Blog Viewer

Owners’ Expectations of Accuracy of Construction Cost Estimates Unless actively discussed with the owner, both orally and in writing, in advance, it is possible the owner may presume that the design stage construction cost estimates will be a “spot-on” estimation of the project’s probable bid or proposal prices, and the final construction price. In reality, however, engineers’, architects’, and CMa’s estimates of construction costs are typically less-exact and involve less overall time and effort than do price proposals and bids by contractors, subcontractors, and suppliers. This basic aspect concerning the level of effort and accuracy of design stage construction cost estimates should be clearly communicated to the owner.

When the owner is either dissatisfied or unconvinced when advised as recommended immediately above, the design professional or CMa may advise the owner to retain the services (either directly, or as a subcontractor to the design professional or CMa) of a professional construction cost estimator. Private cost estimating consultants exist in the design-construction marketplace and serve most larger and medium-sized urban markets. While an entity hiring a cost estimating consultant may rightfully expect that such estimates will be more-detailed and likely, more-accurate than those typically prepared by engineers and architects, such services have an associated cost and time requirement, and likely do not come with any guaranteed accuracy.

AACE International (formerly the Association for the Advancement of Cost Engineering) publishes several guidelines addressing the anticipated accuracy of construction cost estimates at various levels of project definition.  Such guidelines present independent, non-profit, third-party expectations established by industry cost estimating experts and are, thus, more likely to be accepted by project owners, instead of any expectation of accuracy independently asserted by a design professional or CMa.

AACE guidelines are available for a variety of project types, such as:

• AACE 17R-97, “Cost Estimate Classification System”
• AACE 18R-97, “Cost Estimate Classification System – As Applied in Engineering, Procurement, and Construction for the Process Industries”
• AACE 87R-14, “Cost Estimate Classification System – As Applied in the Petroleum Exploration and Production Industry”
• And others.

When using AACE guidelines as a basis for communicating to the project owner expectations concerning the accuracy of construction cost estimates, it is very important to clearly communicate the expected range of the construction cost estimate, to reduce the potential for the owner to focus on the “point estimate” around which the range of costs is established. It is also important to clearly correlate and communicate to the owner the project’s current level of definition (including scope, quality, and time allowed for performance of construction) to the specific “level” of AACE cost estimate.

The design professional’s or CMa’s project manager, or other appropriate team member, should communicate to the owner, both orally and in writing, the expected accuracy of the construction cost estimate, including:

1. Range of costs, both above and below the “point estimate”, in accordance with AACE guidelines.
2. Other factors likely to affect bid prices or proposal prices, such as aggressive schedules, potential for unforeseen site conditions, unusual contractual risk allocations, and other matters.
3. Knowledge gleaned by the design team or CMa concerning the potential for bids or proposal prices to be affected by volatile markets, whether for materials and equipment to be incorporated into the project or other matters, such as other projects expected to be out for bids or proposals, or under construction at the same time as the project, and will likely compete for contractors, subcontractors, suppliers, and other resources.

Finally, the entity that prepared the construction cost estimate should clearly communicate to the project owner and other principal consultants on the owner’s team the latest construction cost estimate at appropriate points in the design stage. This writer has observed a surprising tendency for design professionals to develop and update such estimates but fail to clearly communicate them to the owner. When the owner directs design stage changes in project scope or quality, there will be an associated effect on the project’s construction price, which must be clearly communicated to the owner. Failure to do so can result in unpleasant surprises upon the opening of construction bids and embarrassment for the design professional and CMa.

Contractual Approaches

Where the owner is concerned about its budget, or where market volatility has potential to affect the project’s bids or price proposals, discuss with the owner strategies for managing such matters. That such discussions were held with the owner , and the owner’s acceptance or rejection of the suggestions, should be documented in the design professional’s or CMa’s project file.

Several alternatives are available to help manage risk and project construction costs during periods of cost escalation, volatile markets, and supply chain challenges, including:

• Owner-controlled allowances included in the construction contract price.
• Contractual provisions allocating to the owner some or all of the risk of construction cost escalation, such as AGC ConsensusDocs 200.1—2017, Amendment No. 1: Potentially Time and Price Impacted Materials.
• Compensating contractors on the basis of cost-plus-a-fee.
• Other considerations, such as: project delivery method; duration bids or price proposals are to remain subject to acceptance; early purchase of materials and equipment; payment to the contractor for materials and equipment suitably stored but not yet incorporated into the construction; mitigated risk to the contractor for delays caused by supply chain problems; and cost escalation and delays caused by action or inaction of authorities having jurisdiction over the work.

Unfortunately, discussion of these alternatives is beyond the scope of this blog post.

Conclusions

During periods of market volatility and significant construction cost escalation, design professional and CMa project teams should devote increased attention to developing and documenting the basis for construction cost estimates and communicate the estimates and associated assumptions to the project owner. The design professional and CMa (if any) should always establish clear expectations with the owner regarding the accuracy of design stage construction cost estimates, based (where applicable) on AACE guidelines and the level of project definition.

Design professionals and CMa’s should discuss with the project owner where construction costs are likely to be subject to market volatility or significant cost escalation. They should discuss with the owner, and ultimately obtain the owner’s direction on, appropriate contractual means of addressing such risks via appropriate contract provisions.

Copyright 2022 by Kevin O’Beirne

The content of this blog post is by the author alone and should not be attributed to any other individual or entity.

The author of this blog post is not an attorney and nothing in this blog post constitutes legal advice. Readers in need of legal advice should consult with a qualified, experienced attorney.

Kevin O’Beirne, PE, FCSI, CCS, CCCA is a professional engineer licensed in NY and PA with over 30 years of experience designing and constructing water and wastewater infrastructure for public and private owners.  He is the engineering specifications manager for a global engineering and architecture design firm.  He is a member of various CSI national committees and is the certification chair of CSI’s Buffalo-Western New York Chapter.  He is an ACEC voting delegate in the Engineers Joint Contract Documents Committee (EJCDC) and lives and works in the Buffalo NY area.  Kevin O’Beirne’s LinkedIn page.