Cost Estimating Concepts

Transcription

1 Cost Estimating Concepts

2 Goal to provide an overview of cost estimating (CE) concepts in order to review CEs prepared by others or to create alternative CEs

3 Why? financial assurance provision based upon detailed thirdparty contractor costs is required by regulations

4 Outline Part 1 - cost estimating definitions, phases & methodologies Part 2 estimate development and format Part 3 key elements of a cost estimate Part 4 cost estimating over time

5 Part 1 Cost Estimating Definitions, Phases & Methodologies

6 working definition a cost estimate is a documented summary of all dollar costs based upon a well-defined scope.

7 3 cost estimate phases site characterization +100% to -50% conceptual design +50% to -30% final design +15% to -10%

8 3 cost estimating methods benchmark based upon data from past projects factored to new projects parametric based upon more specific parameters and more precise pricing detailed a bottoms-up estimate based upon a more extensive breakdown of the required activities

9 Benchmark Cost Estimate Examples 1 Cap 10 $200K/ac = $2M 2 Construct 1,500 LF of 25-foot deep slurry $250/LF = $375K

10 benchmark comparisons The age of a past project should be taken into account when comparing cost estimates. The scale of the project should be considered. The complexity of a project will also influence the costs.

11 Parametric Cost Estimating RACER is focused on remedial actions and corrective actions CostPro is for closures & post closures Both build cost estimates based upon parameters such as acreage, depth to groundwater, tonnage, volume, etc.

12 Detailed Cost Estimates basis of quantity calculations unit prices & sources extended costs work rate assumptions crew & equipment assumptions disposal assumptions other documentation

13 definition of detailed CE regulations do not define detailed 1986 FR notice preamble states: the cost estimates must contain sufficient detail to allow them to be evaluated the agency expects the detailed CEs to support the detailed activities described in the closure/post-closure plans

14 Closure/Post Closure CEs 3rd-party costs no parents or subsidiaries most expensive option maximum quantities salvage value of wastes not allowable economic value of wastes not allowable must adjust for inflation annually during active life of the facility

15 Corrective Action CEs 2003 Interim Guidance no detailed regulations regulatory flexibility & discretion CE and FA at remedy select FA can be required prior to CA 400 incremental CEs and FA good idea to adjust annually

16 Definitions Summary Part 1 three CE phases (100%, 50%, 15%) three general methodologies (benchmark, parametric, detailed) Regulatory requirements

17 Part 2 Estimate Development and Format

18 a well-developed cost estimate involves: Scoping Pricing Documenting

19 Scoping a scope begins with a permit, order, investigation and/or design

20 Work Breakdown Structure use a Work Breakdown Structure (WBS) when developing or defining the scope

21 WBS Example No. 1 Level 1 Storage Unit Closure Level 2 Remove/Dispose Waste Materials Clean Building Surfaces Conduct Confirmation Sampling Level 3 Sampling Labor Analytical Costs Reporting Packaging and Labeling Loading Transportation Disposal

22 WBS Example No. 2 Facility A Activity 1 Capping Activity 2 Slurry Wall Activity 3 GW Extraction

23 wbs example no. 2 cont d Activity 1 Capping Year 1 Cap Construction Annual Sampling & Analysis Annual Inspection & Maintenance

24 Pricing (quantification) first specified number of units: how many items/events, etc. second conversions, work rates, frequency, crews, etc. third unit pricing & extended costs

25 Quantities may be obtained from plans, specs, etc. or calculated by estimator from other specified quantities (e.g., tons derived from cubic yards) or inferred by estimator performance- based design, for example

26 Documenting basis of quantities calculations & conversions crew configurations work rates (productivity) unit pricing sources other assumptions

27 Why Document the Cost Estimate? 1. To create a defensible and transparent cost estimate. 2. To make future updating easier. 3. To allow for easier use of cost estimate or individual elements by others in the future.

28 Summary Part 2 three basic CE essentials: scoping (including WBS) pricing documenting

29 Part 3 - Basic CE Elements units of measure unit pricing productivity direct costs indirect costs contingencies

30 Units of Measure (UOM) UOMs provide definition to activities and determine their pricing sources (e.g., tons, cubic yards, gallons, linear feet, lump sum, hours, days, each, acres, etc.)

31 UOMs must match the activity For example, soil excavation and loading costs are may be based on cubic yards, while soil transportation & disposal costs may be based on tonnage.

32 Unit Pricing Sources RCRA & CERCLA files Prior Estimates Bids Contracts Vendor quotes Catalogs and on-line sources

33 unit pricing is affected by: locality factors work rates safety levels site conditions

34 Location Factors location factors adjust unit pricing to account for the variability in prices across geographic areas

35 work rate (productivity) is a function of: labor quantity equipment quantity and type

36 Safety Factor May be appropriate at some sites or for some activities (e.g., tank cleanout). Unit costs found in R.S. Means and other sources will likely assume a Safety Level D.

37 site conditions confined spaces vs. open areas topography active facility vs. closed geology

38 Direct Costs (DCs) Direct costs consist of the labor, equipment and material directly related to a specific activity.

39 Indirect Costs Indirect costs represent sitewide costs which are not specifically attributable to a work activity

40 Indirect Costs Facility operators may inadvertently exclude some or all indirect costs (i.e., procurement, utilities, security, planning, mobilization, travel, bonds, insurance, site management) because these costs often are internal costs to the facility, and are not easily tracked and quantifiable.

41 other terms for indirect costs: Engineering Expenses Administrative Costs Site Management Costs Overhead Costs Construction Mgmt. Costs General Conditions

42 Indirect Costs Typically calculated as a % of DCs. Variable for site complexity & volumes. Applied to the entire cost estimate or only portions (e.g., capital versus O&M). Some DCs already may be burdened.

43 Indirect Cost factors include: Construction/Project Management Engineering during construction G&A costs (home office costs) Change Orders Insurance/bonds/permits Profit Project Management during O&M

44 site-wide indirect cost and profit EPA Region 4 removal projects range from 19% to 25%. RSMeans cost data range from 10% to 25%.

45 Construction Management/ Project Management Bidding, planning, permitting, contract administration, reporting, etc. Mobilization, crew travel expenses, review of plans, construction inspection, engineering surveys, change orders, subcontractor oversight, O&M manual preparation, security, IDW disposal, etc.

46 G&A/Overhead Overhead are the costs incurred by an employer over and above direct salaries and benefits paid to employees working on a project (e.g., insurance, office rent, office equipment costs, and administrative costs including support staff salaries).

47 Contractor Profit Calculated as a % of contractor DCs & OH. Applied to both capital and O&M costs. Sub profit ranges from 5 to 12% of DC & OH. General contractor profit: 4 to 15% for their own work and 4 to 8% for subs.

48 O&M Project Support Provided during O&M activities to monitor, evaluate, and report the progress of the activities. May be full-time or part-time. Typically ranges from 10 to 20% of the total annual O&M costs.

49 Contingencies Contingencies account for errors of omission and unforeseen circumstances Actual factor applied depends on the complexity of the site, detail level of the estimate, and stage of project planning. Typically 10 to 25% of total cost.

50 Summary Part 3 units of measure unit pricing productivity direct costs indirect costs contingencies

51 Part 4 Cost Over Time Inflation Present Value (discounting) Nominal vs. Real Discount Rates Excel Calculations Perpetual Care Value Decision Tree

52 Inflation Inflation measures the change in the cost of goods and services over time. Implicit Price Deflator for GDP is a measure of the change in prices of all new, domestically produced, final goods and services and is published by the Bureau of Economic Analysis (BEA).

53 Inflation of Past Costs Unit price in 2003: $ Current Year: 2008 Inflated 2008 Price = $ $ Year GDP Deflator

54 Inflating Future Costs Important to select a realistic inflation rate for future costs. Reasonable to use the average inflation rate for a period in the past. For example, the average GDP inflation rate for the past 20 years is 2.39%. Cost in Year X = Cost in Year Y * (Inflation Rate) (Y-X)

55 Inflation Example 2008 Unit Cost = $10,000 Assumed Future Inflation Rate = 2.39% Anticipated Unit Cost in 2015 = $10,000 * ( ) ( ) = $11,798

56 Inflating Future Cost Employ the latest Congressional Budget Office s (CBO) Economic forecast

57 Post Closure Costs Multiply estimated one-year costs by the number of years remaining in the postclosure care period to obtain the total post-closure cost estimate. Post closure regulations do not recognize the time value of money.

58 present value analysis: projects long-term costs in present-day terms compares alternative remedies by stating the costs current dollars recognizes the time value of money and is not used for post-closure projections

59 Present Value The present value of a future amount is the present principle figure that must be deposited today at a given interest rate to yield the desired future amount.

60 Nominal vs. Real Discount Rates Nominal discount rates are used with data that has been inflated prior to applying the nominal rate. Real discount rates are used with data that has not been adjusted for inflation (out-years not inflated).

61 Present Value Calculations Present values are determined by using discount rates (interest rates) which are presumed to have long-term validity. OMB in Circular A-94, Appendix C, indicates a 30-year real discount rate of 2.8% and a 30-yr nominal discount rate of 4.9% (January, 2008).

62 Present Value Calculation Basic Present Value Calculation is: Future Payment PV = (1 + Annual Discount Rate) n Cost in 2011 = $10,000 Annual Discount Rate = 2.8% n = number of years = 2 Present Value in 2009$ = $10,000/(1.028) 2 = $9,463

63 Excel Calculations Excel has a Present Value function (PV) and a Net Present Value (NPV) function. The PV function is used with constant annual cash flows. The NPV function is used with irregular annual cash flows.

64 Excel Present Value Function PV(rate,nper,pmt) Rate is the annual discount rate in decimal format (2.8% = or 7% = 0.07) Nper is the total number of payments (10 yrs) Pmt is the annual payment ($10,000/yr) Assumes payments are made at the end of each year Undiscounted cost of $100,000 ($10,000*10 yrs) PV(0.028,10,-10000) = $86,179 PV(0.07,10,-10000) = $70,236

65 Excel Net Present Value Function NPV(rate,value1,value2, ) Each value can vary and is entered individually Use if annual costs fluctuate and you want to calculate in one function. Annual discount rate of 2.8% Assume undiscounted capital costs of $1,200,000 Year 1: $100,000 - Year 3: $400,000 Year 2: $500,000 - Year 4: $200,000 NPV(0.028, , , , ) = $1,117,692

66 Excel Present Value If the base year of the O&M is different than the base year of the cost estimate you have to discount the PV function to the base year. Example: Calculate the PV of O&M costs of $10,000 per year for 10 years starting in 2015 for a cost estimate with a base year of PV(0.028,10,-10000)/(1.028) 5 = $75,065

67 Perpetual Care Value for FA To calculate an investment target for Facilities where the long-term care term (period of operation) is indefinite: Annual Cost /Interest rate = Perpetual Care Value example: $100K/.03 = $3.333 Million

68 Decision Tree Analysis develop an estimate for each alternative remedy. assign a probability to each alternative remedy and multiply by the cost of each to develop target cost estimate at any point in the remedy selection process.

69 Example Decision Tree Soil Disposal 3,000 cy Probabilistic Result ($142.50/cy) = $427,500 Low Landfill Tipping Fee $91.50/cy = $274.5K Medium Landfill Tipping Fee $135.00/cy = $405K High Landfill Tipping Fee $208.50/cy = $625.5K 25% 50% 25%

70 Summary Part 4 Inflation Present Value Nominal vs. Real Discount Rates Excel Calculations Perpetual Care Value Decision Tree

71 Questions