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8/10/2019 Analysis of Indirect Cost
1/5
l-5
Selden H. Harlow
Construction Manager
C. Thoma s McCreedy
Charles T. Main International, Inc.
Prudential Center
Boston, Massachuse tts, USA
Charles T. Main International, Inc.
Prudential Center
Boston, Massachuse tts, USA
ANALYS IS OF THE INDIRECT COSTS OF PROJECT CAPITAL
INVESTMENT COST ESTIMATES
INTRODUCTION
There is a wide variance throughout the
industry in the manner of estimating the in-
direct costs of major capital investment pro-
jects of long duration.
This paper is present-
ed to (1) identify the components of total
project cost, (2) analyze the direct costs,
(3) analyze the indirect costs, (4) identify
optional direct costs that could, instead,
be categorized as indirect, and (5) recommend
a position with regard to the indirect cost
approach.
GENERAL
This paper is the result of a study con-
ducted by Charles T. Main International, Inc.
for a Federal Agency whereby conceptual esti-
mates were prepared by Main and one other
professional firm for similar advanced energy
sys tems. The results were substantially
different, both as to the makeup of Direct
Cost and the amount of Indirect Cost, and an
analysis was undertaken as reported herein.
This paper is directed toward the pre-
paration of conceptual estimates for a project
of several years duration.
For conceptual
estimating purposes, percentages are often
used to estimate indirect costs.
As the pro-
ject proceeds,
the estimate is refined and
updated and, in many cases,
actual estimates
of cost,
rather than percent factors, are
used for the indirect accounts.
All per-
centages shown herein are percentages of
total project cost except Table No. 5
which recasts the cost into percent of
Direct Cost.
COMPONENTS OF TOTAL PROJECT COST
The two major categories of total project
cost are the direct costs and all other costs
which are identified in this paper as indirect
costs.
Table No. 1 identif ies the components
of total project cost and gives approximate
percentages allocated to each component. A
detailed analysis of each of these components
follows, but it should be noted that indirects,
as defined herein, include indirect construc-
tion cost, contingency reserves, professional
services,
owner's and other charges, escala-
tion and financing costs.
TABLE NO. 1
COM P ONENTS OF TOTA L P ROTE CT COS T
Approximate Percentage
E.5
of Total Cost
1 Direct Cat
57.0
2
Indirect Construction Cost
8.2
3
Professional Services
5.2
4
Owners and Other Charges
1.0
5
contingency Reserves
5.0
6
Escalation
10.2
7
Financing Costs
13.4
Total Project Cost
100.0
Note that, in this case,
a typical coal
fired steam electric power station, the in-
direct costs amount to 43% of the total cost.
The direct costs (57%) are calculated by ex-
perienced estimators working with drawings,
estimated quantities,
and material and labor
costs drawn from current data and past exper-
ience with similar projects.
The indirects
are then calculated by applying percent
factors to the direct cost. The higher the
percent, the greater the likelihood of error.
Therefore,
we believe it is best to maximize
the items considered in the direct cost es-
timating.
ANALYSIS OF DIRECT COST
The direct cost can be divided into
three main categories:
land, materials,
and installation, which are further broken
down into the subcategories shown in Table
No. 2.
The land costs include the purchase of
the properties required for the project and
all costs associated with the acquisition of
the land, including agent's fees, title search
and property surveys, condemnations, removals,
relocations, etc.
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8/10/2019 Analysis of Indirect Cost
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1.00
1.10
1.20
.21
.22
.23
.24
.25
.26
.27
.2S
.29
1.30
.31
.32
.33
.34
.35
.36
.37
.38
TABLE NO. 2
ANALYSIS OF DIRECT C OST
Approximate Percentage
of Total Cost
Direct Cost
Land and Acquisition Cost
Permanent Materials and Equipment
Ma,or Purchase Order
Field Purchase Order
Furnish and Erect Contracts
Contra&or FurnIshed Materials
Freight and Special Packaging
Technica l Service Engineers
Customs and Dutiw
spare parts
Sales Taxes
Installation cost
Manual Labor Wages
Wage Related C osts (fringe benefits)
Health and Welfare
Pension Plan
Apprenticeship
Trave l and Subsistence
.X&iOS
spec1a1 Insurance costs
Industry Promotion Funds
Payroll Taxes
FICE
State Unemployment
Federal Unemployment
Payroll Premium Costs
Casual overtime
High, Tool, Mask, etc.
Workmens Compensation Insurance
Supervision (foremanshlp)
Construction Equ ipmen t forSpecialty Work
Contractors Fees
57.0
0.7
39.2
35.4
0.6
0.4
1.5
0.2
0.1
0.2
0.8
17.1
10.4
1.5
0.9
0.3
0.7
1.5
0.8
1.0
The permanent materials and equipment
include the cost of all materials permanently
incorporated in the work from whatever source
t.hey are procured. The major purchase orders
are the engineered equipment, sys tems and
materials requiring long lead times.
These are
generally procured by the engineer or the own-
er's central purchasing department.
Certain
llong lead time items such as chimneys, cooling
towers,
elevators, field assembled tanks, and
architectural features are often procured on
a furnished and erected basis.
The erection
cost portion is carried in installation cost.
The field purchase orders are for those
materials which can be purchased with less
lead time and are normally procured by the
construction manager or contractor.
These
materials usually include civ il engineering
materials such as sand, gravel , concrete and
paving materials,
and miscellaneous piping
and electrical materials purchased to supple-
ment the major purchases.
We consider all
costs associated with the procurement of
permanent materials and equipment as part
of the direct cost.
Allowances for freight,
especial packaging,
technical serv ice engineers,
(customs and duties, spare parts, and sales
taxes are included in direct cost materials.
For international projects the costs
,allowed for freight,
special packaging and
customs and duties will var y from the stan-
dards shown in Table No. 2 and special atten-
tion must be paid to these categories.
The installation portion of direct cost
j.ncludes wage costs for all manual labor,
foremanship,
all wage related costs mandated
by labor agreement, payroll taxes, construc-
tion equipment associated with certain civi l
work items to which the costs can be directly
charged, and contractor fees.
The cost o f all manual labor is estimated
in the direct accounts. The percent used in
this example includes ancillary labor for
unloading, storing and sorting materials and
equipment, general and final cleanup, and
other miscellaneous activities charged to the
direct accounts.
Also included are all fringe benef its,
payroll taxes, payroll premium costs (casual
overtime, mask, tool, high time pay, etc.)
and workmen's compensation insurance costs
which are built into the wage rate.
Con-
tractor fees, which are frequently included
in unit price estimates which are generated
in later updates of the estimate, are also
included.
Finally, for items such as earthwork,
piling, roads,
specialties (such as chimneys
and cooling towers), contractor equipment
and other overhead costs are estimated on
a lump sum or unit price basis and charged
directly to a single account.
COMPONEmS OF INDIRECT CONSTRUCTION COST
There are many items of cost associated
with any construction project which cannot
be convenient ly charged direct ly to a single
estimating account. These items are commonly
referred to as indirect costs, or distribu-
tables, in the industry.
The indirect accounts include indirect
construction cost, contingency reserve, pro-
fessional serv ices, owner's and other charges,
escalation and financing costs. For concep-
tual estimates, these items are often expressed
as a percent of the direct cost.
When detailed
construction cost
estimates
are produced later
in the project period,
many of these items can
be calculated on a unit or fixed cost basis,
but they are still considered indirects be-
cause of their multipurpose nature.
Indirect Construction Costs include
facilities,
equipment and serv ices required
to directly support the construction opera-
tions. These items are summarized in Table
No. 3.
TABLE NO. 3
COM P ONE NTS OF INDIRECT CONS TRUCTION COS TS
2.10 Field Offic e and Labor Expenses
Office Space and Equipment
Opera ting Expenses and Supplies
Communications
Safety Equipment
Inclement Weather Gear
Gmstruction Camp Operations
On-site Transportation
.20 Non-Manual Labor Wages and Benefits
.30 Tempo rary Construction Buildings
-40 Construction Tools and Equipment
Heavy Equipment
Automotive Equipment
Maintenance Costs
Small Tools
Special Equipment Rentals
Approximate Percentage
of Total Cost
1.3
0.8
0.9
2.7
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8/10/2019 Analysis of Indirect Cost
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NC?,
.50
.EO
.>'O
. HO
.30
TABLE NO. 3 (Continued)
Approximate Percentage
of Total Cost
Temporary Facil i ties
Utility Distribution Syst ems
Trans port, Railroad, Parking , Roads
Inclement Weather Protection
Scaffolding
Expendable Supplies
Utility Charges
Fuels; Oils
and
Lubricants
G.St?S
Chemicals
Concrete Fo rm Materials
Construction Service Contracts or Costs
Testins Laboratodes
0.4
0.5
0.3
Guard service
Toilet Rental
Trash Disposal
surveying
Premium Payments (pay for non-productive time)
0.3
Showup Time
Paid Holidays
Absence or Sick Leave
Scheduled Overtime
Labor Dlsruptio
Insurance and Bonds 1.0
All Risk Builders Risk
Public Liability and Property Dam age
Vehicle PL and PD
Bid and Performance Bond Premiums
Field o ff ice and labor expense (1.3%)
includes the cost of providing the field
off ice building and furnishing and equipping
it: with offi ce equipment. This category
also includes the field off ice operating
expense, such as janitorial service, util ity
services, stationery supplies and reproduction
costs, and communications costs.
The costs
associated with the employment of construction
labor, such as safet y equipment, inclement
weather gear, and labor administrative costs
are also included in this category of indirect
construction cost. If the project is at an
isolated site requiring a construction camp,
t'he.costs of developing and operating the camp
would be included here.
The second category of indirect construc-
tion cost in non-manual labor (0.8%) which
includes the wages and benefits for inspectors
and technicians, clerks, typist s, draftsmen,
timekeepers, messengers, and such other field
personnel that are usually locally hired. It
should be noted that construction management
personnel are not included herein, but will be
covered later under Professional Services.
The cost of temporary construction build-
ings (0.9%) is included as a component of in-
direct construction cost and includes change
buildings, warehouses,
workshops and assembly
buildings,
toilet buildings, and all trailers
and buildings used by service engineers.
The cost of construction tools and equip-
ment (2.7%) is the fourth part of indirec
construction cost and includes the cost o
procuring and maintaining heavy equipment,
automotive equipment, and special equipment
rentals as required. The source of supply
of such equipment is not considered signifi -
cant for estimating purposes arid could be
owner-furnished, or leased or furnished by
contractors working on the job.
The cost of
small tools is also included, although these
are usually furnished by the contractors
who are responsible for controlling their
use. As mentioned earlier, specia lty equip-
ment required for equipment intensive work,
such as pile driving and earth work, is
included in the direct cost section of the
estimate.
Temporary facilities (0.4%) is the fif th
component of indirect construction cost and
includes the installation of temporary util-
ity distribution systems (water, air, gases,
sanitary, electricity,
etc.),
and temporary
transport facil ities, such as roads, rail-
roads,
and parking areas. Special provisions
for inclement weather protection, including
enclosures and services (heat, lights, etc.) ,
are also estimated herein.
The sixth component of indirect construc-
tion cost is the category of expendable supplies
(0.5%) and this includes charges fo r util ity
services, fuels, oils and lubricants used
during construction. The cost of other expen-
dable supplies,
such as gases and chemicals,
are also in this category, as is the cost of
concrete form materials which can be distri-
buted to the direct accounts upon completion
of the work.
Construction service contracts or costs
(0.3%), such as testing laboratories and
surveying, security services, toilet rental,
trash disposal, are estimated as a component
of indirect construction cost whether perform-
ed by service contractors, the construction
manager, or included in installation contracts.
Premium payments for
time
not worked
(0.3%) are also estimated as an indirect con-
struction cost and include such premiums as
inclement weather, showup time, paid holidays,
paid absences and sick leave, if any, and
allowances for lost time due to labor dis-
ruptions.
In the event that an accelerated sched-
ule or severe labor shortages make it desirable
to schedule overtime, the premium pay cost,
together with a factor to cover the reduction
in productivity which usually follows, is
carried as an indirect cost. The 0.3% value
used here does not represent any allowance
for scheduled overtime as this practice is
avoided whenever possible.
The cost o f insurnnce and bonds (1.0%)
is the final component of indirect construction
cost and includes the premiums paid for all
risk, builders risk coverage, public liabil-
it y and property damage, vehicle PL and PD,
and bid and performance bonds whether procured
on a project umbrella coverage policy or con-
tractor's individual policy basis.
It should
be noted that workmen's compensation coverage
is included in the direct cost.
CONTINGENCY RESERVE (5.0%)
Contingency is an allowance for costs
which may be incurred as a result of factors
which cannot be speci fical ly anticipated and,
therefore, cannot be included in the direct
accounts.
Items such as unknown site condi-
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8/10/2019 Analysis of Indirect Cost
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tions, unforeseen construction problems,
minor scope changes,
estimating errors and
omissions, engineering uncertainty and var-
iances in labor productivity are included.
In recent years it has also been necessary
to consider the effects of an uncertain and
ralpidly changing economy. Wage rates and
benefits, escalation and financing costs are
all accounted for elsewhere in the estimate,
but the uncertainty with respect to these
forecasts may also be considered as part of
the contingency reserve.
Contingency does not include Force Majeure
or major scope changes.
There are many ways to estimate contin-
gency at the conceptual level. Frequently,
a higher factor is used on that portion of the
project estimate involving the civil works,
if the site conditions are uncertain. In
addition, the factor varies with the degree
of uncertainty with respect to engineering
an.d technology.
In some advanced technology
projects, a separate factor is carried for
engineering uncertainties. In this case, we
have used 5% which amounts to 8.8% of the
direct cost.
EOFESSIONAL SERVICES (5.2%)
Professional services include the follow-
ing activities:
project management, prelimin-
ary engineering,
detail engineering and design,
construction management, procurement services,
architectural design, shop inspection and
expediting. These serv ices may be performed
by the owner,
a single professional engineering
firm,
or by a combination of professional firms,
but we recommend that all professional services
be grouped together in this manner for estima-
ting purposes.
OWNER'S AND OTHER CHARGES (1.0%)
-
Allowances must be made in the project
estimate for owner's charges that are capi-
talized as part of the project.
These own-
er's charges include such categories as
general office expense, owner's field staff,
legal fees, ad valorum taxes, and capitalized
startup costs. Other charges that are esti-
mated in this category include spare parts
and special tools for operation and main-
tenance of the completed project.
PsCALATION (10.2%)
The Cost of major projects of long dura-
tion are affec ted greatly by international
economic conditions and we recommend that
the
project estimate be prepared for the cur-
rent
Y = ~ L
and the costs be escalated to meet
the project schedule.
The other option is
to calculate the escalation individually for
each component of direct cost and include
escalation as part of the direct cost. We
recommend that escalation be carried as a
line item of indirect cost where it is vis-
ible to management.
FINANCING COSTS (13.4%)
The final item in the estimate is fi-
nancing costs which include the total cost
of all financing charges that are capital-
ized as project costs.
Included are allow-
ances for funds used during construction
(AFDC) and any fund commitment fees for
international projects. To calculate AFDC,
it is necessary to prepare a cash flow match-
ing the cost and schedule and for loans at
different interest rates, separate calcula-
tions are desirable.
For conceptual estimating purposes these
financing costs are often combined into an
interest factor which is a percentage of
the total project cost.
OPTIONAL COSTS - DIRECT OR INDIRECT
Throughout the text of this paper, we have
identified project costs and indicated our
preference for treating them as direct or
indirect costs.
In Table No. 4 the i tems which we include
in the direct cost , but which could be treated
as indirects, are listed.
TABLE NC. 4
OPTIONAL COSTS - DIRECT OR INDIRECT
Approximate Percent
y&
of Total Cost
1
Freight and special packaging cost
.2
for material and equipment
2
cost of technical service engineers
.1
from manufacturers
3
customs charges, duties and sales taxes
.8
4
Spare parts
.2
5
Payroll taxes and workmens compensation
1.6
lSranCe
6
Payroll premium costs
.3
(casual OYertlme, etc.)
7
Supervision (foremanship)
1.5
8
Ancillary labor (unloading and stora ge,
.7
housekeeping, final cleanup)
9
Construction equipment for equipment
.8
Intensive work (such as earth work
and pi11ng) and for specialty erection
contracts (such as chimneys and
c001i11g towers)
10
cc,ntractor fees
1.0
7.2
SUMMARY AND RECOMMENDATIONS
We have summarized and explained the
components of capital cost estimate for a
major project. We have also identified op-
tional costs which could be considered in-
direct rather than direct cost,
To place this in perspective for objec-
tive analysis,
we have recast the estimate
with all categories shown as a percentage
of direct cost.
This enables us to compare
the total project cost if the optional costs
are in the directs,
as we recommend against
the other extreme with all optional costs
as indirects.
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Analysis of Table 5 points out the value
of minimizing the percent added for indirect
costs
Considerable time and eff ort is ex-
pended by estimators to accurately forecast
tke Direct Cost.
If the inflated multipliers
are incorrect,
the error in the estimate is
magnified.
If direct cost estimates are
inaccurate because of error or poor defini-
tfLon
the inflated multipliers again magni fy
the rhange in the estimate. Last,
and per-
haps most important,
indirect costs are dif f-
i