Labour Estimate

Labour Estimating Norms

Vikas Khaitan4 Comments

It is my opinion that labour is the most important resource for any project and a proper assessment of labour hours and related costs is essential for the accuracy of any estimate. However, assessing labour hours is not straightforward and the labour effort required for various activities vary hugely, and standardised norms for assessing labour needs are not freely available or widely shared.

For any project, the site needs to be prepared, foundations need to be constructed and all material and equipment need to be fabricated and installed. The cost of this fabrication & installation works can be estimated if all the labour hours required for the project can be calculated. During the estimating process, this is generally done by calculating the direct labour hours for the various estimated quantities from material take-offs (MTOs), using Labour Estimating Norms for ideal working conditions.

[The labour norms are subsequently converted to site specific labour hours using productivity factors and then converted to a total construction cost using an all-in labour rate. This method of calculating construction cost is useful as an in-house estimate in the absence of unit fabrication and installation rates from potential contractors.]

The labour norms are standard time taken by a mixed crew to complete a unit of various types of construction works in an ideal location.

For example:

  • Hours per m2 for site preparation
  • Hours per m3 for excavation works
  • Hours per m3 to install concrete foundations
  • Hours per tonne to fabricate and install structural steel
  • Hours per joint to weld pipes (of various diameters, thicknesses and materials)
  • Hours per meter to erect pipes (for various diameters and thicknesses)
  • Hours per meter to install electrical cables (of various sizes)
  • Hours per instrument installed in the field (various kinds of instruments)
  • Hours per equipment installed (various kinds of equipment)

But the question is, where can an estimator get these labour norm hours?

The various labour estimating norms most prevalent in the Oil & Gas industry are the Gulf Coast, DACE or in-house norms.

In-house Labour Norms

Most estimators use their company’s in-house labour norms for all detailed estimating purposes. These norms are not widely shared with the larger estimating community and are considered proprietary by the individual EPC companies. It is not very clear how these in-house norms were developed by the individual companies and for which location. They could be for a specific country / location where that company mostly executes its projects. They have generally been handed down over the years within the estimating departments of the individual companies.

(In the past, I have used the estimating norms of whichever company I have worked for, and they are all slightly different.)

Gulf Coast Labour Norms

This is a general term used by most estimators to refer to labour hours required to complete an activity in a controlled environment in the Gulf of Mexico which is considered an ideal location. But no specific industry standard Gulf Coast labour estimating norms exist for the Oil & Gas industry. Many estimators use their in-house labour norms but call them Gulf Coast norms for all discussion purposes.

My Understanding

Firstly, referring to the in-house norms as Gulf Coast norms is a bit misleading in my opinion. More importantly, the in-house labour norms as used by the various EPC companies are slightly different, thus making it difficult to easily critique or review detailed estimates, as the norms are not shared outside the company. This creates a black-box scenario for any reviewer who is not part of that company. The labour portion of the overall estimate thus becomes only an opinion of that company’s estimator which sometimes is an acceptable situation for many clients. This estimate is then in future compared against any contractor’s pricing for that scope.

If an alternative is required where a company does not have their own in-house labour estimating norms, the following manhour manuals are a good source to be used as Gulf Coast labour norms.

(I have procured the above manuals and have used them for my estimating purposes.)

For estimating civils related works, I have previously used Spons and Richardson for their labour norms. These are UK specific labour norms (not Gulf Coast) to be suitably adjusted for other regions / countries. But for civil works, it is best to use local unit rates from past projects instead of labour norms.

DACE Labour Norms

More recently, the Dutch Association of Cost Engineers (DACE) have compiled labour estimating norms for the process industry. These labour norms can directly be purchased from the DACE website. (I have not used them yet.)

 Note: These are only the norms that I have used in my career as an estimator in the on-shore Oil & Gas industry so far. There are others which I have not used.

In my opinion, if the estimating community wants to make their estimates more transparent, then it would be better to use a more widely available labour estimating norms as a basis. For example, estimators can buy John S. Page’s man-hour manuals and then those estimates can be cross-checked, instead of using in-house norms which are all slightly different and not widely shared.

Piling Costs: Rough Estimate Model for Benchmarking

Vikas Khaitan1 Comment

Once when trying to benchmark piling costs with available information from various in-house projects, the data showed an apparently inexplicable variation in the $/m rate for the piling works. In some cases, it showed 2-3 times the $/m rate for the same diameter, and in other cases, the data showed similar $/m rate even though the diameters varied between projects.

After the initial failed benchmarking exercise, I started considering the technicalities of piling and understood that there are different kinds of piling specified for various projects depending on different soil and project conditions. I realised that I was making the mistake of comparing the $/m rate of different piling types used in different projects. This wrong comparison had created the above-mentioned variations in the overall rate.  At this point, I separated the available data into the various types of pilings. That was a good start, but then I did not have enough data points for the individual piling types to be able to generate any sensible benchmarking curves.

But benchmarking was needed for the estimate approval process.

To meet this need, I developed a small estimate model to calculate the rough $/m cost for various types of piling and for various diameters. I assumed an indicative length of pile to generate the graph. I used indicative material and labour rates, norms and productivity factors to calculate the cost of the various types of piling. I included an indicative hiring cost of piling hammer or rig as required for a specific type of piling work. All these inputs and assumptions could be modified for specific project and location to help generate a customised benchmarking graph. I have also assumed a total number of pile for this specific example and would caution that the per meter rate could substantially vary if the total quantity is significantly different. But this still gives an idea and relative cost differences

The attached file shows the proposed working.

Piling Rough Estimate Model for Benchmarking-Rev0 (free resource)

This shows how the costs could possibly vary with diameter and piling type and can be used as an in-house estimated benchmarking graph. Any past project data (if available) could be superimposed on this graph for easy comparison. Any contractor bids can then be compared against this graph to demonstrate the reasonableness of market pricing. This can also help the engineers choose and compare more than one piling type, if technically suitable, to use in a project.

Labour Productivity Factor Calculation Tool

Vikas Khaitan2 Comments

During the estimating process, direct labour hours are first calculated using estimated quantities from material take-offs and estimating labour norms like Gulf Coast, DACE or in-house. Calculated norm hours are for ideal working conditions not encountered in reality and only used as a starting point. The norm hours are then multiplied by a theoretical site specific Productivity Factor to arrive at the total on-site labour hour estimate. These site hours are then subsequently used to arrive at the total construction cost. The total site hours are also utilised for labour manpower planning and resource allocation.

The Productivity Factor is purely an estimating parameter and not something that is recorded during any project execution. It is a theoretical location / site specific factor used to convert the norm hours into estimated site hours. It generally depends on the site’s climatic conditions, soil conditions, water table level, permit control requirement etc.

As the ideal scenario, the estimating community needs location / site specific productivity factors for each standard estimating norm (Gulf Coast, DACE etc.). But productivity factors are not easy to arrive at as they could vary between contractors depending on issues like previous experience, engineering level and type, site survey quality etc.

It would be very convenient for every contractor to have their own historical databases of Productivity Factors for use in future estimates. To be able to correctly do this, contractors should have recorded the total direct labour hours actually spent on various projects along with a catalogue of the corresponding installed quantities for various equipment and bulk material. Only then a further exercise can be carried out to calculate the total norm hours based on the current estimating methodology. The actual total hours can be divided by the calculated total norm hours to arrive at the productivity factor for the historical projects to be used as a benchmark for future estimates.

However, most companies lack this kind of historical information gathering and analysis to support future estimates and even less for any specific country / region. Even if suitable historical data were available, such an exercise would involve a considerable amount of estimating effort, which may not be justifiable.

Most estimators finally end up making judgements to determine the best possible Productivity Factor to use for any particular site. As a result, when presenting to the client, any backup benchmark data is generally non-existent and both the contractor and the client teams try to convince themselves of the right factor based only on anecdotal experience.

To help create and substantiate the factor to be used in any estimate, I have created a Productivity Factor Calculation Tool in the attached file.

Productivity Factor Calculation Tool-Rev0 (free estimating resource)

This is based on factors, explanations and comments which I have collected over the years, and the product of innumerable discussions during estimate reviews with different stakeholders.

In the tool that I am offering, I have listed 27 different factors that may affect productivity. For any individual factor, the project specific effect could range between none, low, medium, high or very high. Choosing any of these will affect the proposed productivity factor by a certain value. For example, the distance of the construction site from the population centres will affect the transportation time of the local workforce thus affecting the productivity factor to be used. For longer distances the user of this tool can choose “high”, which would then assign a higher additional factor to be applied to the norm.

I have in effect chosen an arbitrary value for each of the ranges based on experience but they can be modified by individual estimator in discussion with site teams. Assigning a number, even if arbitrary, allows a systematic approach to be taken, which is a better substitute to inconclusive discussions. This approach will allow a more focussed discussion with proper reasoning allowing the team’s experience to be better used and channelized. Estimating finally requires a number to be produced, and through my years of experience, I have formulated this approach, which, although imperfect at the start, has the benefit of focussing discussion and convincing the broader team, as well as the client.

This tool could also be used to calculate different productivity factors for a greenfield or a brownfield project at the same location.

Note that this is just an example working for a typical greenfield onshore oil & gas project, and needs to be modified to suit the specific region / country / project site. This should only be used as a guide and is not considered perfect or exhaustive. Additional factors could be added if deemed suitable. The presentation and relative effects / additional factors are my own and do not have any industry standard / basis.

This working is suitable to present as a backup to any estimate and clearly tabulates all the elements included in the proposed Productivity Factor. This also helps the team to understand why the total direct hours in any particular project are higher than for example another simpler site.

This tabulation, along with any reasonable historical data that can be obtained, will help to make the estimates more transparent and generate confidence in the estimates produced.

This article was published as an opinion piece in May-2018, in the Project Control Professional which is the journal of The Association of Cost Engineers.

All-in Labour Rate Build-up

Vikas Khaitan6 Comments

During the estimating process, direct labour hours are calculated using quantities from material take-offs and estimating norms. There is then the need to convert the direct labour hours to construction cost. The simplest method is to multiply the direct labour hours with an all-in labour rate including direct labour, indirect labour, mob/demob, small tools, site accommodation, contractor’s field management, consumables, construction equipment and other related costs.

The all-in labour rate is purely an estimating parameter and is not something that is measured during actual execution. Total construction cost could be collected from historical projects and very rarely the corresponding total direct labour hours could also be found from historical project close-out reports. Because of this, most companies have very little data on all-in labour rates and generally only 1 or 2 data points for any specific country / region. The estimators end up making judgements as to the best possible all-in rate to use. For presenting to the client, the backup to the scarce historical data is generally left out mentioning the confidentiality of the information. Some benchmarks are provided, but it always remains a bit vague as to what the historical all-in labour rate included or excluded.

All-in Labour Rate buildup Example (free estimating resource)

In the attached file, I have generated a tabulation to help create a backup to the all-in labour rate and substantiate the rate to be used in any estimate. This is just an example working, and needs to be modified to suit the specific region / country / project type / project size / currency.

In any typical major onshore oil & gas project, there is generally a mix of local and international labour. The mix can considerably vary depending on the type of project and available skills in the local labour force. I have presented probable working for both local and international contractor in the attached example file, showing the possible differences.

Also the all-in labour rate will vary between different disciplines – civils, piping, electrical, mechanical etc. The attached working is for a typical average all-in labour rate for a country with an average labour cost. The percentages presented are anecdotal and to be used as guidance only.

This working is suitable to present as a backup to the all-in labour rate used in any estimate and clearly tabulates all the elements included in the rate. This also helps the team to understand what might not be part of the all-in rate and might need additional handling in the overall estimate.

This tabulation, along with any historical data that can be obtained, will help to make the estimates more transparent and generate confidence in the estimates produced.

Key Quantities and Direct Labour Hours

Vikas Khaitan1 Comment

Sometimes a very rough high level direct labour man-hour calculation is needed for initial planning, site man-power resourcing, camp sizing or other contracting strategy discussions.

Key quantities for the project could be utilised to quickly estimate the overall direct labour man-hours. Detailed Material take-offs (MTOs) would generally be produced during the FEED (Front End Engineering Design) stage as an input to the detailed estimate. The below high level key quantities could easily be extracted from the MTOs. (If the MTOs are not prepared, then rough quantities from similar project could be used).

The following rough “hours/ key quantity” could be utilised to calculate the total direct man-hours for a major onshore project, based on all site fabrication and installation. Any pre-fabrication in a shop will increase productivity and reduce total direct hours.

This might also be helpful for cross-checking if the overall man-hours being calculated by the estimating team is in the right ball park.

20151209 Key Quantities & Direct Labour Hours-Rev0

Key Quantities & Direct Labour Hours (Excel Version) – free estimating resource

These rough “Hours / Key Qty” are very much high level anecdotal numbers to just help with a quick calculation of the total direct labour hours. The estimated hours for individual projects will depend on several design parameters, plot layout, location, labour productivity and many other factors. Individual estimators on the project should still do the more detailed work. If no estimating resource is available then this can be used as a rough guide.

Indirect hours could be calculated as a percentage of the direct hours, roughly say 30-40% of the direct hours.