ENGINEER’S ESTIMATEMAKES OR BREAKS THE CONSTRUCTION INDUSTRY

ESTIMATE

This article explains what the engineer’s estimate means and how, when, and why a wrong one may drastically affect the employers, the construction industry and the country’s economy. The article also proposes a way forward, which should be to discuss the topic further in a symposium of stakeholders in the construction industry. Resolutions therefrom should be forwarded to the relevant authorities to be used in reviewing the existing construction laws and regulations or enacting new ones.

Background

It is widely known that many public construction projects register massive variations, cost overruns and cost claims during or after the expiry of the project cycle. There are often administrative reviews that ‘eat’ into the project time and cost emanating from flawed procurement processes. Often, the so-called “lowest evaluated bidder” may return too low or too high a figure, thereby forcing the employer to engage him/her at the employer’s peril! The procurement regulations do not assist the employer, if there is no engineer’s estimate or if it was poorly derived.

The common public view backed by the law is that the lowest evaluated bidder takes the job, assuming he/she is below the engineer’s estimate! However, once such a procurement is awarded and started using a wrong engineer’s estimate, chances of variations exceeding 15% and 25% abound, with the attendant time overruns and loss of earnings due to late utilization of the project products or services?

To our knowledge, Uganda and many countries lose billions of money in variations, claims or litigations concerning failed procurements thus negatively affecting employers, the construction industry and the economy. There are several factors attributed to this problem. A major one is the “Engineer’s Estimate (EE)” which breaks the construction industry, if it has not been derived professionally and kept as a top secret from bidders and their interested associates.

What is the Engineer’s Estimate?

The Engineer’s Estimate (EE) is the estimated market cost of the construction project, derived as the total amount the constructor/contractor ought to ask for, in order to fulfill the employer’s desire on the project time, scope, cost and quality.  All the four result in a value for money, project, and even if the contractor walks off with the market profit.

But why do we call it the Engineer’s   Estimate when a quantity surveyor or any other professional in the construction industry can derive it? This is a question for another day.

There are several massive projects in irrigation, urban water supply, water for production, roads and highways, energy and facilities, buildings and related structures.  These projects need professionals for the design and supervision, and contractors for implementing the works. For a cost-effective procurement, the caring employer’s wish is to have a project that has the 4Es of effectiveness, efficiency, economy and equity. In other words, the project should show Value for Money. If the engineer’s estimate is lower or higher than the just-right value, the project will either be underfunded or vice versa, thereby losing value for money.

Why is the Engineer’s Estimate (EE) important?

The just-right EE assists in the fulfilment of the project time, scope, cost and quality. The correct procedure of soliciting and awarding infrastructure contracts strengthens the competitive bidding process towards value-for-money projects. A competitive contracting environment therefore needs an effective procurement programme that ensures fairness in the pre-bid solicitation process and post-award review of construction bids. A reliable EE is critical to the success of such a procurement. When the EE is just right, it enables a procurement that attains value for money.

How is the EE derived?

The stages of implementing a typical traditional project, say an office block, are:

The inception and planning stage, when the project feasibility and needs are assessed by consultants and approved by the employer complete with an estimate that forms the working budget estimate;

The scheme design stage by consultants, when specifications and design concepts are derived and approved, complete with a more refined project cost estimate that should be within the budget. If the cost estimate is higher than the budget estimate, then either the budget or scheme’s design estimates will have to be adjusted.

The working, detailed drawings and bid documents’ stage entails production of all architectural, civil and structural, electro-mechanical and information communication technology (ICT) working drawings for approval, complete with detailed drawings to derive the EE and bid documents. Firstly, the key professionals provide specifications and the working and detailed drawings to the quantity surveyor (QS). The QS then uses the documents to prepare a bill of quantities (BoQ), which shows columns of the scope of works for each item to be covered together with the rates for doing the work. The BoQ also includes preliminaries such as cost of insurances, plant and equipment and dayworks.  The BoQs are then costed to arrive at a just-right EE. The EE SHOULD STRICTLY REMAIN CONFIDENTIAL for obvious reasons. The critical review of any bid depends on the reliability of the EE it is being compared to. Therefore procurement departments and the relevant consultants should pay sufficient attention to prepare the engineer’s estimate using the same or a better level of detail as the contracting industry. In addition, the EE is the benchmark for analyzing bids and is an essential element in the project approval process. The EE should reflect the amount that the contracting agency considers fair and reasonable and is willing to pay for the work, allowing for a fair contractor’s profit. Under-estimating causes project delays as additional funding is sought. On the other hand, over-estimating causes inefficient use of funds that could be used for other projects.

The contract procurement stage goes through prequalification, qualification and selection of a contractor;

The contract administration/supervision stage goes through the supervision of works by the consultants to achieve the project time, scope, cost and quality;

The post-contract and closure stage goes through correcting defects and closing the project. Here, contracts agreements of both consultants and contractor are ended as the employer effectively takes over the completed project.

 

 

Methods of deriving the EE

Three basic approaches are used to derive the EE: actual cost, historical data, and a combination of both. One of the most important factors in obtaining a good EE is the experience of the estimator, the time and the INTEGRITY he or she devotes to the exercise.

Actual cost approach

Here the estimator considers the market or current cost of every product, material and service needed to actually perform the work (i.e. the cost of money, materials, manpower and machinery). He must consider the sequence of operations, production rates and a reasonable value of overheads and profit.

This approach requires the estimator to have a good working knowledge of construction methods and equipment. An unreliable EE may be made if the estimator does not have adequate resources to determine production rates from actual outgone and current works, construction methods and equipment as performed by the contracting industry on similar types of projects. This method produces a more reliable estimate that will aid review processes and decisions to award the contract or reject the bids altogether. The method is however more time consuming.

Historic data approach

The estimator relies on historical data from recently awarded contracts. For example, the recent rates used by best evaluated bidders on similar projects may be used to develop the EE. Though this is a cost-effective method to develop the EE, solely relying on historical data may not be appropriate when the data is based on a non-competitive bidding environment. A file of previous unit bid prices should be maintained according to type, size, and location of the project. Upcoming projects should be matched to the most recent projects to develop base prices for estimating the value of the unit prices. Under this approach, bid data are summarized and adjusted for project conditions (i.e. project location, size, quantities, etc.) and the general market conditions.

This approach requires the least amount of time and personnel to develop and produce an adequate estimate for use in budgeting/programming as long as competitive bid prices are used to build the estimate. Non-competitive bidding and unbalanced practices are the least recognizable using the historical data approach to estimating. Further adjustment of the base prices should be considered based upon the ages of the similar projects. Past inflation rates should not be projected into the future unless based on circumstances which can be reasonably expected to occur, such as labour-rate increases through labour negotiations and known material price increases. Where the magnitude and timing of future increases are uncertain and would have a major effect on critical unit prices, price adjustment clauses may be a better alternative.

 

Combination approach

This approach combines the use of historical bid data with actual cost data methods.

The confidentiality of the EE should be a matter of policy even after the project has been commissioned for use!  One advantage of keeping the EE confidential is that it eliminates the possibility of only one or some of the bidders knowing what the procurement entity believes as the worth of the project, thus removing any pressure from its employees to secretly release the estimate to bidders.  One disadvantage of making the EE public is that those desiring to rig bids can form an insider-dealing gang and use it to force for their preferred low-bid amount. This is especially important in cases where the contracting agency anticipates minimal competition and/or a single bid for construction.

If a just-right EE is made, it could be the basis for a procurement option, where specifications, design and a range for the estimated project cost could be provided and included in the bid proposal. The bids are then evaluated against time and cost!

Accuracy of the EE

The EE must be credible enough to effectively guide the bid review process. Its accuracy should be judged by comparing it against the lowest bid (%). Although preparation of the EE is not an exact science, the estimate should however be within ±10% of the lowest bid for at least 50 percent of the projects.

With confidence in the art of determining a just-right EE, the contracting entity should reject those low bids that are not within a reasonable percentage above the EE.

What is the situation on the ground?

The situation on the ground in Uganda and East Africa seems to be bleak. There are ever cases of variations, cost overruns and administrative reviews on several projects. Litigations on why the lowest bidder was not chosen are many. The Public Procurement and Disposal of Public Assets (PPDPA) has time and again approved variations in excess of 15% and 25%. Many of these cases fundamentally rely on a poorly derived EE that therefore failed to guide on the way forward. Where the EE is too low and the contract was awarded at a lower cost, cost overruns and variations are bound to occur.

There is a wrong practice by some consultants, who either by omission or commission do not advise the employer on the importance of the EE. There are instances when it is done using documents with missing information!  A vivid example is when design engineers fail or refuse to provide all detailed design information, claiming that the contractor will provide the same! Bulk works unnecessarily left as prime sums often cause untold variations. They are commonly left for the contractor to break them down and price them, often to the detriment of the project. An engineer’s estimate of cost without time is equally lame! A project time that is left to be estimated by the bidder may overshot by twice the time. This escalates insurance and preliminary costs. It may also cause other related costs such as loss of earnings from renting the building.

How does a just-right EE affect the project?

During the pre-bid considerations/prequalification

The potential bidder’s resources, financial assets, work experience and staffing capability must be identified for it to become prequalified. Under consideration should also be the quantity, type of work and cost the bidder can undertake.

If a fair EE is in place, it can be used to evaluate and compare the cost of jobs a potential bidder has handled.

More-than-one bid preference

There may be cases when only one bid is returned. There is evidence (with the Auditor General’s reports) that in those cases where only one contractor was interested in a project and more-than-one bid requirement was desirable, the bidder actually contacted another contractor to submit a complementary but higher bid so that he got the award as the lowest evaluated bidder. In such a case, if the bid far exceeded the just-right EE, it could be rejected. But if it is at or below the EE, it should be considered for award.

Bid analysis and contract award

There are reliable reports of poorly derived EEs, whereby the EEs were overstated. Even when they were not within plus or minus 10% of the low bid for at least 50% of the projects awarded, there was no procurement law to reject the bids based on poorly derived EEs.

Review of the preparation of the EE

What if the engineer’s estimate is not just-right? Are there procurement regulations regarding release or protection of the EE? Do we have a procurement regulation or law that guides on when a contract award is null and void if it is based on an unrealistic EE, so that the estimate overruns, unfair competition and other factors are eliminated?

There is need to review the preparation of the engineer’s estimate and decide when it can be rejected or approved, depending on its comparison with the returned bids. There is a further need to make the EE officer(s) answerable for unprofessional conduct through omission, neglect of failure. The rejection or approval of an EE should be based on the documentation and database the estimator used, in the event that it is questioned.

Conclusion

A fairly derived EE makes the proper procurement of projects by giving value for money and ensuring that they are done in accordance with the desired time, scope, cost and quality. A poorly derived EE breaks the employer’s back and the construction industry.

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