accuracy of estimating costs.

13. 8
Cost estimates are a prediction based on the information known at a given point in time. In
challenging contexts the unavailability of relevant information or the accuracy of the information
could be an issue.
Taking Sudan context as an example three-point estimates technique will be applied to a project to
examine the relevance of this technique, and how it considers the uncertainty and the risk
involved.
Our example will be estimate costs for Basic Education Project in Sudan in three states with one
state subject to renewed instability and insecurity. ‘’The project’s activities focus on improving
results in the following key area:
- The number of students enrolled in primary education in selected schools’’ [3].
To achieve these results we have identified the following scope of work:
1. To rehabilitate and furnish (9) schools in three states, three schools for each state.
2. To construct (3) new Teacher Training Institute (TTI) in three states, one TTI for each state.
3. To supply TTIs with furniture, computer and laboratory equipment, and other necessities.
The planning team will estimate costs using three –point estimates technique based on the
available details and assumptions.
Assumptions
a. The design and the constructions materials for the schools and for the Teacher Training
Centers are agreed.
b. Duration of the project is one year
c. Inflation is expected to increase by 30%
d. Currency fluctuation, the local currency is forecasted to drop down in front of USD
e. Local constructions market stagnation is expected with scarcity on construction materials as
a result
Risk
a. Renewed instability and insecurity in one state

14. 9
Three-Point Estimates Application
Using three-point estimates the team will estimate costs for the three components considering the
assumptions and risk as variables.
The team has calculated that each school’s rehabilitation and furnishing would cost $10,000.
Each TTI would cost $7,000.
And the TTI’s supply for each TTI would cost $6,000.
Being Optimistic means that: deliver project during the project duration, no major inflation
appeared, local currency was stable and local constructions market is also stable. In this case our
total project amount would show (9 X 10,000 + 3 X 7,000 + 3 X 6,000) = $129,000
Looking into the most likely case would be: deliver project during the project duration for two
states, while for the one state subject to renewed instability and insecurity, consider adding more
resources to complete faster, in anticipation to any expected delays due to any renewed instability
and insecurity. That will increase the cost of the three components in one state. It’s most likely that
the inflation will take place but with 15%. Therefore we will include inflation of 15% for all the
materials to be purchased for constructions and for the TTI supply, which increase the cost of the
three components in the three states. It’s most likely that local currency will remain stable and
local constructions market also will remain stable.
To reflect the increase of the costs in the three components in one state:
A = (3*school, increase by 3,500 per each)+(1*TTI, increase by 2,000)+(1*TTI supply, increase by
1,500) = (3*13,500)+(1*9,000)+(1*7,500) = $57,000
B = the other two states costs will remain as they are = $86,000
(A+B) = $143,000
To reflect the increase on the inflation:
(A + B)*15% = (57,000+86,000)*15% = $157,025
Therefore our project total cost is getting into = $157,025
Finally for the pessimistic situation: again with the state subject to insecurity and instability we are
expecting delays, therefore we will add more resources to complete faster, which will increase the
costs for the three components in the one state. While for the inflation we will apply the 30%
increase here. For the currency fluctuation we are considering local currency drop down which may
increase the prices in the market, which again be reflected into the costs. For the local construction

15. 10
market stagnation we will consider the scarcity of the constructions materials which means
reflected in its prices increase.
To reflect the increase of the costs in the three components in one state:
A = (3*school, increase by 3,500 per each)+(1*TTI, increase by 2,000)+(1*TTI supply, increase by
1,500) = (3*13,500)+(1*9,000)+(1*7,500) = $57,000
B = the other two states costs will remain as they are = $86,000
(A+B) = $143,000
Currency fluctuation included in the inflation calculation since the effect is reflected in the prices
increase.
To reflect the construction materials prices increase due to its scarcity. We will apply only on the
school and TTI constructions.
C = (9*school, increase by 1,500 per each)+(3*TTI, increase by 500 per each)
C = $15,000
To reflect the increase on the inflation:
(A + B + C)*30% = (57,000+86,000+15,000)*30% = $ 186,050
Our project total cost is = (A+B +C) = $ 186,050
Now we have our three estimates. Using the following three-point estimating formula we will
calculate the final project cost estimate:
Beta Distribution. cE = (cO + 4cM + cP) / 6
cE = Cost Estimates
cO = Cost Optimistic
cM = Cost Most likely
cP = Cost Pessimistic
The final project cost estimate = (129,000+(4*157,025)+186,050) / 6 = $ 157,192
As you can see the final cost is very close to the most likely amount. During this estimates we have
considered the uncertainty and risk. In addition, we have addressed the different variables of the
fragile and transitional context. We have increased the level of confidence of our costs to a reliable
level, with a simple method of calculation.

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Conclusion
The three-point estimating technique is a simple technique yet provides a good level of confidence
on the cost estimates. This work presented a technical review for the technique and its application
in fragile and transitional contexts.
The calculation is simple and straightforward and can be implemented by using a simple program.
Can be used by any type or size of projects with advanced costs analysis performed.
This technical review suggests that the three-point estimate is reliable for fragile and transitional
contexts costs estimations.
Bibliography
No. Description
1. AACE (2012). Skills and Knowledge of Cost Engineering: AACE.
2. PMI (2013). The Project Management Body of Knowledge: Fifth Edition. Newtown Square: Project
Management Institute.
3. ICF International GHK (2012). Independent Evaluation of the World Bank Administered Multi-
Donor Trust Fund in Sudan Final Evaluation Report.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/311988/Multi-
Donor-Trust-Fund-Sudan.pdf