ESTIMATING-3

Dr. Kareem Adel

CONTINGENCY
 Risks in Estimating & Tendering
The two elements of risk contained in a
tender are:
1. Special Risks
2. Contingency
Factors affecting special risks are:
location, type of project, tender value,
consultant, owner, competition situation,
current work volume, contractor’s strategy,
etc.
The top management is responsible for the
assessment and addition of the special risk
 Contingency (1/7)
Known & Unknown
Known Unknowns
Are unknowns that are anticipated, but not certain, events
(PMBOK, 2004)
Some events could happen in the future of the project;
but are marked by a certain probability and could even not
happen.
There are additional costs, but the precise amount is unknown.
To cover for these, a cost contingency is added to the
construction cost.
Unknown Unknowns
Even a good risk analysis does not cover all the events that are
likely to happen all through the construction phase
These are called “unknown unknowns”.
Top management allocate a management contingency reserve
(Special Risk) to cover for this risk. This allocated sum is added
to the mark up during the tendering process.
 Contingency (2/7)
Definition
An amount of money or time (or other
resources) added to the base estimate to:
a. Achieve a specific confidence level or

b. Allow for changes that experience

shows will likely be required.

(AACE-18R-97)
 Contingency (3/7)
Expected Net Risk Analysis Method

Item Estimated Max. Max. Probability Expected

construction cost risk of net risk
cost (LE) (LE) occurrence (LE)
(LE) (%)

1 40000 50000 10000 30% 3000

2 8000 12000 4000 80% 3200

3 10000 20000 10000 50% 5000

Total 58000 82000 24000 11200

 Contingency (4/7)
Workshop
The following table shows the cost estimating
data for a project.
Use the expected net risk analysis method to
determine the percentage that should be added
to the project construction cost estimate to cover
for contingency.
If contingency will be distributed uniformly,
calculate the total construction cost estimate for
each work item and for the project.
 Contingency 5/7)
Workshop
Work item Estimated Max. cost Probability
(No.) construction cost (LE) of occurrence
(LE) (%)
1 40000 45000 15%

2 8000 10000 20%

3 10000 15000 10%

4 8000 10000 20%

5 7000 9000 10%

6 20000 23000 15%

7 5000 6000 12%

8 12000 14000 10%

9 15000 18000 20%

10 10000 12000 10%

 Contingency (6/7)
Workshop - Solution
Work Estimated Max. Probability Max. Expected net
element construction cost of occurrence risk risk
(No.) cost (LE) (LE) (%)
(LE) (LE)
1 40000 45000 15% 5000 750

2 8000 10000 20% 2000 400

3 10000 15000 10% 5000 500

4 8000 10000 20% 2000 400

5 7000 9000 10% 2000 200

6 20000 23000 15% 3000 450

7 5000 6000 12% 1000 120

8 12000 14000 10% 2000 200

9 15000 18000 20% 3000 600

10 10000 12000 10% 2000 200

Total 135000 162000 27000 3820

 Contingency (7/7)
Workshop - Solution

Solution

Total amount of contingency = LE3820

Contingency as a % of estimated construction

cost =(3820/135000) x100

= 2.83%

Final total cost estimate = 135000 x 1.0283

= LE 138820
METHODS OF COST
ESTIMATING
 METHODS OF COST ESTIMATING

EARLY ESTIMATE DETAILED ESTIMATE

UNIT SPACE ELEMENT UNIT RATE OPERATIONAL

METHOD METHOD METHOD METHOD METHOD
 EARLY COST ESTIMATE
UNIT METHOD

LUC >>> Lowest Unit Cost

AUC >>> Average Unit Cost

HUC >>> Highest Unit Cost

LUC + 4 AUC + HUC

( Estimated Unit Cost )previous =
6

Current Size Current Location Index Current Time Index

Estimated Unit
Cost = ( Estimated Unit Cost )previous x x x
(L.E. / Unit) Previous Size Previous Location Index Previous Time Index
 EARLY COST ESTIMATE
UNIT METHOD
Example ( 1 ):
Cost information from eight previously completed parking garage projects are
given in table (1). Time & location indices are given in tables (2) & (3)
respectively. All the projects given in table (1) were completed 2 years ago in city
(A). A proposed similar type project, for 155 cars, is to be constructed in the
current year in city (C). Estimate the total cost of this proposed project.
Total Cost No. of cars
Project
( L.E.) ( cars / garage )
1 1,487,500 150
2 897,000 80 Table (1) "Cost
3 1,798,000 120 information for
4 1,147,000 90 parking garages"
5 590,400 60
6 1,933,000 220
7 869,000 70
8 1,635,000 180
EARLY COST ESTIMATE
UNIT METHOD

Table (2) "Time Indices"

Year Index
3 years ago 358
2 years ago 366
1 year ago 367
Current year 386

Table (3) "Location Indices"

Location Index
City A 1025
City B 1150
City C 1260
City D 1350
 EARLY COST ESTIMATE
UNIT METHOD
Solution ( 1 ):
Total Cost No. of cars Unit Cost
Project Remarks
( L.E.) ( cars / garage ) (L.E. / car)
1 1,487,500 150 9916.7
2 897,000 80 11212.5
3 1,798,000 120 14983.3 HUC
4 1,147,000 90 12744.4
5 590,400 60 9840
6 1,933,000 220 8786.4 LUC
7 869,000 70 12414.3
8 1,635,000 180 9083.3
88980.9
LUC = 8,786.4 L.E. / car
AUC = ( 88,980.9 / 8 ) = 11,122.6 L.E. / car
HUC = 14,983.3 L.E. / car
 EARLY COST ESTIMATE
UNIT METHOD
Solution ( 1 ):

Estimated Unit Cost (previous)

= ( 14983.3 + ( 4 x 11122.6 ) + 8786.4 ) / 6

= 11,376.7 L.E. / car

Total Estimated Cost

= 11376.7 x 155 x (386/366) x (1260/1025)

= 2,286,129.9 L.E.

Estimated Unit Cost (Current)

= 2,286,129.9 / 155 = 14,749 L.E. / car

 EARLY COST ESTIMATE
UNIT METHOD
Example ( 2 ):
Cost information from six previously completed hospitals projects
are given in table (1). Time & location indices are given in tables (2)
& (3) respectively. All the projects given in table (1) were completed
3 years ago in city (B). A proposed similar type project, for 250 beds,
is to be constructed in the current year in city (C). Estimate the total
cost of this proposed project.
Table (1) "Cost information for Hospitals"
No. of beds
Project Total Cost ( L.E.)
( beds / hospital )
1 800,000 80
2 1,380,000 120
3 1,710,000 180
4 1,640,000 160
5 1,837,500 210
6 1,485,000 110
EARLY COST ESTIMATE
UNIT METHOD

Table (2) "Time Indices"

Year Index
3 years ago 358
2 years ago 366
1 year ago 367
Current year 386

Table (3) "Location Indices"

Location Index
City A 1025
City B 1150
City C 1260
City D 1350
 EARLY COST ESTIMATE
UNIT METHOD
Solution ( 2 ):
Total Cost No. of beds Unit Cost
Project Remarks
(L.E.) ( beds / hospital ) (L.E. / bed)
1 800,000 80 10,000
2 1,380,000 120 11,500
3 1,710,000 180 9,500
4 1,640,000 160 10,250
5 1,837,500 210 8,750 LUC
6 1,485,000 110 13,500 HUC
63,500
LUC = 8,750 L.E. / bed
AUC = ( 63,500 / 6 ) = 10,583.33 L.E. / bed
HUC = 13,500 L.E. / bed
 EARLY COST ESTIMATE
UNIT METHOD
Solution ( 2 ):
Estimated Unit Cost (previous)
= ( 13500 + ( 4 x 10583.33 ) + 8750 ) / 6

= 10,763.9 L.E. / bed

Total Estimated Cost

= 10763.9 x 250 x (386/358) x (1260/1150)
= 3,178,968.3 L.E.

(Estimated Unit Cost)current

= 3,178,968.3 / 250

= 12,715.9 L.E. / bed