may aace presentation, final

Benefits of Proper Cost Estimating Techniques With Case Studies

for

Association for Advancement of Cost Engineers

(AACE)

May 8, 2015

Brandon G. Hummel, Esq. [Riordan McKee & Piper, LLC]Ryan Phillips, P.E., CCM, LEED AP, CDT [The Vertex Companies, LLC]

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Brandon G. Hummel, Esq. - Riordan McKee & Piper, LLC PartnerMr. Hummel is a Partner with the Chicago law firm of Riordan, McKee & Piper, LLC where he devotes a substantial portion of his practice to litigating complex construction, surety, and insurance coverage matters. Over the course of his career, Mr. Hummel has resolved numerous construction and surety disputes in state and federal courts and in mediation/arbitration settings. These include multi-million dollar matters with contested scope/change order claims, delay/acceleration claims, defective design/construction claims, warranty claims, and mechanics lien/payment bond claims. In addition, Mr. Hummel has advised clients on various transactional matters including, but not limited to, negotiating and drafting construction contracts as well as takeover, tender, forbearance, and other dispute resolution documents in the surety setting.

Ryan Phillips, P.E., CCM, LEED AP, CDT - The Vertex Companies, Inc. Executive Vice President

Mr. Phillips has a decade of construction management and construction claim experience in the Rocky Mountain Region. Specific expertise includes: surety consulting and project completion, owner’s representation, construction oversight, construction claim analysis and preparation, construction defect cost estimating, liability review for construction defect matters, construction bid package preparation, and cost to complete preparation. As the Executive Vice President of Vertex’s Litigation Support group, Mr. Phillips oversees contract claims and other legal consulting requiring environmental, engineering and construction expertise. Mr. Phillips has testified numerous times in deposition, trial, and/or arbitration settings.

Speaker Biographies

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Fundamentals of Cost Estimates Generally

• What is the purpose of the opinion/estimate? What is it being used for?• Preliminary Cost Estimate for Proposed Project?• Value Engineering Following Preliminary Estimate?• For Construction Bid Packages?• For Remedial Work Arising Out of Defect Situation?• For Takeover of Incomplete Project by Surety?• For Third Parties Such as Lenders for Construction Loan?

• In every instance, client/intended beneficiary and estimator expectations must be aligned.

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Liability Associated with Cost Estimates

• Potential liability for cost estimators starts with the contract but doesn’t necessarily end with it.

• Liability of an estimator can extend beyond the contract to tort liability where there is a breach of the professional standard of care. • Doesn’t matter if the tort liability is specifically disclaimed in the

contract.

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Liability Associated with Faulty Cost Estimates

• Liability depends upon whether the variation in actual cost from the estimate is within a reasonable range (i.e., 10 to 15 percent). • This is usually a determination for the fact finder (i.e., jury).

• The determination of liability also often depends upon:• the sophistication of the intended recipient of the information• what information the recipient has received and when (i.e.,

construction bids)• how the recipient uses the information received (i.e., whether

the recipient proceeds with work)

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Liability Associated with Faulty Cost Estimates in Design Build Scenario

• In a design build situation, however, failure to revise cost estimates and to advise client of same can be a breach of the professional standard of care.

• In one case an architect was not entitled to recover his fee where his designs resulted in construction costs more than double that contained in his design built estimates, and the true cost of the project was not conveyed until the project was complete.

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Damages Associated with Faulty Cost Estimates

• There are usually two consequences to a breach of contract/tort liability for a faulty cost estimate:• Bar to Recovery of Estimator’s Professional Fees• Recovery of Damages Associated with Owner Cost Overruns

Caused by Estimator’s Breach of Professional Standard of Care• The Latter is Much More Difficult to Prove.

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•Remaining Construction Costs

•Accounts Payable

•Projected Backcharges

•Contracts Funds

•Budgeted Contingencies

Fundamentals of a Cost to Complete Estimate

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• Remaining Construction Costs Unearned Subcontractor / Vendor Balances

Remaining Buyout / Remaining Self-Performance

Items

General Conditions for Completion Contractor

Closeout Administration for Completion Contractor

Completion Contractor Fee


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•Remaining Construction Costs Unearned Subcontractor/Vendor Balance

• Current job cost reports, subcontract agreements, purchase orders, executed change orders, pending change orders and claim information.

Remaining Buyout/Remaining Self-Performance Work• Buyout review• Look for scope gap and exclusions• Calculate the reasonable cost to perform all remaining

buyout work


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•Remaining Construction Costs Remaining Buyout/Remaining Self-Performance

Work• Calculate the reasonable cost to perform all remaining

buyout work. Pricing from local subcontractors and vendors. Historical pricing databases. Unit pricing from estimating guidelines such as RS Means,

Xactimate, HCSS, and Equipment Watch (Equipment Blue Book).

Quantity takeoff software such as OnScreen.


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•Preferred Option Subcontractor bids:

•Proper bid coverage (3-5 bids) will reveal fair market value for the work.

•Will assist with proving reasonableness of costs in a recovery/indemnification action.

•Multiple bids are oftentimes difficult to get. •Sole source bidding doesn’t necessarily mean fair

market value.•Difficult with small scopes of work and work that

is not clearly defined.•Bonding requirements may limit subcontractor

pool.


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• Step One: Quantification

• Step Two: Costing

• Step Three: Pricing


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•Independent Estimate Preparation:

Define the scope of work per contract and change order.

Step One: Quantify the work•Square feet of stucco.•Cubic yards of concrete.•Lineal feet of trim.•Count of plumbing fixtures. •Square footage of scaffolding.•Count of site features/trees.


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DIGITAL TAKEOFF

•Easy to use•Clear Presentation Takeoff Tab•Printable Takeoffs

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•Independent Estimate Preparation: Step Two: Costing the Work – Assigning

realistic costs to the items.•Subcontractor bids.•RS Means•Xactimate•HSS•Equipment Watch •Historical Pricing from Similar Projects


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•Multiple Source Information•Large Volume of Searchable Equipment •Location Specific


• Estimate Verification

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ESTIMATING PROGRAMS

•Most Used in North America•Pre-built Database•Takeoff Compatibility

Tim

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•Widely Used•Takeoff Compatibility

•Interface with Manufacturer Price Data •Built-in Digital Takeoff

•Heavy Civil and Infrastructure

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•Independent Estimate Preparation: Step 3: Pricing the Work

•Economic considerations•Competitive bidding environment•Overhead and Profit considerations•Adapt to specific project circumstances


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• Subdivision Bond Claim(s)• Five separate subdivision bonds for five separate

neighborhoods within a new development are issued.

• Named Principal is the Builder/Developer.• The City is the Obligee.• Builder/Developer completes portions of site

development work before filing for bankruptcy.• Value of bonds determined by the City -

Engineer’s Estimate of Probable Cost

Cost to Complete Case Study

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• Obligee/Plaintiff makes claim on the bond for incomplete work.

• Plaintiff makes claim for $200,376 based on new Engineer’s Estimate. No basis for pricing. Included additional work not included in

subdivision bond.• Vertex’s comparable estimate was for $92,087;

a variance of $108,289.


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• Summary:• Using industry standard pricing databases and

quantity take-off software, as opposed to utilizing arbitrary and unsupported figures, Vertex was able to cut the Plaintiff’s direct costs by more than 40%.

• Applying a strict interpretation of the subdivision bonds regarding what scopes are included, the Plaintiff’s claim was further reduced by approximately 15%.

• In sum, the matter went to trial….


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Proposal Risk Considerations for Design-Build Projects

• The completeness of the Owner provided Design Criteria Package

• The time allowed to prepare the estimate and/or perform additional design and investigation.

• Scheduling the work based on limited information.

• Contingency Considerations(discussed later)

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Design Build Case Study

• Background of Proposed Project

• Proposed roadway improvements spanning approximately 1.5 miles in Colorado.

• Colorado Department of Transportation solicits bids from several contractors and provides outline specifications as the basis of design and bid.

• Work generally consists of widening a roadway, intersection/signal replacement and extensive drainage redesign and installation.

• A Design-Builder contacts a local civil engineering company to provide professional services.

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Execution of Contractor/DB Agreement

The Agreement’s Standard of Care Provision Provides:

Standard of Care: While performing services under this Agreement, Designer shall exercise that degree of care and skill ordinarily exercised under similar circumstances by members of the engineering profession, as applicable, performing the kinds of services to be performed hereunder and practicing in the same or similar locality at the same time. Designer agrees to perform and correct at its expense any work or Services performed by Designer that fails to conform to the standard of care Contractor has accepted pursuant to this subparagraph.

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• First Stage of Design Services Performed

• DB fulfilled its requirements under the Professional Agreement and provided estimated quantities of work (2000 lf of 18” RCP, 100 lf of 32” RCP, 32 inlet structures, etc.) and a schematic design based on the RFP information.

• Discussions were had, although not clearly documented between the two parties, regarding the inclusion of contingencies in the estimate.

• DB was awarded the Project from CDOT. • Contract value was approximately $40M.

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• Following completion of 1st Professional Services Contract, DB contracted with Designer to provide complete design services - $285,000 value.

• Design Agreement:• General Terms: This Agreement is binding and all parties

agree that if DB is awarded the Project from CDOT, team members will execute a mutually agreed upon contract for design services for the said project.

• Scope of Work: Designer will provide design and services necessary for Contractor to develop quantities and unit prices for the bid proposal.

• Designer will be compensated at a rate of $55.00 per hour, not to exceed $5,000.

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• Significant Cost Overruns Occur• DB performed the work; however, significant quantity overruns

occurred for several civil related line items.• DB files a claim against Designer for $952k.• Deposition testimony on behalf of DB indicates DB

assumed 7.5% profit for the project. Final job cost reports indicate the following:

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• Even With Cost Overruns, DB Still Earned Profit

• The Project was profitable for the DB and the DB very nearly met their estimated profit margin – a variance of only $291k.

• DB’s claim was in the format of a modified total cost claim and failed to meet the requisite four part test that is necessary to utilize this claim method.

(1) that it is impractical to prove actual losses directly(2) the Contractor’s bid was reasonable(3) the Contractor’s actual costs were reasonable.(4) the Contractor was not responsible for any of the cost overruns.

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• DB Maintained Inadequate Contingency

• Deposition testimony revealed the DB carried a 2% contingency.

• Expert consultant for the DB stated:

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• Best Practices for Use of Contingencies• RS Means states that contingencies should

generally be carried as follows:

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• AACE Recommendations for Use of Contingencies• AACE guidelines would recommend the following

parameters be discussed (AACE International Recommended Practice No. 17R-97).

Primary Characteristic

Estimate Class

Degree of Project Definition

(express ed as % of complete defi niti on)

End Usage (Typica l purpose of es timate)

Methodology (Typica l estimating method)

Expected Accuracy Range (Typica l +/-

range relative to index of 1 (i .e. Class 1

Estimate))

Preparation Effort (Typica l degree of effort relative to

leas t cost index of 1)

Class 5 0%-2% Screening or feasibilityStochastic (factors and/or models) or judgment

4 to 20 1

Class 4 1%-15% Concept study or feasibility Primarily stochastic 3 to 12 2 to 4Class 3 10% to 40% Budget authorization or control Mixed but primarily stochastic 2 to 6 3 to 10Class 2 30% to 70% Control or bid/tender Primarily deterministic 1 to 3 5 to 20Class 1 70% to 100% Check estimate or bid/tender Deterministic 1 10 to 100

Secondary Characteristic

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• Failure to Align DB and Designer Expectations

• The DB assumed that for $5,000 they were essentially getting a design and estimated quantities in line with “Final Working Drawing Stage (3.0% contingency), or in line with AACE guidelines a Class I estimate with an accuracy range on the low end of -3% to -10% and on the high end of +3% to +15%.

• The failure to properly communicate what was being provided by the Designer and what was expected by the DB set the scene for a dispute.

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• How the DB/Designer Communications Could Have Averted a Dispute

• Clear communication on the basis of the Designer’s design and quantity takeoffs would have eliminated the possibility for a claim.

• The AACE provides estimating guidelines that when used could have protected the Designer.

• The DB was awarded a small portion of their claim but failed in their claim submittal primarily due to the failure to support their modified total cost claim method.

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Conclusions

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may aace presentation, final

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