The Analysis of Pretender Building Price Forecasting Performance A Case Study

Engineering, Construction and Architectural Management
The analysis of pre-tender building price forecasting performance: a case study

Martin SkitmoreDerek Drew
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Martin SkitmoreDerek Drew, (2003),"The analysis of pre-tender building price forecasting performance: a case study",
Engineering, Construction and Architectural Management, Vol. 10 Iss 1 pp. 36 - 42
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GARY D. HOLT, PAUL O. OLOMOLAIYE, FRANK C. HARRIS, (1996),"Tendering procedures, contractual arrangements and
Latham: the contractors' view", Engineering, Construction and Architectural Management, Vol. 3 Iss 1/2 pp. 97-115 http://
dx.doi.org/10.1108/eb021025
JOHN GUNNER, MARTIN SKITMORE, (1999),"Pre-bid building price forecasting accuracy: price intensity theory",
Engineering, Construction and Architectural Management, Vol. 6 Iss 3 pp. 267-275 http://dx.doi.org/10.1108/eb021117
Djoen San Santoso, Stephen O. Ogunlana, Takayuki Minato, (2003),"Assessment of risks in high rise building
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Introduction
The analysis of
pre-tender building
price forecasting
performance:
a case study
The analysis of pre-tender forecasting

(estimating) accuracy has long been a topic of
academic interest and has developed over the
years into a wide-ranging set of approaches.
Although benefiting the field of study, in
terms of sheer volume of analyses reported,
the lack of a clear consensus on analytical
method to use (Gunner and Skitmore, 1999)
has caused difficulties in (ANOVA)
comparing the results of the reported studies
and (MRA) gaining the confidence of
practitioners for serious implementation in
practice.
The causes of this situation are
multifarious. A major issue has been that
most researchers in the topic have been
ill-equipped to do the work the analysis is
essentially statistical in nature and the
researchers, almost without exception, are not
statisticians. Another equally important issue
is that, until recently, there has been a
complete absence of any theoretical
explanation for the underlying causes of
forecasting accuracy (Gunner and Skitmore,
1999). The result of this has been the
undirected collection and analysis of data,
relying on retrospective, ad hoc, data held by
practitioners.
Gunner and Skitmore's (1999) recent price
intensity (PI) theory, however, promises to
change this situation. As yet, PI theory has
had little direct empirical confirmation except
for the analysis of one set of Singapore data
(although it is also supported indirectly
through replication of all previous work with
no notable discrepancy in results).
In this paper, an analysis is described of
pre-tender forecasts (estimates) made by a
Hong Kong consulting organisation for a
series of 89 building projects from 1995 to
1997, the main objective being to identify
factors influencing the accuracy of the
forecasts made for possible improvement in
performance. This involved the consideration
of two distinct sets of models, the purpose of
which was:
(1) to identify and explain the underlying
systematic causes of errors; and
(2) to assist in improving the predictive
ability of the forecasts.
Martin Skitmore and

Derek Drew
The authors
Martin Skitmore is a Professor in the School of
Construction Management and Property, Queensland
University of Technology, Brisbane, Australia.
Derek Drew is an Associate Professor in the
Department of Building and Real Estate, The Hong Kong
Polytechnic University, Kowloon, Hong Kong.
Keywords
Tendering, Estimating, Performance, Prices,
Construction industry, Hong Kong
Abstract
The financial management of the construction procurement
process is dependent on the performance of the managers
involved. This paper describes an analysis of pre-tender
building price forecasts (estimates) made by a Hong Kong
consulting organisation for a series of 89 building projects
from 1995 to 1997 to identify factors influencing the
accuracy of the forecasts made for possible improvement in
performance. This involved the consideration of two
distinct sets of models, the purpose of which was: (1) to
identify and explain the underlying systematic causes of
errors; and (2) to assist in improving the predictive ability of
the forecasts. The analysis for (1) used ANOVA to detect
significant differences between the errors grouped
according to building size (value), building size (floor area),
forecasting (estimating) method (approximate quantities
and superficial), nature of the work (new build and
alteration work), type of client and type of project. This was
followed by a Gunner-Skitmore price intensity theoretic
analysis. For (2), MRA was used by using cross-validation
analysis to simulate the ex-post errors.
Electronic access
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available at
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The current issue and full text archive of this journal is
available at
http://www.emeraldinsight.com/0969-9988.htm
The authors are indebted to H.K. Yu for kindly

granting permission, and Chan Suk Wan (whose
dissertation provided the basis for this paper) and
Anslem Chow, for collecting the data.

Volume 10 . Number 1 . 2003 . pp. 36-42
# MCB UP Limited . ISSN 0969-9988
DOI 10.1108/09699980310466532
36
The analysis of pre-tender building price forecasting performance

Volume 10 . Number 1 . 2003 . 36-42
Martin Skitmore and Derek Drew
The analysis for (1) first follows the

conventional approach of summarising the
distributional characteristics of the errors for
subgroups of each of the variables available.
The statistical results of this analysis show the
only significant effect, in both bias and
consistency, to be the forecasting (estimating)
method used. This was followed by a PI
theoretic analysis, which simultaneously
removed the confounding effects of the
conventional treatment and confirms the
applicability of PI theory to the case study.
The analysis for (2) involved regressing all
the independent variables, and a variety of
transformations, on an additive as well as
multiplicative version of the dependent
variable, using cross-validation analysis to
simulate the ex-post errors.
Table I Forecasting errors summarised
Analysis
Data
Pretender forecasting (estimating) data for a
complete set of 89 building projects for the
period January 1995 to October 1998 were
collected from a Hong Kong private quantity
surveying consultant (see Appendix). For
each of the projects, the forecasting
(estimating) method (approximate quantities
or superficial), tender date, gross floor area,
forecast price, lowest bid, type of client, type
of project and nature of the work (new build
or alterations) were recorded. For comparison
purposes, all the monetary values were
deflated to a common base date of March
1999 by means of the Levett and Bailey
(1999) local tender price index. The floor
areas of three projects were not known.
All the projects were carried out in
Hong Kong and, therefore, as Hong Kong
building prices are known to be homogeneous
(Drew and Skitmore, 1997), no adjustment
was made for geographical price differences.
All of the forecasts were carried out by
professional, certified trained, surveyors.
All significance tests were made at the 5 per
cent level.
Variable
Mean
error (%)
Standard
deviation
Coefficient
of
variation
Total
89
1.78
12.95
13.19
Method
Approx Q
Superficial
46
43
1.25
5.04
14.45
10.32
14.27
10.87
Project type
Commercial
Health
Apartment
Education
Other
20
18
21
12
18
1.24
4.07
3.95
7.20
2.13
14.90
13.29
11.00
12.89
11.39
15.09
12.77
11.45
13.89
11.64
Project size (value) ($)

< 60m
61-100m
101-250m
> 250m
18
23
26
22
0.50
1.80
1.39
4.12
13.39
12.92
14.37
11.25
12.75
13.15
14.57
11.73
Project size (area)

< 5,000m2
5,001-10,000m2
10,001-30,000m2
> 30,00m2
17
23
27
19
5.40
0.43
0.55
1.76
12.86
13.29
12.66
13.42
13.59
13.34
12.73
13.80
Nature
New work
Alterations
74
15
1.64
2.51
12.42
15.79
12.63
16.20
Client type
Private, experienced
Private, inexperienced
Public, primary
Public, secondary
29
33
18
9
5.60
1.39
3.46
1.49
10.57
14.35
10.84
16.24
11.20
14.55
10.47
16.49
percentage difference between the forecast

bid price and the lowest bid price (a positive
value indicates an overestimate); column 4
gives the standard deviation around the mean;
and column 5 gives this expressed as the
coefficient of variation.
The overall distribution of errors has a
mean of 1.78 per cent with a standard
deviation of 12.95 (13.19 per cent coefficient
of variation (the coefficient of variation of the
ration, i.e.100 (0.1295/0.9822)). The mean is
not significantly different from 0 per cent,
which indicates the forecasts to be unbiased
overall.
The only sub-groups to record significant
differences in bias (mean errors) or
consistency (standard deviations) to each
other are those for ``method'', with significant
differences in both means (ANOVA F = 5.501,
df = 1,87, p = 0.021) and standard deviations
(Bartlett's 2 = 4.73, p = 0.030). This is very
Explanatory models
Conventional analysis
Table I summarises the results of the
conventional analysis. Column 1 describes
the grouping variable, with sub-groups inset;
column 2 gives the number of relevant
projects involved; column 3 gives the mean
37

Volume 10 . Number 1 . 2003 . 36-42
and then testing the ensuing residuals with the

additional variables for any possible residual
correlation or heteroscedasticity (there should
be none). Figure 1 provides a plot of price
intensity and against the percentage error of
forecast. Table II summarises the regression
results. Only 86 cases could be analysed due
to the three projects with unknown floor
areas. As can be seen, the model is significant
with an R2 of 0.145 and the price intensity
variable (INTENSIT) together with the
intercept have a significant t-value.
As predicted by PI theory, none of the
sub-groups now has significantly different
means or standard deviations.
much a surprise the approximate quantities

method, as it utilises more data, being
expected to have a lower coefficient of
variation than the superficial method instead
of vice versa. Even more suprisingly, however,
apart from James' (1954) early comparison of
the accuracy of the superficial, cube and
storey enclosure methods, which showed the
superficial and storey enclosure methods
produce significantly more accurate results
than the cube method (2 = 5.99, df = 2)
(Skitmore et al., 1990, p. 15), no other
empirical studies comparing traditional
methods have been reported. It is possible,
therefore, that the result found here that the
superficial method is significantly more
accurate than the relatively more resource
consuming approximate quantities method
is correct. Of course, this does not imply that
the superficial method will always outperform
the approximate quantities method. It is
possible, for example, that the use of the
superficial method has deliberately been
restricted to simpler, more typical, projects,
with the approximate quantities method being
reserved for only those that are more complex
and less typical. No data, however, were
available to verify this possibility.
Predictive models
Introduction
PI theory, while accounting for all significant
systematic forecasting errors, has relatively
little to offer as a predictive theory. Clearly, it
is one thing to know that expensive projects,
in terms of price intensity, are systematically
underestimated and inexpensive projects are
systematically overestimated (Figure 1) but
quite another to be able to predict expensive
and inexpensive projects in advance.
Inspection of the regression equation of
percentage error on price intensity indicates
why this is the case both dependent and
independent variables contain what is in
predictive mode the unknown value of the
lowest bid. The obvious solution to this is just
to replace the unknown true value of the
lowest bid with the forecaster's estimated
value of the lowest bid. However, a moment's
reflection will show why this is not
appropriate. The forecaster's estimated value
of the lowest bid is, as illustrated in Figure 1,
biased towards the mean price intensity of all
the projects and, as this bias is a major aspect
that we are trying to correct (we would also
like to reduce the spread or standard
deviation of the errors), it is unlikely to be of
much use in identifying the nature of the
correction.
It is also clear that, assuming PI theory is
correct, whenever the price intensity error is
removed only purely random ``noise'' can
remain. It follows, therefore, that the only
correction needed is to the price intensity
forecast. This suggests the need for a model
that either has:
(1) the actual price intensity as the dependent
variable with the forecasted price
PI analysis
Gunner and Skitmore's (1999) approach to
PI analysis was to conduct a series of trivariate
regression analyses of the ratio error (forecast/
low bid value) on price intensity ratios (low
bid value/gross floor area) plus a further
independent variable. As the theory holds that
price intensity, and price intensity alone,
correlates with forecasting error (bias), the
expectation is that the price intensity variable
will always be significant, irrespective of the
additional independent variable and that the
additional independent variable will never be
significant. Trivariate regression, however,
estimates the partial coefficients of the price
intensity variable and the additional variable
simultaneously, with each allowing for the
influence of the other. This rather contradicts
the theory itself, which maintains that the
additional variable can have no such
influence. In other words, the theory implies
that whatever correlation is detected by the
regression for the additional variable must be
spurious. To avoid this contradiction, the
regressions were instead approached in
hierarchical manner by first regressing the
error variable on the price intensity variable
38

Volume 10 . Number 1 . 2003 . 36-42
Figure 1 Price intensity and forecast errors
Table II Price intensity regression

Statutory multiple
regression n = 86
Intercept
INTENSIT
Beta
0.381222
Regression summary for dependent variable

Standard error
Standard error
of beta
B
of B
t(84)
0.100869
8.381499
0.000772
2.977280
0.000204
2.81515
3.77936
p-level
0.006073
0.000293
Notes: PCTERR R = 0.38122202, R2 = 0.14533023, Adjusted R2 = 0.13515559, F(1,84) = 14.284, p < 0.00029,
Standard error of estimate: 12.039
method, nature of the work, project type and

client type. A forward stepwise-like procedure
was used in which each independent variable
was entered into the regression equation, the
deleted residual calculated for each project,
and the standard deviation of the deleted
residuals calculated for the independent
variable. The independent variable was then
removed and replaced by a different
independent variable from the above list and
the process repeated.
The results are summarised in Table III for
both the multiplicative (percentage) and
additive (difference) error dependent variable.
The first row of the results gives the standard
deviation of the original error term (before
adjustment) for comparison with the
regression results.
As Table III shows, such improvements in
standard deviation that do occur are trivial.
In view of this, the intended forward
stepwise-like approach was terminated as
having failed to achieve enough
improvement to allow entry of the first
variable into the equation.
intensity included among the

independent variables; or
(2) the actual intensity forecast error as the
dependent variable with or without the
forecasted price intensity included among
the independent variables.
In fact using arithmetic differences (between
actual and forecasted price intensity) as the
dependent variable produces proportionally
identical results for (1) and (2), so there are
really only two basic approaches available
depending on whether a multiplicative
(percentage error) or additive (difference)
dependent variable is used.
Finally, the cross-validation method was
used to measure the performance of the
predictive models as this gives the closest
simulation to ex-post results available.
Results
The independent variables chosen for the
analysis were the raw, log and inverse forecast
value, raw, log and inverse gross floor area,
the forecasted price intensity value and
dummy variables representing the forecasting
39

Volume 10 . Number 1 . 2003 . 36-42
a conventional analysis were disconfirmed.

The use of PI theory for predictive purposes
was then examined and two approaches
applied to the prediction of the forecasting
errors by a cross validation forward stepwiselike technique.
Table III Results of cross validation analysis
Independent variable
None
Raw forecast price
Log forecast price
Inverse forecast price
Raw floor area
Log floor area
Inverse floor area
Forecasted price intensity
Nature
Method
Private, experienced
Private, inexperienced
Public, primary
Commercial
Health
Apartment
Dependent variable
(SD deleted residual)
Percentage Difference
12.95
12.99
13.33
15.96
12.91
13.33
13.43
13.17
13.35
12.89
12.95
13.26
12.95
13.25
12.92
13.16
2,030.7
2,025.1
2,065.3
2,381.1
2,084.1
2,088.9
2,090.9
2,029.6
2,079.1
2,051.9
2,057.8
2,085.3
2,022.9
2,077.4
2,019.8
2,065.3
References
Ashworth, A. and Skitmore, M. (1983), ``Accuracy in
estimating'', Occasional Paper, 27, The Chartered
Institute of Building, Ascot.
Drew, D. and Skitmore, M. (1997), ``The effect of contract
type and contract size on competitiveness in
construction contract bidding'', Construction
Management and Economics, Vol. 15 No. 5,
pp. 469-89.
Gunner, J. and Skitmore, M. (1999), ``Building contract
price forecasting: price intensity theory'',
Engineering, Construction and Architectural
Management, Vol. 6 No. 3, pp. 267-75.
James, W. (1954), ``A new approach to single price-rate
approximate estimating'', The Chartered Surveyor,
May.
Levett & Bailey (1999), Tender Price Indices and Cost
Trends, June 1998, Levett & Bailey Quantity
Surveyors, Hong Kong.
Skitmore, M., Stradling, S.G., Tuohy, A.P. and
Mkwezalamba, H. (1990), ``The accuracy of
construction price forecasts: a study of quantity
surveyors' performance in early stage estimating'',
University of Salford, Salford.
Conclusions
The work described in this paper was aimed
at developing a statistical method for
improving pre-contract price forecasting
accuracy. This was demonstrated via the
analysis of a set of forecasts from a
Hong Kong firm of consultants for 89
building projects. Using a modified PI
theoretic approach, the significant findings of
40

Volume 10 . Number 1 . 2003 . 36-42
Appendix
Table AI
Project
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
Forecast
Lowest bid
79,241,250
82,888,103
43,471,015
41,618,240
80,,493,383
89,250,034
183,939,361
214,178,580
11,628,199
13,268,606
42,960,772
40,726,449
4,058,621,825 5,274,295,620
29,569,708
31,339,221
129,290,146
135,400,955
69,903,285
77,979,898
88,273,179
80,922,259
107,814,107
87,754,775
106,748,679
104,342,104
91,408,929
87,171,429
273,016,071
231,894,093
90,004,500
89,981,696
131,096,143
130,389,206
143,663,357
119,127,192
91,893,214
89,981,696
581,506,071
617,222,143
1,240,431,818 1,146,066,545
298,201,469
276,770,979
188,642,832
224,336,213
169,179,965
167,282,039
79,605,734
73,008,626
2,821,048,951 3,761,003,497
35,879,476
28,053,749
1,153,311,189
998,245,766
1,124,863,636
994,479,021
159,424,826
184,302,210
574,344,231
581,259,165
150,666,667
118,659,657
619,787,879
668,167,744
253,393,939
281,472,727
128,671,616
124,642,424
902,858,586
836,329,546
67,434,747
81,993,798
31,149,192
32,020,059
196,505,859
216,027,465
100,395,296
98,575,559
45,720,395
52,231,029
84,192,434
80,289,474
132,867,928
211,053,148
98,321,151
96,104,570
1,148,586
1,417,245
9,179,905
9,347,925
213,623,810
204,515,505
13,377,048
12,825,850
171,996,762
142,815,443
201,247,619
204,515,605
Method
GFA
Sec
Type
Nature
2
1
2
1
2
1
1
1
2
2
1
1
1
2
1
2
1
1
1
2
2
2
1
1
1
1
1
2
1
2
1
1
2
2
1
1
1
2
1
1
1
2
2
1
2
2
2
1
1
2
8,760
4,390
5,195
19,985
915
5,288
295,417
1,950
20,000
4,100
8,940
8,070
7,590
5,720
20,233
7,956
9,770
13,416
6,519
33,490
63,000
31,072
10,753
16,350
12,893
175,400
158,900
134,468
148,090
21,930
47,882
17,535
6,200
31,096
7,168
61,370
3,705
31,096
20,889
10,876
6,975
5,710
8,864
7,500
1,550
470
19,350
800
18,756
13,155
3
3
1
1
2
2
1
3
1
3
3
3
3
3
1
1
3
3
1
1
3
1
2
3
1
1
4
2
4
2
1
2
3
2
1
1
1
2
2
2
1
3
2
2
1
2
2
2
3
2
32
721
721
816
816
442
32
412
32
721
442
442
852
852
816
32
442
442
32
816
852
713
713
721
282
32
981
981
816
816
816
981
721
522
32
816
816
522
713
442
447
412
713
412
816
543
852
852
412
852
1
1
1
1
1
1
2
2
1
2
1
1
1
1
1
1
1
1
2
1
1
1
1
1
1
2
2
1
1
1
1
1
2
2
1
1
1
1
1
1
1
1
1
1
1
1
2
1
1
1
(continued)
41

Volume 10 . Number 1 . 2003 . 36-42
Table AI
Project
Forecast
Lowest bid
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
519,800,000
768,432,286
353,905,238
81,446,095
224,364,190
258,522,476
118,079,619
319,079,714
25,290,476
113,107,619
99,805,905
163,139,714
280,675,663
22,463,855
63,051,958
11,970,938
18,876,136
62,599,432
66,615,426
92,550,852
62,599,432
7,242,273
65,552,486
86,847,680
638,359,475
125,636,022
73,390,691
7,988,039
188,987,818
263,408,619
468,232,044
51,791,667
172,861,190
148,238,074
657,400,000
41,900,000
650,000,000
515,460,000
170,000,000
570,447,434
858,800,000
328,572,439
91,956,294
213,085,714
247,590,291
131,994,762
328,572,439
27,709,752
131,437,924
99,975,480
147,438,095
311,747,946
23,374,229
68,964,095
10,900,744
23,820,698
79,200,725
69,804,935
69,804,935
57,898,118
7,121,754
69,200,538
86,995,238
747,298,343
157,379,841
89,900,552
6,261,316
181,013,465
271,229,594
496,383,817
64,076,323
189,310,974
141,997,658
658,550,000
39,188,000
658,550,000
658,550,000
197,129,126
Method
GFA
Sec
Type
Nature
1
2
1
2
1
2
2
1
1
2
2
2
1
2
2
1
2
1
1
1
2
2
1
2
2
1
2
1
1
1
1
1
2
2
2
2
2
2
2
28,002
102,440
45,480
5,080
11,760
23,227
9,760
45,5400
238,500
7,828
9,860
29,488
43,710
1,441
4,130
1
1
2
4
3
4
2
2
4
1
2
4
1
2
2
2
2
4
2
2
2
2
1
2
4
2
2
2
3
1
1
3
1
1
2
1
1
1
4
816
816
981
412
412
713
442
981
114
32
442
32
282
534
154
816
32
114
442
442
816
342
816
442
816
442
852
534
721
32
816
721
816
816
32
816
32
32
816
1
1
1
1
1
1
1
1
1
1
1
1
1
2
1
2
2
1
1
1
1
2
2
1
1
1
1
2
1
1
1
1
1
1
1
1
1
1
1
3,650
8,050
7,100
2,400
5,000
8,140
93,452
16,620
2,132
470
18,756
27,594
28,000
4,440
12,750
9,325
28,350
2,527
28,240
28,610
11,700
42
This article has been cited by:
1. Mohd Azrai Azman, Zulkiflee Abdul-Samad, Suraya Ismail. 2013. The accuracy of preliminary cost estimates in Public
Works Department (PWD) of Peninsular Malaysia. International Journal of Project Management 31, 994-1005. [CrossRef]
2. Ajibade Ayodeji Aibinu, Thomas Pasco. 2008. The accuracy of pretender building cost estimates in Australia. Construction
Management and Economics 26, 1257-1269. [CrossRef]
3. Martin Skitmore, Franco K. T. Cheung. 2007. Explorations in specifying construction price forecast loss functions.
Construction Management and Economics 25, 449-465. [CrossRef]

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