1st International Conference on Transportation Infrastructure and Materials (ICTIM 2016)

ISBN: 978-1-60595-367-0

Estimation of Highway Project Cost

using Probabilistic Technique
Abdul Hannan1, Anwaar Ahmed2, Tabjeel Ashraf3 and Qiang Bai4
1
Assistant Professor, Department of Civil Engineering, The University of Lahore, Islamabad, Pakistan,
Ph: +923335629699, ahannanq@yahoo.com, abdul.hannan@ce.uol.edu.pk
2
Associate Professor, Military College of Engineering, National University of Sciences and
Technology, Risalpur, Pakistan; anwaar5148@gmail.com, dranwaar@scee.nust.edu.pk
3
Humphrey Research Fellow, MIT, Cambridge, MA, USA; tabjeel@gmail.com
4
Associate Professor, Chang’an University, School of Highway, Middle Section of South 2 nd Ring
Road Xi'an, Shaanxi Province, 710064, China; qiang.bai@chd.edu.cn, baiqiang@outlook.com

ABSTRACT: Accurate assessment of effort, time and resources for estimation of

project cost is a challenging task for project managers. Several methodologies are
commonly practiced around the globe for project cost estimation based on the
project’s scope, type, and availability of resources. In developing countries like
Pakistan most of the construction projects face delay and cost overrun, and
construction industry continues to use traditional methodologies for preparation of
project cost estimates. Present study developed a probabilistic framework for project
cost estimation using Monte Carlo Simulation. A probabilistic model is proposed for
estimation of total project cost using data on key risk factors that included (1) labour
efficiencies, (2) machine efficiencies, (3) construction material wastages, and (4)
construction items’ prices. Using data from completed highway projects, model
validation results revealed that developed model has the ability to predict reliable
future project cost.

INTRODUCTION AND MOTIVATION

Cost estimation is an important step in project management life cycle as it

establishes the baseline for the project cost at various phases of the project
development process (Buertey et al., 2012). Accurate cost estimation is a key element
in the successful execution of any project (Love et al., 2013; Clough et al., 2000).
Several techniques have been used worldwide for project cost estimation, based on
the project’s scope, type of the estimate and availability of project resources (Buertey
et al., 2012). Project cost overrun is a usual phenomenon and one of the major
responsibilities for project managers is to control cost overrun during project
execution (Barraza and Bueno, 2007). A project is said to have cost overrun when its
final cost exceeds the original estimated cost (Leavitt, Ennis and McGovern, 1993;
Love et al., 2013). In order to overcome this issue, cost contingency is added into the
estimated cost of a project to mitigate risk of cost overrun (Flyvbjerg et al., 2002;
Agyakwa-Baah, 2007). The inability of the project managers to complete projects on
time and within allocated budget continues to be a challenging problem issue for
project managers (Alinaitwe et al., 2013). Present environment of construction
industry demands use of reliable techniques for project cost estimation to overcome
the issue of cost overrun (Ogunlana and Butt, 2000).
Construction industry in Pakistan uses traditional methodologies for preparation
of project cost estimates and generally there is lack of awareness about latest
techniques. Also, traditional, contingency reserves technique that are practiced around
the globe are used to set aside a fixed percentage of the estimated project cost as cost

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contingency reserve (Thompson and Perry, 1992; Mills, 2001). Most of the projects in
Pakistan that follow traditional methodology for estimation of cost contingency
reserve suffer from cost overrun. For most of the public sector projects schedule of
rates issued by Pakistan Public Works Department (PWD), Punjab Finance
Department, Military Engineering Services (MES), and National Highway Authority
(NHA) are used for project cost estimation. The estimation of project cost for
different scenarios is an important step in successful execution of a project. In order to
address this key issue and other associated factors, the objective set forth for present
research was to develop probabilistic model for cost estimation of highway
construction projects and to design rational contingency reserves.

A REVIEW OF RELEVANT LITERATURE

Several cost estimation techniques are used worldwide. The “analytical technique”
is an activity based costing method in which the cost of individual work items is
estimated and summed up to get total project cost (Makovšek, 2014; Duverlie and
Castelain, 1999). The “analogical technique” of cost estimation is based on a
comparison of the new system with a prior one (Molcho et al., 2014; Duverlie and
Castelain, 1999). “Parametric technique” employs statistical methods, to relate the
historical construction costs with a few relevant project parameters (Makovšek, 2014).
“Expert systems” is another technique that combines different techniques such as
decision trees and specialized cost estimation software etc. for project cost estimation
(Molcho et al., 2014; Dagostino and Peterson, 2011).
Project management institute (PMI) defines cost contingency as “the amount of
money or time needed above the estimate to reduce the risk of overruns of project
objectives to a level acceptable to the organization” (PMI, 2000). Traditional
percentage is a widely used technique for establishing project contingency reserves
around the globe. Traditionally for the construction projects contingency reserves are
set between 1-10% of the estimated project cost (Thompson and Perry, 1992; Mills,
2001). This is an arbitrary technique that is difficult to justify (Thompson and Perry,
1992; Lhee et al., 2009; Cioffi and Khamooshi, 2009). Project cost overruns and
associated contingency funds are also predicted using predictive model (usually
multiple regression analysis) and set of identified risks (Baccarini, 2005; Federle and
Pigneri, 1993). Monte Carlo Simulation (MCS) is an advanced probabilistic
quantitative technique for analysing risk and provides a opportunity for estimating the
contingency value for total cost of the project (Clark, 2001).
Sonmez et al., (2007) using data of 26 construction projects from 21 different
countries studied bidding stage financial risk factors of construction projects. Using
correlation and regression analysis techniques, different significant risk factors
impacting cost contingency were identified and model was developed to support
bidding contingency decisions. Barraza and Bueno (2007) proposed cost contingency
management model using Monte Carlo simulation. The application of the
methodology was tested on hypothetical industrial project with 32 different activities.

STUDY METHODOLOGY

The detailed methodology adopted for present study is shown in Figure 1.

Description of each step is herein discussed:

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Identification of Cost Risk Factors

Literature review revealed that the cost of project is influenced by its resources
(material, labour and machine) and their uncertainty (Thal et al., 2010; Yang, 2005).
Based on resources required for rate analysis, cost risk factors were identified which
directly affect the estimated cost of activities and project, that includes (1) labour
efficiencies, (2) machine efficiencies, (3) road construction material wastages, and (4)
construction items’ prices.

Literature Review

Identification of Project Cost Risk Factors

Data Collection and Collation

Material Construction Labour Machine

Wastages Items Rates Efficiencies Efficiencies

Developing Traditional Project Cost Estimation Model for Highway Project

Incorporation of Risk Factors in Traditional Model

Evaluation of Probabilistic Cost using Probabilistic Model

Analysis and Discussion

Conclusion and Recommendation

Figure 1. Study Methodology.

Data Collection and Collation

For each risk factor, detailed methodology was adopted for data collection. Data on
labour and machine efficiencies were collected using two separate questionnaires.
Survey for labour efficiencies comprised of 24 questions about 9 different labour
activities, whereas, 18 different questions were asked about 18 efficiencies of
machine activities. Questionnaires were distributed to academia, clients, consultants
and contractors and over 100 responses were collected for each. Data on percentage of
material wastages were collected using expert opinion. Onsite interviews were
conducted from site supervisors and project managers for material wastages about
different construction items. It was revealed through onsite interviews that percentage
wastage for various materials used in road construction varied between 3% to 7%.
One of the major cost risk factor was uncertainty in price of different road
construction items. For analysis of uncertainties/ variation of construction item’s
price, past 10 years data on material, labour and machines were obtained from

425
Pakistan Bureau of Statistics, and Punjab Finance Department. Data for
approximately 2960 different construction items, 90 different types of construction
machineries and 130 different types of labourer’s trades were collected for year 2004
to 2013. Summary of methodology used for data collection is presented in Table 1

Development of Traditional Project Cost Estimation Model

A 10 Kilometer long section of a two-lane highway (12 feet wide lane and 8 feet
wide shoulder) was selected and its basic project cost estimation model was
developed using Microsoft Excels. Bill of quantities (BOQs) sheet was developed as
per the work break down structure of project representing project activities. For each
activity as per designed BOQ, separate rate analysis sheets were developed. Also the
quantity sheet, based on project design and specifications, was developed and
incorporated into basic model.

Table 1. Summary of Data Collection Methodology.

Data Collection
Risk Factor Description
Methodology
Labour Questionnaire Survey 24 questions about 9 different labour
Efficiencies trades.
Machine Questionnaire Survey 18 questions about 18 types of different
Efficiencies machines.
Material Expert Opinion Top 15 materials identified with likely
Wastages high wastage rate
Construction Field data collection a. Past 10 year data (2004-13)
Items Prices b. Price data were collected from:
(1) Pakistan Bureau of Statistics
(2) Punjab Finance Department

Incorporation of Risk Factors in Traditional Model

Questionnaire survey technique was used to determine labour and machine
efficiencies. Twenty-four different questions related to nine different labour
categories (both skilled and unskilled) and eighteen different questions related to
eighteen different commonly used machines were used to collect data on labour and
machine efficiency. Using risk analysis tool Palisade @RISK probabilistic mean and
standard deviation of efficiency of different labour categories and machine
efficiencies were obtained. The efficiency of labour for excavation in ordinary soil
and Grader (150 horse power (HP)) for sub-grade with the best fitted probability
distribution along with their probabilistic mean and standard deviation with a
confidence level of 90% are shown in Figure 2.

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 5.0 % 90.0% 5.0% 5.0% 90.0% 5.0%
0.03 0.006
69.2 127.2 0.006 339.3
0.02 0.004

0.01 0.002

0 0

120

150
60

90

100

200

300

400
0
(a) ExtValue (93.0, 18.2) (b) Normal (212.5, 77.09)
Figure 2. Probability Distribution (a) Labour excavation in ordinary soil
(cubic feet) (b) 150 HP Grader output (cubic meter).
Expert opinion was used to identify top 15 items that are high wastage rate in road
construction. Expert opinion was sort from contractors, quantity surveyors and house
owners. Materials were ranked using Likert scale ranging from 0-5. Triangular
distribution was fitted to maximum (Mx), minimum (Mn) and most likely value (ML)
values of material wastages rates, obtained using expert opinion of the professional.
Figure 3 shows the triangular distribution fitted to wastage rate of aggregate (3/4”-
3/8”) and asphalt liquid (90% of confidence level).

5.0% 90.0% 5.0% 5.0% 90.0% 5.0%

0.35 62.3 0.35 59.8

0.3 0.3

0.2 0.2

0.1 0.1

0 0
0

20

40

60

80
0

20

40

60

80

Values in Thousandhs Values in Thousandths

(a) Triangle (4.3, 1.25) (b) Triangle (3.8, 1.23)

Figure 3. Probability Distribution (a) Aggregate wastage rate
(b) Asphalt wastage rate.

In order to cater for fluctuation in construction price of construction item due to

inflation construction price index (CPI) were established for individual construction
items, using data from past ten years. CPI values were established by selecting a base
item price and future CPI’s were determined using base price. If, same quantity of an
item is sold at a different price during base period and time period for which CPI is to
be determined, then following Deaton and Zaidi (2002) CPI is given as follows:

𝑷𝒛 𝒕𝒊 . 𝑸𝒛 𝒕𝒊 (1)
𝐂𝐏𝐈 =
𝑷𝒛 𝒕𝒃 . 𝑸𝒛 𝒕𝒃

Where, tb and ti are the base and time period for which CPI is required, Pz,ti denotes
the price of item “z” in period t, Qz,tb denotes the quantity of item “z” in period t.
Project duration was estimated as the sum activity duration on critical path.
In order to develop probabilistic schedule, 18 activities were identified and expert
opinion was sought on duration on these activities. A questioner survey was
distributed to project managers, contractors and schedulers to get an estimate of

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different activities. Probabilistic mean and standard deviation were calculated by
fitting PERT distribution to different activity estimates in order to develop
probabilistic schedule. Project schedule duly accounted for relationship/ dependency
between different activities. Using Palisade @RISK probable project duration (PPD)
was obtained duly considering different distributions for activities duration and
efficiency of workmanship and machinery.

RESULTS AND ANALYSES

Once the probabilistic model was obtained by incorporating risk factors, into
traditional cost model, cost for ten different projects using data from 2004 to 2013
was estimated using both traditional model and probabilistic model that incorporated
different risks factors such as labour and machine efficiencies, material wastages and
material price fluctuation. It was revealed that both the models predicted different
project cost which is intuitive as traditional model is unable to account for risk
factors. In next step actual completion cost of ten different projects was compared
with predicted cost using probabilistic model. It was revealed that predicted
probabilistic costs by developed model was close to the actual completion costs. To
further validate the model, Mean Absolute Percentage Error (MAPE) was estimated
as follows:
𝑛
1
𝑀𝐴𝑃𝐸 = ∑|𝐸𝑖 | (2)
𝑛
𝑖=1

Where, Ei = (Ai – Pi) /Ai is the percentage error for project i of the actual and
predicted project cost respectively. A MAPE value of 0.0186 was obtained for the
developed model. A value close to zero indicates better prediction accuracy of the
model. In this case MAPE values indicated that on average model overpredicts or
underpredicts the true cost by only about 1.86%.

RESEARCH SUMMARY AND CONCLUSIONS

This research mainly focused on development of probabilistic cost estimation model

for highway projects using Palisade @RISK. The developed model has the capability
to predict future project cost by duly incorporating the effect of different cost risk
factors. It was revealed that the traditional project cost estimation techniques that do
not account for different cost risk factors are inefficient and project estimates based
on traditional techniques may result into project delays due to cost overrun. The
developed probabilistic cost estimation model can predict project cost for highway
construction projects with reasonable accuracy (minimum risk). Using data from
completed projects, model validation revealed that the developed model on average
overpredicts or underpredicts the true cost by only about 1.86%.

ACKNOWLEDGMENTS

The authors are grateful to official at National Highway Authority of Pakistan for
their assistance in cost and traffic data collection. The contents of this paper reflect
the views of the authors, and do not reflect the official view of National Highway
Authority of Pakistan.

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