Project consultants way of estimating the cost

The project consultants/ detailed engineering contractors are selected by the owners setting up the plant based on the detailed engineering companies experience in their previous projects, the resources that company have to execute the project and their collaborators who can extend their support during execution of the project including the technical knowhow the project consultant they have of their own or with tie up with their collaborators. Even though the detailed Engineering consultant posses major above said qualities the cost element plays a vital role while selecting the project consultant by the owner. Hence it becomes very much necessary for the project consultant also to optimise their cost to secure the contract with the owner. In normal circumstances all the companies wants to save the cost of the project from day one which will help in completion of the project within the budgeted cost. .The owner starts control process  with floating of tenders to various project/detailed engineering consultants . The project consultants/ detailed engineering contractors starts working in their estimate  with basic inputs provided by the owner and develop the mass flow/ heat flow diagrams. The basic main important equipment details  are provided by owner or by the process licenciator. On development of the said drawings the detailed engineering contractors calculate the number of drawings which may be required to be designed and detailed by them during the execution of the project. The number of P&I diagrams required, the number of isometrics to be designed etc are calculated by the companies. If the owner further wants the contractor to carry out other services like monitoring of supply of equipments, supervision of civil, mechanical, electrical & instrumentation works .The consulting companies start calculating the man-hours required to be spend by the company for developing whole project drawings and number of man hours going to be spent on other activities. Based on market rates of Engineers/technicians and other category personals required  for that project the total cost of the consultants are calculated. In case of any tie up required from partners of other nations  the cost of that is also included. Finally considering the overheads and profit margin that particular company maintains are included to arrive at the final quotation cost by the project consultants

Basic Elements of construction cost Estimate

On receipt of the construction bids the company decides their participation based on the principles of the companies quoting for the bid. Once decided to participate in the race for the work with other competitors the strength and weakness is analysed and strategies are made to hit the work. The estimator starts work on the bid. While estimating at what cost the work to be quoted the minute details and requirements of the client is to be understood. Because each requirement mentioned in the bid by the owner  has cost implication for the company participating and the estimator to calculate the cost for each item mentioned. .Let us consider the company participates in a mechanical erection works the minimum basic items to be considered by the estimator are

1.    Direct manpower cost

2.    Indirect manpower cost

3.    Cost of consumables to be used for that work

4.    Heavy equipment hire charges

5.    Non destructive testing and other testing requirement cost

6.    Cost of maintenance of tools going to be used

7.    Amount to be spent on documentation for obtaining statutory requirements

8.    Arrangements to be made onsite cost

9.    Arrangement for stay of persons at site

10.      Expenses incurred at corporate office on account of this work

11.      Salary of the officers/staff working at site

The details mentioned are the basic cost to be considered .over and above any special requirement of owners cost also to be included in the cost. The sum of total of the said cost becomes the basic cost for completion of the works. However all the companies work towards earning their profit which is not included in the above calculated cost. Erection works are very dangerous in nature. Hence workers and staff persons who will involve in the works are also to be covered under some safety scheme which is not covered in the above cost. With all possibilities for various reasons like lack of time, not getting the required correct input in time delay from subordinates in compilation of the work and many other reasons may leave the estimator in omission of certain items in the bid which is to be covered in the form of contingencies.. On various stages of quoting the work many types of guarantees are required by the owner/client of the project which in turn cannot be given by any company as cash. So some of the bankers of the company stand guarantee for the amount and it is normally accepted by the owner in their own accepted format which in turn  was already approved by their bankers. Such type of guarantees is given for non withdrawal of the bid after the specified date mentioned in owners document. Likewise for the performance of the work carried out by the contractor and for any major defects caused in  their work. In many cases the bank Guarantee formats are discussed between the contractor and owner  on award of contract for all guarantees except for bid gurantee.Normally it is common practice in India for execution of the work the estimated amount is not totally spend by the company of their own. There are lenders and financers who is ready to help the companies on good will and with some interest for the amount given by them. Such interest amounts are not normally added in the cost of the work before taking it further with owner for finalisation. Even when we go for any purchase we are not satisfied by the sale price mentioned in the tag. Everyone is happy with the discounts and reduction in price. Same principle apply here too. On finalisation of the contract the owner too wants reduction in the sale price of that work and the contractor always keep provisions on the calculation to pass it on to the owner and to clinch the contract. To execute the work from corporate/regional/head offices the indirect expenses spent while executing the project needs to be considered..Every company based on its size and volume have their own norms for this purpose and it is being communicated to the estimator to add it up along with other expenses. Addition of the total basic cost along with the above said hidden cost forms the basis for the cost of the work. On further discussions and requirement for that particular work for the company the cost is revisited and finalised and submitted to the owner,

Types of contracts

In my Blog i would like to describe the general procedure for preparation of quotation when the company receive the enquiry from the client. Initially the received bid is thou roughly scrutinised for the worth of quoting the bid. The nature and financial involvement is assessed by viewing the bid. The bid may be a normal Labour contract, only a small infra structure civil contract, only a part package of the project , may be either Engineering,Procurement and construction project or a normal erection contract . 

                     Labour contracts :Every company in India have their own policies in selection of the work for execution. Some contracting  companies wish to participate in all works of construction. It may be a civil contract, mechanical contract, electrical contract others which is purely construction in nature. This means whatever materials related to the construction activities either consumables or construction materials every item will be supplied by the client. Only labour portion of the contract will be carried out by the contracting company. The contract value of which will be very less. The contractors who have labours under their control wishes to execute such bids. Bigger companies with their own resources don’t wish to participate in such bids

LABOUR CONTRACTOR WITH WORKERS

Civil contracts : When the owner wishes to control the cost of the project normally the infr tructure facilities like local roads( Temperorary in nature) to be provided for their Engineering, rocurement and contraction contractor ,they develop the facilities with their own officers and only hiring a medium sized contractor who can carry out such projects ( Mostly from local area) are selected. In such cases the civil materials like bricks, sand,rebar,metal etc.According to clarifications ,contractors are classified as Class A,B,C based on their resources and financial capabilities. When the work starts the design and darwings required for execution of the works are normally prepared by the design and engineering contractor selected by the owner of the project and the execution at site is being carried out by the officers of the owner.

Buil                                                    Building Contractor

Packaging Route : Certain clients having sufficient workforce implements the project on package   route. It means the major equipments and material procurement actions are taken care by the owner himself and units forming part of the project which are readily available in market with sufficient experience in that particular field are purchased by owner. In the presence of the representative of the package supplier the client himself hire a small contractor and under the guidance of package vendor the contractor completes the works of the package. Normally the value of contracts are normally less except for major erections like boilers of higher capacity. Based on the size and capacity of the package the client choose a contractor who has sufficient experience in that particular field along with financial capabilities. In case  the client wants to capture good reputed contractors for installation they combine major packages together to increase the contract value of the installation.

                                Erection Contracts : When big factories are set up for the production of power, fertilizer ,petrochemicals and ore beneficiation plants the volume of items to be installed are huge and many and in most of the cases such items can not be handled by client himself. Hence it becomes absolutely necessary for him to engage a standard contractor to carry out major installation works. The erection works are complex in nature and involves installation of many items like structural steel, Heavy equipments, rotary equipments, pipe line works with various materials of construction . To handle such a big volume of work it may not possible either by a small or a medium sized contractor. Hence the client/ owner has no option except to select a contractor with good financial capability along with their own major resources to execute the work in time with quality.  Contracts of that nature are being handled by big contracting companies in the country.

Read my next post regarding cost estimation of Erection contracts