Independent Cost Estimating

Whether you’re a project owner, contractor, or manager, having a realistic view of forecasted construction costs is crucial to prevent budget overruns, misguided decisions, and stakeholder conflict. However, achieving a clear and reasonable estimate can be challenging without assistance since it may require an objective viewpoint and expertise in cost analysis and estimation techniques.

If your project is large or complex, consider partnering with an independent cost estimator to obtain an unbiased estimate and expert recommendations.  

What Is an Independent Cost Estimate? 

An independent cost estimate (ICE) is an objective assessment of the predicted costs associated with a construction project. A third-party estimator with expertise in construction processes and material, labor, and equipment costs performs an ICE.

ICE professionals understand material pricing trends, such as historical patterns and price fluctuations, and know how to utilize cost estimation tools and techniques to forecast potential price increases more accurately. Their skills, knowledge, and experience allow them to form a realistic understanding of estimated project costs and identify risks to help their clients budget effectively and make informed decisions.

The Independent Cost Estimating Process

Independent cost estimating is a multistep process that can occur at any point or span the entire project life cycle. For example, an ICE consultant can help project owners develop a realistic baseline budget in the preconstruction phase, which they can use as a benchmark throughout the project, updating and reassessing it as changes occur.

ICE professionals may also assist contractors in preparing competitive and reasonable bids, mitigating risks, and managing change orders.

Overall, the ICE process generally involves the following steps:

1. Define the Estimate’s Scope

The first step of independent cost estimating is defining its scope and purpose. This step usually involves considering cost estimation standards and whether an independent estimate is legally required.

For instance, clause 36.203 of the Federal Acquisition Regulation (FAR) requires an independent government estimate of construction costs with certain federally funded projects. In such a case, the ICE team must comply with FAR standards throughout the cost estimation process.

Regardless of whether an ICE is required, the consultant and their client should collaborate to define the estimate’s scope, considering factors such as the amount of detail needed and the specific tasks or materials requiring cost estimation. Knowing the purpose of the cost estimation can also be useful in defining its scope and the amount of detail needed.

If the owner only needs an ICE for initial budgeting, for example, they may not need extensive detail, shrinking the estimate’s scope. By contrast, a more comprehensive ICE requiring a robust cost analysis can expand the estimate’s scope and the time needed to complete it.

2. Develop a Work Breakdown Structure

Developing a work breakdown structure (WBS) involves breaking the project into smaller, more manageable parts and defining the activities needed to complete a project in detail. While a WBS usually becomes more detailed as a project progresses, creating it in the planning phase is crucial because it provides a framework for structuring cost estimates.

The WBS is commonly presented in a diagram format to show the relationship between work tasks. For example, a house construction project may be broken down into startup, construction, and close-out components, each branching into subcomponents. Estimated costs for scheduled activities are then assigned to the corresponding WBS components.

3. Collect and Analyze Data

Data collection is an essential step in the ICE process. Estimators rely on high-quality data to form an accurate cost estimate. 

Estimators may use various data collection methods to prepare for cost estimating. They might gather historical data on projects similar in size and scope, conduct market research, collect supplier quotes, or consult engineers for insights. In addition to cost data, they’ll also gather scheduling and technical data to understand the labor and materials needed for a project when predicting costs.

Cost data should be collected on direct and indirect costs and supplemented with actual costs and supplier quotes throughout the project life cycle. Estimators must also adjust costs for inflation.

Data collection and analysis is typically the most time-consuming aspect of ICE, but it is essential nonetheless. A well-defined WBS can help streamline the process because it tells the estimator exactly what needs to be estimated and the data required to do so.

4. Choose and Utilize a Cost Estimation Technique

After the estimator collects and analyzes data, they must select a cost estimate method. The following are some of the most commonly used cost estimation techniques:

• Analogy: The analogy method uses the actual costs of a similar project, adjusting the costs to account for inflation or differences in materials or time. This method can be relatively quick since it utilizes actual historical data, but it may be less accurate than other methods because its accuracy depends on project similarities.
• Parametric: This method aims to develop a statistical relationship between the historical costs of multiple sources and the project’s characteristics to formulate an estimate. It can be quick to perform but challenging since it relies on obtaining historical data from various sources.
• Bottom-up: The bottom-up method involves determining detailed estimates of the tasks and components of the lower levels of a WBS, such as material and labor, and then summing up these costs to develop an overall cost estimate. This method provides great insights into cost drivers but can be time-consuming.

Choosing the appropriate cost estimation technique depends on the life cycle phase. For example, the analogy method is often used in the preconstruction phase when actual costs aren’t sufficiently built out yet. Conversely, the bottom-up method is suitable during the construction phase because it’s based on the idea that actual costs are the best sources for predicting future costs.

The ICE professionals must also consider contractual clauses mandating a particular technique.

After cost estimation, the consultant may perform a cost-benefit analysis to help their client weigh the potential benefits of different project options against the costs. 

5. Conduct a Sensitivity Analysis

Although not always part of the ICE process, a sensitivity analysis is considered best practice because it evaluates the impact of changes in cost inputs, like material prices and labor costs, and involves recalculating total cost and seeing how it affects the final estimate. If a slight change in a cost input significantly impacts overall cost, the results are sensitive to that particular input.

A sensitivity analysis is usually performed on high-cost or high-risk elements. For example, increasing material quality might make a substantial impact, potentially adding thousands of dollars to the cost estimate. Through a sensitivity analysis, an estimator can help project managers or owners better understand major cost drivers and their impact so they can make informed decisions.

6. Perform a Risk and Uncertainty Analysis

Large and complex projects can benefit from an analysis that identifies and quantifies risks and uncertainties.

A risk and uncertainty analysis utilizes statistical methods to look at the total effect of risk and uncertainty and predict the likelihood that a project will be completed within budget. It allows an estimator to adjust cost estimates and account for quantified risks.

Through a risk and uncertainty analysis, project owners can determine if they’ve created realistic budgets and gain confidence in a cost estimate by better understanding risks.

7. Thoroughly Document the Estimate

Another essential step of ICE is documentation. It’s crucial that an ICE professional documents the most important steps of cost estimation in detail, showing all the calculations, estimation techniques, variables, and assumptions used to estimate project costs.

The estimator’s documentation should also present results in a way that facilitates easy reporting and traceability. That way, owners or contractors can use the estimate to justify costs to stakeholders or resolve issues in a clear, streamlined manner.

A well-documented estimate can also help with analyzing changes and their impact and provide historical data for future estimates. 

8. Present the Estimate to Key Decision-Makers

Once the estimate is complete and the estimator has documented it well, they’ll generally present it to stakeholders to increase transparency, build trust, and foster collaboration. The estimator should share enough detail with stakeholders to illustrate the reliability of the cost estimate while remaining concise and direct.

Decision-makers should be taken through the cost estimate information in every phase and made aware of challenges or concerns that arise during the ICE process. Finally, stakeholders and the ICE consultant can discuss recommendations for mitigating risks uncovered by cost estimating.

What Are the Advantages of an Independent Cost Estimate?

An independent cost estimate can significantly impact a project’s success and stakeholder relationships — particularly if the project is high-stakes. Advantages of having an ICE performed include:

• Unbiased assessment: ICE professionals offer an objective estimate of project costs, which is crucial for creating a budget that is based on actual data and unaffected by personal interests. An objective assessment enables cost estimation that is fair and reasonable for all parties involved.
• Effective risk mitigation: The cost estimation process involves uncovering potential risks that could impact the budget, like material price fluctuations. When project owners or contractors are aware of the risks related to costs, they can proactively address them to help prevent budget overruns or decreased profit margins.
• Improved negotiation: A reliable, well-documented cost estimate empowers project owners, contractors, and other stakeholders to negotiate pricing. With expert estimates, no one is left guessing how much labor or materials might cost, and they have clear information to consider and work through.
• Enhanced transparency and accountability: Lack of transparency often leads to misunderstandings, which can turn into conflicts and project delays. A clear, comprehensive, and objective cost estimate leaves little room for confusion and allows accountability.
• Potential cost savings: A comprehensive cost estimate can highlight opportunities to save on costs. For example, an estimator might help a project owner identify innovative ways to save on material costs.
• Improved budget control: ICE professionals can assist owners with creating more accurate and realistic baseline budgets, which is crucial for having a reference point for tracking costs as the project progresses. They might also offer budget management support throughout the project life cycle, helping the project team identify risks before they become costly problems.

What Are Some Challenges With Independent Cost Estimating? 

While ICE has many benefits, it also involves some challenges. One of the main challenges is data availability.

Finding high-quality historical data that can be accurately applied to a new construction project isn’t always easy. Estimators can check historical data accuracy by various methods, such as benchmarking one dataset against another.

If obtaining historical data or performing accuracy checks becomes excessively time-consuming, estimators can consider alternative research and data collection methods. For example, they might gather information from subject matter experts. They can also include contingency allowances in cost estimates to cover unforeseen costs or risks if research presents challenges.

Another common challenge with ICE is adapting to changing project scope and accounting for those changes accurately. To overcome this obstacle, estimators can use a flexible approach that enables easy adjustments to estimates. For instance, the parametric estimation method can enable efficient recalculations based on scope changes.

Overall, there are ways to overcome data collection and availability challenges, and the ICE consultant should have experience with and knowledge of their options.

Discover Spire’s Expert Cost Estimating Services

Estimating project costs can be a difficult, time-consuming process that often requires diverse skills and experience. Still, it’s crucial to perform cost estimation to create a realistic budget, identify and mitigate risks, and increase the chance of project success. 

If you have a complex, high-stakes project, working with an experienced ICE professional enables you to launch your project with a solid foundation. Whether you’re a project owner, manager, or contractor, Spire Consulting Group can help you achieve your cost estimation goals, regardless of your project’s complexity.

As a multidisciplinary construction consulting firm with expertise in cost estimating and firsthand experience in construction project management, we understand the techniques and tools needed to develop a reliable cost estimate. We’ll tailor our cost estimating services to your needs and can help you at any stage of the project life cycle. 

Learn how our independent cost estimating services can transform your approach to project management and help your team stay on budget. Contact us today.

The content included in this article is for informational purposes only and does not reflect the opinions or recommendations expressed by any individual unless otherwise stated.