Cost Estimation Contingency Risk Construction Essay

This proposal is written to give an overview over proposed compulsory pupil assignment in the seventh semester portion of a Bachelor of Architectural Technology and Construction Management grade class – no duty is taken for any advice, direction or decision given within!


I want to thank those who left me with stuffs and research in support of my treatment subjects and of class instructors of Via University, for reading, reviews and religion in the undertaking and an ageless inspiration.


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This study has been written as a mandatory assignment in the seventh semester portion of a Bachelor of Architectural Technology and Construction Management grade class.

This study discusses the phenomenon of cost estimation in building undertakings, the chief focal point is on the undertaking calculator, and how he can manage hazard and eventuality. In this study are given ways to carry through better public presentation covering with cost and eventuality, acknowledge hazard and chance in clip and take action implementing technique and methods to do dependable estimation throughout the undertaking unrecorded rhythm.

Problem background

Cost appraisal in building undertaking unrecorded rhythm is one of the most critical undertaking designers and interior decorators are confronting during the design stage of a building undertaking. From the beginning of an thought of a concern instance, clients are depended on cost appraisal of a certain scope of certainty. To be able to give this appraisal and the investors are possible usage it for their concern theoretical account and make up one’s mind on the feasibleness of undertaking, we would believe that the building needed to be engineered and designed to the full for the most truth of the estimation. In most instances this is non an option for the investors, they want to minimise the cost in the first period of the unrecorded rhythm and make up one’s mind with assurance to continue with the undertaking.

Problem Statement

The traditional attack to be estimating is to deduce a best estimation from cognition of bing conditions based on current rates and monetary values in similar state of affairss with accommodations to reflect awaited differences in land conditions, site handiness, and other factors. A eventuality allowance, which varies harmonizing to type of work, anticipated hazard, and undertaking phase, is added to cover unanticipated outgo.

Covering with big undertaking that ranges over long period of clip, there will be risk factors that will be harder to cover with and the uncertainness will increase in the same clip. This study is supposed to cover with such influence and give a guideline of how to manage struggles of that sort.

Covering with hazard and eventuality in building undertakings could sometimes been referred to as an art non a scientific discipline. The thought with this study is tough to somehow cogent evidence that gauging building cost is in fact a scientific discipline and if done in ways interior decorators and experient calculators has described in books and articles.

The tools and technique demonstrated in this study for doing bankable cost appraisal in any phase of the undertaking unrecorded rhythm will be adopted from assorted literatures available. The study should give a good illustration of how to do appraisal enchantress can be used as a dependable papers in the procedure of funding or analyzing the feasibleness of building undertakings of any sort.

Research inquiry

How can a hazard analysis be made for a building undertaking? ( subdivision 1 in job statement )

How is currency rising prices in cost estimation dealt with? ( subdivision 2 in job statement )

What techniques and direction tools are available to do cost appraisal? ( subdivision 3 in job statement )

What is the function of cost estimation during the undertaking unrecorded rhythm? ( subdivision 4 in job statement )

Key words

Construction, Cost estimation, planning, undertaking unrecorded rhythm, undertaking direction, Estimator, Contingency, Risk, Management Reserve,


I am traveling to compose this undertaking chiefly by roll uping information from books, like published literature from direction associations and universities, municipality, organisations and private companies in the building sector in the signifier of published statistic, studies and communications. I will interview experienced calculators for common pattern in gauging big undertaking like power workss and aluminium production workss in Iceland.


Construction estimating is the finding of likely building costs of any given undertaking. Many points influence and contribute to the cost of a undertaking ; each point must be analysed, quantified, and priced. Because the estimation is prepared before the existent building, much survey and thought must be put into the building paperss. The calculator who can visualise the undertaking and accurately find its cost will go one of the most of import individuals in any building company.

For undertakings constructed with the design-bid-build ( DBB ) bringing system, it is necessary for contractors to subject a competitory cost estimation for the undertaking. The competition in building command is intense, with multiple houses competing for a individual undertaking. To remain in concern, a contractor must be the lowest-qualified bidder on a certain figure of undertakings, while keeping an acceptable net income border. This net income border must supply the general contractor an acceptable rate of return and compensation for the hazard associated with the undertaking. Because the estimation is prepared from the on the job drawings and the undertaking manual for a edifice, the ability of the calculator to visualise all of the different stages of the building undertaking becomes a premier ingredient in successful command. The on the job drawings normally contain information relation to the design, location, dimensions, and building of the undertaking, while the undertaking manual is a written addendum to the drawings and includes information refering to stuffs and craft, every bit good as information about the command procedure. The on the job drawings and the undertaking manual constitute the bulk of the contract paperss, define the range of work, and must be considered together when fixing an estimation. The two complement each other, and they frequently overlap in the information they convey. The command submitted must be based on the range work provided by the proprietor or the designer.

The calculator is responsible for including everything contained in the drawings and the undertaking manual in the submitted command. Because of the complexness of the drawings and the undertaking manual, coupled with the possible cost of an mistake, the calculator must read everything exhaustively and recheck all points. Initially, the programs and the undertaking manual must be checked to guarantee that they are complete. Then the calculator can get down the procedure of quantifying all of the stuffs presented. Every point included in the estimation must incorporate as much information as possible. The measures determined for the estimation will finally be used to order and buy the needful stuffs. The estimated measures and their associated projected costs will go the footing of undertaking controls in the field. Estimating the ultimate cost of a undertaking requires the integrating of many variables. These variables fall into either direct field costs or indirect field costs. The indirect field costs are besides referred to as general conditions or undertaking overhead costs in constructing building. The direct field costs are the stuff, labor, equipment, or subcontracted points that are for good and physically integrated into the edifice. For illustration, the labor and stuffs for the foundation of the edifice would be a direct field cost. The indirect field costs are the cost for the points that are required to back up the field building attempts. For illustration, the undertaking site office would be a general conditions cost. In add-on, factors such as conditions, transit, dirt conditions, labour work stoppages, material handiness, and subcontractor handiness need to be integrated into the estimation. Regardless of the variables involved, the calculator must endeavor to fix as accurate an estimation as possible. Since subcontractors or forte contractors may execute much of the work in the field, the calculator must be able to joint the range of work in order for these companies to supply a monetary value quotation mark. The complexness of an estimation requires organisation, calculator ‘s best judgement, and complete forte contractors ‘ ( subcontractors ‘ ) commands, accurate measure take-offs, and accurate records of completed undertakings.

Undertaking Management

PM is a structured model around a defined undertaking. In some sense, it is used by everyone every twenty-four hours. During any given twenty-four hours, individual ‘s encephalon, with the aid of his or her organic structure, indicates, novices, defines, programs, interruptions down, executes, proctors, controls and closes multiple undertakings ; this is the end of a good PM. In this illustration, one ‘s encephalon is so good at pull offing these undertakings that one does non cognize it is making it. Therefore, the challenge is to besides use this organized attack to the work we do consciously. It can be said that everyone applies this methodological analysis ; we merely late defined it as PM.

The definition of PM that is widely accepted and is used in this thesis is stated below:

Project direction is the planning, organisation, way, and commanding of company resources for a comparatively short-run aim that has been established to finish specific ends and nonsubjective. Furthermore, undertaking direction utilizes the systems attack to direction by holding functional forces ( the perpendicular hierarchy ) assigned to specific undertaking ( the horizontal hierarchy ) ( Kerzner 2009 ) .

To this can be added the followers:

Project direction is the application of cognition, accomplishments, tools and techniques to project activities to run into undertaking demands. Pull offing a undertaking includes:

Identifying demands

Establishing clear and accomplishable aims

Balancing the viing demands for range, quality, clip and cost

Adapting the specifications, programs, and attack to the different concerns and outlooks of the assorted stakeholders. ( PMI 2008 )

From these definitions it is clear that PM spans a big field and requires specific cognition, administration, and subject. It can be hard to warrant the application of all the elements that have been recognized in connexion to PM, particularly when covering with smaller undertakings. The Undertaking Manager must measure what tools and method he needs for the successful completion of each undertaking he manages.

The PM cognition countries, as they have been depicted by PMI are listed here below.

Undertaking Integration Management

Project Scope Management

Undertaking Time Management

Undertaking Cost Management

Project Quality Management

Project Human Resource Management

Undertaking Communications Management

Undertaking Risk Management

Project Procurement Management

The country that will be the focused in this study falls under the Fieldss of Project Cost Management.


It is of import to recognize when an thought can go defined as a undertaking because there is a important difference between these two footings. Equally shortly as an thought moves to being a undertaking, it is of great importance and should be treated as such. How it is treated should give indicant of its size and importance. The theory of PM should be used to manage its rapidly turning complexness. The definition of a undertaking is given below:

A undertaking can be considered any series of activities and undertakings that:

Have a specific aim to be completed within certain specifications,

Have defined start and terminal day of the months,

Have funding bounds ( if applicable ) ,

Consume homo and nonhuman resources ( i.e. , money, people, equipment ) ,

Are multifunctional ( i.e. , cut across several functional lines ) ( Kerzner 2009 ) .

This definition coincides with what the PMI, a world-leading organisation in PM, accepts as appropriate ( PMI 2008 ) .

Basic Cost Estimate Documents: Input signals

Enterprise Environmental Factors

The Enterprise Environmental input refers to factors that are outside the undertaking but might still act upon the success of the undertaking. Heldman ( 2009 ) and PMI ( 2008 ) suggest some factors that should be considered when explicating a undertaking. The factors that influence the Appraisal of cost include ( PMI 2008 ) :

Market conditions: Here description of merchandises, service, and resources are available in the market. It should besides depict from who they are and what footings and status may use.

Published commercial information: Information on resources cost rate is sometimes available from commercial databases that provide accomplishments and human resources cost, including besides standard cost for stuff and equipment. Published seller monetary value is besides a beginning of information

Organizational Process Assets

Organisational Process Assets refers to an administration ‘s policies, guidelines, processs, programs, attacks, and criterions for put to deathing work ( besides project work ) . Harmonizing to Heldman ( 2009 ) and PMI ( 2008 ) , these include a broad scope of elements that can impact the undertaking, such as:

Organisation criterion processes, and definitions

Financial controls

Communication demands

Issue and defect direction process

Change control processs

Risk control processs

Procedures used for authorising work

Performance measuring standards

Organisation criterion policies

Project direction policies

Safety policies


Undertaking charter templets and etc.

Historical information and lessons learned cognition base.

Previous undertaking hazard

Performance measurings

Earned value informations

Agendas from old undertakings

Historical information has been shown to assist with the undertaking charter, undertaking range statement, development of undertaking direction program, the procedure of specifying and gauging activities, etc. ( Heldman 2009 ) . The value of historical informations should non be underestimated.

Undertaking Agenda

The Undertaking Schedule is an end product papers that is created in the Develop Schedule Process which is a portion of the Project Time Management. That procedure analyses activities sequences, continuances, resources demands and agenda constrains. Scheduling tools are used for making the agenda ; it can be iterative work to bring forth an acceptable agenda ( PMI 2008 ) .

The Project Schedule determines the planned start and finish day of the month for undertaking mileposts. The agenda requires changeless keeping to maintain a realistic agenda throughout the undertaking work procedure ( PMI 2008 ) . Scheduling requires activities of the undertaking to be identified. These are all the activities necessary to finish the work bundles that are defined in the WBS ( see subdivision 3.5 ) ( APM 2006 ) .

Human Resources Plan

The Human Resource Plan is a portion of the Project Management Plan4, it describes how human resources are to be defined, staffed, managed, controlled and released. It describes how human resources are to be managed and what they should make. The Human Resource Plan should at least include the undermentioned paperss:

Functions and duties,

Undertaking organisation charts, and,

Staffing direction program ( PMI 2008 ) .

Scope Definition and Baseline

Define range

The procedure of specifying range is the development of a thorough description of the undertaking and merchandise ( s ) . The foundation of a solid undertaking range statement is important to a undertaking ‘s success. It is based on the major deliverables, constrains and premises that should be documented during the undertaking induction. When the undertaking moves on to the planning stage, the range is fine-tuned and defined in more item as more information has become available. All known restraints and premises are analyzed every bit best as possible ; if any new hazards, premises or restraints are found to be necessary subsequently in the undertaking, they must besides be added ( PMI 2008 ) .

Scope Baseline

The Scope Baseline is one of the chief constituents of the Project Management Plan. It is the baseline against which all alterations to the undertaking will be measured. Once the points to be included in the range baseline have been approved, formal alteration direction for the undertaking begins ( Norman et al. 2008 ) . Harmonizing to PMI ( 2008 ) , the range baseline should include:

Project range statement,

WBS, and

WBS lexicon.

The Project Scope Statement is discussed farther here below, but WBS and WBS lexicon are covered in Chapter 3.5.

Project Scope Statement

The intent of the Project Scope Statement is to depict in item the undertaking objectives, the deliverables, and the work required to bring forth the deliverables. The range statement is an understanding that states exactly what the undertaking will bring forth. This provides an apprehension of the undertaking range among the undertaking stakeholders. It is of import to name what is portion of the undertaking and what is excluded from the undertaking, as this is a key in pull offing stakeholder outlooks. The range statement can be used to direct the undertaking squad ‘s work, and is a footing for future undertaking determinations ( Heldman 2009, PMI 2008 ) . It is critical to include a high degree of item in the range statement because this determines how good the undertaking director can command the undertaking range.

Work Breakdown Structure

The usage of WBS goes back to the 1960 ‘s when the U.S. Department of Defence ( DoD ) and National Aeronautics and Space Administration ( NASA ) used it for helping their planning and controlling of big undertakings ( Cleland 1964 ) .

WBS is defined by PMI ( 2008 ) as:

“ A deliverable-oriented hierarchal decomposition of the work to be executed by the undertaking squad to carry through the undertaking aims and make the needed deliverables, with each falling degree of the WBS stand foring an progressively elaborate definition of the undertaking work. The WBS organizes and defines the entire range of the undertaking, represents the work specified in the current sanctioned undertaking range statement. ”

Without a well-developed and decently managed WBS, the likeliness of a undertaking ‘s success is badly diminished ( Norman et al. 2008 ) .

West by south

The WBS provides a clear vision for the undertaking leaders, participants and stakeholders. It breaks-up the undertaking range into manageable, hierarchal and definable bundles of work that make it possible to equilibrate the control needs of direction, with a sufficient degree of elaborate undertaking informations. This creates a model for the undertaking deliverables over the life rhythm of the undertaking. This break up of undertaking work makes it possible to pass on with everyone involved in the undertaking, and clearly identifies answerability within the undertaking ( PMI 2006 ) . With regard to answerability, the WBS is connected to the OBS[ 1 ]and Responsibility Assignment Matrix6 ( RAM ) .

The upper degrees of the WBS are intended to reflect the major deliverable work countries of the undertaking, but they can besides be used to sketch the major stages of the undertaking ‘s life rhythm. These upper degrees make it possible to make logical drumhead points for measuring the communicating of achievements, public presentation of squads and persons, and measuring of cost and agenda public presentation compared to specific deliverables every bit good as the overall undertaking. In order to avoid confusion, it is best to specify the degrees of the WBS prior to building ( PMI 2006 ) .

The lowest degree of the WBS, called the “ Work Package ” , contains all the planned work. A work bundle must be cost-estimated, scheduled, controlled and monitored. Using this work dislocation relationship “ work ” refers to the work merchandises or deliverables that are the consequence of an attempt but non the attempt itself ( PMI 2008 ) . The deliverable-oriented WBS provides, at the least, the following benefits to the undertaking ( PMI 2006 ) :

Better communicating to undertaking patrons, stakeholders, and squad members ;

More accurate appraisal of undertakings, hazards, timelines, and costs ;

Increased assurance that 100 % of the work is identified and included ; and

A foundation for the control processes within the undertaking.

The WBS transforms the boundaries and the range into an easy apprehensible papers that the whole undertaking squad and stakeholders can utilize. The creative activity of a WBS may look like a challenge to people unfamiliar with the procedure, but it can be simple to get down with and so germinate as users become more comfy with it. In decision, the end products from this procedure are key in conveying and procuring the range and work of the undertaking at manus.

In connexion to Cost Estimating, the WBS is one of the cardinal tools for specifying undertaking cost elements. As such the WBS Quality Principles must be fulfilled

Deliverable-Based Management

The Deliverable-Based Management ( DBM ) takes the control construct beyond the Work Package to besides include undertakings and activities in the undertaking agenda. All the undertakings and activities produce single deliverables that can be combined with other deliverables from the intended Work Package deliverables. This attack is used to pull off the full undertaking by the creative activity and integrating of single and compound deliverables. By following this attack, the undertaking can be managed at a elaborate degree. This makes it easy to sum up the deliverables based on the WBS hierarchy, which is the true power of DBM. It allows for cost, agenda, resources and quality to be understood, measured, aggregated and monitored for specific deliverables at higher WBS component degrees. This enables the undertaking director to visualise and pass on how the undertaking is executing. DBM is the direction attack that should be used for most undertakings ( Norman et al. 2008 ) .

Activity/Task-Based Management

Activity-Based Management ( ABM ) is the antonym of DBM. It is a valid technique for back uping of ongoing concern operations. When ABM is used, the cost at activity degree is most of import factor of consideration when managing and commanding the cost of the concern. Using ABM, the undertaking director can bind all undertaking costs to specific operational activities, and hence is able to command the undertakings connected costs. A elaborate analysis of specific operational deliverables is time-consuming and dearly-won to execute because activities frequently impact several deliverables at the same time and can traverse concern units and maps. This inability to group work and cost against the WBS hierarchy and so demo traceability is a serious job for the director. ABM is hence appropriate for an ongoing concern operation ; it is, nevertheless, inappropriate for the direction of a undertaking ( Norman et al. 2008 ) .

Importance of the WBS

There are many things that must be included in the direction of a undertaking if it is to be successful ( as outlined in Chapter 3 ) . The WBS is an of import tool that can assist procure project coating that is acceptable to all stakeholders. Harmonizing to PMI ( 2006 ) , the WBS does the followers:

Defines all the work of the undertaking, and merely the work of the undertaking, thereby clear uping the undertaking range ;

Reflects the input from all squad members to guarantee buy-in ;

Provides the baseline for subsequent alteration control ;

Is a primary input to other project direction processes-for illustration, resource planning, cost estimating, agenda development, and hazard designation ;

Provides the model for undertaking control, public presentation monitoring, and the foundation for communicating with all stakeholders ; and

Ensures the work of the undertaking correlates suitably with the RAM and the OBS.

In the field of Earned Value Management ( EVM ) , executing a WBS of sufficient quality is critical if Earned Value ( EV ) is to be applied ( PMI 2005 )

WBS Quality

The quality of the WBS must to be considered ; it is non plenty merely to do a WBS and so be done with it. Quality includes the thoughts of harmoniousness to demands and fittingness for usage ( that is to state, the undertaking is suiting for its intended intent ) ( PMI 2006 ) . WBS should be created every bit early as possible in the life rhythm and germinate as the undertaking grows. It can hence be described as a life papers. The WBS must run into the undertaking directors ‘ demands ; it is of no usage to do a WBS that overwhelms the undertaking squad. Its complexness has to be balanced so that it can both give counsel and aid with determination devising. Indeed, it is of small value if it is non really used to pull off the undertaking ( Norman et al. 2008 ) .

Harmonizing to PMI ( 2006 ) , there are two chief WBS Quality Principles that all WBS should integrate. These principals are explained in Appendix II.

Construction Cost