Budget quote

There are no fixed international standards; it is generally based on domestic business quotes plus various additional fees and estimates derived from experience

Some domestic construction clients entrust design institutes to prepare preliminary estimates for the foundation design in order to submit them for approval. For the purposes of approval within the industry, the costs of equipment and materials can be referenced from the client’s database, while the costs related to building installation are determined in accordance with the domestic industry standards. Regarding the general contracting phase that LZ is concerned about, design institutes or engineering companies will determine quotes based on experience with similar installations and the volume of work involved in the preliminary design, making adjustments accordingly to market prices. As for how to obtain a reasonable quote and compete in the same industry, I believe that the costs included in the EPC quote – such as headquarters management fees, equipment and material costs, construction expenses, commissioning costs, and other fees – will differ significantly from those in the preliminary basic design estimate. I would like to learn more about this aspect; I hope experienced users can share their insights with me.

A brief discussion on the cost components in bid pricing for international engineering EPC projects. International construction projects share common characteristics such as the fixed nature of the physical structure, long construction periods, and a gradual implementation process. Their unique characteristic is their international nature, which is manifested in the following ways: (1) The parties involved in the contract are from multiple countries. The parties to the contract belong to different **, with different languages, cultures, and laws. (2) Diversity of currency types and payment methods. International projects inevitably involve the use of multiple currencies to cover expenses originating from different countries, and payment methods include not only cash and checks but also letters of guarantee, letters of credit, and so on. (3) It is highly affected by international ** and changes in the economic situation, with more risk factors. The reason why a project becomes an international project is that the client needs to select a suitable project executor – a contractor – on an international scale, in order to achieve satisfactory project results at the lowest cost and in the shortest time possible. The method chosen is international bidding. For engineering companies, submitting bids and competing fairly in international tendered projects is the main way to obtain contracting contracts and take on international projects. The main price forms in a contract are as follows: (1) Fixed lump sum price. The total price is fixed within the scope of work specified in the contract, with no price adjustments. (2) Fixed unit price. The price per unit of work is fixed; payment is made by multiplying the actual amount of work completed by the unit price. (3) Cost plus fee (costplusprice). The project costs are paid by the owner based on the actual expenses, while the contractor receives a fixed amount or a percentage of the fee as stipulated in the contract. The bid price for a general contract is different from the estimated cost of a construction project. The purpose of the estimate is to calculate the total investment required for the project from the owner’s perspective; it represents the maximum amount that the owner is willing to invest in the project. This amount includes not only the costs associated with building the physical structure of the project but also various other expenses related to the owner’s management responsibilities. The bid price is the amount that the bidder sets, in response to the owner’s requirements for the construction of the project as outlined in the tender documents; it is a reasonable price that the owner can accept, with the aim of winning the bidding competition and achieving the desired profit. How to organize the cost items in a proper manner in order to submit competitive prices? Some time ago, the author was involved in the bidding process for an oil refining project in a certain country. In response to the requirements outlined in the owner’s bidding documents regarding pricing, the author explored the components of the costs involved in estimating prices, aiming to meet the needs of this particular bid while also taking into account future international bidding endeavors. The owner specified in the tender documents that the bid price shall be a fixed total amount, with the cost composition consisting of design costs, procurement costs (including service fees for procurement), and construction costs ； From the contractor’s perspective, the quote consists of project costs and profits; the costs related to design, procurement, and construction constitute the main portion of these costs, while expenses for project management and other activities related to project execution should also be included in the costs. Quotation estimation should follow the principles of comprehensiveness, no omissions, and no double counting, taking into account all costs required to complete the project ； Therefore, the quotation estimate consists of procurement costs, construction costs, design and procurement service costs, management costs (including head office management costs, on-site management costs, and management-related expenses), other costs, contingency funds, and profit. The first three costs need to be calculated separately, while the latter four costs are calculated first and then allocated to the first three costs. 1 Procurement costs: These account for the largest proportion of the project cost, ranging from 60% to 70%, or even more. The components of procurement costs generally include: equipment and material costs, procurement service fees, and other costs related to procurement. Equipment and material costs refer to the ex-factory prices of the equipment and materials that make up the physical structure of a project. Depending on their source, these can be categorized as internationally sourced or locally sourced. As required by the owner, the cost of equipment and materials also includes the expense of purchasing spare parts, as well as the cost of purchasing catalysts for initial filling and for one year’s use, along with chemical agents and lubricants for one year’s use. Procurement service fees include the salaries and non-salary expenses of project procurement staff. International procurement is primarily carried out at the contractor’s headquarters. The costs associated with procurement services include the salaries and allowances of procurement staff, travel expenses, office expenses, business entertainment and team-building costs, as well as expenses related to the urgent procurement, supervision, and inspection of international equipment and materials ； Procurement is carried out locally, and the procurement service fees include on-site allowances for procurement staff, travel expenses, personal insurance costs, passport and visa fees, fees for obtaining work permits and residence permits, costs related to the urgent acquisition of local equipment and materials, supervision during production, and inspection fees, as well as costs for customs clearance coordination and transportation coordination. Purchase-related expenses are costs associated with equipment and materials; they encompass a variety of items, the main ones of which are listed below. (1) Shipping and handling fees. The various costs incurred from the time the goods leave the factory until they are delivered to the site and accepted into storage are related to the source of the equipment and materials; transportation costs are divided into those for international procurement and those for local procurement. International procurement freight and handling charges can be divided into five stages: ① The domestic stage in the exporting country, where the costs include packaging fees, loading and unloading costs, transportation costs, transportation insurance premiums, customs clearance fees in the exporting country, and port handling fees. ②During the international transportation phase, the costs include sea (air) freight and transportation insurance fees. ③During the customs clearance process in the importing country, the costs include tariffs and other taxes in that country, customs clearance fees, port handling charges, inspection fees, demurrage fees, and the fees charged by local customs clearance agencies ； Among these are the customs duties and other taxes in the importing country; the basis for calculating such taxes as well as the applicable tax rates are quite complex and difficult to determine for foreign contractors. Generally, these costs are paid by the owner, and they are not included in the quotation ； The customs clearance procedures and rules are also difficult for foreign contractors to understand and handle properly, which can lead to delays in the release of goods. This not only increases storage costs and fines but also affects the project schedule. As a general practice, local customs clearance agencies with the necessary expertise are hired to carry out the clearance process, and fees are paid to these agencies, thereby reducing other expenses and ensuring that the goods arrive on time. ④During the local transportation phase, the costs include local shipping fees and shipping insurance. ⑤During the on-site phase, the costs include loading and unloading fees at the on-site warehouse, sorting fees, etc. Furthermore, some equipment and materials are not ordered directly from the manufacturers, but through agents, which incurs additional procurement agency fees ； In international multimodal transport involving five stages, it is easy for there to be poor coordination between these stages, resulting in delayed deliveries, or even damage or loss of the goods. Therefore, if the contractor lacks the capability to coordinate transportation, it is necessary to hire a professional freight forwarder who can take charge of coordinating the entire transportation process and provide door-to-door service. Thus, a freight forwarding fee must be included. Local procurement eliminates the first three stages of international procurement, mainly local transportation costs and transportation insurance fees ； On-site warehouse loading/unloading fees, sorting fees, etc ； There are also procurement agency fees and shipping agency fees. Since the contractor is located in a different place, it is impossible for them to gain a complete and accurate understanding of the local market in a short period of time; as a result, it is difficult to obtain locally produced products that are both reasonably priced and of good quality. Additionally, local regulations impose restrictions on the quantity of goods that foreign companies not registered locally can purchase. Therefore, hiring experienced local purchasing agents to handle the procurement on behalf of the contractor is the best way to overcome these difficulties. (2) Fees for special measures related to the transportation of oversized equipment. For oversized equipment that is extremely wide, tall, or heavy, a fee for special transportation measures should be calculated to cover the shortfall compared to regular transportation costs ； If this cost component is not taken into account, the funding gap will be quite significant. For example, in the implementation of certain foreign turnkey projects, the shipping and handling fee for internationally purchased equipment and materials is usually around 10%; whereas for heating furnaces that are delivered in separate modules, due to their large size, heavy weight, and the need for fire-resistant linings, the shipping and handling fee can reach as high as 26%. (3) Manufacturer on-site service fee. For some rotating equipment such as compressors and pumps, as well as complete sets of equipment, power distribution and control systems, etc., where the manufacturer is required to provide on-site installation guidance and commissioning services, an on-site service fee should be calculated. This fee is generally determined by multiplying the number of on-site service man-days by the unit price per man-day, and then adding additional costs such as travel expenses and accommodation fees. (4) Third-party inspection fees. The owner’s tender documents specify that third-party inspection is required for pressure vessels with pressures exceeding a certain value, as well as for all rotating equipment. Therefore, the third-party inspection fee must be calculated and included as a cost related to procurement. (5) Inspection fees for boilers and pressure vessels. For boilers and pressure vessels that are welded and assembled on-site, it is necessary to have them inspected on-site by authorized inspection agencies, and the inspection costs are also part of the related procurement expenses. 2 Construction cost: The unit price of the construction cost consists of labor costs, material costs, machinery costs, management fees, profits, and taxes. This is similar to the composition of construction costs in China, with differences and similarities in aspects such as management fees and taxes; there are also some costs that are specific to the local area and require attention. An important component of the construction costs is the expense related to the use of large-scale machinery. It is necessary to prepare a construction plan in advance, based on the details of the construction work; in particular, a plan for lifting large equipment must be developed. It is also essential to consider in advance where such lifting equipment will come from and for how long it will be used, so as to determine whether to rent it or purchase it. Additionally, attention should be paid to the division of material supply responsibilities between the contractor and subcontractors. Some insulation materials, paints, etc. may be supplied by the subcontractor on their own, but welding rods and similar items that are used in large quantities or have special specifications may be purchased by the contractor for use by the subcontractor; such details need to be specified in the unit price for construction. 3 Design fees: Design fees consist of the salaries and non-salary expenses of the project designers. It is divided into two phases: headquarters design and on-site design. During the design phase at the company’s headquarters, the costs associated with design work include the salaries and allowances of designers, travel expenses, office expenses, business entertainment costs, and team-building expenses ； During the on-site design phase, the design fees include the on-site allowances for designers, travel expenses, personal insurance costs, passport and visa fees, fees for obtaining work permits and residence permits, as well as costs related to international design coordination. 4 Administrative Expenses (1) Headquarter administrative expenses refer to the wage and non-wage costs of other project management personnel (such as project managers, project control, construction, quality, safety, finance, administrative staff, etc.) at the contractor’s headquarters. This includes salaries and allowances, travel expenses, office expenses, business entertainment costs, and team-building expenses, etc. (2) On-site management costs refer to the wage and non-wage expenses at the project site incurred by other project management personnel (such as project managers, project control, construction, commissioning/test run services, quality, safety, finance, administrative staff, etc.) after being transferred to the site. This includes on-site allowances, travel expenses, personal insurance premiums, passport and visa fees, costs associated with obtaining work permits and residence permits, as well as international communication expenses. It can be seen that most of the aforementioned design fees, procurement service fees, and headquarter and on-site management fees are identical; they are calculated separately only to meet the requirements for breaking down the quoted prices. (3) Management-related expenses include costs such as temporary facilities, office facilities, transportation vehicles, living facilities, and daily expenditures incurred on site. 　 ①Costs of temporary facilities on-site, including on-site office spaces, on-site warehouses and shelves, stockyards and parking lots, pipeline and steel structure prefabrication plants, temporary fences, gates, signboards, as well as costs related to the installation of water, electricity, heating, communication services, and road access. ②The costs of on-site office facilities include the purchase expenses for desks and chairs, filing cabinets, computers, network connection devices, printers, copiers, plotters, projectors, scanners, fax machines, shredders, telephones, mobile phones, receiving antennas, digital cameras, binding machines, as well as stationery and consumables. 　 ③The transportation assets mainly include official sedans and commuter vehicles, while the costs related to warehouses involve cranes, forklifts, etc. 　 ④The costs of living facilities include those for dormitories, bedding and furniture, work uniforms, tableware and cooking equipment, medical facilities, entertainment facilities, fire-fighting equipment, security equipment, etc. ⑤Daily expenses include a variety of cost items, mainly including: water bills, electricity bills, heating costs, gas fees, fuel costs, vehicle maintenance and repair expenses, vehicle insurance premiums, telephone bills, internet costs, photo development fees, house repair costs, hospitality expenses, marketing costs, team-building expenses, rent, and so on ； The costs associated with local employees can also be included in the daily expenses. When contractors carry out projects abroad where labor costs are low, it is cost-effective to hire locals for certain non-technical tasks. Local employees have advantages in terms of language skills and familiarity with the local environment. Positions that typically involve local employees include drivers, security guards, kitchen assistants, cleaners, warehouse handlers, and administrative assistants. 5 Other costs include project insurance, preliminary work expenses, taxes and fees, guarantee procedures fees, loan interest, owner’s engineer fees, etc. Engineering insurance, such as construction project insurance, third-party liability insurance, and construction machinery insurance. Preparatory work costs, that is, the expenses incurred during the initial quotation phase of a project. Taxes and fees: various taxes and fees required for carrying out construction projects as stipulated by the country where the project is located, are generally the responsibility of the owner to pay. Loan interest, interest on various short-term loans, such as interest on loans for purchasing advances, interest on loans for covering customs duties on imported equipment and materials, interest on letters of credit loans, etc. During the project procurement process, the contractor pays advance payments and the actual cost of purchases to the suppliers, and applies to the owner for payments related to the progress of the project. When such payments are not sufficient to cover the costs, such as when the proportion of payments related to progress is lower than that related to the actual purchase costs, or when these payments are delayed, the contractor may need to take out short-term loans to cover the costs of purchases; the interest incurred on such loans should be included in the project costs ； Customs duties must be paid when importing equipment and materials; although this cost should be borne by the owner, it is usually paid in advance by the contractor to speed up the clearance process, with the contractor then seeking reimbursement from the owner based on the invoices issued. If the amount to be paid in advance is large, the contractor may opt for a short-term loan to cover it, and such loans also incur interest ； From the bidding stage until the completion of the project, the contractor must issue to the owner a bid bond, a performance bond, a advance payment bond, etc. If the funds for these bonds are obtained through loans, the interest incurred shall also be included in the project costs. By optimizing the schedule of engineering projects, it is possible to reduce the amount of short-term loans or shorten their duration, thereby lowering loan interest costs and bid prices and enhancing competitiveness in bidding. Guarantee processing fees refer to the charges levied by banks for issuing the various guarantees mentioned above for the contractor. The owner’s engineer costs refer to the various expenses incurred when, during the initial phase of the project, the owner’s engineer visits the contractor’s headquarters to carry out tasks such as project coordination and drawing approval. In the later stages of the project, the owner’s engineer works on-site, and these costs include accommodation, transportation, office facilities, and other such things provided by the contractor. 6 Contingency fund: The contingency fund is a sum reserved by the contractor to cope with various risks. The contents may include a reserve for internal design changes and variations in the volume of work, a reserve for losses caused by general natural disasters and for measures taken to prevent such disasters, a reserve for fluctuations in the prices of equipment, materials, and construction costs, a reserve for delays in completion due to tight schedules, and for international projects, a reserve for exchange rate fluctuations that could result in loss upon conversion. Contractors working on projects abroad face a variety of risks. To turn these risks into opportunities for profit, they need not only the confidence and determination to overcome them, but also a thorough understanding of those risks, an objective assessment of them, and effective ways to avoid them. 7 The profit expected to be earned by the profit contractor from executing the project. Contingency funds and profits can be considered together; if a project is not carried out properly and the contingency funds are insufficient, it will result in profits being reduced. On the other hand, if a project is completed on time, to the required quality standards, and at the agreed price, the contingency funds can be converted into profits. The above provides a brief introduction to the cost components of quotes for international EPC projects. Most of these cost items are the same as or similar to those in domestic projects; therefore, special attention should be paid to the costs associated with the characteristics of international projects and the local conditions of the country where the project is carried out. In practical work, the components of the quotation costs must be determined based on the specific circumstances of each project, the requirements of the client, and the bidding strategy; they cannot remain unchanged. Excessive costs lead to high quotes, reducing the chances of winning the bid ； Considering too low costs increases the risks for contractors and reduces the project’s profits as well. Finding the right balance between winning bids and achieving profits, and determining which is more important, is also something that needs to be continuously discussed in the course of work. (China Industry Research Network) This post was last edited by wovihlfg on 2008-2-23 at 17:28.]

I’m a bit confused about the following: “Design fees refer to the salaries and non-salary expenses of the project designers.” It is divided into two phases: headquarters design and on-site design. During the design phase at the company’s headquarters, the costs associated with design work include the salaries and allowances of designers, travel expenses, office expenses, business entertainment costs, and team-building expenses ； During the on-site design phase, the design fees include the on-site allowances for designers, travel expenses, personal insurance costs, passport and visa fees, fees for obtaining work permits and residence permits, as well as costs related to international design coordination. What is included in the design fee are actually labor costs and management fees (as I understand it). How can intellectual achievements, especially proprietary technologies and patents, be reflected in the design fee?

Also, the rates for labor costs, equipment costs, etc., must vary quite significantly depending on the region, right?

Let me share my views: According to the regulations regarding fees for survey and design work, the design fee consists of a basic design fee and other design fees. The basic design fee is calculated by multiplying the estimated cost of construction and installation plus equipment costs plus costs related to commissioning tests by a specific rate; the other design fees are determined based on specific circumstances, including fees for custom design work (calculated based on the estimated cost of custom equipment). Fees related to patent or proprietary technology transfer can be negotiated with the client in order to increase them. In the cost structure of the quote, these costs are generally converted into an hourly rate, which is then compared with the actual calculated hourly rate. In short, ensure the company’s profitability. For example, if the cost of a hydrogenation plant is 800 million, the design fee is **generally 20 million according to the regulations; adding other adjustment factors and costs related to non-standard design brings this amount to around 40 million. This figure is then converted into man-hours for pricing purposes. In fact, the labor hour quote is merely a conversion based on the design fee (with the rates or total number of labor hours being adjustable); during project execution, it is then compared with the actual labor hours consumed (the wages and non-wage costs of designers and managers). It’s just my personal opinion; those who have experience with the specific steps involved can share their insights.