Analytical and Approximate Variance of Total Project Cost
Publication: Journal of Construction Engineering and Management
Volume 128, Issue 5
Abstract
The statistical variance of total project cost is usually estimated by means of Monte Carlo simulation on the assumption that exact analytic approaches are too difficult. This paper tests that assumption and shows that, contrary to expectations, the analytic solution is relatively straightforward. It is also shown that the coefficient of variation is unaffected by the size (floor area) of the project when using standardized component costs. A case study is provided in which actual component costs are analyzed to obtain the required total cost variance. The results confirm previous work in showing that the approximation of the second moment (variance) under the assumption of independence considerably underestimates the exact value. The analysis then continues to examine the effects of professional judgment, and, with the simulated data used, the approximation is shown to be reasonably accurate—the professional judgment absorbing most of the intercorrelations involved. An example is also given in which the component unit quantities are priced by their average unit costs and which again shows the approximation to be close to the true value. Finally, this is extended to show how the exact total project cost variances may be obtained for each project.
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References
Ashworth, A., and Skitmore, R. M. (1983). “Accuracy in estimating.” Occasional Paper No. 27, Chartered Institute of Building, London.
Beeston, D. T. (1974). “One statistician’s view of estimating.” Cost Study No. 3, Building Cost Information Service, Royal Institution of Chartered Surveyors, London.
Moselhi, O., and Dimitrov, B.(1993). “Discussion of ‘Monte Carlo technique with correlated random variables,’ by Ali Touran and Edward P. Wiser.” J. Constr. Eng. Manage., 119(3), 658–660.
Touran, A.(1993). “Probabilistic cost estimating with subjective correlations.” J. Constr. Eng. Manage., 119(1), 58–71.
Touran, A., and Wiser, E. P.(1992). “Monte Carlo technique with correlated random Variables.” J. Constr. Eng. Manage., 118(2), 258–272.
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Copyright
Copyright © 2002 American Society of Civil Engineers.
History
Received: Oct 28, 1999
Accepted: Dec 4, 2001
Published online: Sep 13, 2002
Published in print: Oct 2002
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