May AACE Presentation, FINAL

Benefits of Proper Cost Estimating Techniques
With Case Studies
for
Association for Advancement of Cost
Engineers
(AACE)
May8,2015
Brandon G. Hummel, Esq. [Riordan McKee & Piper, LLC]
Ryan Phillips, P.E., CCM, LEED AP, CDT [The Vertex Companies, LLC]
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RiordanMcKee&Piper,LLC

Brandon G. Hummel, Esq. - Riordan McKee & Piper, LLC
Partner
Mr. Hummel is a Partner with the Chicago law firm of Riordan, McKee & Piper, LLC where
he devotes a substantial portion of his practice to litigating complex construction, surety,
and insurance coverage matters. Over the course of his career, Mr. Hummel has resolved
numerous construction and surety disputes in state and federal courts and in
mediation/arbitration settings. These include multi-million dollar matters with contested
scope/change order claims, delay/acceleration claims, defective design/construction
claims, warranty claims, and mechanics lien/payment bond claims. In addition, Mr.
Hummel has advised clients on various transactional matters including, but not limited to,
negotiating and drafting construction contracts as well as takeover, tender, forbearance,
and other dispute resolution documents in the surety setting.
Ryan Phillips, P.E., CCM, LEED AP, CDT - The Vertex Companies, Inc.
Executive Vice President
Mr. Phillips has a decade of construction management and construction claim experience in
the Rocky Mountain Region. Specific expertise includes: surety consulting and project
completion, owner’s representation, construction oversight, construction claim analysis
and preparation, construction defect cost estimating, liability review for construction
defect matters, construction bid package preparation, and cost to complete preparation. As
the Executive Vice President of Vertex’s Litigation Support group, Mr. Phillips oversees
contract claims and other legal consulting requiring environmental, engineering and
construction expertise. Mr. Phillips has testified numerous times in deposition, trial, and/or
arbitration settings.
Speaker Biographies
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Fundamentals of
Cost Estimates Generally
• What is the purpose of the opinion/estimate? What is it
being used for?
• Preliminary Cost Estimate for Proposed Project?
• Value Engineering Following Preliminary Estimate?
• For Construction Bid Packages?
• For Remedial Work Arising Out of Defect Situation?
• For Takeover of Incomplete Project by Surety?
• For Third Parties Such as Lenders for Construction Loan?
• In every instance, client/intended beneficiary and estimator
expectations must be aligned.
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Liability Associated
with Cost Estimates
• Potential liability for cost estimators starts with the contract
but doesn’t necessarily end with it.
• Liability of an estimator can extend beyond the contract to
tort liability where there is a breach of the professional
standard of care.
• Doesn’t matter if the tort liability is specifically disclaimed in the
contract.
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Liability Associated with Faulty Cost
Estimates
• Liability depends upon whether the variation in actual cost
from the estimate is within a reasonable range (i.e., 10 to 15
percent).
• This is usually a determination for the fact finder (i.e., jury).
• The determination of liability also often depends upon:
• the sophistication of the intended recipient of the information
• what information the recipient has received and when (i.e.,
construction bids)
• how the recipient uses the information received (i.e., whether
the recipient proceeds with work)
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LiabilityAssociatedwith Faulty Cost
Estimatesin DesignBuild Scenario
• In a design build situation, however, failure to revise cost
estimates and to advise client of same can be a breach of the
professional standard of care.
• In one case an architect was not entitled to recover his fee
where his designs resulted in construction costs more than
double that contained in his design built estimates, and the
true cost of the project was not conveyed until the project
was complete.
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Damages Associated
with Faulty Cost Estimates
• There are usually two consequences to a breach of
contract/tort liability for a faulty cost estimate:
• Bar to Recovery of Estimator’s Professional Fees
• Recovery of Damages Associated with Owner Cost Overruns
Caused by Estimator’s Breach of Professional Standard of Care
• The Latter is Much More Difficult to Prove.
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• Remaining Construction Costs
• Accounts Payable
• Projected Backcharges
• Contracts Funds
• Budgeted Contingencies
Fundamentals of a Cost to Complete
Estimate
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 Unearned Subcontractor / Vendor Balances
 Remaining Buyout / Remaining Self-Performance
Items
 General Conditions for Completion Contractor
 Closeout Administration for Completion Contractor
 Completion Contractor Fee
Estimate
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 Unearned Subcontractor/Vendor Balance
• Current job cost reports, subcontract agreements,
purchase orders, executed change orders, pending
change orders and claim information.
 Remaining Buyout/Remaining Self-Performance
Work
• Buyout review
• Look for scope gap and exclusions
• Calculate the reasonable cost to perform all remaining
buyout work
Estimate
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 Remaining Buyout/Remaining Self-Performance
Work
• Calculate the reasonable cost to perform all remaining
buyout work.
 Pricing from local subcontractors and vendors.
 Historical pricing databases.
 Unit pricing from estimating guidelines such as RS Means,
Xactimate, HCSS, and Equipment Watch (Equipment Blue
Book).
 Quantity takeoff software such as OnScreen.
Estimate
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• Preferred Option
 Subcontractor bids:
• Proper bid coverage (3-5 bids) will reveal fair
market value for the work.
• Will assist with proving reasonableness of costs in
a recovery/indemnification action.
• Multiple bids are oftentimes difficult to get.
• Sole source bidding doesn’t necessarily mean fair
market value.
• Difficult with small scopes of work and work that
is not clearly defined.
• Bonding requirements may limit subcontractor
pool.
Estimate
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• Step One: Quantification
• Step Two: Costing
• Step Three: Pricing
Estimate
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• Independent Estimate Preparation:
 Define the scope of work per contract and
change order.
 Step One: Quantify the work
• Square feet of stucco.
• Cubic yards of concrete.
• Lineal feet of trim.
• Count of plumbing fixtures.
• Square footage of scaffolding.
• Count of site features/trees.
Estimate
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DIGITAL TAKEOFF
•Easy to use
•Clear Presentation
Takeoff Tab
•Printable Takeoffs
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 Step Two: Costing the Work – Assigning
realistic costs to the items.
• Subcontractor bids.
• RS Means
• Xactimate
• HSS
• Equipment Watch
• Historical Pricing from Similar Projects
Estimate
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Estimate
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•Multiple Source Information
•Large Volume of
Searchable Equipment
•Location Specific
Estimate
• Estimate Verification
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ESTIMATING PROGRAMS
•Most Used in North
America
•Pre-built Database
•Takeoff Compatibility
Timberline
ICE
•Widely Used
•Takeoff Compatibility
•Interface with
Manufacturer Price Data
•Built-in Digital Takeoff
•Heavy Civil and
Infrastructure
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 Step 3: Pricing the Work
• Economic considerations
• Competitive bidding environment
• Overhead and Profit considerations
• Adapt to specific project circumstances
Estimate
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• Subdivision Bond Claim(s)
• Five separate subdivision bonds for five separate
neighborhoods within a new development are
issued.
• Named Principal is the Builder/Developer.
• The City is the Obligee.
• Builder/Developer completes portions of site
development work before filing for bankruptcy.
• Value of bonds determined by the City -
Engineer’s Estimate of Probable Cost
Cost to Complete Case Study
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• Obligee/Plaintiff makes claim on the bond for
incomplete work.
• Plaintiff makes claim for $200,376 based on
new Engineer’s Estimate.
 No basis for pricing.
 Included additional work not included in
subdivision bond.
• Vertex’s comparable estimate was for $92,087;
a variance of $108,289.
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• Summary:
• Using industry standard pricing databases and
quantity take-off software, as opposed to
utilizing arbitrary and unsupported figures,
Vertex was able to cut the Plaintiff’s direct costs
by more than 40%.
• Applying a strict interpretation of the
subdivision bonds regarding what scopes are
included, the Plaintiff’s claim was further
reduced by approximately 15%.
• In sum, the matter went to trial….
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Proposal Risk Considerations for
Design-Build Projects
• The completeness of the Owner
provided Design Criteria Package
• The time allowed to prepare the
estimate and/or perform additional
design and investigation.
• Scheduling the work based on limited
information.
• Contingency Considerations(discussed
later)
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Design Build Case Study
• Background of Proposed Project
• Proposed roadway improvements spanning approximately
1.5 miles in Colorado.
• Colorado Department of Transportation solicits bids from
several contractors and provides outline specifications as
the basis of design and bid.
• Work generally consists of widening a roadway,
intersection/signal replacement and extensive drainage
redesign and installation.
• A Design-Builder contacts a local civil engineering company
to provide professional services.
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Execution of Contractor/DB Agreement
The Agreement’s Standard of Care Provision Provides:
Standard of Care: While performing services under this
Agreement, Designer shall exercise that degree of care
and skill ordinarily exercised under similar circumstances
by members of the engineering profession, as applicable,
performing the kinds of services to be performed
hereunder and practicing in the same or similar locality at
the same time. Designer agrees to perform and correct at
its expense any work or Services performed by Designer
that fails to conform to the standard of care Contractor
has accepted pursuant to this subparagraph.
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• First Stage of Design Services Performed
• DB fulfilled its requirements under the Professional
Agreement and provided estimated quantities of work
(2000 lf of 18” RCP, 100 lf of 32” RCP, 32 inlet
structures, etc.) and a schematic design based on the
RFP information.
• Discussions were had, although not clearly
documented between the two parties, regarding the
inclusion of contingencies in the estimate.
• DB was awarded the Project from CDOT.
• Contract value was approximately $40M.
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• Following completion of 1st Professional Services Contract,
DB contracted with Designer to provide complete design
services - $285,000 value.
• Design Agreement:
• General Terms: This Agreement is binding and all parties
agree that if DB is awarded the Project from CDOT, team
members will execute a mutually agreed upon contract for
design services for the said project.
• Scope of Work: Designer will provide design and services
necessary for Contractor to develop quantities and unit
prices for the bid proposal.
• Designer will be compensated at a rate of $55.00 per hour,
not to exceed $5,000.
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• Significant Cost Overruns Occur
• DB performed the work; however, significant quantity overruns
occurred for several civil related line items.
• DB files a claim against Designer for $952k.
• Deposition testimony on behalf of DB indicates DB
assumed 7.5% profit for the project. Final job cost
reports indicate the following:
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• Even With Cost Overruns, DB Still Earned Profit
• The Project was profitable for the DB and the DB very
nearly met their estimated profit margin – a variance
of only $291k.
• DB’s claim was in the format of a modified total cost
claim and failed to meet the requisite four part test
that is necessary to utilize this claim method.
(1) that it is impractical to prove actual losses
directly
(2) the Contractor’s bid was reasonable
(3) the Contractor’s actual costs were
reasonable.
(4) the Contractor was not responsible for
any of the cost overruns.
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• DB Maintained Inadequate Contingency
• Deposition testimony revealed the DB carried a
2% contingency.
• Expert consultant for the DB stated:
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• Best Practices for Use of Contingencies
• RS Means states that contingencies should
generally be carried as follows:
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• AACE Recommendations for Use of
Contingencies
• AACE guidelines would recommend the following
parameters be discussed (AACE International
Recommended Practice No. 17R-97).
Primary
Characteristic
Estimate
Class
Degree of Project
Definition
(expressed as % of
complete definition)
End Usage
(Typical purpose of estimate)
Methodology
(Typical estimating method)
Expected Accuracy
Range (Typical +/-
range relative to index
of 1 (i.e. Class 1
Estimate))
Preparation Effort
(Typical degree of
effort relative to
least cost index of 1)
Class 5 0%-2% Screening or feasibility
Stochastic (factors and/or
models) or judgment
4to 20 1
Class 4 1%-15% Concept study or feasibility Primarily stochastic 3to 12 2to 4
Class 3 10% to 40% Budget authorization or control Mixed but primarily stochastic 2to 6 3to 10
Class 2 30% to 70% Control or bid/tender Primarily deterministic 1to 3 5to 20
Class 1 70% to 100% Check estimate or bid/tender Deterministic 1 10to 100
Secondary Characteristic
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• Failure to Align DB and Designer Expectations
• The DB assumed that for $5,000 they were
essentially getting a design and estimated
quantities in line with “Final Working Drawing
Stage (3.0% contingency), or in line with AACE
guidelines a Class I estimate with an accuracy
range on the low end of -3% to -10% and on the
high end of +3% to +15%.
• The failure to properly communicate what was
being provided by the Designer and what was
expected by the DB set the scene for a dispute.
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• How the DB/Designer Communications Could
Have Averted a Dispute
• Clear communication on the basis of the
Designer’s design and quantity takeoffs would
have eliminated the possibility for a claim.
• The AACE provides estimating guidelines that
when used could have protected the Designer.
• The DB was awarded a small portion of their
claim but failed in their claim submittal primarily
due to the failure to support their modified total
cost claim method.
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Conclusions
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May AACE Presentation, FINAL

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