I.

Definition of Terms
II. Elements of a Good Cost Estimate
III. Project Cost Components
IV. Causes of Inaccurate Cost Estimates
V. Essential Factors to Consider
VI. Major Cost Estimating Techniques
VII. Steps in Cost Estimating
VIII.Cost Management : Earned Value Analysis
IX. Life Cycle Costing
2
“The practice of forecasting the cost of completing a project

with a defined scope.”

“The summation of individual cost elements, using established methods

and valid data, to estimate the future costs of a project/contract, based

on what is known today”. (US-GAO)

❑ Repetitive and iterative process

❑ Utilizes many techniques

❑ Authorize a project’s budget and manage its costs

❑ Critical for:

1. Deciding whether to take on a project;

2. Determining a project’s eventual scope;

3. Establish a project cost baseline; and

4. Ensuring that projects remain financially feasible and avoid cost

overruns.
What makes a good cost estimate?

1. Accuracy – revise estimates as more project details are obtained.

2. Confidence Level - communicate the amount of potential variability in

any estimate.

3. Credibility – incorporate expert judgement and use set values for

variables.

4. Documentation – identify and record assumptions underlying the

estimates.
What makes a good cost estimate?

5. Precision – compare and corroborate estimates.

6. Reliability – backup with historical cost estimates

7. Risk Detailing – build allowances into cost estimates

8. Uniformity – maintain consistency across projects

9. Validity – rely on established cost literature

10. Verification – check that mathematical operations are correct

Assess ▪ Review studies ▪ Post/Advertise Procure
▪ Consolidate into APP opportunity
▪ Decide procurement ▪ Open and evaluate
method bids
▪ Approve APP ▪ Post-qualify
▪ Determine readiness ▪ Award and enter into
contract

Identify ▪ Cost-benefit analysis ▪ Oversee Implement

▪ Feasibility study implementation
▪ Market study ▪ Inspect and accept
▪ PPMP deliveries
▪ Release payment
Procurement Planning is a process of determining:

❑ How to buy? Procurement Project - Goods, Infrastructure

or Consulting Services

❑ How many do you need? Quantity/items

❑ What are the details of a Procurement Project? Technical

Specifications or Terms of Reference

❑ What is the cost? ABC

❑ When you need it? Timelines/milestones

❑ How to source it? Procurement Modalities

❑ It aims to manage the expectations for fulfillment

of procurement needs.
Increase probability of a program’s success. An accurate cost estimate
is the basis of sound project management and planning.
❑ “Underestimating cost estimating”
▪ Lack of experience with similar projects.
▪ Size and expertise of human resources
▪ Expecting that resources will work at maximum productivity
▪ Length of planning

❑ Failing to identify the risks and to prepare adequate contingency plans

❑ Not updating cost estimates after project scope changes.

❑ Stating estimates as fixed sums rather than ranges.

❑ Making a project fit a fixed budget amount.

1. Ownership
Project cost estimates should be prepared from the perspective of
the project owner. Cost estimates should be sufficiently detailed and
constructed to facilitate project financing and enable effective
implementation.

2. Local Currency Basis and Use of Government Accounting Systems

It should be prepared in local currency units, for better appreciation
of costs and the budgetary implications of the project will be more relevant.
This will also facilitate project monitoring and supervision as project
accounting systems and financial reports are likely to be maintained in
local currency.
3. Foreign Exchange and Local Currency Cost

The underlying project cost estimates should differentiate between foreign

exchange and local currency costs as:

a. Component prices are likely to vary between local and international

markets, taking into consideration, among other things, varying tax
rates between import and local sales taxes, freight, customs, etc.

b. Computation of price contingencies may vary

c. It could highlight the extent to which the project could be

susceptible to foreign exchange risks during implementation.
4. Timeliness

If the date of the cost estimates is:

❑ Less than 6 months – cost estimates may still be acceptable.

❑ 6-12 months - the cost estimates should be revised by simple escalation

factor, reflecting actual price changes since the date of cost estimates.
Unless, the project team concludes that the base cost has not changed
materially.

❑ More than 12 months – cost estimates should be reappraised, unless the

project team concludes that the base cost has not changed materially.
5. Project Cost Elements

Cost estimates comprise:

a. Base Cost
b. Contingencies
c. Financial Charges during Implementation
Base Cost

➢ Prepared for each project component/output by expenditure

category.
➢ Expressed in local currency at prices in effect at the date of
estimation.
➢ It should include all project-related costs irrespective of financing
source.
Components of Base Cost

In preparing the base cost, the following should be considered:

1. Incremental recurrent costs (Direct Cost)

❑ Salaries, purchase of textbooks/ soft wares, office administrative

costs.

❑ it should be itemized, estimated on the price and quantity, and presented

as separate line item in the detailed cost estimate.

2. Audit costs

❑ Estimated costs and financing arrangements of the audits of project

financial statements.
Components of Base Cost

In preparing the base cost, the following should be considered:

3. Taxes and Duties

❑ Include excise taxes, sales taxes, value-added taxes, import and custom
duties.

❑ Taxes and duties are estimated by applying prevailing tax rates to the
related tax categories.

4. Cost of Project Management, Capacity Development and Consulting

Services

❑ Cost of airfare and per diems/honoraria, supplies/training materials

and equipment
Components of Base Cost

In preparing the base cost, the following should be considered:

5. Retroactive Financing of Project Costs

❑ Costs proposed for retroactive financing are to be included in the cost

estimates

❑ Applies to certain projects only

6. In-kind Contributions

❑ Some expenditures are provided in kind, eg labor costs

Components of Base Cost

In preparing the base cost, the following should be considered:

7. Safeguards-Related Costs

❑ Environmental management plans eg impact mitigation measures

❑ Monitoring measures
Contingencies
➢ Uncertainties throughout a project’s life.

1. Physical Contingency – associated with quantities and categories of

expenditures. The greater the uncertainty, the greater the physical
contingency allowance.

NOTE: As the design is refined, uncertainty regarding

the quantities of inputs should decline.

2. Price Contingency – provision for price increases over the project

implementation period, due to either inflation, foreign exchange movements
or expected real price increases
Financial Charges during Implementation

➢ comprise all financial charges during the project implementation

period.
1. Data • What data do you need? • Are the data readily available? • If the
data are not readily available, what are your alternatives? • Are the
organizations you need to collect the data from cooperative &
accessible? • Are non-disclosure agreements required?

2. Expectations • What is your expectation of the estimate? • What is the

expected outcome or usage of the estimate? (based on estimate type) •
What is the customer’s expectation of the estimate? • What is the team
expectation of the estimate? • What are the Agency-wide expectations
of the estimate outcome and usage?
3. Resources • How many people are required to conduct the estimate? •
How many people are available to conduct the estimate? • What is the
budget required to conduct the estimate? • What is the available budget
to conduct the estimate?

4. Schedule • How long have you been given to complete the estimate? •
How long do you need to complete the estimate, given the available
resources and data? • Do you have the resources needed to conduct the
estimate with the allotted schedule? • Do you have the time to collect
the required data and analyze the data?
1. Define Estimate’s Purpose
▪ Provide overall scope.
▪ Determine who will receive the estimate

2. Develop Estimating Plan

▪ Develop timeline
▪ Determine the approach

3. Define Program Characteristics

▪ Identify the program’s purpose, its system and performance characteristics
▪ Program procurement schedule and methodology
▪ Support and security needs
▪ System quantities for development, test and production
▪ Deployment and maintenance plans

4. Determine Estimating Structure

▪ Develop a cost estimating checklist
▪ Define a work breakdown structure and describe each work element
▪ Choose the best estimating method for each work element
5. Identify Ground Rules and Assumptions
▪ Clearly define what the estimates includes and excludes
▪ Identify program-specific assumptions
▪ Identify any schedule or budget constraints, inflation assumptions, and travel costs
▪ Specify equipment the government will provide

6. Obtain Data
▪ Create a data collection plan with emphasis on collecting current and relevant technical, cost,
and risk data
▪ Investigate possible data sources and document all pertinent information including an
assessment of data reliability and accuracy
▪ Collect data and normalize them for cost accounting, inflation, learning and quantity
adjustments
▪ Analyze data and compare against standard factors derived from historical data
▪ Store data for future estimates
7. Develop Point Estimate and Compare It to an Independent Cost Estimate
▪ Develop a cost model, estimating each work element using the best methodology from the
data collected, and including all estimating assumptions
▪ Time-phase the results by spreading costs in the years they are expected to occur, based on
the program schedule
▪ Sum the work breakdown structure elements to develop the overall point estimate
▪ Validate the estimate by looking for errors
▪ Compare estimate against the independent cost estimate and examine where and why there
are differences
▪ Update the model as more data become available

8. Conduct Sensitivity Analysis

▪ Test the sensitivity of cost elements to changes in estimating input values and key
assumptions
▪ Identify affects on the overall estimate of changing the program schedule or quantities
▪ Determine which cost elements are affected most by changes
9. Conduct Risk and Uncertainty Analysis
▪ Determine the technical risk associated with each work breakdown element and discuss it
with experts, if necessary
▪ Analyze severity and probability of each risk
▪ Identify the amount of contingency funding and add this to the point estimate to determine
risk-adjusted cost estimate
▪ Develop a risk management plan to track and mitigate risks

10. Document the Estimate

▪ Document all steps used to develop the estimate, for future reference

11. Present Estimate to Management for Approval

12. Update the Estimate to Reflect Actual Costs and Changes

▪ Keep the estimate current as the program progresses
▪ Document all changes to the program and how they affect the cost estimate
❑Also called “top-down” estimating or “historical
costing”

❑Draws from a purpose-built archive of historical project

data, often specific to an organization.

❑Can be quite accurate if used to form estimates for

similar projects and if experts can precisely assess the
factors affecting costs.
 Strengths Weaknesses Applications
▪ Based on actual ▪ Relies on single ▪ Early in the design
historical data In historical data point process
some cases ▪ Can be difficult to ▪ When less data are
▪ Quick identify appropriate available
▪ Readily understood analog ▪ Cross-checking
▪ Accurate for minor ▪ Requires ▪ In rough order-of
deviations from the "normalization" to magnitude estimate
analog ensure accuracy ▪ Architectural studies
▪ Relies on ▪ Long-range planning
extrapolation and/or
expert judgment for
"adjustment factors
❑ Provides the “most accurate” estimating technique if a complete
Work Breakdown Structure (WBS) is available.

❑ Also the most versatile estimating technique and you can use it for
many types of projects.

❑ But it can also be time-consuming, especially in large and complex

projects with numerous work breakdown structure components.
 Work Breakdown Structure is a decomposition of the project scope into
smaller, manageable components described in terms of tangible
deliverables(adjective-noun form), from the final project output level down to
the lowest level called work package

OPPCIS

Functional Project Operations

GUI Infrastructure Integration
Modules Management Manual
 Strengths
❑ Intuitive
❑ Defensible
❑ Credibility provided by visibility into
each cost element
❑ Severable; the entire estimate is
not compromised by the
miscalculation of an individual cost
element
❑ Provides excellent insight into
major cost contributors (e.g., high
dollar items).
❑ Reusable; easily transferable for
use and insight into individual
project budgets and performer
schedules
Weaknesses Applications
❑ Costly; significant effort (time and 1. Production estimating
money) required to create a build- 2. Negotiations
up estimate. Susceptible to errors 3. Mature projects
of omission/double counting 4. Resource allocation
❑ Not readily responsive to "what if"
requirements
❑ New estimates must be "built up"
for each alternative scenario
❑ Cannot by itself provide
"statistical" confidence level
❑ Does not provide good insight into
cost drivers (i.e., parameters that,
when increased, cause significant
increases in cost)
❑ Relationships/links among cost
elements must be "programmed"
by the analyst
❑ A method of estimating the cost of a project (or part of a project)
based on one or more project-based cost factors. Historical bid data is
commonly used to define parameters related to the cost of a typical
transportation facility construction, such as cost per lane mile, cost
per interchange or cost per square foot. Percentages can also be
used to estimate the cost of project elements based on historical cost
information. Parametric methods are often used in early estimating,
such as planning and scoping estimates. (Source: WSDOT working
definition)

❑ Effective in creating highly accurate estimates using unit costs for

projects that involve similar tasks with high degrees of repeatability.

❑ Unit costs must be accurate for this method to be effective.

 Strengths
❑ Once developed, Cost
Estimating Relations are an
excellent tool to answer many
"what if" questions rapidly
❑ Statistically sound predictors
that provide information about
the estimator’s confidence of
their predictive ability
❑ Eliminates reliance on opinion
through the use of actual
observations
❑ Defensibility rests on logical
correlation, thorough and
disciplined research, defensible
data, and scientific method
Weaknesses Applications
❑ Often difficult for others to 1. Design-to-cost trade studies
❑ understand the statistics 2. Long-range planning
associated with the Cost 3. Architectural/Eng studies
Estimation Relations 4. Sensitivity analysis
❑ Must fully describe and 5. Data-driven risk analysis
document the selection of raw 6. Software development
data, adjustments to data,
development of equations,
statistical findings, and
conclusions for validation and
acceptance
❑ Collecting appropriate data and
❑ generating statistically correct
data is typically difficult, time
consuming, and expensive
❑ Loses predictive
ability/credibility outside its
relevant data range
1. Feasibility Study: Analogous (if similar projects were undertaken recently) or
parametric

▪ Accuracy level: -25% to +50%

2. Design Concept: Analogous or parametric

▪ Accuracy level : -15% to +25%

1. Preliminary Design: Engineering estimate (bottom-up based on WBS) for

completed parts

▪ Accuracy level: -10% to +15%

2. Detailed Design: Bottom-up and Definitive estimate

▪ Accuracy level: -5% to +10%

 Approved Budget for the Contract (ABC)

1. Direct Cost
1.1 Cost of Materials
▪ Co Expenses for hauling to project site
▪ st at source
▪ Handling expenses
▪ Storage expenses
▪ Allowance for waste and/or losses, not to exceed 5% of materials
requirement
DPWH Department Order No. 197 s. 2016 dated October 7, 2016
Revised Guidelines in the Preparation of Approved Budget for the Contract
(ABC)
 Approved Budget for the Contract (ABC)

1. Direct Cost
1.2 Cost of Labor
▪ Salaries and wages, as authorized by the Department of Labor
and Employment
▪ Fringe benefits

DPWH Department Order No. 197 s. 2016 dated October 7, 2016

Revised Guidelines in the Preparation of Approved Budget for the Contract
(ABC)
 Approved Budget for the Contract (ABC)

1. Direct Cost
1.3 Equipment Expenses
Rental rates of equipment shall be based on the prevailing
“Association of Carriers and Equipment Lessors, (ACEL) Inc.”
approved for use by the DPWH.
Mobilization and demobilization shall be treated as a separate
pay item. Mobilization and demobilization shall not exceed 1% of
the Estimated Direct Cost (EDC) of the civil work items.
DPWH Department Order No. 197 s. 2016 dated October 7, 2016
Revised Guidelines in the Preparation of Approved Budget for the Contract
(ABC)
 Approved Budget for the Contract (ABC)

1. Direct Cost
1.4 Cost for Permits, Clearances and other Government Taxes shall
be included in the cost under Part B – Other General
Requirements of the Program of Works (POW) and
Estimate/ABC

DPWH Department Order No. 197 s. 2016 dated October 7, 2016

Revised Guidelines in the Preparation of Approved Budget for the Contract
(ABC)
 Approved Budget for the Contract (ABC)

2. Indirect Cost shall consist of the following:

2.1 Overhead Expenses – ranges from 7 – 11% of the EDC, which
includes the following:
▪ Engineering and Administrative Supervision
▪ Transportation allowances
▪ Office expenses
▪ Premium on Contractor’s All Risk Insurance (CARI)

DPWH Department Order No. 197 s. 2016 dated October 7, 2016

Revised Guidelines in the Preparation of Approved Budget for the Contract
(ABC)
 Approved Budget for the Contract (ABC)

Financing Cost
Premium on Bid Security
Premium on Performance Security
Premium on Surety for Advance Payment

DPWH Department Order No. 197 s. 2016 dated October 7, 2016

Revised Guidelines in the Preparation of Approved Budget for the Contract
(ABC)
 Approved Budget for the Contract (ABC)

2. Indirect Cost shall consist of the following:

2.2 Contingencies – ranges from 0.5% - 3% of the EDC.

2.3 Miscellaneous Expenses – ranges from 0.5% - 1% of the EDC.

These include laboratory tests for quality control and plan
preparation.

2.4 Contractor’s Profit Margin – shall be 8% of the EDC for projects

above P5Million and 10% for projects P5Million and below.
DPWH Department Order No. 197 s. 2016 dated October 7, 2016
Revised Guidelines in the Preparation of Approved Budget for the Contract
(ABC)
 Approved Budget for the Contract (ABC)

2. Indirect Cost shall consist of the following:

2.2 VAT Component – shall be 5% of the sum of the EDC, OCM and
Profit.

DPWH Department Order No. 197 s. 2016 dated October 7, 2016

Revised Guidelines in the Preparation of Approved Budget for the Contract
(ABC)
A life-cycle cost estimate provides a structured
accounting of resources and associated cost
elements required to develop, produce, deploy
and sustain a particular program.
LCC is a tool which evaluates the costs of an asset throughout
its life cycle starting from its purchase to disposal

Initial purchasing costs

+ Operating costs
+ Maintenance/service costs
+ Disposal costs
The Life Cycle Costing process can be as simple as a table of
expected annual costs or it can be complexmodel that allows for
the creation of scenarios based on aasumptions about future
costs.

A life cycle cost analysis involves the analysis of the costs of a

system or a component over its entire life span.
Acquisition costs are only the tip of the iceberg
 Maintenance
Cost
28%

Operating Cost
55%

Installation Cost
8%

Initial Cost
9%
❑ Typical costs for a system may include:

1. Acquisition Costs (or design and development cost)

2. Operating Costs (cost of failures, repairs, pares, downtime

costs, loss of production)

3. Maintenance Costs (Corrective, preventive and predictive

maintenance)

4. Disposal Costs