Cost Estimation

 Costs Associated with Constructed Facilities

The costs of a constructed facility to the owner include both the initial capital cost and the subsequent operation and maintenance costs. Each of these major cost categories consists of a number of cost components.

The capital cost for a construction project includes the expenses related to the inital establishment of the facility:

  • Land acquisition, including assembly, holding and improvement
  • Planning and feasibility studies
  • Architectural and engineering design
  • Construction, including materials, equipment and labor
  • Field supervision of construction
  • Construction financing
  • Insurance and taxes during construction
  • Owner’s general office overhead
  • Equipment and furnishings not included in construction
  • Inspection and testing

The operation and maintenance cost in subsequent years over the project life cycle includes the following expenses:

  • Land rent, if applicable
  • Operating staff
  • Labor and material for maintenance and repairs
  • Periodic renovations
  • Insurance and taxes
  • Financing costs
  • Utilities
  • Owner’s other expenses

The magnitude of each of these cost components depends on the nature, size and location of the project as well as the management organization, among many considerations. The owner is interested in achieving the lowest possible overall project cost that is consistent with its investment objectives.

It is important for design professionals and construction managers to realize that while the construction cost may be the single largest component of the capital cost, other cost components are not insignificant. For example, land acquisition costs are a major expenditure for building construction in high-density urban areas, and construction financing costs can reach the same order of magnitude as the construction cost in large projects such as the construction of nuclear power plants.

From the owner’s perspective, it is equally important to estimate the corresponding operation and maintenance cost of each alternative for a proposed facility in order to analyze the life cycle costs. The large expenditures needed for facility maintenance, especially for publicly owned infrastructure, are reminders of the neglect in the past to consider fully the implications of operation and maintenance cost in the design stage.

In most construction budgets, there is an allowance for contingencies or unexpected costs occuring during construction. This contingency amount may be included within each cost item or be included in a single category of construction contingency. The amount of contingency is based on historical experience and the expected difficulty of a particular construction project. For example, one construction firm makes estimates of the expected cost in five different areas:

  • Design development changes,
  • Schedule adjustments,
  • General administration changes (such as wage rates),
  • Differing site conditions for those expected, and
  • Third party requirements imposed during construction, such as new permits.

Contingent amounts not spent for construction can be released near the end of construction to the owner or to add additional project elements.

In this chapter, we shall focus on the estimation of construction cost, with only occasional reference to other cost components. In Chapter 6, we shall deal with the economic evaluation of a constructed facility on the basis of both the capital cost and the operation and maintenance cost in the life cycle of the facility. It is at this stage that tradeoffs between operating and capital costs can be analyzed.

Example : Energy project resource demands [1]

The resources demands for three types of major energy projects investigated during the energy crisis in the 1970’s are shown in Table 5-1. These projects are: (1) an oil shale project with a capacity of 50,000 barrels of oil product per day; (2) a coal gasification project that makes gas with a heating value of 320 billions of British thermal units per day, or equivalent to about 50,000 barrels of oil product per day; and (3) a tar sand project with a capacity of 150,000 barrels of oil product per day.

For each project, the cost in billions of dollars, the engineering manpower requirement for basic design in thousands of hours, the engineering manpower requirement for detailed engineering in millions of hours, the skilled labor requirement for construction in millions of hours and the material requirement in billions of dollars are shown in Table 5-1. To build several projects of such an order of magnitude concurrently could drive up the costs and strain the availability of all resources required to complete the projects. Consequently, cost estimation often represents an exercise in professional judgment instead of merely compiling a bill of quantities and collecting cost data to reach a total estimate mechanically.

TABLE 5-1 Resource Requirements of Some Major Energy Projects


Oil shale
(50,000 barrels/day)

Coal gasification
(320 billions BTU/day)

Tar Sands
(150,000 barrels/day)


Cost
($ billion)

2.5

4

8 to 10

Basic design
(Thousands of hours)

80

200

100

Detailed engineering
(Millions of hours)

3 to 4

4 to 5

6 to 8

Construction
(Millions of hours)

20

30

40

Materials
($ billion)

1

2

2.5


Source: Exxon Research and Engineering Company, Florham Park, NJ
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