Purpose
The following procedure provides a guideline for project cost estimating.
References
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Responsibilities
Project Manager (PM): The PM is responsible for ensuring that project estimates are prepared, updated, and approved by the Owner/Client Department. While the PM may employ other resources to help in preparing the various estimates, the PM is ultimately responsible for the accuracy of all cost estimates.
Project Engineer (PE): The PE is responsible for preparing and updating cost estimates for their assigned projects.
Construction Management Division (CMD): CMD is responsible for regularly updating and publishing the “Unit Prices for Preliminary Estimates” and will help the Project Engineers prepare unusual or unconventional estimates. CMD will help in checking estimates for accuracy and consistency, if requested.
Procedure
Project estimates are a critical element in the planning and delivery of projects in the Bureau. They are the basis for the Bureau’s Capital Improvement Program (CIP) and are closely monitored by our clients who use them to measure our ability to deliver projects within budget. The Bureau has pledged to be the provider of choice and accurate project estimates are a key to satisfying our clients.
The Project Manager Training course includes a “Managing Money” presentation (Attachment 3.3-5) that explains the impact of estimating, planning, and communication on a project’s budget. Designing projects to an approved and budgeted amount is a key responsibility for every PM and PE and is a critical factor in reducing or eliminating the “scope creep” which requires our clients to add additional funds to a project before a construction contract can be awarded.
In addition, the Bureau has created several forms that are to be used when preparing construction estimates. These forms are available in an electronic version for easier use. Also available on the Bureau’s website are Unit Prices for Preliminary Estimates for Sewer, Storm Drain, Street, and Structures. The first form is the Construction Cost Estimate Sheet that gives a detailed breakdown of construction items for Street, Sewer, Storm Drain, and Bridge projects. The second form is the BOE Project Cost Estimate Form. This form is to be used for the initial cost estimate on the project, which is usually a Class O or C estimate. The form may be modified to meet the needs of specific programs, but any modification should not alter the essential information on this form. The BOE Project Cost Estimate Form provides a written record of the initial estimate and details the assumptions that were made regarding the project. It then provides a historical reference for the project as it is developed and refined during the design process.
There are several types of estimates that are developed at different stages in the life of a project, including Classes O, C, B, A, and the City Engineer’s estimate. Each of these is further described:
Class O Estimate
A Class O estimate is developed at the planning stage of a project. It is sometimes referred to as an “opinion of cost”, hence the term Class O. The Class O estimate represents the engineer’s opinion of cost and is developed based on the preliminary understanding of the project. Often, the Class O estimate is used as a placeholder in the CIP planning and program budgeting. This estimate is based on similar projects or unit prices to the extent that corresponding quantities can be determined. Even though the Class O Estimate is the least accurate of the Bureau’s estimates, it is important that it be prepared with care as it can be the basis for the initial project budget appropriation in the CIP.
Class C Estimate
A Class C estimate is developed during the predesign stage when the project is between 5%-20% complete. The PE is required to complete the BOE Project Cost Estimate form or a program specific form that incorporates similar elements. Once this form is filled out completely and signed by a Senior Engineer / Architect, it becomes what is referred to as a Class C estimate. These estimates are based upon a rough idea of the project’s size and location and are also based upon similar projects in the same area. The Class C estimate should include the BOE labor percentages from the Budget Templates (Attachment 3.7-1) which will serve as a guideline for determining the appropriate design and construction management budget values. The templates may be modified, as necessary, based upon the nature of the project. The PM needs to determine which disciplines are necessary for the design and construction management of the project and when these disciplines will be needed. This information will then be used in the preparation of the Bureau’s Work Program and the proposed three-year Master Schedules.
See Attachment 3.7-2 for a sample Class C estimate. Line items 1 – 7 are the “known” construction quantities. Line items 8 – 13 are lump sums or assumed costs. Line item 14 (Overhead and Profit) is zero, because this amount is included in the above line items. The format and content for the other estimate levels is identical except for the contingency factors.
Class B Estimate
A Class B estimate is used to update the Class C estimate based upon more detailed knowledge obtained from field investigations and from preliminary design. Upon assignment of a project to a section, the Project Engineer should update the Class C Estimate to a Class B estimate at about the 30% to 50% design stage. This estimate is then used by the PM to inform the Client of the latest updated cost of the project. If the estimate exceeds the project budget, the client can then either provide additional funding for the project or request that the design be adjusted to meet the existing budgeted amount.
For all consultant designed projects, the design firm must procure an independent cost estimate to be performed by a cost estimating firm not previously affiliated with the design consultant. For projects above $25 million, an additional independent estimate must be procured by the BOE from an estimating firm not previously subcontracted with the design consultant.
All Bureau designed projects will require a second estimate to be provided by Bureau staff outside the design team.
There are situations where preparation of a Class B estimate may not be necessary. For example, many secondary sewer renewal projects are similar in scope with a large body of unit price data available. Experience has shown that there is minimal risk in proceeding directly from a Class C estimate to a Class A estimate. This avoids the cost of preparing the Class B estimate, while the increased budget risk is minimal. A decision to bypass a particular cost estimate is program specific and should include weighing the costs and risks of such a decision.
Class A Estimate
A Class A estimate is more detailed and is based upon the design drawings, specifications, and quantity take-offs. It is usually updated in three different stages. The Preliminary Class A estimate is developed when the design is 90% complete. This estimate is then updated to the Draft Final Class A when the constructability reviews of the project are completed, and comments incorporated. The Draft Final Class A is updated as necessary when the final plans are signed by the City Engineer. This then becomes the Final Class A estimate. It is important to note that the Class A estimate usually contains a zero or minimal estimating contingency. However, it should include the budget contingency that would be expected to be added to the contract award amount at the time of award.
The goal in preparing Class A estimates is to match the lower range of bids received on a specific project. This is meant to mean the Class A estimate minus the budget contingency.
For all consultant designed projects, the design firm must procure an independent cost estimate to be performed by a cost estimating firm not previously affiliated with the design consultant. For projects above $25 million, an additional independent estimate must be procured by the BOE from an estimating firm not previously subcontracted with the design consultant.
All Bureau designed projects will require a second estimate to be provided by Bureau staff outside the design team.
City Engineer’s Estimate
The Final Class A estimate, minus the budget contingency, then becomes the City Engineer’s estimate. The City Engineer’s estimate is sent to the Project Award and Control (PAC) Division as part of the Ready to Advertise Checklist and becomes part of the Bid Package. It should reflect the prevailing market conditions in the contracting community and provide a justification for the award of the contract to the lowest responsible, responsive bidder. The purpose in preparing the City Engineer’s estimate is to establish a reasonable cost for the project and set a benchmark against which the bids received will be evaluated. Under Special Order 01-0102, the City Engineer has the authority to approve changes in the City Engineer’s estimate up to $100,000 if required.
Estimating and Budget Contingencies
At all levels of project cost estimating there are two types of contingencies that need to be included into the project estimate. The “Estimating Contingency” is included to cover variances in the costs of the individual quantity line items and other unknowns. The estimating contingency will be high at the beginning of a project and should reduce as the project proceeds through design. The “Budget Contingency” is used to cover change orders that may occur during construction due to unforeseen circumstances, changes in scope, or errors and omissions. The awarding Board Report for a construction contract will contain the amount being awarded to the lowest responsive and responsible bidder.
The following table indicates suggested rates to be used for contingencies for the various estimating levels:
| Estimating Level | Estimating Contingency | Budget Contingency |
| City Engineer's Estimate | 0 - 10% | 0% |
| Class A Estimate | 0 - 10% | 10 - 20% |
| Class B Estimate | 10 - 20% | 10 - 20% |
| Class C Estimate | 15 - 30% | 10 - 20% |
| Class O Estimate | 20 - 50% | 10 - 20% |
The reader might question the possible application of a 10% estimating contingency to Class A and City Engineer’s estimates. Normally, these estimates do not include an estimating contingency. In other words, the estimating contingency is zero. However, situations may arise where the PM or PE feel that some estimating contingency is appropriate. For example, suppose the industry encounters a recent escalation in material or fuel costs that is not yet reflected in the most recently available unit prices. Or suppose the work output in the public and private sector is suddenly taxing the available pool of contractors. In such cases, the PM or PE may use an estimating contingency to adjust the cost estimate to the bidding conditions expected during the bid phase. Obviously, experience and judgment are necessary to properly apply the estimating contingency.
The budget contingency is normally 10% for projects greater than $1 million construction value (CV). It is common practice to increase the contingency to 20% for projects less than $1 million or for very complex projects. There are tradeoffs in assigning the budget contingency. A higher contingency ties up money that might otherwise be used for other projects. On the other hand, too low a contingency may require the preparation of additional Board Reports to increase the contingency should change orders exceed the budget authority granted in the awarding Board Report.
Escalation to Mid-Point of Construction
All estimates of construction costs should be escalated to the mid-point of construction. In other words, the PM or PE is trying to estimate the cost that contractors will bid at the time of bidding. This can be several years in the future. The escalation factor (% increase per year) depends on current market conditions. A value of about 5% per year is common. However, some commodities have seen much higher cost run-ups. For example, concrete sidewalk and concrete pavement escalated about 79% and 21% respectively in the period from 2021 to 2022. A project that is heavily dependent on concrete may experience a much higher escalation compared to the total construction industry.
It is industry practice to escalate construction costs to the expected mid-point of construction. The theory is that a contractor at bid time must try to estimate costs over the life of the project. To avoid unnecessary risk, the contractor will have to include some contingencies to cover expected cost increases. The escalation factor is usually extended to the mid-point of construction to model this effect.
Most BOE projects do not warrant a special individual analysis to determine the escalation amount to be used in the cost estimate. Therefore, escalation rates and a simplified method of application are provided below. The following methodology and rates should be used for all projects unless specific conditions warrant otherwise and are approved by the appropriate Deputy.
Current Escalation Rates
The current BOE escalation rates for all capital improvement projects shall be as shown below.
| Date | Annual Rate |
| Until June 30, 2014 | 3% |
| July 1, 2014 and beyond | 5% |
These rates are based on a combination of recently published construction cost inflation observations, longer term historical cost inflation projections and feedback from a sampling of BOE contractors.
Calculating the Cost Estimate
This method of estimating to the midpoint of construction assumes that the costs being used to estimate the project are valid at the current time and it does not apply annual compounding.
The first step is to determine the midpoint of construction, which is simply the point in time half way through the scheduled construction phase.
The next step is to break the time period to the midpoint of construction into lengths of time with different applicable escalation rates.
Next, the total escalation percentage is calculated by multiplying each individual length of time in years by the applicable annual escalation percentage.
Lastly, the escalated cost estimate is calculated by increasing the cost estimate by the total escalation percentage.
Sample Cost Estimate
The following example is provided to demonstrate the process of calculating the escalated cost estimate for a project with the given values:
| Construction Cost Estimate | $12,000,000 |
| Current Date | July 1, 2022 |
| Scheduled Construction Start Date | January 1, 2023 |
| Scheduled Construction Duration | 2 Years |
Determine the Midpoint of Construction
| Construction Start Date + Half of Construction Duration = | X |
| January 1, 2023 + 2 years / 2 = | January 1, 2024 |
Break the time period to the midpoint of construction into lengths of time with different escalation rates
| 3% rate until June 30, 2014 | |
| July 1, 2013 (Current Date) to June 30, 2014 = | 1 Year |
| 5% rate July 1, 2014 and beyond | |
| July 1, 2014 to January 1, 2015 (midpoint) = | 0.5 Years |
Multiply each time period by the applicable escalation rate
| Escalation = (1 Year * 3%) + (0.5 Years * 5%) | 5.5% | .055 |
Escalated Cost Estimate = $12,000,000 * 1.055 = $12,660,000
A worksheet is provided as Attachment 3.7-3 to assist in the process of calculating the cost estimate. However, the worksheet may not be able to meet the needs of every project. These limitations should be considered prior to its utilization.
Historical Rates
For historical purposes, it is useful to know what escalation rates were in effect at a particular time. Note that effective 2013 BOE Notice No. 19, escalation rates will no longer be set by BOE Notice, instead all future revisions will be made directly in the PDM and recorded below:
BOE Notice No. 12 issued April 9, 2007
Effective April 9, 2007 through September 7, 2010
| Date | Annual Rate |
| Until June 30, 2018 | 10% |
| July 1, 2008 to June 30, 2009 | 8% |
| July 1, 2009 and beyond | 6% |
BOE Notice No. 28 issued September 8, 2010
Effective September 8, 2010 through December 16, 2013
| Date | Annual Rate |
| Until June 30, 2012 | 3% |
| July 1, 2012 and beyond | 5% |
PDM Revision as stated in BOE Notice No. 19 issued December 17, 2013
Effective December 17, 2013
| Date | Annual Rate |
| Until June 30, 2014 | 3% |
| July 1, 2014 and beyond | 5% |
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