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Engineering, Construction and Architectural Management

Cost estimating practices in Australian construction


THOMAS E. UHER

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Engineering, Construction and Architectural Management 1996 3 | 1, 2, 83-95

Cost estimating practices in Australian


construction
THOMAS E. UHER
School ofBuilding, (Construction Management and Economics Unit), University ofNew South Wales,
Sydney 2052, Australia

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Paper submitted 13 July 1994; accepted for publication 28 July 1995; discussion open until
September 1996

Abstract The aim of the paper is to examine attitudes of general contractors operating in
the Sydney region to the potential use of probability estimating and databases in cost
estimating. A sample of 10 large general contractors with a turnover over $100m was
selected for the study, which took place in 1993. Responses of the contractors to a
standard questionnaire were obtained using face to face interviews. The research
described in this paper confirmed the popularity of traditional single value estimating and
highlighted the lack of use of probability cost estimating by the general contractors surveyed. The limited availability of client-prepared bills of quantities for tendering has neither diminished their popularity among bidding contractors nor increased the use of
elemental cost planning. Although databases are generally available, subjective judgements of estimators are of greater value in cost estimating. The research has concluded
that a change in the estimating paradigm towards probability cost estimating, and the use
of databases, are unlikely to occur in the near future.
Keywords bill of quantities, construction, database, general contractors, probability
estimating

INTRODUCTION
Tendering is the commercial function through which a contractor compiles a bid
for a project on the basis of the net cost estimate with provision for general
overhead and profit. The objective of every contractor is to submit a bid that gives
an appropriate balance between its competitiveness and the desired profitability.
The bidding process emphasizes the need for a sound knowledge of bidding
strategies and the ability to prepare a stable and accurate estimate of project costs.
Estimating is the technical process carried out by a contractor in order to calculate the likely net cost of a proposed project from available information. It can
be approached in two ways:
1 Using the traditional single value estimate with the addition of a contingency
allowance
2 By probability estimating where estimates of variable cost items are expressed in

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the form of ranges (probability distributions) of possible values and the combined effect ofrisks on the final cost determined mathematically or stochastically.
Traditionally, contractors compile bid prices in the form of single-value estimates. A bid price comprises explicitly in addition to the value of materials,
labour, plant and preliminary cost items - a risk contingency. A risk contingency is
an assessment of the assessed impact of risk on a project and is commonly
expressed as a percentage of a project cost. It is the goal of every estimator to be
able to perceive the presence of risks, and accurately predict their magnitude and
likely impact on the project. However, there is little evidence (Perry & Hayes
1985) that contractors undertake a systematic and detailed assessment of individual risks and the expression of a contingency is often at best an educated guess of
a stab in the dark.
Risk and uncertainties are inherent in construction. While they are almost
always present, their presence may not necessarily be a problem, particularly
where their impact is low. However, even high impact risks may serve a useful
purpose as an estimator may want to utilize a greater level of risk to generate a
potentially higher level of income. The effective management of risk during cost
estimating requires the application of a systematic and disciplined approach to the
identification and analysis of, and response to, risks. Probability estimating provides a suitable framework for such an effective management of project risks.
Because it focuses the attention of estimators on ranges (probability distributions)
of possible values of various risk variables, it helps to model project variables
vigorously and systematically and provides estimators with a more robust and
reliable decision making tool (Raftery 1990).
Diekmann (1983) outlined four probability estimating methods suitable for
cost estimating:
1 Direct analysis technique
2 Methods based on the central limit theorem
3 Approximate methods for general estimating models
4 Simulation techniques such as the Monte Carlo method.
These and other methods of cost estimating, such as the successive principle
approach, have been reviewed by Toakley (1989). Probability estimating using the
Monte Carlo method has been the main focus of this research.
A successful application of probability estimating is dependent on both the
structural requirements, such as the development of appropriate modelling tools
and the availability of data, and human (cultural) factors such as knowledge, skills
and attitudes of decision makers. Bills of quantities have traditionally provided a
satisfactory structure for the generation of contractors' single value cost estimates.
However, this structure is inappropriate for probability estimating due to the very
large number of cost items in a typical bill of quantities. Jaafari (1990) and Uher &
Levido (1992) proposed the use of an elemental cost planning structure for
probability estimating while Brotherton (1993) preferred a trade summary
structure. These issues will need to be carefully addressed in developing the most
appropriate approach to probability estimating.
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Cost estimating practices in Australia

The availability of objective databases is said to enhance the effectiveness of the


cost estimating process (Cooper et al. 1985). However, there is little evidence of
use of databases by Australian contractors. How contractors elicit data for cost
estimating is also largely unknown.
Because a successful bid will establish a firm contract price between the client
and the contractor, it is important that it does not expose the contractor to
excessive risk. The knowledge and experience of estimators is equally important
considering the current practice of subjective elicitation of cost data and subjective
identification and response to risk. The limited availability of bills of quantities for
tendering in Australia adds extra pressure on estimators to maintain accuracy of
estimates.
Probability estimating is a promising concept which may, when appropriately
applied, improve the effectiveness and accuracy of cost estimating. Because the
adoption of new management paradigms by contractors has never been easy, the
transition from a single value to probability estimating is expected to follow a
similar pattern. The objective of this long term research is to effectively aid this
transition by developing the most appropriate model of probability cost estimating
and the necessary skills in probability estimating.
Although a considerable volume of information exists on concepts of risk
management and probability estimating, little is known about cost estimating
practice of general contractors particularly with regard to probability estimating
and the use of databases for estimating. N o evidence of previous similar research
has been uncovered.
The aim of this paper was to examine cost estimating procedures employed by
large Sydney based general contractors, and their attitudes to probability cost
estimating and the use of databases in estimating.
PROBABILITY ESTIMATING
Proponents of probability estimating argue that the traditional method fails to deal
adequately with risk and uncertainty. Risks are rarely systematically identified and
quantified; instead they are expressed and added to an estimate as a percentage of
the project cost (Perry & Hayes 1985). This is disputed by Lewellen & Long
(1972) who claim that a single-value cost estimate has a higher potential for
relevant risk recognition than simulated probability cost estimate, because data for
simulation is commonly expressed subjectively and may not be accurately
described by standard probability distributions.
Newton (1992) suggests that the traditional estimating method is appropriate
but only under stable conditions. He concludes that an inherent risky nature of the
construction industry which gives rise to large-scale and often wide-ranging variations in cost items requires a more reliable approach to cost estimating. He
believes that the use of probability estimating which introduces risk management
into estimating should be encouraged. This view is echoed by many other
researchers such as Campbell (1971), Picardi (1973), Doyle (1977), Flanagan &
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Norman (1984), Perry and Hayes (1985), Cooper & Chapman (1987), Jaafari
(1990), Raftery (1990), Uher (1990, 1991), Morgan (1991), Moselhi et al. (1991),
Rowland & Curran (1991), Shafer (1991) & Yeo (1991), whose work promotes
the use of probability estimating in preference to the traditional single value
(deterministic) estimating method.
Rowland & Curran (1991) & Uher (1991) believe that because deterministic
estimates are largely based on past experiences of estimators and/or historical data
sets, they are often expressed as averages or estimates close to average of such past
data sets. In probability terms, such deterministic estimates represent 50% or
higher probability or 50% or lower probability that they would actually be
achieved, which represents a risky decision. Probability cost estimating enhances
the decision making process by systematically assessing the impact of the key
project variables on an estimate and by generating a range of possible decision
outcomes.
While unit cost rates and monetary allowances, such as prime cost items and
contingencies, are the most common examples of risk variables in a probability
estimate, risks associated with quantities can also be expressed as risk variables.
An enhanced probability cost estimate can further include modelling of correlations among different risk variables.
Considering the risky nature of the construction industry and the degree of
exposure of contractors to risk under a typical construction contract, contractors
would be expected to embrace estimating methods which reduce their exposure to
risk and improve their decision making capabilities. However, probability estimating is largely ignored by contractors and only a small number of specific
applications have been reported so far in the US construction industry (Golden
1991; Moselhi et al. 1991; Rowland & Curran 1991; Shafer 1991; Townley 1991).
Risk variables in a probability cost estimating model need to be expressed as
probability distributions. In the absence of data bases, rigorous and systematic
elicitation and analysis of subjective data is required. Techniques such as Delphi
analysis and a fractile method (Pratt 1964; Morrison 1967; Raiffa 1968; Winkler
1967; Huber 1974; Herz & Thomas 1983), and the use of simple uniform and
triangular probability distributions (Raftery 1990) meet the requirements. Some
researchers, notably Betts (1987, 1991), Ivkovic (1991) and Townley (1991)
believe that there is no apparent reason why past project data could not be analysed and filed in a database for use in risk analysis. Such a database would be
more flexible, permitting data to be retrieved in the user defined format.
RESEARCH METHODOLOGY
The research concentrated on the cost estimating activities of the 10 large general
contractors who operated in the Sydney region. These contractors average in
excess of A$100m annually. All the contractors sampled operated nationally in
both the public and private sectors of the construction industry and were
experienced in different forms of project delivery. Eight contractors were engaged
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across the whole spectrum of construction activities while the remaining two
contractors specialized in building construction only. For this reason the research
sought views and opinions on building cost estimating practices only. Interviews
with selected general contractors took place in 1993.
Although there are close to 10 000 registered construction firms in New South
Wales, the selected sample of 10 contractors represented the top end of construction firms in terms of turnover. Although the sample may seem small, it
actually represents all but two building contractors working in the Sydney region
with a turnover over $100m annually. It was assumed that because of their size
and diversity the contractors surveyed would be near or at the forefront of
applying modern cost estimating technologies.
Responses of the selected contractors were collected through face to face
interviews with chief estimators. The initial aim was to examine estimating
practices of each contract for up to 10 specific building projects to identify variations in approach. However, after preliminary interviews this strategy was
abandoned as no significant differences in approach were detected.

RESEARCH OUTCOMES AND DISCUSSION


Estimating methods used by contractors
The survey showed that all the contractors compiled a bid price as a single-value
estimate inclusive of a contingency allowance for future uncertain events. The
amount of contingency which is added to a cost estimate is determined by the top
management. However, it may not be the only contingency as a series of small unit
rate contingencies may also be added to a cost estimate by estimators for 'risky'
items (Samid 1994). In combination these contingencies may, in some cases, be
excessive and unnecessarily inflate a bid price.
The survey showed that eight sampled respondents sometimes added contingencies to unit cost rates. Depending on the degree of exposure to risk, they
expressed contingencies to either increase or decrease average values of such unit
cost rates. The remaining two respondents did not employ contingencies in
estimating and preferred to use average values of unit cost rates. Apart from one
respondent, all the others either always (two respondents) or sometimes (seven
respondents) use average values of unit cost rates in estimating.
While the use of averages in estimating was found popular among the contractors surveyed, there was no consensus among them as to whether or not this
represented a risky decision (Fig. 1). Nevertheless, four respondents who
perceived estimates expressed as averages to be of low or no risk, held the view that
there was at least 90% probability that such estimates would be realised. In
probability terms an average estimate represents 50% probability that it would be
achieved. The possible explanation for the overoptimistic assessment of the
accuracy of average estimates by the respondents is their lack of familiarity with
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concepts of probability and probability estimating. This was confirmed by the


survey in which only three respondents indicated that they were familiar with the
concept. The lack of familiarity with the concept is a barrier which adversely
affects the application of probability estimating. Although none of the contractors
surveyed intended to develop and use probability estimating in the near future,
most of them (eight out of ten) indicated their willingness to examine merits of the
technique and possibly use it at some later date, but only if it could be clearly
demonstrated that major improvements in the competitiveness and profitability of
their organizations could be realized.
Identification and quantification of risks by contractors
Cost estimating during a tender stage involves piecing together a large volume of
information such as quantity of work, productivity rates of resources and cost unit
rates in order to compile a cost estimate for a project. It is referred to as a 'bottom
up' cost estimating approach. It breaks a project up into small elements and then
links them together in a meaningful and logical manner. According to Ashley
(1989) a 'bottom up' approach is also a preferred method for identifying project
risks. All ten surveyed general contractors employed this approach to identify
project risks when preparing a cost estimate during a tender stage. However, they
relied exclusively on the use of subjective judgments and past experience rather
than on systematic techniques such as checklists, flow charts, data bases, Delphi
analysis and influence diagrams (Fig. 2).
While the respondents employed a systematic approach to risk identification,
they universally preferred to quantify risks subjectively using contingencies ahead
of commonly used techniques such as sensitivity and probability risk analyses.
Flanagan & Norman (1984), Perry & Hayes (1985), Raftery (1990) and others
have established that there is little evidence of a systematic and detailed assessment of individual risks by contractors. The findings of this research tend to
support their argument but only on the question of quantification or analysis of
risk. The use of a 'bottom up' approach to risk identification, even though based

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on subjective judgments and past experience of estimators, can be interpreted as


evidence of a systematic approach to risk identification.
The use of bills of quantities and elemental cost planning
The research attempted to establish benefits as well as limitations of bills of
quantities as a tender document as perceived by general contractors. The range of
possible benefits and limitations was established through a preliminary interview
with three categories. These were then put to all the respondents. The results are
given in Tables 1 and 2. Bills of quantities appear to help contractors to speed up
tendering and to make the process of subcontract bid prices elicitation and analysis
simple and efficient. The presence of errors and the incompleteness of bills are
regarded by the contractors as critical limitations. The recognition of the limitation
of bills of quantities to facilitate the use of probability estimating was surprising
considering the lack of knowledge of the concept among the respondents.
Table 1 Ranked order of perceived benefits of bills of quantities as a tender document, response scored on
a 5, 4, 3, 2, 1 scale in decreasing order of importance

Ranked order of benefits of bills of quantities


as a Tender Docuement
Speed up tendering process
Simplify obtaining and analysis of bids from subcontractors
Low or no risk of errors in quantities (to contractor)
Cost items in bills broken up into trade packages
Errors in bills give rise to claims against client

Total scored
values
43
37
30
30
10

%
values
29
25
20
20
6

Note: % values column expresses the scored values for each benefit as a percentage of the total scored value for all the
benefits.

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Table 2 Ranked order of perceived limitations of bills of quantities as a tender document, response scored
on a 5,4, 3, 2, 1 scale in decreasing order of importance
Ranked order of benefits of bills of quantities
as a tender document
Presence of errors
Incompleteness
Cannot be used to control project costs
Cannot facilitate the use of probability cost estimating
Poorly structured and too 'bulky'

Total scored
values
39
36
30
25
20

%
values
26
24
20
17
13

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Note: % values column expresses the scored values for each benefit as a percentage of the total scored value for all the
benefits.

Client-produced bills of quantities are rapidly disappearing as a tender document from major Australian commercial and industrial projects. Principally, clients argue that the production of a document which is almost always incomplete,
inaccurate and often misleading and which for reasons of incompleteness and
inaccuracies gives rise to claims against clients, is not worth having and paying for.
It is not the aim of this paper to argue for or against the use of a bill of quantities.
Of more interest is the examination of attitudes of general contractors towards a
bill of quantities and the manner in which general contractors compile tenders
when a client-prepared bill of quantities is unavailable.
The limited availability of client-prepared bills of quantities has not diminished
their popularity as a tender document among contractors. Seven of the contractors surveyed preferred to use bills of quantities in tendering and all agreed
that the structure of a typical bill, where various bill items are broken up into trade
packages, facilitated a more effective elicitation and formulation of subcontract
bid prices.
If bills of quantities were not provided by the client, the above seven contractors
either prepared their own bills or purchased them for quantity surveyors. The remaining three contractors in the sample preferred to develop an elemental cost plan
first, in order to establish a better control over tendering in terms of cost and time.
An interesting observation here is that these contractors were experienced in the
design and construct (turnkey) method of project delivery. This mode of delivery
requires the use of cost planning in the absence of the traditional tender documentation. The three contractors benefited from an inherent ability of the method
to facilitate a more accurate and faster comparison of alternative construction
strategies, with an added benefit of combining cost estimating with time scheduling. This approach also forms a basis of a project cost control system (Table 3).
The survey also showed that in addition to elemental cost planning, the above
contractors also prepared an electronically compiled builder's bill, a simplified
version of a traditional bill of quantities, to ensure the most effective form of
elicitation and analysis of subcontract and supply bid prices. Combining elemental cost planning with billing provides an added benefit of a vital check of the
cost estimate accuracy.

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Table 3 Ranked order of perceived benefits of elemental cost planning as a tender document, response
scored on a 4, 3, 2, 1 scale in decreasing order of importance
Ranked order of benefits of using elemental cost
planning as a tender document

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More effective cost comparison of alternative construction


strategies
Improved speed of cost estimating
Improved accuracy of cost estimating
Forms the basis of a project cost control system

Total scored
values

%
values

19

32

15
14
12

25
23
20

Because elemental cost models have significantly smaller numbers of cost items
than traditional cost estimating models based on a bill of quantities, the process of
modelling the behaviour of random risk variables using elemental cost models is
generally less arduous. A successful application of probability cost estimating is
dependent not only on the knowledge of the fundamental principles of risk
management but also the ability to express cost items in an elemental form. A
number of probability cost estimating models express cost items as elements, e.g.
those developed by Campbell (1971), Picardi (1973), Doyle (1977), Flanagan &
Norman (1984), Perry & Hayes (1985), Cooper & Chapman (1987), Jaafari
(1990), Raftery (1990), Uher (1990, 1991) and Yeo (1991). Similarly a trade
summary approach proposed by Brotherton (1993) would significantly reduce the
number of cost items and would enhance modelling of random risk variables.

The use of databases in cost estimating


This research also attempted to examine the extent of the use of databases in cost
estimating. A relatively widespread use of databases was expected among the
contractors surveyed, particularly in relation to the retrieval of productivity and
cost rates.
Eight out of ten respondents were found to extract some information from
databases. However, the detailed analysis of the responses revealed that the most
commonly sought after information was a feedback on the respondents' own
unsuccessful bid prices (in 70% of cases). Databases of unit cost rates, subcontract bid prices and labour productivity rates were less frequently used and
relied on (Fig. 3). The high cost of developing databases, the length of the
development period and the perceived irrelevance of historical data in cost estimating were identified by the respondents as the key obstacles to developing and
using databases (Table 4).
So how do general contractors generate the necessary data for cost estimates?
The survey showed that personal contact, subcontract/supply bid prices and
subjective judgements by estimators are the most common sources of data for
estimating (Fig. 4). Two of the surveyed contractors even prohibit the use of
databases by their estimators, fearing that this practice would lead to a mechanical
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Table 4 Ranked order of perceived reasons for not having databases, response scored on a 6, 5, 4, 3, 2, 1
scale in decreasing order of importance

Ranked order of reasons for not having databases


Takes too much time to create
Only current data is used in estimating
Past information is generally irrelevant
Costs too much to create
Too difficult to create
Nobody is prepared to do it

Total scored
values
33
27
25
24
19
19

%
values
23
18
17
16
13
13

rather than intuitive estimating proess and that estimators would be distracted
from examining projects in detail.
The results given in Fig. 4 show a 'weak' support for computerized databases
with only three contractors surveyed using them. However, considering that an
additional five contractors intended to develop them in the future, their use in cost
estimating will become more prominent.
CONCLUSION
The research has shown that the use of a single value cost estimating method is
popular among the ten large Sydney based general contractors and that the limited
availability of the client-prepared bills of quantities for tendering has had little
impact on their cost estimating practices. When the client-operated bills are
unavailable, these contractors either prepare their own quantities or commission a
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quantity surveyor to compile a suitable bill. The availability of bills of quantities


helps contractors to speed up tendering and its structure simplifies elicitation and
analysis of subcontract bid prices. There is little evidence to suggest that the lack
of availability of bills of quantities for tendering has increased the use of elemental
cost planning.
Although databases are generally available, subjective judgements of estimators
are of a greater value to the general contractors in cost estimating. The identified
mode of the use of databases does not appear to effectively enhance the cost
estimating process. Fast and easy access to past data, such as unit cost rates,
labour productivity rates and subcontract bid prices, would undoubtedly improve
the cost estimating process.
Considering the popularity of the traditional cost estimating approach, it is
unlikely that probability cost estimating based either on elemental cost or trade
summary modelling will be enthusiastically adopted by building contractors in the
near future. The unwillingness of general contractors to break away from their
traditional estimating paradigm and explore alternative approaches seems to be an
attitudinal problem which can be overcome through a systematic development of
new knowledge and skills.
To increase the use of modern management concepts, future research will need
to focus on cultural issues, particularly attitudes of decision makers to change,
identification and development of skills for implementation of change, and formulation of training requirements for the successful implementation of modern
management processes such as probability decision making.

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