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 CHAPTER THREE
COST ESTIMATING APPROACH
 Types and Methods of Estimates
 Preliminary Cost Estimate
 Detailed Cost Estimate
 Unit Rate Analysis
 Pro-rata Rates
 Risk Analysis for Cost Estimation
 Cost Risk Assessment
 Cost Escalation
 Applying Cost Escalation
 Price Adjustment for Cost Escalation
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 Cost Estimating Approach
Introduction
General

Before starting any construction one has to have a thorough

knowledge about the volume of the work and the probable cost
that may be required for the completion of the project.
Otherwise, the construction will be stopped before its completion
due to shortage of money or materials.

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Introduction
General
Project Cost estimation is the process of valuing on
monetary expression, including the cost of all possible
entrants necessary for the planning, implementing and
monitoring stages of the proposed project under
consideration.
 Cost estimation is the determination of the probable cost
of a project.
 Project Cost includes:
 Preliminary investigation (project appraisal costs);
 Design and supervision (consultancy cost);
 Construction works (contractor’s cost);
 Land owning cost, and
 Monitoring costs.

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 Introduction
General
 An estimate serves a number of different functions,
depending on the stage of the project, as shown below
:  Feasibility: Initially feasibility of the project need to be
determined Feasibility Estimate (Conceptual).
 Schematic Design (Conceptual design): Sketches are
prepared. Major elements are defined Use a
preliminary method to estimate cost. Cost of each
element is established (cost plan).
 Design Development: Progressively the scope of the
project is defined A series of preliminary estimates
are done during this phase to assure adherence to cost
plan.
 Contract Document: Finalize drawings and
Specifications: Designer’s estimate to anticipate
and check contractor’s bid prices.
 Bidding Phase: Contractors prepare detailed
estimate to submit bids.
 Construction Phase: Estimates are prepared for cost
Control and change order evaluations.
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 Introduction
Feasibility Estimate (Conceptual Estimate)
 Needed to make decision to go or no go with project.
 Costs include the following items:
 Land, Financing cost,
 Consultations/Studies,
 Engineering,
 Project Management,
 Construction, and
 Operation and Maintenance.

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Introduction
Preliminary Estimates and Cost Planning
 The Conceptual Estimate found during feasibility
becomes the initial project budget.
 Subsequent design development should remain within the
limit of this budget.
 For that purpose, several preliminary estimates are
performed as more details become available through the
design.
 Preliminary estimates assign cost to various assemblies
(elements) of the project (Cost Plan) i.e. substructure,
superstructure, interior partitions & doors, exterior
cladding ..etc.
 Preliminary estimates allow for Value Analysis –
Compare value of an element with its cost Consider
alternatives Select desired option.
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Introduction
Objective of Cost Estimate

Over all the main purpose of cost estimation can be

summarized as follows:
 Know the volume of work in reference to the fund
available;
 Determine actual cost per unit of item;
 Identifying engineering estimate of the work for
bidding purpose;
 Work out economical use of materials, labor and
equipments;
 Determine the extra cost to be incurred in cases of
variations ; and
 When there is escalation, to work out the Cost
escalation.

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Introduction
Information Required for Cost Estimation
The following information is required to define cost per
unit of work:
 Correct information of the market price of the
materials at the time of need to be used as a basic
price;
 Correct information of the rates of various
categories of skilled and unskilled laborers as
wage rates to be used for daily work rate;
 Output of laborers per day for various types of
items (productivity);
 Correct information of the rates of various
categories of equipment and tools as rental rates to
be used for major items of rates; and
 Up-to-date knowledge of the construction
methods.
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Introduction
Knowledge and Managerial Skill for Cost Estimation
The following knowledge, managerial talents, and
degree of construction experience make a good
estimator.
 Ability to read and understand contract
documents, with special skills in reading
construction drawings for all specialties and related
specifications.
 Ability to accurately take off the quantities of
construction work for which he or she is preparing
the detail estimate.
 Ability to visualize the future building from
drawings, which usually requires some years of
construction site experience.
 Knowledge of arithmetic, basic geometry, and
statistics.
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Introduction
Knowledge and Managerial Skill for Cost Estimation
The following knowledge, managerial talents ….
 Familiarity with estimating software in depth and
with available building cost databases.
 Knowledge of building construction methods.
 Knowledge of labor productivity,crew
composition, and impacts of various forecasted site
conditions on crew output.
 Possession of office managerial skills in
organizing project-related cost information.
 Ability to work under pressure and to meet all bid
requirements and deadlines.

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Introduction
Factors Affecting Cost Estimation
Factors which affect the cost estimation are summarized
as follow:
 Type and documentation of the project;
 Construction scheduling;
 Bidding environment;
 Quality and availability of material and labor
(given in specification);
 Construction facilities/tools and method of
construction;
 Location of the site: Transportation charges;
 Proper management;
 Land charges (lease); and
 Nature of subsurface condition.

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 Types and methods of Estimates
Estimating types
We will try to see the different classification which is also
based on its accuracy in different stage of construction. The
first way is as follows:-
 Rough order of magnitude estimates: -These estimates
are also referred as ROM estimate are useful for ‘go/no-go’
kind of decision making’ which essentially refers to whether
the project should or should not be pursued.
The accuracy levels in such estimates are usually only +/-
60%.

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 Client’s Indicative cost estimate: -This is done during the
project feasibility stage may decide to proceed with the
engineering phase of the project, which involves detailed
design and plans for execution. Method available for this is
area and cubic meter method and schedule based estimate.
 Client’s preliminary cost estimate: -Whether from the client
side or the consultant develop the design, specification and
drawing from which a bill of quantity (BoQ) can be
formulated.
 Client’s detail estimate: - It is an accurate estimated and
consists of working out the quantities of each item and the
associated costs. For working out quantities, the dimensions-
length, breath and height or thickness of each item are taken
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 Client’s definitive estimate:-Most contracts has escalation
clause and invariability, and some additional work and
deviations from the specification. Therefore, it is important
that the estimation process continue into the execution stage,
based on information from the site, analysis the actual
payments made deviation from original estimate, and predicts
the final cost of the project.
 Revised estimation
 Supplementary estimation
 Project closure cost

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Types of Costing or Estimation
The most familiar ways of classifying types of cost estimating
which is based on its stage and accuracy as follow.
Estimation can be broadly classified as preliminary
(approximate),Intermediate and detailed.

Preliminary /approximate costing

Approximate Cost Estimate is made to find out an
approximate cost in a short time. Such an estimate is prepared
adopting different methods for different types of works.

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Preliminary /approximate costing
During preparation of the estimate detailed surveying, design,
drawings etc., are not required. This estimate is prepared after
preliminary investigation, preliminary surveying and a line
sketch of the drawing according to the requirements. Rates are
determined either from practical knowledge or from records of
similar works.
As the design is not fully developed at this stage, a
contingency is typically included in the order of 15%.

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Preliminary /approximate costing
Purpose of approximate estimate
Approximate estimate is worked out before preparation
of detailed estimate of a work or a project to serve mainly
for the following purposes:
 To investigate feasibility: An approximate estimate
of a project gives an idea for the probable expenditure
in a short time.
 To save time and money: Before having any rough

idea of financial implications if detailed drawings,

specifications and detailed estimates are prepared,
spending much time, labor and money.
 Adjustment of Planning: For unavoidable projects

approximate estimates for a number of alternatives for

the original work after adjustment of sketch of the
intention along with sketch reports are required for
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Preliminary /approximate costing
 To investigate benefit and comparison of cost with
utility: Where there is no scarcity of fund but it is
intended to know readily whether the investment shall
be ideal then approximate estimated cost of the project
is drawn up and compared with the income or benefits
availed from such expenditure.
 To obtain administrative approval: For government
or public body projects approximate estimate with a
brief report and site plan has to be submitted to obtain
administrative approval to proceed with detailed with
detailed investigation and preparation of detailed
estimate.

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 For insurance and tax schedule: For insurance
and tax schedule, the value of a property or a project
is drawn up from the approximated cost estimate.

Preliminary /approximate costing

 This type of cost estimation is required to know the
financial position of the client before costly detailed
designs are carried out.
 Such estimates are based on practical knowledge and cost
of similar previous works.
A. Cost per Functional Unit
 Hospital =cost per bed, Dormitory = cost per student, Cinema or
theatre = cost per seat, residential buildings = cost per area, road
works = cost per kilometer length, culverts or bridges = cost per
meter span, water supply or sewerage projects = cost per head
of population.
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 Types of Costing or Estimation
Preliminary /approximate costing

B. Plinth Area method – cost per m2

 Based on Plinth Area - roof area or external dimensions
at the plinth level (Courtyard and open area shall not be
included).
 The rate per meter square is deduced from the cost of
similar building projects in the locality.

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Preliminary /approximate costing
Example on Square Foot Method
A 24 x 60 house with a 20 x 20 garage has 1,440 square feet of
living space plus 400 square feet of garage space.
If the building cost is $100 per square foot, then the building
cost for the living area is $144,000.
Calculation: 1,440 x $100 = $144,000
If the building cost of the garage is $50 per square foot, then the
cost of the garage is $20,000.
Calculation: 400 x $50 = $20,000

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Preliminary /approximate costing
The estimated building cost of the completed home, not
including the land, is $164,000 using this method.
Calculation: $144,000 + $20,000 = $164,000.
In the example, the constant of $100 per square foot is used for
comparative purposes.
Cost varies substantially in different locations, for different
styles of homes, and for materials specified.
Check with local builders to determine the constant for your
area.

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Preliminary /approximate costing
c. Cubical Content method – cost per m3
Based on cubical contents of various buildings, i.e. Plinth
area of the building * height * cubic content rate.
 The cubic foot method produces an estimate of the building
cost based on the volume of the house.
 The volume of the house is determined by finding the area
and then multiplying it by the height.
 The height is the distance from the floor to the ceiling for
each level of the house.

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Preliminary /approximate costing
The basement volume and attic volume are included in the
calculations.
The attic volume is calculated by finding the area and
multiplying it by 1/2 of the rise.
The rise of the roof is the distance from the ceiling to the
ridge.
This takes in to account the volume lost due to the sloping
roof.

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Preliminary /approximate costing
Example on Cubic Foot Method
If the 24 x 60 house is used for the cubic foot method, the
area is 1,440 square feet. The height is 8.
Calculation: 1,440 x 8 = 11,520 cubic feet for the living
space, not including the attic.
The attic area is 1,440 square feet and the rise is 4.
Calculation: 1,440 x 2 = 2,880 cubic feet for the attic.
The total cubic feet for the house is 11,520 + 2,880 = 14,400
cubic feet.

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Preliminary /approximate costing
If the cost per cubic foot is $10, the estimated building cost for
the living space, not including the land, is $144,000.
Calculation: 14,400 x $10 = $144,000.
The garage volume must be added to the total.
The volume is 400 x 8 = 3,200 cubic feet.
The garage attic with a rise of 3 feet is 400 x 1.5 = 600 cubic
feet.
Therefore, the total volume of the garage is 3,200 + 600 =
3,800 cubic feet.

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Preliminary /approximate costing
The cost per cubic foot of garage space is figured at one half the
cost per cubic foot of the living space.
Therefore, the estimated building cost of the garage is 3,800 x
$5 = $19,000.
The total estimated building cost of the house is $144,000 +
$19,000 = $163,000.
This cost does not include the land.

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Preliminary /approximate costing
Comparative Estimates
The square foot method produced a building cost of $164,000.
The cubic foot method produced a building cost of $163,000.
The difference in estimated building cost between the two
methods is $1,000.
The constant used is most important.

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 Intermediate Estimates
After proceeding with a preferred course of action,
Intermediate Estimates are employed at various stages of
project design development to maintain accountability for
initial budget projections and as a means of evaluating
competing alternative construction assemblies, systems, and
materials. On large projects it is common practice for an
owner to employ a construction manager or professional
estimator to continually update project estimates and
provide feedback on budget impacts of decisions on major
design elements.

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Detailed Cost Estimate (Based on
Item Rate)
Final Estimates: As the design is completed a detailed
pre-bid estimate can be prepared. At this stage the
contingency would be reduced to zero.
This is the most reliable and accurate type of estimate.
The quantities of items are carefully prepared from the
drawings and the total cost worked out from up to date market
rates. A more accurate estimate may be obtained using the
quantity, quality, and cost of materials as well as the cost of
waste, labor, supervision, and overhead. This method is called
material takeoff.
 A detail cost estimate thus requires:
Quantity surveying, and
Analysis of different rates for quantities prepared
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Detailed Cost Estimate (Based on
Item Rate)
The first step in preparing an accurate estimate using material
takeoff is to study the construction drawings.
The specifications must also be examined to determine the
quality of materials and trade work specified.
Both of these factors affect the final cost.

The non standard sizes and unique styles found in the house
shown increased the building cost considerably.
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Detailed Cost Estimate (Based on
Item Rate)
A list of the materials required to construct the house may be
compiled after studying the drawings and specifications.
Most estimates follow the headings listed in the
specifications.
The order of headings usually follows the construction
sequence.

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 Estimating Methods
There are four primary methods used to estimate construction
costs. Those methods are known as:
 Project Comparison Estimating or Parametric Cost
Estimating,
 Area & Volume Estimating,
 Assembly & System Estimating, and
 Unit Price & Schedule Estimating.
Each method of estimating offers a level of confidence that is
directly related to the amount of time required to prepare the
estimate:

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Estimating Methods
 Project Comparison Estimating or Parametric Cost
Estimating:- is often used in early planning stages
when little information is known about the program
other than overall project parameters. This method is
sometimes called a “ preliminary “ or "ballpark"
estimate and has no better than 15% to 25% accuracy.
 Project comparison estimating uses historical
information on total costs from past projects of similar
building type. For example, the number of beds in a
hospital, or number of spaces in a parking garage, or
number of courtrooms in a courthouse can form the
basis of a project comparison estimate by comparing
them to similar scope projects recently done in the
same geographic region.
.
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Estimating Methods
Square Foot & Cubic Foot Estimates:- are another
method of developing both preliminary and
intermediate budgets based on historical data. This
method is effective in preparing fairly accurate
estimates if the design is developed enough to allow
measurement and calculation of floor areas and
volumes of the proposed spaces.

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Estimating Methods
Assembly & Systems Estimates are intermediate level
estimates performed when design drawings are between 50%
and 75% complete. Assemblies or systems group the work of
several trades or disciplines and/or work items into a single
unit for estimating purposes. For example, a foundation
usually requires excavation, formwork, reinforcing, and
concrete— including placement and finish— and backfill. An
Assembly & Systems estimate prices all of these elements
together by applying values available in assemblies cost data
guides. Estimates made with this method can be expected to
be within 10% of accurate.
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Estimating Methods
Unit Price and Schedule Estimating:- the work is
divided into the smallest possible work increments, and a
"unit price" is established for each piece. That unit price
is then multiplied by the required quantity to find the cost
for the increment of work. Finally, all costs are summed
to obtain the total estimated cost. For example, the cost to
erect a masonry wall can be accurately determined by
finding the number of bricks required and estimating all
costs related to delivering, storing, staging, cutting,
installing, and cleaning the brick along with related units
of accessories such reinforcing ties, weep-holes, flashings
and the like.

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Fundamental Approach to Construction Cost Estimation

 Efficient construction cost estimates shall address

properly the required project quality, completion time of
works and of course the construction cost of the project.
 In deciding to participate in the intended project tender, the
contractor shall carefully assess the impact of the
following key factors:
 Type of project;
 Method of tendering;
 Type of construction contract;
Number and progress of contracts already at hand;

Resource availability i.e. skilled manpower, plants
and machineries; and
 Financial position.

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Fundamental Approach to Construction Cost Estimation
 Once decision is made to participate in the intended tender,
the contractor shall give due attention to the following
major items listed below:
 General and particular conditions of contract
contained in the bidding documents;
 Technical specifications;
 Drawings;
 Estimated bill of quantities;
 Method of measurement;
 Supporting documents such as information
regarding geological formations and hydrological
data;
 Site visits; and
 Construction method statements.

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Fundamental Approach to Construction Cost Estimation
a. General and ParticularConditions of Contract
 Proper understanding of the General and Particular
conditions of contract is mainly important for construction
cost estimation in identifying the responsibilities and cost
implications on the project.
 Amount and type of performance security;
 Amount of advance payment and type of advance
repayment guarantee;
 Time for completion of the whole project;
 Limit of liquidated damages and Retention money;
 Claims and disputes settlement, Applicable laws;
 Price escalation, Tax exemptions, Insurance of the
works and Owner’s risks.

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Fundamental Approach to Construction Cost Estimation
b. Technical Specification
 Technical specifications specify the following crucial
information to the contractor and it is the sole basis both
for the construction methods to be adapted and the
construction cost of the project.
 Quality of materials;
 Quality of machineries and plants;
 Quality of workmanship;
 Erection and installation methods; and
 Test and inspection requirements and methods.

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 Fundamental Approach to Construction Cost Estimation
b. Technical Specification
 Technical specifications basically have restricted
applications, which usually define specific work items.
Therefore, for a better understanding and cost estimation
of the project, the contractor must check the given
specifications for:
 Technical accuracy and adequacy;
 Define and clear stipulations; Fair
 and equitable requirements;
 Formats which can be easily used during bidding
and construction; and
 Legal enforceability.

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Fundamental Approach to Construction Cost Estimation
c. Drawings
 The contractor mainly understands from the drawings
what type of construction methods to be adapted during
cost estimation as well as construction of the project.
 Some of the construction methods which need to be
addressed during cost estimation of this building project
are:
 Concrete production, transportation and placement;
 Transportation of materials to different floors;
 Methods and type of scaffolding, shuttering works;
 Erection and installation of glazing works; and
 Temporary access for manpower working at
different floors, and Skilled manpower
requirement.
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Fundamental Approach to Construction Cost Estimation
d. Estimated Bill of Quantities
 Estimated quantities of work are also the basis to
determine the type and number of resources to be
deployed during construction of the project.
 Moreover, construction methods shall be selected in such
a way the given quantity of works can be executed during
the completion time of the project.

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Fundamental Approach to Construction Cost Estimation
d. Estimated Bill of Quantities
 Based on the estimated quantity of works, the contractor

shall decide the method of construction to be adapted

during executing of the project such as:
 Type and size of crushing plants;
 Type and size of mechanical mixers or batching
plants;
 Type, size and number of machineries such as
dozers, graders, loaders, rollers, dump trucks and
so on;
 Skill and number of manpower requirement; and
 Type and quantity of construction materials.

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Fundamental Approach to Construction Cost Estimation
e. Supporting Documents

 Supporting documents such as geological formations,

hydrological data and other technical reports like socio-
economic studies are usually provided by the owner to
contractors for their own interpretations for heavy
construction projects.
 Therefore, the contractor shall have the technical ability
and experience in interpreting the technical data provided
to determine construction methods to be adapted which
directly affects the construction cost estimates.

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Fundamental Approach to Construction Cost Estimation
f. Site Visit
 In order to prepare competent and reasonable construction
cost estimates, the contractor must visit the project site
unless the site is familiar to the contractor with previous
reliable site information.

 Site visits are critically important especially when the

contractor is working with heavy construction project cost
estimates such as road works and hydropower projects.

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Fundamental Approach to Construction Cost Estimation
f. Site Visit

 The contractor shall prepare his own checklists during the

sitevisit which shall address, but not limited to, the
following issues which have direct impact on the
construction costs of the intended project.
 Location of the site;
 Location of local construction materials;
 Access roads;
 Water and power supply;
 Communication facilities;
 Environmental protection; and
 Existing facilities.

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 Fundamental Approach to Construction Cost Estimation
g. Method of Measurement

 Contractors shall thoroughly understand the method of

measurement incorporated within the bidding documents
before starting any cost breakdown calculations.
 BaTCoDA Technical specification and method of
measurement (March 1991);
 ERA standard specifications (2002); and
 Civil Engineering Standard Method of
Measurement (CESMM) etc.

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 Fundamental Approach to Construction Cost Estimation
h. Construction Method Statement

 Construction method statements give the clear picture of

each project activity execution during the construction
phase of the project.
 The required quality of works as per the specifications,
estimated quantity of works, safety standards, as well as
time for completion are the sole basis in determining the
construction method statements of a project.

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Fundamental Approach to Construction Cost Estimation
h. Construction Method Statement

 Construction method statements shall clearly indicate the

following crucial construction issues:
 Skill and number of manpower required;
 Type and specification of equipments required;
 Quantity and quality of materials required;
 Proposed working crews;
 Estimated crew productivity;
 Estimated duration for completion; and
 Expected defects and remedial measures.

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Basic Cost Components of Construction Project
Construction Cost: the sum of all costs, direct and
indirect, inherent in converting a design plan for material
and equipment into a project ready for start-up, but not
necessarily in production operation.
 Direct costs, which include the direct cost of
materials, labor as well as equipments; and
 Indirect costs, which include but not limited to
head office and site overhead costs.

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Basic Cost Components of Construction Project
Direct Construction Cost

 Direct Construction cost is the Cost of installed

equipment, material and labor directly involved in the
physical construction of the permanent facility; costs
incurred directly in the performance of an activity.
 Direct costs are those costs, which can be attributed to a
single task of construction work. These costs are usually
associated with a construction labor crew performing a
task using specific equipment and materials for the task.
 Direct construction costs are all costs that can be
specifically booked with an activity in a project.
 The current trend is to assign as much as possible costs to
direct costs as these costs can be budgeted, monitored and
controlled far more effectively than the indirect costs.
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Basic Cost Components of Construction Project

Direct Construction Cost

The direct costs mainly include material, labor, equipment
and subcontract costs as described below.
 Direct Material costs: These costs referring to the cost of
materials, consumables and components used for executing
an activity including the allowances for scrap and wastages.
 Direct Labor costs: All costs related to the workers working
on a specific activity such as carpenters, masons, erectors,
painters, plumbers and so on.

Direct Equipment costs: These costs referring to the costs
of machineries and plants used in executing a specific
activity.
 Subcontract costs: In case some specific activities are
subcontracted, the subcontract price will be considered as
the direct cost of the activities to be executed by the
subcontractor.

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Basic Cost Components of Construction Project
Indirect Construction Cost

 Indirect Construction Costs are all costs which do not

become a final part of the installation or constructed
facility, but which are required for the orderly
completion of the installation; costs incurred indirectly
for the accomplishment of the project.
 Indirect construction costs are all costs, which can not be
directly booked under a specific activity in a construction
project but required to keep the whole project
operational.
 These costs are also called overhead costs, which mainly
include the head office and site overhead costs.

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 Basic Cost Components of Construction Project
Indirect Construction Cost
A. Head office overhead costs
 Head office overhead costs are all costs required to run
the whole operation of the construction company, which
usually administers different projects at a time.
 These costs are not usually associated with specific
project but rather shared proportionally by all projects
under the company.

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Basic Cost Components of Construction Project
Indirect Construction Cost

A. Head office overhead costs

 Some of the checklists for head office overhead costs are
given below with further clarifications.
 Senior management costs: These refer to costs related
with salaries and benefit packages of the senior
management in the head office.
 Indirect labor costs: Staffs other than the senior
management members working at the head office such
as the technical, administrative, marketing, finance and
supply staffs.
 Head office building costs: In both cases, costs are
incurred in such a way either rental costs will be paid, if
the building is rented and building depreciation will be
considered, if the building is owned.
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 Basic Cost Components of Construction Project
Indirect Construction Cost
A. Head office overhead costs
 Bidding Expenses: These costs are usually associated
with bid document purchases, site visit expenses, bid
bonds and so on. These costs are sometimes called sunk
costs.
 Expertise service costs: These costs will be incurred
when professional services are required such as the
services of external auditors, lawyers, management
consultants and external trainings.
 Office furniture and equipments: Different office
furniture and equipments are required depending on the
size and standard of the company.
 Office running expenses: The head office operation
requires lots of miscellaneous expenses such as
telephones, fax, internet services, stationery, mail
services and so many others.
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Basic Cost Components of Construction Project
Indirect Construction Cost
A. Head office overhead costs
 Workshops, garages and warehouses: Costs related to
central workshops, garages and warehouses such as the
depreciation costs of the buildings or rental expenses.
 Bank charges: It is very natural that companies may
borrow money from banks. Therefore, the interest to be
paid on the borrowed capital shall be considered under
the head office costs.
 Insurance charges: Employees medical insurance,
office building and small vehicles insurance.
 Transportation and travel expenses: costs related to
transportation, per diem and living expenses.
 Sundry expenses: These are miscellaneous expenses
such as advertisement expenses, reception parties and
donations.
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 Basic Cost Components of Construction Project
Indirect Construction Cost

B. Site overhead costs

 Site overhead costs are all costs required to run the
whole operation of a specific construction project at site
level.
 These costs are not associated with specific activity in a
project but rather shared proportionally by all activities
within the project. Some of the site overhead costs are
listed below with further clarifications.
 Site management costs: These costs refer to costs related
with salaries and benefit packages of the site
management members in the project site.
 Indirect labor costs: salaries and benefits of staffs other
than the site management members working at the
project site such as site engineers, office engineers,
administrative and finance
27/05/2021staffs, data collectors and so62
YASICHALEW
 Basic Cost Components of Construction Project
Indirect Construction Cost
B. Site overhead costs
 Mobilization and demobilization costs –These costs are
mainly transportation costs.
 Tender Expenses – These costs are related with the
costs of the contract performance security, advance
repayment guarantee, contractor’s all risk insurance,
insurance of the works and third party insurance
depending on the contract conditions agreed.
 Site offices –site offices are constructed from different
materials such as corrugated iron sheets, prefabricated
materials, material packing steel containers, steel
structure and normal hollow concrete blocks.
 Expertise service costs – These costs will be incurred
when professional services are required at the project
site such as lawyers, claim experts and so on.

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Basic Cost Components of Construction Project
Indirect Construction Cost
B. Site overhead costs
 Office furniture and equipments – Different office
furniture and equipments are required depending
on the size and location of the project.
 Office running expenses - The site office operation
requires different expenses such as telephones, fax,
internet service, mail service and stationery.
 Radio communications - If the coverage area of
the construction project is vast, hand held and
stationed radio communications may be used
within the site and with the head office.

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Basic Cost Components of Construction Project
Indirect Construction Cost
B. Site overhead costs
 Camp facilities – The costs of construction and
operation of other facilities such as restaurants,
recreational centers and playgrounds are also included
under the camp facilities.
 Access roads – Depending on the topography and
location of the project site, different access roads may
be required to construct such as detour roads, access
roads to quarry and disposal areas, etc.
 Water and power supply – All the site offices, camp
facilities, the construction itself requires water and
power supply for operating the whole project properly.
 Workshops garages and warehouses, Bank charges,
Transportation and travel expenses, Insurance
charges, etc…
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Basic Cost Components of Construction Project
Risk Allowance
 Usually contractors incorporate risk allowances in their
tender prices to compensate the negative impacts of
different risks such as contractual, technical, political and
economic risks.
 Contractual risks are usually stemming from the
contract agreements with the project owner,
subcontractors and suppliers.
 Technical risks are associated usually with the
clarification of the technical specifications, working
drawings, construction technology and difficulties in
understanding new method of constructions.
 Political and economic risks reflect the impact of
political situations, stability of economic policies,
inflation and price escalation on the execution of the
intended construction project.
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 Basic Cost Components of Construction Project
Profit and Income Tax
 Construction projects are executed by contractors
whereby these contractors will commit to invest their
capital to get maximum possible profit from the
contracts to be performed.
 A profit margin entirely depends on the market
competitiveness and company strategies.
 Any construction company operating a profitable
business in Ethiopia shall pay 30% of its gross profit as
an income tax as per the Income Tax Proclamation No.
286/2002.
 If the contractor is registered for VAT, which is usually
the case, the contractor’s construction cost estimate shall
also include Value Added Tax which is 15% of the tender
amount in accordance with the Value Added Tax.
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Unit Rate Analysis
General
Construction cost estimation formats and procedures
shall also serve as the basis for different purposes as
listed below in managing the project during construction.
 Construction planning;
 Project cash flow preparation;
 Productivity data collection;
 Material consumption data collection;
 Construction monitoring;
 Performance evaluation and controlling;
 Performance related pay;
 Subcontractor’s price evaluation;
 Variations and claims substantiation; and
 Remedial measures and improvements.

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Unit Rate Analysis
The diagram below summarizes the components of unit
rate build-ups.

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Unit Rate Analysis

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 Unit Rate Analysis
Disposition of the Cost Calculation
I. Direct itemized costs :- Costs that can be allocated directly to
a product.
a. Material costs
 Construction/Building material.
 Operating supplies.
 Loading and unloading and
 Transportation costs.
 Wastages.

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Unit Rate Analysis
Direct Material Unit Cost
In order to have a better material cost estimation,
contractors shall develop their own material price
database and the database should contain, but not limited
to, the following information:
 Material price at place of delivery;
 Supplier’s address such as telephone, fax and mail
address;
 Supplier’s contact person, email address and web
site;
 Supplier’s credit facility;
 Country of origin, Material delivery time;
 Place of delivery such as at the supplier’s shop,
project site, Addis Ababa air port or Djibouti port;
 Transportation charges usually per ton-km as well
as transporters.
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 Unit Rate Analysis
Direct Material Unit Cost
Construction Material Costs
Cost of all material which will be part of the building.
What is the required information?
 Quantity of material required to produce a unit amount of
itemized work
 Basic price (Prime cost) at the source of material
 Transport, loading and unloading to the site
 Waste/loss amount (e.g. Breaking, rupture, defective material,
wastage etc.)

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 Unit Rate Analysis
Direct Material Unit Cost
Direct material cost is the total cost of construction
materials required to execute a unit of specific activity in
a project.
In estimating the direct material cost, the contractor shall
obtain the quantity and quality of materials required to
produce the specific unit of an activity.

` Material Break Down - In order to facilitate

estimation of cost due to material, it is
important to know the quantities of various
elements i nvolved in construction of various
parts of the building work.
`

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 Unit Rate Analysis
Direct Labor Unit Cost
b. Labor costs
 The real challenge in pricing construction work is the
computation of labor and equipment costs. These are the
categories of construction expense that are inherently
variable and the most difficult to estimate accurately
because of human variance and external conditions.
 To do an acceptable job of establishing these costs, the
estimator must make a complete and thorough job analysis,
maintain a comprehensive library of costs.
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Unit Rate Analysis
Direct Labor Unit Cost
 It can also know the production rates from past
projects (historical data), and obtain advance
decisions about how construction operation will be
conducted. Labor costs include
 Standard wages
 Extra pay and Supplementary pay
 Social Service payments
 Supplements
 Production bonus
 Long continuity of Service (permanent
laborer) Property creating performance
 Over time pay
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 Unit Rate Analysis
Direct Labor Unit Cost
 Less favorable condition /allowances -Social Service
payments
 Merit increase
 Holiday pay if any
 Health insurance
 Unemployment insurance
 Payment during sickness
Required information for the calculation of labor cost
 Number and type of skilled and unskilled manpower for a
particular type of work, (Crew)
 Performance of crew per hour for a unit amount of work
 Indexed hourly cost of the workman ship.
 Utilization factor of the workmanship. Share of a particular
personal per hour for the specified work.
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 Unit Rate Analysis
Direct Labor Unit Cost
In calculating the direct labor cost, contractors need to
calculate the direct labor hourly cost which is the total
hourly cost of labor crew required to execute a specific
activity in the project.
 In estimating the direct labor hourly cost, the contractor
shall obtain the following inputs:
 Number of labor;
 Skill and labor utilization factor (UF);
 Labor basic salary; and
 Labor index from his previous records and the
labor market.

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 Unit Rate Analysis
Direct Equipment Unit Cost
Equipment costs: - All costs for commissioning /holding
and operation of the equipment
 ownership of plant
 hire of plant
All items of mechanical plant should be estimated in
terms of all-in rate and a production output. In the case
of hired plant, the standing costs will be comparable to
the hire charge.
The main factors in building up a rate will be:
 Standing Costs: includes capital sum based on
purchase price and operating cost, maintenance, tax
and insurance
 Operating Costs: operators cost, fuel, consumable

stores.
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 Unit Rate Analysis
Direct Equipment Unit Cost

In order to calculate the direct equipment cost,

contractors need to calculate the direct equipment hourly
cost which is the total hourly cost of equipment crew
required to execute a specific activity in a project.
 In estimating the direct equipment hourly cost, the
contractor shall obtain:
 The number of equipments;
 Capacity and equipment utilization factor(UF); and
 The equipment hourly cost.

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80
 Unit Rate Analysis
Costs for sub-constructor:- If the work is to be Sublette to a
nominated sub-contractor, the cost shall be determined and
separately established as a sub-contractor fee.
Eg -Marble cladding
-Supply and fix items (aluminum frames) and
-Furniture etc.
II. Indirect Costs
 The project overheads are the cost of administering a project
and providing the general plant, facilities and site based
services.
 The cost of some of the project are time related and will be
estimated in terms of the contract period or length of time on
site and the all-in rate for a unit of time, the information on
time being obtained from the pre-tender program.

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 Unit Rate Analysis
Indirect Unit Cost
a. Site over head costs
Time-independent costs
 Costs for site plant/ site installations
 Cost for site facilities
 Engineering and controlling
 Operation risks
 Special costs
Time-dependent costs
 Commissioning /holding costs
 Operating costs
 Costs for contractor’s agent
b. General overhead costs
c. Risks and profit
Direct cost + Indirect Cost = Total cost
Total cost + Mark up amount = Bid sum
General over head cost + risk +profit+ contingency = Mark up
amount
Bid sum + Vat = Bid sum inclusive27/05/2021
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 Unit Rate Analysis
Direct Material Unit Cost
Execution of the Cost Calculation
Example: Material Break Down for 1m3 C-25
concrete (1:2:3 mix)
` Wet (fresh) concrete mix … = 1m3
◦ Quantity for dry base analysis…= 1.55m3
◦ Volume of cement……………..…= 1/6*1.55 = 0.258m3 =
0.258m3/0.035m3 per bag = 7.4 bags of cement
◦ Sands ………………………….....= 2/6* 1.55 = 0.517m3
◦ Coarse aggregate…………….….= 3/6 *1.55 = 0.775m3
◦ Water …………………………….= 0.16 m3 ( assuming w/c
0.62)
` Note:- 1.5 to 1.6 times dry volume of the
materials is required to get 1m3 of compact dense
fresh concrete mix.
` Exercise: Do similarly for C 15 and C 20 concretes?

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 Unit Rate Analysis
Direct Material Unit Cost
Material Break Down
MBs:- is important to facilitate the estimation of cost due to
material, it is important to know the quantities of various
elements involved in construction of various parts of the
building.
General Formula
Concrete Assuming 30% for shrinkage.
5% for wastage.
For Mechanical mix water/cement =0.4 – 0.5
Hand mix water/cement = 0.4 – 0.65
eg. 1. Concrete Mix ratio = 1:2:3
Let Volume of concrete = Z m3
Then a) Cement = 1/6 x Zm3 x 1400 kg/m3 x 1.30 Shrinkage x
1.05 wastage
= 318.5 kgs Z
= 0.22295 m3 27/05/2021
Z YASICHALEW 84
 Unit Rate Analysis
Direct Material Unit Cost
b) Sand =2/6 x Zm3 x 1840kg/m3 x 1.30 Shrinkage x 1.05
wastage
= 837.2kgs Z
= 0.293 m3 Z
c) Gravel = 3/6x Zm3 x 2250 kg/m3 x 1.30 Shrinkage x 1.05
wastage = 1,535.62kgs Z
= 1.07m3Z
2. Lime Mortar Mix Ratio = 1:4
Let Volume of Lime Mortar = Ym3
Then - a) Lime = 1/5 x Ym3 x 1900 kg/m3 x 1.20 Shrinkage x
1.05 wastage = 479 kgs Y
= 0.25 m3Y
b) Sand = 4/5 x ym3 x 1840 kg/m3 x 1.20 Shrinkage x 1.50
wastage = 1855 kgs Y
= 1.01 m3Y
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 Unit Rate Analysis
Direct Material Unit Cost
Execution of material unit Cost Calculation
Ex. Calculation of material costs for 1m3 of C-25 grade
concrete.
Required information for the calculation of material cost
• Type and quantity of materials for a unit amount of work.
• Basic price including transportation, loading and unloading of
materials.
• Loss or wastage amount.
Ex 1) Calculation of the material costs of 1m3 concrete C-25 grade
given.
 1Qtl of cement at Mugher(OPC) -320 Birr
 1truck of Sand (16m3 ) from source to Site 7800 Birr
 1 truck of gravel (16m3) from source to site 7200 Birr
 0.3m3 water 1 Birr
 Transportation cost 0.11 Birr/Qtl/Km
 Shrinkage 30%.
 Wastage 5%. 27/05/2021 YASICHALEW 86
 Unit Rate Analysis
Direct Material Unit Cost

Wastage and shrinkage 641.232

Total 2398.032 Birr/m3

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 Unit Rate Analysis
Direct Material Unit Cost
Example
a) Calculation of the material costs of 1m3 concrete C-25 grade
given.
-1Qtl of cement at Mugher – 62 Birr
-1truck of Sand (13 m2 ) from source to Site 1500 Birr
-1 truck of gravel (6m3) from source to site 800 Birr
-1m3 water 1 Birr
-Transportation cost 0.07 Birr/Qtl/Km
-Wastage 5%
Type of material Unit Qty Rate Cost / Unit
(Birr) (Birr)
Cement Qt1 3.6 62 223.2
M3 0.5 115.38 57.69
Sand
Gravel M3 0.75 133.33 108.00

Water M3 0.3 1 0.30

SUM 381.19
Loss 5% 19.06
Total 400.25 Birr/m3
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 Unit Rate Analysis
Direct Material Unit Cost
Example on Costs For Formwork.
Two methods of calculation to be accounted
i) With monthly rental charges
eg. Steel form works
ii) With charges according to the number of uses
eg. Timber formworks
 1m2 formwork for floor slab made of zigba: - 300 birr &
number of possible uses 7
Type of Unit Qty Rate Cost per
material unit
Zigba m2 1 42.8 42.85
5
Batten M 1 2.0 2.00
Beams M 1 4.16 4.16
Eucalyptus posts M 1 2.5 2.5
Mold oil Lt 0.1 1 0.1
Nail Kg 0.22 8 1.76
Sum 53.37
Loss 5% 2.67
Total 56.04

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 Unit Rate Analysis
Execution of labor unit Cost Calculation
Required information for the calculation of labor cost
 Number and type of skilled and unskilled
manpower for a particular type of work, (Crew)
 Performance of crew per hour for a unit amount of work
 Indexed hourly cost of the workman ship.
 Utilization factor of the workmanship: Share of a
particular personal per hour for the specified work.

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 Unit Rate Analysis
Direct Labor Unit Cost
Direct Labor Unit Cost
Example: Calculation of indexed hourly cost for carpenter
 Standard wage:- 104 birr /day
 Extra pay (for long continuity of service)
1Birr /hr for 60 % of the carpenters
 Over time
50 weekly working hours / 44 weekly working hours/
6 overtime hours with 25% increment
 Property- Creating performance
For 80% of the employees 0.25birr /hr
 Supplements: 10% of wage
Solution:-
Standard wage..........................................13 Birr /hr
 Extra pay = 0.6 (1) ...................................0.6 birr/hr
 Over time= 0.25 x13...............................0.39 birr/hr
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 Unit Rate Analysis
Direct labor Unit Cost
Property creating performance 0.8(0.25) = 0.2 birr/hr
Supplements= 0.1(13)..............................…..1.3 birr/hr
Total..................................................…….. 15.4 birr/hr.
Example. Calculation of labor cost for producing a m3 of
concrete, production rate of 1.25 m3/hr.
Labor No UF Indexed Hourly cost
hourly cost (Birr)
Forman 1 ½ 18 9
Mason 2 1 8 16
Carpenter 1 ¼ 15.49 3.87
Bar bender 1 ¼ 13 3.25
D. Laborer 20 1 4 80
Total 112.12
Labor cost = 112.12/1.25= 89.696birr/m3
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 Unit Rate Analysis
Direct Equipment Unit Cost
c) Equipment cost
Required information
 Type of equipment for a particular item of work.
 Performance of equipment per hour for a unit amount of
work (production rate)
Two methods of calculation are followed.
I) With charges accounted for depreciation, interest of return
and monthly repair costs.
II) With monthly rental charges.
Example: Calculation of equipment cost for producing1m3 of
concrete.
Mixer - Original cost = 75,000 Birr
Assume 8 working hours per day and 22 days per month
Useful life = 3yrs
Interest rate=6.5%
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 Unit Rate Analysis
Direct Equipment Unit Cost
Monthly repair cost with supplies: - 800 Birr
Vibrator- Original cost =15,000 Birr
Useful life = 7yrs
Repair cost monthly = 75 Birr
Hourly equipment cost
i) Mixer
Depreciation (d)
75000 Birr = 11.84 Birr/hr
3x12(22x8) hr
Interest of return (i)
i=[(0.065(1+0.065) 3)/((1+0.065)3-1)]75000
= 28318.2 Birr/year
Hourly cost= 28318.2/(12x8x22) =13.41 Birr/hr
Hourly repair cost = 800/8x22 = 4.54 Birr/hr
Hourly Mixer cost = 11.84+ 13.41+4.54 = 29.79 Birr/hr
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 Unit Rate Analysis
Direct Equipment Unit Cost
ii) Vibrator
Depreciation (d)
Dn=15000/(7x12x8x22) = 1.015 Birr/hr
Interest return (i)
i=[(0.065 (1+0.065)7)/(1+0.065)7 -1)]15000
= 2734.97 Birr/hr
395.7/(12x8x22) = 1.295 Birr /hr
Repair cost =75/(8x22) = 0.426 Birr /hr
Hourly vibrator cost =1.015+1.295+0.426= 2.736 Birr/hr
Type of No UF Indexed Hourly
equipment Hourly rate Cost
Mixer 1 1 29.79 29.79
Vibrator 1 1 2.736 2.736

Total hourly cost (Birr)= 32.526

Equipment cost for (1m3 concrete) 32.526/1.25 = 26.021 Birr/ m3
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 Unit Rate Analysis
Direct Equipment Unit Cost
Example. Equipment cost using monthly rental changes
Mixer= 10,000 Birr Month rental charge
Vibrator = 600 Birr month rental charge
Hourly cost
Mixer=10,000/22x8 = 56.82 Birr/hr
Vibrator = 600/22x8 = 3.41 Birr /hr
Total = 60.23 Birr/hr
Equipment cost for 1m3 of concrete = 60.23/1.25= 48.184 Birr/
m3

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 Unit Rate Analysis
Direct Material, Labor and Equipment Unit Cost
Example Suppose instructed to prepare rate for C-25 concrete
with ratio of 1:2:3. Having the following data through Dry base
analysis and through material specification formula?
Material Cost at Site
Cement Cost= 300birr/Qtl
Gravel=200birr/m3
Sand= 75birr/m3
Manpower Hourly Cost
Forman Hourly Cost=12.50birr/hr UF= 1
DL=3.75birr/hr UF=9
Masons=10birr/hr UF=2

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 Unit Rate Analysis
Direct Material, Labor and Equipment Unit Cost
Equipment Hourly Cost
Mixer= 40birr/hr
Vibrator=12birr/hr
Labor Hourly Out Put= 3.6m3/hr
Unit Weight
Gravel =2250kg/m3
Cement=1400kg/m3
Sand =1800kg/m3,
Shrinkage=1.3: wastage=1.05 and take 15% profit and
15% Overhead

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 Unit Rate Analysis
Direct Material, Labor and Equipment Unit Cost
Material Break Down for 1m3 C-25
concrete (1:2:3 mix).
` Wet (fresh) concrete mix … = 1m3
 Quantity
◦ for dry base analysis…= 1.55m3
 Volume
◦ of cement……………..…= 1/6*1.55 = 0.258m3 =
0.258m3/0.035m3 per bag = 7.4 bags of cement
 Sands
◦ ………………………….....= 2/6* 1.55 = 0.517m3
 Coarse aggregate…………… .= 3/6*1.55 = 0.775m3
` Note: - 1.5 to 1.6 times dry volumeof the
materials is required to get 1m3 of compact dense
fresh concrete mix.
` Exercise: Do similarly for C 15 and C 20 concretes?

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 Unit Rate Analysis
Direct Material, Labor and Equipment Unit Cost
For the given data
Required quantities
Cement= (1*1.3*1.05*1400)/6=318.50kg
Cement=6.37 bags
Sand=(2*1.3*1800*1.05)/6=0.455m3
Gravel=(3*1.3*2250*1.05)/6=0.683m3
PROJECT LABOR HOURLY OUTPUT
DESCRIPTIO Conctrete C-25 (1:2:3)
N EQUIPMENT DAILY OUTPUT
ITEM RESULTANT 3.60 m3/hr
1) Material Cost 2) Labor Cost 3) Equipment cost
Type of Un Unite Mat. Labor Hourly Rental
Qtty Unit Qtty U.F. Total Equipment No U.F. Total
material it rate Cost (Direct) Pay cost
Ba
Cement g 6.370 150.00 955.50 Mason No 1 2 10.00 20 Mixer 1 1 40.00 40.00
Sand m3 0.455 75.00 34.13 Daily L. No 1 9 3.75 33.75 Vibrator 1 1 12.00 12.00
Gravel m3 0.683 200.00 136.50 Direct 2
- C.Forman No 1 1 12.50 12.50

Total (1) 1126.13 Total (2 ) 18.40 Total (3) 14.44

A=ma
terial
cost 1126.13 B=Labor cost 18.40 C=Equipment cost 14.44

Direct cost= 1158.97

Rate /m3 1,506.66

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 Unit Rate Analysis
Analysis sheet for Direct and Indirect cost

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 Unit Rate Analysis
Direct Material Unit Cost

 The contractor shall add the following costs to the

material supplier’s price to get the material unit cost at
the project site:
 Loading expenses at the supplier’s place of delivery;
 Transportation costs to the project site;
 Insurance charges during transportation to the project
site; and
 Unloading expenses at the project site.

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 Unit Rate Analysis
Direct Material Unit Cost

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 Unit Rate Analysis
Direct Material Unit Cost

 Unless otherwise stated on the contract conditions and

investment incentives, contractors shall add the
following costs, but not limited, to the CIF Djibouti price
to get the final material unit cost at the project site.
 Port clearance;
 Duty;
 Excise tax;
 Value Added Tax;
 Customs clearance;
 Clearing Agent’s fee;
 Transportation cost from Port to the project site;
 Insurance, if required, during transportation; and
 Unloading expenses at the project site.

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 Unit Rate Analysis
Direct Material Unit Cost

Example: Assume the CIF price at Djibouti Port for Re-bar is

4,115.53 Birr/ton.

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Unit Rate Analysis
Direct Material Unit Cost

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Unit Rate Analysis
Direct Material Unit Cost

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 Unit Rate Analysis
Direct Labor Unit Cost
Labor Hourly Cost Estimation
 The direct labor hourly cost is the total cost of labor per hour
at the project site required to execute a specific construction
activity in a project, which mainly refers to the skilled and
unskilled workers.
 The direct labor hourly cost widely varies from company to
company based on the contractors’ salary and other benefits
scale such as food allowance, insurance, hardship allowance,
project allowance, severance pay, provident fund, annual
leave, bonuses, per diem and any other benefits specially
based on collective agreements in between the contractor and
the workers.

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Labor Hourly Cost Estimation
As an illustration, let’s see what minimum benefits a
contractor shall fulfill to his workers in addition to their basic
salaries according to the Labor Proclamation No. 377/2003.
 Severance pay
 Annual leave
 Occupational accident expenses
 Occupational disease expenses
 Overtime pay
 Occupational safety, health and working environment
 Benefits resulting from collective agreement

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Labor Hourly Cost Estimation
A – Severance pay:
In accordance with the Labor Proclamation No. 377/2003, when
an employment contract is terminated due to decrease in the
volume of construction works as a result of its successive
completion, the contractor is legally bound to pay severance pay
to his workers as follows:
Thirty times the average daily wages of the last week service for
the first year of service and for service of less than one year,
severance pay shall be calculated in proportion to the period of
service.

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Direct Labor Unit Cost
Labor Hourly Cost Estimation
In case a worker has served for more than one year, payment
shall be increased by one-third for every additional year of
service, provided that the total severance pay shall not exceed
twelve month wage of the worker.
B – Annual leave:
Under this labor law, workers are entitled to uninterrupted
annual leave as stated below. Therefore, a contractor shall
calculate the additional labor costs related to workers annual
leave.
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Direct Labor Unit Cost
Labor Hourly Cost Estimation
Fourteen working days for the first one year service.
Fourteen working days plus one working day for every
additional year of service.
Where the length of service of an employee is less than one
year, the employee shall be entitled to annual leave proportion
to the length of his/her service.

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Direct Labor Unit Cost
Labor Hourly Cost Estimation
C – Occupational accident and disease expenses:
Under the Labor Proclamation No. 377/2003, occupational
accidents are defined as any organic injury or functional
disorder sustained by a worker as a result of any cause
extraneous to the injured worker or any effort the worker makes
during or in connection with the performance of his/her work.
Moreover, occupational diseases are also defined as any
pathological condition whether caused by physical, chemical or
biological agents which arises as a consequences of the type of
work performed by the worker or the surroundings in which the
worker is obliged to work during a certain period prior to the
date in which the disease become evident.

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Direct Labor Unit Cost
Labor Hourly Cost Estimation
In cases whereby a worker has got occupational accident
and/or disease, the contractor shall cover the following medical
and cash expenses:
General and specialized medical expenses, surgical expenses as
well as hospital and pharmaceutical expenses.
Periodical payment while the worker is temporarily disabled.
Moreover, if the worker sustains permanent disablement, the
contractor shall also pay compensation.

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Direct Labor Unit Cost
Labor Hourly Cost Estimation
In case the worker dies; the contractor has to pay compensation
to the worker’s dependents as stated in the proclamation.
Generally, estimating the risks of occupational accidents and
diseases is very difficult unless the contractor has a sound
experience. Therefore, local contractors are advised to
insure their workers for both the occupational accidents
and diseases. Even though the insurance premium widely
varies among the local insurance companies based on the
number of workers, salary, and type of project and so on, the
current average annual insurance premium in Ethiopia is about
1.5% of the workers annual basic salary.

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Direct Labor Unit Cost
Labor Hourly Cost Estimation
D – Overtime pay:
As a contractor, it is very normal to work overtime hours at the
construction sites for different reasons such as to speed up
delayed progress of works. According to the Labor Proclamation
No. 377/2003, in addition to his basic salary, a worker who
works overtime hours shall be entitled at least to the following
payments:
In the case of overtime work done is between 6 a.m. in the
morning and 10 p.m. in the evening, 1.25 times the ordinary
hourly rate.

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Direct Labor Unit Cost
Labor Hourly Cost Estimation
On the other hand, if the overtime work is done between 10
p.m. in the evening and 6 a.m. in the morning, 1.5 times the
ordinary hourly rate.
Moreover, if the overtime work is done on weekly rest day, 2
time the ordinary hourly rate.
Last but not least, if the overtime work is done on public
holidays, 2.5 times the ordinary hourly rate.

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Direct Labor Unit Cost
Labor Hourly Cost Estimation
E – Occupational safety health and working environment:
The contractor is also legally bound to take necessary measures
to safeguard the health and safety of the workers and shall
particularly provide his workers with protective equipment’s,
clothing and other necessary materials. Depending on the type
of work to be performed, the contractor may be required, but
not limited, to provide the following items:
 Working clothes
 Safety shoes
 Safety belts
 Helmets
 Goggles Safety apron
 Breathing apparatus equipped with oxygen
 Ear protectors
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Direct Labor Unit Cost
Labor Hourly Cost Estimation
Most of the safety materials are normally used by many
workers at different times and it is better to include the cost of
safety, health and working environment to the indirect cost of
the project.
F – Benefits resulting from collective agreements:
Based on the Labor Proclamation No. 377/2003, collective
agreements between the contractor and his workers are legally
applicable when the collective agreement is more favorable
to the workers in similar matters than these provided for by
law. However, when the law is more favorable to the worker
than the collective agreement, the law shall be applicable.

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Direct Labor Unit Cost
Labor Hourly Cost Estimation
Generally, even though, the Ethiopian labor law dictates the
minimum benefits to the workers, contractors need to have their
own salary and other benefits scales depending on, but not
limited to, the following conditions:
 Project location.
 Labor market.
 Type of project.
 Complexity of project.
 Project time for completion.
 Project weather conditions.
 Project site facilities.
 Level of skill required.
 Type of skill required.
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Direct Labor Unit Cost
Labor Hourly Cost Estimation
As an example, let’s see how to estimate the direct labor hourly
cost for a carpenter, mason, bar bender and unskilled labor
working at a high rise building project located in Woldia based
on the following assumptions:
Project location…………………………….. Woldia
Project working hours………………………10hrs per day
Rest days…………………………………….Every Sunday
Employment………………………………….On daily
basis
Bonuses………………………………………One month
salary per year

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Labor Hourly Cost Estimation
Medical insurance……………………………1.5% of annual
salary
Annual leave…………………………………..14 working
days for the first year.
Moreover, as construction workers are highly mobile for
different reasons mainly of other better job opportunities,
assume a worker will work on average for one year on the
project.
Basic Salary for carpenter, mason, bar bender and unskilled
labor is 30, 30, 25 and 10 respectively.

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Direct Labor Unit Cost
Labor Hourly Cost Estimation
Let’s demonstrate the carpenter hourly cost calculation and with
similar manner the hourly cost for mason, bar bender and
unskilled labor are also calculated.
1. Basic salary:
A. Basic daily salary……………….30.00 Birr/day (Market
labor price)
B. Working hours per day…………8 hours (Labor Proclamation
No. 377/2003)
Basic hourly salary = A/B
Basic hourly salary = 30/8
Basic hourly salary = 3.75 Birr
2. Overtime pay:
A. Normal overtime hours per day……………….2 hours
B. Working hours per day…………………………8 hours
C. Working days per month………….26 days (30 – 4 Sundays)
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Direct Labor Unit Cost
Labor Hourly Cost Estimation
In this case, the additional cost to be considered is the difference
between the ordinary pay and overtime pay for the overtime
work performed. As a result, the additional multiplying factor is
1.25 for normal overtime working hours.
Overtime hourly pay = A*(1.25*3.75)/B
Overtime hourly pay = 2*(1.25*3.75)/8
Overtime hourly pay =1.17 Birr
3. Bonus:
A. Annual bonus…...one month salary per year
B. Working days per year……………….313 days (365 – 52
Sundays)
C. Amount of bonus per year……….…..780.00 Birr (26 days *
30 Birr/day)
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Labor Hourly Cost Estimation
Hourly bonus = C/ (B*8)
Hourly bonus = 780/ (313*8)
Hourly bonus = 0.31 Birr
4.Medical insurance:
A. Medical insurance……………………..1.5% of annual salary
B. Annual salary…..……………………….10, 950 Birr (30
Birr/day*365days)
Hourly medical insurance = 0.015*B/ (313*8)
Hourly medical insurance = 0.015*10950/ (313*8)
Hourly medical insurance = 0.07 Birr

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Labor Hourly Cost Estimation
5.Severance pay:
A. Severance pay…………….30 days salary for one year
service (Labor law).
B. Amount of severance pay…………...900 Birr (30 days * 30
Birr/day))
Hourly severance pay = B/ (313*8)
Hourly severance pay = 900/ (313*8)
Hourly severance pay = 0.36 Birr

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Direct Labor Unit Cost
Labor Hourly Cost Estimation
6. Annual leave:
A. Annual leave……………....14 working days for one year
service
B. Amount of annual leave pay………....420 Birr (14 days *
30 Birr/day))
Hourly annual leave pay = B/ (313*8)
Hourly annual leave pay = 420/ (313*8)
Hourly annual leave pay = 0.17 Birr
The hourly labor cost summary for carpenter, mason, bar
bender and unskilled labor are summarized under Table below,
which indicates the contractor shall increase the basic salary of
his direct labor by 55% based on the given assumptions to get
the total hourly direct labor cost.
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Direct Labor Unit Cost
Labor Hourly Cost Estimation
Indexed Hourly Cost= Basic hourly salary = 3.75 Birr +
Overtime hourly pay =1.17Birr + Hourly bonus = 0.31 Birr +
Hourly medical insurance = 0.07 Birr + Hourly severance pay =
0.36 Birr + Hourly annual leave pay = 0.17 Birr = 5.83birr/hr

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Direct Labor Unit Cost
Labor Hourly Cost Estimation
Indexed Hourly Cost= Basic hourly salary = 3.75 Birr + Overtime hourly
pay =1.17Birr + Hourly bonus = 0.31 Birr + Hourly medical insurance = 0.07
Birr + Hourly severance pay = 0.36 Birr + Hourly annual leave pay = 0.17
Birr = 5.83birr/hr

Direct Labor Cost Summery

TYPE OF LABOR BY SKILL
SALARY AND BENEFITS Unskilled
Carpenter Mason Bar Bender Labor

1 Basic salary 3.75 3.75 3.13 1.25

2 Overtime pay 1.17 1.17 0.98 0.39

3 Bonus 0.31 0.31 0.26 0.10

4 Medical Insurance 0.07 0.07 0.05 0.02

5 Severance pay 0.36 0.36 0.30 0.12

6 Annual leave 0.17 0.17 0.14 0.06

Therefore, the hourly indexed cost of carpenter, mason, bar bender and unskilled labor will be,
•Hourly Indexed Cost Of carpenter and mason = basic salary * labor index=1.55*3.75=5.82 birr
Similarly for bar bender and unskilled labor will be 4.85 and
27/05/2021 1.94 respectively.
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Direct Equipment Unit Cost
Generally, Equipment costs are divided into three major parts.
These are:
1. Accessing or Availing Costs (Owning, or Renting, or
Leasing Costs),
2. Operating Costs, and
3. Overhead and markup Costs;
1. Accessing or Availing Costs
Ownership Costs:
Cash flows for purchase expenses salvage value (SV), Tax
savings from depreciation, major repair and Overhauls,
Insurance, Interest and Tax Costs, and Storage and
Miscellaneous expenses for construction equipments
constitute the significant components of Ownership costs.

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Direct Equipment Unit Cost
Ownership cost (OC = DC+IC)
OC- Ownership cost
DC- Depreciation costs
IC-Investment cost
Depreciation cost:
Why do equipments depreciate?
 It represents the reduction in market value of an asset
due to Age (use), obsolescence (technological advancement
or market preference), wear deterioration, etc leads to loss of
value; Some assets actually do appreciate with time.
The physical deterioration of the asset occurs due to
wear and tear with passage of time.

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Obsolescence occurs to due to availability of new
technology or new product in the market that is superior to
the old one and the new one replaces the old even though
the old one is still in working condition.
The tangible assets for which the depreciation analysis
is carried out are construction equipment, buildings,
electronic products, vehicles, machinery etc.
Depreciation amount for any asset is usually calculated on
yearly basis.
Depreciation is considered as expenditure in the cash flow
of the asset, although there is no physical cash outflow.

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Direct Equipment Unit Cost
Before discussing about different methods of
depreciation, it is necessary to know the common terms
used in depreciation analysis.
These terms are initial cost, salvage value, book value and
useful life.
 Purchase expenses/ Initial cost is the total cost of
acquiring the asset.
 Purchase expenses: include the price of the equipment, its
shipping or other forms of transporting services and
necessary custom taxes to own it.
Salvage value:- represents estimated market value of the
asset at the end of its useful life.
It is revenue shown as cash inflow of equipments if they
have value at any time of their transfer of ownership or their
disposal..
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Direct Equipment Unit Cost
Machines that wear out and posses few secondary uses could
be grouped as low salvage value equipments.
On the other hand, the are equipments either gets overhauled
to keep their operating conditions or even have multiple
service life applications which could be regarded as high
salvage value equipments.
There is a possibility also when subsequent brands with new
and technologically, economically and socially better products
succeed, then its salvage value will dramatically be reduced.

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Book value is the value of asset recorded on the accounting
books of the firm at a given time period. It is generally
calculated at the end of each year. Book value at the end of a
given year equals the initial cost less the total depreciation
amount until that year.
Useful life represents the expected number of years the
asset is useful in terms of generating revenue. The asset
may still be in working condition after the useful life but it may
not be economical. Useful life is also known as
depreciable life. The asset is depreciated over its useful life.
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Direct Equipment Unit Cost
Tax savings from depreciations: can only be applicable if
only the company who owns the equipment is profitable.
There is a possibility to carry over to years where such
profitability occurs.
Depreciation is a legitimate cost of business that recognizes
the loss in value of equipment over time. Tax saving from
Depreciations can be computed commonly used depreciation
methods are straight-line depreciation method, declining
balance method, sum-of-years-digits method and
Production methods or use of Tax code schedules.
Using the first approaches, the three major factors used to
compute tax savings from depreciations are initial cost or
basis, service life in years and their salvage or residual
values.

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Direct Equipment Unit Cost
a. Straight-line (SL) Depreciation Method
 It is the simplest method of depreciation. In this method it
is assumed that the book value of an asset will decrease by
same amount every year over the useful life till its salvage
value is reached.
 It is called a linear method that allocates depreciation
values of equipments uniformly along its service years.
 In other words the book value of the asset decreases at a
linear rate with time period.

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Direct Equipment Unit Cost
That is, Dlm = Ioc / N
BVn = Ioc – (N*Dlm)
Where; Dlm = Depreciation using Linear Method;
Ioc = Initial Owning Cost;
N =Number of Years; and
BVn = Book Value @ N years; OR
Annual Depr. = Ioc – Estimated Salvage Value
Estimated Useful Life (years)
Example 1: The total initial cost of Dozer is 500,000 birr; the
useful life is expected to be 5 years; and the estimated salvage
value at the end of this period is 150,000: find the annual depr.
of this equipment; using the straight line method?

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

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b. Accelerated Methods:
In these methods, large amounts of depreciations are considered
during the early years of the equipment life.
Two methods can be considered for accelerated depreciations
approaches.
These are:
i. Sum of Years Digit Methods and
ii. Declining Balance

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Direct Equipment Unit Cost
i. Sum-of-years-digits (SOYD) depreciation method
Sum of years digit method: is the application of depreciation
base which is held constant and the yearly rate is considered
decreasing.
It is an accelerated depreciation method. In this method the
annual depreciation rate for any year is calculated by dividing
the number of years left (from the beginning of that year for
which the depreciation is calculated) in the useful life of the
asset by the sum of years over the useful life.
SOY=N/2(N+1)
Dn= RL/SOY(P-S)
SOYD depreciation causes larger decreases in book value in
earlier years than in later years.

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Direct Equipment Unit Cost
Example
A Cat Excavator is available with a down payment of birr 900
with an estimated salvage value of birr 70 and five year of
service life.

The product of the multiplier and B-S for the year is the
depreciation charge for the year.
 SOYD depreciation causes larger decreases in book value in
earlier years than in later years. 143
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Direct Equipment Unit Cost
ii. Declining Balance Method:
 Declining Balance method: applies twice the rate of the
Straight Line method for depreciation when applied to new
equipment with a useful life of at least 3 years.
 It is also an accelerated depreciation method.
 In declining-balance method the calculated book value of the
asset at the end of useful life does not match with the
salvage value. If the book value of the asset reaches its
estimated salvage value before the end of useful life, then
the asset is not depreciated further.

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Direct Equipment Unit Cost
For straight line depreciation with N years, the rate of
decrease each year is 1/N.
Declining balance depreciation uses a rate of either 150% or
200% of the straight-line rate.
Since 200% is twice the straight-line rate, it is called double
declining balance (DDB).
The DDB equation for any year is
DDB depreciation dt = (2/N) ( Book
value)
Book value = Initial cost – total charges
to date,
So, DDB deprec. dt = (2/N) (Initial cost – total charges to
date)
It can be shown for DDB, that the depreciation schedule in
year t is given by:
DDB depreciation in year t = αBvn-1(1- α )n-1
Where, α = (1.25 to 2)/N
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Direct Equipment Unit Cost
Example:- A Cat Excavator is available with a down payment
of birr 900 with an estimated salvage value of birr 70 and five
year of service life. Calculate the annual depr. of this equipment;
using the DDB depreciation method?

 If the salvage value of this example had not been 70, a

modification of DDB would be necessary.

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Direct Equipment Unit Cost
Exercise:- An equipment costs 10,000 birr with a salvage
value of 2,000 birr. Useful life of the item in taxpayer’s hands
is 5 years. calculate, the depreciation value in the useful life
this equipment using all the three methods?

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Direct Equipment Unit Cost
2. Operation Costs
 Typical expenses during equipment operations are Fuel, Oil
and Grease (FOG) costs, Normal Repairs and Tire and
High Wear Items Replacement Costs.
 Operators’ costs are often considered in Labor costs
component of CBSs and are not considered as a part of
equipments operation costs.
 Either manufacturers’ or good service records could be used
to estimate hourly FOG expenses of equipments. Besides,
routine maintenance, servicing and tires and high wear
replacement parts such as blades, bucket teeth, ripper tips, and
cutting edges can also be estimated per working hour.

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Direct Equipment Unit Cost
Operating Costs :-are incurred only when equipment is
operated. Therefore, costs vary with the amount of equipment
use and job operating conditions.
Major elements of operating cost:
 FOG cost
 Service cost
 Repair cost
 Tire cost
 Cost of special items
 Operators’ wages

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Direct Equipment Unit Cost
Fuel cost
The hourly cost of fuel is simply fuel consumption per hour
multiplied by the cost per unit of fuel (gallon or liter). Actual
measurement of fuel consumption under similar job conditions
provides the best estimate of fuel consumption. It may
estimated from historical data or from manufacturer’s data or
by the use of table 1 below.

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Direct Equipment Unit Cost
Service Cost
 Service cost :- represents the cost of oil, hydraulic fluids,
grease, and filters as well as the labor required to perform
maintenance service. Equipment manufacturers publish
consumption data or average cost factors for oil, lubricants,
and filters for their equipment under average conditions.
Table 2. Service Cost Factors (% of hourly fuel cost)

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Table 3. Typical lifetime repair cost (%of initial cost less tires)

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Table 3. Typical lifetime repair cost (%of initial cost less tires)

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Table 4. Typical tire life (hours)

Special Items
The cost of replacing high-wear items such as dozer, grader, and scraper
blade cutting edges and end bits, as well as ripper tips, shank protectors,
should be calculated as a separate item of operating expense. As usual,
unit cost is divided by expected life to yield cost per hour.

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Direct Equipment Unit Cost
Operator
The final item making up equipment operating cost is the operator’s wage.
Care must be taken to include all costs, such as worker’s compensation
insurance, Social Security taxes, overtime or premium pay, and fringe
benefits, in the hourly wage figure.
Total Owning and Operating Costs
After owning cost and operating cost have been calculated, these are totaled
to yield total owning and operating cost per hour of operation. Although this
cost may be used for estimating and for charging equipment costs to
projects.

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Direct Equipment Unit Cost
Example Problem:
Calculate the expected hourly owning and operating cost for the second
year of operation of the twin-engine scraper described below. Cost
delivered = $152,000
Tire cost = $12,000
Estimated life = 5 years
Salvage value = $16,000
Depreciation method= sum-of-the-year’s-digit
Investment (interest) rate = 10%
Tax, insurance, and storage rate = 8%
Operating conditions = average
Rated power (consumption) = 465
Fuel price = $1.30/gal

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160
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3. Overhead and Markup Costs
In addition to the direct costs of ownership and operation,
general overhead costs constituted Equipment costs;
These costs are associated with wages of mechanics and
supervisory personnel’s, clerical and records services, rental
and repayment of maintenance facilities.
A markup or profit margins expressed as percentage of total
hourly operating costs is also part of the Equipment costs.

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Site Overhead Cost
It is easier to express the site overhead costs as a
percentage of the direct unit cost of an activity.

Head Office Overhead Cost

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Risk Allowance
Let’s assume the following factors represent the
percentage cost increment of each cost component and
the risk allowance will be calculated as follows:

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Gross Profit
As an illustration, if the net profit margin is assumed to
be P% of the breakeven cost (direct costs + indirect costs
+ risk allowances), the gross profit (net profit + income
tax) can be calculated as follows, which is X% of the
breakeven cost.

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Total Unit Price without VAT
If the contractor is registered for VAT but the contract is
VAT exempted, the contractor’s unit price in his tender is
the sum of direct unit cost (H), indirect unit cost (K), risk
allowance (L) and gross profit (M).

Total Unit Price with VAT

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 Unit Rate Analysis
Unit Rate Analysis Format Examples

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 Unit Rate Analysis
Two approaches for cost calculation
i/ Cost Calculation with predetermined charges.

Direct itemized Indirect itemized

cost cost
- Material - site overhead costs
- Labour - General overhead
- Equipment cost
- Subcontractor risk and profit

Unit prices
( Rate )

Bid Sum

Procedure for the cost calculation with predetermined charges

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 Unit Rate Analysis
The direct itemized cost will be established in accordance with
the methods and approach illustrated in the previous examples.
However the indirect itemized cost will be a product of the
corresponding direct itemized cost with some fixed charge to be
established by the individual contractors for the particular
project. In our country high-class contractors presume 30-40%
of the direct itemized cost as an indirect cost for the particular
item of work. One can readily establish the corresponding unit
prices by just summing up the direct and indirect itemized costs .
The summation of the price of the whole item which results
from the multiplication/unit price x quantity/ would give the bid
sum to the particular project.

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 Unit Rate Analysis
Example: Establish the unit price of 1 m3 concrete
considered for in the previous examples.

Given that the surcharge for the indirect cost is 35%.

Material cost= 2398.032

Labour cost = 88

Equipment cost = 26.021

Direct cost = 2512.053

Indirect cost = 0.35 (2512.03) =628.013

Unite price = 2512.053 + 628.013=3140.04 Birr/ m3

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 Unit Rate Analysis
ii/ Cost calculation through the bid Sum
In this approach, amounts for site overhead costs, general
overhead costs, risk and profit are to be ascertained separately
for each project. Here from surcharges on direct itemized costs
result with different amount for each project;
Four steps for this calculation method:
 Establishing the production costs
 Establishing the bid sum
 Establishing the surcharges on direct itemized costs
 Establishing the unit prices

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 Unit Rate Analysis
Eg. Given the following detail for the construction of 50m long
fence around a site.
1/ List of items quantities and direct itemized costs are as given
in the table.
No Items of work Unit Quantity Direct itemized cost
1 Excavation to a depth of 1m M3 40 6
2 50 cm thick masonry wall M3 25 185
3 Concrete for tie beam M3 5 425
4 Dia 14 deformed bar Kg 242 5
5 Dia 8 stirrups kg 132 4.5
6 Formwork tie beam M2 20 45
7 20cm thick HCB wall M2 90 52
Direct 14,374 birr
cost

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 Unit Rate Analysis
2) Site overhead costs

 Site facilities (office, store---)……………..2500 birr

 Electricity, water & telephone……………800 birr

 Salary professionals……………................2000 birr

 Secretarial service………………………..300 birr

3) General overhead cost………………………10 % direct cost

4) Risk & profit……………………………..7% of direct cost

Question: Establish bid sum and unit prices for the itemized
works.
Step 1: Establish production cost. (Direct cost + Site overhead
cost)
Direct cost :-14,374 birr
Site overhead cost :- 5,600birr
Production cost:- 19,974 birr
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 Unit Rate Analysis
Step 2: Establish bid sum [production cost + General overhead
cost + risk & profit] Production cost=19,974 birr
General overhead cost = 10%(14,374)=1,437.40 birr
Risk & profit ---------------7 %(14374)= 1,006.18 birr
Bid sum without vat = 22417.58 birr
vat 15% = 3362.64
Bid sum with vat =25780.22 birr
Step 3: Surcharge on direct itemized cost
Surcharge = Bid sum without vat/Direct itemized cost
= 22,417.58/14374= 1.5596 = 1.56

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 Unit Rate Analysis

Step 4: Establishing unit prices

Unit price = Surcharge x direct itemized cost

Item of work Unit Qry Unit price Amount

1. Excavation m3 40 9.36 374.40
2. masonry wall m3 25 288.53 7213.25
3. Concrete m 3 5 662.83 3314.15
4. dia 4 bar kg 242 7.798 1887.116
5. dia 8 bar kg m 132 7.018 926.376
6. formwork 2 20 70.18 1403.6
7. HCB wall m2 90 81.099 7298.91

Bid sum without vat 22417.8

Add 15 % vat 3362.67
Bid sum with vat 27/05/2021 25780.47 birr
YASICHALEW 184
 Unit Rate Analysis
Pro-rata Rates
It is sometimes found that there are a number of items which
vary from the original measurement and description of finished
work in the bill of quantities. Those items which differ only in
output or quality of materials may be related to contract rates on
a pro-rata basis. A pro-rata rate is the procedure of determining
unit prices of items that undergo changes in output or quality of
materials from the original contract rates.
The price of a unit of finished work will consist of the elements
of labour, materials and a mark up for profit and on costs,
which are not readily adjustable by simple proportionate
methods. This may be illustrated by the example that whilst a
40 mm screed will require double the quantity of material to
that of a 20mm screed, however the labour in laying will not be
doubled, as there will be less surface to work to a smooth finish
per volume of material laid.
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 Unit Rate Analysis
The major assumptions behind the concept is that
•Material, equipment and indirect costs can readily be
determined or available from existing prices and
predetermined charges and hence readily adjustable whilst
difficult to readily drive the labour cost component for
existing rates and hence remain as uncertain factor.
There are three main methods of assessing pro-rata rates and
some skill and thought is needed to decide which is
appropriate to the particular work at hand.

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 Unit Rate Analysis
1 By Derivation
By derivation from two or more similar unit rates. This a simple
and straight forward method of obtaining a pro-rata rate but it
may only correctly be used in certain circumstances, and to
illustrate this, two examples are quoted below.
e.g.1 Assuming a priced bill has rates for 20mm and 40mm
thickness screeds for the same mix laid to a similar
specification: simple deduction of one rate from the other will
give the additional value of the material, mixing and profit for
an increase in thickness of 20mm. As already stated, the value of
spreading in these circumstances would not be appreciably
altered, therefore, to find the price of 25mm thickness (an
additional 5 mm) all that is needed is to add ¼ of the difference
in price between 20mm and 40mm thickness screed to the
20mm thickness.
Screed 20 mm : 20 Birr
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Screed 40 mm: 30 Birr
 Unit Rate Analysis
2 The following itens and prices appear in a bill of quantities
prices by a contractor. 50 x 100 mm softwood joist Birr 31.5
50 x 125 mm softwood joist Birr 37.0
50 x 150 mm softwood joist Birr 42.5
From the above it is required to calculate the rates of the
following: 50 x 75mm Softwood member
50 x 112.5 mm Softwood member
By inspection it can be seen that the rate increases by Birr 5.5 for
each increase in 25 mm depth of joist, also that the increase is
not proportionate to the volume of timber contained in each item
or to the area of the surface. It is therefore reasonable to assume
that the price for the other two items given should be derived
from the bill figure in the same way as they were priced- Birr 5.5
for each increase or decrease in 25mm depth.
Thus the rate becomes Birr 26 and Birr 34.25 respectively.

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 Unit Rate Analysis
2 By Reconciliation of Analysis
This is by far the most frequent method that has to be employed
in preparing proper pro-rata rates. Current market costs of
materials are fairly readily available and the quantity of material
in a given item may be calculated. Rates of wages and costs of
insurances are also available so that the only variables in the
contract bill rates are the labour outputs and profit and markup.
A difference of a few points in the markup makes very little
difference to the ultimate answer and therefore the most
important factor left is the labour cost. Working on this theory it
is usually practicable to break down a unit rate to arrive fairly
closely at the figure included by the contractor as the labour on
the item and thus apply it to another item of similar labour
output.

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 Unit Rate Analysis
The following method has, of course, to be varied slightly in
detail to suit the circumstances of the problem and may be used
in circumstances to discover a material cost included in a bill
rate, although generally it is the labour factor which is the
uncertain factor in a bill price. The principle is to look for the
differences between the given items as only this need to be
analyzed in detail. It is, however, of vital importance to set out
the problem in logical steps and to give detailed explanations at
each stage.
1st Step: Break down a unit rate into its component to
arrive fairly closely at the figures included by the contractor as
labour component.

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 Unit Rate Analysis
2nd Step: Apply the labour cost to arrive at a pro rata rate
of a similar item. Eg. A bill of quantities contains the following
item:
Hollow Concrete Block wall for load bearing superstructure
Class-A bonded in mortar 1:1:6 Birr 150 / m3.
During construction, the engineer issued work order to change
the HCB to class C wall with 1:3 mortar. Determine the rate on
pro-rata basis.
i) Deduct a reasonable rate for mark-up ( Profit +
Administrative Costs) 20% is assumed.
Direct Cost = 150/1.2 = Birr 125.00
ii) Deduct Material cost (Available data)
HCB: 12.5 pcs x 5 = Birr 62.5
Mortar: Cement- 0.1 qtl x 150 = Birr 15.00
Lime - 0.1 qtl x 80 = Birr 8.00
Sand - 0.05 m3 x 120 = Birr 6.00 All-in-material Cost=Birr 91.5
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 Unit Rate Analysis
iii) All-in-Labour Cost: 125-91.5 = Birr 33.5
iv) Adjusted material cost for class-C HCB wall. HCB: 12.5
pcs x 4 =Birr 50.00
Mortar (1:3) Cement : 0.1 x 150 = Birr 15.00
Sand : 0.06 x 120 = Birr 7.20 Direct Cost: = Birr 105.7
Mark-up (20%) = Birr 21.14
New Item Rate: = Birr 126.84

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 Unit Rate Analysis
3 By Analogy
With knowledge of pricing and building operations it is
sometimes possible to discover items of different description,
or even trades, which are equivalent in labour, or labour and
material, to the item for which a price is sought.
By way of example, one may require a rate for joinery of a
different description of hardwood to that given, and
investigation shows that the cost of the raw material is
practically the same and the degree of workability equal. In
such case one may well agree with the contractor that item for
item there is no variation in price.
Similarly a rate might be required for screwing and pelleting
hardwood and only a rate for the same operation in softwood
appears in the bill. It is a safe assumption, providing the
screws are of the same description (The pellets being
manufactured out of waste material have no value as such),
that the difference is virtually one of labour
27/05/2021 only and may be 193
YASICHALEW
adjusted for hardwood by multiplying by the additional labour
Risk Analysis for Cost Estimation
Risk Analysis: General
 Many practical problems involve uncertainty and are
probabilistic as opposed to deterministic.
 What does for example the cost of a project is
ETB10million mean?
 It is simply the expected value only, not supplemented
with a measure of the uncertainty such as:
 What is the probability that the cost will be
12million or more, or between 11 and 13million?
 How sensitive the uncertainty of the project is to
the uncertainty of the component elements?

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 Risk Analysis for Cost Estimation
Risk Analysis: General
 Schedule Planning and Development, Cost Estimating
and Budgeting, Resource Planning, Procurement
Planning, Profitability Study, etc. always involve some
uncertainty since not all the components that go into the
study are exactly known.
 Most are estimates, thus it is required to pay attention to
and inclusion of uncertainty as well as understand the
impact of risk and uncertainty.
 Risk Analysis: Reducing or effectively addressing
uncertainty quality of estimate improves Better
decisions.

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 Risk Analysis for Cost Estimation
Risk Analysis: General
Key Variables of Project Management and Associated Risks

Sub-
Standard
Quality

MAJOR
RISKS

Cost
Delay
Overrun
Major Project Constraints

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Risk Analysis for Cost Estimation
Risk Analysis: General
Risk Management Model in Project Management

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Risk Analysis for Cost Estimation
Risk Analysis: General
Why Risk Analysis in Cost Estimates?
 Cost estimation is prediction. Little in cost estimating is
certain. There is an inherent need for accurate forecasts
of costs in all of business activities for obvious reasons.
 Traditional, single-point cost estimates are incapable of
providing decision makers with such crucial information
as:
 The probability of overrunning the cost estimate at all or by
some percentage (e.g. probability of a 20 percent overrun);
 How much different actual costs can realistically be from the
baseline estimate (i.e., exposure);
 The most important factors contributing to a project’s
exposure; and
 The contingency required to obtain a certain level of
confidence in a cost estimate.
 Single point estimate doesn’t enable us to get Full
knowledge of estimate 27/05/2021 YASICHALEW 80
198
Risk Analysis for Cost Estimation
Risk Analysis: General
Why Risk Analysis in Cost Estimates?
 A risk analysis framework for estimating costs is
required for improving the quality of cost estimates for
Civil Works projects because it provides opportunities to
explicitly address much of the uncertainty inherent in
the cost estimating process.
The Language of Risk and Uncertainty
 Risk: is a characteristic of a situation, action, or event in
which a number of outcomes are possible, the particular
one that will occur is uncertain, and at least one of the
possibilities is undesirable.
 Uncertainty: is a situation in which a number of
possibilities exist and which of them has occurred, or will
occur, is unknown.
 All risks are uncertain but27/05/2021
not allYASICHALEW
uncertainty is risky. 199
 Risk Analysis for Cost Estimation
Risk Analysis: General
The Language of Risk and Uncertainty

Risk (AACEI)- An ambiguous term that can

mean any of the following:
all uncertainty (threats and opportunities);
downside uncertainty (a.k.a., “threats”); or
the net impact or effect of uncertainty
(threats - opportunities).
The convention used in any work should be
clearly stated to avoid misunderstandings.
Thus, in our discussions, risk is defined as
“the chance of a bad thing happening.”
RISK AND UNCERTAINTYVENN DIAGRAM

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Risk Analysis for Cost Estimation
Risk Analysis: General
Inherent Risk in Construction
A) Inherent Risk
 Inherent (range) Risk in the measured items (that have a
100% likelihood of occurring) included within the
various components (direct costs, indirect costs, margin
and owner’s costs ) of the Base Estimate (such as Rates,
Quantities, Assumptions, etc).
B) Contingent Risk
 Contingent Risk being the risk attached to items outside
the Base Estimate (that have a less than 100% likelihood
of occurring).

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Risk Analysis for Cost Estimation
Risk Analysis: General
Inherent Risk in Construction
B) Contingent Risk
 Contingent risk is the risk due to unmeasured items.
Typical contingent risks include weather impact,
industrial issues, safety, planning approval conditions,
design development, owner requirements, geotechnical
investigations and potential claims from contractors.
 They should not be expected to cover project scope
definition changes, as these may also bring a change in
project benefits.
 Contingent risk should include the risk of changes to
standards and minor changes due to slight changes to
owner’s requirements.

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 Risk Analysis for Cost Estimation
Risk Analysis: General
Inherent Risk in Construction
B) Contingent risk
 Acts of God: Flood, Earthquake, Landslide, Fire, Wind damage;
 Physical: subsurface conditions;
 Financial & Economic: uncertainty with high inflation and interest
rates, Availability of funds, Exchange rate fluctuations, Financial
default;
 Construction Related: Labor strikes, Labor productivity, Different
site conditions, Design changes, Equipment failure, inability of a
subcontractor to perform, Damage to structure, Damage to
equipment, Labor injuries, Fire, Theft, offsite accidents by vehicles;
 Design Related: Incomplete design scope, Design assumptions,
Defective design/ constructability, Errors and omissions, Inadequate
specifications;
 Political/public and Environmental: Changes in laws and
regulations (such as environmental protection and public safety
regulations), Requirement for permits/ disapproval of the required
project permits, Law and order, Pollution and safety rules; and
 Organizational and Contractual: Contractual relations, Attitudes of
participants, Communication, risks assigned by contract.
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203
Risk Analysis for Cost Estimation
Risk Analysis: General
Reserve Funds
 Reserves are amounts included in a cost estimate to
mitigate cost risk by allowing for future situations that
are difficult to predict.
A) Contingency Reserve
 An amount added to an estimate to allow for items,
conditions, or events for which the state, occurrence,
and/or effect is uncertain and that experience shows will
likely result, in aggregate, in additional costs.
 Contingency usually excludes;
 Major scope changes such as changes in end product
specification, capacities, building sizes, and location of the
asset or project (see management reserve);
 Extraordinary events such as major strikes and natural
disasters;
 Management reserves.
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Risk Analysis for Cost Estimation
Risk Analysis: General
Reserve Funds
B) Management Reserve
 An amount added to an estimate to allow for
discretionary management purposes outside of the
defined scope of the project as otherwise estimated.
 Use of management reserve requires a change to the
project scope and the cost baseline, while the use of
contingency reserve funds is within the project’s
approved budget and schedule baseline.

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Risk Analysis for Cost Estimation
Benefit of Risk Analysis
 Two broad categories of benefits from cost estimation
risk analysis include:
 Improved accuracy of cost estimates; and
 Improved decision making.
Improving Accuracy of Cost Estimates
 Risk analysis offers several options for improving the
likelihood that the estimate of an unknown cost will be
correct.
 These include the ability to:
 Estimate the probability of costs exceeding the
estimate;
 Estimate owner’s exposure to overrun risk; and
 Identify key components in exposure, in
determining the uncertainty in a project’s.
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Risk Analysis for Cost Estimation
Benefit of Risk Analysis
Improving Decision Making
 Single point contingencies Vs. contingencies with
confidence intervals.
 Single point contingencies/ traditional methods of
contingency estimation: do not enable cost estimators or
decision makers to understand the confidence associated
with that point estimate plus contingency.
 However, with risk analysis, it is possible to select a
contingency so the cost estimator is 60, 70, 80, 90, 95, 99
or any other percent sure that the cost estimate will not be
exceeded.

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Risk Analysis for Cost Estimation
Benefit of Risk Analysis
Improving Decision Making
 Selecting a contingency to acquire a desired level of
confidence in a cost estimate is possible under risk
analysis cost estimating techniques but not under
traditional techniques.
 This process is similar to the current method of assigning
a contingency. It entails adding a sum of money to the
baseline, best guess estimate. The difference now is that
the desired confidence level to manage the risk of a cost
overrun can be chosen by the cost estimator.
 Cost estimators are free to use their professional
judgment to choose a risk averse (i.e., conservative) cost
estimate or a risk seeking (i.e., optimistic) cost estimate.
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Risk Analysis for Cost Estimation
Cost Risk Assessment
General Risk Assessment Approach
 The general approach to think about risk assessment
includes:
 Recognize that uncertainty exists;
 Identify the key sources of significant uncertainty;
 Reduce the uncertainty whenever possible;
 Account for the uncertainty that cannot be reduced;
and
 Probabilistic Vs. Deterministic.

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 Risk Analysis for Cost Estimation
Cost Risk Assessment
General Risk Assessment Approach
Step 1: Identify the key sources of significant uncertainty
 It is important to rigorously investigate and identify the
key sources of significant uncertainty in a cost estimate.
 Tactical Risk Assessment: Focus Areas:
 Definition Risks:
o Definition/scope factors
 Performance Risks:
o Construction methodology and time line factors;
o Price factors; and
o Performance factors.

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Risk Analysis for Cost Estimation
Cost Risk Assessment
General Risk Assessment Approach
Step 2: Reduce the uncertainty whenever possible.
 Reducing significant uncertainties whenever possible
within the resource constraints (time, money, personnel,
and expertise)
Step 3: Account for the uncertainty that cannot be reduced
 Finally, when significant uncertainty has been identified
and cannot be reduced it must be accounted for in an
explicit fashion.
 The three significant risk analysis tools that will be useful
to cost estimators include:
 Sensitivity Analysis/Scenarios;
 Monte Carlo Simulation; and
 Range Estimating/Probability Analysis.
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211
Risk Analysis for Cost Estimation
Cost Risk Assessment
Cost Escalation
 Escalation: the provision in actual or estimated costs for
an increase in the cost of equipment, material, labor, etc,
over that specified in the purchase order or contract due
to continuing price level changes over time.
 It should be noted that escalation is included to provide
adequate capital funding to compensate the project for
forecast cost increases due to inflationary imposts in the
construction sector. It is not a secondary contingency
figure.
 Applications of Price Indices in Forecasting (noting the
price level changes over time): Trends in price changes
can also serve as a basis for forecasting future costs.
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Risk Analysis for Cost Estimation
Cost Risk Assessment
Cost Escalation
A) Calculation of Cost Escalation
 Escalation is usually calculated by examining the
changes in price index measures for a good or service.
 Future escalation can be forecast using econometrics.
 Unfortunately, because escalation (unlike inflation) may
occur in a micro-market, and it may be hard to measure
with surveys, indices can be difficult to find.

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Elements of Construction Industry Prices
INPUT PRICE INDEX OUTPUT PRICE INDEX SELLER’S PRICE INDEX
Elements paid by Elements paid by Client Elements paid by Final Owner
Contractor
A B C
Materials Materials Materials
Labor Labor Labor
Plant & Equipment Plant & Equipment Plant & Equipment
Transport Transport Transport
Energy Energy Energy
Other Costs Other Costs Other Costs

Contractor’s Indirect Cost ( Contractor’s Indirect Cost (

Preliminaries +contractor’s Preliminaries +contractor’s
offsite OH Expenses) offsite OH Expenses)
Productivity Productivity
Contractor’s Margin Contractor’s Margin

VAT
Land
A/E and PM Services Fees
Other Costs
27/05/2021 Client’s Profit Margins
YASICHALEW 96
214
Risk Analysis for Cost Estimation
Cost Risk Assessment
Cost Escalation
B) Applying Cost Escalation
Approach 1
 Escalation can be assessed in an overall way by multiplying
the cash flow for a specific year by the expected percentage
figure to cover escalation for the entire cash flow in that
year.
 The usual method of applying cost escalation is to use the
midpoint of construction as the end date of the escalation.
Approach 2
 An alternative methodology can also be used that breaks
down the annual expenditure into key components (such as
pavement, structures, drainage, etc for roads or formation,
track, signaling, etc for rail) and apply the expected unit
price escalation percentages to each key element.
27/05/2021 YASICHALEW 215
Risk Analysis for Cost Estimation
Cost Risk Assessment
Cost Escalation
B) Applying Cost Escalation
 The Construction Input Index is used to project
escalation due to inflationary factors.
 The indices are based on forecasts of anticipated
escalation for the future fiscal years and are issued by the
recognized authority/institutions. The index shall be
updated annually.
 When escalation is minimal, it is sometimes estimated
together with contingency. However, this is not a best
practice, particularly when escalation is significant.

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Risk Analysis for Cost Estimation
Cost Risk Assessment
Cost Escalation
C) Price Adjustment for Cost Escalation
 Base Price/Document Proof/Proxy Method.
 Price Indices/Formula Method: PPA 2006 Clause 47.1,
FIDIC 1999, FIDIC 2006 MDB Clause 13.8.
Ln Mn En
pn  A  b c d  etc.
Lo Mo Eo

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 Risk Analysis for Cost Estimation
Cost Risk Assessment
Cost Escalation
C) Price Adjustment for cost Escalation
Amount of Interim Payment
Requested= 1,245,000.00

Item Unit Initial Price Weight Current Price 1 Current Price 2

Cement Birr/qtl 275.00 18% 300.00 240

Rebar Birr/kg 13.00 16% 15.00 12

Fuel Birr/lt 9.00 10% 10.00 8

Currency Birr/USD 12.75 25% 13.00 12.25

Total 69%
A= (1-Total) 31%
Pn1= 105.7%
Pn2= 94.4%

Adjusted Payment 1= 1,315,955.16

Adjusted Payment 2= 1,175,115.89
27/05/2021 YASICHALEW 218
PPPAA, HAMLE 2002EC

27/05/2021 YASICHALEW 219

THANK YOU!

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