ESTIMATING FOR CONTRACT ADMINISTRATION

INTRODUCTION Parviz F. Rad1 has defined estimating as the art and science of using historical data, personal expertise, institutional memory, and the project scope statement to predict the resources expenditures, total cost and duration of a project. The project estimate is the product of an estimating procedure which specifies the expected cost to perform a stipulated task or to acquire an item in a project. A project estimate is required at various phases of a project such as the Initiating; Planning; Executing; Controlling; and Close out phases. The activities in the phases may be stated as indicated below: Table 1 Initiating Planning Executing Controlling Close out and Operations Completion of the contracts, occupation, commissioning , final accounts, provision of warranties etc,, maintenance, defects liability period and amendments

Selection of project, land acquisition, hiring professionals for feasibility studies, procurement of services, hiring of agents for various tasks

Preparation of plans by owner, professionals, agent and project team in-house or by outsourcing the services.

Preparation of tender documents, tender invitation, award of contract, execution of contracts, Supply of goods, Construction supervision, equipment testing, verification

Administratio n of contracts, Contract payment, reporting.

The owner, project manager, project team, consultant and/or contractor must determine cost at each phase of a project for decision making, control, defining strategic direction and determining profit. The project estimate derives these costs. The accuracy of estimates at each stage is dependent on the personnel abilities in estimating, the accuracy of the historic data, the relevance of the data, the duration of the project, the project activities, uncertainty, complexity, equipment used and the degree project team commitment.

Pariz F Rad, Project Estimating and Cost Management, Management Concepts (2002) pg. 1
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The estimate is refined in each phase dependent on the information that is available. An initial estimate follows: Example A: Housing Development Company Limited has decided to implement a new housing development project for the HDC Ltd. The Project Manager has recently constructed similar housing developments comprising ten (10) houses in the same location as proposed at $460,000 per house. Twelve (12) new houses are proposed in the new housing development. (Note: No market changes are expected) The Initial Protect Estimate: The project estimate for the development project would be: = 12 x $460,000.00 = $5,520,000.00. Rodney Turner2 suggests that project estimates are needed at each phase of a project for the following reasons: THE USE OF ESTIMATES 1. Assessing Project Viability (Aid in Decision-Making). An initial program or project estimate assists the project manager in the decision making. Management requires an estimate of the project to compare the estimate of cash flows. 2. A Basis for Obtaining Funding. After the approval of the project is obtained, the project must be financed. An estimate of the cost for the financial requirement must be prepared. ( In Example A, HDC Limited would estimate the total project funds required by obtaining an estimate for management cost and other omitted costs) 3. As A Basis of Control. The estimate is prepared as a measure to control expenditure on a project. The item, task or project expenditure is used as a measure called a baseline. The control estimate has four (4) steps: Step Step Step Step 1. 2. 3. 4. Estimate the future performance Monitor the actual performance Calculate the difference, called the variance Take action to correct according to size of variance as follows: Where the variance is negligible or zero continue the project without change; if the variance is significant but recoverable : plan recovery if the variance is large : revise estimate

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(In Example A, ABS Company would seek to keep project cost to within $5200,000.00 )

4. Manage Cash Flow. The estimate is used in preparing cash flows. Zealous project managers set goals of completing projects early and to under spend while the company may go into liquidation because bankers called in the overdraft halfway though the project. ( In Example A, ABS Company Limited would determine the cash expenditure at time intervals seeking to keep the project cost to within $5,200,000.00) 5. Allocate Resources. The resources can be assigned weekly in accordance with the estimate. (In Example A, ABS Company Limited the project manager is the only allocated human resource identified for the project.) 6. Estimate Duration. The estimate of time is determined by comparing the work content to resources availability. (In Example A, ABS Company Limited determines the duration time for the new housing development.) 7. Prepare Tenders. To prepare a tender price an or anticipated tender price estimate of the project cost must determined. This estimate can be used to forecast the profit or determine the cost to the client/ owner. ( In Example A, the procurement of construction services would be determined at a later stage i.e. at Execution Stage, prior to the tender a tender estimate would be prepared) Parties in project require the estimate as follows:

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Cabinet/ Board of Directors/ Major Stakeholders

Program or Project Consultant/ Manger/ Project Designers Engineer/ Coordinators Decide on go or Decide on go or Decide on go or no of the project no of the project no of the project Determine Determine Determine funding funding funding Determine Determine Determine resources resources resources Determine profit Determine profit Determine profit Determine Determine Determine duration duration duration For control For control For control Determine Determine Determine procurement procurement procurement plan plan plan To prepare To prepare tender tender To evaluate To evaluate tender prices tender prices To evaluate To evaluate variations alternatives To determine extensions to the contract

Suppliers , Contractors , Subcontractors, Vendors Decide on go or no of the project Determine funding Determine resources Determine profit Determine duration For control Determine procurement plan To prepare tender

To compare subcontractors prices To submit for variation works

2. PROJECT ESTIMATING ACCURACY The accuracy of the estimate for each purpose and at each stage is dependent on: The accuracy, amount and quality of the historic data The spectrum of estimates ranges from the rough to the very detailed The probability of the actual that if it will meet the predicted costs The relevance of the data, the duration of the project, the project activities, uncertainty, complexity, equipment used and the degree project team commitment. Rodney Turner 2also suggests the use of the binomial theorem in determining the accuracy of an estimate. This theorem states that the percentage error of the part, as a percentage of the whole, is inversely proportional to the square root of the size of

+ e% = +E % S s

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Were S = Project duration, s = part duration, e = accuracy of the part, and E the project accuracy. Using these Turner proposes the following accuracy. Table 2 Type of Accuracy (%) estimate Proposal Budget Sanction Control + 30% 50% + 20% 35% + 10% 25% + 5% to Level of effort as % Stage of of accuracy of production project cost to + 0.02 0.1 Pre-proposal and initiation to + 0.1 0.3 Proposal and initiation to + 0.3 1.0 Design and appraisal + 15% 1 3 Implementati on and planning 5 10 Tender preparation

Tender

+ 2% to + 5%

Other authors have suggested the accuracy to be adopted. In an effort to monitor and forecast variance (i.e. the accuracy) of the estimate, the actual estimate to the projected estimates should be complied for all estimates. The accuracy can then be refined and trends determined.

3.0 TYPES OF ESTIMATES The same estimate therefore cannot serve all the purposes as stated above. Many authors have proposed types of estimates for example, Rodney Turner 2 suggest five (5) estimate types as note above, Proposal, Budget, Sanction, Control and Tender in the project life cycle. Harold Kerzner2 suggests three (3) types. Thus estimates are often defined by their method and not by the life cycle of the project, as follows: Table 3: Type of estimate Order of magnitude Method of estimating Without detailed engineering data, determined by using past experience, scale factors, capacity estimates etc. example cost of $/ kilowatt (kW) for energy estimate.

Harold Kerzner, Project Management, A system Approach to Planning , Scheduling and Controlling, 8th Edition, John Wiley & Sons , Inc. (2003) pg. 511-624
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Approximate

Without detailed engineering data, determined from previous projects that are of similar scope, capacity and may be similar activities adjusted for capacity and technology. A detailed estimate determined by building up the costs from well-defined engineering data including a minimum of vendor quotes, fairly complete plans, specifications, unit prices and estimate to complete, and/or the use of Bills of Quantities.

Definitive

Rory Burke4 proposes three types (3) of estimates; these are defined in the stages of the lifecycle of the project as follows: Table 4: Type of estimate Conceptual (Also called Order of magnitude, Budget figure, Ball-park figure, Thumb suck, Plucked from the air) Method of estimating Based upon a limited scope of works using scale factors. This estimate is not a legal binding document. This estimate gives a level of accuracy of + 25%.

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Type of estimate Feasibility (Preliminary comparative estimate)

Method of estimating or The estimate is made without detailed engineering data, based on previous project having scope of work and capacity. This estimate gives a level of accuracy of + 10%. (A number of techniques are suggested by Rory4 to keep the accuracy these include needs analysis, Cost-benefit Analysis. The cost- benefit Analysis includes : The Pareto improvement criteria The Hicks-Kaldor test The willingness to pay test Definitive ( also detailed Determined from a considerable amount of estimate, project control data incorporating: a detailed scope of work, estimate, quotation or tender) detailed drawings, specifications, vendor quotations, (which are now legally binding) and site surveys. This estimate gives a level of accuracy of + 5%. J. Davidson Frame5 proposes two types (2) of estimates; these are defined by the method of estimating as follows: Table 5: Type of estimate Bottom-up Approach Method of estimating The estimate is prepared by gathering vast amounts of detailed cost data on each component of the project. Once the data is gathered, they are rolled for an overall estimate of costs for the whole project. or This estimate eschews the detail data on each component of the project. Once the data is gathered, they are rolled for an overall estimate of costs for the whole project.

Top-down Approach Parametric Cost Estimate

J. Davidson Frame states that the estimating approaches are as follows: Bottom-up Approach The methods focus on tracking cost element associated with the project. The total project cost is the sum of costs of all the individual elements. The most common approach is to prepare a Work Breakdown Structure (WBS) as a guide to identifying

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the cost elements. Cost data are then gathered at the bottom-most level of the WBS. An example of a Bottom-up Estimate is as follows:

New Housing Development Estimate ABS Company Limited $5,520,000

Design Fees $400,000

Construction Costs $4,000,000

Marketing and Administration Cost $250,000

Infrastructure Cost $470,000

ABS COMPANY LIMITED NEW HOUSING DEVELOPMENT- BOTTM UP ESTIMATE The Top-down Estimate or Parametric Estimate This type of estimate is formulated by estimating fundamental parametric cost estimates by examining fundamental parametric relationships. Parameters determine the fundamental relationship.

For Example the cost of the Design Fees for ABS Company Limited is estimated as follows:

Table 6:

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Professional on the Design stage (500person hours @ $ 200 per hour)

$100,000

Technical Support Staff $50,000 ( 1 x professional hours , 500 hours @ $ 100 per hour) Total Direct Wages $150,000 Fringe benefits + overhead etc ( From historical records a multiple of the direct cost x 2.666) $250,000 Total Labor cost ( Total Direct Cost + Fringe benefits + overhead $4000,00 cost) 0 This method can be used initially on a project to determine the design fees for any project. Parviz F. Rad1 suggests three estimating models in a WBS:

Analogous Level 1 Parametric Level

Level 1

Project
Level 1 Level 1

Level 2

Level 2

Level 2

Level 3

Level 3

Level 3

Bottom-up

Level 4

Level 4

Level 4

Parviz F. Rads notes that many organizations use different estimate titles and that not all organizations use titles in internal and external estimate project. Parviz F. Rad states that were the WBS is the base of reference with very little project information available, only level zero of the WBS is the total project, will be estimated using the model shown above in Table 7. Once more information becomes available, individual level one elements will be estimated of again using these models. The project would be the summary of level one (1) elements, and can be more accurate. Level two (2) items of the WBS are defined and estimated as additional information is made available. Finally, once the project has been divided into its smallest units and planned at the lowest level of the WBS, the lowest level units are then estimated using experience or the appropriate models of estimating.
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Analogous Estimates When developing analogous estimates the project manger uses the values of the deliverables available: types, functions, requirements, design characteristics, capacity, size, location, cost constraints, and quality expectations. Generally, analogous tools are ratios. The general ratios are: Equipment Ratio or Capacity Factor used in construction, industrial, and process projects. The prime is that there is a linear relationship between the cost and duration of the project and one or more of the basic features of the proposed project cost. The ratios are refined or normalized from personal experiences; company files, or published industry-specific data. For example, experience has shown that the cost of major turbines are 30% of the total cost of the plant, in the software industry system development is 30% of the total project cost, and only 20% for coding and 75 % of the cost is labor. Other ratios are used such as: The Tree- Quarter Rule The square Root Rule The two-third Rule Ranging Estimate Additionally expert judgement in estimating is used. This involves the communication with one or more experts to prepare the estimate. Parviz F. Rad defines additionally modular estimating and parametric estimating being very similar as follows: Modular Estimating: This method is used for estimating physical deliverables, such as refineries, power stations, office buildings, or manufacturing plants. The facilities are characterized by indices describing the quantity and size of the several key components such as power rating and number of pumps and turbines, size of plant floor, capacity, and number of cranes. The modular estimates the uses historical data and predictive formulas developed from modules characterized to estimate the projects cost, duration, and the amount of necessary resources. Modular estimates are used primarily in the construction, process and manufacturing projects. Parametric Model: Similar to the modular model parametric models uses historical data as the basis of the models predictive features. However, the characteristic are primarily performance indicators such as speed, accuracy, tolerance, reliability, friendliness, error rate, and complexity of the environment of the deliverables. Parametric estimates are used primarily in software development and systems development projects. The output of parametric models includes the cost of major phases, duration of projects major phases, total project cost, and resource requirements.

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The input and output in these estimates is as follows (Parviz F. Rad): Table 8: Construction and Industrial Projects A. Input B. Output Project Type Design Cost Frame Structure Cost Exterior Material Equipment Cost Roof Type Crew Size Ground Conditions Labor Cost Desired floor space Phase Duration Equipment type Project Duration System Development Projects A. Input B. Output Reliability Analysis Cost Data size Implementation Cost Project Complexity Transition Cost Error Rate Testing Cost Number of Querries Phase Duration Function Points Project Duration Labor Skills 4.0 HOW TO PREPARE ESTIMATES: Estimates are prepared in various ways depending on the type of project and the time given to prepare the estimate. There is no need for an estimator to expend vast amounts of time and hoping obtain high accuracy value and overrun the project budget trying to achieve a more accurate estimate. The time spend i.e. cost must be in order of the returns i.e. profit / benefits. Many industries have prepared Estimating manuals in an effort to standardize estimating procedures. A generic plan of estimating is suggested as follows (adapted from Dennis R. Mudd6 and B. Cook 7):
1 2

3 4 5

Determine the project requirements, indices etc. Plan the estimating process. (This will include the following as a minimum Conduct a preliminary study Conduct a material and sub-contractors enquire Carry out a project Study and Project Methodology Determine Resources and equipment requirements Estimate the Direct costs, determine risks, and contingency Conduct cost calculations Prepare the estimate report Study the requirements these may have been provided verbally, or in the form of written statements, drawing and discussions. Make enquires on the requirements Determine if historical data is available to prepare the estimate

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6 7 8 9 10 11 12 13 14

Determine the project indices etc. Dispatch vendor enquires for quotations for the vendor estimates Visit the site, project sponsor and review the design etc. Price small items Plan the works Determine resources Determine the total estimate Do arithmetic checks on the estimates Submit estimate

Where estimates are required in a short time the requirements are determine and an appropriate estimate method adopted to prepare the estimate. Sources of data available to estimators in preparing estimates are as suggested by B. Cook:

Labor output and constants for work Company files, project files, cost data and past analysis Material prices for suppliers Newspaper clippings Trade magazines, buyers guides, catalogues Quotations from venders, subcontractors and Human Resources Agencies Lessons learnt files Professional Advice from others Trade books that are up to date

5.0 ESTIMATING TYPE PROPOSAL Many types of estimates have been presented four; (4) types the proposed as a standard for estimators using the project life cycle approach as follows: Initiating Method

Planning Method

Executing Method

Controlling Method

Order of Magnitude Preliminary Ballpark Proposal Approximate Conceptual Budget Figure Analogous

Budget Approximate Bottom -up Bottom down Parametric Modular

Sanction Definitive Bottom -up Bottom -down

control

Each method uses a different methodology in the estimating process. The title of the estimate defines the phase of the project life cycle. The estimating tyes are those as defined in the body of this paper

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6.0 FLAWS IN ESTIMATING Estimates can be flawed in many ways in the estimating process as follows: 1. Inexperienced Estimators6: The preparation of estimates by inexperienced estimators i.e. estimator does not know what they are doing. Most estimates are prepared by individuals with certain technical experience and others with the responsibility for carrying out the estimating task and presenting the estimate to higher level management. Unfortunately these individuals generally scratch their heads, think back to past experiences, make a phone calls and then come up with the estimate. These estimates therefore are not prepared in a consistent manner. The estimate for the same items may vary every time by the same individuals if requested for the same project estimate on another day of the week. The issue is that most estimates are made by amateurs who fall into the following traps: They tend to be optimistic about what is needed to do the job and consequently underestimate the potential problems They tend to leave out activities, items and other things out of the estimate They do not use a consistent methodology Solution: A method to deal with this problem is to: Give training on estimating processes, train that estimating is an art and science. The curriculum must include the methodologies such as parametric estimating etc. Companies should have tight methodologies when preparing their organizations estimates. These organizations should have forms and costing sheets, analysis methodology, company estimating files and records, explicit methods for determining accuracy variances etc. 2. Lack of Continuity between the pre-award and post award Phases: Estimates who are sales staff under value the product to gain commissions. The more products sold the higher the commission. If the opportunity slips, the estimate is reduced to get the order. In government the executing agency for a Multilateral Loan should lead in preparing the estimates for the project. Solution: Have a team approach for accountability. 3. Unclear Scope: The scope of the project is unclear at the estimating stage and the estimate is made on assumptions that are incomplete in scope. These assumptions may have errors in the quality of the work, the time for completion, the risks involved, the cost for the suppliers items to be purchased. For example the Piarco Airport Project, the need for an additional Fire Station was omitted from the scope and the cost had to be added at a later stage for Airport Authority certification at millions of dollars and lost credibility among other things. Solution: Clarify the scope. Ask questions. Determine what is in and not in the scope. When are items to be delivered?

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4. Politics: The estimate is adjusted for political reasons in the organization. Accurate estimates submitted to higher management who after glancing at it cut out items or reduce items to make the estimate more acceptable to upper management. This has occurred in the process for obtaining international loans. Solution: The development of clear defined procedures for the preparation of estimates. 5. Errors in Normalizing the data: The historic data may not be adjusted or may have assumed no inflation, market changes, possible increases in oil prices or other related factors in the pricing of an item. Solution: Consider the risks in the preparation of the estimates to avoid costing errors. Track factors that affect variations in the estimate. Determine the factors in the estimating process that will significantly affect cost. 6. Gross errors: Errors in the typing and tacking off of data in the preparation of estimates have cased major costing errors. This may happen when the estimator gives the secretary/ typist to complete the report and no checks are made on complete document. A recent bid in the authors office was received upon inspection an item was not multiplied across thus the tenderer could not hold to his price. The error would have cost the supplier all of his profit. The original tender price was correct, as prepared by the estimator. Solution: Diligence is need at all stages of estimating, all work must be checked. Arithmetic checks should be introduced into the estimating process. The use of computer software would assist. The use of spreadsheet packages etc. should be used extensively. 7. Scope Changes during the Implementation: During the implementation the scope of works changes i.e. the designs, variations etc. Solution: All a contingency for the scope creep and changes. Try to define the scope in the inception and planning stages of the project. Prepare a contingency plan for the estimate and project. 8. Lack of Information on the Project, therefore cost escalates: The inefficiency of management, supervision, suppliers and labor lead to cost escalation. This results in changes in the contract. Solution: Adequate controls are needed in the implementation stage to avoid escalation.

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REFERENCES
1

Pariz F Rad, Project Estimating and Cost Management, Management Concepts (2002) J. Rodney Turner, The Handbook of ProjectBased Management, 2nd Edition McGraw-HillBook Company (1999) Harold Kerner, Project Management : A System Approach to Planning, Scheduling, and Controlling , 8th Edition, John Wiley & Sons, Inc. (2003) Rory Burke, Project Management, Planning and Control, 2nd Edition, John Wiley & Sons, (1993) J. Davidson Frame, The New Project Management, Jossey-Bass Publishers, (1994) Dennis R. Mud, Estimating and Tendering for Construction Work, Butterworths, (1984) B. Cook, Contract Planning and Contract Procedures , The Macmillan Press Ltd., (1981)

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