Benchmark Estimating Software Whitepaper

First
principles
estimating

What it is, how it benefits private companies and public organisations

and important features to look for when selecting a first principles
estimating system

Author: Nigel Watts

Copyright Benchmark Estimating 2013

Marketing & Product Manager

First principles estimating

Executive summary
The practice of first principles estimating is not a new one,
but one of the most important aspects of many businesses
today. With strong competition, uncertain market
conditions and with organisations relying more on
technology to drive their business, first principles estimating
systems are seen as a key competitive advantage and riskminimisation strategy in many project-based organisations.
This paper explains the basics of first principles estimating,
the benefits of it, compares it to the unit rate estimating
method, and provides readers with a checklist of key
features to look out for when choosing a first principles
estimating solution.

What is first principles estimating?

Estimating from first principles is all about having accurate
knowledge of the direct costs of the resources required to
complete your project. Direct cost resources are generally
classified as either:

Plant
Labour
Materials
Subcontractor

This method of estimating is regarded as best practice

throughout the world. It can be used to price all types of
projects no matter the size of the job, the industry you are
in or the stage in the lifecycle of the project (i.e. strategic,
concept, detailed).
When estimating a project it is common practice to break it
down into a schedule of items, otherwise known as a bill of
quantities or quite simply a scope of work. When using first
principles estimating, the cost of each Item in the schedule
is based on a first principles buildup. This means that every
Item has the appropriate Labour, Materials, Subcontractor
and Plant allowances to construct the Item of work with
adjustments made to suit any unique aspects of the site
(such as difficult access or ground conditions).
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First principles estimating

What is unit rate estimating?

There are other forms of estimating and one is known as unit
rate estimating. We will refer to this throughout this paper for
the purposes of comparison. This is a method of estimating
where the Quantity of each Item in the scope of work is simply
multiplied by a Rate to obtain a price. This method does not
use resources or have, generally, an underlying construction
methodology.
Main cost components of an estimate
The illustration below shows the main cost components of an
estimate. The Direct Costs as mentioned are a key component
of a first principles estimate and the illustration also
demonstrates how they can be broken down into a scope of
work which is commonly done with sections at the first level
and then the items of work.
Other key cost elements of an estimate are:

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Indirect Costs - Contingencies (Risk) and Overheads.

Overheads can be classified as either On-Site Overheads
which themselves can have a first principles estimate, or
Off-Site Overheads.

Provisional Sums

Profit

First principles estimating

First principles estimating does not

discriminate
It doesnt matter if you are a designer, full time estimator or
project manager, and irrespective of your industry, first
principles estimating is appropriate for you.

First principles is common among fulltime estimators, however, if you are a

designer for example preparing a
budget price for a project with little
detail available about the project, you
can still (and we propose you should)
develop a first principles estimate in
order to ensure maximum accuracy.
You may not go into the detail like an
estimator would when preparing a
hard dollar bid, however, having the
first principles detail ensures the
estimate is not only accurate, it also
means you have more confidence in it
and, when the project moves along its
lifecycle, it is easier then to adjust the
scope and make changes to the
estimated cost with complete
traceability.

7 benefits of first principles estimating

First principles estimating offers organisations, both public and
private, many benefits. Some of these are detailed below:

1. GREATER ACCURACY OF ESTIMATES

When you estimate by first principles you need a clear
understanding of your direct costs. The process is to assess the
project and the amount of materials for every item. You then
allocate plant and labour, often through the use of production
rate data, and then of course subcontractors. Because the
estimate that youve done is particular to the project it is far
more accurate than unit rate data.
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First principles estimating

2. GREATER ACCOUNTABILITY
Accountability for estimates is paramount today. With a first
principles estimate this is possible. The exact allowances of
labour, plant, materials and subcontract can be accounted for,
for every item in the estimate. With unit rate estimating this is
not possible.
3. BE MORE COMPETITIVE
When you have an accurate direct cost breakdown you will
have the confidence and ability to adjust your overhead and
profit amounts so as to make your bid as competitive as
possible. By that we mean that if you have certainty in your
material costs, for that project, and you really want to win the
job, you will have the confidence to reduce your profit margin
as required. You may wish to apply different profit margins to
each main component of the direct costs (plant, labour,
materials, subcontract) to be more competitive.
4. WINNING A JOB AT THE RIGHT PRICE
As we all know, anyone can win a job simply by cutting their
price, especially jobs that are more difficult. The beauty of first
principles estimating, in this case, is to be able to allow the
right amount of money for the project. There is nothing wrong
with winning a challenging project, as long as you have the
money in your bid to perform the job satisfactorily.
5. MAKING MONEY
When you have done a first principles estimate for a bid and
you win the project you are in a great position to make money.
The estimate that you have done can produce a budget which
will enable you to do many things. One is to be able to order
your materials as you will know exactly what is needed for the
projects. Another is that you will be able to track your progress
against this budget so as to ensure that you are on track to be
profitable.

6. BETTER PROJECT MANAGEMENT

With a first principles estimate, the project manager and all
those involved in the project know exactly what has been
allowed for. Only with a first principles estimate is this
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First principles estimating

Benefit

1st
principles

Speed of estimate
production

Accuracy

Project management reports

Competitive estimates

Maximum profits
Captures corporate knowledge

Ease of updating
rates

Ability to apply
profit by different
categories

Ease of adjusting
estimate to suit
project site conditions

Facilitates integration with ERP/

accounting systems

Accountability

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Unit
rate

possible. This means that the project manager has the

information needed to run the project correctly and within
budget.

7. EASIER INTEGRATION WITH ERP AND ACCOUNTING

SYSTEMS
Enterprise Resource Planning (ERP) and accounting systems
generally require Resource details when setting up a budget.
Using unit rate estimating this is not possible. First principles
estimating techniques ensure that you can easily create a
budget from the estimate to assist in not only running the
project, but also to facilitate easier and more effective
integration between business systems.

14 key features to look for in a first principles

estimating system
The following list provides you a with checklist of important
features to consider when looking for a first principles
estimating system:

1.

Libraries for your Resources (Labour, Plant, Materials and

Subcontractors)

2.

Libraries to store common Items of work with first

principles breakdowns

3.

Ease of update of these Libraries

4.

Security over who has read/write access to these

Libraries

5.

Comprehensive reporting of the Direct Costs for a Project

6.

Ability to undertake a first principles estimate for on-site

Overheads (e.g. establishment, preliminaries etc) if
required

7.

Ability to apply Profit and Indirect Cost percentages by

Labour, Plant, Materials and Subcontractors

First principles estimating

8.

Ability to compare and update Resource rates used in an

old estimate with current prices

9.

Ease of making project-specific price changes for

Resources

10.

Subcontractor/supplier quote comparison to gain

materials and/or subcontractor quotes for a project

11.

Ability to import Suppliers price lists

12.

Ability to assign Cost Codes to Resources for preparation

of budgets and to aid in job costing

13.

Links with construction programming tools like Microsoft

Project and Primavera to allow for resource-based
programming

14.

Auditing to track who changes the Resource rates and

other details of the estimate

About Benchmark Estimating

Benchmark Estimating Softwares market leading
simplicity and range of powerful pricing features
enables designers, estimators and project managers to produce accurate, consistent estimates
amazingly quickly.
Benchmark Estimating Software enables you to
create estimates, quotes, project management
reports, marketing analysis graphs, progress
claims (valuations) and creates a program in
common construction scheduling software.
Our company, Benchmark Estimating, is part of
the MacDonald Group, a world leading cost engineering consulting firm focussed on major
infrastructure projects.

Contact us:
www.benchmarkestimating.com
+61 2 4969 8435 Australia
+44 161 237 1155 UK
+34 985 308 906 Spain

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