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Improving the Accuracy of Early Cost Estimates for Federal Construction Projects Committee on Budget Estimating Techniques Building Research Board Commission on Engineering and Technical Systems National Research Council NATIONAL ACADEMY PRESS WASHINGTON, D.C. 1990 .

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NOT ICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee respon- sible for the report were chosen for their special competencies and with regard for appropriate balance. This report has been reviewed by a group other than the authors according to procedures approved by a Report Review Committee consisting of members of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technol- ogy and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Frank Press is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administra- tion and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering pro- grams aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Robert M. White is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and upon itS own initiative, tO identify issues of medical care, research, and education. Dr. Samuel O. Thier is president of the Institute of Medicine. The National Research Council was established by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy's purposes of furthering knowledge and of advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Frank Press and Dr. Robert M. White are chairman and vice chairman, respec- tively, of the National Research Council. This report was prepared as part of the technical program of the Federal Construction Council (FCC). The FCC is a continuing activity of the Building Research Board, which is a: unit of the Commission on Engineering and Technical Systems of the National Research Council. The purpose of the FCC is to promote cooperation among federal construction agencies and between such agencies and other elements of the building community in addressing technical issues of mutual concern. The FCC program is supported by 14 federal agencies: the Department of the Air Force, the Department of the Army, the Department of Commerce, the Department of Energy, the Department of the Navy, the Department of State, the General Services Administration, the National Aeronautics and Space Administration, the National Endowment for the Arts, the National Science Foundation, the U.S. Postal Service, the U.S. Public Health Service, the Smithsonian Institution, and the Veterans Administration. Funding for the FCC program was provided through the following agreements between the indicated federal agency and the National Academy of Sciences: Department of State Contact No. 1030-621218; National Science Foundation Grant No. MSM-8902669, under master agreement 8618641; and U.S. Postal Service grant, unnumbered. For information regarding this document, write the Director, Building Research Board, National Research Council, 2101 Constitution Avenue, Washington, DC 20418. Printed in the United States of America

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Building Research Board (1989-1990) Chairman RICHARD T. BAUM, Consultant, Jaros, Baum and Bolles, New York, New York Members LYNN S. BEEDLE, University Distinguished Professor of Civil Engineering and Director, Council on Tall Buildings and Urban Habitat, Lehigh University, Bethlehem, Pennsylvania GERALD L. CARLISLE, Secretary-Treasurer, International Union of Bricklayers ~ Allied Craftsmen, Washington, D.C. NANCY RUTLEDGE CONNERY, Consultant, Woolwich, Maine RAY F. DeBRUHL, Executive Vice President, Davidson and Jones Corporation, Raleigh, Norm Carolina C. CHRISTOPHER DEGENHARDT, President, EDAW, Inc., San Francisco, California DAVID R. DIBNER, Vice President and Principal Architect, Sverdrup Corporation, Arlington, Virginia ELISHA C. FREEDMAN, Regional Manager, Boyer, Bennett ~ Shaw, Inc., and Executive-in-Residence, University of Hartford, Connecticut DONALD G. ISELIN, USN, Retired, Consultant, Santa Barbara, California GEORGE S. JENKINS, Consultation Networks Inc., Washington, D.C. RICHARD H. JUDY, Consultant, Miami, Florida FREDERICK KRIMGOLD, Associate Dean for Research and Extension, Virginia Polytechnic Institute and State University, Alexandria, Virginia HAROLD J. PARMELEE, President, Turner Constn~ction Company, New York, New York LESLIE E. ROBERTSON, Director, Design and Construction, Leslie E. Robertson Associates, New York, New York JAMES E. WOODS, William E. Jamerson Professor of Building Construction, College of Architecture and Urban Studies, Virginia Polytechnic Institute and State University, Blacksburg, Virginia APRIL L. YOUNG, Senior Vice President, NVR Development, L.P., McLean, Virginia Stop ANDREW C. LEMER, Director HENRY A. BORGER, Executive Secretary, Federal Construction Council PETER H. SMEALLIE, Executive Secretary, Public Facilities Council PA - ICIA M. WHOLEY, Staff Associate JOANN V. CURRY, Senior Secretary LENA B. GRAYSON, Senior Secretary - 111

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Committee on Budget Estimating Techniques Chairman MICHAEL R. MORRIS, Hanscomb Associates, Inc., Alexandria, Virginia Members MICHAEL D. DELL'ISOLA, Hanscomb Associates, Inc., Alexandria, Virginia DONALD G. ISELIN, Consultant, Santa Barbara, California ROBERT E. JOLSON, College of Architecture & Urban Planning, University of Michigan, Ann Arbor, Michigan FRANK KELLY, Rudolph ~ Sletten, Contractors, Foster City, California RICHARD E. LAREW, Civil Engineering Department, Ohio State University, Columbus, Ohio EDWARD A. MARSCH, IBM Corporation, Stamford, Connecticut ROBERT S. MORSE, Sverdrup Corporation, Dallas, Texas JAMES E. ROWINGS, Construction Engineering, Iowa State University, Ames, Iowa Agency Liaison Members THOMAS J. BI~NS, Department of the Air Force, Tyndall AFB, Florida TIMOTHY BERGIN, Indian Health Service, Rockville, Maryland JONNY DAVIS, Department of the Air Force, Washington, D.C. BRIAN HARRISON, Department of He Navy, Alexandria, Virginia JOHN F. REIMER, Department of the Army, Washington, D.C. GEORGE T. SPARROW, Department of Veterans Affairs, Washington, D.C. ROBERT A. WHITING, Department of Veterans Affairs, Washington, D.C. JOHN ZAMOSTNY, Department of Energy, Washington, D.C. Building Research Board Stay HENRY A. BORGER, Executive Secretary, Federal Construction Council LENA B. GRAYSON, Senior Secretary v

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Preface Concerns regarding the cost of construction have been with us a long time. Shakespeare discusses the problem in Henry IV. When we mean to build, We first survey the plot, then draw the model; and when we see the figure of the house, Then must we rate the cost of the erection which if we find outweighs ability, What do we then but draw anew the model In fewer offices, or at least desist To build at all? . . . William Shakespeare Henry IV, Part 2, I.iii,1598. Typically, the blame for cost overruns is attrib- uted to a faulty budget estimate. This is probably due to the normal tendency to judge the quality and level of accuracy of an estimate against bids re- ceived and then make the assumption (often erro- neous) that the bid is right and the estimate is wrong. The intention of a properly developed estimate is to reflect what the construction "should cost"; a bid reflects what the construction "will cost." Dunng the committee deliberations, it became evident at an early stage that many factors influ- enced the difference between a budget estimate and e V11 final constuction costs. In fact, inaccurate budget estimating was found not to be the prime cause for cost overruns on construction projects. As a result, the committee's work took on addi- tional dimensions looking into not only enhancing estimating techniques, but also studying and mak- ing recommendations of other [actors likely to in- fluence the differences between budget estimates, bids, and final construction costs. Time and resources precluded art extensive in- dependent analysis of the federal government agen- cies abilities and success with budget estimating but considerable help was provided by the agencies by providing cost data input and sharing their expe- riences with the committee. The committee is par- ticularly appreciative of the input received from the federal liaison members without whose help this study would be far less comprehensive. As chairman of the committee, I would like to express my thanks to all committee members for their enthusiasm and professionalism in addressing a difficult and complex issue. I would also like to thank the members of the Building Research Board staff whose guidance and assistance we received during the drafting of this report. Michael R. Moms, Chairman Committee on Budget Estimating Techniques

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Contents EXECUTIVE SUMMARY Putting the Problem in Perspective 1 Committee Recommendations 2 1. INTRODUCTION.... S tudy S cope and Emphasis 4 Construction Cost Estimating Terminology 4 Focus of the Report 5 FACTORS OTHER THAN ESTIMATES THAT CONTRIBI~E TO BUDGET-RELATED PROBLEMS ...... Elements of the Construction Process 7 Keys to a Successful Project 10 Committee Suggestions for Improving the Process 12 3. PROCEDURES CURRENlLY USED BY FEDERAL AGENCIES TO PREPARE EARLY ESTIMATES ......... Pre-Programming Estimates 15 Program Estimates 16 Concept/Schematic and Design Development Estimates 17 Committee Observations 18 . . . 1 4. / SUGGESTIONS FOR IMPROVING THE EARLY ESTIMATING PROCEDURES FOR FEDERAL AGENCIES . Interagency Cooperation 19 The Importance of A-E Estimators 20 Use of Parametric Estimates 21 Use of Probabilistic Estimating 21 Appendix A The Views of Agency Representatives on the Nature and 19 Causes of Budget-Related Problems in Federal Construction Programs 23 Appendix B The Construction Budget Preparation Process at the Naval Facilities Engineering Command . Appendix C The Construction Budget Preparation Process at IBM Corporation . Appendix D Current Procedures for 15 Preparing Early Estimates Appendix E Glossary of Estimating Terms Used by Federal Agencies..... . . 29 31 33 . . . 39 References 43 LO

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