Process of Cost Estimating in Construction

Process of Cost Estimating in Construction

August 7, 2023
Process of Cost Estimating in Construction

In the vast and dynamic realm of construction projects, accurate cost estimation plays a pivotal role in ensuring the success and profitability of any endeavor. Cost estimating is a systematic process that involves predicting the financial investment required for a construction project from its inception to completion. This indispensable process allows stakeholders, including project owners, contractors, and investors, to make informed decisions, establish budgets, and manage resources effectively.

Cost estimating holds significant importance for several key reasons:

  1. Budget Management:
    Accurate cost estimates enable project stakeholders to create realistic budgets, ensuring that financial resources are allocated appropriately throughout the project lifecycle. This helps prevent cost overruns and keeps the project financially viable.
  2. Project Feasibility:
    Before committing to a construction project, potential investors need reliable cost estimates to evaluate its feasibility and potential profitability. A well-prepared cost estimate aids in making informed investment decisions.
  3. Bid Preparation:
    Contractors rely on cost estimates to develop competitive bids for projects. A precise estimate enhances their chances of securing contracts while maintaining a reasonable profit margin.
  4. Resource Allocation:
    Effective cost estimation assists in determining the required resources, such as materials, labor, and equipment, to accomplish project milestones efficiently.
  5. Risk Management:
    Identifying potential cost risks during the estimation process allows stakeholders to develop contingency plans and mitigate financial uncertainties.
  6. Project Control:
    Throughout the project's execution, cost estimating serves as a benchmark for evaluating actual costs against the estimated figures. This facilitates cost control and aids in making necessary adjustments as the project progresses.

The purpose of this article is to provide a comprehensive understanding of the process of cost estimating in the construction industry. It aims to equip readers, including project managers, estimators, architects, engineers, and other construction professionals, with the knowledge and tools necessary to create accurate and reliable cost estimates.

The objectives of the article are as follows:

  1. Explain the significance of cost estimating in construction and its impact on project success.
  2. Provide an overview of the key steps involved in the cost estimating process.
  3. Explore various cost estimating methodologies and their suitability for different project types.
  4. Introduce essential techniques and tools used in cost estimating, such as quantity takeoff and cost databases.
  5. Discuss the factors that contribute to direct costs, including labor, materials, and equipment.
  6. Examine indirect costs and overhead that must be considered during the estimation process.
  7. Illustrate how to integrate direct and indirect costs to develop a comprehensive project estimate.
  8. Highlight the importance of monitoring and controlling costs during project execution.
  9. Emphasize the need for continuous improvement in cost estimating practices to enhance project outcomes.

Cost estimating, in the context of construction, refers to the systematic process of forecasting and calculating the anticipated expenses associated with a construction project. This process involves assessing various elements, including labor, materials, equipment, overhead, and contingencies, to develop a detailed financial projection. Accurate cost estimating is essential for informed decision-making, budget management, and successful project execution in the construction industry.

Preparing for Cost Estimating

Gathering Project Information

Before embarking on the cost estimating process, comprehensive project information must be collected to ensure the accuracy and reliability of the estimate. The following key elements are essential to gather:

  1. Project Scope and Requirements:
    Understanding the project's scope is fundamental to cost estimation. This includes identifying the overall objectives, size, and complexity of the construction project. Clear project requirements, such as functionality, design specifications, and performance standards, should be documented to determine the level of resources needed.
  2. Architectural and Engineering Drawings:
    Detailed architectural and engineering drawings provide critical information about the project's layout, dimensions, and design features. These drawings enable estimators to perform quantity takeoffs accurately and assess the materials and labor required for each element of the construction.
  3. Bill of Quantities (BOQ) or Specifications:
    The Bill of Quantities or detailed project specifications outline the specific materials, quantities, and quality standards required for construction. It serves as a basis for estimating material costs and provides insights into the project's technical requirements.
  4. Site Visit and Assessment:
    Conducting a thorough site visit is essential to gain a comprehensive understanding of the existing conditions and potential challenges. Estimators can observe the site's topography, access points, utilities, and any constraints that might impact construction costs. Additionally, site assessments help identify potential risks and determine the need for specialized equipment or techniques.

By diligently gathering this project information, estimators can build a solid foundation for the subsequent stages of the cost estimating process, facilitating the development of accurate and well-informed estimates.

Identifying Cost Estimating Methodology

Cost estimating methodologies are diverse and vary in complexity and accuracy. The selection of the appropriate method depends on the project's stage, available information, and desired level of precision. Below are some common types of cost estimating methods used in construction:

  1. Preliminary Cost Estimate:
    A preliminary cost estimate is a broad and rapid assessment of the project's cost during the early planning stages. It provides a rough estimate based on limited information and serves as a quick decision-making tool. This method is useful when only high-level project details are available, such as conceptual drawings or rough outlines of the project scope.
  2. Detailed Cost Estimate:
    A detailed cost estimate is a comprehensive and accurate projection of the project's cost, typically prepared during the later stages of project development when more detailed information is available. It involves a thorough analysis of all cost components, including labor, materials, equipment, and indirect costs. Detailed cost estimates are valuable for establishing precise budgets and negotiating contracts.
  3. Parametric Cost Estimate:
    The parametric cost estimating method relies on historical data and mathematical models to estimate costs based on specific project parameters. It involves using cost-per-unit metrics or cost indices to extrapolate from previous similar projects. This approach is beneficial when there is a lack of detailed project information but sufficient historical data is available.
  4. Unit Cost Estimating:
    Unit cost estimating involves breaking down the project into individual units or components, each with its associated cost. These costs are then multiplied by the estimated quantities required for the project. This method is often used for repetitive construction elements or projects with standard components.
  5. Historical Cost Data:
    Historical cost data relies on information from past projects that are similar in nature to the current one. Estimators use historical cost records to benchmark and compare with the current project's specifications and requirements. It is particularly useful for projects with repetitive elements or in regions with consistent construction practices.

Each cost estimating method has its strengths and limitations, and estimators may employ a combination of these methods to create a more comprehensive and accurate estimate. The chosen methodology should align with the project's stage, the available information, and the level of detail required for decision-making. It is important for estimators to continuously update and refine their cost estimating practices based on lessons learned from previous projects and changes in the construction industry.

Assembling Cost Estimating Team

Assembling a competent and cohesive cost estimating team is crucial for the success of the cost estimating process in construction projects. The team should consist of individuals with diverse skills and expertise to ensure a well-rounded and accurate estimation. Here are the key aspects to consider when assembling the cost estimating team:

Roles and Responsibilities of Team Members:

  1. Chief Estimator or Lead Estimator:
    The Chief Estimator or Lead Estimator is responsible for overseeing the entire cost estimating process. They coordinate the team, allocate tasks, and ensure that the estimation aligns with industry standards and best practices. They also review and validate the final estimates before presentation to stakeholders.
  2. Quantity Surveyors:
    Quantity surveyors are experts in quantifying and measuring construction materials, labor, and other resources needed for the project. They perform detailed quantity takeoffs based on architectural and engineering drawings, bills of quantities, and project specifications.
  3. Cost Estimators:
    Cost estimators are responsible for calculating the costs associated with labor, materials, equipment, and other direct and indirect expenses. They use various cost estimating methods and software tools to develop accurate estimates based on the quantity takeoffs and other project information.
  4. Cost Analysts:
    Cost analysts
    analyze historical cost data, market trends, and industry benchmarks to validate the estimates and ensure that they are realistic and competitive. They also conduct sensitivity analyses to assess the impact of potential cost variations.
  5. Project Managers and Engineers:
    Project managers
    and engineers play a vital role in the cost estimating team as they provide technical insights and domain-specific knowledge. They assist in evaluating constructability, potential risks, and project-specific factors that may impact the estimates.

Collaborating with Architects, Engineers, and Contractors:

Successful cost estimating requires collaboration and coordination with various project stakeholders, including architects, engineers, and contractors. The cost estimating team should work closely with these professionals to:

  1. Understand Project Specifications: Collaborate with architects and engineers to gain a clear understanding of the project's design, specifications, and technical requirements. This collaboration ensures that the estimates align with the intended design and scope.
  2. Seek Expert Input: Engage with specialized engineers and consultants to estimate costs for specific technical aspects of the project, such as mechanical, electrical, or structural components.
  3. Value Engineering: Work with architects and engineers to explore value engineering opportunities that can optimize costs without compromising on quality or functionality.
  4. Contractor Input: Involve contractors in the cost estimating process to obtain their insights on construction methods, materials, and market prices. Contractor input can enhance the accuracy of estimates and foster collaboration during the construction phase.

Ensuring Communication and Coordination:

Effective communication and coordination among the cost estimating team members are essential to avoid misunderstandings and errors. To ensure seamless collaboration:

  1. Establish Regular Meetings: Conduct regular team meetings to discuss progress, address challenges, and exchange information.
  2. Share Information Transparently: Ensure that all team members have access to relevant project documents, updates, and changes.
  3. Implement Version Control: Maintain version control for cost estimates and revisions to prevent confusion over the most recent estimate.
  4. Foster Open Dialogue: Encourage a culture of open communication where team members feel comfortable discussing their ideas and concerns.

By assembling a well-structured cost estimating team and promoting effective collaboration and communication, construction projects can benefit from accurate and reliable cost estimates, leading to successful project outcomes.

Cost Estimating Techniques and Tools

Quantity Takeoff

Quantity takeoff is a critical process in cost estimating that involves measuring and quantifying the various materials, labor, and resources required for the construction project. Accurate quantity takeoffs lay the foundation for precise cost estimates. Here are the key aspects of quantity takeoff:

Measurement Units and Conversions:

In quantity takeoff, the estimator needs to be familiar with the measurement units used in construction. These units can include square footage, cubic meters, linear feet, tons, etc., depending on the item being measured. It is essential to ensure consistency in units throughout the estimation process.
Conversions may be necessary when quantities are measured in different units. For instance, converting the length of a wall from feet to meters or converting the volume of concrete from cubic yards to cubic meters. Estimators should use reliable conversion factors to avoid errors and inconsistencies in the calculations.

Utilizing Advanced Software for Takeoff:

Manual quantity takeoff can be time-consuming and prone to errors. To enhance efficiency and accuracy, estimators often use advanced software tools specifically designed for quantity takeoff. Some popular construction takeoff software includes:

  1. Building Information Modeling (BIM) software: BIM software allows estimators to extract quantities directly from the 3D digital model, enabling more accurate and automated quantity takeoff.
  2. Cost Estimating Software: Many cost estimating software solutions include built-in quantity takeoff capabilities, enabling estimators to create detailed quantity lists and measurements efficiently.
  3. Digital Measurement Tools: Digital measurement tools, such as digital planimeters and digitizers, help estimators measure areas and lengths on digital drawings accurately. Utilizing such software can significantly streamline the quantity takeoff process, reduce errors, and improve overall estimating productivity.

Ensuring Accuracy in Quantities:

Accurate quantity takeoff is vital to produce reliable cost estimates. To ensure accuracy:

  1. Verify Drawings and Specifications: Thoroughly review architectural and engineering drawings, bills of quantities, and project specifications to identify all relevant elements that require measurement.
  2. Double-Check Measurements: Verify and double-check all measurements to avoid errors that could lead to overestimation or underestimation of quantities.
  3. Account for Waste and Allowances: Consider waste factors and allowances for each material, such as cutting losses, breakages, and extra material for repairs, to ensure adequate quantities are accounted for in the estimate.
  4. Consult with Subject Matter Experts: Collaborate with engineers, suppliers, and other experts to validate quantities and measurements, particularly for complex or specialized components.
  5. Update Quantities Regularly: As the project evolves and design changes occur, ensure that the quantity takeoff is updated to reflect the latest information.

By paying close attention to measurement units, leveraging advanced software tools, and maintaining accuracy throughout the quantity takeoff process, estimators can produce reliable cost estimates that form a solid basis for successful construction projects.

Cost Data Sources

Accurate and up-to-date cost data is crucial for generating reliable cost estimates in construction projects. Estimators use various sources to obtain cost data, including industry databases, benchmarking, market analysis, and historical data from previous projects. Here are the key cost data sources:

Utilizing Industry Databases:

Industry databases are repositories of construction cost information collected from various projects across the industry. These databases contain data on material prices, labor rates, equipment costs, and other construction-related expenses. Estimators can access these databases to retrieve cost data for specific items or activities relevant to their projects.

Some popular industry databases include:

  1. RSMeans (now Gordian): RSMeans is a well-known database providing comprehensive construction cost data for various regions, covering material and labor costs, equipment rental rates, and productivity factors.
  2. Building Cost Information Service (BCIS): BCIS offers cost data for the UK construction industry, including building costs, elemental costs, and regional cost indices.
  3. National Construction Estimator: The National Construction Estimator is a database with detailed cost data for various construction tasks, widely used in the United States. Accessing reliable industry databases ensures that estimators base their cost estimates on current and accurate market data, enhancing the credibility of their projections.

Benchmarking and Market Analysis:

Benchmarking involves comparing a project's cost with similar completed projects or industry averages. Estimators can conduct benchmarking to validate their cost estimates and identify areas where the projected costs deviate significantly from the norm.
Market analysis involves studying the current construction market conditions, such as supply and demand of materials and labor, inflation rates, and economic trends. This analysis helps estimators adjust their cost estimates based on prevailing market conditions.
By benchmarking and analyzing the market, estimators can ensure that their cost estimates are in line with industry standards and reflective of the current economic climate.

Historical Data from Previous Projects:

Historical data from previous construction projects executed by the same organization or in a similar context can be an invaluable resource for cost estimating. Estimators can draw insights from past projects to identify patterns, lessons learned, and factors that influenced costs.
Historical data can include detailed records of labor productivity, material prices, equipment usage, and any cost deviations encountered during past projects. This data helps estimators make informed adjustments to their cost estimates based on past performance.
It is essential to maintain a comprehensive database of historical project data to facilitate continuous improvement in cost estimating practices over time.

By utilizing industry databases, conducting benchmarking and market analysis, and leveraging historical data from previous projects, estimators can enhance the accuracy and reliability of their cost estimates. These diverse cost data sources provide valuable inputs to develop well-informed estimates that align with real-world construction scenarios.

Estimating Direct Costs

Labor Costs

Labor costs are a significant component of direct costs in construction projects. Estimating labor costs involves considering various factors to determine the workforce required and their associated expenses. Here are the key aspects of estimating labor costs:

  1. Determining Labor Productivity Rates: Labor productivity rates indicate the amount of work that can be completed by a laborer in a specific unit of time. Estimators need to determine realistic and industry-standard productivity rates for different trades and activities. These rates are influenced by factors such as project complexity, workforce experience, and construction methods.Estimators can refer to historical data, industry benchmarks, or consult with experienced professionals to establish accurate labor productivity rates for each construction task.
  2. Factoring in Union Wages and Overtime: Union wages and labor agreements can significantly impact labor costs, especially in regions where construction work is subject to union regulations. Estimators must consider the prevailing union wage rates and any applicable overtime or penalty rates for work outside regular hours. Complying with union requirements ensures fair compensation for workers while providing a realistic assessment of labor costs.
  3. Considering Skill Levels and Local Market Conditions: The skill level and experience of laborers affect their productivity and, consequently, labor costs. Skilled workers may be more efficient but come with higher wage expectations. On the other hand, less experienced workers may require more time to complete tasks. Estimators should account for local market conditions when estimating labor costs. Labor costs can vary significantly between regions due to factors such as labor supply and demand, cost of living, and prevailing wage rates.

Material Costs

Material costs encompass all expenses related to acquiring construction materials for the project. Estimators need to consider several factors when estimating material costs:

  1. Sourcing Material Prices: Estimators should obtain current and accurate material prices from reliable suppliers and vendors. Prices can fluctuate over time, so it is essential to use up-to-date pricing information to ensure the accuracy of the estimate.
  2. Accounting for Material Waste and Storage:Construction projects often generate material waste during cutting, installation, and other processes. Estimators should include allowances for material waste in their estimates to avoid underestimating the required quantities. Additionally, the cost of storing materials on-site or off-site should be considered, as storage expenses can add to the overall material costs.
  3. Evaluating Quality vs. Cost Trade-offs: When selecting materials, estimators should consider the trade-off between cost and quality. Lower-cost materials may lead to initial cost savings, but they might be less durable or require more maintenance, leading to higher life-cycle costs. Evaluating the long-term benefits and potential savings of investing in higher-quality materials is crucial for making informed decisions during cost estimation.

Equipment Costs

Equipment costs pertain to the expenses associated with using construction equipment on the project site. Estimators must account for various factors when estimating equipment costs:

  1. Rental vs. Ownership Costs: Estimators need to decide whether to rent or purchase the required construction equipment. Renting equipment may be more cost-effective for short-term projects or when specialized equipment is needed. On the other hand, ownership costs include purchase or lease costs, maintenance, insurance, and depreciation. For long-term projects or when equipment is frequently used, ownership costs may be more economical.
  2. Factoring in Equipment Utilization Rates: Estimators should consider the anticipated utilization rates of equipment. If equipment will be idle for extended periods during the project, the cost per hour of utilization may increase, impacting the overall cost estimate.
  3. Accounting for Maintenance and Fuel Costs: Construction equipment requires regular maintenance to ensure optimal performance. Estimators should factor in maintenance costs, including servicing and repair expenses, when calculating equipment costs. Additionally, estimating fuel costs is essential, as fuel consumption can significantly influence the overall expenses of using construction equipment.

By diligently estimating labor costs, material costs, and equipment costs, estimators can develop a comprehensive and accurate direct cost projection for the construction project. Considering all relevant factors ensures that the cost estimate reflects real-world conditions and contributes to successful project planning and execution.

Indirect Costs and Overhead

Indirect costs and overhead are critical components of cost estimation in construction projects. These costs are not directly tied to specific project activities but are necessary for the successful execution of the project. Estimators must carefully account for indirect costs and allocate appropriate contingencies to manage potential risks. Here are the key aspects of estimating indirect costs and managing contingencies:

General and Administrative (G&A) Costs:

  1. Office Overhead: Office overhead costs include expenses related to the administration and management of the construction company or project team. This can encompass salaries of administrative staff, utilities, office supplies, and other general office expenses.
  2. Estimators should allocate a portion of the total G&A costs to the specific project based on factors such as the project's size, duration, and the proportion of the company's resources dedicated to the project.
  3. Project Management Costs: Project management costs include salaries and expenses for the project management team, such as project managers, engineers, schedulers, and coordinators. These costs are essential for coordinating and overseeing the construction activities and ensuring the project's successful execution.
  4. Estimators should consider the project's complexity and size when estimating project management costs, as larger or more complex projects may require a larger management team.
  5. Insurance and Legal Costs: Construction projects require various insurance policies, such as general liability insurance, worker's compensation insurance, and builder's risk insurance, to protect against potential risks and liabilities. Legal costs include fees for legal counsel and contract review.
  6. Estimators should include insurance premiums and legal fees in the cost estimate to ensure adequate coverage and compliance with legal requirements.

Contingency and Risk Assessment:

  1. Identifying Project Risks: Estimators and project stakeholders must conduct a thorough risk assessment to identify potential uncertainties and risks that may impact the project's cost. Risks can include unforeseen site conditions, weather-related delays, supply chain disruptions, labor shortages, and design changes.
  2. By identifying and documenting potential risks, the project team can proactively develop risk management strategies.
  3. Allocating Contingency Funds: Contingency funds are set aside to mitigate the impact of unforeseen events and risks that may arise during the project. The amount of contingency funds allocated depends on the project's complexity, level of risk, and the level of uncertainty in the estimates.
  4. Estimators may use industry-standard contingency percentages or assess specific risks to determine an appropriate contingency allocation.
  5. Managing Unforeseen Changes: Throughout the project's execution, unforeseen changes may occur that impact the cost estimate. Change orders, design modifications, and scope adjustments are common examples.
  6. Project teams must carefully manage change orders and promptly assess their cost implications. Effective change order management helps control costs and ensures that adjustments are accurately incorporated into the overall project budget.

By accounting for general and administrative costs, project management expenses, insurance, and legal costs, as well as allocating contingency funds and addressing potential risks, the cost estimate becomes more comprehensive and realistic. Properly managing indirect costs and contingencies enhances the project's financial control and fosters successful project delivery within budgetary constraints.

Putting It All Together: Developing the Cost Estimate

After estimating the direct and indirect costs, the cost estimator needs to consolidate all the information into a comprehensive cost estimate for the construction project. This involves integrating the direct and indirect costs, reviewing and validating the estimate, and presenting it to relevant stakeholders. Here are the key steps in this process:

Integrating Direct and Indirect Costs:

  1. Combine Direct Costs: Sum up all the estimated direct costs, including labor, materials, and equipment costs. Ensure that all relevant elements are accounted for, and double-check the calculations for accuracy.
  2. Add Indirect Costs: Add the indirect costs, such as general and administrative (G&A) expenses, project management costs, insurance, legal fees, and contingency funds, to the direct costs. Apply the appropriate percentages or amounts based on the project's specific requirements.
  3. Calculate Total Estimated Cost: The sum of direct and indirect costs represents the total estimated cost for the construction project. This total provides a comprehensive projection of the financial investment needed to complete the project successfully.

Reviewing and Validating the Cost Estimate:

  1. Cross-Check Data: Review all data sources, calculations, and assumptions used in the cost estimating process. Ensure that the quantities, prices, and rates used are accurate and consistent.
  2. Verify Accuracy: Validate the estimates against industry standards, historical data, and benchmarks to ensure their reasonableness. Seek input from subject matter experts and experienced professionals to review and validate the estimate.
  3. Consider Market Factors: Revisit the estimate to account for any changes in market conditions or cost trends that may have occurred since the initial estimation.
  4. Address Contingency: Assess the appropriateness of the contingency funds allocated. Ensure that the contingency amount adequately covers potential risks and uncertainties that may impact the project's cost.
  5. Refine the Estimate: If discrepancies or errors are identified, make necessary adjustments to refine the cost estimate.

Presenting the Estimate to Stakeholders:

  1. Compile a Detailed Report:Prepare a comprehensive cost estimate report that includes a breakdown of direct and indirect costs, a list of assumptions made during the estimation process, and the basis for the contingency allocation.
  2. Communicate Clearly:Present the cost estimate in a clear and understandable manner. Avoid technical jargon and ensure that stakeholders can easily grasp the information.
  3. Highlight Key Assumptions:Emphasize the key assumptions and risks that underpin the estimate. This helps stakeholders understand the level of confidence in the estimate and the potential impact of unforeseen events.
  4. Discuss Options and Trade-offs:Discuss various cost-saving strategies and alternatives that could optimize the project budget without compromising on quality or scope.
  5. Address Stakeholder Questions:Be prepared to answer questions and provide clarifications to stakeholders regarding the cost estimate and its underlying factors.
  6. Obtain Approval:Seek formal approval from relevant stakeholders, such as project owners, investors, or clients, before proceeding with the project.

Effectively developing and presenting the cost estimate helps ensure that the project's financial planning is robust and aligned with realistic cost projections. It fosters transparency and informed decision-making among stakeholders, contributing to the overall success of the construction project.

The cost estimating process in construction involves a systematic approach to predict the financial investment required for a project. It begins with gathering comprehensive project information, including the scope, architectural drawings, and specifications. Estimators identify the most suitable cost estimating methodology based on available data and project stage, which can include preliminary estimates, detailed estimates, or parametric estimates.

Quantity takeoff is a crucial step in the process, requiring accurate measurement of materials, labor, and equipment. Estimators leverage advanced software tools and historical data to enhance efficiency and precision. Once direct costs (labor, materials, and equipment) are estimated, indirect costs (G&A expenses, project management costs, insurance, legal fees) are included. Contingency funds are allocated to address potential risks and uncertainties.

Construction cost estimating is a dynamic process that benefits from continuous improvement and learning from past projects. By maintaining historical data and analyzing completed projects, estimators can:

  1. Enhance Accuracy: Identify areas of improvement and refine estimation techniques to enhance accuracy in future estimates.
  2. Optimize Decision-making: Use past data to make informed decisions, particularly regarding the allocation of resources and contingency planning.
  3. Improve Cost Control: Learn from cost variances in past projects to improve cost control measures and avoid potential pitfalls.
  4. Incorporate Lessons Learned: Apply insights gained from previous projects to optimize material choices, construction methods, and labor productivity.

By embracing a culture of continuous improvement and learning from past experiences, construction companies can strengthen their cost estimating capabilities, leading to successful project execution and improved financial outcomes.

In conclusion, the process of cost estimating in construction is a multifaceted endeavor that requires meticulous planning, accurate data, and collaboration among various stakeholders. Accurate cost estimates serve as a solid foundation for effective project management, decision-making, and successful project delivery within budgetary constraints. As the construction industry continues to evolve, the importance of precise cost estimating remains paramount, enabling stakeholders to navigate challenges and seize opportunities for growth and success.

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