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The Importance of Location Factors in Cost Estimation

November 8, 2022

Location factors

Before starting a cost estimation for a technical project, it is important to have the knowledge of both the content and the circumstances of the project. One should be aware of the specific details during project execution along with an overview of the required equipment and labor activities. Cost and labor data are based on certain standards, whereas the location can be different than the standards. Therefore, we apply location factors to account for that.

Gathering and processing this data manually can be time-consuming and prone to error, but cost estimating software can help automate the process. It ensures all location factors are incorporated into your estimates, saving time and reducing human error.

In this article, we explore what location factors are, why they matter in project cost estimation, and how to determine them effectively.

What are location factors?

Location factors are adjustments made to cost estimates to account for the unique conditions of a project’s location. These include variations in labor costs, material availability, transportation, site characteristics, legal policies, and political stability.

Why do location factors matter in cost estimation?

Location factors affect nearly every aspect of a project’s cost. Without considering them, your estimates could lead to significant cost overruns.

For instance, a project in a remote area might face higher costs due to the need for specialized transportation for materials and equipment, while projects in urban areas often deal with increased labor expenses and stricter compliance requirements. By accurately assessing location factors, you can better anticipate challenges, mitigate risks, and create more accurate estimates.

Determining location factors in cost estimation

Use cost data from past projects

Before starting to map the location factors, always look for the relevant historical cost data. There is no point in trying to invent the wheel yourself when others have already done it before. Data from similar projects in the same region can serve as a basis for establishing location factors. However, keep in mind that the process doesn’t finish here.

You need to define the differences between projects since the scope of two projects never is the same. Even if it were to be the same, there is no assurance that all costs have been covered. Additionally, if there is a difference in time, then you need to apply indexation.

Assess project site characteristics and their impact on costs

Always keep an eye on site characteristics that include properties such as landscape morphology, on- or offshore site, the accessibility of the site, and the availability of utilities such as electricity.

Remember that projects at remote locations have higher costs compared to the same type of projects in urban areas. This is because of the increased costs of transporting construction materials and equipment to the site. On the other hand, the costs of acquiring land are usually higher in urban areas.

Check the political and legal factors around the technical projects

Policies with regards to large technical projects strongly differ per country. For example, the environmental legislation in countries in Europe can be classified as extensive when being compared to countries in Africa. As a result of this, a huge amount of the budget needs to be allocated to environmental mitigation measures for projects in Europe.

Another important aspect when determining location factors in cost estimation is political stability. When carrying out a project in a country with an unstable political situation, consider the possible events that could influence the project’s performance. Assign a possibility and a cost to these possible events. Use contingency factors to include them in your estimate.

Create a cost library of labor, rental, indexation and exchange rates

Labor and rental rates differ strongly between countries and often between regions in a country. Before starting an estimate, it is strongly recommended to have a cost library in place which contains all relevant labor and rental rates for the region where the project is executed.

Also, make sure that your information and rate lists are up to date. A special case would be when you need to perform an estimate with multiple currencies involved. Given the volatility of exchange rates, you would need to update them frequently.

Understanding the impact of location factors in project cost estimation is crucial for achieving reliable cost estimates. It requires more information than just the materials and labour activities involved. Knowing the site-specific conditions and how they affect your project’s costs helps you increase the accuracy of your estimates. Collect all the data required to start working on your estimating; knowledge is the key to success!

Ready to put these strategies into practice? Consider using cost estimating software to streamline data collection and ensure accuracy.

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