Analytical and approximate variance of total project cost

Skitmore, Martin & Ng, S. Thomas (2002) Analytical and approximate variance of total project cost. Journal of Construction Engineering and Management, 128(5), pp. 456-460.

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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 judgement and, with the simulated data used, the approximation is shown to be reasonably accurate – the professional judgement 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 that 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.

Impact and interest:

8 citations in Scopus
5 citations in Web of Science®
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ID Code: 4113
Item Type: Journal Article
Refereed: Yes
Keywords: Cost, components, distribution, variance, covariance, coefficient of variation, independence assumption, correlation, Monte Carlo simulation, professional judgement
DOI: 10.1061/(ASCE)0733-9364(2002)128:5(456)
ISSN: 0733-9364
Subjects: Australian and New Zealand Standard Research Classification > BUILT ENVIRONMENT AND DESIGN (120000) > BUILDING (120200) > Quantity Surveying (120203)
Divisions: Past > QUT Faculties & Divisions > Faculty of Built Environment and Engineering
Copyright Owner: Copyright 2002 American Society of Civil Engineers
Copyright Statement: Reproduced in accordance with the copyright policy of the publisher.
Deposited On: 27 Nov 2006 00:00
Last Modified: 09 Jun 2010 12:32

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