Development of an International Cost Database

International Project Estimating Limited

Category: International Cost Database | 17/09/2010 - 11:59:11

A good estimator can readily estimate the cost of a project in their home country utilizing data they are familiar with on a day by day basis.

Estimating the cost of international projects outside your own country is much more difficult. Estimating international projects involves working in foreign currencies, utilizing different resource rates and working with labour crews operating at different levels of productivity.

One method of generating conceptual estimates on international work is to take the costs of a similar domestic project and convert those costs utilizing published location factors. Reliable location factors for the type of project or in the country you are working may not exist. These location factors also become unreliable when the scope of work or mix of work varies from the base project they are compared against.

This paper discusses the development of foreign country specific cost data, by converting your own domestic data that the estimator is already familiar with. Utilizing this cost data the estimator can then create a detailed estimate on an international construction project.

In this paper we show how a detailed comprehensive domestic work breakdown (WBS) and resource cost database is converted into a foreign cost database. The data is automatically converted by entering cost conversion factors and basic commodity rates from the foreign country.

The cost factors utilized include the currency exchange rate, the labour rate conversion factor, the labour productivity factor, the local fuel rate, the local power rate, local mechanic rate and local interest rate. In addition the makeup and percentage of local taxes & duties and freight rates are entered.

Material rates are converted automatically by entering the representative commodity prices for the basic materials included in most construction projects including Cement, Reinforcing Steel, Structural Steel, Lumber, Steel Pipe, Conduit, Electrical Cable, Asphalt Cement, Aggregate, Concrete Pipe and PVC Pipe.

The result is a comprehensive WBS & Cost Database for the chosen country.

The examples used in this paper cover Heavy Civil and Hydroelectric Power Projects but the principles cover all forms of construction including Industrial & Process Engineering as well as Commercial Construction.

Comprehensive Domestic Cost Data
The cornerstone of developing an international cost database is to start with a comprehensive detailed domestic work breakdown and resource database covering a similar scope of work as the project you are estimating in the foreign country. The domestic WBS and Resource database should include resource rates for labour, material and subcontracts.

The data should also include typical crew makeup with associated production rates and productivity man-hour factors. The construction equipment rates should be developed from first principles and include current equipment values, depreciation and interest rate formula, parts and labour repair factors and equipment fuel consumptions.

Resource Database Conversion

Converting your resource database into a foreign country database involves 5 steps;

  1. Currency Exchange conversion
  2. Labour Rate Conversion
  3. Equipment Rate Conversion
  4. Productivity Rate Conversion
  5. Material Rate Conversion

Most estimating systems have functions that allow you to convert or factor resource rates as well as production rates. If you estimate using excel you can set up additional fields in your spreadsheet covering the 5 factors listed above.

Step 1: Currency Exchange Conversion
The first step in the process is to convert all resource rates according to the exchange rate between the domestic and foreign country. This converts the database into the currency of your estimate.

This would also handle the conversion of construction equipment and process equipment values that are normally procured competitively on an international basis.

For example the base value of an international procured piece of heavy construction equipment such as a bulldozer or a piece of power generation equipment such as a turbine, excluding freight, taxes and duties, would be similar around world.

This is illustrated in figure 1.

Currency Exchange Conversion
Figure 1: Currency Exchange Conversion

Step 2: Labour Rate Conversion
The second step in the process is to convert all the labour rates, now in the correct currency, to the local currency. This is normally done in two stages by converting trade rates and then management rates.

The "Trade Rate Factor" is the ratio of a sampling of the foreign trade rates to a sampling of trade rates in your domestic database.

The "Management Rate Factor" is the ratio of a sampling of the foreign management rates to a sampling of management rates in your domestic database.

It is necessary to do this in two stages because there is normally a much more significant variance between management and trade rates in developing countries than there are in more industrialized nations. This variation may be as high as 20/1 in developing countries and 2/1 in more industrialized nations.

The rates can be converted globally first and updated in detail down to the resource level depending on the level of detail required. The lower the labour rates, the less important it is to update down the individual resource level.

Depending on the precision required on the estimate, you may also want to factor the labour rates based on payroll burden adjustments such as Holiday Pay, Workers Compensation, Union dues, Government deductions as well as Travel & Subsistence requirements.

Factoring labour base rates and burdens is illustrated in figure 2.

Labour Rate Conversion
Figure 2: Labour Rate Conversion

Step 3: Construction Equipment Rate Conversion
Remember in Step 1 we already converting all equipment values and parts costs based on the currency exchange rates. Step 5 involves completing the construction equipment rate conversion by updating the local mechanic rate, fuel price, power rate, interest rate and typical equipment utilization for the location of the project.

For example, utilization factors for equipment are significantly different in northern countries where excavation equipment may only be able to work 8 or 9 months per year. The maintenance and repair component of the rates is significantly influence by the mechanic's labour rate.

In order to utilize this conversion method, it is necessary that the equipment rates be developed from first principles utilizing depreciation, interest and maintenance formula as illustrated in figure 2.

Equipment Rate Conversion
Figure 3: Equipment Rate Conversion

Step 4: Productivity Rate Conversion
Productivity is usually measured two ways, either as a Production Rate or a Manhour Factor. For equipment dominated activities such as excavation or pipeline work, productivity it is usually measured as a production rate per unit of time. Examples would be m3/hour or metres/day.

The "Production Rate Conversion Factor" is based on equipment driven production rates and is the ratio of a sampling of the foreign production rates to a sampling of production rates in your domestic database. There is usually not a significant difference in these rates utilizing the same equipment. Logically, the productivity generating from a Cat 365 excavator in the United Arab Emirates should not be significantly different from the productivity generating from a Cat 365 excavator in the United States.

Although there may not be a significant difference in the production rate per unit of time, there is usually a significant difference in the man-hours per unit of measure. This is due to a difference in the crew size influenced by union rules, safety considerations, work habits and cultural differences. For example in third world counties, equipment operators usually have helpers or support persons who accompany them. Although the production rate may be the same, the man-hour factor can vary by as much as 2-3 times.

Converting production rates is in itself a two step process. You first must factor the production rates. These should not vary by more than 30%. You then must adjust the crew sizes by adding or removing helpers and support labour.

As mentioned above, productivity can also be measured as a man-hour factor. For labour dominated items such as set and strip formwork or process piping productivity is usually measured as a man-hour factor, such as manhours/m2 or man-hours/m.

The "Labour Man-hour Conversion Factor" is based on labour driven production rates and is the ratio of a sampling of the foreign man-hour factors to a sampling of man-hour factors in your domestic database. There is usually a significant difference in these factors and they can vary by as much as 200%. The variance is mainly influenced by crew size but is also influenced by union rules, safety considerations, work habits and cultural differences.

Converting man-hour factors is also a two step process. You first must adjust the crew sizes by adding or removing helpers and support labour. You then must factor the man-hour factors.

Productivity conversion is illustrated in Figure 4.

Productivity Rate Conversion
Figure 4: Productivity Rate Conversion

Step 5: Material Rate Conversion
Remember in Step 1 we already converting all material rates based on the currency exchange rates. Step 7 involves completing the material rate conversion by factoring basic material commodity rates.

The basic commodity rates include Cement, Reinforcing Steel, Structural Steel, Lumber, Steel Pipe, Conduit, Electrical Cable, Asphalt Cement, Aggregate, Concrete Pipe and PVC Pipe.

This step requires you to find out the local prices for a representative sampling of the commodities listed above.

The "Material Rate Factor" is the ratio of a sampling of the foreign commodity prices to a sampling of material rates in your domestic database.

For example, the rates for Ready Mix Concrete, Grout etc. are strongly influenced by the local price of cement. By determining the ratio of Cement Prices, you can factor all cement based material rates. By determining the ratio of 100mm and 200mm steel pipe prices you can reasonably convert the remaining pipe prices.

Depending on the level of accuracy required for your estimate this may be enough. If more precision is required you may have to go into the market place to procure quotations as required.

To assist in this process it would be useful to group your material rates in your home database so that you can highlight a range of rates by commodity or build in a formula that would include the commodity rate or the material rate factor. This is illustrated in Figure 5.

Material Rate Conversion
Figure 5: Material Rate Conversion

Updating your Master Work Breakdown Structure (WBS)
Once you have converted your resource database, if you maintain a local master work breakdown structure that is linked to your resource file, it is necessary to update and globally replace all the resource rates and crews with your converted resource file.

This will then update all your work assemblies and various levels within your master WBS.

This is illustrated in Figure 6.
Update Work Breakdown Structure
Figure 6: Update Work Breakdown Structure

You should now be able to bid the foreign project by utilizing the converted resource rates and crews from your resource file or import work assemblies from your updated work breakdown structure.

Conclusion
A common approach when bidding International Work is to convert a similar estimate prepared on a similar type of project by using "Location Factors". This is a top down conversion. This type of conversion relies on converting labour based man-hour factors and tends to ignore equipment based production rates and crews.

This top down method of conversion will not work for equipment based heavy civil or infrastructure projects or any project where productivity is equipment driven.

If you have developed a local detailed Work Breakdown Structure linked to a detailed resource database, you can create an International Cost Database from the bottom up by converting your local database as described in this paper, and then bid your project from first principles as you normally would at home.