Construction Cost Estimating - The Estimating Process

Summary

In this course, led by experienced project engineer Tim, participants learn the intricacies of construction cost estimating and management. The course covers the process of estimating direct and indirect costs, using software tools, and ensuring accurate budgeting for major infrastructure projects. With a focus on practical skills, the course aims to equip students with the expertise to excel in construction management, featuring comprehensive content and hands-on activities.

Takeaways

• 🏗️ The course is designed for those interested in understanding the budgeting process for major construction projects.
• 👨‍🏫 Tim, the project engineer with extensive experience, teaches fundamental construction management skills.
• 🎓 The course includes hours of content and practice activities to equip students with essential job skills.
• 💡 The video is an extract from a course on construction cost estimating and management, focusing on the estimating process.
• 🔍 Direct costs form the bulk of project costs, usually over 70%, and include labor, materials, and subcontract costs.
• 📊 Estimating direct costs involves understanding the scope, establishing delivery methodology, and estimating costs.
• 🔄 The estimating process is iterative, with results from one step potentially impacting previous steps.
• 🛠️ For indirect costs, which include preliminaries, overheads, and risk, a different estimating process is used.
• 💼 A project organization chart is essential for determining overhead costs, including staff salaries and insurances.
• 📈 Cash flow analysis is crucial to ensure the project remains cash positive and to strategically fill out the pricing schedule.
• 💻 Estimating is often done in purpose-built software like Caddy, but for this course, Microsoft Excel is used for demonstration.

Q & A

What is the main focus of the course mentioned in the transcript?

The main focus of the course is teaching fundamental construction management skills, specifically construction cost estimating and management, to engineers and other construction management professionals.

Who is the instructor of the course?

The instructor of the course is Tim, a project engineer with extensive experience in the design and construction of major infrastructure projects.

What types of costs are discussed in the course?

The course discusses direct and indirect costs, including preliminaries, overheads, risk, and opportunity costs.

What is the first step in the estimating process according to the transcript?

The first step in the estimating process is to determine direct costs, which typically form the bulk of the project costs.

How are direct costs estimated in the construction project?

Direct costs are estimated by developing a work breakdown structure, determining the work required to complete the project, quantifying the costs for each scope item including labor, materials, and subcontract costs.

What is the importance of understanding the scope in direct cost estimating?

Understanding the scope is crucial as it involves creating the work breakdown structure and identifying all the unique project deliverables, which are then summarized into work packages.

What is the role of the delivery methodology in the estimating process?

The delivery methodology is essential as it involves how the required work will be completed, including developing the construction methodology, which is heavily related to procurement and the development of the project schedule.

How are indirect costs determined in the course?

Indirect costs are determined by quantifying preliminary costs, estimating overhead costs by creating a project organization chart, and determining the contingency needed by developing a risk and opportunity register.

What is the significance of the cash flow analysis in the estimating process?

The cash flow analysis is significant as it ensures the project remains cash positive, meaning revenue will cover costs, by strategically filling out the pricing schedule.

What tools are typically used for estimating in construction projects?

Estimates are usually done in purpose-built estimating software like Caddy, but for the course, they will use Microsoft Excel due to its accessibility for building up cost estimates.

Why is it important to review and summarize the estimate before submission?

Reviewing and summarizing the estimate is important to ensure accuracy, get approval from upper management, and have the estimate independently reviewed. This process helps to avoid underestimating costs which could lead to significant financial losses.

Outlines

00:00

🏗️ Introduction to Construction Cost Estimating

This paragraph introduces a course on construction cost estimating and management, led by Tim, a project engineer with extensive experience in major infrastructure projects. The course aims to teach fundamental construction management skills to engineers and construction management professionals. Tim explains that the course will cover the construction cost estimating process in detail, including direct and indirect costs, and the use of software tools. The video is an extract from a larger UdeMy course, and the content is designed to provide a comprehensive understanding of the estimating process, from determining direct costs through work breakdown structures and delivery solutions to combining these with indirect costs to form a total project cost. The process also includes applying a markup for profit margin and corporate overheads.

05:01

🔍 Detailed Process of Direct and Indirect Cost Estimation

In this paragraph, Tim delves deeper into the process of estimating direct costs, which typically constitute over 70% of the total project costs. The process involves understanding the project scope, establishing a delivery methodology, and estimating costs. For self-performed tasks, productivity and labor plans are estimated, while for subcontracted work, quotes are obtained. The paragraph also discusses the iterative nature of these steps, where outcomes from one stage can affect previous ones. Indirect cost estimation is also covered, including preliminaries, overheads, and risk and opportunity assessments. Tim emphasizes the importance of workshops for identifying risks and opportunities, and the use of checklists for preliminaries. Overhead costs are determined through a project organization chart, and insurances and securities required by the head contract are quantified. The paragraph concludes with a discussion on summarizing the estimate, including cash flow analysis and strategic pricing to ensure the project remains cash positive.

Keywords

💡Construction Cost Estimating

Construction cost estimating is the process of predicting the financial costs of a construction project. It involves calculating the expenses associated with labor, materials, equipment, and other resources required to complete the project. In the video, this concept is central as the course aims to teach how to accurately estimate these costs, ensuring that the project remains financially viable and profitable.

💡Project Engineer

A project engineer is a professional who manages and oversees the technical and engineering aspects of a construction project. They are responsible for ensuring that the project is completed on time, within budget, and to the required quality standards. In the script, Tim, the project engineer, is teaching the course on construction management skills, emphasizing the importance of this role in the successful execution of infrastructure projects.

💡Work Breakdown Structure (WBS)

A work breakdown structure is a hierarchical decomposition of all the work involved in a project. It breaks down the project into smaller, more manageable components, making it easier to estimate costs and manage the project. In the video, developing a WBS is mentioned as a crucial step in determining direct costs, as it helps in identifying all the work required to complete the project.

💡Direct Costs

Direct costs are expenses that can be directly attributed to the production of a specific project, such as labor, materials, and equipment. These costs form the bulk of the project's total costs, usually over 70%. In the video, direct costs are discussed as a primary focus during the estimating process, as they are essential for calculating the overall project budget.

💡Indirect Costs

Indirect costs, also known as overheads, are expenses that are not directly tied to the production of a specific project but are necessary for the overall functioning of the organization. These can include office rent, utilities, and administrative salaries. In the video, indirect costs are highlighted as an essential part of the estimating process, as they contribute to the total project cost and need to be accounted for in the budget.

💡Risk and Opportunity

Risks and opportunities refer to potential events or circumstances that could impact a project's outcome, either negatively or positively. In construction cost estimating, identifying and quantifying these factors is crucial for setting appropriate contingency funds. The video discusses the need to develop a risk and opportunity register to determine the contingency required for the project.

💡Markup

A markup is the amount added to the total cost of a project to cover profit margins and corporate overheads. It is the difference between the cost price and the selling price. In the script, applying a markup to the total project cost is mentioned as a step to ensure that the project is not only completed but also generates a profit for the company.

💡Quantity Takeoff

Quantity takeoff is the process of estimating the quantities of materials required for a construction project. It involves calculating the amount of each material needed for the project based on the design documents. In the video, quantity takeoff is mentioned as a step in the direct cost estimating process, where the quantum of work for each work package is determined.

💡Construction Methodology

Construction methodology refers to the techniques and approaches used to construct a project. This includes the sequence of construction activities, the types of equipment used, and the organization of labor. In the video, establishing the delivery methodology is discussed as a critical step in the estimating process, as it influences how the work packages will be completed.

💡Pricing Schedule

A pricing schedule is a document that lists the prices for various items or services included in a project. It is used to communicate the estimated costs to clients and is often part of the contract documentation. In the video, filling out the client pricing schedule is mentioned as a step in summarizing the estimate, ensuring that the costs are logically distributed and that the project remains cash positive.

💡Cash Flow Analysis

Cash flow analysis is the process of estimating the inflows and outflows of cash over the life of a project. It is important for ensuring that the project has sufficient cash to cover its costs at all times. In the script, completing a cash flow analysis is discussed as a necessary step to ensure the project remains financially viable and to strategically plan the pricing schedule.

Highlights

Introduction to a course on construction cost estimating and management by Tim, a project engineer with extensive experience.

The course is designed for those interested in understanding how to budget for major infrastructure projects.

Tim has developed short courses to teach fundamental construction management skills to engineers and professionals.

Over a thousand students have enrolled in the courses, which are packed with content and practice activities.

The video extract discusses the construction cost estimating process and techniques for accurate cost estimation.

The basic structure of a cost estimate involves quantifying direct and indirect costs to derive total project costs.

Direct costs typically account for over 70% of total project costs.

Indirect costs include preliminaries, overheads, risk, and opportunity, which are quantified separately.

The estimating process begins with determining direct costs through a work breakdown structure and delivery solution.

Direct cost estimating involves understanding the scope, establishing delivery methodology, and estimating costs.

Quantity takeoff is essential for determining the amount of work required for each work package.

Delivery methodology development is closely linked to procurement and project scheduling.

Cost estimation requires estimating productivities, labor plans, materials, and subcontractor quotes.

Iterative steps in the estimating process may require revisiting previous stages based on new insights.

Indirect cost estimating involves using checklists, project organization charts, and risk registers.

Estimates are reviewed and formatted into a pricing schedule for client submission.

Cash flow analysis is crucial to ensure the project remains cash positive and covers financial costs.

Strategic pricing and logical distribution of indirect costs across direct costs are essential for a successful estimate.

Estimating tools like purpose-built software and Microsoft Excel are used to compile and review cost estimates.

The course transitions to section 2.2, which delves into the detailed calculation of direct costs.

Transcripts

have you ever driven past a major

construction project and seen cranes

concrete trucks earth-moving equipment

and multiple different trades or working

at a million miles an hour

have you ever wondered how anybody could

possibly work out a budget for a project

like this

well if you've answered yes to any of

these questions then this course is

designed just for you

my name is tim and i'm a project

engineer with lots of experience on the

design and construction of major

infrastructure projects i've been

building short courses to teach the

fundamental construction management

skills to engineers and other

construction management professionals so

far we've had over a thousand students

enroll in our courses

each course is loaded with hours of

content and practice activities to make

sure you're equipped with the skills you

need to excel at your job

this short video is an extract about

course on construction cost estimating

and management we will talk about the

construction cost estimating process and

how to accurately estimate construction

costs

if you find this video interesting and

useful check out the link in the below

description to our complete udemy course

on construction cost estimating and

management

now we have a better understanding of

what estimating is the types of

estimating and the types of costs we're

required to estimate let's revisit the

estimating process in more detail

in this section we'll go through the

estimating process how to estimate

direct and indirect costs and

summarizing the estimate finally we'll

look at the different software

estimating tools to do this

[Music]

let's go back to looking at our diagram

we introduced in the introduction of the

estimating process

the basic structure of our cost estimate

will be quantifying direct and indirect

costs combining these to get our total

project costs

we'll then apply a markup to cover our

profit margin and corporate overheads to

get the price we submit to the client

the first step in the estimating process

will be to determine direct costs

direct costs

will always form the bulk of the project

costs usually over 70 of the total

project costs will be direct costs

to determine our direct costs we need to

develop our work breakdown structure and

determine all the work required to

complete

develop our delivery solution so work

out how we're going to complete the

works

then quantify the costs for each scope

item so work out the labor plan

materials and subcontract costs for each

of these

next we need to determine our indirect

costs

these will consist of preliminaries

overheads and our risk and opportunity

we'll quantify our preliminary costs

based on identifying all of our

preliminary cost items quantifying them

we'll determine our overhead costs by

creating our project organization chart

and estimating staff salaries and

finally we'll work out what contingency

we need to allow for by developing a

risk and opportunity register

we'll then combine all these costs to

get our total project cost apply a

markup to this cost to cover the

business profit margin and corporate

overheads

review our estimate fill out the client

pricing schedule and then submit it to

the client

let's now look at direct cost estimating

in a little bit more detail direct cost

estimating can be broken down into three

simple fundamental steps number one

understand the scope

number two establish the delivery

methodology and number three estimate

the costs

in step one we need to work out

everything we need to accomplish to

complete the project

what is everything we need to do to

finish and hand over the project to the

client

this involves creating the work

breakdown structure and identifying all

the unique project deliverables

these will be summarized into work

packages

next we need to do a quantity takeoff

and determine for each work packaged the

quantum of work to be completed

for example if we have a work package

from a subsurface drainage patent

install how many linear meters of

drainage are required

in step 2 we need to establish our

delivery methodology

how are we going to complete the

required liberals

this involves developing our

construction methodology step 2 will be

heavily related to procurement and the

development of the project schedule

we'll put a lot of focus on the timing

and resource requirements needed to

complete the work by the end of step two

for each package we should know whether

we plan on subcontracting or self

performing the works and exactly how we

plan on delivering the work package

and finally

in step 3

now we know what has to be done and how

we are planning on doing it we can

estimate costs how much money do we need

to complete each work package

for our self-performed costs this will

require us to estimate our

productivities

our labor plan and materials

when using subcontractors to complete

the works we'll need to get quotes from

subcontractors and suppliers

it's worth noting that all these steps

are iterative meaning they won't exactly

occur in the order and the results we

get from each stage will impact the

previous step for example as we're going

through and establishing the delivery

methodology we'll probably realize we've

missed some scope and have to go back to

step one

whereas we're estimating costs we may

realize we can save a lot of money by

self-performing the works and go back

and change our delivery methodology

we'll go through a slightly different

process when estimating our indirect

costs and the process will vary

depending on the type of integros

indirect cost we're estimating

when trying to work out our risk and

opportunities and ultimately what

contingency funds we need to have we

need to complete workshops to identify

all the risks and opportunities and work

out what mitigations we're going to put

in place

not all mitigations will require us to

hold contingency for example we may have

commercial mitigations in place that

don't require holding contingency

contingency funds

for our preliminaries or working at our

site running costs we'll generally use

checklists

for example

most companies will have a site setup

checklist which will require us to go

through and check we've got everything

covered such as toilets crib sheds waste

disposal security power and so on for

our overhead costs we'll need to create

a project organization chart this will

tell us how many engineers we need

community and stakeholder managers

environmental managers and so on our

head contract will also tell us

what insurances and securities we are

required to hold so we can quantify

those

finally

to summarize the estimate we'll need to

go through the process of reviewing and

translating our estimate into a format

where we can submit it to our client

we'll need to get approval from upper

management and our estimate

independently reviewed as discussed

this will likely happen through top down

and parametric track checks the

management staff at our company they

want to be confident that the project

will generate a profit before they

submit anything to a client remember

attend a submission is contractually

binding

if we've underestimated costs we can

turn around in six months time when

we're losing millions of dollars

sorry if we're if we've underestimated

costs we can't turn around in six months

time when we're losing millions of

dollars and simply ask the client for

more money

we also need to understand our cash flow

if you've ever done any finance you'll

understand the concept of the cost of

capital basically what this means is

that if there is a delay between

incurring costs and getting paid we'll

have to make up this by sourcing capital

from somewhere

sourcing capital incurs financial costs

therefore we need to complete a cash

flow analysis

therefore we need to complete a cash

flow analysis to ensure we're going to

be cash positive meaning our revenue

will be coming in to cover our costs

we ensure we are cast cash positive by

strategically filling out the pricing

schedule we want to front load items

like mobilization to ensure our project

is always cash positive

we also need to logically fill out the

pricing schedule and spread our indirect

costs across

our direct costs

the pricing schedule may be used at a

base as a basis for including items or d

scooping these scoping items in the

future

finally let's look at some of the tools

we use to complete our estimates

estimates are usually built are usually

done in purpose build estimating

software

i've used candy before this is a special

type of estimating software

that has a structured process for

collating and building cost estimates

check out some youtube tutorials if

you're interested to see how it works

it's super useful

for this course as most people don't

have access to candy we're going to go

through and build up our cost estimate

in microsoft excel

excel works fine for less complicated

projects but the problem with it is

we'll have to set up a pricing model and

it's easier to make mistakes and

calculate things incorrectly

and with that we've now completed our

introduction to estimating let's now

move on to section 2.2 where we're going

to dive into the detail of how to

calculate direct costs