**2. Background**

#### *2.1. Cost Estimation*

Industry organisations, such as the Royal Institute of Chartered Surveyors (RICS) in the UK and the Association for the Advancement of Cost Engineering (AACE) in the USA, have promoted the development of cost estimation, leading the engineering practice into the standardisation of cost-information management. The guides developed by the Royal Institution of Chartered Surveyors [5] have provided significant advances and contain sets of rules to estimate construction projects' costs. Researchers have also contributed to the knowledge domain by providing crucial educational training material on cost estimation, presenting it as a control measure for all the stages of construction projects [3,4,19,20]. Nevertheless, the need remains for improvements in the understanding of the key factors of construction costs and their estimates accuracy [4].

Researchers have encouraged paradigm shifts in the construction industry, especially in the area of cost estimation [21]. Brandon [22] stressed the importance of putting under scrutiny the philosophy of estimation, proposing that the advance in computer hardware and utilisation of large databases would provide means to reduce the limitations of human abilities and move into simulations to model the reality. In the same line, understanding of the construction activity through principles found in the Japanese industrial production has intensified the research within the construction industry [23,24]. The need for innovation towards lean construction has led to different proposals to manage costs in construction projects, such as Activity Based Costing (ABC) [25] or Target Costing [26]. Despite these promising advances, the traditional philosophy to estimate costs remains broadly utilised in practice.

The main objective of cost-estimation practice, since its establishment within the discipline of quantity survey in the decade beginning in 1950, has been to provide a basis to control project costs with the elaboration of cost estimates [4]. Framed within the knowledge area of cost management, different cost estimates provide the necessary information for the decision-making process in the development of projects [2]. With the same perspective, [19] argues that the Royal Institute of British Architects' (RIBA) Plan of Work (PoW) is conceived as an organised procedure for taking design decisions, with accompanying data to be included at various stages of the design evolution. And RICS New Rules of Measurement NRM 1 [5] identified the RIBA Plan of Work as a construction-industry-recognised model that organises the processes of designing and administering/managing building projects.

Given the nature of the link between cost estimations and the evolution of the projects' designs, the techniques used to estimate costs will depend on the objective of the stage at which the project is in and the level of information available. In the inception stage, when the information about the project is limited and the main goal is to determine feasibility and viability of projects, cost estimates provide the information for investment decisions and a cost reference for the initiation of the design stage. In this early stage, preliminary cost estimates, also called Order of Magnitude estimates or Rough Cost estimates, use the statistical square area (superficial) method, also called floor-area method [2,4,5]. The superficial method relies on statistical data from previous building projects that are adjusted according to the location and year of construction, and it is widely used due to its simplicity, quick calculation because most published cost data are expressed in this form (square area), and is easily understood by the architect/designers and client. Alternative methods, such as cube and storey enclosure methods, are available in the early stages, but they have not been widely adopted in the construction industry as they involve more rigorous calculations than any of the previous methods and historical rates for use are not usually published.

In the design stage, the objective is to create a building design within the scope defined by the owner's requirements and within the cost target defined in the earlier stages. This objective makes cost estimation a tool of control for the design in terms of cost. The estimate is called cost plan in the stage of design, and it evolves with the increasing level of detail in the design. This cost plan follows an analogous approach in which unitary costs from historical databases are assigned to the different project elements that are aggregated according to the total quantities and then adjusted using location and time indexes [4]. The subdivision of the buildings in elemental constituent parts, such as substructure, frame, upper floors, and roof, follow standard guidelines [5].

Contractors estimate costs in the tendering stage with the objective of elaborating budgets and controlling later expenses. Since the design is usually completed in the tender stage, it includes the details of the project, and, contrarily to the early stage Rough Cost estimate, the detailed cost-estimation process follows a bottom–up approach, in which the cost is estimated based on complete design documentation and by work packages associated with the work breakdown structure considering the necessary resources, e.g., labour, equipment, materials, and subcontractors [2].

Further, the RICS [5] illustrates the key components of a cost estimate. The base cost estimate is the total estimated cost of the building works, the main contractor's preliminaries, and the main contractor's margin (profit and overheads). Therefore, the base cost estimate contains no allowances for risk or inflation (that is, the risk-free estimate). Also, allowances for risk and inflation (i.e., fluctuations allowance in the basic prices of materials, labour, and plant during the period from the date of tender return to the midpoint of the construction period) are to be calculated separately and added to the base cost estimate to determine the client's cost limit for the building project. In comparison with the foregoing submission, Smith and Jaggar [27] categorised contingency factors, including the risks involved during design development stages, as:


In an attempt to address uncertainty in cost estimation, risk management recognises that factors may affect the design phase of the development process, and the traditional way of dealing with them is to make a percentage contingency allowance. For example, the RICS [5] identified contingency provision as a key element that could be incorporated into a cost estimate. These contingencies are to provide for risks associated with design development, construction, employer-driven changes, and other employer-restrictive concerns.

In the early stages of projects, accuracy remains a challenge [6]. The accuracy of final estimates falls within the range of ±5% as the project approaches the tendering process [7]. Despite the critical importance of the early stages mentioned in the previous paragraphs and the low accuracy of traditional methods, alternatives supported by computational advances have not been widely adopted in the construction industry [4].
