AN INVESTIGATION INTO CURRENT COST ESTIMATING PRACTICE OF SPECIALIST TRADE CONTRACTORS

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1 AN INVESTIGATION INTO CURRENT COST ESTIMATING PRACTICE OF SPECIALIST TRADE CONTRACTORS Moayad Al-Hasan, Andrew Ross and Richard Kirkham School of the Built Environment, Liverpool John Moores University, Liverpool, L3 3AF ABSTRACT: Although extensive research has been undertaken on cost estimating processes of contractors for construction projects, very little research has considered the cost estimating practice within specialist construction contractors. The objective of this paper is to gain an understanding on current cost estimating practice of specialist mechanical and electrical contractors for construction projects. The paper reports upon semi-structured interviews and a questionnaire survey of mechanical and electrical contractors that was undertaken in Jun 2005.The respondents were classified into five groups based on annual turnover, namely: very small, small, medium, large, very large. The data analysis indicated that the main cost estimating method being used by electrical and mechanical contractors was: the unit rate method, followed by comparison with similar past projects based on documented facts, comparison with similar past projects based on personal experience, parametric estimating, and then operational estimating. The study showed that almost half of the respondents surveyed (48%) do not routinely utilize and rely upon historical cost data provided as site feedback when producing estimates. The reasons revealed by the survey were: unique characteristics of each project, unstructured site feedback, lack of confidence in data provided; incompatibility of information for future estimating needs. The data analysis also showed that the main causes of inaccuracy in cost estimating are: insufficient time for estimating, inadequate specifications, and then incomplete drawings. The paper sets out a framework for research into the development of a cost estimating model/technique in order to improve the prediction of specialist resources productivity. Key words: accuracy, cost information, estimating, site feedback, and specialist contractors. 1. INTRODUCTION The code of estimating practice produced by the Chartered Institute of Building (CIOB, 1997, P. xiii), in addition to many other authors (Kwakye, 1994; Brook, 2004; Ashworth, 2002) define estimating as the technical process or function undertaken to assess and predict the total cost of executing an item(s) of work in a given time using all available project information and resources. Therefore, for a construction company to thrive, it must have the ability to forecast the likely cost of proposed construction work, and thus at least be able to establish a baseline figure from which a price can be quoted to the client. Cost estimating methods have been developed for preparing estimates of various types and for various purposes (Daschbach and Apgar, 1988). Many standard textbooks on cost estimating (e.g. Bentley, 1987; Buchan et al., 1991; Kwaky, 1994; Smith, 1995; Brook, 2004 and Ashworth, 2002) are readily available. In this regard, Akintoye and Fitzgerald (2000) in their study of UK current cost estimating practices reported that the main method used by construction organisations is the standard estimating procedure, followed by comparison with similar projects 566

2 based on documented facts, and comparison with projects based on personal experience. Such commonly applied methods do not differ from traditional ways of estimating, where costs of construction elements (labour, materials, plant, sub-contractor, and preliminary) are established and to which allowance for profit, overhead, and risk is added. In this regard Curran (1989) has argued that these conventional or traditional methods of estimating often fail to cope with the realities of today s world, which involves elements of uncertainty. Bryan (1991), argued that estimating a construction project is time consuming and often tedious. To improve the quality of estimating, he advocates the use of an assembly pricing technique (also called work module pricing, system pricing, rapid pricing or aggregate pricing). Uman (1990) contends that it is difficult to develop a standard process from which to develop a cost estimating system for construction, due to such factors as extreme diversity in building systems, methods, projects, suppliers, contractors and workforce. However, such methods rely upon judgment and estimator s experience, and are within the domain of what Ntuen and Mallik (1987) called experience-based models. Hegazy and Moselhi (1995) argued these methods are often inaccurate and unstructured and are based solely on contractors own experiences and the general-purpose procedures dictated by the software systems they use. Law (1994) outlined a general procedure for building contractor cost estimating. However, he reckoned that in practice, contractors devise their own methods for cost estimating and bidding. Skitmore and Wilcock (1994) investigated estimating processes of smaller builders based on an experiment conducted with eight practicing builders estimators. The work investigated the process of estimating rather than the practice of cost estimating, by looking at methods that estimators used to price selected items from bills of quantities and the variability associated with the outcomes. The results showed that just over half of the items were rated by the detailed methods prescribed in the standard texts. The remaining items were rated mainly by experience. Although extensive research has been undertaken on cost estimating processes of contractors for construction projects, very little research has considered the cost estimating practice within specialist trade contractors. This paper reports upon an investigation of current cost estimating practice for mechanical and electrical construction organisations, and sets out a framework for research into the development of a cost estimating model/technique in order to improve the prediction of specialist resources productivity. 2. METHODOLOGY AND RESEARCH FRAMEWORK A two-phase mixed design strategy is adopted. The mixed method approach has been successfully used in number of recent studies (Fortune, 1999; Hall, 1999; Ross 2005). It has its roots partly in the construct of triangulation, in increasing the validity of a study by considering data from different sources, gathered under different conditions, and using different data gathering instruments. Triangulation has been identified by Denzin and Lincoln (2003) and Yin (1994) as having four aspects: data source triangulation- where the data are considered to be similar in different context, investigator triangulation- when several investigators consider the same phenomenon, theory triangulation- when investigators with differing perspectives investigate the same phenomenon and methodological triangulation- where one approach is used 567

3 to inform a second approach that takes a different methodological stance. In this study triangulation is from both data source and methodological approaches. The first phase of the study adopted a quantitative approach to the collection and analysis of the data. It used the results of a comprehensive literature review to inform the theoretical selection of a number of informants to be interviewed using a semi-structured interviews approach. The results of the data collected from the semi-structured interviews were used to design a measuring instrument that was administrated to a sample population. Multivariate statistical analysis techniques were used on the resultant data set; the results will then be used to inform the second phase of the study. The second phase of the study will adopt an in-depth case study approach in order to explain the results obtained from the first phase. The resultant data from the two phases will then be used in developing a cost estimating model/technique in order to improve the prediction of specialist resources productivity using historical productivity data provided as site feedback. 3. SEMI-STRUCTURED INTERVIEWS 3.1 Semi-structured Interviews Design and Sample Selection It was decided that the most appropriate approach was to carry out semi-structure interviews with a number of senior estimators in order to get a better understanding of current estimating practice within mechanical and electrical construction organisations prior to the development of the operationalised constructs for the study. A covering letter was sent to the chief estimator of selected organisations. The letter indicated the objectives of the research and requested that the interviewee should be a staff member responsible for cost estimating activities in the organization. A two-page in length protocol with 19 questions was prepared based on a combination of an extensive review of the literature dealing with cost estimating practice in the United Kingdom. The covering letter was mailed to 14 mechanical and electrical construction organizations based in the North West of England. Organisations were randomly selected from available lists of mechanical and electrical construction organisations in the Directory of Members of Heating and Ventilating Contractors Association (HVCA). Five organisations were returned with one firm has no estimating department. The semi-structured interviews schedule also sought information regarding the following areas: 1. Characteristics of responding organisations in term of annual turnover, typical sizes of projects undertaken, total number of craftsmen, and percentage of work subcontracted; 2. Factors affecting accuracy of cost estimating; 3. Difficulties that estimators face when estimating typical project cost; 4. Suggestions regarding any improvements required in estimating. The subsequent semi-structured interviews were conducted in each of the participant s office and lasted for 30 to 40 minutes each. The interview protocol was given to the participants and their permission was sought to tape record the interviews for further analysis. The option was 568

4 given for confidentiality; however, none of the participant requested that their transcripts remained confidential. Table 1: Schedule of organisations characteristics Organisation Annual Turnover Typical Project Size Range Number of Craftsmen % of work Sub-contracted Organisation 1 20m Up to 15m 50 30% Organisation 2 144m Up to 24m Unknown 60% Organisation 3 15m Up to 2m % to 30% Organisation 4 69m Up to 4m 25 Unknown 3.2 Semi-Structured Interview Data Collection The interview protocol was considered carefully, as effective in-depth interviewing requires considerable skill in order to yield meaningful data. Descriptive questions were used, such questions were useful to encourage the participants to describe their experiences and approaches to particular issues, however, it was found that directly asking for a rationale i.e. using why was seen as being a little to interrogative and led to a loss of rapport. It was found as well that the use of clarification questions was particularly useful to open up areas for further explanation. The interviews were recorded and transcribed. The phrasing of the questions was refined as the interviews proceeded from case to case and to ensure clarity and reliability of the questions the interviewer took care to avoid the use of statement that may have biased the collected data. 3.3 Semi-Structured Interview Data Analysis The analysis of semi-structured interviews showed that the main method being used by mechanical and electrical construction organisations in predicting the likely costs of a typical project was the unit rate method of estimating, which was found in most estimating text books, where costs of labour, materials, plant, subcontractors and preliminaries are established and to which allowances for profits, overhead and risk is added. It was also identified in the analysis of the data collected in the semi-structured interviews that estimators relied upon judgment when assessing productivity rates for labour, plant and subcontractors. The interviewees were asked about difficulties they face when estimating a typical project cost, which also have been considered as causes of inaccurate cost estimates. The main difficulty being identified by all interviewees was insufficient time for estimating. The interviewees were asked about their opinion in the areas of estimating that require more improvement. Three of the interviewees indicated that the improvement is required in the quality of the data provided to estimators as site feedback. The fourth interviewee had no answer. 569

5 4. QUESTIONNAIRE 4.1 Questionnaire Design The questionnaire survey was undertaken to determine the opinion of mechanical and electrical construction organisations regarding the current practice on cost estimating in the UK. The questionnaire was designed to be as attractive as possible; a columnar format was used with colours highlighting the questions. The header of the questionnaire indicated the logos of the HVCA and Liverpool John Moores University. The questionnaire was four pages in length with 21 questions. The questionnaire design was based on a contribution of an extensive literature review and the results obtained from the semi-structured interviews that had been conducted. The final questionnaire was developed with the aid of a series of pilot questionnaires involving estimating departments of mechanical and electrical construction organisations. The questions were collected together to ensure that the informant kept the research construct to mind when answering the questions and also to ensure the questionnaire was considered trustworthy, and covered the following sections: Section one: organisational information, annual turnover, staff volume, business sector, and client type. Section two: project size, tendering and procurement approaches Section three: estimating practice, techniques being used, factors affecting accuracy, role of site feedback. Section four: personal information Section five: improvement to cost estimating. However, this paper focuses on the major results of the survey (main methods of cost estimating, cause of inaccurate cost estimates, and role of site feedback in improving accuracy of cost estimates) rather than talking in detail about each of these sections. In total 1000 copies of the questionnaire were sent out to practicing estimators of mechanical and electrical construction organizations in June The final total response rate was 10.4% (104), this is considered as low when compared to other recent survey response rates (Ross, 2005; Akintoye et al, 2000). 4.2 Estimating Techniques and Methods Mechanical and electrical construction organisations were classified into five categories based on their annual turnover in the last financial year, namely: Very Small (N=24) : < 1.5m Small (N=16) : 1.5m- 2.99m Medium (N=20) : 3m- 6.99m Large (N=21) : 7m m Very Large (N=19) : > 25m The respondents were asked to provide information on the effectiveness of the estimating techniques that their organisations used when predicting the likely cost of a typical project. A six point Likert scale was used to gather the data, ranging from 1=least effective to 6=most effective. 570

6 The techniques were drawn from the literature review and were, unit rate technique, operational method, comparison with similar past project based on personal experience, comparison with similar past project based on documented facts, and parametric estimating technique. Descriptive statistics indicated that the most effective technique was the unit rate method of estimating (mean=4.2), followed by comparison with similar past projects based on documented facts (mean=3.8), comparison with similar past projects based on personal experience (mean=3.7), parametric estimating technique (mean=3.5), and then operational estimating (mean=3.4). To determine whether there was a significant difference between different organisation sizes and the main method of cost estimating being used by mechanical and electrical construction organisations, a non-parametric Kruskal-Wallis (KW) test was carried out, which indicated that the only two methods that approached a significant difference in estimating construction costs were unit rate method of estimating X 2 (4,88)= 11.9, ρ = 0.018, method of comparison with similar past projects based on personal experience X 2 (4,92)= 10.6, ρ = No significant difference was found between different organisation sizes and operational method of estimating X 2 (4,66)= 2.2, ρ = 0.702, method of comparison with similar past projects based on documented facts X 2 (4,83)= 7.44, ρ = 0.114, and parametric estimating technique X 2 (4,55)= 6.3, ρ = In order to establish whether a significant correlation existed between organisation sizes and the estimating techniques being used, a non-parametric bivariate analysis was carried out. In each case Spearman s rho is reported and displayed in Table 2 Spearman' s rho Table 2: Bivariate analysis of estimating techniques - Spearman s rho Unit Operational Personal Docu. rate exper. facts Parametric Org. Corr..295 annual Coef. ** turnover (*) (*) Sig. ( tailed) N ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed). The analysis indicated that a positive correlation significant at the 0.01 level was found between unit rate method r = , ρ = and organisation sizes. A negative correlation significant at the.05 level was found between comparison with similar past projects based on personal experience r = , ρ = and organisation sizes. No significant difference was found for other estimating techniques. This indicated that larger organisations tended to consider unit rate method of estimating as being the most effective technique compared to smaller organisations that considered comparison with similar past projects based on personal experience as being the most effective estimating technique. Bearing in mind what the literature review revealed about insufficiency of these methods, a more sophisticated estimating technique is suggested to improve the quality of the estimating process. 571

7 4.3 Site Feedback One of the reliable sources of information upon which estimating is based, should be from recorded company data derived from site feedback or work-study exercises. Only 52% of respondents indicated that their organisations rely upon historical cost data provided as site feedback when producing estimates. The results displayed in Table 3 indicated that the most important reason why estimators do not routinely use site feedback in estimating cost, irrespective of organisation size, was: unique characteristics of each project; followed by unstructured site feedback; lack of confidence in data provided; incompatibility of the information for future estimating needs. However, the data analysis indicated that unstructured site feedback was rated more highly (mean=4.053) as a reason for not using site feedback in predicting resources productivity with very large organisations compared to other organisation sizes. This indicated that for historical productivity data provided as site feedback to be routinely used by very large mechanical and electrical construction organisations (annual turnover > 25m) needed to be more structured. Smith (1995) in this regard, reported that a major reason given why estimators disassociate themselves from site feedback is due to the poor recording systems employed by contractors and hence a lack of confidence in the data provided. Despite the above, there is no doubt that, systematic, realistic and more structured site feedback would be of great benefit to the estimator as this will minimize estimators reliance upon judgment and experience in estimating construction cost which leads to more accurate results. Table 3: Reasons for non- use of site feedback Reasons Overall V. Small Small Med. Large V. Large The unique characteristics of each project Unstructured site feedback Lack of confidence in data provided Incompatible of information for future estimating needs The results displayed in Table 4 indicated that increasing the accuracy of the estimate was rated very highly as an effect of site feedback on the estimating process (mean=4.218), compared to increasing the time required to develop estimate (mean=2.655), and increasing net cost of estimate (mean=2.636). This indicated that while site feedback had a high effect on increasing the accuracy of the cost estimate, it had a low level of effect on increasing the time and the net cost of estimate. Adrian (1982: p. 31 et seq.), from Smith (1995), for example, asserts An important component of any estimating system is the collection of past project data and the structuring of the data for use in estimating future projects. 572

8 Table 4: Suggested effects of structured site feedback Effect of structured site feedback N Mean Std. Deviation Variance Increasing accuracy of estimate Increasing time consumed in developing estimate Increasing net cost of estimate Accuracy of Cost Estimating The overall purpose for an accurate cost estimate is its use in establishing the budget for a project and as a tool used for scheduling and cost control. When bidding on a project, the accuracy of a cost estimate has a number of different implications. The most obvious is the effect on winning the contract. The importance of cost estimating is emphasized by Hicks (1992) that without an accurate cost estimate, nothing short of an act of god can be done to prevent a loss, regardless of management competence, financial strength of the contractor, or know how. The survey revealed six major factors that affect the accuracy of the estimating process within mechanical and electrical organisations, and is displayed in Table 5. Insufficient time for estimate rated the highest factor (mean=4.398), followed by inadequate specification (mean=4.252), incomplete drawings (mean=4.146), quality of project management (mean=2.942), lack of historical cost data (mean=2.592), and then lack of confidence in structured site feed back (mean=2.563). Table 5: Factors that affecting accuracy of estimating process. Reason Overall V. Small Small Med. Large V. Large Insufficient time for estimate Inadequate specifications Incomplete drawings Quality of project management Lack of historical cost data Lack of confidence in structured site feedback Generally, however, very large organisations, where their turnover exceeded 25 million in the last financial year rated insufficient time for the estimate as a cause of inaccurate cost estimates (mean=4.737) more highly compared to other organisation sizes. This can be explained by what the previous data analysis and the extensive literature review showed about the reliance of very large organisations on unit rate as the main method of cost estimating and the more time consumed in developing an estimate that is associated with such method. 573

9 The results displayed in table 5 indicated that incomplete drawings and inadequate specifications as reasons for inaccurate cost estimates were rated more highly by very large organisations (mean=4.474, mean=4.579 respectively) compared to other organisation sizes. The data analysis clearly indicated that lack of confidence in structured site feedback rated the lowest as being a cause of inaccurate cost estimates. This confirmed what previous analysis showed that mechanical and electrical organisations, irrespective of organisation size, generally have similar opinions regarding the confidence of site feedback in increasing the accuracy of cost estimating. 5. CONCLUSION AND THE WAY FORWARD Cost estimating is a process designed mainly to predict the likely cost of undertaking work. However, the paper shows that the main methods of cost estimating being used by mechanical and electrical construction organisations do not differ from conventional/traditional ways of estimating, which entail estimating the cost of specialist construction resources for a project, including labour, materials, plant, subcontractor and preliminaries, and to which profit, overhead and allowance for risk is added. The reviewed literature indicated that such traditional methods are inaccurate, unstructured and rely up judgment and estimator s own experience in assessing resources cost. However, one of the reliable sources of the information upon which estimating is based, ought to be from recorded company data derived from site feedback or work-study exercises. The survey revealed that very large organizations (annual turnover > 25m) considered unstructured site feedback as a main reason of not using site feedback as a source for providing productivity information. The paper highlighted that the main causes of inaccurate cost estimates are: Insufficient time for estimate development (rated the highest factor); followed by inadequate specification; incomplete drawings; quality of project management; lack of historical cost data; and then a lack of confidence in structured site feed back. One of the reasons for such inaccuracy may be the estimators reliance upon the unit rate method of cost estimating, which requires more time to develop estimates. In order to address this problem and to improve the accuracy of the estimated cost, a more sophisticated estimating technique requires developments. The results from the first quantitative phase of the research will be used to inform the second phase, which adopts an in-depth case study approach. The aim of the use of case study in this research is to explain, expand, and generalise the results obtained from the first phase. The resultant data from the two phases will then be used in developing the proposed cost estimating model/technique in order to improve the prediction of specialist resources productivity using historical productivity data provided as site feedback. 6. REFERENCES Akintoye, A. and Fitzgerald, E. (2000) A survey of current cost estimating practices in the UK, Construction Management and Economics, 18 (2), Ashowrth, A. (2002) Pre-contract Studies-Development Economics, Tendering and Estimating, Blackwell, Oxford. Bentley, J. I. (1987) Construction Tendering and Estimating, E. & F. N. Spon, London. 574

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