Cost Estimating 05

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Study of factors causing variability in project estim ate
Hastak, Makarand, M.S.

University of Cincinnati, 1991
Copyright © 1991 by H astak, M akarand. A ll rights reserved.
UMI
300N.ZeebRd.
Ann Arbor, MI 48106
UNIVERSITY OF CINCINNATI
March 5, 1991
I hereby recommend that the thesis prepared under

my supervision by Makarand Hastak____________
entitled Study o f factors cousins variability in project
estimate
be accepted asfu lfillin g this part o f the requirements fo r

the degree o f Master o f Science_______________
Approved by:
STUDY OF FACTORS CAUSING VARIABILITY
IN PROJECT ESTIMATE
A thesis submitted to the
Department of Civil and Environmental Engineering
College of Engineering
Division of Graduate Studies
UNIVERSITY OF CINCINNATI
in partial fulfillment of the
requirements for the degree of
MASTER OF SCIENCE
1991
by
MAKARAND HASTAK
B.E., Civil Engineering, Nagpur University,
Nagpur, India, 1987.
Committee Chair: Dr. Issam A. Minkarah
ABSTRACT
This thesis presents a new model for evaluating
percentage cost escalation in estimated project costs. This
PWPCE model takes into account all attributes that have a
potential for project cost escalation. It is based on an
intricate influence pattern generated by complex
interdependencies among the attributes. The model allows the
contractor to utilize his experience in evaluating the
probable weighted percentage cost escalation in the estimated
project cost. Additionally it calculates the probability of an
attribute occurring as a variable. The probability and
percentage cost escalation values obtained by using this model
can help a contractor to identify risk attributes.
Furthermore, the output of this model and the resulting
knowledge of risk attributes can be used as an effective cost
control measure. One of the outputs are, minimum and maximum
values for the probable cost escalation in the estimated
project cost by the end of a project. This information can be
used by contractors in appropriating contingency funds for a
project. The input required from the user is the conditional
probability that an attribute will occur as a variable, given
that its preceding attribute has occurred as a variable. Also
the probability and percentage cost escalation values for the
starting attributes are required as an input. Contractors can
easily provide these values based on their experience.
© Copyright Makarand Hastak 1991.
All rights reserved.
ACKNOWLEDGEMENTS
I would like to. express my sincere gratitude to Prof.
Issam Minkarah for his constructive advise and guidance
throughout this research. I am also thankful to the members of
my committee Prof. Andrew Bodocsi, Prof. Prahlad D. Pant and
Prof. George Suckarieh for their valuable support. Prof. Paul
Horn of the UC mathematics department, helped clarify certain
important mathematical aspects of the model. A special note of
thanks is due to Mr. John W. Slomba of Belcan Engineering
Services, Inc. for providing access to literature from which
this research has benefitted greatly.
ii
TABLE OF CONTENTS
CHAPTER PAGE
ABSTRACT i
ACKNOWLEDGEMENTS ii
TABLE OF CONTENTS iii
LIST OF FIGURES v
LIST OF TABLES vi
I INTRODUCTION
1.1 General Background. 01
1.2 Thesis Objective. 04
II THE ESTIMATING PROCESS AND ESTABLISHED VARIABLES 06
2.1 The Estimating Process. 06
2.1.1 Type of Estimates. 08
2.2 Estimating Techniques. 10
2.3 Opinion of Researcher's on Potential 15
Variables.
III RESEARCH APPROACH ANDMETHODOLOGY 22
3.1 Identification of Variables. 23
3.2 The Influence Pattern of the Variables. 23
3.3 The Probable Weighted Percentage Cost 42
Escalation Model.
3.4 Impact of Attributes on the Estimated 53
Cost Of the Project.
iii
IV CONCLUSION 57
4.1 Phases of Research. 58
4.2 Scope and limitations. 61
4.3 Conclusion. 62
4.4 Suggestions for further study. 63
LIST OF REFERENCE 64
ADDITIONAL READINGS 66
APPENDIX
Sample Project. 68
iv
LIST OF FIGURES
FIGURES PAGE
Figure-1. Influence pattern of Attributes. 07
Figure-2. Actual Equipment Cost. 36
Figure-3. Actual Labor Cost. 37
Figure-4. Project Management Cost & Construction 38
Support Indirect Cost.
Figure-5. Actual Material Cost. 39
Figure-6. Total Cost of Project/End of Work. 40
Figure-7. The Estimating Process. 41
Figure-8. Probability of Occurring as a Variable. 44
Figure-9. Normalized Weights. 49
Figure-10. Minimum and Maximum Percentage cost 52
Escalation in Estimated Project Cost.
LIST OF TABLES
TABLE PAGE
Table-I List of Attributes (Group-1) 24
Table-II List of Attributes (Group-2) 25
Table-Ill Precedence Chart of Attributes (Group-1) 27
Table-IV Precedence Chart of Attributes (Group-2) 29
vi
CHAPTER 1
INTRODUCTION
1.1 General Background
There is no business skill more important to the
construction industry than estimating. The success or failure
of a project depends to a great extent on the accuracy of
estimating at every stage of the project, may it be a
feasibility estimate, design estimate or a detailed contractor
estimate.
The accuracy of an estimate is equally important to the
project owner, his design team and the contractor. An accurate
estimate makes or breaks a contractor. Although contractors
put in a lot of time and effort in preparing a detailed
estimate, it is a common experience that the total cost of a
given project invariably differs from the previously estimated
cost of that project. Most of the times contractors/owners
have to face a cost overrun rather than a cost underrun. This
cost growth is sometimes in the range of 1.8 - 4.0 times the
Reproduced with permission o f the copyright owner. Further reproduction prohibited without permission.
initial estimate, especially in new technology plants.1 Was
there an error in quantity take-off or was the productivity of
resources not assessed properly? Are natural causes to be
blamed or the owner for his frequent changes? It is of concern
therefore, to study the factors which cause this variation in
a project-cost estimate.
While evaluating the cost of the new project, the
contractor's estimator usually consults the available data
bank of previously executed projects. Using this data bank, he
appropriates various factors like schedule and labor/equipment
productivity for the new project. However, without questioning
the completeness of the available data, the probabilistic
nature of these factors and their interrelationship with
numerous other factors cannot be neglected. For example, the
schedule of a project, apart from productivity of
labor/equipment, depends on many other factors like project
management, weather, change orders, error/rework, regulatory
approvals, etc. These factors in turn depend on many others
like the owner, management, nature of work, etc. As each
project differs, the exclusive use of the available data bank
cannot be justified.2 Thus the usual practice is to add a
1 James J. Diekmann, "Probabilistic Estimating: Mathematics

and Applications," Journal of Construction Engineering and
Management 109, no. 3 (September 1983): p. 306.
2 James J. Adrian, Construction Estimating: An Accounting and

Productivity Approach (Reston, Virginia: Reston Publishing
Co.,1982): p. 154.
contingency factor to the baseline estimate.3 Estimators after
calculating the cost of the project add a contingency factor
from their own side. This factor is called "engineering
contingency". It is added to increase the confidence level of
their estimate, such that, the probability of a cost overrun
or underrun is 50 percent (0.5). This estimate is then
submitted to the management for approval where a "management
contingency" is added to it to further increase the confidence
level.4 An estimator defines a contingency fund as
[a]n assessment, made by a professional, of the amount of

funds which, when added to the line item estimate, will
reflect the most likely final cost of the project given
relative stability of the scope and assumptions upon
which the estimate is based.5
One important point that is illustrated by the definition
of contingency fund is that the evaluation of this fund is
based on certain constraints and assumptions. Even if, the
scope of work is fixed before the initiation of the project,
the assumptions might vary. Furthermore, there are many other
factors which are relatively independent of the base line
estimate but have a potential of tremendous impact on the
overall cost of the project. Some examples of this would be
3 Patricia A. Owen and John K. Nabors, "Quantifying Risks in

Capital Estimates," 1983 Transactions of the AACE (1983): pp. B.5.1
- B.5.7.
4 K.T. Yeo, "Risk, Classification of Estimates, and
Contingency Management," Journal of Management in Engineering 6,
no.4. (October 1990): pp. 458 - 470.
5 John R. Healy, "Contingency Funds Evaluation," 1982

Transactions of the AACE (1982): p. B.3.1.
[Underlining were in the original].
inflation, regulatory approvals, wastage, weather conditions,
project management, etc. All these factors are potential
variables and might occur with different probabilities and
weights in different projects. A decision on a contingency
fund without a systematic consideration of all factors, their
interrelationships and their relative impact on the overall
cost of the project, is bound to be fallacious and
inconsistent. Therefore a new approach to the problem needs to
be taken, one that would account for the whole range of
possible variables that might lead to a cost overrun. The
objective of this thesis is to establish the factors that
cause variation in the estimated cost of a project, their
interrelationships and their effect on the overall cost of the
project.
1.2 Thesis Objective
In order to provide contractors and their estimators with
a more reliable way of estimating their projects, this thesis
aims at achieving the following objectives:
1. To ascertain the variables that cause project cost
escalation.
2. To establish the interdependencies of these variables.
3. To formulate the relationship of these variables with
respect to their probability of occurrence, weight
accredited to each of them and the percentage cost
escalation each variable causes on the total cost of the
project.
4. To study the overall impact of these variables on the cost
of the project.
CHAPTER 2
THE ESTIMATING PROCESS AND ESTABLISHED VARIABLES
In the field of construction, estimating has been defined
as a technique to approximately forecast the most probable
cost of the elements and efforts involved in a project with a
well defined scope.6 The probabilistic nature of an estimate
prevents it from being 100% accurate, no matter what is done
to improve the estimating process to gain a higher confidence
level in the estimate.
2.1 The Estimating Process
The estimating process in general can be illustrated as
in fig-1.7 A request for bids is placed by the owner or his
architect/engineer after evaluating a feasibility or
preliminary estimate of the project. The contractors,
6 Kenneth K. Humphereys, Jelen's Cost and Optimization

Engineering. 3rd. ed.(New York, NY: McGraw-Hill 1991): p.363; James
J. Adrian, Construction Estimating: An Accounting and Productivity
Approach (Reston, VA: Reston Publishing Co. 1982): p.2.
7 Adrian, p.152, Fig. 6.3.
C O N TR AC T
D O C U M E N TS
Q U A N T IT Y
T A Z E -O F F
P R IC IN G O F D E T E R M IN A T IO N OF
S U B -C O N T R A C T O R
D IR E C T LA B O R E Q U IP M E N T COST ESTIMATES
A N D M A T E R IA L
D E T E R M IN A T IO N O F D E T E R M IN A T IO N O F
JOB OVERHEAD COMPANY OVERHEAD
A D D IT IO N O F
P R O F IT
B ID
F IG U R E -!: THE ES TIM A TIN G PROCESS
(James J. Adrian, CONSTRUCTION ESTIMATING: An Accounting and

Productivity Approach, 01982, p.152. Reproduced by permission
of Prentsca-Hatt, /«&, Englewood Cliffs, NJ 07632)
interested in bidding for the project, purchase the contract
document and prepare a detailed or a conceptual cost estimate
of the project. The contractors' cost estimate includes
quantity take-off, pricing of direct labor and material,
determination of equipment cost, subcontractor estimates,
determination of job overhead, determination of company
overhead, addition of profit, and finally the compilation of
a bid.
The accuracy of the contractors bidding task, i.e., to
find the actual amount of his bid proposal can make or break
him. If the contractors team underestimates the cost of the
project, he might win the bid but it may be unprofitable as
the actual cost of the project might exceed his estimated
cost. The relative accuracy of the cost estimate also depends
to a certain extent on the type of estimate used to evaluate
the project. However, the definitive type of estimate prepared
by the contractors is by far the most accurate.
2.1.1 Type of Estimates
The selection of an estimating type depends to a
considerable extent on the purpose of the estimate, available
information, and on time demands.8 The American Association
of Cost Engineers classifies the estimate in three types,
based on their method of preparation and on their probable
8 Humphreys, p.368.
accuracies.9
1. Order of Magnitude: Cost-capacity curves, scale-up or down
factors, or ratio estimating techniques are often used to
prepare this type of estimate. However, detailed
engineering data is mostly not used. Probable accuracy:
-30 % to +50 %.10
2. Budget (Conceptual): Equipment details, flow sheets and
layouts are used to prepare this type of estimate. This
type does not refer to the budget as a project control
document but as an owner's budget. Probable accuracy:
-15 % to +30 %.11
3. Definitive: A complete set of specifications and a very
finely defined engineering data is used to prepare this
type of estimate. Probable accuracy: -5 % to +15 %.12
These different types of estimates are generally grouped
into two main categories: preliminary and detailed. The
"order-of-magnitude type" and "budget or conceptual type" of
estimate are included in the preliminary estimate category,
whereas the "definitive" type is included in the category of
detailed estimate. Definitive type is sometimes divided into
9 John R. Healy, "Contingency Funds Evaluation," 1982

Transactions of the American Association of Cost Engineers (1982):
p.B.3.3
10 David J. Peeples, "Capital Cost Estimates: Sensitivity to

Schedule," 1984 Transactions of the AACE (1984): pp. B.1.1 - B.1.5
11 Ibid.
12 Ibid.
semi-definitive (-15 % to +25 %), definitive (-10 % to +15 %)
and check (-5 % to +10 %).13 Estimates are not only used for
bidding but are also used for budget establishment,
feasibility study, obtaining government approvals, legal
claims, etc., therefore the degree of accuracy required in the
estimate varies from one purpose to another. For example, a
preliminary estimate might serve the purpose of an owner,
whereas a contractor requires a more precise estimate and
would therefore prefer to use a detailed estimate.
2.2 Estimating Techniques
Diverse estimating techniques are used by estimators to
come up with their desired type of estimate. To arrive at a
preliminary project cost estimate, the most commonly used
techniques are:14
1. Feasibility estimate.
2. Unit cost estimate.
3. Parameter estimating.
4. Factor estimating.
5. Range estimating.
6. Probabilistic estimating.
Feasibility estimate or owner's estimate, as the name
suggests, is prepared to determine the feasibility of building
13 Humphreys, p.369, Table 14.2.
14 For the following see: Adrian, p.101-149.
10
the project, irrespective of the financing. It helps the owner
to evaluate the benefits and costs involved in the project at
its conception. The most important concepts in a feasibility
estimate are life-cycle costs, depreciation costs, and debt
service. As at this stage the project drawings or even the
preliminary plans are not available, the accuracy of a
feasibility estimate primarily depends on the ability of the
estimator. The feasibility estimator should have a good
knowledge of project design, life of construction material,
pricing and should be well versed with accounting and related
tax laws.
Unit cost estimates are based on the unit cost of a
functional element such as cost-per-student, cost-per-bed or
cost-per-parking space. It is a measure of the cost of the
building relative to its function. It is very easy and fast to
work with. The cost-per-square-foot estimate is the most
prominent example of this type of estimate. The unit cost is
based on historical data and when multiplied by the total
area, gives the total cost of the project. Cost-per-cubic-foot
is sometimes used as a function, however, it is not very
reliable.
Parameter estimating is a relatively new technique. It
provides the owner with an approximate cost of the project.
Parameter cost estimates were first published by Engineering
News Record in 1966 and since then the periodical has expanded
the concept further. This technique allows an estimator to
11
allocate lump-sum cost to the various activities or attributes
of a project. Parameter measures, like gross enclosed floor
area, total basement floor area, number of floors including
basement, area of face brick, interior partitions, parking
area, etc., are selected and are then allocated to the various
activities/attributes of the project, one parameter to an
activity/attribute. Cost ratios are then calculated relative
to the parameter measure. For example, if a gross enclosed
floor area is the selected parameter with a value of 500,000
sf., and if the general conditions and fee for the project was
$1,645,000 then the cost ratio or the parameter cost would be
3.29. The parameter costs can be easily established by an
estimator from a previously executed project of a similar
nature or he can directly use published parameter costs. These
cost ratios or parameter costs can then be used to evaluate
the cost of the new project. This technique can be suitably
used by estimators to evaluate contractor bids.
Factor estimating is a technique in which a factor of 1.0
is assigned to a predominant activity cost and other
activities are then assigned factors proportionate to the cost
of that activity. For example, if in a project a factor of 1.0
is assigned to the cost of concreting with a projected cost of
$400,000, then the factor assigned to excavation with a
projected cost of $280,000 would be 0.7. These factors can
then be used by an estimator to evaluate the cost of a similar
new project.
12
Range estimating, as the name suggests, is the technique
in which a range is established for the unit cost and
quantities of the critical activities. Critical activities are
defined as those having a potential of causing a cost
variation of at the least 0 . 5 % in the conceptual and0.2 % in
the detailed estimate. The percentage variation is considered
over the total estimated cost of the project. If however,
profit is considered then activities causing variation of 5 %
and 2 % respectively are considered critical. All critical
activities are considered to be mutually independent.15
After finalizing the critical activities and their target
quantities, a probability that actual value will be equal to
or less than the target, is assigned to each activity. The
literature, however, does not clarify the use of this
probability in the subsequent computations. For each critical
activity, a lowest expected and a highest expected value is
ascertained, thus defining a range. There are no established
criteria for deciding on the lowest and the highest expected
value for an activity. The estimator here, has to rely on his
instinct or that of his col leagues/superiors. Then a model is
prepared to establish the mathematical relationship between
the quantities, unit costs and the total cost of the project.
When Monte Carlo simulation is conducted on the accumulated
data, using a personal computer 1000 scenarios are generated,
15 Michael W. Curran, "Range Estimating: Reasoning with Risk,"

1988 Transactions of the American Association of Cost Engineers
(1988): pp. N.3.1 - N.3.9
13
each giving a bottom line cost. These results when plotted in
the form of a graph, with cost along y-axis and percentage
probability of overrun along the x-axis, one gets an s-curve
with a practical maximum and minimum. This graph can be
suitably used to evaluate the amount of contingency required
to reduce the probability of a cost overrun.
Range estimating is promoted as a decision technology, to
be used in conjunction with the conventional estimating,
rather than a new estimating technique.
Probabilistic estimating is a relatively new technique.
The point estimates commonly prepared may or may not indicate
the most probable value of the estimate. The future cost of
most of the elements is usually unknown in an estimate. These
cost elements can therefore be considered as random variables.
In probabilistic estimating these variables are assumed to
have a probability distribution function which is continuous,
unimodal, non-negative and real valued. Direct analytical
techniques, the central limit theorem, approximation for a
general function and simulation are some of the probabilistic
estimating procedures.16
A contractor's detailed estimate or definitive estimate
is one of the most important types of estimate, governing the
actual cost of building the project. A detailed estimate is
prepared by careful evaluation and pricing of the quantities
of work, material, labor and equipment involved in the
16 James E. Diekmann, pp.297-308.
14
project. A contractor usually sublets part of the work to
specialty contractors or sub-contractors. The general
contractor (or prime contractor) collects the estimates
prepared by the sub-contractors, adds them to his own, then
after including the job and company overhead comes up with his
estimated cost of the project. Addition of profit to this
estimate completes a contractor's bid.
The various estimating types vary in accuracy and detail.
The contractor's detailed estimate is by far the most accurate
in predicting the line item costs. Range estimating also
provides quite an accurate projection of a line-item cost
overrun. However it only considers the critical line items and
does not account for certain other factors, which have a
potential for tremendous impact on the total cost of the
project.
2.3 Opinion of Researcher's on Potential Variables
Herbsman17 and Stukhart18 have pointed out the adverse
effect of inflation on project cost. Herbsman has suggested a
forecasting model whereas Stukhart suggests that the increase
17 Zohar Herbsman, "Long-Range Forecasting Highway Construction

Costs," Journal of Construction Engineering and Management 109, no.
4. (December 1983): pp. 423-434.
18 George Stukhart, "Sharing the Risks of the Cost of

Inflation," 1982 Transactions of the American Association of Cost
Engineers (1982): pp. M.1.1 - M.1.7
15
in cost due to inflation should be shared equally by the
parties involved in the project. Inflation causes an upward
change in the cost of labor, material and equipment and thus
adversely affects the estimated cost of a project.
A detailed project estimate is based on a predetermined
schedule for that project. The total cost of the project,
particularly with large, long-term projects, is significantly
affected by changes in schedule and project plans. Changes in
a schedule can also have a considerable impact on worker
morale, equipment cost, job overhead, project management cost
or construction support indirect cost, company overhead and
labor cost. Peeples has pointed out that, due to inflation and
interest rate the value of every dollar in a capital cost
estimate depends on its expenditure in time. Therefore, every
cost element can be considered to be schedule dependent.19
Parisi and Schlunt have divided the time sensitive costs
into three groups, displacement cost, disruption cost and
extended cost. Displacement cost has been defined as the cost
incurred due to, execution of work in a time frame other than
originally anticipated, e.g., effect of inflation on labor and
material cost and additional cost of performing work in an
unfavorable seasonal condition. Disruption cost relates to
costs incurred due to change in work strategy, e.g., poor
planning, change orders, overtime, acceleration and suspension
of work, etc. Extended cost has been defined as the time
19 Peeples, p.B.1.2.
16
dependent fixed cost, e.g., job site overhead and home office
overhead.20 Parisi and Schlunt have classified construction
delays into three types, excusable/compensable, excusable/non-
compensable, and non-excusable. Excusable/compensable type are
usually owner-caused delays like, failure to obtain a building
permit, failure to prepare building site, etc. Excusable/non-
compensable type are the delays caused by unforseen events
beyond the contractor's control. They are, unusual weather,
fire, etc. Under these circumstances the contractor is excused
for the delay but is not paid for it. The third category of
non-excusable delays are contractor caused delays like,
improper work management, delay in performance by
subcontractors, failure to procure material and equipment on
time, etc. The contractor is neither compensated for them nor
excused.21 Yeo has also mentioned schedule changes as one of
the major causes of cost overrun.22
Stukhart and Adrian have illustrated the probabilistic
nature of labor, equipment and material cost and its impact
on the total estimated cost of the project. Adrian illustrates
the point that, labor and material costs form the major
portion of a contractor's project cost estimate. Therefore it
is important that due consideration should be given to the
20 Ronald F. Parisi and Robert J. Schlunt, "Construction Delay

Claims: Treatment of Extended overhead," 1983 Transactions of the
AACE (1983): pp. C.2.1 - C.2.7.
21 Ibid.
22 Yeo, p.459.
17
accuracy of these costs. However, these costs depend on many
other factors which are probabilistic in nature. Labor cost
directly depends on labor productivity, whereas productivity
in turn can be related to variables like worker morale, crew
balance, prior training of workers, prior experience of
workers, age of workers, weather conditions, degree of
management leadership, repetitive nature of work and
difficulty of work.23 Depending on the type of project,
equipment cost can be a considerable portion of the project
cost estimate. Sometimes "application process" is used to
calculate the equipment cost. In this process the labor and
material costs is multiplied by a factor to come up with the
equipment cost, however, the accuracy of this method is
doubtful.24 Equipment cost also depends on equipment planning
and productivity.25 Stukhart has explained the importance of
materials management for construction industry. He has pointed
out certain problem areas in materials management which can
adversely effect the project cost. They are, slow placement of
purchase orders, poor supplier performance, poor site
distribution at job site, poor quality control, poor inventory
control at job site, incomplete specifications and changes by
23 Adrian, p. 154.
24 Ibid, p. 155.
25 George Stukhart, "Materials Management Report: Business

Roundtable Construction Industry Cost Effectiveness Project
(CICE)," 1983 Transactions of AACE (1983): pp. K.6.1 - K.6.6.
18
engineering.26 Adrian has provided a list of factors that
affect material cost. They are supply of material, demand for
material, quantity purchased, location of material purchased,
need of storage of material, quality of material needed and
materials management.27
Herbsman has discussed the influence of "Bidding Volume
Index" on the total cost of the project. Bidding volume index
is defined as the total volume of work in a certain area at a
certain time span. If bidding volume is high for a particular
year, more jobs are created and as a result costs are also
high, on the other hand costs are forced down if bidding
volume is low for that year. Herbsman also pointed out the
effect of rising cost of material, labor, equipment and
subcontracting work on the total cost of the project.28
Owen and Nabors have pointed out the effect of variables
like productivity, schedule, labor rates, escalation,
regulatory approval and weather uncertainty on the project
cost. They pointed out that the productivity of union workers
was influenced by the unemployment rate in that specific area.
The higher the unemployment rate the harder the workers would
work.29 In an earlier article, Nabors has discussed the
26 Ibid.
27 Adrian, p. 155.
28 Zohar Herbsman, "Long-Range Forecasting Highway Construction

Costs," Journal of Construction Engineering and Management 109, no.
4. (December 1983): pp. 423-434.
29 Patricia A. Owen and John K. Nabors, pp. B.5.1-B.5.7.
19
adverse impact of changes on the construction cost and
schedule. He has cited a project in which 700 change orders
were processed. To solve the problem, econometric techniques
were used. A time series model was developed to predict the
future behavior of a variable. In such a model, the influence
of other factors on the variable is not considered.30 This
was again the topic of the April, 1990 Construction Industry
Institute report.31 The ClI report suggests that any
additional costs resulting directly or indirectly from the
change, should be borne by the owner. In other words, if the
owner issues a change order, then the direct or indirect
impact of this change on the project activity and its cost
shall be evaluated and then reimbursed to the contractor.
However, a proper record of change orders is not always
maintained. Change orders might thus result in a loss for the
contractor.
Bullis has described some major reasons for field cost
variance. They are design changes, insufficient manpower
supply high turnover of force, poor supervision, poor
craftsmen, poor productivity, labor relations problem,
weather, unanticipated soil conditions, underground
30 John K. Nabors, "Forecasting Final Project Cost With

Econometric Techniques," 1982 Transactions of the AACE (1982): pp.
A.4.1-A.4.5.
31 Cost/schedule Controls Task Force of the Construction

Industry Institute, ed., The Impact of Changes on Construction Cost
and Schedule (Austin, TX: Bureau of Engineering Research at the
University of Texas, 1990).
20
obstruction, unanticipated interferences, error, rework and
equipment and material and schedule/quality problem.32
Other important factors that can cause variations in
project cost estimates are wastage during handling/delivery
and execution, mathematical errors, omissions at the stage of
quantity take-off, estimators experience, site management,
misinterpretation of specifications or drawings and the
manhours the estimator put in preparing • the estimate.
Furthermore, the interdependency of these variables also play
a major role in influencing the final cost of the project.
Peter J. Bullis, "Practical Cost Control: Techniques and Timing,"

1984 Transactions of the AACE (1984): p. A.1.3, Table-4.
21
CHAPTER-3
RESEARCH APPROACH AND METHODOLOGY
In the previous chapters it has been shown that the
accuracy of an estimate is of prime importance to the
contractor. Although estimates are prepared with meticulous
care, no comprehensive approach is available to account for
all the variables that influence the total cost of the
project. Some further research is therefore required to
understand the precise behavior of these variables in the
estimating process. The objective of this research is to
identify these variables, to establish the influence pattern
of these variables with respect to the estimating process and
to understand their collective impact on the project cost
estimate.
This chapter explains the methodology and procedure
followed in carrying out this study. The research was carried
out in four stages.
22
3.1 Identification of variables
It is of importance to properly identify the attributes
that occur as variables and cause project cost escalation. In
this research, potential variables were ascertained by using
the available literature. As these variables come into play at
different stages in the life of a project, they were arranged
into two groups. The attributes (potential variables), that
influence the project before it has started, were included in
group-one. Group-two included the attributes that come into
play after the project has started. The project cost estimate
was considered as the dividing line between the two groups. A
complete list of attributes in the two groups was thus
prepared (Table-I and Table-II). However, this thesis deals
with group-two only, i.e., the attributes which come into play
after the project has commenced.
3.2 The Influence pattern of the Attributes
Available literature not only helped in identifying the
potential variables but also to understand the
interrelationship among the attributes. It was found that the
attributes are highly interdependent and an intricate
influence pattern is obtained. The results have been
summarized in Table-Ill and Table-IV.
To a considerable extent, the management or project team,
23
TABLE - I (GROUP - 1)
S. NO. ABBR, DESCRIPTION OF ATTRIBUTE

1. A INTERPRETATION OF SPECIFICATIONS & DRAWINGS
2. A1 SCOPE OF WORK
3. B QUANTITY TAKE-OFF
4. B1 MATHEMATICAL ERROR
5. B2 OMISSION
6. B3 ESTIMATOR'S EXPERIENCE
7. B4 ESTIMATING TECHNIQUE USED
8. . B5 MANHOURS AVAILABLE TO PREPARE THE ESTIMATE
9. B6 AVAILABLE DATA BANK
10. B7 COSTING OF DIRECT LABOR/MATERIAL/EQUIPMENT
11. C MANAGEMENT OR PROJECT TEAM
12. Cl JOB PLANNING
13. C2 EQUIPMENT SELECTION
14. C3 SCHEDULE & DURATION OF PROJECT
15. C4 PROJECT MGMT. COST/CONST.SUPPORT INDIRECT COST/FINANCE COST
16. C5 SUB-CONTRACTOR ESTIMATE
17. C6 SUB-CONTRACTOR SELECTION
18. D TOTAL ESTIMATED COST OF THE PROJECT
TABLE - II (GROUP - 2)
S.NO. AfiBR* DESCRIPTION OF ATTRIBUTE
1 c Management or Project team.

2 Cl Job Planning.
3 C2 Proper selection of equipment.
4 C3 Schedule and Duration of Project.
5 C4 Project management cost/Const, support indirect cost.
6 E Actual Equipment cost.
7 El Actual Equipment Productivity.
8 F Change orders.
9 G Regulatory approvals.
10 H Unanticipated soil conditions/Interferences/Underground obstructions.
11 I General environment.
12 J Error and Rework.
13 L Actual Labor cost.
14 LI Actual Labor Productivity.
15 L2 Worker morale
16 L3 Crew balance.
‘CONTD. ..
S. HO* ABBR. DESCRIPTION OP ATTRIBUTE*
17 L4 Prior experience/training of workers.

18 L5 Repetitive nature of work.
19 L6* Difficulty of work.
20 L7 Weather conditions.
21 M Actual Material cost.
22 Ml Demand and supply of material/equipment at site.
23 M2 Quantity of material purchased.
24 M3 Location of material purchased.
25 M4 Need of storage of material.
26 M5 Quality of material needed.
27 0 Owner/A&E.
28 R Availability of Resources.
29 S Site management.
30 SI Site location.
31 0 Labor Union.
32 V Bidding Volume Index.
33 w Wastage.
34 T Total cost of Project/End of work.
TABLE - III (GROUP-1)
S.NO. ABBR. DESCRIPTION OF ATTRIBUTE PRECEDING FOLLOWING
ATTRIBUTE ATTRIBUTE
1. A INTERPRETATION OF SPECIFICATIONS & B3 A1
DRAWINGS
2. A1 SCOPE OF WORK A B
3. B QUANTITY TAKE-OFF A1 D
4. B1 MATHEMATICAL ERROR B3 D
5. B2 OMISSION B3 D
6. B3 ESTIMATOR'S EXPERIENCE START (ST) B1,B2,B4,B7,A
7. B4 ESTIMATING TECHNIQUE USED B3 D
8. B5 MANHOURS AVAILABLE TO PREPARE THE C b
ESTIMATE
9. B6 AVAILABLE DATA BANK START B7
10. B7 COSTING OF DIRECT B3,B6 D
LABOR/MATERIAL/EQUIPMENT
11. C MANAGEMENT OR PROJECT TEAM START B5,Cl ,C2 ,C3 ,C
6
12. Cl JOB PLANNING C D
13. C2 EQUIPMENT SELECTION C D
14. C3 SCHEDULE & DURATION OF PROJECT c C4
CONTD...
S. HO. ABBR. DESCRIPTION OF ATTRIBUTES PRECEDING FOLLOWING

ATTRIBUTE ATTRIBUTE
15. C4 PROJECT MGMT. COST/CONST.SUPPORT C3 D
INDIRECT COST/FINANCE COST
16. C5 SUB-CONTRACTOR ESTIMATE C6 D
17. C6 SUB-CONTRACTOR SELECTION C C5
18. D TOTAL ESTIMATED COST OF THE PROJECT B,B1,B2,
64,65,67,01,02,
C4,C5 1
to
09
TABLE ~ IV (GROUP - 2)
S.NO. ABBR. DESCRIPTION OF ATTRIBUTE PRECEDING ATTRIBUTE FOLLOWING
ATTRIBUTE
1. c MANAGEMENT OR PROJECT TEAM START(ST) Cl,C2,S ,R
2. Cl JOB PLANNING C El, LI
3. C2 PROPER SELECTION OF EQUIPMENT C El
4. C3 SCHEDULE & DURATION OF PROJECT F,G,J,R L,E,C4
5. C4 PROJECT MGMT. COST/CONST. SUPPORT C3,H T
INDIRECT COST
6. E ACTUAL EQUIPMENT COST El,C3 T
7- . El ACTUAL EQUIPMENT PRODUCTIVITY Cl,C2,L2,L3,L4,L5,L6, E
L7
8. F CHANGE ORDERS 0,S C3
9. G REGULATORY APPROVALS O C3
10. H UNANTICIPATED SOIL START C4
CONDITIONS/INTERFERENCES/UNDERGROU
ND OBSTRUCTIONS
11. I GENERAL ENVIRONMENT START T
12. J ERROR AND REWORK S C3,M
13. L ACTUAL LABOR COST L1,C3 T
14. LI ACTUAL LABOR PRODUCTIVITY Cl,L2,L3,L4,L5,L6,L7 L
CONTD...
S.NO. fcBBR. DESCRIPTION OF ATTRIBUTE PRECEDING ATTRIBUTE FOLLOWING

ATTRIBUTE
15. L2 WORKER MORALE. S Ll,El
16. L3 CREW BALANCE S LI, El
17. L4 PRIOR EXPERIENCE/TRAINING OF u Ll,El
WORKERS
18. L5 REPETITIVE NATURE OF WORK START Ll, El
19. L6 DIFFICULTY OF WORK SI Ll,El
20. L7 WEATHER CONDITIONS SI Ll, El
21. M ACTUAL MATERIAL COST W ,R ,J ,M2,M3,M4,M5 T
U> 22. Ml DEMAND AND SUPPLY OF S R,M2,M4
o
MATERIAL/EQUIPMENT AT SITE
23. M2 QUANTITY OF MATERIAL PURCHASED Ml,SI M
24. M3 LOCATION OF MATERIAL PURCHASED SI M
25. M4 NEED OF STORAGE OF MATERIAL Ml, SI M
26. M5 QUALITY OF MATERIAL NEEDED 0 M
27. 0 OWNER/A&E START M5,F,G
28. R AVAILABILITY OF RESOURCES Ml,S1,U,C C3,M
29. S SITE MANAGEMENT C,U L2,L3,M1,F,W,
J
CONTD...
S. NO. ABBR. DESCRIPTION OF ATTRIBUTE PRECEDING ATTRIBUTE FOLLOWING

ATTRIBUTE
30. SI SITE LOCATION START L6,L7,R ,
M2,M3,M4
31. U • LABOR UNION V L4,R,S
32. V BIDDING VOLUME INDEX START U
33. w WASTAGE S M
34. T TOTAL COST OF THE PROJECT/END OF M, E, C4 ,1,L ---
WORK
influences the availability of resources on site, site
management, job planning and proper selection of equipment for
the project. Managements' laxity in making the required
resources available at site on time can have an adverse effect
on the schedule and duration of the project. Lack of resources
can also have an incremental effect on the material cost of
the project. Many decisions on site require confirmation from
the head office or the management/project team. An error or
delay in taking these decisions might affect a cost sensitive
attribute, resulting into a possible cost escalation. Proper
job planning and selection of equipment is very important for
the success of a project, mismanagement in these aspects can
have a considerable impact on the equipment productivity. Low
equipment productivity would directly influence the equipment
cost.
Many factors, other than lack of resources, can be held
responsible for the change in schedule and duration of a
project, such as, error and rework, change orders and
regulatory approvals.33 Error and rework can be attributed to
improper site management, whereas management of regulatory
approvals is often handled by the owner. Change orders are
either issued by the owner to the contractor or by the
contractor to the sub-contractor.
33 Peeples.
32
Change in a project schedule has an adverse effect on the
worker morale, thereby affecting labor productivity. As every
cost element in an estimate is schedule dependent, a change in
schedule has a negative effect on the equipment cost, labor
cost, job overhead, finance cost, company overhead, project
management cost and construction support indirect cost.34
Actual labor and equipment cost, i.e., the total cost of labor
or equipment incurred by the end of the project, also depends
on actual labor and equipment productivity. Actual labor and
equipment productivity is defined as the actual productivity
achieved during the course of the project. This productivity
value might be different than the value assumed during the
estimating stage. The variability in productivity can be
attributed to factors like worker morale, crew balance, prior
training of workers, repetitive nature of work, difficulty of
work, weather conditions, job planning and proper selection of
equipment.35 Repetitive nature of work would depend on the
scope, as defined in the contract document. Nothing much can
be done about the effect of weather on productivity, however,
all other factors affecting productivity can be controlled to
a considerable extent by the management or site team.
The management decides on the degree of site
34 Ibid.
35 Adrian, p. 154.
33
investigation required for the project, however, this decision
influences the probability of facing unanticipated soil
conditions, unanticipated under ground obstructions and
interferences. If faced, these unanticipated conditions can
have an incremental effect on the project management cost and
construction support indirect cost, which add up to increase
the total cost of the project.
Site management is one of the major factors. It
influences a large number of attributes other than what have
been mentioned earlier like supply of material, demand for
material, quantity of material purchased, location of material
purchased, need of storage of material, wastage and
error/rework. Wastage increases the actual material cost
whereas material cost and error or rework add up to increase
the total cost of the project.36 Quantity of material
purchased, location of material purchased and need of storage
of material are attributes influenced by the location of site.
Site location also influences the difficulty of work. Weather
condition at site can be approximated with respect to the site
location.
Labor union is much influenced by the bidding volume
index, which is defined as the volume of work available in an
area in a specific time span. Bidding volume index for a
36 Adrian, p. 155.
34
particular area is governed by factors like political
situation, unemployment, stock market behavior, etc., and is
thus beyond the scope of this research. Labor union influences
factors like prior training/experience of workers,
availability of resources and site management. There are
certain factors which are beyond the control of the management
or the owner such as, recession in a country, war, world
situation, inflation, etc. These factors have.been clubbed
under general environment.
Finally the total cost of the project depends on five
attributes. They are, actual material cost, actual labor cost,
actual equipment cost, general environment and the project
management cost/construction support indirect cost. Actual
material cost, actual equipment cost and actual labor cost
indicates the total cost of material, equipment and labor
respectively, i.e., the cost experienced by the end of the
project. The intricate influence pattern of the attributes as
described, is illustrated graphically in Fig.-2.
Figures 3 to 6 show the influence pattern of attributes
actual equipment cost (E), actual labor cost (L), project
management cost and construction support indirect cost (C4)
and actual material cost (M) respectively. Whereas, Fig.-7
illustrates the attributes influencing the end-of-the-project
cost.
35
OF ATTRIBUTES
PATTERN
FIG UR E-2: INFLUENCE
START
COST
EQUIPMENT
FIGURE-3: ACTUAL
<o START
/ 1
✓ N.
38
L, Ki
o
o
39
COST
MATERIAL
FIG U R E S : ACTUAL
START
"40
WORK
OF
COST OF PROJECT/END
o
FIGURE-7: TOTAL
.41
3.3 The Probable Weighted Percentage Cost Escalation Model
The Probable Weighted Percentage Cost Escalation model
was developed based on:
(1) The probability that an attribute will act as a variable,
i.e., the probability that over the course of the project, the
cost or status of an attribute will differ from what was
assigned to it at the estimating stage. For example, the labor
productivity obtained during the course of the project might
differ from what was assumed at the estimating stage.
Similarly, at the estimating stage a non-variable status might
be assigned to the attribute, management or project team.
However, there is a possibility that during the course of the
project the management or project team might make a decision
error, influencing many other attributes. This would change
the non-variable status of the attribute, management or
project team, to a variable. The probability of this event
cannot be neglected.
To determine the probability associated with each
attribute, three assumptions were made:
(1) If an attribute is influenced by a set of attributes,
containing more than one element, then the attributes in
that set are considered to be independent.
(2) All the attributes are conditionally dependent on their
preceding attribute(s ).
42
(3) There is a probability that, although an attribute has
occurred as a variable, the attributes influenced by it
might not occur as variables, i.e., if attributes, B and
C are influenced by an attribute A then it is possible
that [ l - p ( B U C ) ] * 0 , B and C being independent.
To satisfy assumptions (2) and (3) conditional
probabilities are required at every step in the influence
pattern of the attributes. These conditional probabilities can
be generalized for all the projects. The author proposes to
conduct an extensive questionnaire survey to collect data on
conditional probabilities of attributes, weight accredited to
the members of a group of attributes influenced by a common
attribute and the percentage cost escalation due to them.
However for the sample project, conditional probabilities were
assigned using an educated judgement. The conditional
probabilities were then used to calculate the global
probabilities of the attributes, with respect to the
probability of their preceding attribute. In order to
calculate the probability of an attribute influenced by more
than one attribute, the following steps were taken,
(1) conditional probabilities were calculated for the
attribute, with respect to all its preceding attributes.
(2) a union of these conditional probabilities would then
provide the probability of the attribute. The example in
Fig.-8 illustrates this point.
43
C4
C3
Ml
P R O B A B IL IT Y PRO BA F O L L O W IN G ATTRIBUTE
PREC B IL IT Y
A T T R I E D IN G D U E TO
OF A T T R I C O N D I PROBA
BUTE PR E C E T IO N A L
ATTR S U M PRO D BUTE B IL IT Y
A TTR I
IB U T E D IN G
A T T R I UCT PROBA
BUTE B IL IT Y
BUTE
F 0.084 L 0.90 0.159
G 0.023
C3 0.189 0.012 0.177
E 0.80 0.142
J 0.037
R 0.045 C4 0.90 0.159
F IG U R E -8:P R O B A B IL ITY OF OCCURING AS A VARIABLE
44
Attribute, schedule and duration of project (C3), is
influenced by attributes regulatory approval (G), change
orders (F), error and rework (J) and availability of resources
(R). Attributes G and F are influenced by attribute, owner/A&E
(0), whereas, F and J are influenced by attribute, site
management (S). Attribute R is influenced by attributes,
demand and supply of material/equipment at site (Ml), site
location (SI), labor union (U) and, management or project team
(C). For C3 to act as a variable it is sufficient for either
G, F, J or R to act as a variable. With the information that
either G, F, J or R can occur as a variable conditional
probabilities for C3 were calculated, i.e.,
p(C3 ! G), p(C3 | F), p(C3 | J) and p(C3 | R)
These conditional probabilities were then multiplied with
the probability of G, F, J and R respectively to calculate the
global probabilities associated with C3. In other words the
intersection of C3 with G, F, J and R was calculated.
Conditional probability of C3, given G has occurred as a
variable, is defined as,37
37 J. R. Benjamin and C. A. Cornell, Probability. Statistics,

and Decision for Civil Engineers (New York, N.Y.: McGraw-Hill Book
Co., 1970): pp. 44-50.
45
p(C3 I G) = p(C3 n G) t p(G)
•* p(C3 n G) = p(C3 i G) X p(G)
p(C3 | G) is undefined if p(G) = 0
Therefore the probability of C3, given G, F, J and R have
occurred as variables would be the union of global
probabilities of C3 with respect to G, F, J and R, i.e.,
p(C3) = p[(C3 n g ) u (C3 n f ) u (C3 n j) u (C3 nr )]
however, from assumption (1) it is known that G, F, J and R
are independent, i.e.,
P[(C3 n G) | (C3 n F)] = p(C3 n g)
p(c3 n, g ) n p(C3 n f) -f p(c3 n f) = p(c3 n g )
-> p(c3 n g) n p(c3 n f) = p(C3 n g) x p(C3 n f)
Therefore using the independence of G, F, J and R
p(C3) = p(C3 n G) + p(C3 n f) + p(C3 n j) + p(C3 n r )
- [{p(C3 n G) x p(C3 n F)} + {p(C3 n G) x p(C3 n J)}
+ {p(C3 n g ) x p(c3 n r )} + {p(c3 n f ) x p(C3 n j)}
+ {p(C3 n f) x p(C3 n R)} + {p(c3 n j) x p(C3 n R)}]
+ [{p(C3 n g) x p(c3 n F) x p(c3 n j)} + {p(c3 n g)
x p(C3 n F) x p(c3 n R)} + {p(c3 n F) x p(C3 n j) x
46
p(C3 n R)} + {p(C3 n G) x p(C3 n j) x p(C3 n r) }]
- [p(C3 n G) x p(c3 n F) x p(C3 n j) x p(C3 n r)]
However, if the accuracy of computing the probability is
only required up to three significant digits then the
following equation is sufficient.
p(C3) = p(C3 n G) + p(C3 n f ) + p(C3 n j) + p(C3 n r )
- [{p(C3 n G) x p(C3 n F)} + {p(C3 n G) x p(.C3 n J)}
+ {p(C3 n G) x p(C3 n R)} + {p(C3 n F) x p(C3 n J)}
+ {p(C3 n F) x p(c3 n r)} + {p(c3 n j) x p(c3 n r)}]
The probability of attributes with more then one
preceding attribute can be similarly calculated. Once the
probability that C3 will occur as a variable is known, the
conditional probabilities of its following attributes can be
calculated. The attributes influenced by C3 are actual labor
cost (L), actual equipment cost (E) and project management
cost and construction support indirect cost (C4) . The
conditional probabilities [p(L C3)] and the global
probabilities [p(L fl C3)] of L, E and C4 as calculated are
shown in column six of the table in Fig.-8.
The probabilities associated with all the attributes of
a sample project are illustrated in the Appendix. To calculate
these probabilities it is necessary to make an educated guess
47
for the probabilities of the starting attributes. This can be
done based on the prior experience of the firm. The starting
attributes are management or project team (C), unanticipated
soil conditions, interferences or underground obstructions
(H), general environment (I), repetitive nature of work (L5),
owner/A&E (0), site location (SI), and bidding volume index
(V).
(2) Weighted percentage cost escalation in the estimated
project cost due to each attribute, assuming that the
attribute occurs as a variable. It can be said that, the
percentage cost escalation in the estimated project cost
because of an attribute would be, the cumulative percentage
cost escalation due to the attributes influenced by it. This
point has been illustrated in the example in Fig.-9. The
attributes, job planning (Cl), proper selection of equipment
(C2), site management (S) and, availability of resources (R)
are influenced by the attribute, management or project team
(C). If for some reason attribute C occurs as a variable then
there is a possibility that its following attributes Cl, C2,
S and R might occur as variables. But if Cl, C2, S and R occur
as variables then they have an independent capacity to cause
certain percentage cost escalation in the estimated project
cost. Therefore it can be said that, the percentage cost
escalation due to the attribute C would be the cumulative
48
C2
F O L L O W IN G ATTR IB U TE
P A IR W IS E C O M P A R IS IO N R E LA TIV E N O R M A L IZ E D
A T T R - A RRT1-
FO R % COST ESCALATION W E IG H T W E IG H T
B U TE BUTE
M IN MAX M IN MAX M IN MAX
1.0 1.0 1.0 1.0 0 .2 3 0.2 2

Cl
|
0 .7 5 1.0 o!<5 1.0 0.75 0.6 0 .1 7 0 .1 3
C2
C 1 1
1 1
S 1.0 2.0 1.0 3.0 1.50 1.8 0 .3 4 0.4 0
t |
1
R 0 .7 5 0.6 1.13 1.1 0 .2 6 0 .2 5
TOTAL 4.38 4.5 1 .0 0 1.00
FIG U R E -9: N O R M ALIZED WEIGHTS
49
percentage cost escalation due its following attributes Cl,
C2, S and R. The proportion in which Cl, C2, S and R influence
the percentage cost escalation due to C can be calculated by
assigning weights to each one of them. However, as a range of
values should be considered for the percentage cost escalation
due to each attribute, the same proportion might not apply for
both minimum and maximum values. Therefore separate weights
were assigned for the minimum and maximum percentage cost
escalation due to the following attributes. To calculate the
weights, a temporary weight of 1.0 was assigned to Cl and it
was then compared with C2, similarly a pairwise comparison was
done between C2 and S and S and R. In the following step,
relative weights were calculated for Cl, C2, S and R with
respect to Cl. These relative weights were then normalized to
add up to one. As explained earlier, two sets of weights were
assigned to the following attributes, one for maximum and the
other for minimum percentage cost escalation. The calculation
has been illustrated in the example in Fig.-9. The calculation
of normalized weights for all the attributes in the sample
project has been illustrated in the Appendix (Normalized
Weights).
To calculate the weighted percentage cost escalation due
to each attribute it is necessary to assign minimum and
maximum percentage cost escalation values to the starting
attributes. This would vary from firm to firm and thus should
50
be done based on the prior experience of the firm. For the
sample project an educated guess was made to ascertain the
maximum and minimum percentage cost escalation due to the
starting attributes. Once the percentage cost escalation due
to the starting attributes has been ascertained, the
percentage cost escalation due to the following attributes can
be calculated based on their normalized weights. This process
has been illustrated through an example in Fig.-10. Attribute,
availability of resources (R) is influenced by attributes,
demand and supply of material/equipment at site (Ml), site
location (SI), labor union (U) and management or project-team
(C). Furthermore, attribute R influences attributes, schedule
and duration of project (C3) and actual material cost (M). The
percentage cost escalation due to R would then be the sum of
individual cost escalations in R due to its preceding
attributes Ml, SI, U and C, i.e., cost escalation in R if each
one of its preceding attributes independently occur as a
variable. The percentage cost escalation due to C3 and M,
given R has occurred as a variable, would be the product of
their normalized weights and the total percentage cost
escalation due to R. The weighted percentage cost escalation
due to each attribute in the sample project has been
illustrated in the Appendix (Minimum and Maximum Weighted
Percentage Cost Escalation).
Once the probability of occurring as a variable and the
51
C3
Ml
P R EC E D IN G A TTR IB U TE
A T T R I
FO LLO W IN G ATTRIBUTE
ATTRIBUTE % C.E
BUTE
% COST
A T T R IB U T E ESC A LA N O R M A L IZ E D * COST
M IN M A X ATTR1 W E IG H T
E S C A L A T IO N
T IO N
BUTE
M IN MAX M IN MAX M IN MAX
Ml 0.4 9 0 .6 7
C3 0 .5 7 0 .6 7 3.33 9.1
SI l.IS 2 .8 0
R 5.84 1 3 .56
u 1.60 3 .84
M 0 .43 0.33 2 .5 1 4 .4 6
c 2 .6 0 6 .2 6
F IG U R E -1 0 :M IN IM U M & M A X IM U M PERCENTAGE COST ESCALATION
I N ESTIMATED PROJECT COST
52
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission
minimum and maximum weighted percentage cost escalation due to
all the attributes is ascertained, the probable weighted
percentage cost escalation can be calculated by multiplying
the probability and cost for each attribute. This has been
illustrated in the Appendix (Probable weighted Percentage Cost
Escalation).
3.4 Impact of Attributes on the Estimated Cost of the Project
The PWPCE model was tried on a sample project. The
project cost was calculated for the attributes including the
attribute end-of-the-project. The probable weighted percentage
cost escalation in the estimated project cost due to an
attribute is defined as the weighted percentage cost
escalation in the estimated project cost, if and only if the
attribute occurs as a variable, given all the attributes
preceding it have occurred as variables.
In the sample project, probabilities were assigned to the
starting attributes, management or project team (C, 0.10),
unanticipated soil condition, interferences and underground
obstructions (H, 0.05), general conditions (I, 0.15),
repetitive nature of work (L5, 0.06), owner/A&E (O, 0.05),
site location (SI, 0.04) and bidding volume index (V, 0.06)
and it was found that the probability that the end of the
53
project cost (T) would vary from the estimated project cost
was 0.60. The major contributors to this high probability were
the five end attributes, actual material cost (M, 0.216),
actual equipment cost (E, 0.210), project management cost and
construction support indirect cost (C4, 0.201), general
conditions (I, 0.135) and finally the actual labor cost (L,
0.240). The figures in brackets indicate attribute and its
probability of occurring as a variable. A few other attributes
which indicated a high probability of occurring as a variable
were, labor union (U, 0.06), site management (S, 0.102),
Availability of resources (R, 0.075), labor productivity- (LI,
0.096), change orders (F, 0.084), equipment productivity (El,
0.079) and schedule and duration of project (C3, 0.177).
As per the definition of PWPCE model, the probable
weighted percentage cost escalation associated with an
attribute holds true only if it occurs as a variable, given
that all attributes preceding it have occurred as variable.
PWPCE for an attribute is the product of the probability
associated with the attribute and the cumulative weighted cost
escalation in it, expressed as a percentage of the estimated
project cost. For example in the sample project, the PWPCE
associated with the attribute total cost of the project or
end-of-work cost (T) is minimum 21.60 % and maximum as 43.12
%, this escalation in cost is true only if the probability
that T would occur as a variable is 0.60. In other words it is
54
the sum of 60 % of individual cost escalation in T due to its
preceding attributes, M, E, C4, I and L. However it would be
noticed that the sum of PWPCE associated with M, E, C4, I and
L is not equal to the PWPCE associated with T. This comes from
the definition of PWPCE model that the PWPCE value indicates
the percentage escalation in cost associated with an
attribute, if and only if it occurs as a variable, given that
its preceding attributes have occurred as variables. For
example PWPCE associated with E is derived from the product of
the probability that it occurs as a variable given its
preceding attributes equipment productivity (El), and schedule
and duration of project (C3) have occurred as variables and
the sum of the weighted percentage cost escalation in E
because of the variability in El and C3. From this it implies
that their is no direct relation between the PWPCE associated
with an attribute and the PWPCE value associated with its
preceding attribute(s ).
Multiple iterations can be performed by giving different
probability values to the starting attributes and obtaining
the probability of T occurring as a variable. However, as
there are seven starting attributes it would be highly
laborious to perform multiple iterations. The author proposes
to computerize the PWPCE model so that it becomes possible to
study the changes in cost due to various iterations. Multiple
iterations and the probabilities of attributes generated
55
thereof can help the management in pin-pointing the attributes
which have a high probability of occurring as a variable. The
knowledge of high risk attributes can help the management in
controlling the project cost by maintaining tighter control on
these attributes. Furthermore the PWPCE value associated with
the end-of-the-project cost would enable management to take a
sound decision on the contingency fund for the project.
56
CHAPTER 4
CONCLUSION
The accuracy of a project cost estimate is very important
for the success of a project. Contractors and owners take
meticulous care in preparing an estimate, however, it is
rarely seen that the total project cost equals this estimate.
The most common approach taken to counter this problem is the
addition of a contingency fund to the estimated project cost.
So far, no comprehensive approach has been available to
account for all attributes that influence the total cost of a
project.
The objective of this study has been to identify the
attributes which have a potential to occur as variables and
thus cause a project cost escalation. Furthermore this study
ascertained their influence pattern and finally established a
mathematical relationship between these attributes.
57
4.1 Phases of Research
The study was carried out in four stages. First, all
attributes that have a potential for causing a project cost
escalation were identified through an extensive literature
survey. These variables were arranged in two groups, according
to their emergence at different stages of the project. The
potential variables like quantity take-off, mathematical
error, omission, estimator's experience, costing of direct
labor/material/equipment, etc., which come into play before
the project has started, were included in group one. Group two
includes the potential variables which influence the project
after it has started.
In the second stage, the influence pattern of attributes
was determined with the help of available literature. It was
observed that all the attributes were highly interdependent.
As a result an intricate influence pattern was obtained. Seven
attributes were categorized as starting attributes and the
influence pattern was developed from them.
In the third stage of the study, a four tier model was
developed to establish the mathematical relationship between
the attributes. The PWPCE model provides the probable weighted
percentage cost escalation value for the last attribute (i.e.,
the total cost of the project/end of work) and also for all
other attributes. In the first tier of the model, normalized
58
weights are calculated for all the attributes following a
common attribute. These values of normalized weight were used
later in the third tier to determine the percentage cost
escalation due to various attributes. The normalized weights
were calculated for minimum and maximum percentage cost
escalation. This provides a relationship between the ranges of
percentage cost escalation due to attributes which have a
common preceding attribute in the influence pattern.
The probability of an attribute occurring as a variable
is calculated in the second tier of the model. This
probability of an attribute to occur as a variable is
calculated based on the knowledge that its preceding attribute
has occurred as a variable. Probability values are assigned to
the starting attributes based on past experience of the user.
The user also has to provide the conditional probabilities for
the following attributes. These conditional probabilities are
converted into global probabilities by multiplying them with
the probability of the preceding attribute. The global
probabilities thus collected from all preceding attributes,
are then used to calculate the probability of that attribute.
Similar calculations are carried throughout the influence
pattern, arriving at the probability of the total cost of the
project.
If the attributes occur as variables, they have a
potential to cause a certain percentage cost escalation in the
59
estimated project cost. This escalation is calculated in the
third tier of the model. Minimum and maximum percentage cost
escalation values are assigned to the starting attributes
based on the user's experience. The normalized weights
calculated in the first tier, are then used to appropriate the
percentage cost escalation due to all other attributes in the
influence pattern. The minimum and maximum values thus
obtained indicate the percentage cost escalation in the
estimated project cost if an attribute occurs as a variable.
In the fourth and last tier of the model, the probability
obtained in the second tier and the minimum and maximum
percentage cost escalation obtained in the third tier are
multiplied to obtain the probable weighted percentage cost
escalation in the estimated project cost. The PWPCE value thus
obtained is different for all attributes. There is no direct
relationship between the PWPCE value of an attribute and the
PWPCE value of its preceding attribute. The PWPCE value
obtained is unique for each attribute. This is because the
PWPCE value associated with an attribute, indicates the
project cost due to that attribute, if, and only if, all its
preceding attributes have occurred as variables. Due to the
intricate influence pattern of the attributes, most of them
have different preceding attribute(s ). The influence of an
attribute on each of its following attributes is also
60
different.
In the final stage of the study, the PWPCE model was
applied to a sample project in order to study its
effectiveness. Normalized weights were calculated and an
educated judgement was made to assign probability and
percentage cost escalation values to the starting attributes.
It should be noted that the PWPCE values obtained are
dependent on the normalized weights, conditional probabilities
and the values assigned to the starting attributes. Therefore
care needs to be taken in assigning these values.
4.2 Scope and Limitations
The scope of this model is manyfold. It provides the
probability of an attribute occurring as a variable during the
course of the project. It also provides the weighted
percentage cost escalation in the estimated project cost due
to an attribute, if it occurs as a variable. Finally, the
model provides the probable weighted percentage cost
escalation in the estimated project cost due to each variable.
There are a few limitations of this model. The user will
have to provide the values for probability and percentage cost
escalation for the starting attributes. Also the conditional
probabilities for attributes have to be provided, given that
their preceding attribute has occurred as a variable. Finally,
61
the accuracy of the model depends on the values supplied by
the user. However, these limitations can be overcome if the
user takes due care in providing the values. The values
required from the user relate to past experiences of the firm.
Furthermore, these values might differ from project to project
and from situation to situation.
4.3 Conclusion
The output of this model can be used beneficially by
contractors and estimators in evaluating the contingency fund
for a project. The minimum and maximum PWPCE values associated
with the total cost of the project will enable the management
to take a sound decision on the contingency fund. The
probabilities associated with the attributes can be used to
isolate the risk attributes. From this model, two kinds of
risk attributes can be identified: (1) the attributes that
have a high probability of occurring as a variable but cause
a low percentage cost escalation, and (2) the attributes that
have a low probability of occurring as a variable but can
cause a considerable percentage cost escalation in the
estimated project cost. Furthermore, the knowledge of risk
attributes will be beneficial to the management for effective
project control. The output of this model can also be used as
a cost control document. The project cost can be kept under
62
check by keeping a tighter control on the functions of the
risk attributes.
4.4 Suggestions for Further Study
The effectiveness of this model can be improved further
by standardizing the conditional probabilities for the
attributes. This objective can be achieved by. conducting a
national survey, sending a suitable questionnaire to the top
500 construction firms.
As the model requires lengthy calculations, it is tedious
to perform multiple iterations manually. It will therefore be
beneficial to computerize the model. Results thus obtained can
be used to study the behavior of attributes against each
other. If presented graphically, these behavior patterns can
be used directly by contractors and estimators.
63
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70
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INFORMATION TO USERS

The quality of this reproduction is dependent upon the quality of the

Oversize materials (e.g., maps, drawings, charts) are reproduced by

Photographs included in the original manuscript have been reproduced

University Microfilms International

Study of factors causing variability in project estim ate

Hastak, Makarand, M.S.

Copyright © 1991 by H astak, M akarand. A ll rights reserved.

I hereby recommend that the thesis prepared under

be accepted asfu lfillin g this part o f the requirements fo r

A thesis submitted to the

Department of Civil and Environmental Engineering

Division of Graduate Studies

in partial fulfillment of the

requirements for the degree of

B.E., Civil Engineering, Nagpur University,

Nagpur, India, 1987.

Committee Chair: Dr. Issam A. Minkarah

This thesis presents a new model for evaluating

percentage cost escalation in estimated project costs. This

PWPCE model takes into account all attributes that have a

potential for project cost escalation. It is based on an

intricate influence pattern generated by complex

interdependencies among the attributes. The model allows the

contractor to utilize his experience in evaluating the

probable weighted percentage cost escalation in the estimated

project cost. Additionally it calculates the probability of an

attribute occurring as a variable. The probability and

percentage cost escalation values obtained by using this model

can help a contractor to identify risk attributes.

Furthermore, the output of this model and the resulting

knowledge of risk attributes can be used as an effective cost

control measure. One of the outputs are, minimum and maximum

values for the probable cost escalation in the estimated

project cost by the end of a project. This information can be

used by contractors in appropriating contingency funds for a

project. The input required from the user is the conditional

probability that an attribute will occur as a variable, given

that its preceding attribute has occurred as a variable. Also

the probability and percentage cost escalation values for the

starting attributes are required as an input. Contractors can

easily provide these values based on their experience.

All rights reserved.

I would like to. express my sincere gratitude to Prof.

Issam Minkarah for his constructive advise and guidance

throughout this research. I am also thankful to the members of

my committee Prof. Andrew Bodocsi, Prof. Prahlad D. Pant and

Prof. George Suckarieh for their valuable support. Prof. Paul

Horn of the UC mathematics department, helped clarify certain

important mathematical aspects of the model. A special note of

thanks is due to Mr. John W. Slomba of Belcan Engineering

Services, Inc. for providing access to literature from which

this research has benefitted greatly.

TABLE OF CONTENTS iii

1.1 General Background. 01

1.2 Thesis Objective. 04

II THE ESTIMATING PROCESS AND ESTABLISHED VARIABLES 06

2.1 The Estimating Process. 06

2.1.1 Type of Estimates. 08

2.2 Estimating Techniques. 10

2.3 Opinion of Researcher's on Potential 15

III RESEARCH APPROACH ANDMETHODOLOGY 22

3.1 Identification of Variables. 23