Week 4

Question 1

What is the objective of cost estimating?

Answer 1

The objective is to define the realistic cost of executing an activity.

Question 2

What is estimating used for?

Answer 2

• Comparing alternative technical solutions.
• Identifying financial commitment.
• Basis for tendering.
• Yardstick against which performance can be measured.

Question 3

The process of estimating the total cost of a project can be variable. What does it depend on?

Answer 3

• The type of project.
• the organisation doing the estimate (promoter, contractor, sub-contractor etc.)
• The stage of the project.

Question 4

Why is it so easy to underestimate a project cost or time?

Answer 4

• Projects often experience cost growth or escalation because we have an inability to foresee all outcomes.
• We affected by error of bias and heuristics.

Question 5

What does “insufficient adjustment” mean?

Answer 5

The tendency of decision-makers to “anchor” on a current value and make insufficient adjustments for future effects.

Question 6

What does “Optimism bias” mean?

Answer 6

The tendency to be overly optimistic about that outcome of planned actions. The bias manifests itself in project planning and forecasting. Related to wishful thinking.

Question 7

What does “overconfidence in estimation of probabilities mean?

Answer 7

A tendency to provide overly optimistic estimates of uncertain events. Decision makers often get overconfident after a series of project successes which can lead to risk-taking

Question 8

What are the three main errors of bias and heuristics?

Answer 8

• Insufficient Adjustment
• Optimism Bias
• Overconfidence in Estimation of Probabilities.

Question 9

What does the estimating process consist of?

Answer 9

1. Consideration of cost and finance.
2. Identifying elements of cost.
3. Determining cost data.
4. Applying the data.
5. Conversion of estimate into a tender bid.
6. Consideration of other factors.

Question 10

What do you have to consider when managing financial resources?

Answer 10

• Expenditure.
• Income.
• Liability.
• Earning.

Question 11

What does “Expenditure” mean?

Answer 11

Flow of money out of the company. Could occur to:
- Suppliers of materials;
- Subcontractors for work carried out;
- Internal or external plant hire companies;
- Directly employed labour.
- Overheads.
Also by paying the contractor for the work done.

Question 12

What does “income” mean…?

Answer 12

Flow in as payment for work undertaken. Must be greater than expenditure. Financial performance is often measured by the difference of expenditure vs income.

Question 13

Explain the term “liability”.

Answer 13

The provision of work and services rarely occurs at the same time as an exchange of money. When work or a service is provided a liability is incurred by the receiver of that work or service. After the agreed period of time the actual payment is made and the liability becomes an expenditure. In a similar manner the provider of the work or service has generated an earning.

Question 14

What is “Retention”?

Answer 14

• Money held back by the promoter.
• Typically 5% of each interim payment held back.
• Creates fund to cover cost of any eventual defects.
• Promoter is effectively a trustee of a trust fund.
• Eventually paid to Contractor after pre-agreed period/end of contract.
• How its used widely depends on industry and type of contract.

Question 15

What are the main elements of cost?

Answer 15

• Personnel
• Equipment
• Materials
• Sub-contractors
• Specialist Services
• Overheads
• Risk

Question 16

In what ways can the cost element be expressed?

Answer 16

• Period based (£/hr).
• Fixed (£/item).
• Unit output (£/m3).

Question 17

Name some estimating methods.

Answer 17

Broad: 
-Global/approximate. 
- Factorial. 
- Labour-hours. 
More detailed and ideal for tendering: 
- Unit rate. 
- Operational.