2.3 Estimating cost of risk
Pricing the cost of risk is a significant and challenging part within the bid’s process. As it was discussed on the previous section, construction projects face a high level of uncertainty and risk situations regarding the complexity of the project. According to Laryea and Hughes (2010), there are distinctive factors that affect the estimation of the total cost and it include the anticipated budget before construction, strong competition on bidding, low fixed capital conditions, preliminary expenses, delays to cash inflows, reduced working capital, weather conditions, fluctuations rates, political issues, and so on. Concerning this, it is definitely important to undertake an adequate cost risk analysis from the …show more content…
Nevertheless, there are common issues in cost estimating related to assumptions that cannot be validated, discordance with the schedule and scope of the projects, disinterest on geographic location, as well as the adoption of such as labour rates and overhead cost that are no longer in use (Burtonshaw-Gunn, 2009). In fact, construction projects must be updated in terms of the budget regarding the inclusion of expected and unexpected cost implicit in the whole process.
Certainly, it is possible decrease the cost overrun with a combination of risk management methods with a use of construction cost estimations not completely based on experiences and intuition (Nworuh and Nwachukwu, 2004). From long time ago contractor are relying on traditional and instinctive methods for pricing the risk without systematic and analytical techniques. For that reason, we will discuss in the following section some analytical risk …show more content…
The ‘analogy’ approach is based on statistical evaluation of past events, finding an appropriate relation between cost and efficiency. The adjustments into a new bid should be established through a comparison of complexity and composition, clear differences, as well as location and escalation data. In a similar way, the ‘Parametric’ method relies on previous characteristics of completed projects but, in this case, estimations are done on scope, function and material basis. ‘Expert opinion’ is typically used to establish estimations having confidence on experienced consultants. Likewise, ‘Wideband Delphi’ involves the approach of a group of expert in an individual way, where each expert evaluate the issues related to the project; thus, it is possible to obtain several supported assumptions. ‘Range estimating’ is used to determine the effort and confidence required for each element when technical data and scope of the projects is not properly defined. Finally, the ‘Activity-based’ method is mainly adopted on large-scale constructions, where the material costs are detailed and added to all stages of the WBS. In this particular case, the analysis requires to have detailed information about the design, materials and labour; WBS, project, as well as the historical data, must be accurate to obtain
Pricing the cost of risk is a significant and challenging part within the bid’s process. As it was discussed on the previous section, construction projects face a high level of uncertainty and risk situations regarding the complexity of the project. According to Laryea and Hughes (2010), there are distinctive factors that affect the estimation of the total cost and it include the anticipated budget before construction, strong competition on bidding, low fixed capital conditions, preliminary expenses, delays to cash inflows, reduced working capital, weather conditions, fluctuations rates, political issues, and so on. Concerning this, it is definitely important to undertake an adequate cost risk analysis from the …show more content…
Nevertheless, there are common issues in cost estimating related to assumptions that cannot be validated, discordance with the schedule and scope of the projects, disinterest on geographic location, as well as the adoption of such as labour rates and overhead cost that are no longer in use (Burtonshaw-Gunn, 2009). In fact, construction projects must be updated in terms of the budget regarding the inclusion of expected and unexpected cost implicit in the whole process.
Certainly, it is possible decrease the cost overrun with a combination of risk management methods with a use of construction cost estimations not completely based on experiences and intuition (Nworuh and Nwachukwu, 2004). From long time ago contractor are relying on traditional and instinctive methods for pricing the risk without systematic and analytical techniques. For that reason, we will discuss in the following section some analytical risk …show more content…
The ‘analogy’ approach is based on statistical evaluation of past events, finding an appropriate relation between cost and efficiency. The adjustments into a new bid should be established through a comparison of complexity and composition, clear differences, as well as location and escalation data. In a similar way, the ‘Parametric’ method relies on previous characteristics of completed projects but, in this case, estimations are done on scope, function and material basis. ‘Expert opinion’ is typically used to establish estimations having confidence on experienced consultants. Likewise, ‘Wideband Delphi’ involves the approach of a group of expert in an individual way, where each expert evaluate the issues related to the project; thus, it is possible to obtain several supported assumptions. ‘Range estimating’ is used to determine the effort and confidence required for each element when technical data and scope of the projects is not properly defined. Finally, the ‘Activity-based’ method is mainly adopted on large-scale constructions, where the material costs are detailed and added to all stages of the WBS. In this particular case, the analysis requires to have detailed information about the design, materials and labour; WBS, project, as well as the historical data, must be accurate to obtain