BASIC DEFINITIONS

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Contents

• BASIC DEFINITIONS
• COST PRICE MODULE (FOR CONSTRUCTION CONTRACTS)
• COST ESTIMATING PROCESS PROCEDURE
• COST ESTIMATING CLASSIFICATION
• COST ESTIMATING METHODOLOGIES
• FACTORS AFFECTING COST ESTIMATING ACCURACY
• CASE STUDIES

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Basic Definitions

• CAPITAL COST ESTIMATE (CAPEX)
• REPRESENTS THE TOTAL CAPITAL COST OF THE PROJECT,
  INCLUDING ENGINEERING, MATERIAL, CONSTRUCTION,
  AND MANAGEMENT COSTS.
• ALLOWANCES 2 Types Escalation Contingency
• Escalation is allowance to provide for future
  increases in Known Uncertainties - that are
  likely to occur due to the variance in time
  between the development of the estimate and the
  delivery and installation of the items.
• Sources
• (A) Market Conditions
• (B) Technological Changes (New materials such as
  corrosion resistance)
• (C) Governmental Action (special treatment of
  wastes )
• (D) General Inflation

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Basic Definitions

• CONTINGENCIES
• USED TO REDUCE THE RISK OF OVERRUN DUE TO
  POTENTIAL UNCERTAINTIES
• specific provision for un-foreseeable elements of
  cost within the defined project scope It is
  never an allowance for changes that have already
  occurred and is not intended to cover substantial
  changes in the project scope (change orders).
  Contingency varies for only one reason - a change
  in the degree of uncertainty associated with an
  item.
• Sources
• INCOMPLETE PROJECT DEFINITION (quantities,
  specifications)
• CURRENCY FLUCTUATION
• ERRORS
• ACTS OF GOD (RISK)

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Basic Definitions

• DIRECT COSTS
• COSTS DIRECTLY ATTRIBUTED TO A JOB OR A PIECE OF
  PROJECT EQUIPMENT

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Basic Definitions

• INDIRECT COSTS
• THESE ARE OFTEN REFERRED TO AS OVERHEAD COSTS
  AND CANNOT EASILY BE ALLOCATED TO ONE JOB OR
  PROJECTS.
• THE PROCESS OF RECOVERING OVERHEADS IS KNOWN AS
  ABSORPTION COSTING . CLIENTS FOR LARGE CAPITAL
  PROJECTS ARE VERY INTERESTED IN PROPOSED OVERHEAD
  RATES, CHARGEABLE TO PROJECTS AND REQUIRED
  DETAILED OF HOW THE OVERHEADS ARE TO BE ALLOCATED.

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Basic Definitions

• FIXED COSTS
• COSTS ARE SAID TO BE FIXED WHEN THEY REMAIN
  UNCHANGED AND MUST CONTINUE TO BE INCURRED, EVEN
  THOUGH THE WORKLOAD FLUCTUATES, (eg. MANAGEMENT,
  SALARIES , RENT INSURANCE.ETC.

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Basic Definitions

• VARIABLE COST
• THESE ARE COSTS WHICH ARE INCURRED AT A RATE
  DEPENDING ON THE LEVEL OF THE WORK ACTIVITY.
• E.G - MATERIAL
• - CONSUMABLES
• - SPARE PARTS
• - UTILITIES (POWER, WATER, STEAM)

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Cost Price Modle
COST


INDIRECT
PROFIT

• DESIGN
• MARKETING
• SALES
• ACCOUNTING
• PURCHASING
• MANAGEMENT
• WARRANTY
• LIABILITY
• ADMINISTRATION

• LABOUR
• MATERIAL
• COMPONENTS
• TOOLING

• MATCH
• SAFE
• INVESTMENT

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Cost - Price Model
DURATION (HOURS) X RATE /HR X CONSUMABLE FACTOR
CONSTRUCTION EQUIP.

LABOR COST
LABOR (MHRS) X /HR X SUPERVISION FACTOR

MATERIAL COST DELIVERY COST PURCHASING
INSPECTION COST
MATERIAL COST

DIRECT COST
TOTAL DIRECT COST

OVERHEAD, MOB. DEMOB., TEMPORARY FACILITIES ,
INSURANCE, ADMINISTRATION, MANAGEMENT,
ENGINEERING,ETC
INDIRECT COST

TOTAL COST
COST
X
PROFIT FACTOR
PRICE
PRICE
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Cost - Price Model
BP MC LEC a b MU contingencies
MC cost of all materials supplied by contractor
LEC costs of labor and equipment to needed
a overhead elements inherent to this specific
project type (e.g.. timing)
b common overhead elements inherent to almost
any kind of contract
x coefficient relating BP to "a, so that a
xBP
y coefficient relating BP to "b, so that b
yBP
MU mark-up, where MU zBP
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Cost - Price Model

• BP

MC LEC
contingency
1- (x y z)
OR
MC LEC a b
BP
contingency
1-z
Z will depend on market and economic factors
(Interest, Competition, ROI, Business trend
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Cost Estimating Process 1.0 Cost Estimation
Purposes

• BUDGET UPDATING/ REVISION
• NEW BUDGET PROPOSALS
• REVIEW BIDDERS RATES
• EVALUATE ALTERNATIVES / OPTIONS

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Cost Estimating Process 2.0 Capital Cost Major
Component

• Screening Studies
• Basic Engineering (FEED)
• Detailed Engineering
• Procurement Services

ENGINEERING

• Major Equipment
• Bulk Material
• Freight Transportation

MATERIAL
DIRECT COST

• Preliminaries (Mobilisation, Site Facilities,
  Site Running Costs)
• Civil, Mechanical, EI Works etc.
• Pre-commissioning / Commissioning

CONSTRUCTION
OWNER COST
INDIRECT COST
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Cost Estimating Process 3.0 In-House Cost
Estimate
Review Check
Output

• Quality
• Risks
• Contingency

Cost Data
Computer Tools
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Cost Estimating Process 4.0 Estimating Procedure

• PREPARE ESTIMATING REQUIREMENTS
• PLANNING THE ESTIMATE
• STRUCTURE THE ESTIMATE
• DEVELOPING THE ESTIMATE
• DEVELOPING CONTINGENCY
• DOCUMENTING
• REVIEW / ISSUE ESTIMATE

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Cost Estimate Classification International
Classification Practices
American Society of Professional Estimators (ASP
E)
Association of Cost Engineers (UK) ACostE
Norwegian Project Management Association (NFP)
ADCO EMPD Classification
ANSI Standard Z94.0
AACE Pre-1972
AACE Classification Standard
Concession Estimate
Class 4 40/-20 Screening / Feasibility
Order of Magnitude Estimate
Order of Magnitude Estimate -30/50
Order of Magnitude Estimate Class IV-30/30
Class 5
Exploration Estimate
Level 1
Feasibility Estimate
Class 3 30/-15 Conceptual / Prelim. Budget
Study Estimate Class III -20/20
Study Estimate
Class 4
Authorization Estimate
INCREASING PROJECT DEFINITION
Budget Estimate -15/30
Level 2
Budget Estimate Class II-10/10
Class 2 20/-10 Master Budget
Class 3
Preliminary Estimate
Master Control Estimate
Level 3
Level 4
Definitive Estimate
Class 2
Class 1 10/-5 Definitive / Control Budget
Definitive Estimate Class I-5/5
Definitive Estimate -5/15
Current Control Estimate
Level 5
Detailed Estimate
Class 1
Level 6
Extracted from AACE International Recommended
Practices and Standards
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Estimating Classification 1.0 Conceptual
Estimates
Order-of- Magnitude Method

• PREPARED BEFORE PROJECT STARTS
• HAZY INFORMATION
• DETAILS OF PROJECT YET TO BE DEVELOPED
• USEFUL FOR QUICK SCREENING AND PLANNING DECISIONS

• INTENDED ACCURACY 35

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order-of- magnitude

• END-PRODUCT UNITS,
• THE RATIO METHOD, and
• PHYSICAL DIMENSIONS IMETHOD.
• Order of magnitude estimates are very inaccurate.
  While the level of accuracy usually depends on
  the amount and quality of information available
  as well as the judgment and experience of the
  estimator, it is recommended that they be
  prepared with care, their limitations be
  recognized, and they be used with caution.

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END-PRODUCT UNITS

• This methodology is generally used when enough
  historical data exists from similar projects in
  order to relate the end-product (capacity units)
  of a project to its costs.
• Examples of the relationship between costs and
  end-product units are
• The cost of building an electric generating
  plant and the plant's capacity in kilowatts
• The construction cost of a hospital and the
  number of patient beds
• The development cost of a software program and
  the number of function points (screens, reports,
  calculations, etc.) to be included in the
  application and
• The construction cost of a parking lot and the
  number of parking spaces required.

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THE RATIO METHOD(Capacity Factoring)

• is one in which the cost of a new proposed
  project is derived from the cost of a similar
  project of a known capacity.
• B/A (CapB / CapA)e
• The exponent "e" (or the capacity factor) is
  actually the slope of the log-curve that is drawn
  to reflect the relationship between actual costs
  and capacities of two or more completed projects.
  
• If e lt 1 economies of scale

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The Physical Dimensions Method

• This type of order of magnitude estimate is the
  most popular of all
• Commonly used for estimating a variety of
  projects in the building construction industry.
• It is usually based on some physical dimensions
  such as square foot, cubic foot or linear foot
  (or meters) or its volume in cubic feet pipe
  lines may be estimated on a linear foot or mile
  basis.

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Estimating Classification 2.0 Study Estimate
Parametric Estimates

• PREPARED DURING PROJECT STUDY AND SCREENING PHASE
• BASED ON A GOOD OUTLINE PROJECT DEFINITION
• MAJOR PROJECT ELEMENTS
• SIZE / CAPACITY /VOLUME /AREA
• USEFUL FOR SCREENING ALTERNATIVES /OPTIONS
• PRELIMINARY FEASIBILITY STUDY
• MANAGEMENT DECISION

• INTENDED ACCURACY 20

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Parametric Estimates

• A parametric estimating model is a mathematical
  representation of one or more cost estimating
  relationships (CER's) that provide a logical and
  predictable correlation between the functional or
  physical characteristics of a project and its
  costs. (Gross enclosed floor area, Number of
  floors, Interior partitions, Roof area.)
• The key is to identify the significant project
  design parameters that can be defined with
  reasonable accuracy early in project scope
  development, and that are correlated with
  statistical significance to project costs.
• Both cost and design scope information must be
  identified and collected. It should be normalized
  for time, location, site conditions, project
  specifications, and cost scope.

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Parametric Estimates

• Drive regression of cost versus selected design
  parameters to identify the key cost drivers.
• it is necessary to do the following
• Have an effective cost accounting system.
• Prepare a database from the accounting
  history.
• Identify the different multipliers required to
  normalize the
• data (location factors, inflation factors, and
  project type factors).
• Exclude outliers.
• Do statistical analysis to find cost
  estimating relationships.
• Apply required multipliers.
• Prepare a template.

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Estimating Classification 3.0 Budget Estimate

• DEVELOPED DURING ENGINEERING PHASE 10-20 OF
  ENGINEERING
• BASED ON - WELL DEFINED DESIGN CRITERIA.

• INTENDED ACCURACY 15

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Budget Estimate

• It should be in considerable detail to conform to
  the project data that has been made available
  from continuing project engineering and design
  studies on the important features and from more
  extensive engineering geological investigations
  of site conditions.
• mainly for use in the proper preparation of
  construction plans and specifications, and a
  review of project economics.
• unexpected site and foundation conditions should
  be practically resolved
• It should be clear by now that a sound and
  realistic cost estimate, depends greatly on the
  accuracy and completeness of the information that
  is made available, and the time allowed for doing
  the work.

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Estimating Classification 4.0 Definitive
Estimate

• MOST DESIGN WORK COMPLETED.
• ALL MAJOR CONTRACTS / PURCHASE ORDER HAVE BEEN
  PLACED.
• USED TO UPDATE BUDGET FOR THE THE PURPOSE OF COST
  CONTROL.

• INTENDED ACCURACY 5-10

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Definitive Estimate

• more advanced and precise cost estimates
• based on complete plans and specifications
• included a complete list of the definite work
  items in the bid forms, which are used mainly as
  the basis for awarding contracts and for making
  payments on contract work

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General Case

• The Process of Estimating the Construction Cost
  of a Secondary Clarifier for a Wastewater
• Treatment Plant
• James L. Matthews
• Adapted from
• Cost Engineering, Vol. 46, No. 08, AACE
  International, 2004

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The secondary clarifier's function is to separate
solids from wastewater by serving as a settling
tank.
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• The purpose of this case is to better explain the
  process that the estimator must go through to
  properly prepare a detailed estimate of a
  wastewater treatment plant process unit. The unit
  as outlined is one of the main treatment steps in
  treating raw wastewater prior to discharge to
  streams or river or in some cases recycled to be
  used as irrigation water.
• The clarifier is one of the simpler units but the
  conditions which the estimator must take into
  account in determining the actual construction
  cost are more defined in relationship to the
  surrounding area, adjacent process units and
  overall constructability of the unit.
• The estimator must address several conditions
  during the process and conferring with the design
  team is a must in determining the actual scope of
  the design.

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• The estimator should pay close attention to the
  structural aspects of the tank and the excavation
  requirements as these will be a major portion of
  the overall cost of the project.
• Circular wall construction is in many ways more
  costly than rectangular wall construction and
  both the labor productivity and materials must be
  addressed at the time of take-off.
• Also, any special requirements and other tie-ins
  to other process units need to be accounted for
  before the final estimate is produced.
• For the purpose of this case, assume that the
  project will consist of a single 100-foot
  diameter secondary clarifier.

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• CSI Subdivisions
• 01300- Administrative Requirements
• 01500 - Temporary Facilities and Controls
• 02300 - Earthwork
• 02450 - Foundation and Load Bearing Elements
• 03100 - Concrete Forms and Accessories
• 03200 - Concrete Reinforcement
• 03300 - Cast-in-Place Concrete
• 05500 - Metal Fabrications
• 07100 Damp-proofing and Waterproofing
• 09900 - Paints and Coatings
• 11300 - Wastewater Treatment and

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• Disposal Equipment
• 15100 - Piping
• 15110 - Valves
• 16100 - Electrical

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Estimating Steps
Before beginning the estimate, the estimator must
become familiar with the project scope, drawings,
and specifications. The estimator should meet
with the design team to review these items in
detail and ensure the documents are clear, prior
to preparing quantity take-offs.
If there are issues either above ground or
underground that the contractor will encounter
during construction, or any other circumstances
that will affect the bid price, the estimator
should take care of. (Normalization for this
specific project)
verify the local wage rates, including all
fringes, so he or she can adjust the rate table
used in preparation of the estimate for the
particular project area.
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In the conceptual stage of the project
the estimator will need to make assumptions on

• materials,
• quantities,
• overall size of some of the piping
• determine the need for piles or special
  dewatering during construction.
• excavation, storage, and disposal of earthen
  material
• review the equipment specifications
• prepare the information to send to the
  appropriate vendors to request actual budget
  quotes to use in the estimate.

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In the actual quantity take-offs.
excavation
Rebar crew productivity
Wall construction
the concrete pour requirements
quantity of concrete finishing
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Effects of Geographical and Site
SpecificLocation of Process

• Wage rate,
• Transportation,
• Existence of other utilities,
• Surrounding area.
• All this may affect the design and/or the method
  of construction used, hence the cost.

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Season/Schedule Effects of the Process Work

• Seasonal weather,
• Process schedule (night shifts only),
• Labor productivity,
• Bulk Material delivery schedule,

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Assembling the take-off quantities and material
list.

• Site demolition,
• Excavation (hand or mechanical),
• Backfilling (Swell factor for un-compacted
  fill),
• Hauling

Foundation Requirements

• Are piles needed,
• Pile driving machines,
• Under-slab piping,
• Encasement,
• Formwork bracing

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Clarifier mechanism needs to be estimated

• Request a unit price from manufacturer, add
  assembly labor, cranes (may be add to overall if
  needed), welding material,

Determining the Electrical Requirement.

• Power control wiring for the drive unit,
  valves, lighting.
• Corrosive environment,

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Contingencies

• Depth of the process unit excavation,
• Unexpected groundwater intrusion because of
  depth,
• Unsuitable soil conditions resulting in piles,
• Installation of sheet-piling versus laid back
  slopes,
• Material pricing and delivery schedule,
• Work force availability,
• Existing utilities encountered and mandated shut
  downs for tie-ins, and
• Contractor familiarity with this type of
  construction

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Cost Estimating Methodology
Example (Process Equipment)
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Cost Estimating Methodology What is Process
Equipment

• Package Units
• chemical Dosing
• Water Treatment
• HVAC Equipment

PROCESS EQUIPMENT

• Engineered Equipment
• Columns
• Vessels
• Reactors
• Tanks

• Standard Equipment
• Pumps
• Compressors
• Fans

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Estimating Equipment Cost Methodologies (Direct
Cost)

• BUDGET PRICE
• PRICE TABLES
• PURCHASE ORDERS (FROM PREVIOUS JOBS)
• PRICE CURVES
• CALCULATION BASED
• EXPONENTIAL METHODS (COSTS SCALING)

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Estimating Methodologies Equipment Cost (Direct
Cost)

• ADJUSTMENT TO THE NEW NEW CONDITIONS
• Cost of Spare Parts
• Freight, Insurance, Transportation Cost
• Currency Exchange Rate
• Exclusions
• Escalation Formula
• Scaling Factor

• SOURCE OF DATA
• BUDGET PRICE
• PURCHASE ORDER
• BUDGET QUOTATION
• COST CURVES

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Estimating Methodologies Estimating Equipment
(Scaling Factor)
COST
E2
E1
x
COST E2 COST E1 X (size E2/ size E1)
SIZE
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Estimating Methodologies Estimating Equipment
Cost Calculation
MANHOLE
VESSEL WIGHT
NOZZLES

• Shell weight ? x D x L x t x s.g. W1 Kg
• Heads weight 2 x 1.3 x D x t x s.g. W2 Kg
• Others
• Internals W3 Kg
• Supports W4 Kg
• Nozzles W5 Kg
• Manhole W6 Kg
• ---------------
• Total Weight W
  Kg
• Estimated Cost W (Kg) X Unit Cost (Cost/Kg)

D
HEAD
SHELL
L
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Material Selection Impact on Equipment
FOB-COST VS WEIGHT CURVE - PRESS. VESSEL
FOB-VALUE
S.STEEL
V1
C.STEEL
V2
W
WEIGHT Kg
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Factors Affecting Project Final Cost

• 1.0 SCOPE OF WORK
• CLARITY OF SCOPE DEFINITION
• CHANGES IN SCOPE
• 2.0 TECHNICAL FACTORS
• DESIGN STANDARDS PRACTICES
• SAFETY ENVIRONMENT REQUIREMENTS
• SKILLS/COMPETENCIES
• 3.0 OTHERS
• PROJECT TIME FRAME/SCHEDULE
• INTERFACES WITH OTHER OPCOS
• PROJECT ORGANIZATION
• CURRENCY EXCHANGE RATES
• MARKET CONDITIONS

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Case Study 1
7.00 mtr
T- 1001
5.0 mtr
0.00 mtr

• TANK T-1001 NEEDS TO BE RE-PAINTED (EXTERNAL).
• MAINTENANCE RECEIVED A QUOTATION FOR
  BLAST-CLEANING AND PAINTING OF THE TANK. THE
  QUOTE EXCLUDES THE PROVISION OF THE SCAFFOLDING,
  ASSUMED TO BE PROVIDED BY THE OWNER. THE JOB IS
  PLANNED TO START ON MONDAY 1ST MAY AND WILL TAKE
  10 WORKING DAYS.
• THE MAINTENANCE DEPARTMENT REQUESTED YOU TO
  PROVIDE AN ESTIMATE OF THE COST FOR THE
  SCAFFOLDING.

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Case Study 1

• THERE IS A CURRENT SCHEDULE OF RATES CONTRACT
  WITH A SPECIALIZE COMPANY FOR PROVIDING OF
  SCAFFOLDING

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Case Study 1
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Case Study 1

• STEPS TO BE TAKEN
• 1.0 MAKE A (SIMPLE) WORK PLAN
• 2.0 DEVELOP SCOPE OF WORK
• 3.0 CALCULATE QUANTITY OF EACH ACTIVITY
• 4.0 APPLY APPLICABLE UNIT RATES
• 5.0 CALCULATE TOTAL COST

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Case Study 1

• WORKPLAN SCAFFOLDING FOR BLASTING/PAINTING
  T-1001.Dia 5 Mtr H 7 Mtr
• 1.0 ERECT STANDARD SCAFFOLDING (NO HEAVY EQT.
  ETC. INVOLVED) AROUND TANK.
• 2.0 PROVIDE WORKING FLOORS. FOR EASY WORKING AT
  VERTICAL CENTERS OF 2.0 Mtr.
• 3.0 FOR ENVIRONMENTAL REASONS PROVIDE FLEXIBLE
  SHEETING AROUND SCAFFOLDING.
• 4.0 PROVIDE 3 LADDERS
• 5.0 APPROVAL SAFETY ADVISER
• 6.0 SCAFFOLDING SHOULD BE READY BEFORE START OF
  THE WORK ON MONDAY 1ST MAY (WK18).

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Case Study 1
WORK SCHEDULE
START
WK18
WK19
WK 20
WK17
W/E
W/E
Blasting/painting
Scaffolding Ready
Start Dismantling Scaffolding
Renting Period Scaffolding
(16 Calendar Days )
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Case Study 1
D (d4)
d
Volume Scaffolding Õ/4 (D2 - d2) x H Õ/4(92 -
52) x 7 307 m3 (S400) Work Floor each Õ/4(D2
- d2) Õ/4(92- 52) 44m2 Total 3 x44m2 132m2
(WFR) Flexible Sheeting ÕD x H Õ x 9 x 9 - 254
m2 (ZR) Ladder 3 x 6 m1 18m1
(LA)
9
6
Work Floor
4
2
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Case Study 1 Cost Estimate Details
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Case Study 1

• POINTERS
• UNDERSTAND PROJECT REQUIREMENTS BEFORE DEFINING
  SCOPE.
• UNDERSTAND METHOD OF MEASUREMENT OF A SCHEDULE
  OF RATE CONTRACT.
• SELECT OPTIMUM IMPLEMENTATION PLAN.

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Case Study 2

• THE FOLLOWING COST INFORMATION IS AVAILABLE OF A
  SPECIFIC EQUIPMENT ITEM
• SIZE F.O.B COST
• 100 M3/hr US 50,000
• 200 M3/hr US 80,000
• QUESTION
• WHAT IS THE ESTIMATED COST FOR THE EQUIPMENT ITEM
  WITH A CAPACITY OF 300 M3/HR?

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Direct Cost Estimating Equipment Cost Calculation
COST
E2
E1
x
COST E2 COST E1 X (size E2/ size E1)
SIZE
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Case Study 2
THE SOLUTION 1)
80,000
50,000 2)
2 1.60 3)
LOG2 x (X) LOG 1.60 4)
0.301 x (X) 0.204 5)
(X)
0.678 Estimated Cost
X US80,000 US105,000
(X)
(X)
(0.678)