Week 11_LanreGiwa_Appropriate Cost Estimating Technique

Problem Recognition / Identification

My task this week is to determine the best cost estimating technique that will be used to determine the quotation for installation of interior fittings (Kitchen Cabinets, Wardrobes and Curtains) in a 3-bed apartment located in Lagos. The most difficult, expensive and time consuming part of the contract quotation is the cost estimating part.

“Decisions both great and small, depend in part on estimates. ‘Looking down in barrel’ need not be an embarrassment for the engineer if newer techniques, professional staffing, and a greater awareness are assigned to the engineering cost estimating function” – Philip F. Ostwald (1992)

Development of Feasible Alternatives/Solutions

The following are the alternatives considered in getting a cost estimate for my mini project:

Alternative 1 – A top down approach of cost estimating where historical data from similar projects or my expert’s knowledge are used. The data will just be modified considering factors such as size or inflation.

Alternative 2 – A bottom –up approach to cost estimating which is more detailed by breaking down the project into small, manageable units and calculating the economic consequence. The smaller units are then added together to get the final cost of the Project.

Alternative 3 – An integrated approach of getting the cost estimate by breaking the project into small manageable units (WBS), getting the costs of each element and using an estimating model to factor in other considerations such as overheads and taxes before getting the final cost of the project.

Possible Outcomes and Cash Flow of Alternatives / Solutions

Alternative 1: This technique is used to give a rough estimate of the job and may likely miss out some important cost elements and may not consider other parameters. The outcome is likely to be inaccurate.

Alternative 2: This approach will give more detailed results but limited as it may not consider external parameters. The final outcome will be about +/- 30% from the actual value

Alternative 3: This technique is an integrated approach combining three components; Work Breakdown structure (WBS), Cost and Revenue structure and an appropriate cost estimating technique. With this, it is assured that the entire project will be considered and a precise estimate can be arrived at. It will give a possible outcome of +/- 5% accuracy from the actual values.

Selection Criteria of best solution

• Provide information that will be used for the quotation
• Determine whether the project will be profitable or not
• If I were to initially fund the project, it will help to evaluate how much I will need to commence the Job.
• A technique that will give a +/- 10% degree accuracy to the cost of the project.

Analysis and comparison of the Alternatives/Solutions

Alternative 1 would have been very desirable if the client was just making an initial enquiry on the cost of interior fittings. With this method, I may just ask the client on basic information and use my expert judgement is doing a rough estimate. However, due to the nature of what I want to achieve this time, I need a more detailed estimate, hence, I can’t use this method because of its error margin from actual values.

Alternative 2 is a very brilliant approach in estimating because the intended project will be broken down into manageable units and the costs of each item is derived. These costs are added up to get the total cost of the project. However, in many cases, alternative 2 does not consider external parameters such as taxes, insurance and other cost elements thereby missing vital areas that will add to the entire cost of the project. Furthermore, the accuracy level will affect my profit on the job. It may even hinder my expected deliverables as I would want to cut corners in order to make profit.

Alternative 3 is an organized approach that combines the bottom-up method (WBS) of getting the small units of the projects, the cost or revenue elements and a model that can be used to determine futuristic cost of the Project. This approach seems to be very robust and considers the BIG PICTURE. Since the job has not been awarded to me yet, I need to put in factors such as inflation, overhead cost, taxes and escalation in the model. With this method, I can come up with the cost of the job if I were to commence immediately or to commence in a year from the estimate. This model makes it possible to consider many factors in arriving at a final cost that is +/- 5 % from the actual value.

Figure 1 – Cost Estimate Classification Matrix for Process Industries.

From the analysis, the type of job I am doing the estimate for is a detailed Bid and the estimate will be used as a control estimate. From the AACE international RP18R-97 (see classification matrix above) ,I would say alternative 1 is a class 5 estimate with an accuracy range of -20% to+100%, alternative 2 is a class 3 estimate with an expected accuracy range of -10% to +30% while alternative 3 is a class 1 estimate with an accuracy range of -3% to +15%

Based on the analysis above, I have come up with the best alternative at choosing a cost estimating technique for a near firm prospect.

Best Alternative to be Selected

Amongst all the alternatives analyzed, I would recommend alternative 3 as the best choice in getting the right price to be quoted for the installation of interior fittings in a 3-Bed apartment. This is because I am bidding for a project and I need a very detailed estimate that will be beneficial to me and my client.

Performance Monitoring / Post evaluation

For performance monitoring and post evaluation, I will develop a performance monitoring spreadsheet by comparing the estimate for any project against the actual amount expended on the project. This will be used to evaluate the level of accuracy of the estimates and can be used for bench marking in subsequent jobs.

References:

1. AACE International. Skills & Knowledge of Cost Engineering, 5^th Edition Revised.Chapter-9, pp.9.1-9.9 Edited by Dr. Scott J. Amos, PE. 2010. AACE International. Morgantown, WV, USA.

2. Sulliven, W. G., Wicks, E.M., Koelling, C. P., et al. (2009). Engineering Economy (14^th ed.), Chp 3 pp.68 -75. New Jersey: Pearson Education.
3. Brassard M, Ritter D. The memory Jogger 2. Tools for Continuous Improvement and Effective Planning.2010.
4. AACE International Recommended Practise 18R- 97