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  • The final steps in the contractor selection phase involve decisions about the size of the markup to be added to the net project cost, the submittal and opening of all tenders, the selection of the successful contractor and, at last, the notice to proceed, which directs the contractor to begin work.

    Turning the estimate into a tender

    Pilcher (1992) defines tendering as the process whereby a contractor, given the net cost, converts this to the sum that will actually be submitted to the client, together with any qualifications that are seen to be required. At this stage the principal discussions are concerned with the profit and the risk, together known as the margin or the markup.

    Although we have already illustrated the addition of markup, or ‘profit and contingency’, to net project cost in the determination of total tender price, it is important that we consider some of the issues involved in determining the markup amount. Also, the separation of the rather mechanical process of determining the net project cost from the judgment-based setting of markup is an important part of the thought process. Furthermore, while the estimating staff will perform most or all of the assembly of net project cost, the setting of markup is the responsibility of upper management. If the net project cost estimate is a relatively accurate prediction of what the project will cost, the decision about markup will ‘make or break’ the project. For those reasons, we set this section apart from the ‘cost estimating’ section in this presentation.

    Hendrickson and Au (1989), in their discussion of the principles of competitive bidding, state that most contractors ‘exercise a high degree of subjective judgment’ in the setting of markup. The process is far from exact. In a competitive tendering situation, two opposing objectives are at work: (1) the desire to be selected as the winning tenderer and (2) the desire to make a decent profit from the project. The lower the markup, the higher will be the probability of the contractor having a sufficiently low price to be selected. On the other hand, the higher the markup, the greater will be the profit if the contractor is selected, other things being equal. It is upper management’s responsibility to set an ‘optimum’ markup that balances these two objectives for any particular tender.

    The factors that may be involved in setting the markup amount have some resemblance to the factors the contractor considers in making the decision whether to spend the effort to prepare the tender, discussed earlier in this chapter. The factors are related to the contractor’s potential risk if the project is won, the degree of need and desire to win the project and the expected competition. Among all the factors a contractor might take into account are the following.

     The owner and design professional and the likelihood they will cause difficulties for the contractor.

     Stipulations in the contract documents for delays in payments or retention of moneys owed to the contractor.
     Disclaimer clauses that place on the contractor most or all of the risk for unknown physical conditions at the site, especially underground conditions.
     Clauses making the contractor responsible for any delay in the project, even if not caused by the contractor.
     Other clauses providing for procedures the contractor may believe to be unreasonable, for such matters as change orders (variations), contract claims and the rendering of binding decisions in case of disputes.
     The extent to which the contractor may be liable for any worker safety-and-health problems or labour law violations.
     The project’s location, size and complexity.
     The amount of work to be done by the contractor’s own forces in comparison to work to be done by subcontractors. In general, contractors believe that more risk is associated with doing the work yourself; some apply a higher markup percentage to that work than to subcontracted work.
     How ‘hungry’ the contractor is, based on the number of projects the contractor already has under contract and the potential for other new projects. This degree of desire to win the project can be a major influence on markup.
     The expected competition, including the number of tenderers and the characteristics of each.
    In general, the competition will be more intense as the number of tenderers increases and the contractors will need a smaller markup to have a high chance of success. Also, if some of the other contractors have reputations for offering low-priced proposals, this fact may influence our contractor’s markup decision. Of course these other tenderers are considering the same factors when pricing their proposals, including their current and future workloads, so attempts to analyse their potential competitiveness will be inexact at best.

    Most of these factors are quite intangible, which is why the evaluation of these risks and the decision on markup is the responsibility of those personnel with considerable experience and judgment skills. In our two examples earlier in this chapter, we used markups of 9.6% and 10.5%, before adding taxes and bond costs. In good times, these may be reasonable percentages, but it is well known that some contractors add only a few per cent for profit and contingency when the competition is intense and they are highly desirous of obtaining the work. One other comment is in order with regard to markup. Sometimes this term is defined to include general overhead, as well as profit and contingency. In that case, of course, a higher percentage would be used. Clough et al. (2000) suggest that markup may vary from 5% to more than 20%, especially if it includes general overhead.

  • In our consideration of the role of the project planner and designer, we have discussed the importance of constructability analysis and value engineering. Formal value engineering is an essential activity throughout the construction process as well. In this process, the contractor is invited to suggest changes to the design that will result in cost savings; if a proposal is accepted, the contractor and owner share the savings in a manner provided in the contract documents. A common contract provision (Office of Federal Procurement Policy, 2002) reads as follows: The Contractor is encouraged to develop, prepare, and submit value engineering change proposals (VECP’s) voluntarily. The Contractor shall share in any net acquisition savings realized from accepted VECP’s, in accordance with the incentive sharing rates in paragraph (f) of this clause. Note that if the contractor saves money by implementing a different construction technique than originally envisioned, with no change in design, the cost savings accrue solely and fully to the contractor. While such analyses by the contractor are usually presumed to take place after the contract is signed (the ‘Contractor’ in the above quotation means the contractor that has already been selected and is under contract), value engineering proposals made during the tendering process may provide benefits to both the owner and contractor. Thus, the cost estimator may be involved in pricing various alternative designs and developing proposals for their implementation, in addition to performing the more standard estimating work. The resulting tender contains a base price related to the original design, plus proposed prices associated with the proposed design alternatives.

  • The process described above for compiling construction cost estimates might be described as simple, routine, time consuming, even boring, but also essential, with requirements for accuracy, organisation, no omissions and no duplications. The spreadsheets used to prepare Tables 4.1 through 4.4 are examples of the use of information technology to manage effectively and efficiently the large amounts of cost-estimate data in a simple, logical manner and many contractors prepare their estimates using this well-suited application. Beyond the use of spreadsheets, several commercial software packages provide convenient ways of data management by combining spreadsheet concepts with the use of cost databases and other features. The basic structure of a cost-estimating program includes a spreadsheet-like table, with one line for each item, a means for calculating item quantities, databases of cost information, routines for determining and adding various add-ons, capability for all required cost calculations and means to interface with software that will be used to account for project costs as the project proceeds (Bennett, 2000). A sampling of available packages includes the Global Estimating® program developed and supported by BuildSoft Pty. Ltd (2002), the Precision Estimating Collection® (Timberline Software Corporation, 2002), which integrates the process from conceptual estimate to final bill of materials and also interfaces with its Gold Collection for project cost accounting and Everest®, an estimating and cost planning program available from Construction Software Services Partnership Pty. Ltd (2002). Several software developers, including BuildSoft, have taken the process a step further with on-line estimating systems, by which the user can upload schedules of quantities to a website, where subcontractors and material suppliers can attach their proposed prices electronically. Another package is the WinEst® 6.01 program (WinEstimator, Inc., 2002). We have utilised this package to produce an estimate for our concrete wall example, whose spreadsheet version was presented in Table 4.1. Details for each item are shown in Table 4.5, including take-off quantity and the unit cost for each element of cost, plus the several items of overhead and markup as discussed previously. Table 4.6 contains the same information in summary form; it is organised by major CSI section and includes the total, rather than the unit, cost for each major section.

  • Our second example of a cost estimate is for the construction of an embankment and roadway. Once again, the example is oversimplified but still includes the basic concepts. In this example, the result of our effort will be a series of unit prices for each of the specified bid items, as required by the tender instructions. These unit prices, multiplied by their respective quantities, will determine the total tender price, which will be compared with those from other tenderers. Our approach will be to calculate the total tender price using methods similar to those employed for the previous example, to allocate that total to each of the various bid items and to divide by the respective estimated quantities to determine the unit prices.

    The tender documents would include a schedule of quantities such as those shown in Table 4.2. It is important to understand that the items listed here are the only items for which the owner will pay. Thus all project expenses not included under the listed items must somehow be channelled into the unit prices for the listed items. If the contractor’s proposal is accepted by the owner, its payments will be based on the actual quantities installed multiplied by their respective unit prices, as explained in Chapter 2. The estimated quantities are used only to determine a total tender price and thus compare the tender prices from each tenderer.

    Table 4.3 shows the cost estimate for the project whose quantities are listed in Table 4.2. First, we develop the direct costs for each of the 11 pay items. Note that the contractor intends to perform clearing and grubbing, earthwork, culvert piping and geotextile installation with its own forces and subcontract the paving, signage and traffic marking.

    For each element of direct cost, we compile a cost estimate. The contractor’s cost records may contain sufficient unit cost information to allow simply multiplying that unit cost by the estimated quantity. Clearing and grubbing might be an example of this approach. In other cases, the item’s cost may be developed as a combination of several different components, each with its unit costs. For example, the material cost for corrugated steel pipe might be a combination of the costs of pipe, connectors, bedding material and hardware, even though the pay item is based solely on length of pipe. Another approach is to conduct an analysis of the work’s details, setting forth, in the case of labour, the estimated time required, based on crew size and productivity and the cost per hour or day. The labour involved in base course installation might include studies of loading, hauling, dumping, spreading, watering, compacting and final grading. Whatever method is used, we arrive at a direct cost for each element of each item. In the case of aggregate base course, for example, the estimated direct costs are US$ 201 662, based on US$ 40 364 for labour and US$ 161 298 for material. In this example, we have elected to show equipment costs as a single item, rather than as an element of each item. We noted this approach in our previous discussion of equipment costs. The rationale in this case might be that we expect our equipment fleet to be assigned to the project for its duration or specified periods within its duration and the project will be responsible for the fleet’s costs continuously during the time the equipment is on the job. We thus calculate these costs based on their cost per time (say, per month) and the duration each is expected to be assigned to the project. In our example, the total of the direct costs (excluding equipment) for all pay items is US$ 903 968. However, there are other costs that relate directly to construction operations. Whether they are classified as direct or overhead costs may be arguable, but in any case, they must be included in our cost estimate! For this project, we expect to have mobilisation, surveying and layout, traffic control and demobilisation expenses in the amounts shown. Because no pay items include these expenses, we will allocate them to the items in a process to be explained shortly. The subtotal for all direct costs is US$ 1 291 132. To this subtotal we add costs for site overhead, general overhead, profit and contingency, bonds and sales tax, in a manner similar (though not in the same order) to that explained for our lump-sum estimate. The ‘bottom line’ total tender price is US$ 1 711 743. If this were a lump-sum tender, we would submit this single number as our proposed price. However, in the case of a unit-price (measure-and-value) tender, we also furnish unit prices for each item listed in the schedule of quantities. The final steps in our calculations result in unit prices for each of the 11 items which, when multiplied by their respective estimated quantities, give a sum equal, or nearly equal, to US$ 1 711 743. One way to approach the task is to allocate the sum of all the amounts below the US$ 903 968 of direct costs in Table 4.3 to each of the 11 items in proportion to that item’s listed direct cost. The amount to be added is the difference between the total tender price of US$ 1 711 743 and the US$ 903 968 of direct costs, or US$ 807 775. To accomplish this calculation, we find the ratio of US$ 1 711 743 to US$ 903 968, or 1.893588 and multiply that ratio by the direct cost for each item to arrive at the ‘tender total’ for the item. In the case of unclassified excavation, the calculation is (US$ 77 406)(1.893588) = US$ 146 575. As shown in Table 4.3, the total of these 11 ‘tender totals’ is our total tender price of US$ 1 711 743, as expected. Finally, we divide each tender total by its respective estimated quantity to find its unit price. Because the unit price has been derived in this fashion, the total price in our tender, which shows unit prices multiplied by their estimated quantities, will give the desired total tender price. Table 4.4 summarises the results of the various calculations in Table 4.3; the pricing section of the contractor’s tender would consist essentially of the information in Table 4.4. Note that rounding of the unit prices to the nearest US$ 0.01, as would be required in a tender offer, results in some minor differences between the 11 ‘tender total’ numbers in Table 4.3 and the ‘estimated amounts’ in Table 4.4, although the final tender price, at US$ 1 711 741.50, is remarkably close to our target of US$ 1 711 743. The calculations explained above are an example of ‘balanced’ unit-price tendering, in which the allocations of the various overheads and other non-direct charges are allocated proportionately to each tender item’s direct cost. There are a variety of other ways we could split the total tender price of US$ 1 711 743 among the 11 items and still arrive at the desired total. For example, we could reduce the amount for asphalt concrete by US$ 10 000 and add an equal amount to the clearing and grubbing item. The resulting unit prices would be US$ 23 434 per hectare and US$ 126.22 per tonne. This practice of ‘unbalanced’ tendering might be used by a contractor interested in increasing its cash flow early in the project by receiving higher revenue on clearing and grubbing; note that the total revenue is unchanged, assuming the actual quantities are the same as the estimated quantities. A contractor might also employ unbalanced tendering if it believed the actual quantities for some items were going to be different than estimated. (This is a good reason to perform independent calculations to check the quantities furnished in the schedule of quantities.) Items whose quantities were expected to be higher than estimated would be assigned higher than proportional unit prices, while those anticipated to be lower than estimated would have their unit prices reduced. An exercise at the end of this chapter demonstrates this effect. Caution is advised in using unbalanced tendering for this latter purpose; if the actual quantities are not as anticipated, the results may be unfavourable.


  • Consider a ‘project’ that will construct a cast-in-place concrete foundation wall, as shown in Figure 4.5. We desire to compile a single price for submittal to the owner for this lump-sum contract. The work will consist of mobilisation; clearing and grubbing an area of 400m2; excavating through silt and rock to a depth of 400 mm as shown and removing the excavated material from the site; placing footing forms, footing reinforcement and concrete for the 400mm wide footing; removing the footing forms; placing wall forms, wall reinforcement, anchor bolts and concrete for the 200 mm wide wall; removing wall forms; backfilling on both sides of the new wall with new gravel to the original ground level; and cleanup and move-out. Note that this is a rather ‘minimalist’ design, lacking in specification details about concrete, reinforcing, anchor bolts and backfill. First, we prepare a bill of quantities, with the result shown in the quantity and unit columns of Table 4.1. The unit measure represents the units by which the various items are measured. Mobilisation and cleanup and move-out are both measured as simply one job, with a lumpsum amount for each. The square metre (m2) and cubic metre (m3) units should require no explanation, as should the tonne (= 1000 kg) units for steel reinforcement. Anchor bolts are measured by the number of items or ‘each’. The unit smca stands for square metre of contact area, the area of contact between formwork and concrete. In the case of both footing and wall, this area is the area of the vertical formwork at the sides and ends of each. As a sample of the calculations required to determine quantities, consider the excavation quantities, as follows.

    Assuming the end slopes and clearances are the same as the side slopes,
    rock excavation: average width = 1.15 m; average length = 30.75 m; thickness = 0.15m
    volume = (1.15 m)(30.75 m)(0.15 m) = 5.3m3
    silt excavation: average width = 1.55 m; average length = 31.15 m; thickness = 0.25m
    volume = (1.55 m)(31.15 m)(0.25 m) = 12.1m3.
    As a check, find the total excavation volume:
    (1.4 m)(31 m)(0.4 m) = 17.4m3 = 5.3m3 + 12.1m3 (OK).

    Verification of the other quantities is left to the reader. We then apply unit costs from our company database or other sources, or we develop unit costs based on a study of the operation and assumptions about productivity and costs or we apply costs from material and subcontract proposals. The result is the subtotal of US$ 18 534, as shown in Table 4.1. The two overheads are added next, site overheads of US$ 2250, the result of an analysis of supervisory, site office, utility and other expenses not shown here and company overheads stipulated by the company as 6.5% of the second subtotal or US$ 1351. The result is a net project cost of US$ 22 135. A markup of 10.5% of the net project cost (US$ 2324), sales tax on materials (US$ 183) and bond costs of 1.5% (US$ 370) complete the total tender price of US$ 25 013. Some comments on the presentation in Table 4.1 are in order. The items labelled ‘mobilisation’ and ‘cleanup and move-out’ could be considered as applying to the entire project and thus not individual work items; in that case, they would be included as part of site overheads and not shown as direct costs. Note that we intend to subcontract the excavation and backfilling work and pay for that work on a price-per-cubic-metre basis. The order in which some of the ‘add-ons’ are added is chosen by the tenderer as a matter of policy; in our example, markup is not calculated on sales tax, but sales tax could be added earlier. Also, this compilation assumes bonding costs are based on the entire amount, including markup and sales tax. The question of whether sales tax and bond costs should be classified as direct costs, overhead or markup is probably trivial. Sales tax on materials only is probably a direct cost, but if the jurisdiction extracts sales tax on the entire tender price, the tax is more on the order of an overhead cost. The order of presentation of the add-ons in Table 4.1 is typical of many such estimates.


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