4. 2 Construction Cost Estimate.pdf

Dr. Mohammed ABUNEMEH
CONSTRUCTION CONTRACTS
COST ESTIMATE AND SPECIFICATIONS
An Najah National University
Faculty of Engineering

Estimating Project Cost
Construction costs includes:
1) Materials costs.
2) Labor costs.
a) Direct labor cost
b) Indirect labor cost
3) Plant and equipment costs
4) Overhead costs
a) Job overhead costs (site)
b) Operating overhead costs (head office)
5) Profit.

Estimating Project Cost
COST
ESTIMATE
DIRECT COSTS
LABOR MATERIALS EQUIPMENT SUBCONTRACT
INDIRECT
COSTS
TAXES OVERHEAD OTHERS

Indirect Costs
 Bond premiums
 Insurance premiums
 Fees for licenses and permits
 Services such as water, electricity, telephone, maintaining site
office
 Home office overheads allocation

Material Costs
The material price in a competitive market determined by the
supply & demand and is affected by:
 Quality of material
 Quantity of material
 Time of purchase
 Place of delivery
 Buyer & seller

Material Costs
Demand & Supply:
 In the competitive market the price of a good mainly
determined by the supply of that good by manufacturers and
the demand to that good by consumers.
 The supply curve is upward curve
 The demand curve is downward curve

Material Costs
Supply Curve:
Quantity
price
Q2 Q1
P1
P2

Material Costs
Demand Curve:
Quantity
price
Q1 Q2
P1
P2

Material Costs
Demand & Supply Curve:
price
Quantity
Qe
Pe
Q1
P1
Q2
P2
Pe: Equilibrium Price
Qe: Equilibrium Quantity

Material Costs
Quality of materials:
Type and specifications of the material
The higher the quality, is the higher the price
Quantity of materials:
Mostly, the more the quantity requested, the lower the price
quotation.

Material Costs
Time of purchase or delivery:
 If the delivery time requires the manufacturer or supplier to
bear additional costs, he will back charge them to the
material price, such as supplying material in holydays
Place of delivery:
Affects the price through the means and distance of
delivery, and the accessibility to the site.

Material Costs
The buyer and seller:
The buyer and seller affects the price through the market
level from which they are able to buy.
E.g. Retail Vs. Wholesale
Cash discounts, Trade discounts

Material Taxes
 The taxes rate for materials will vary depending on the
location.
 Generally the tax on materials will range from 3 to 6 percent.
 The estimator should include the appropriate amount of tax in
the summary of the estimate.

Labor Costs
 The importance of Labors:
They influence every part of a project
They operate equipment, fabricate and install materials and
make decision that have a major effect on the project.
Most persons involved in construction agree that people are
the most important resources on a project

Labor Costs
 Direct labor costs: wages and other direct payments to
workmen
 Indirect labor costs: any other amounts paid by the contractor
on behalf of labors such as (transportation, insurance,
accommodation, paid vacations, etc.)

Labor Costs
 The straight time wage plus any over time pay
 Social security tax.
 Unemployment compensation tax.
 Workers compensation insurance
 Public liability and property damage insurance.
 Fringe benefits

Labor Costs
 Labor wages: Wage rate vary considerably with the location of
project and the various type of crafts and it determine by one of
three means:
Union wage
Open-shop wage
Prevailing wage
Wage rate within 40 hr/week , 8 hr/day and 5 day/week is
called base rate.
For work in excess of 8 hr/day or 40 hr/week the base rate is
generally increased to (1.5-2) times the base rates

Labor Costs
 Social security tax:
 Federal Government Requires Employers to be taxed for
providing retirement benefits for employees
 The employee contributes an equal amount through the
employer

Labor Costs
 Unemployment compensation tax:
 This tax is collected by the State to compensate workers
during period of unemployment.
 Paid by employers.
 Usually 3% of total earnings (Avg. Wage) of the
employees.

Labor Costs
 Worker compensation insurance:
 To provide financial assistance to the employee or to his or
her family in the event of an injury or death.
 Insurance paid by employers.
 Premium rate is vary depending on company's record of
accidents.

Labor Costs
 Public liability and property damage:
 This insurance protects the contractor against injuries to
the general public or damage to public property due to
actions of employee while working during construction.
 Premium is vary depending on company's record of
accidents.

Labor Costs
 Fringe benefits:
 The contractor often pay benefits in terms of :
 Health insurance.
 Pension plans (
‫معاشات‬
‫التقاعد‬
) .
 Training program.
 Paid holiday and vacations.
 Generally the costs is a percent of base wage.

Labor Costs
 Tow methods of estimation:
 Labor rates: the hourly rates of employing workmen, based
on total labor costs (direct and indirect cost) divided by the
total hours worked. E.g. 10 $/hour
 Productivity: the amount of work done in the specific
period of time paid for. E.g. 10 $/m2

Labor Costs
 Production rate: is the number of units of work produced by a
unit of equipment or a person in a specified unit of time
(usually an hour or a day).
 Tables of production rates:
 When preparing an estimate for a project, if access is
available to production rates obtained from actual jobs
constructed under similar conditions, the estimator should
use them instead of the general tables.

Labor Costs
 Productivity rates depend on:
 Labors.
 Projects.
 Climatic condition.
 Job supervision.
 Complexities of the operation.

Labor Costs
 Example:
150 m3 ready-mixed Portland cement concrete placed in
continuous footings. Given the concrete unit cost is 80 $/ m3,
and the labor unit cost is 30 $/ m3
Calculate the work item total Cost.

Labor Costs
 Solution:
Description Quantity Unit Unit cost Total Cost
Concrete
(as specified)
150 m3 80 $ 12,000 $
Labor 150 m3 30 $ 4500 $
Total Material & Labor Costs 16,500 $

Labor Costs
 Example:
A plaster mason works 10 hrs/day, 6 days/week and can
produce 30 m2/day. A base wage of 10 $/hour is paid for all
straight-time work (8 hrs/day). An overtime rate is paid as time
and one half for all hours over 8 hrs/day. The social security
tax is 7% and the health insurance is 10 %. (Tax are paid on
actual wage and insurance is paid on base wage)
Calculate:
1) the average hourly, daily and weekly labor cost?
2) Labor unit cost

Labor Costs
 Solution:
Actual hours = 10 hrs/day
Pay hours = day straight-time + day overtime
= (8 hrs x 1) + (2 hrs x 1.5)
= 8 + 3 = 11 hrs
Average hourly pay (Actual Wage) = (pay hours/actual hours) x base wage
= (11 / 10 ) x 10 $ = 11 $/hr
11 $/hr is the direct Labor Cost

Labor Costs
 Solution:
Tax are paid on actual wage and insurance is paid on base wage
Indirect Labor Cost:
Social security tax: 7 % x 11 $ /hr = 0.77 $ /hr
Health insurance: 10 % x 10 $ /hr = 1 $ /hr
Indirect Labor Cost: 0.77 + 1 = 1.77 $/hr (Indirect)
Average hourly cost = Direct Labor Cost + Indirect Labor Cost
= 11 $ /hr + 1.77 $ /hr = 12.77 $/hr
Daily cost = 10 hrs x 12.77 $/hr = 127.7 $/day
Weekly cost = 6 days x 127.7 $/day = 766.2 $/week
2) Labor unit cost = 127.7 $ / 30m2/day = 4.26 $/m2

Equipment Costs
Whether to rent or own.
Does not matter to the estimator since he should consider costs.
 If equipments are rented, the rental rate will be formed by offer
and acceptance like any other contract.
 The price of renting is your equipment cost
 If equipments are self-owned, an economically realistic rental
rate should be established for use within the company to assure
accurate cost estimation.

Equipment Costs
Choice between purchased and rental usually depend on the
amount of time the equipment will be used in the contractors
operations. If extensive use of equipment is required the
equipment is often purchased. If the equipment is to be used a
limited amount of time it is typically rented.

Equipment Costs
If your decision to own equipments consider the following
costs:
 Owning costs
 Operating costs

Equipment Costs
Owning costs of equipment:
Owning costs (fixed costs) Can be identified as:
 Depreciation: Loss in value
 Investment: cost arising from investment and ownership
 Taxes
 Insurance
 Storage

Depreciation
 Loss in value of equipment resulting from use and age.
 Decrease in value of equipment through wear, deterioration,
and obsolescence
 Straight Line method
Dep./ year =
Where:
P = initial capital cost
F = salvage or resale value
n = estimated life of Equipment
Initial cost (P) – Estimated salvage value (F)
Estimated life in years (n)
= (P – F) / n

Depreciation
 Example
 Initial Price of equipment including shipment = $ 35,000
 Expected life of equipment = 5 yrs.
 Expected salvage value after 5 yrs. = $ 5,000
Calculate the cost of depreciation per year.
= $ 6,000
Dep./ year =
35,000 – 5,000
5

Depreciation
 Example
 A concrete vibrator having an initial cost of 10000 $ and an
estimated salvage value of 2000 $ after 8 years. Calculate the
annual depreciation?
= 1,000 $/year
Dep./ year =
10,000 – 2,000
8

Declining Balance Depreciation
 Example
 A concrete vibrator having an initial cost of 10000 $ and an
estimated salvage value of 2000 $ after 8 years. Calculate the
annual depreciation?
% of Depreciation = 1/ n
= 1/ 8 = 12.5%
Depreciation/yr = 0.125 x 10,000
= 1250
B. V. 1 = 10000 – 1250 = 8,750

Investment
 Return on money paid to acquire the equipment based on the
rate of interest of banks
 The purchase of the construction equipment requires a
significant investment of money
 The money on purchase the equipment will be either borrowed
from a lender or it will be taken from reserve fund of the
contractor.
 Investment costs includes:
 Interest on investment
 Insurance and taxes.
 Storage costs.

Taxes & Insurance Costs
 The amount of the tax varies by geographic location.
 The construction contractor must secure insurance for owning
and operating equipment.
 The cost of equipment insurance varies, depending on the type
and size of equipment, and the safety record of the contractor .

Ownership Costs Calculation
 Ownership cost can be calculated as Follows:

















 n
n
n
i
i
F
i
i
i
)
1
(
1
)
1
(
)
1
(
P
A
 Where:
A = Annual Cost or investment
P = Purchase Price
F = Future Salvage Value I = Annual interest rate
n = useful life, in years

 Example:
The purchase price for new equipment is 145,000 $. The
estimated salvage value is 25,000 $ after the end of its
expected useful life of 6 years. Assume interest for
borrowing money is 9 %, 5% risk allowance and 3 % for
taxes, insurance and storage.
 Calculate the annual ownership cost?
 Calculate ownership cost per hour considering that the
equipment will work 40 hrs/week?

 Solution:

















 n
n
n
i
i
F
i
i
i
)
1
(
1
)
1
(
)
1
(
P
A
 Analyze Data:
A = ??
P = 145,000 $
F = 25,000 $
I = 9 % + 5 % + 3 % = 17 %
n = 6
 Apply Equation :

 Solution:

















 6
6
6
)
17
.
0
1
(
17
.
0
$
000
,
25
1
)
17
.
0
1
(
)
17
.
0
1
(
17
.
0
$
145,000
A
   
0662726
.
0
$
000
,
25
0.2786148
$
145,000 

= 38,742 $ / year
hr
year
hrs
/
$
62
.
18
/
2080
$
38,742
cost
ownership
Hourly 


Distribution of Hourly Charges of Equipment
Hours used per year
Hourly
Ownership
Charges
(
$
/
hr
)

Operating Costs
 Operating costs includes:
 Fuel costs
 Oil (Engine)
 Running repairs ( minor repairs and parts replacement)
 Transportation: (transporting to and form the site, setting up and
dismantling).
 Tire costs
 Operator: direct and indirect costs

Operating Costs
 Fuel costs
 Fuel consumption rates gallons/hr
Gasoline engines = 0.06 x HP x f
Diesel engines = 0.04 x HP x f
Where:
f : operating efficiency

Operating Costs
 Oil (Engine)
 q = +
Where:
q : quantity consumed, gallon per hour (consumption of oil
per hour)
HP: rated horsepower
c: crankcase capacity
f: operating efficiency
t: number of hours between oil changes
HP x f x 0.006
7.4
c
t

Operating Costs
 Repairs
 Overhauls, minor repairs, spare parts.
 Since it depends on the usage, it is usually determined as
percentage of the depreciation costs.
 Tire costs
 Depreciation of tire is treated separately.
 Repairs of tires.

Operating Costs
 Repairs
 The cost for maintenance and repairs include costs for
replacement part and labor required to keep the equipments
in good working conditions. These costs vary with the type
of equipment, skills of operator, times of services. For
Example: If an excavator is used to excavate soft earth, the
replacement parts will be less than when the same
excavator is used to excavate rock.

 Example:
A contractor borrowed 150,000 $ with 10% interest rate to
buy a diesel engine shovel. No salvage value is assumed for
this equipment after 6 years. tax and insurance is 5 %.
Maintenance and repairs costs are expected as 80 % of the
annual straight line depreciation cost. Fuel gallon costs 1 $
and the average fuel consumption is 30 gal/day.
Determine the probable cost per hour of owning and
operating the shovel considering that the equipment will
work 40 hrs/week?
Operating Costs

 Solution:
Operating Costs
1 ) Calculate hourly owning cost:

















 n
n
n
i
i
F
i
i
i
)
1
(
1
)
1
(
)
1
(
P
cost
Ownership
Annual

















 6
6
6
)
15
.
0
1
(
15
.
0
0
1
)
15
.
0
1
(
)
15
.
0
1
(
15
.
0
150,000
A
  0
0.264237
150,000
A 

A = 39635.54 $ / year
Hourly ownership cost = 39635.54 $ / 2080 hr/year = 19.05 $ / Hr

Annual Depreciation = (P – F)/n = (150000 – 0)/6
=25000 $ / year
Maintenance and Repair = 0.80 x 25000
= 20000 $ / Year
Hourly Maintenance and repair Cost = 20000 $ / 2080 hr / year
= 9.61 $ / hr
Fuel Cost = 30 gal/day x 6 days/week
=180 gal/week X 1 $/gal= 180 $/week
Hourly Fuel cost = 180 $/week / 40 hr/week = 4.5 $/hr
Total Hourly operating cost = 9.61$ + 4.5 $ = 14.11 $/hr
Total hourly (Owning + operating) Cost = 19.05 $ + 14.11 $ = 33.16 $/hr
2 ) Calculate Hourly operating cost:

 Example:
 Calculate the probable owning & operating costs per hour for
the following equipment:
 Cost delivered, including freight and tax = $92,623
 Cost of new set of tires = $ 12,113
 Useful life = 5 yrs
 Salvage value after 5 yrs = 0.0
 Life of tires = 5,000 hrs
 Usage hours per year = 2000 hrs
Operating Costs

 Diesel engine of 250 HP
 Operating factor = 0.6
 Crankcase capacity = 14 gal
 Time between oil changes t = 80 hrs
 Other lubricant consumption per hour = 0.5lb.
 Interest rate per year (i) = 15%
 Maintenance & repair = 50% of depreciation
 Repairs of tires = 15% of cost of tire depreciation
 Fuel costs = $ 0.5/ gal
 Cost of the engine oil = $ 1.6/ gal
 Other lubricant costs = $ 0.3/ lb
 Operator Costs = $20/hr
Operating Costs

Solution
1 ) Calculate hourly owning cost:
Net cost less tires = 92,623 – 12,113 = $80,510

















 n
n
n
i
i
F
i
i
i
)
1
(
1
)
1
(
)
1
(
P
cost
Ownership
Annual

















 5
5
5
)
15
.
0
1
(
15
.
0
0
1
)
15
.
0
1
(
)
15
.
0
1
(
15
.
0
92,623
A
  0
0.264237
92,623
A 

A = 24,474.4 $ / year
Hourly ownership cost = 24,474.4$ / 2000 hr/year = 12.24 $/hr

Annual Depreciation = (P – F)/n = (80,510– 0)/5
=16,102 $ / year
Maintenance and Repair = 0.50 x 16,102
= 8,051$ / Year
Hourly Maintenance and repair Cost = 8,051$ / 2000 hr / year
= 4.026 $ / hr
Fuel Cost = (250x0.04x0.6) x $ 0.5 = 3 $ / hr
Engine oil =(((250x0.6x0.006)/7.4) + (14/80)) x $1.6
= $0.48
Other Lubricant = 0.5 x $0.3 = $0.15
Tire depreciation = 12,113 / 5,000 = $2.42
Tire repairs = 0.15 x $2.42 = $0.36

Total Operating Cost = 4.026 + 3 +0.48 +0.15+2.42+0.36 +20
= 30.436
Total hourly (Owning + operating) Cost = 12.24 $ + 30.436 $ = 42.67$/hr

Overhead Costs
 Overhead costs can be specified as:
 Job overhead costs
 Operating overhead costs.

Job Overhead Costs
 If the costs can be attributed to a specific project, and cannot
be attributed to a specific work item. these costs are JOB
OVERHEAD COST.
 E.g. Project manager salary, Security fence, site offices
services, water and power supply etc.
 These costs estimated to be 5 – 15 % of the projects direct
cost.

Operating Overhead Costs
 If the cost cannot be attributed to any specific project, they are
operating overhead costs.
 Costs of running business
 These costs exist as long as firm exists regardless projects
running or not.

 Operating Overhead costs may include: ( head office costs)
 Management and staff.
 Business offices.
 Communications.
 Rentals
 Usually is not a part of the estimator’s duties.
 It is the duty of the firms accountants to provide the estimator
with the required data.

 Can be calculated as follows:
 The accountant predicts the annual operating overhead cost
for the coming year, say 600,000 $, And the total expected
amount of work for the coming year, say 20,000,000 $
 History records are these data sources

 Then: a percentage allowance can be calculated
600,000
20,000,000
X 100 = 3 percent
 This allowance should be added to each job total cost.

Profit
 The profit is an indicator to success and efficiency of the
firms.
 The profit = total income – total expenditures.
 Usually added as a percentage to the total project cost. e.g. 15
%
 Can be determined in relation to the market situation and the
work conditions.

Example
A contractor estimated a project direct cost to be 1,500,000
$, 10 % is the estimated job overhead costs, 3 % is the
operating overhead costs, his profit margin is 5 %.
Calculate:
 Job overhead costs
 Operating overhead costs
 Total project cost
 Profit and
 Bid price.

Solution
Direct cost = 1,500,000 $
1) Job overhead = 1,500,000 X 0.10
= 150,000 $
2) Operating overhead = 1,650,000 x .03
= 49,500
3) Total project cost = 1,500,000 + 150,000 + 49,500
= 1,699,500
4) Profit = 1,699,500 X 0.05
= 84,975 $
5) Bid price = 1,699,500 $ + 84,975 $
= 1,784,475 $

4. 2 Construction Cost Estimate.pdf

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4. 2 Construction Cost Estimate.pdf