Characteristics of Effective Cost Estimating

Friday, 29 January 2010
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Cost Estimating

1 Definition

Cost Estimating is a planned and systematic process for identifying and predicting costs within the constraints of varying levels of uncertainty and for an identified scope. Good quality estimates are those which are neither conservatively high, due to excessive contingencies, nor optimistically low, due to lack of proper scope definition or unrealistic targets.

2 Characteristics of Effective Cost Estimating

2.1 Estimates predict the cost of work that it is proposed to carry out at some future date. An estimate must recognise the reality that all relevant details cannot be known exactly and consequently some uncertainty will exist about the total cost.

2.2 The items which make up a total estimate can be categorised as follows:-

Known items, i.e. firm, identified scope with values based on measured or calculated quantities.

  • Unknown items, i.e. scope which cannot be quantified but is firmly believed to exist
  • Contingency, i.e. an unspecific provision for the whole estimate to cover minor errors or omissions, as well as the uncertainty associated with quantities unit rates and productivity.

Care and clarity is needed when incorporating allowances into estimates so as not to introduce bias or hidden reserves.

2.3 An estimate should be viewed as a set of values within a range of possible outcomes. Accuracy is best described by a probability statement/curve.

2.4 The purpose for which an estimate is required and time available for estimate preparation will determine the estimating methodology together with the quantity and quality of input data that can be brought to bear.

In addition to quantities and unit rates, other key factors which can influence an estimate include: -

  • Project execution strategy
  • Anticipated project schedule or, as a minimum, a project execution duration
  • Phasing of expenditure and cash flow, and escalation assumptions
  • Location parameters – (including local practices and productivity)
  • Exchange rate
  • Allowances for overheads and profit where required.
  • The level of contingency necessary to take the total estimate to the required level of confidence

2.5 Estimates should follow a formal review and approval process with a record of the review being issued to all parties involved in the project.

2.6 Estimates should be structured in such a manner that they can satisfy all the uses to which they may subsequently be put. A consistent estimating framework should be adopted and maintained throughout.

2.7 Project execution should contain feedback loops aimed at improving the quality of future estimates. There should be provision for data collection for future estimates. This process may form part of routine cost control and is not, therefore, an additional cost to the project. Strict attention to change control is the key to both good cost control and effective estimate reconciliation.

2.8 Estimates should be subject to ongoing reconciliation throughout the project lifecycle.

2.9 There should be a clear understanding of the scope of work to be estimated along with boundaries and exclusions to the estimate.

3.2 For every estimate the methodology adopted should be fit for purpose.

3.3 All key assumptions should be documented and, for larger projects a methodology report produced which documents the project execution strategy. This would take account of commercial issues, contracting arrangements, local issues, sourcing of design/other services and construction philosophy/constraints. The strategy should be agreed with the major project stakeholders.

3.4 The total cost should be divided into a series of standard items.

3.5 An assessment should be made of the quality of information available on:-

  • project scope
  • project specification
  • quantities
  • cost data (rates)
  • project schedule
  • project location factors
  • cost escalation

3.6 As part of the estimating process, cross checks should be made against published data, check lists, other current estimates and past project out-turn data to compare level of estimate.

3.7 A formal estimate review and approval process should also be undertaken involving, as appropriate, staff from commercial, project management, design, construction and quality disciplines, along with other stakeholders. To win acceptance from all contributors, it is good practice to hold interim reviews.

3.8 Full account must be taken of commercial factors, e.g.:

  • cash flow/expenditure phasing.
  • project financing to compensate for differing profiles for cashflow and expenditure.
  • exchange rates, where costs are to be incurred in more than one currency
  • bonds, guarantees and insurance
  • forward escalation of costs, identifying and isolating those items subject to inflation.

3.9 A risk review should be undertaken, identifying those items subject to uncertainty and the range of potential outcomes for the total estimate.

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