Pareto’s Principle and Concept Cost Estimates
Although cost reliability is critical to success, lately cost confidence has been low. So what can you do to achieve better cost certainty? It all starts with a reliable concept cost estimate. Historically based project cost estimates are often used because they are simple to develop. However, historically based cost estimates are a “look in the rearview mirror.” Historical costs are not typically a good indicator of future costs. Consider what has happened in your market since 2019!
Concept estimates are generally created at the earliest level of design requiring the estimator to make many assumptions that affect the accuracy of the estimate. Although that sounds highly speculative, an experienced estimator can build these estimates with a reasonable amount of accuracy even when working with a very preliminary design.
How accurate is your estimate given the often very preliminary design level? Well, let’s apply Pareto’s Principle, commonly known as “the 80/20 rule”. In short, this principle says that 80% of the effects come from 20% of the causes. Adapting to cost estimating…80% of the costs come from 20% of the items. This is typically true on any project regardless of the type of project you’re estimating. Major bid items always make up a significant portion of the overall cost. When preparing concept cost estimates, IC&E will use production-based cost estimating practices for the 20% of the items that make up 80% of the costs. The other minor bid items are estimated based on historical unit prices.
But what about items you can’t quantify at preliminary design, or risks that trigger during a project? It is appropriate to apply contingency factors to account for the unknown costs at this level. At the concept estimate level, contingency factors typically range between 20% to 30%, depending on the level of design. To select the appropriate contingency factor, the estimator’s judgment is required to assess the completeness of design and level of risk.
The final consideration is cost escalation, a factor critical to any project. Cost escalation is very tightly bound to local markets and material types. Each can vary wildly as supply chain and availability issues ebb and flow. A good way to get an overview is to use the National Highway Construction Cost Index (refer to the exhibit below). It will give you a general sense of cost inflation level that can then be adjusted to account for local market conditions. Using this index and making local market adjustments will help you to make a more reasonable assessment of cost escalations.
The takeaway here? A concept cost estimate is a projection of construction costs often several years in the future. The key to success is to use your experience, focus on the major project elements, apply appropriate contingencies, and escalate costs for anticipated year of construction. Concept estimates can be quite accurate. It’s all in the way you attack the process.
I-95 & SR 896 INTERCHANGE PROJECT
Purpose – The purpose of this project is to improve the I-95 and SR896 traffic levels of service, which was being affected by the merging and diverging traffic. As always, a primary goal was to improve safety and reduce the amount and severity of crashes at this interchange. These goals are achieved by constructing a double flyover interchange, realigning the existing ramps, and widening the I-95 one mile north and south of the interchange. This project requires construction of 6 new bridge structures, 16 retaining walls, rehabilitation of 4 existing bridge structures, and mainline widening along I-95.
Schedule - The Delaware Department of Transportation began design work on this interchange project in 2016. In early 2021, the plans had been developed to Semi-final design level, and DelDOT selected their CM-GC contractor and independent cost estimator.
Challenge – The project had a fixed budget based on the preferred alternative, which was selected in 2018. At that time, DelDOT set the project budget based on historical unit prices.
Result – The CM-GC team collaborated on design advancement, risk management, and vetting innovations between May 2021 and March 2022. Following the second OPCC price reconciliation in March 2022, it became apparent to DelDOT that the fixed budget was significantly short of the anticipated construction costs required to build this project. At that point, DelDOT decided to take the “off-ramp” and convert the CM-GC project to a Design-Bid-Build (DBB) delivery method. The project was greatly enhanced because of the contractor involvement (design optimizations, constructability, risk reductions, innovations added, and cost and schedule were better understood). However, the budget shortfall forced the project to go out for competitive bidding. In the end, the Contractor who was selected for the CM-GC project was allowed to bid on the project, and they were selected as the low bidder and awarded the construction contract. All’s well that ends well.
Lessons Learned – The budget shortfall forced this project to convert from CM-GC to DBB. To be fair, the budget was established in 2018 using typical historical unit prices (before historical inflations and supply chain issues related to COVID-19). Budget shortfalls have been an unfortunate trend on large transportation infrastructure projects since 2020. This trend is largely a result of 2 things, 1) COVID-19 market disruptions, and 2) historical unit price estimating. The problem with using historical unit price estimating practices for setting budgets is historical means looking backwards (using relative pricing from past projects). A better practice is to use a Concept Estimate, which simply put is a hybrid production-based (bottoms-up contractor style estimate) combined with a historical unit price estimate. The large quantity items that make up most of the construction costs are estimated using production-based estimating techniques, while the minor bid items are estimated using historical unit prices. Then the entire estimate is escalated for the anticipated year of construction.
Using a Concept Estimate approach to establish the budget for I-95 & SR 896 Interchange would not have predicted the impacts related to COVID-19; however, it would have better-predicted construction costs and may have been able to set the budget at a level that would have allowed this project to be completed using the CM-GC delivery method.
For more information about using Concept Estimates to establish project budgets, contact Dan Bender at (702) 523-2354.
Matt Bender, Cost Estimator
It is our pleasure to highlight an absolute rock star on our team, Matt Bender! He is the youngest estimator on our team and has been an MVP since he started. Matt joined our team in March of 2019 as a junior estimator after graduating from Utah Valley University the year before, with a BS degree in Construction Management. We have been so impressed with the commitment he has to estimating and to our team. Matt’s strength in communication and collaboration has greatly supported the fluidity of our team efforts. Matt helps develop contractor-style, production-based construction cost estimates, constructability reviews, and assists with developing construction schedules, and risk analysis/mitigation. Matt is handling our advanced 3d modeling and has become well-versed in all disciplines of civil construction from marine work to large earthworks projects.
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Critical Path Scheduling Using Primavera P6
Constructability Reviews
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We love what we do! We have a passion for finding creative approaches to construction. We are constantly looking for innovative construction techniques to add value to the projects we are working on. Our team has found ways to reduce schedule and/or construction costs on every project we have worked on to date!
Innovative Contracting & Engineering (ICE) is a team comprised of former contractors and professional engineers who have a thorough understanding of market fluctuations, pricing trends, construction strategies, and innovations. Our experience working on alternative delivery projects across the United States has provided our team with a tool bag full of industry best practices. Construction cost estimating and scheduling is our primary focus. This focus is how we stay current on construction trends and price changes, and that helps us produce more accurate estimates than our competition. We have a passion for finding creative approaches to construction. We are constantly looking for innovative construction techniques to add value to the projects we are working on. Our team has found a way to reduce schedule and/or construction costs on every project we have worked on to date! ICE works closely with our clients to improve the quality of their most challenging projects.
Past Newsletters:
Meeting Project Risks & Challenges
Leaders Turn Vision into Infrastructure
Early completion milestone bonuses in CMGC contracts
Risk Management Best Practices
Vision 2020?? Nobody saw this coming!
How can we help you? Send us your questions, comments, and request.
Email, Call, or Text: Dan Bender, 702-523-2354, danbender@iceteams.com