Construction Cost Estimation Accuracy: A Detailed Analysis Report

This report examines the discrepancies between estimated and final costs in a construction project, focusing on a fourteen-story residential apartment complex in Sydney. The report explores the preliminary estimation method used, which involved parametric cost estimation and historical data analysis, and identifies assumptions made during the process. It then delves into factors that impacted the accuracy of the initial cost evaluation, such as rising material and labor costs, and site-specific issues. The analysis highlights how these factors led to a significant cost overrun, emphasizing the importance of considering dynamic economic variables in construction cost estimation. The report concludes by underscoring the potential for errors due to the use of historic data and the subjective nature of preliminary cost estimation.

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Construction Management
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Abstract
The cost of a construction project can differ significantly from its preliminary estimate due to the cost
evaluation approach that the estimator chooses, and the unstable nature of particular costs that are
utilized in computing an initial estimate. The problem of cost estimation is made even more tenuous by
the fact that the complete extent of the work, which might be necessary to complete a project is not yet
clearly defined at the initial stages of a construction project. This report studies the phenomenon of cost
variation, by considering the vast difference between the estimated cost of constructing an apartment
complex and its final cost.

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Contents
Abstract.......................................................................................................................................................2
Introduction.................................................................................................................................................4
Why variances occur................................................................................................................................4
Project scenario...........................................................................................................................................5
Preliminary estimation method...................................................................................................................5
How the preliminary estimation method was used.................................................................................5
Availability of information...........................................................................................................................6
Assumptions made in the estimation..........................................................................................................7
Factors that might have impacted the accuracy of the preliminary cost evaluation...................................7
Conclusion...................................................................................................................................................7
References...............................................................................................................................................9

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Introduction
It is an unfortunate fact that variances, between the actual cost and the projected cost of a construction
project, usually occur. Sadly, according to Walker (2017), this situation might have an undesirable impact
on the reputation of the cost estimator, since it leads to the emergence of doubts concerning the
competence of the estimator. However, it is important to consider that the fact that the projected cost
is termed as an ‘’estimate’’, implies that the figure is likely to vary from the real cost of development,
which will be computed once the project is finalized. This is due to the influence of a myriad of forces
that cause the real cost of construction to differ from the projected cost of construction.
Project scenario
An estimate was generated for a project involving the construction of a fourteen-story residential
apartments tower, that is situated in Milsons Point, Sydney. The residential tower contains 200 three-
bedroom luxury apartments, with finishes that are of the highest quality. Moreover, the apartment
complex also has other convenient amenities including car parking zones at the basements, a swimming
pool and fitness gym in the roof terrace, and an exquisite garden that is safeguarded by a sophisticated
security system. Upon completion of the project, an audit revealed that the final total cost of
construction exceeded the estimated cost by 50%, thus leading to scepticism, about the competence of
the estimator, among the investors. This report examines the factors that might have affected the
accuracy of the initial estimation and led to the resulting difference between the estimated price and
the actual cost.
Preliminary estimation method
The parametric cost estimation or the project comparison method was applied. According to Przywara
and Rak (2018), it is a useful method that is applied in the initial planning stages of a project, when the
exact demands of the program remain underestimated and a consensus, about the general project
parameters, has not been agreed upon. Furthermore, this approach utilizes the historical data
concerning the total costs of similar projects that involved a building with similar specifications.
How the preliminary estimation method was used
As previously mentioned, the chosen estimation method utilized the historical information to
approximate the building costs by reviewing data from similar projects, that were built in the
geographical region of Milsons Point, Sydney. Accordingly, the characteristics of the projects including
the number of apartments, the car parking zones and other amenities such as the pool and the gym
provided a useful criterion for selecting similar projects that would provide trustworthy estimation data.
Moreover, Przywara and Rak (2018) add that the estimation technique requires the specification of the
approximate total area for the required work. Additionally, the accuracy of the model increases when a
greater quantity of comparison historical data is utilized. This data is available on databases such as the
Cordell cost guides by Roberts (2019). After, collecting the required data, a regression analysis method is
performed to generate the most probable estimation of the construction cost. The construction cost, in
the preliminary estimation method, is a sum of the labour hours, labour rates, material prices, indirect
costs, subcontractor quotes and equipment costs.
The figure below from Przywara and Rak (2018) shows an instance of regression analysis is applied to
produce an estimate through project comparison. The highlighted points on either side of the line are

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the amalgamations of expenditure and the total size of a project. Additionally, the illustrated line is
known as a best-fit line, which denotes the correlation between the construction cost and size of a
development, and it is applied in the prediction of the preliminary budget of the project in question.
Furthermore, how far the points are scattered from the line of best fit is an indicator of the accuracy of
the statistical model.
Assumptions made in the estimation
The first assumption made in preliminary cost evaluation is that of an approximate total area for the
construction work that is yet to commence. Furthermore, it is assumed that the data used in the
approximation of the project cost is adequate enough to be used to calculate an accurate
approximation. Moreover, it is assumed that the material costs are equal to the figures quoted in the
historical data. Another assumption is that the local citizenry can offer both unskilled and skilled labour
that is required for the project.
Factors that might have impacted the accuracy of the
preliminary cost evaluation
It was established that the final construction cost differed from the initial cost by 55%. This is a
consequence of a variety of factors including a rise in material costs, the cost of water and power, issues
resulting from confined sites and a rise in labour costs. First, the inflation in the cost of material was
influenced by additional transportation expenses, that were necessary to move the construction
equipment and material to the site. This caused the material costs to shift significantly from the
amounts that were computed based on a prior similar project.
Secondly, an increase in labour costs rendered the initial estimate quite inaccurate. The availability of
skilled and unskilled labour in any location is dependent on the state of the economy of the municipality,
which hosts the construction site. Unfortunately, the absence of individuals skilled at certain tasks that
had to be undertaken at the construction site necessitated the importation of personnel from other
distant areas. Therefore, an unwanted expense was the result of this situation as more funds were
needed to cater for the accommodation of the workers.

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Consequently, a labour camp that also included leisure facilities, dormitories, and on-site kitchen staff
had to be created to serve the labour force. Additionally, the leisure facilities were helpful in keeping the
workers occupied and relaxed during their off-duty hours. Moreover, it was imperative to keep the
morale of the workers high, to maintain the high productivity levels needed to complete this project
successfully. Unfortunately, the initial estimation model made an assumption that the local population
would supply the project site with the necessary labour, hence such costs were ignored in the initial
evaluation of the projected cost.
Conclusion
The estimated cost of a construction project might vary from its final, and actual cost due to the
subjective nature of the preliminary cost estimation process, as it is at the discretion of the estimator to
establish the true cost of certain materials, equipment and services. Furthermore, errors in estimation
are the result of the shortcomings of using historic data in approximating the construction cost. This is
because certain costs such as labour costs and material costs fluctuate greatly and are influenced by
other changing economic factors. Therefore, the cost of the constructing the apartment building varied
from its projected estimate by 50% due to the dynamic nature of costs such as labour costs, material
costs and the costs of amenities such as water and power.
References
Li, H. (2019). Study on Construction Cost of Construction Projects. Asian Social Science, 5(8), p.19.

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Przywara, D. and Rak, A. (2018). Analysis of the construction industry on the basis of price trends of
labour cost. MATEC Web of Conferences, 174, p.04005.
Roberts, J. (2019). Cordell Cost Guides | CoreLogic. [online] Corelogic.com.au. Available at:
https://www.corelogic.com.au/products/cordellcostguides [Accessed 16 Aug. 2019].
Walker, A. (2017). Factors Affecting Construction Cost Estimation of Building projects. International
Journal of Recent Trends in Engineering and Research, 3(4), pp.379-387.