A Cost Engineer by Another Name
If you are like me, you’ve probably often had to explain what exactly a Cost Engineer or Cost Estimator does. You probably have to explain this to friends and family that have never set foot into a plant or job site and have no idea what you are talking about. I often try to explain it in terms of a person or job they may be more familiar with. I recently ran into just such an example and I’d like to share it with you here.
Recently the housing market in my neighborhood has taken off. When we saw our neighbor’s selling for nearly 50% more than they paid, my wife and I started to think it might be time to cash in on the market. We started to look for our next home. After a few weeks of searching and touring various houses we found one that sparked our interest.
The property we were looking at was a foreclosure. For those of you who don’t know what that is, it is when the current owner can’t fulfill his or her obligation to pay off the loan. This could be for any number of reasons. This owner left the house approximately 85% complete. It would be up to the new owners to complete the property prior to moving in.
Ok, at this point I’m sure you are wondering what this has to do with Cost Engineering or Cost Estimating. Am I correct? Please be patient and you will see.
Being a trained Cost Engineer, I created numerous spreadsheets calculating the cost to complete the house. I did my research on how much concrete was needed to complete the driveway and how much it would cost. I estimated the cost of new landscaping including planting grass. There were no appliances, so like any good Cost Engineer, I requested quotes on items like a stove, refrigerator, dishwasher and more. I researched how much flooring would cost and if it would be more economical to use carpet, hardwood or tile. We even did a time sensitive approach by determining what had to be done to move in and what we could put off for the second and third year. What was necessary and what was wish list items (think inground swimming pool). I’m sure you all can relate and even picture the excel files. This is the first example of a Cost Engineer or Cost Estimator in this example. I will give you two more.
While my wife and I were creating our “Cost Estimate” or “Cost Model” of what it would take to complete this property, our realtor was busy running “COMPS”. Comps is short for COMPARABLES in realtor talk. These comps were run to provide insight into what the property would be worth when completed. This will provide insight into our future sales price to determine our potential profit margin. Comps are nothing more than doing benchmarking or market analysis based on various parameters. For example, comps would be property that sold in the same area recently. These properties could be feature adjusted for things like square footage, number of bedrooms or bathrooms, lot size, age of home and previous sales. Does this start to look a lot like a TOP DOWN cost model or estimate? Maybe parametric based modeling?
The final example of a Cost Estimator or Cost Engineer by another name is the APPRAISER. The appraiser’s job is to determine what a piece of property is actually worth on the market. They do this so the bank doesn’t loan more than they can get back if they need to repossess the property. In my case, the property we were interested in was cash only sale. Unfortunately, we did not have enough liquid cash to cover the new property so we opted for a home equity loan since the neighborhood prices were increasing. To get this loan the bank required our current property to be appraised. If you are unfamiliar with this process, I will explain briefly.
Interestingly enough there are at least two very familiar methods of appraisals. The first of which I will call a TOP DOWN or parametric method. This is often referred to as Drive By appraisals. Banks even have their own programs that only require an address. These usually starts with a search of government records starting with the most recent sales prices. This is then adjusted for inflation and other environmental factors. It is then often compared to similar house in the areas and adjusted once again. This is like what the realtor did above. The appraiser will look at items like room count and square footage. This is a very common practice within real estate. There are numerous webpages devoted to estimating the cost of house based on just this logic. I’m sure many of you have used similar logic in estimating your projects. However, just like Cost Engineering or Cost Estimating, data matters.
In my case, the government database on my current property is incorrect. Not only does it have the wrong (smaller) square footage, it also does not take into account that I purchased it in a down market (cheaper than usual). So, in this case, the starting point for the adjustments was incorrect and therefore the appraised value was incorrect. Fortunately, I had a good appraiser, he used a bottom up approach.
A bottom up approach appraisal for real estate is not unlike one in manufacturing. It requires much work and much knowledge. The appraiser came to my house, measured each room, inspected fixtures, checked quality and asked questions. He didn’t start with what I previously paid and make adjusts, he built it up from scratch. In this particular case, the difference was dramatic. This is not always the case, but this does point out that in either option, good data is paramount. I hope you see some parallels to our profession.
There are Cost Estimators and Cost Engineers everywhere in our very day life. We just have to look for them.
If you’re interested on knowing how this all turned out, we didn’t get the new house. It was up for auction, and we were out bid. No great lose. I’m sure I’ll create more spreadsheets for the next opportunity.