CONSTRUCTION COST ESTIMATE

CONSTRUCTION COST ESTIMATE

Cost Estimate – According to American Association of Cost Engineers (AACE), cost estimates can be defined as “a prediction of the probable costs of a project, of a given and documented scope, to be completed at a defined location and time in the future.” An estimate is a prediction of the expected final cost of a proposed project (for a given scope of work).

By its nature, an estimate involves assumptions and uncertainties, and is therefore associated with some level of error. This level of error and uncertainty can be correlated to probabilities of over-running or under-running the predicted cost. Also, a cost estimate reflects a range of potential cost outcomes, with each value within this range associated with a probability of occurrence (Dysert and Elliot 2000). The accuracy of cost estimates determines to a large extent the feasibility, scale and phases of construction of the project.

On the other hand, Dysert (2006) defined a cost estimate as, “is the predictive process used to quantify cost and price the resources required by the scope of an investment option, activity, or project.” While, Akintoye (2000) defined cost estimate as, “is crucial to construction contract tendering, providing a basis for establishing the likely cost of resources elements of the tender price for construction work”.

If estimates are consistently high, compared to bid costs and ultimately actual costs, fewer projects will be authorized than could have been performed with the resources available, resulting in loss of benefits. If estimates are consistently low, more projects can be authorized than can be fully funded, resulting in project slowdowns, scope changes, performance shortfalls, and generally higher costs and lower benefits. If estimates are consistently neither high nor low, but still inaccurate, the estimated benefit/cost ratios will not be correct and the most beneficial projects may not be authorized, while less beneficial projects are authorized. All of these conditions result in misallocation of funds and a loss in benefits to the public which is an attribute of poor construction cost performance (Flyvbjerg et al., 2002).

The outcome of an estimate can be accurate, underestimate or overestimate. An accurate estimate generally results in the most economical project cost, while an underestimate and overestimate often lead to greater actual expenditures. Underestimate means the design and specifications cost more than they are estimated. It is also often a result of poor planning and inexperience estimating, whereby substantial cost items may be omitted. This unrealistic estimate leads to project delays, reorganization, and re-planning, which usually results in significant cost growth. On the other hand, an overestimated cost can be as bad as an underestimated cost (Ashworth, 1944).

Overestimation of a project at the initial stage can lead to a viable project being dropped or re-tendered when there is no bid close enough to permit project award (Oberlender and Trost, 2001). The complexity of the construction projects and the lack of time allocated for cost estimating often lead to a poor performance of the estimate (Marjuki, 2006).