Why use production rate versus unit rate cost estimating?
Using production rate cost estimating, also called “bottom-up”, is the very first level of knowledge a cost estimator should acquire. It takes time and consistency, but it is all worth the effort.
From my observations in the field of cost estimating and working for various clients, there is a tendency among some cost estimators to use the unit rate method. And this would still be fine for as long as the cost estimator can justify and thoroughly understand the unit rate. But, sadly, the practice of using unit rates without understanding the cost components is not uncommon, and it is detrimental to the quality of a cost estimate.
In my practice, I estimate the production rate cost for each element with a quantity. Yes, it takes more time to assign a crew, assess production rates based on the specifics of the project and update the cost for resources as applicable. But, I would choose to use this method any time over the unit rate method.
What are the benefits of using production rate cost estimating in conceptual and detailed cost estimates? The following list represents my personal view on the matter:
It links the cost estimate to project planning throughout the various phases of design.
Allowing this interaction between the cost and planning of the project provides a better understanding of the project’s constructability. It empowers the project team to prepare a buildable approach, avoid significant changes throughout the construction phase, and better understand expected contractor costs/performance.
It allows for proper consideration and factoring in specific project conditions.
It allows the cost estimator to expand his/her knowledge of production-based cost estimating beyond the construction activities with which he/she is familiar.
It empowers the cost estimator with the knowledge to review and assess pricing from contractors.
Using production rates cost estimating gives the cost estimator the tools to analyze a unit price and develop various factors that can be used in future work. Such factors can be used for conceptual cost estimating on a less-defined design. An example of factors that can be extracted from production rate cost estimating: is the cost type ratio to the total unit cost and labour hours per unit, to name a couple. How is this important?
Construction equipment factor can be applied to future projects where all-inclusive labour rates are used to determine the man-hours on construction activities. For example, a comprehensive labour rate for earthworks would include all labour costs, direct and indirect, and allowance for construction equipment and construction materials. The construction equipment allowance can be better determined by providing for an increase in cost estimate accuracy.
It allows for proper adjustments based on labour factors most likely to have an influence on each project. The factors that influence productivity on a construction site are multiple, and it is recommended that they are considered when establishing production rates for each project.
A very comprehensive list of factors that influence labour productivity is provided in a white paper released by Intergraph, “Factors Affecting Construction Labour Productivity”. While production rate is defined as expected performance, productivity can be defined as actual performance. Constantly adjusting the production rates based on achieved productivity is a goal that is worthwhile chasing. Let’s look at how many factors have an impact on labour productivity, as mentioned in the above white paper. It only emphasizes the need to use production-based cost estimating versus unit rates.
Over time, using production rate cost estimating provides the cost estimator with a better understanding and skills to perform a “top-down” cost estimate. On a factored cost estimate, for example, a skilled cost estimator can extract a high level of total man-hours required on the project, a high level of construction equipment cost, etc. This information is valuable in the early stages of project planning as it provides input and adds value to the project validation activities.
And last but not least, a cost estimate that is well documented increases the chances of a project being successful, both in the short and long term.
I hope you liked this article. Please leave your comments below: what is your opinion on this topic? What is your experience with production-based cost estimating for conceptual cost estimates?
