At the core of cost estimating are labour productivity and efficiency. Do you have a good handle on it?
Wikipedia defines labour productivity as:
“the value of goods and services produced in a period, divided by the hours of labour used to produce them. In other words, labour productivity measures output produced per unit of labour, usually reported as output per hour worked or output per employed person.”
Why is labour productivity so important to cost estimating. The obvious reason is to produce as accurate cost estimates as possible. We all have that in mind when we do a cost estimate, don’t we? Following is my take on this subject.
Compared to other workplaces, where the work is usually performed in a more controlled environment, say a factory, construction is all over the map. The environment is anything but a controlled one. Unexpected and unknown will have an impact on most construction projects: weather, site conditions, the projects can vary greatly, the location of the project is most likely different from the last project completed, trades skill level and availability may vary, stress level (schedule-driven projects), etc. So to say that a cost estimator can use productivity from a previous project on a current one would not be accurate.
From one project to another, productivity will change. It would not be realistic to expect that we can replicate the exact performance, even on similar projects.
Let’s take a look at the factors that influence productivity:
Marketplace. In a slow economy, there is more interest in bidding on construction projects and the general environment is very competitive. The skilled labour pool to choose from would be excellent. With few projects to bid on, most of the skilled labour will be available for hire. When the economy is at a peak, skilled labour would be harder to find. Therefore, the estimator can safely assume that productivity would be influenced in a negative way. On a scale from 1 to 5, where 1 is the most unfavourable and 5 is the most favourable, a slow economy would be a 5 and a peaking economy would be a 1. Anything in between would need to be carefully examined by the estimator and apply the perceived value.
Project Management and Supervision. Poor leadership and lack of consistency in the implementation of project and work procedures can make or break a project. And then, the experience of the project management and supervision team: are they well-seasoned, experienced professionals? The availability, experience and pay level of the members of the project management team should be evaluated separately, and, on a scale from 1 to 5 have a number assigned. The average is the productivity factor for project management and supervision.
Project Location. The project location can have a big influence on productivity. A project located in a remote area, in harsh weather conditions, limited access, might be very difficult to find the right team and trades for. Also, projects that are located in an area with some present hazards (traffic, operations, confined space, lockout procedures, etc.) have a negative impact on labour productivity. The cost estimator would be wise to take all aspects related to project location into consideration and assign a productivity factor number from 1 to 5.
Job Conditions. There are some aspects related to job conditions: site access, site conditions, project schedule, procurement, manual labour requirements, shift work, the general scope of the project. In this category, I would also like to add the Owner’s Engineer and the Owner; do both of them have a reputation for being professional, working well with contractors, paying on time, short turn around time for responses to inquiries, etc. The final productivity factor would be the average of individual factors considered.
Labour Conditions. Union or non-union project? What is the relationship with local labour organizations? Is the project located in an area where local trades are not available and will need to rely on out of town to fill the project needs? All aspects related to labour conditions need to be considered and assigned a factor. The average would be the resulting factor for labour conditions.
Weather. General weather conditions for the area should be checked. Past weather conditions and weather forecast for the months the project will be constructed. Cold weather and hot weather influences labour productivity. It can also impose restrictions on certain activities, like welding under extremely dry conditions and in proximity to forest areas/vegetation. Same as with other factors above, consideration should be given to all influencers and an average factor should be determined.
Equipment. This factor is not always applicable to all projects. We expect that a construction company willing to get involved in a project would have the required equipment for the job. But, is there any specialized equipment that will be needed on the project? Is such equipment available locally? What about equipment operators? Are they available locally and have the right skill level to perform well? These aspects need to be reviewed and a productivity factor assigned.
New Technology. This factor is important for all projects that have new technology as part of the scope. Things to consider are whether there is specialized service available, vendor/manufacturer support, etc.
To illustrate the above, let’s assume that we did a close analysis of all factors affecting the project and came up with the following:
1. The state of the economy: productivity factor 3
2. Project management and supervision: productivity factor 4
3. Project location: productivity factor 2
4. Job conditions: productivity factor 3
5. Labour conditions: productivity factor 4
6. Weather: productivity factor 1
7. Equipment: productivity factor 5
8. New technology: productivity factor 4
The average factor affecting productivity for the project we are analyzing would be 3.25. If 5 is 100% and 1 is 10%, 3.25 would be 46.56%. We apply this factor to the average productivity data under normal site conditions. A fair productivity rate would be around 70% for most of the trades. For further details on how to determine the productivity rate for normal site conditions, please read the post “Composite Crew Rates”.
For example, if we have data from another project where the productivity used was 70% (normal site conditions), we can use that data and apply a decreasing factor of 70-46.56=23.44%. So, compared to a project where all the conditions were “normal site conditions”, the productivity on the project we are estimating would be 23.44% lower.
In my practice, I record the productivity factor used on each cost estimate and how I calculated it. This way I can always go back and reference any project in my database with confidence.
Note for the less familiar with composite crew rates:
• Composite crew rates are used for detailed cost estimating, usually when a cost estimate software is not available. All estimating software programs I know use a crew database.
• Composite crew rates are very useful in conceptual cost estimating.
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