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1 Tntrocluction Cost is a major factor in most decisions regard- ing construction, and cost estimates are prepared throughout the planning, design, and construction phases of a construction project. All of these esti- mates are important because they influence the expenditure of large sums of money. However, estimates made in the early phases of a project are particularly important because they affect the most basic decisions about a project: whether it will be undertaken at all; how large it will be; how elabo- rate, sophisticated and durable it will be; and how much it will cost (i.e., what the budget* will be and, in the case of federal agencies, what the con- gressional appropriation will be). If an estimate made early in the process is seri- ously in error on the high side, it can result either in a needed and worthwhile project being rejected or in the allocation of excessive money to a project, which takes money away from other deserving projects and invites waste and extravagance. Con- versely, if an early estimate is seriously in error on the low side, it can result either in the construction of an inadequate facility or in money being wasted on a fruitless design effort. *In this report the budget is the amount of money author- ized by an official fending authority (e.g., Congress, a board of directors, or top management) to be spent on a project. A budget estimate is a prediction by a profes- sional estimator of what a proposed project will cost. The budget for a project may be significantly different from the corresponding budget estimate. 3 Federal agencies, like most organizations with large continuing construction programs, have long recognized the importance of these early estimates, and they have instituted various policies and proce- dures to help ensure that such estimates are pre- pared carefully and properly. Yet problems associ- ated with the accuracy and validity of early esti- mates have persisted; such problems may result in a failure to award a construction contact because of excessively high bids, receipt of embarrassingly low bids, design problems, project delays, and fa- cilities with marginal or impaired operations. Because Congress maintains fairly tight control on federal expenditures, agencies have limited lee- way to deal with problems caused by erroneous early estimates. Consequently, agencies periodi- cally look for ways to improve their early esti- mates. In 1988 the agencies that sponsor the Fed- eral Construction Council asked the Building Re- search Board (BRB) to review their current prac- tices and, if possible, to recommend ways of im- proving those practices. The BRB formed the Committee on Budget Estimating Techniques to conduct the study. The committee met six times in the course of the project. The first two meetings were devoted to reviewing literature on preparing early estimates and discussing the estimating procedures and prac- tices of federal agencies. Subsequent meetings were devoted to developing a consensus among commit- tee members on the principal issues and reviewing and refining committee and staff-prepared draft material.

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4 STUDY SCOPE AND EMPHASIS Early in the study the committee requested sta- tistics from federal agencies on their experiences with early estimates in order to get a clear under- standing of the nature and magnitude of the prob- lem being addressed. However, the agencies re- ported that they could not provide such information without a costly analysis of records. To fill this statistical gap, a special meeting of the agency liai- son members of the committee was held at which information on the experiences of federal agencies with budget estimates was assembled through a modified "Delphi" exercise. The results of this meeting are presented in Appendix A. In brief, Hose participating in the exercise esti- mated that budget-related problems have been ex- penenced on approximately 35 percent of federal projects and that among the factors contributing to such problems were: poor definition of user needs, which was esti- mated to have been a factor almost 60 percent of the time; . poor design work and/or poor agency man- agement of design, which were estimated to have been factors almost 40 percent of the time; ~ poor A-E and/or agency estimators, which were estimated to have contributed to problems more than 25 percent of the time; and . inadequate estimating procedures and/or data which were estimated to have contributed to prob- lems almost 20 percent of the time. These data verified that indeed federal agencies do have serious budget-related problems; however, the data also suggested that the problems are caused by a number of factors besides poor estimating techniques and procedures. Consequently, the committee has included in its report a discussion of various additional factors that contribute to budget- related problems. This discussion is presented in Chapter 2. In accordance with its original charge, the com- mittee has focused primarily on budget estimating techniques and data. Thus, Chapter 3 of the report describes the current procedures, techniques, and data sources used by federal agencies to prepare early estimates, and Chapter 4 presents the committee's recommendations on steps that agen- cies can take to improve the accuracy of such esti- mates. Descriptions of venous budget estimating pro- EARLY COST ESTIMATES FOR FEDERAL CONSlRUCIIONPROJECIS cedures are presented in Appendix D. The report does not discuss techniques for preparing detailed estimates that are developed in the later stages of a project. CONSTRUCTION COST ESTIMATING TERMINOLOGY Different owners use different procedures and processes to administer their construction programs, as illustrated by Appendixes B and C, which de- scribe, respectively, the construction budgeting processes of the Naval Facilities Engineering Command and the IBM Corporation. However, regardless of the owner, most construction projects require the preparation of a number of increasingly detailed cost estimates in the course of the plan- ning, design, and construction phases of a project. One or more of these estimates may be used to establish the budget for a project. The construction industry and related profes- sions use a variety of terms to indicate different types of estimates. In order to maintain consis- tency for the purposes of this document, the follow- ing terminology will apply. The estimates are listed in He chronological order of Heir preparation, which means that they are also in ascending order of de- tai1. Pre-program~rung estimate. An estimate of the probable magnitude of total construction cost, usu- ally based on single unit costs (such as dollars per gross floor area), for use in the earliest planning phases of a project. Program* estimate. An expression of probable total construction cost, usually based on a combina- tion of single unit costs and theoretical costs as related to the functional program requirements of He facility and the general design concepts to which the budget and the program of requirements relate. Conceptlschemaac estimate. A construction cost estimate based on a proposed scheme and a quanii- tative analysis of proposed- facility components and *The term "program" may have two different meanings in connection with federal construction activities. It may refer to the totality of construction projects of an agency for a given time period or to the list of requirements for a particular project. (Lists of requirements are sometimes referred to as owner criteria, user needs, or architectural programs.) To minimize confusion, the committee has avoided using the term "program" without a descriptive modifier.

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PRODUCTION subcomponents using both historical and analyti- cally derived unit costs. Design criteria and scope, including alternates, may be established in relation- ship to the funding limitations of the program of requirements. Design development estimate. A construction cost estimate based on quantities derived from a preliminary but definitive set of drawings (frequently about 35 percent complete) and current in-place costs. The design and estimate may be used as the basis for a budget request and/or to verify that established criteria are being followed, that the scope of tile protect is not being expanded, and that changes in scope are being documented. Some assumptions are made where design documentation is not com- plete. Construction document estimate. A cons~uc- lion cost estimate based on a quantitative material take-off using well-developed construction docu- ments. The estimate and the design are used to verify that the authorized budget and scope of the project have not been exceeded. This estimate is normally updated several times until the design is complete. Pre-bid estimate. A cost estimate based on a final review of the completed construction bid docu- ments. Federal agencies do not use a consistent and uniform terminology for budgets and estimates, as indicated by the glossary of federal estimating terms presented in Appendix E. However, the committee believes that most agencies would understand the terms defined above, and this terminology is used throughout the report, unless otherwise indicated. FOCUS OF THE REPORT This report focusses on early estimates, which include He pre-programming, program, concept/ schematic, and design development estimates. Such estimates are important because they are used in making some of the most basic and important deci- sions regarding a project. Specifically: Pre-prograwrung estimates are ordinarily made by an operating element of an agency as part of a request for funding for a new facility or the modification of an existing facility. In most agen- cies there are many operating elements (commonly called users), and each year each of these elements submits multiple funding requests to agency head- quarters. Since funding for construction is always 5 limited, agency headquarters must review these requests and screen out projects that are less critical to or are not in accord with the agency's long-range plans. Program estimates are ordinarily prepared by the central or regional office of the responsible agency, or by a private A-E firm, based on an analysis of the needs of the user organization and the development of a program of requirements. Some agencies base their funding requests to Con- gress on a program type estimate.* However, many agencies do not proceed in this manner because they are required by Congress to complete at least 35 percent of the design of a facility before request- ing funding for it.t In these agencies, program estimates are mostly used to indicate to the organi- zation designing the facility (almost always a pri- vate A-E firm) the approximate cost of the desired facility and to help set the design fee. In theory the program estimate that is given to the design organi- zation is not the final estimate that will be given to Congress. However, in practice design organiza- tions are expected to fry to stay within program estimates because agencies usually make prelimi- nary allocations of money to various projects based on program estimates. A major increase in the estimated cost of a project can cause the project to be dropped or adversely affect funding for other projects. Concept/schematic estimates are prepared by the design organization (usually a private A-E) using the initial design documents as a basis. This esti- mate is not often submitted to Congress, but instead is used by the design organization to verify the project budgets and to compare alternate schemes. Design development estimates are prepared by the design organization after analysis of the user's needs, evaluation of alternative designs, and preparation of initial design documents (which fre- quently corresponds to the 35 percent design point). The design development estimate is used by certain agencies as He basis for funding requests to Con- gress. Other agencies that base their funding re- quests to Congress on concept/schematic estimates, use design development estimates as a check to ensure that projects are within budget. *Some private companies, as discussed in Appendix C, also base funding requests to their top managers or boards of directors on program estimates. fAgencies follow different policies because their budget requests are reviewed by different congressional com- mittees.

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