DEVELOPING OWNER COST

ESTIMATE (OCE)

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 OUTLINE

1. Introduction
2. The Essentials of Costs
3. Cost Estimating

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1. INTRODUCTION

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The connecting dots MLS-ITC (IPSCM) Model
Module 1 Module 2 Module 3 Module 4

Understanding Specifying Analysing Developing

the Corporate requirements & supply supply
Environment planning supply markets strategies

Module 5 Module 6 Module 7 Module 8

Obtaining Preparing
Appraising the
& selecting Negotiating
suppliers contract
offers

Managing Managing Managing Measuring &

the supply International Inventory Evaluating
contract Logistics Performance

Module 9 Module 10 Module 11 Module 12

 GOODS/SERVICES

NON-
PROJECT- PROJECT-
BASED BASED

• CONSTRUCTION • PRODUCTION
• EPC • MAINTENANCE
• DRILLING • PERSONNEL OFFICE
• OTHERS • CAR RENTALS
• CONSULTANCY
• OTHERS 5
 PROJECT-BASED

Project management body of knowledge (PMBOK):

1. Project life cycle
2. Project management process
3. Project management knowledge areas

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 PMBOK
Project life cycle:
1. Starting the project
2. Organizing and preparing
3. Carrying out the project work, and
4. Closing the project

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 PMBOK
Project management process (process groups):
1. Initiating process group
2. Planning process group
3. Executing process group
4. Monitoring and controlling process group
5. Closing process group

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 The 10 Knowledge Areas – PMBOK:
1. Project Integration Management
2. Project Scope Management
3. Project Time Management
4. Project Cost Management
5. Project Quality Management
6. Project Human Resource Management
7. Project Communication Management
8. Project Risk Management
9. Project Procurement Management
10. Project Stakeholder Management

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 PROJECT COST MANAGEMENT
Scope of knowledge area:
1. Estimate costs
2. Determine budget
3. Control costs

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ESTIMATING
General:
Estimation Theory is a procedure of “guessing” properties of the
population from which data are collected.
 The objective of estimating is to determine the approximate value of
a population parameter on the basis of a sample statistic.
 Approximate value can be Point Estimate or Interval Estimation.

Related to work:
It is the technique of calculating or computing the various quantities
and the expected expenditure to be incurred on a particular work or
project.
2. THE ESSENTIALS OF
COSTS

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TYPES OF COST
• Fixed Cost • Relevant and irrelevant costs
• Variable Cost • Historical cost
• Direct Cost • Replacement cost
• Indirect Cost • Explicit cost
• Overhead Cost • Implicit cost
• Sunk Cost • Economic cost
• Opportunity Cost • Incremental cost
• Total Fixed Cost • Average cost
• Total Variable Cost • Short-run and long-run costs
• Total Cost • Learning curve cost
• Marginal Cost • Tooling cost
THEORY OF COST
What is Cost?
• The real physical resources consumed.
• The money equivalent of the real physical resources used.
• The value of benefits foregone in the alternative use of resources.
• A measure of the consequences of a decision.
• The value of money that has been used up to produce something.
• The expenses faced by the business in the process of supplying goods and
services to consumer.
• Associated with performing an activity or the acquisition of an asset.
• The value (resources) of an activity or asset.
A. Cost Engineering
 The application of scientific principles and techniques to problems
of estimation, cost control, business planning, profitability analysis,
and project management.
 The engineering practice devoted to the management of project
cost, involving such activities as estimating, cost control, cost
forecasting, investment appraisal and risk analysis.
 It seeks the optimum balance between cost, quality and time
requirements.
 Engineering economics is a core skill and knowledge area of cost
engineering.
B. Cost Accounting
The internal reporting system, the process of recording, classifying,
analyzing, summarizing, allocating various alternative courses of
action for the control of costs.

Common types of costs used for OE development:

1. Direct (material, labor, other) costs
2. Indirect (material, labor, other) costs
3. Fixed (direct and indirect) costs
4. Variable (direct and indirect) costs
Direct costs:
1. Those costs that have directly accountable to specific cost
object such as a process or product.
2. Examples: wages paid, salary paid labor, material, etc.
3. For manufacturing (product) it includes labor costs, materials
costs, tooling costs, utilities costs, operating costs.
Indirect cost:
1. Costs that are added to the direct costs and consist of
overhead charges, insurance and bonding, general and
administrative (G&A) rates, contractor profit and others.
2. Those costs which are not directly accountable to specific cost
object or not directly related to production.
3. Examples: insurance, maintenance, telecommunication, etc.
4. In manufacturing (product), it includes indirect variable and
fixed costs.
Fixed costs:
1. Costs which remain more or less constant irrespective of the
volume of production, or remain unchanged irrespective of the
output level or sales revenue.
2. Examples: depreciation of plant and machinery and building,
interest on capital, supervisory charges, cost of lighting, heating,
cleaning the works, operator charges, rent of building, equipment
and tooling, utilities, interest, rent, salaries, insurance premium,
taxes on facilities, management salaries, etc.
Variable Cost:
1. Those items of expenditure which vary with the volume of
production or vary depending on a company’s production volume;
they raise as production increases and fall as production
decreases.
2. Examples: direct material cost, direct labor, cost of power/fuel
consumed, cost of tools used, cost of consumable stores, repair
and maintenance charges, storage charges, etc.
Total cost is the cost refers to the total expenses incurred in
reaching a particular level of output.
TC = TVC + TFC

TC = TOTAL COST
TVC = TOTAL VARIABLE COST
TFC = TOTAL FIXED COST

Overheads are included in, and as

part of both TVC and TFC.

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C. Cost Management
Cost management focus on recording of how inputs are employed in
the creation of goods and services (outputs) at the production level.

INPUTS CONVERSION OUTPUTS

WORK/ PROJECT

RESOURCES: WORK PERFORMED BY GOODS OR SERVICES

MAN, MONEY, MACHINE, ORGANIZATIONS (COST
MATERIALS, OTHERS CENTERS) TO PRODUCE
PRODUCTS AND SERVICES
Project Cost Management
 Project cost management is the processes involved in planning,
estimating, budgeting, and controlling costs so that the budget can
be completed within the approved budget.
 For project work, especially on inputs, cost information is required
for cost management, through:
 Cost estimating
 Cost trending
 Cost forecasting
 Lifecycle costing
Cost Estimating
 A structured process to come up
COST ESTIMATION TRIANGLE
with the cost estimate.
 The estimation of the expected
cost of producing a job or SCOPE
executing a manufacturing order SCHEDULE
or performing work/project
before the actual production is COST
taken up or work/project to be
performed, before they are made
or executed. RESOURCES
Cost Estimating
Why cost estimating is needed?
 Provide an idea of the total cost of work is feasible to be carried out, to see if
the work or project is economically justified; thus as a decision support tools.
 To develop budgeting and ask for fund.
 To develop cash flow needs.
 For selection process.
 For work scheduling & estimating the work/product/project duration (start
and end).
 For monitoring and controlling of work/project/production progress, in terms
of actual cost and planned cost.
Budgeting:
1. The allocation of funds for specific projects is based on estimates
of the costs of those projects.
2. Fund will be available and given, based on the cost estimate.
3. Major cost under or over estimates can be disruptive; delay or
causing uneconomic.
4. Basic principle of budgeting is to have “an-over estimate”.
Creating a Budget
Evaluating suppliers’ cost proposals:
1. Developing a good understanding of the project/work/activity
requirements.
2. Writing a detailed scope of work.
3. Developing a detailed bid price schedule that the bidders are
required to fill out.
4. Evaluate the suppliers cost proposal against owner cost estimate.
Example of a bid price
Direct costs: $ 80,000
Direct overhead: $ 20,000
Total direct costs: $100,000

Overhead (20%): $ 20,000

Total costs: $120,000

Profit (20%): $ 24,000

Total bid price: $144,000

3. COST ESTIMATING

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Cost Estimating
Cost estimating needs the following items:
1. A well-defined scope, drawings, specifications, etc.
2. A cost element structure, rates.
3. Historical cost data.
1. Developing Scope
Project scope management processes (PMBOK):

1. Collect requirements
2. Define scope
3. Create WBS
4. Verify/validate scope
5. Control scope
WBS
2. Cost Element Structure, Rates
 Cost element structure is also called cost breakdown structure is derived from
WBS.
 In order to determine the cost or rate of a particular item, the factors affecting the
rate of that item are studied carefully and then finally a rate is decided for that
item. This process of determining the rates of an item is termed as analysis of
rates or rate analysis.
 For construction, the rates of particular item of work depends on the following:
 Specifications of works and material (quality, proportion and constructional)
 Operation method
 Quantity of materials and their costs
 Cost of labors and their wages
 Location of site of work and the distances from source and conveyance
 Charges, overhead and establishment charges, profit
Elements to understand
 Wages
 Transportation (incoterms; risks, costs, liabilities)
 Importation (taxes, other costs)
 Insurances
 Levies
 Bonds
 Provisional sum
 Contingencies
 Insurances Levies
 Taxes
 Workman's  Asset
 Fees
Compensation  Third Party
 Fines
 Automobile Liability
 Tariff
 Cargo Marine  General Liability
 Toll
 Car (Construction  Professional
 Excise
All Risks) indemnity
 Duty
 EAR (Erection All  BPJS
Risks)
Bonds
 Performance bond: ensure the seller will complete the work as
specified and for the agreed price.
 Bid bond: provides an assurance that the bidder will not withdraw
his bid within the specified period for acceptance and will execute a
written contract and furnish the required bonds if the bid is
accepted.
 Advance Payment bond: payable against advance payment given to
seller.
 Payment bond: protect sub-contractors, sub-vendors, and laborers
against nonpayment by the prime contractor.
Provisional sum
 A certain amount included in the contract but it is optional.
 Only to cover any works or required goods which are not predictable
or uncertain whether needed or not during the work performance.
 It may be used by instructing contractor to perform certain work or
activities.
 Different than contingencies.
 Contingencies sometime are kept by owner in the budget, not in the
contract, or incorporated into the owner cost estimate as a control during
selection process.
 If the winner is less cost, then keep the excess into the budget.
Contingencies
 AACE: an amount added to an estimate to allow for items,
conditions, or events for which the state, occurrence, or effect is
uncertain and that experience shows will likely result, in aggregate,
in additional costs.
 They are used to cover unknowns, unforeseen uncertainties, and/or
unanticipated conditions that are not possible to adequately
evaluate from the data on hand at the time the cost estimate is
prepared, but must be represented by a sufficient cost to cover the
identified risks.
Contingencies
 To develop appropriate contingency allowances, the estimator must
identify the uncertainty associated with an item of work or task,
forecast the risk/cost relationship, and assign a value to this task that
will limit the cost risk to an acceptable degree of confidence.
 It is calculated by using risk management framework. Value may be
different from phase to phase.
 Contingency is included in budget as a control account.
Contingencies
Contingency usually excludes:
 Major scope changes (product specification, capacities, building
sizes, and location of the asset or project).
 Extraordinary events such as major strikes and natural disasters.
 Management reserves.
 Escalation and currency effects.
Contingencies
Methods:
1. Expert judgment
2. Predetermined guidelines (with varying degrees of judgment and
empiricism used)
3. Simulation analysis (primarily risk analysis judgment incorporated
in a simulation such as Monte-Carlo)
4. Parametric Modeling (empirically-based algorithm, usually derived
through regression analysis, with varying degrees of judgment
used)
Contingencies
Contingency Percentages (The American Association of State
Highway and Transportation Officials – AASHTO 2009):
1. Planning 25-40%
2. Preliminary Design 20-35%
3. Design Phase I (30%) 15-30%
4. Design Phase II (60%) 10-20%
5. Design Phase III (90%) 05-10%
6. Final Design (100%) 00-05%
3. Historical Cost Data
 The more complete and the more recent will give more
accurate.
 The conditions of each of the costs should be understood. For
example a unit rate for buying 10 units of pumps compared to
buying 1,000 units.
 The different source of supply location and different mode of
transportation will also be considered.
 Time of purchase should be considered for an cost index
adjustment.
What costs to be estimated?
 People
 Buildings
 Materials
 Equipment
 Vehicles (heavy and light)
 Services
 Licenses
 Financing
 Etc.
Types of Owner Cost Estimate IN CONSTRUCTION
1. Catalog, industrial / construction databases
2. Documented vendor estimate based on
drawings / sketches and specifications
3. Engineering internal estimate based on Use a technique or
drawings/ sketches and specifications
a combination of
4. Engineering estimate based on similar more than one.
items or procedures
5. Engineering estimate based on analysis
6. Expert opinion (engineering allowance)
7. Existing contract
Catalog, Industrial / Construction Databases:
 This category is used when most of the costs in an estimate can be
documented from current vendor catalogs or from published or
proprietary industrial or construction databases.
Documented Vendor Estimate Based on Drawings /
Sketches and Specifications:
 The estimate is primarily based on vendor estimates obtained for
the specific item or activity.
 Must be written rather than oral. If oral, they must be
documented.
 Quotes by a vendor indicate that a design is sufficiently mature
that its cost can be independently estimated (i.e. significant detail
in drawings and specifications have been prepared), although the
quotes will not be taken as an offer to sell at that price.
Engineering Estimate Based on Drawings/ Sketches and
Specifications:
 Have the same level of detail available as Documented Vendor
Estimate Based on Drawings / Sketches and Specifications type, but
the estimates are done by an internal expert estimator or a
consultant.
Engineering Estimate Based on Similar Items or Procedures:
 This category is used when most of the costs in an estimate can be
documented from current vendor catalogs or from published or
proprietary industrial or construction databases.
Engineering Estimate Based on Analysis:
 Estimates of items or procedures that are different from previous
experience, and, while sketches and specifications may exist, the
level of detail is not sufficient.
 Some labor costs, such as assembly of an item not previously built,
may fall into this category.
 Supporting background for procured items would include, for
example, standard costs for fabricating a given material and the
mass of material needed.
Expert Opinion (Engineering Allowance):
 This category should be used for items or procedures having little
documented basis for the estimate.
 It indicates little confidence in the estimate, so that its use should
be minimized in the final estimate.
 It may be used as the estimate preparation develops to measure
the maturity of the estimate at any given point.
 Given time constraints on the estimation process, this category
may also be used for items or activities that have low dollar value.
Existing contract:
 For next owner estimate, obtained from a contract which has
already been awarded.
Cost Estimating Techniques (A)
1. Top-down (Analogous)
2. Bottom-up
Top-down (Analogous):
 Uses historical data from similar engineering projects to
estimate costs, revenues.
 Uses those data to modify for changes in inflation or
deflation, activity level, weight, energy consumption, size,
and other factors.
 Best used in early stage when alternatives are being
developed and refined.
Bottom-up: It can Use WBS
 Also called as segmenting model.
 More detailed method of cost estimating.
 Breaks down the project into small, manageable units and
estimates their economic consequences. Individual cost of activity
is then rolled up to higher level.
 Best used in the final stage or when the desired output has been
defined and clarified.
NO CONDITION TOP-DOWN BOTTOM-UP

1 Strategic Decision Making X

2 Cost and Time Important X
3 High Uncertainty X
4 Small Project X
5 Fixed-price Contract X
6 Customer Wants Details X
7 Unstable Scope X
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Cost Estimating Techniques (B)
1. Capacity Factored (exponential, power sizing)
2. Index or Ratio
3. Equipment Factored
4. Analytical
Capacity Factored, Exponential or Power-Sizing
Used for developing capital investment estimates for industrial plants and
equipment. Specification is the same but the size is different.
Equipment/ Facility X
Blower, centrifugal 0.59
Compressor 0.32
Vacuum 0.37
Dryer, drum 0.40
Centrifugal, Fan 1.17
Motor 0.69
Reactor 0.56
Tank, horizontal 0.57
Fossil-fuel power plant 0.79
Index or Ratio
I = Index
It can be individual cost items (labor,
material) or group of costs (CPI, PPI)

Used if the scope, specification or capacity is the same.

Index Sources:
• Chemical Engineering Plant Cost Index (CEPCI), www.che.com/pci
• McGraw-Hill Construction Index, www.construction.com
• US Department of Labor, Bureau of Labor Statistics, www.bls.gov
• CPI (Consumer Price Index)
• Chemical Engineering Plant Cost Index (CEPCI),
http://www.chemengonline.com/pci/
• PEP Index, SRI Consulting - www.sriconsulting.com/
• Marshall and Swift Equipment Cost Index (all industry equipment index)
• INTRATEC Chemical Plant Construction Index, IC
• Nelson-Farrar Indexes, NF (petroleum industry construction cost)
• Engineering News-record Construction Cost Index (indicates variance in labor
rates and materials costs for industrial construction)
Equipment Factored
C = f * Sum of M
C = total installed cost of facility
f = Lang factor
M = cost of purchased major equipment

Lang factor
• Solid process plants: 3.10
• Solid-fluid process plants: 3.63
• Fluid process plants: 4.74
Analytical
• By having detailed work items (WBS, BOQ), supply and installation
cost, including project management, contingency, overhead and
profit.
• Multiply the quantities with the unit costs.
Example: analytical
Given the data below, use the segmenting model to estimate a manufacturer's total
annual cost. Estimated annual production volume = 400,000 units
Estimated direct labor cost per unit = $3.75 and estimated indirect labor cost per unit =
$0.92 Estimated raw material and purchased part cost per unit = $32.50
All other costs are independent of production volume and are estimated at $800,000
per year.

Choose an answer by clicking on one of the letters below.

A. $2,668,000
B. $15,668,000
C. $14,868,000
D. $15,300,000

Also, what is the average cost per unit?

Cost Estimation – Other Techniques (C)
NO METHOD DESCRIPTION
1 Resource List the resources (equipment, material, services and
Costing labor) you need for the project and to total their costs.
2 Unit Costs Using a cost-per-unit (depending on the
work/product) such as CU-FT, SQ-FT, IDR or USD/hour,
IDR or USD/day, etc.
3 Empirical Using software or a paper-based system that contains
statistical information about the other completed
projects.
4 Historical Based on previous work or previous good/equipment
Costing purchase.
Cost Estimate Techniques – American Association
of Cost Engineering AACE (D)
1. Stochastic
 Based on judgment, obtained at early definition.
 The independent variable(s) used in the cost estimating
algorithms are generally something other than a direct
measure of the units of the item being estimated.
2. Deterministic
 Obtained at later definition. the independent variable(s) are
more or less a definitive measure of the item being estimated.
 Tend to be straightforward counts or measures of units of items
multiplied by known unit costs or factors. 68
Cost Estimating Techniques – PMI (E)
Basis of Estimates:
 Documentation of the basis of the estimate (such as how it was
developed).
 Documentation of all assumptions made.
 Documentation of any known constraints.
 Indication of the range of possible estimates to indicate that the
item is expected to cost between a range of values.
 Indication of the confidence level of the final estimate.
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Requirements:
 Understand the scope statement.
 Scoping in detail, for example, using the work breakdown
structure method.
 Understand the project schedule.
 Understand the required resources.

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Types:
 Expert Judgment
 Analogous Estimating
 Parametric Estimating
 Bottom-up Estimating
 Three-point Estimates (PERT)
 Reserve Analysis
 Vendor Bid Analysis

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Expert Judgment:
 Developed by expert(s)
 Guided by historical information from similar projects.
 Can also be used to determine whether to combine methods of
estimating and how to reconcile differences between them.

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Analogous (top-down) Estimating:
 Also called as ballpark or rough order of magnitude estimate.
 Uses historical information on similar projects/works and expert judgment.
Therefore, it relies on previous actual cost of similar projects, may be with
adjustment.
 Uses the values of parameters, such as scope, cost, budget, and duration or
measures of scale such as size, weight, and complexity, from a previous,
similar project as the basis for estimating the same parameter or measure for
a current project.
 Used because of limited detailed information about the project.
 Can be applied to total project or segments of a project, in conjunction with
other methods.
 Less costly, less time consuming, and less accurate.
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Example of Analogous (top-down):
 A single-point or absolute estimate: the past project costed at USD
100,000. The new project, similar one and just a few years ago, it would
be also USD 100,000.
 Ratio estimate: the new project would require 25% more time to
complete, so that the cost would 25% more, say from USD 100,000 to
USD 125,000.
 The drilling cost for 3 standard holes of a production geothermal well is
USD 18 Million in 2018. Assuming all conditions are the same, you will
drill another 3 wells in 2020 at the near by location, then the cost
would be the same, USD 18 Million.
 But you may do an adjustment as well, say an increase by x%.
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Parametric Estimating:
 Also called as Rule-of-Thumb estimate. Linear:
Cost=A+BX1+CX2+ ...........
 Uses mathematical model, a statistical
relationship (regression analysis) between
Exponential:
variables or parameters (such as costs and
quantities). Cost=A+ BX12+DX22 +..........
 It needs historical data to make an accurate
estimate.
 May result higher accuracy, but depending upon
the sophistication and underlying data built into
the model.
 Can be applied to total project or segments of a
project, in conjunction with other methods. 75
Example of Parametric
• The historical price of building a 200 m2 of house costed IDR 800
Million or IDR 4 Millions per m2 in July 2010. If you want to build similar
house in 2020 for 400 m2 in Sep 2020, then the cost would 400 m2 x
(4x1.3) Million/m2 = 2.08 Billion IDR (30% increase on unit cost)
• Or you have the cost breakdown:
• Cost available for a work in July 2010: foundation per m2, unpainted wall
per m2, roofing per m2, M&E per m2, floor per m2.
• For a new house in Sep 2020 with different total of m2: then you just
multiply the total m2 for each part with the historical unit cost from July
2020 construction (after unit cost adjustment).
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Example of Parametric

• Implementation cost of ERP at client A is USD 500,000 in July 2020.

The implementation has 4 parts: installation, customization,
interfaces, and testing. You want to install the same for your other
client.
• Installation cost: fix and lump sum
• Customization, Interfaces and Testing: unit cost per job or per module.
• Then for the new work, you add the installation cost, plus a the
unit cost of customization, interfaces and testing modules
multiplied by each of the quantity of the modules.
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Bottom-up Estimating:
 A method of estimating a component of work. Also called as
segmenting model.
 The cost of individual work packages (based on WBS) is estimated
with the greatest level of specified detail.
 The detailed cost is then rolled up to higher levels.
 The cost and accuracy are influenced by size and complexity of the
individual work package.
 Slow, accurate

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Three-point Estimates (PERT Estimate):
 Also called as PERT Estimate since this method is originated by
PERT (program evaluation and review technique).
 It uses 3 estimates to define an approximate range for an activity’s
cost: optimistic (CO)-best-case, most likely (CM)-realistic, and
pessimistic (CP)-worst-case.
• Optimistic: assuming the risks do not occur, Most likely: assuming
the risk will be most likely to occur, Pessimistic: assuming that the
risks occur.
 Expected Cost (CE) = (CO+ 4*CM + CP) / 6
 It provides more accuracy and can be improved by considering
estimation uncertainty and risk.
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Example of Three-point Estimates:
 You will complete building a house of 400 m2 for IDR 6 Million per
m2 on the worst case, and IDR 4.5 Million per m2 if no rains and
other negative events (best case). But most likely it is a IDR 5
Million per m2 job (most likely). Therefore the cost estimate is =
(4.5+4*5+6)/6 = 5.08 Million per m2 or IDR 2.033 Billion total.
 Or it can be used to estimate time. The worst case is 24 months,
the best case is 20 months, but the most likely is 22 months. So
the expected time is (20+4x22+25)/6 = 22.17 months.

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Reserve Analysis:
 Adding contingency to each activity cost estimates (slow, overstates
cost).

Vendor Bid Analysis:

 Estimating using bids + allowances for gaps in bid scope (slow,
accuracy depends on gaps).

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Cost Estimating Techniques (F)
(Ben-arieh and Qian) for production / manufacture:
 Intuitive
 Analogical
 Parametric
 Analytical

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Intuitive:
 Using past experience.
 Types:
• Case-Based Methodology
• Decision Support Systems (DSS)

Analogical:
 Based on historical cost data for products with known cost.
 Types:
• Regression Analysis Models
• Back-Propagation Neural-Network (BPNN) Models
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Parametric:
 Derived by applying the statistical methodologies and by
expressing cost as a function of its constituent variables.
 These techniques could be effective in those situations where the
parameters, sometimes known as cost drivers, could be easily
identified.
 Generally used to quantify the unit cost of a given product.

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Analytical:
 Requires decomposing a product into elementary units, operations,
and activities that represent different resources consumed during
the production cycle and expressing the cost as a summation of all
these components.
• Operation-Based Approach
• Breakdown Approach
• Tolerance-Based Cost Models
• Feature-Based Cost Estimation
• Activity-Based Costing (ABC) System

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Cost Estimating Techniques (G and H)
(Zhang, et al.) for (Cavalieri, et al.) for
production / manufacture: production / manufacture:
1. Traditional detailed- 1. Analogy-based
breakdown 2. Parametric
2. Simplified-breakdown 3. Engineering
3. Group-technology-based
4. Regression-based
5. Activity-based cost

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Using Cost Estimate Techniques
Similar Projects:
New Projects: 1. Analogous Estimation
1. Bottom Up Estimation 2. Parametric Estimation
2. Parametric Estimation 3. Group Decision Making
3. Group Decision Making 4. Expert Judgment
4. Expert Judgment
Cost Estimate Accuracy

88
 NAME

Order of
Magnitude

Intermediate

Preliminary

Substantive

Definitive
COST ESTIMATE CHARACTERISTICS:
1. Level of Project Definition
2. End Usage
3. Estimating Methodology
4. Accuracy Range
5. Effort to Prepare Estimate
Level of Project Definition:
 Based upon percent complete of project definition (roughly
corresponding to percent complete of engineering).
 The level of project definition defines the extent and types of
input Information available to the estimating process.
 INPUTS are project scope definition, requirements documents,
specifications, project plans, drawings, calculations, learnings from
past projects, reconnaissance data, and other information that
must be developed to define the project.
End Usage:
 The various classes (or phases) of cost estimates prepared for a
project typically have different end uses or purposes.
 As the level of project definition increases, the end usage of an
estimate typically progresses from strategic evaluation and
feasibility studies to funding authorization and budgets to project
control purposes.
Estimating Methodology:
 Two broad categories: stochastic and deterministic.
 As the level of project definition increases, the estimating
methodology tends to progress from stochastic to deterministic
methods.
 Lower level of effort required to prepare an estimate using
stochastic methods.
 Combination of methods may be found in any given class of
estimate.
Accuracy Range:
 Indication of the degree to which the final cost outcome for a given
project will vary from the estimated cost (after application of
contingency).
 Factors affecting accuracy: state of technology, quality of reference
cost estimating data (history), quality of the estimating process, and
skill and knowledge of the estimator.
 Uncertain technology or unfinished R & D leads to lower accuracy.
 Accuracy will be better when verified empirical data and statistics
are employed.
 Accuracy ranges will typically vary by industry.
Effort to Prepare Estimate:
 The level of effort needed to prepare a given estimate is an
indication of the cost, time, and resources required.
 The cost measure of that effort is typically expressed as a
percentage of the total project costs for a given project size.
 Estimate preparation costs as a percentage of total project costs
will vary inversely with project size.
 Each class of estimate, the preparation costs in different industries
will vary.
Challenges in Owner Cost Estimate Development
 Difficult to get the data or lack of  Changes in Owner’s Requirements
reliable cost data sources.  Current Workload
 Lack of understanding of applicable  Over reliance on verbal cost estimates
regulations. developed by contractors based on
 Incomplete or inaccurate project insufficient information.
scoping.  Errors in Judgment
 Incomplete drawings and  Lack of Historical Data for Similar Jobs
specification  Use of cost data from completed projects
 Incomplete project scope definition that are not directly comparable.
 Unforeseeable changes in material  Lack of Experience of Similar Projects.
prices

A combination of several techniques are often used and will

provide a more accurate estimate.
A combination of several techniques
are often used and will provide a more
accurate estimate.
 Cost Estimate Basis Assumption for Project
The quality cost estimate depend on:
 Engineering quality
 Back up data availability
Project:
 Completeness of the scope of work Four-Leg Platform &
 Major equipment identification Gas Processing
 The quality information available Facilities
 Data base quality
 Time available
Project Cost Estimate Development

 Screening Phase : - 50% / + 100% Rough Order of Magnitude

 Conceptual Phase : - 40% / + 60%
 Conceptual to Definition Phase : - 30% / + 30%
 Definition Phase : - 15% / + 15%
 Engineering Estimate / Owner Estimate : Narrow ± 10%,
Recommended bids within 80% - 100%
 SCREENING PHASE
ACCURACY - 50% / + 100% WITH P80

Objective:
 Establish Development Philosophy
 Establish FS of project development for long range plan

Minimum Basis Information Required:

 Volume / capacity
 Preliminary Location to identify site condition & distance
 Identify major equipment
 Estimate structural tonnage
 Pipeline size and length
 Preliminary project timing & schedule
 Information on existing typical projects
 CONCEPTUAL LEVEL
ACCURACY - 40% / + 60% WITH P80

Objective:
 Optimize several development options to determine best development philosophy

Basis Information Required:

 Initial project scope
 Preliminary design basis
 Operating philosophy
 List of major equipment and other processing facilities
 Define type of plat form & module
 Identify pipeline size and length
 Conceptual schedule
 Information on existing typical projects
 Contracting execution strategy
 DEFINITION PHASE
ACCURACY ± 15% WITH P90

Objective:
 Produce AFE/AFC quality estimate for funding and budgeting based on Value
Engineering, Scope of Work for Design and Construction phase of the projects

Basis Information Required:

 Design basis, completed SOW and operating philosophy
 Completed PFD’s
 Firm major equipment size & selected preliminary quotation
 Preliminary P&ID’s, Plot Plan, Electrical one-line diagram
 Preliminary utilities, services & support building
 Schedule phase 2 and contracting basis
 ENGINEERING / OWNER ESTIMATE
ACCURACY NARROW FROM ± 10% WITH P90

Objective:
 This estimate acts as a bid control estimate to evaluate recommended bids.

Basis Information Required:

 Latest / updated Definition phase data information

Recommended Bid Price:

 Within 80% - 100% owner estimate
 < 80% or > 100% but within AFE portion
 Re-tender if professional price analysis is considered un-justifiable by
tender committee
WORK BREAKDOWN STRUCTURE
( WBS )
 OBJECTIVE OF WBS

 To provide a structure in accordance with the way the work is to be

performed
 To provide the way in which project cost will be estimated, monitored,
controlled and reported
 To provide the foundation for data accumulation which should readily
relate to construction philosophy & meet reporting need
 To provide means of assigning organizational responsibilities for
specific element of tasks. WBS is not organization chart
 To permit assignment of responsibility, delineate objectives for
monitoring cost and progress including provide basis for uniform
planning and control
WORK BREAKDOWN STRUCTURE LEVELS

 Level 1 : Total Project

 Level 2 : Major Cost Center (Manageable units)
 Level 3 : Sub Major Cost Center (Specific Facilities)
 Level 4 : Further Breakdown to Disciplines
 Level 5 : Breakdown to primary control level for contractor
 Level 6 : Detail Activity Breakdown
 Example Level 2 WBS

1. Processing Facilities (On/Offshore)

2. Pipeline
3. Onshore Receiving Facilities
4. Subsea Production Facilities
5. Drilling
 Example Level 3 WBS
1. Engineering & Project Management Team
2. Survey Work (Site Condition)
3. AMDAL
4. Procurement
5. Fabrication
6. Transportation
7. Installation
8. Commissioning & Hook up
9. Certification & Inspection
10. Insurance
11. Temporary Facilities & Indirect Cost
Exercise-1
1. Take an example that you are procuring a car rental service.
2. Estimate the OE.
3. Use any required necessary assumptions.
Exercise-2
1. Take an example that you are buying master valves.
2. Estimate the OE.
3. Use any required necessary assumptions.
Exercise-3
1. Take an example that you are procuring a security service.
2. Estimate the OE.
3. Use any required necessary assumptions.
Exercise-4
1. Take an example that you are procuring a drilling rig service.
2. Estimate the OE.
3. Use any required necessary assumptions.
Exercise-5
1. Take an example that you are procuring a heavy equipment rental
service.
2. Estimate the OE.
3. Use any required necessary assumptions.
Exercise-6
1. Take an example that you are procuring an owner engineer service.
2. Estimate the OE.
3. Use any required necessary assumptions.
Exercise-7
1. Take an example that you are procuring directional drilling service.
2. Estimate the OE.
3. Use any required necessary assumptions.
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