Cost Management and Estimating
Estimate the work, then manage the money
Estimating builds from quantity takeoff, productivity, labour rates, material costs, equipment, waste, and indirect costs. A cost breakdown structure (CBS) aligns the estimate with cost codes so actual costs can be compared with budget. Distinguish direct costs (labour, material, equipment) from indirect costs (site supervision, temporary facilities, insurance, overhead). Contingency covers known-unknowns; escalation covers price changes over time; allowances cover undefined scope. None of these is profit.
Traps: confusing markup with margin, double-counting indirects, treating an allowance as a blank cheque, and reporting committed cost as if it were actual cost. Earned value helps: CPI = EV/AC and SPI = EV/PV. A CPI below 1.0 means cost overrun; forecast estimate at completion as EAC = BAC/CPI when the current trend continues.
Worked example: A package costs $100,000. To earn a 20% margin on the selling price, divide by (1 - 0.20): $100,000 / 0.80 = $125,000. Adding a 20% markup to cost gives $120,000, which is only a 16.7% margin. Rule of thumb: margin is a percentage of price; markup is a percentage of cost.
Control the forecast, not just the past. Review cost reports for coding errors, unposted commitments, pending change orders, and productivity trends. Update forecast to complete with realistic crew output, not the original estimate.