Download Cost Estimation Methodology

Appendix A
Cost Estimation Methodology
(White Paper Prepared by FTA)
Introduction
Cost estimation is a process that provides progressively more accurate information
as a project moves from conceptual through final design and construction award.
It establishes initial budget limits and is the crucial element of a project
management/control system. FTA relies heavily on a grantee’s ability to develop
and monitor an accurate project budget. Over time budgets are refined as more
detailed engineering information is available.
Current Practice of Budget Development
Creating a project budget requires the allocation of all costs associated with
completing a project. Project budgets are built from the “bottom up” by use of
work breakdown structures (WBS). The WBS provides a means for defining
program/project scope, both what is to be built – hard costs; and all
management/administrative costs, including fees, testing, etc. – soft costs. This
latter category is typically twenty (20) percent of a project’s budget.
Development of an “order of magnitude” estimate marks the beginning of the
budget and project management process. Design consultants are retained to
prepare “order of magnitude” estimates using models or templates developed by a
professional engineering association having detailed knowledge of a particular
field or industry. In rail transit, for example, a frequent starting place would be
manuals published by the American Railway Engineering and Maintenance
Association (AREMA) with adjustments reflecting unique features of a light rail
project. Another source is the “R. S. Means Construction Cost Estimating
Manual.” At this level of detail reserves or contingencies of 35 percent and higher
are normal.
Hard costs are the probable costs of construction and are first prepared as “order
of magnitude” estimates. From this point the engineering/design consultant is
instructed to “design to cost”, an exercise that relies on budget limits to control
scope expansion. No construction contingencies are included at this level of
detail. Grantees do not release design contingencies at this stage of design,
usually reserving these funds for added design work needed at a later time. In
some circumstances an architect/engineer instructed to “design to cost” may be
required to redesign a project, at no cost to the grantee, if construction bids
exceed final design estimates. At the preliminary design, design development and
FTA Project and Construction Management Guidelines
Final May 2003
2003 Update
Page A-1
Appendix A – Cost Estimation Methodology
final design stage construction cost estimates should be verified to ensure that a
project has remained within budget.
“Value Engineering (VE)” is advocated by FTA throughout the design process
particularly in the early phase where there is the greatest opportunity to affect the
cost of construction with minimal impact to project goals. VE assesses products
and systems and provides recommendations for a more economical solution. The
process also considers long-term operations and maintenance practices and
costs.
FTA requires its grantees to escalate construction costs to reflect anticipated
inflation and to report this amount as a separate budget line item. This
requirement acknowledges that over time, materials and labor costs may rise due
to general inflation. Escalation may be calculated by applying an assumed fixed
annual percentage to probable construction costs through the mid-point of
construction. A more sophisticated approach would be to apply escalation by
either individual construction contract or by trade item, e.g. bridge, track, signal,
etc., and adjust to the anticipated year of expenditure.
Large, complex projects that encompass many construction contracts should add
a program contingency over and above design and construction contingencies. A
program contingency addresses interfaces between and among construction
contracts as well as uncertainty associated with system start-up, testing, and
commissioning. FTA participates in reasonable startup costs that directly support
activation and pre-revenue operations. These costs should be accounted for in
the project estimate.
Recommendations
1. Resolution of Variations in Cost Estimates – During project development
FTA and the grantee should agree on a method to resolve variances between
estimates. Regions 1 and 9 have utilized a Capital Reserve Account (CAPRA)
for this purpose. The CAPRA requires the grantee to set aside funds equal to
estimating differences. These funds are available for overruns.
2. Cost Management System – Grantees should implement a cost management
system to operate within the framework of the grant requirements and provide
the grantee with reliable cost information. Greater visibility to cost information
will permit the timely implementation of alternative solutions. The cost
management system will encompass a data warehouse of all project costs
organized within the WBS.
FTA Project and Construction Management Guidelines
Final May 2003
2003 Update
Page A-2
Appendix A – Cost Estimation Methodology
Reporting categories within the cost management system should include:

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
Baseline Budget Authorization
Contract Commitments
Actual Cost
Pending Contract Changes
Forecast-to-Complete
Estimate-at-Completion
Budget Variance
Earned Value
Grantee’s can manage the program/project contingency by evaluating
commitments to budget estimates and tracking potential changes as soon as
they are identified. Further, the grantee should establish a change order
control system that identifies and records the cause of the changes.
Increases/changes in scope or “scope creep” are a common occurrence on
large-scale projects. Individual changes should be logged and recorded with
the appropriate funding source.
3. Cost Recovery – In association with the change order control system,
grantees should be encouraged to develop and utilize a cost recovery
procedure. Several larger projects have successfully implemented procedures
that allow for the potential recovery of costs due to “errors and omissions” that
cause rework of a portion of the project. It is a requirement of all design
contracts for the Architect/Engineer to maintain professional and general
liability insurance to cover these items. Regardless of how much is recovered
through this process, it is an effective negotiation tool.
FTA Project and Construction Management Guidelines
Final May 2003
2003 Update
Page A-3
2003 Update
Page A-4
1
Estimate
Stage
Order of
Magnitude
(conceptual)
Probable
Accuracy1
50% - 30%
Design
Stage
Preliminary
Preliminary
(budget)
15% - 30%
Definitive
Detailed
(engineer’s
estimate)
Purpose
Information Available
Estimate Methods
Evaluation of
projects or
alternatives
100-scale alignment, facility
descriptions, sketches, study
reports
Preliminary
Design
Report
(25%)
Establish Control
Budget
15% - 5%
75% to
100%
complete
Detailed Control
Budget, Cost
Control, and
Reporting
40-scale alignment, facility
descriptions, sketches, study
reports, cross sections,
profiles, elevations,
geotechnical data, staging
plans, schedule, definition of
temporary work
Progress Plans and
Specifications, working
construction schedule
 5%
PS&E
Check Estimate
for
Bids, Commit
Funds
Parametric – Cost of a similar facility is
adjusted to represent the new facility.
Includes costing by SF, LF, or CF.
Model – A typical design is used to
develop quantities and costs for
elements.
Quantity development of major
commodities, pricing by database,
manuals, quotes, bid results, or
experience which may be adjusted for
the conditions of the specific package.
Rough estimates or allowances
developed for immeasurable items.
Takeoff of quantities from plans,
representative pricing by database,
manuals, quotes, bid results, or
experience adjusted for the conditions
of the specific package. Crewed
approach to labor and equipment,
percent approach to general conditions,
overhead and profit, contingency, and
escalation. Some allowances carried
for immeasurable items.
Detailed takeoff of all measurable items,
detailed review of specifications,
detailed pricing including price quotes,
crewed approach to labor and
equipment, detailed estimate of general
conditions, overhead & profit, and
escalation. Consideration of
construction schedule, work restrictions,
shift requirements, and risk.
Complete Plans and
Specifications for Bidding,
Detailed Construction
Schedule, Contract Terms
and Conditions
Probable Accuracy as stated by the Association for the Advancement of Cost Engineering International (AACE)
Contingency
Guideline
20% or higher
10% - 20%
5% - 15%
0% - 10%
Appendix A – Cost Estimation Methodology
FTA Project and Construction Management Guidelines
Final May 2003
Table A-1. Recommended Contingency by Estimating Stage