Profit is not earned at the end of a project; it is secured at the start with accurate cost estimation and proper cost planning. This statement highlights the importance of understanding these two key terms, often essential for commercial management professionals but frequently misunderstood, even by practitioners. This raises the question: Are these two connected, or are they separate concepts? To understand their relationship, first we need to know what each term means.
Cost Estimation & Cost Planning
Estimation is the process of determining the overall cost requirements before starting a work item, while cost planning involves deciding how to allocate those costs across the various components of the project. For example, estimates suggest that the total cost of a project will be LKR 20 million, while the client only has LKR 18 million. Assuming the client cannot arrange additional funds, they are left with two options: either drop the project or modify the initial requirements to align the estimated costs with the available budget. This adjustment process is known as cost planning. Therefore, it becomes clear that cost estimates are essential for effective cost planning. It’s important to note that cost planning establishes a framework, specifically through cost plans, which play a crucial role in cost control during the construction phase of the project.
Cost Estimation Techniques
Since there are various estimation techniques available, professionals should have a clear understanding of each one. This knowledge will help them select the most appropriate technique based on the specific requirements of the project.
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Conference method / Expert Opinion
As the name suggests, this method involves construction management experts from various disciplines discussing and sharing their experiences to estimate the cost of a project. This approach is typically used when no historical cost data is available. For example, it is suitable when a client is planning a unique project that has never been undertaken in that country before. This method is typically conducted during the early strategic definition phase, as outlined in the RIBA Plan of Work 2020, when there is little to no clear understanding of the design requirements.
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Financial Method Cost Estimate
In this method, the maximum cost for the project (cost limit) is determined based on the expected return over the period from the project. For example, if a client plans to construct a unique hotel without any historical cost data but can forecast the expected return on investment over time, this method becomes appropriate. However, it should account for the time value of money due to economic changes. Once the cost limit is established, further design development can proceed within the defined budget constraints.
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Unit Method Cost Estimate
Cost per functional unit is used to estimate the total cost of the project. Functional unit is defined as a measurable unit that represents the primary function or output of a building or structure. For example, in a hotel project, a room is a functional unit; in a stadium project, a seat is a functional unit; and in a parking area project, a parking slot is a functional unit. To perform this estimate, historical cost data for the functional unit must be available, along with the number of units planned for the proposed project. Before using the historical unit rate, the estimator should assess whether adjustments for time and location factors are necessary. To provide clear understanding below example is used.
The proposed project is planned to be constructed in 2025 in Jaffna and is identical to a past project completed in 2020 in Galle. The number of functional units for the proposed project is 35, with a historical functional cost of LKR 50,000 per unit based on the completed project in Galle.
The estimated cost for the proposed project is often calculated as LKR 50,000 × 35 units = LKR 1,750,000. However, this approach is not entirely reliable, as adjustments for location and time factors must be accounted for before utilizing the functional unit cost directly. - Superficial Area Method Cost Estimate
This method is similar to the unit cost estimation method; however, instead of using historical functional unit costs, the cost per area, typically measured in square meters, is utilized. As with the previous method, adjustments for time and location are necessary. To give more clarity the previous example is used with some modifications.The proposed project is planned to be constructed in 2025 in Jaffna and is identical to a past project completed in 2020 in Galle. The superficial area for the proposed project is 1250 m2 , with a historical cost of LKR 5,000 per m2 based on the completed project in Galle. Prior to multiply the historical cost per m2 with the area of the project, time and location factors to be considered.
For a reliable understanding of this method, the estimator should be familiar with the concepts of gross external floor area, gross internal floor area, and net internal floor area, as well as how to measure them under realistic project conditions. These concepts should be explained in detail in a separate article, using simple sketches for better clarity and comprehension. - Cube Method Cost Estimate
In contrast to the superficial area method, the volume of the building serves as the basis for estimation in this approach. Compared to previous methods, additional design details, such as the building’s height, are required to determine the volume accurately. Beyond this, the procedure is identical to the functional unit and superficial area methods.
The estimated cost is calculated as follows: Estimated Cost = Cost per m³ (Historical cost adjusted for time and location factors) × Total Volume of the Proposed Project. - Elemental Method Cost Estimate
Instead of estimating the total cost as a whole, as described in the previous methods, this approach focuses on estimating costs based on individual project elements. Commonly considered elements include the substructure, frames (columns and beams), internal and external walls, and finishes. While conceptually similar to the functional unit, superficial area, and cube methods, this approach uses elemental unit costs and elemental quantities for estimation. As with the other methods, adjustments for time and location factors are also necessary in this approach.
|
Sr. No |
Element |
Unit |
Elemental Quantities |
Adjusted Elemental Unit Cost |
Estimated Cost |
|
1 |
Sub-Structure |
m 3 |
100 |
10 000. 00 |
1 000 000.00 |
|
2 |
Frames |
m 3 |
50 |
25 000. 00 |
1 250 000.00 |
|
3 |
Walls |
m 2 |
250 |
3 000.00 |
750 000.00 |
|
4 |
Finishes |
m 2 |
250 |
1 000.00 |
250 000.00 |
|
5 |
Doors |
Nr |
10 |
5 000.00 |
50 000.00 |
It is important to note that the figures in the above table are arbitrary and are provided solely to illustrate the concept in detail. For this method, at a minimum, a schematic design is required, as it provides the quantities for each element necessary for the estimation.
7.Approximate Quantities Estimate
As the name suggests, this estimate involves calculating the quantities for every work item required for the project. For example, when estimating the substructure, quantities must be identified for activities such as excavation, removal of excavated material, concreting, reinforcement, etc. Similarly, quantities for other elements of the project are measured. In essence, all quantities necessary to complete the project must be determined for accurate cost estimation. There are two methods to estimate costs:
• Using Historical Rates: Apply historical rates for each item, adjusted for time and location factors.
• Rate Build-Up from First Principles: For each work item, identify the required materials, labor, and miscellaneous costs, then add a profit markup to calculate the unit cost.
This detailed approach ensures a more accurate and comprehensive cost estimation for the project; however, a detailed design is essential to perform this level of estimation. The selection of an appropriate estimation method depends on several factors, including the purpose of the estimation, the information available, the time available for the estimation, and the level of accuracy required.
In conclusion, cost estimation is essential for reliable cost planning. Once the estimates are established, they should be updated as new information becomes available and as changes occur in the project. Furthermore, these estimates serve as the foundation for the cost control process, ensuring that the project stays within budget.
