Capital Cost Estimate – Direct Costs

CAPITAL COST ESTIMATE DIRECT COSTS

In the field of cost estimating, the direct costs can be defined, in a simplistic way, as all the costs associated with a construction activity. If we perform the activity, we incur the costs and vice-versa. Only the resources allocated to construction activities are considered direct costs. Let’s say that we have an excavator to perform excavation on site in an activity that has a quantity and a production rate; the excavator is considered a direct cost. If on the other hand, we have a bulldozer on the site that is servicing the site (maintaining proper drainage, access roads, granular material stockpile, etc.) the bulldozer will be an indirect cost.

The direct costs fall into one of the following categories:

It is interesting to mention that item 3 above, temporary construction material, can be both direct or indirect cost. If the temporary construction material is only used as a resource to an activity, then it is classified as a direct cost. If on the contrary, it is allocated to many different activities concurrently, then it should be an indirect cost.

For example, we have scaffolding for access to build a concrete column. We will use the scaffolding to install the formwork, the reinforcing, and place and finish the concrete. We will not prorate the cost of scaffolding to allocate it to the many activities we use it for. The reason we do not follow this practice is because we could not determine with enough precision how much to allocate to each activity. This is important because we need to have accurate costs allocated to each activity.

Things get complicated when we act in the area of conceptual and capital cost estimating. Depending on the Project Owner, the definition of direct costs for a capital cost estimate is not the same from one Owner to another.

Some Project Owners prefer to list all construction costs as direct costs of a capital cost estimate. The construction direct costs are contractor’s total costs, including contractor’s indirect costs and profit. Other Project Owners consider contractor’s indirect costs and profit as indirect costs of a capital cost estimate. It can go even a step further, defining direct costs as all costs associated with the construction of a facility which are incurred on site.

All approaches are correct, from the cost estimator’s perspective. As long as all the required costs are included in the cost estimate once complete, there is no need for debate. It is recommended to clarify the definition of direct costs with the Project Owner early on. This is particularly important if the estimating method used is the unit rate. Most unit rates in a database are inclusive of contractor’s indirect and profit costs.

The estimation of direct costs is possible if we use the unit rate or bottom-up cost estimating methods. For cost estimates that have very limited design information (1% to 20%, depending on the type of project), we will need to use factored or parametric cost estimating methodology. Extracting the direct costs in a cost estimate that was developed using the parametric or factored methodologies is not required. At that phase of project development, there would be no requirement to a cost breakdown into direct and indirect.

If, for any reason there is an interest in the direct costs only (validating a high-level construction duration for example) it can be done with a low level of accuracy. For the experienced cost estimator, using a factored cost allocation per type of project, the direct costs can be determined.

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