Construction Cost Variables 1 Running Head: Construction Cost Variables

Construction Cost Variables 1 Running head: Construction Cost Variables

Construction Cost Variables Argosy University R7103 Solutions Orientated Business Research Methods Professor: Dr. Alfredo Herrera August 10, 2009

Construction Cost Variables 2 Abstract Project Management techniques are examined outlining preliminary considerations used to bid a project. Linier regression is one of the possibilities discussed to evaluate labor, material, equipment, and risk escalation calculation in the preparation of a construction bid.

Construction Cost Variables 3 Construction Cost Variables Problem Statement Your company builds roads, bridges, schools, and other multi-million dollar public construction projects. Competitive bids are invited for the contracts to undertake these projects. For each project, there are three costs involved: •

Best estimate of what the project will cost the company

•

Adjusted cost on which the company bases its bid

•

Actual cost incurred towards completing the project

Find out whether the cost estimates that are made before the bidding process are accurate predictors of the actual costs of completed projects Assumptions Based on the problem statement it is assumed: the project is large in scope and at least one year in duration. The economic, political environment, and infrastructure is stable and will not produce variations outside the normal escalation range for material, delays, and labor costs. Access to past project data similar to the project in question is available and has no serious flaws in documentation of past costs and problems encountered. The majority of the material, labor and equipment will be procured locally, or is owned by the company. Equipment used in the construction of the project will be in reasonable working order or suitable back-up equipment is readily available. Work Breakdown Schedule Assessment of Risk Examination of past project data will provide an order of magnitude for the basis of the initial estimate. The best estimate can only be produced by constructing a work breakdown schedule of to the task level necessary to evaluate the hours required to complete each task, the materials used, and the equipment necessary for that step. In this manner, a Project Manager will be able to evaluate the ability to calculate the best distribution of resources, labor, material,

Construction Cost Variables 4 equipment. In other words the project will not be overmanned, have too much material on site, or suffer delays from equipment that is over utilized by the need to be at several task sites at one time. Load leveling of manning, equipment requirements and evaluation of the materials needed can be performed under the “perfect” scenario situation. Assessment of Risk The next step will be to consider the risks associated with labor or material interruptions, equipment, malfunctions. Risk can be thought of in four possibilities: Unforeseeable, mitigation of risk, transfer of risk, or acceptance of Risk. There are types of risk that can not be predicted and have a very low probability of occurrence- unforeseen. Risk mitigation is accomplished by the identification of the most likely of risks and taking steps to reduce the impact to the project.risk planning. This could include having extra equipment available, sub contracting portions of the project. Risk transfer could be the purchase of insurance for fire flooding or theft of building materials. And finally there is risk acceptance, things like storms or earthquakes that have an increased possibility but still have a low probability of happening. Recover =y plans should still be considered for these events and addressed in the bid contract- Force Majeure. First Estimate Using the labor, material, and equipment costs linier regression would be a method to evaluate escalation costs of labor, material , and replacement of equipment during the length of the project. Additional considerations would have to be given to the possibility of failure of one or more of the areas, linier regression analysis, to create a parametric to establish an appropriate contingency cost buffer. This completed the same steps would have to be taken with the weighted average of the risks associated with the project. An initial bid can be constructed using

Construction Cost Variables 5 the appropriate contract language. The contract would offer an initial price subject to conditions that may be discovered by inspecting the site. These conditions may not be apparent to preliminary inspection such as subterranean ground conditions, the proximity of water to the surface, or other environmental conditions that would affect the cost of the project and would require contract clauses to allow cost adjustments to compensate. Actual Costs Actual costs are the labor paid, the material used, and the equipment rental fees, or equipment repairs and depreciation. Other indirect costs could be the loss of future projects if the stakeholders are not satisfied and the project is not closed-out properly and met the full scope of the contract-completed properly. This could result in rework or litigation that- very real costs. Summary Best estimate is based on ideal conditions but the contract should allow for contingencies that may not be discovered, even with due diligence, during the bidding process. Appropriate adjustments to the bid must be made to allow for escalation of labor, materials, equipment, risk mitigation, and anticipated delays during the project.

Construction Cost Variables 6 Reference A GUIDE TO THE PROJECT MANAGEMENT BODY OF KNOWLEDGE (PMBOK GUIDE), 4th ed, Project Management Institute