# Cost Estimating

1. Problem or Opportunity Statement

The PMO has been assigned the supervision of two hospitals, and they have to produce a Class 3 Estimate for the projects as a single estimate, as part of the internal assurance process. As part of a bilateral agreement between two states there is the need to set up the budget to accommodate the cost of the work. We will estimate what the cost would be for this assignment and how many hours are needed.

2. Feasible Alternatives

AACE International identifies five classes of estimates. A Class 5 Estimate is associated with the lowest level of project definition (or project maturity), and a Class 1 Estimate is associated with the highest level of the project definition.

Below matrix provides the Cost Estimate Classification for the Process Industries, including the preparation effort for each estimate class.

Fig.01: Cost Estimate Classification Matrix for the Process Industries[1]

3 Develop the outcomes for each alternative

Based on the previous estimate, Class 4, the estimated combined project value is 242,857,142.86 US\$

As we need now to calculate the effort cost, we can use the index range of a Class 3 Estimate form the above figure 1 in the preparation effort column. The index, in this case, is 3 to 10.

At this point we can prepare the effort cost as per below:

Fig.02: Preparation Effort Cost Estimate

To estimate the manhours required, we should now determine the unit rates of the estimator, who will execute this work.

With the basis that this work required to be executed by experienced and globally reputable Contractor, it is anticipated there will be mixed of the national and expatriate estimator to do this work. With minimum local content was set in 30%, then the composite unit rates as per below :

Fig.03: Composite Hourly Rate Calculation for Estimator Position

The expatriate estimator rate is taken from the Italian Infrastructure Plan of rates 2019 and converted to US\$ using EUR 1.18/USD[2]

The national estimator rate is taken from the Norma Tecnica - Metrados Para Obras de Edificacion y Habilitaciones Urbanas Of the Ministry of Health of Peru'[3].

The rate in PEN, and is converted to USD using PEN 0.28/USD rate as per official currency exchange.

Then by using the composite unit rate approach, the estimated manhours required to do this work is as per below:

Fig.04: Preparation Effort Manhours Estimate[4][5]

4 Selection of the acceptable criteria.

Based on the data presented above, we need to consider the estimate by applying PERT formula, which provides the confidence estimate from Contractor’s point of view to do the work.

Past Company experience, the predicted confidence level for the Contractor is minimum P80.

5. Compare the outcomes from each alternative analysis done in Step 3 against the minimum acceptable criteria from Step 4.

Using PERT formula, the preparation effort cost in various probability level is calculated as per below :

Fig.05: Preparation Effort Cost at Various Probability Level

And by using the composite rate from Table 2 above, we can get the estimate manhours required to do this work at various probability level as per below :

Fig.06: Preparation Effort Manhours at Various Probability Level [6]

6. Selection of the “best” and Conclusions

As we can see from fig.05 and fig 06 above, the Project Manager recommends to the Project to set the budget at P85 cost USD 16,811.13 with estimated 172.87 manhours, since it provides the more conservative number and it is within the historical data for the confidence level to execute the work.

7. How to plan on tracking/reporting on the recommended choice.

Once we have estimated the preparation effort, it is important to monitor and maintain the information updates such as project scope including the estimated project value, Contractor’s proposal, unit rates standard, currency exchange rates, and other related information, which could potentially impact to the estimate preparation cost and related manhours.

REFERENCES.

[1] Amos, S. J. (2012). Skills & Knowledge of Cost Engineering: A Continuing Project of the AACE International Education Board (5th ed.). Section 1, Chapter 9. Morgantown, WV: AACE International.

[3] Ministerio de Salud. (n.d.). Gobierno del Perú. https://www.gob.pe/minsa/

[4] Sullivan, W. G., Wicks, E. M., & Luxhoj, J. T. (2014). Chapter 3. Cost Estimating Techniques. Engineering economy.

[5] Humphreys, G. C. (2018). Chapter 19. Estimating Techniques. Project management using earned value. Humphreys & Assoc.

[6] Guild of project controls compendium and reference (Car). (n.d.). Planning Planet | dedicated to Project Controls. https://www.planningplanet.com/guild/gpccar/introduction-to-managing-cost-estimating-budgeting

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