9.0 Cost Estimation and Predictability

Question 1

What is a Project Cost Estimate?

Answer 1

• A prediction of the most likely total cost of the identified scope of work for a project
• The philosophy of project cost estimating is to produce the best cost estimates to the level of project development, inclusive of contingencies reflective of the project risks and the project phase, using the most accurate and complete project and pricing information available at the time the estimate is prepared

Question 2

Purpose of a Project Cost estimate

Answer 2

To provide a basis for developing, amending, or reviewing a project budget. A cost estimate is a key component of the project business cases, as it is the foremost document to justify/support funding allocation

Question 3

Contractor, Developer, City’s cost estimate

Answer 3

• Contractor - estimate too high & the bid may go to someone else; estimate too low, wins the big & later he wishes it went to someone else
• Developer - estimate too low, additional financing cost down the road or lose of profit
• City - too high estimate could lead to killing a project, political ramification, lose of public trust

Question 4

Accuracy and completeness of cost estimating

Answer 4

• The importance of accuracy and completeness cannot be overstated
• An estimate based on incomplete or incorrect information can make an already programmed and committed to project difficult or impossible to deliver, if early estimates prove to be significantly low
• Conversely, when early estimates prove to be significantly high, it can lead to killing an important project
• An accurate and complete cost estimate goes a long way toward supporting the successful delivery of a project within its approved budget

Question 5

Project life cycle phases

(see photo)

Answer 5

1. Pre Project work (corridor)
2. Planning and evaluation
3. Design and engineering
4. Property acquisition and construction
   * As knowledge increases, risk typically decreases
   * Accuracy improves as knowledge increases
   * Cost estimates need to be continually revised to keep them current
   * Each revision should result with a greater level of confidence than the preceding estimate
   * Each successive estimate should fall within the range of accuracy of the previous estimate

Question 6

Quality:

Cost estimators should…

Principles of Project Cost Estimating

Answer 6

• Apply expert judgement to the estimate and the assumptions made in developing it
• Incorporate appropriate quality control processes into the estimating process
• Appropriately consider and quantify the risks and uncertainties of the project
• Present the estimate in an easily understood format
  Be able to defend the estimate and the basis for the decision and assumptions therein, if asked

Question 7

Integrity

Principles of Project Cost Estimating

Answer 7

• Project cost estimates should be prepared using a high standard or professional and ethical integrity
• They should not be prepared by anyone who may be, or may be perceived to be in conflict of interest
• Project cost estimates should be presented in a manner that is easily understood
• Where possible project cost estimates should be prepared using a team approach, employing expertise from appropriate disciplines for the major project components

Question 8

Contingency

Principles of Project Cost Estimating

Answer 8

• Contingency is generally understood to be an amount of money added to an estimate to cover items of cost which are not known exactly at the time the estimate is developed, but which will likely occur during the life of the project
• It is intended only for the scope as defined in the estimate, it is not intended to cover scope changes

Question 9

An estimate assumes things as….

Principles of Project Cost Estimating

Answer 9

• Errors will not be made and quantities will not change
• Resources will be available
• The work will be done according to the execution plan
• The project is well defined and decisions will be made on time
• Contractors work will flow smoothly and produce deliverable per the schedule
• Contractor will have materials, equipment, and information as per the schedule
• Contingency is meant to cover likely variations to these assumptions

Question 10

What does contingency include?

Answer 10

• Normal design development changes
  
  • Normal variations in project execution
  • Normal variations in estimating (e.g. between estimated and actual quantities and costs)

Question 11

What does contingency EXCLUDE?

Answer 11

• Significant changes in scope
  
  • Major changes in project execution
  • Extraordinary variations in cost (escalation)
  • Major (unexpected) work stoppages
  • Disasters (earthquakes, tornadoes, etc.)

Question 12

Contingency point to remember

Answer 12

• Project cost estimates should always include contingency to cover certain uncertainties and risks
  
  • Contingency is an item in a cost estimate like any other. It is bet presented as a separate line to clearly identify it
  • Contingency evolves with the level of project understanding
  • An estimate that contains too much contingency is overpriced; such estimates can negatively impact project “go/no-go” decisions

Question 13

AACE Process Industry Estimate Classification

Answer 13

See photo

Question 14

Cost Estimate Variance Matrix

Answer 14

Class of estimates

D, C, B, A

Based on concept sketch design, 33% design development, 66% design development, 100% complete tender documents

Question 15

Factors influencing an estimate

Answer 15

See photo

Question 16

Cost predictability in construction

Answer 16

*“the prediction of a construction cost estimate, as compared to the median of competitive bids”
* Where Prediction is defined as “an assertion on the basis of data, theory or experience, but in advance of proof”

Question 17

Issues and Considerations in cost predictability

Answer 17

Local or national construction industries are becoming increasingly affected by global trends and influences, which can create significant and unexpected volatility and unpredictability in the construction marketplace

Question 18

Examples of such market volatility would include:

Answer 18

• The abnormal cost escalation in BC during 2006 leading up to the Vancouver Olympics
  
  • The unprecedented run-up in almost all construction material prices in 2008, especially for steel and oil-based products, across the world
  • The equally unprecedented and sudden global financial crisis, and resulting potential temporary collapse of both the commodity and construction markets in 2008-2009
  • NAFTA renegotiation/Trans-Pacific Trade Agreement

Question 19

To manage Scope creep and absorb its impact

Answer 19

• Immediately adjust for any changes
  
  • Use value engineering techniques with input from various sectors

Question 20

The following two escalation contingencies should be taken into consideration

Answer 20

1. Market escalation up to the bid
   
   2. Embedded escalation within bid prices

Question 21

Issues and considerations in cost predictability

Answer 21

1. Consideration of local or regional market influences
   
   2. Current and accurate information should be shared between stakeholders
   3. Cost estimates should be prepared during tender period for changes to schedule or addenda
   4. Incomplete/uncoordinated bid documents, causing different interpretations
   5. Failure to recognize the appropriate class of estimate
   6. Fast-tracking projects or proceeding with a project before it is well defined
   7. Project objectives or program not clearly defined when developing the intial budget
   8. Scope creep - growth in project objectives or programs during design development
   9. Proper use of contingencies
   10. Mistake of designing to maximum of the budget
   11. No consideration or misuse of data about similar projects
   12. Actual errors in the estimate or bid preparation
   13. Ensure that the estimate is produced by a qualitifed individual
   14. Outdated estimate used
   15. No consideration for normal cost inflation
   16. Pressure to meet limited budget

Question 22

11. No consideration or misuse of data about similar projects

Answer 22

When using budgets from previous projects one should take into account lessons learned. This applies in particular to the Class D estimate stage

Question 23

12. Actual errors in the estimate or bid preparation

Answer 23

Double check and overview all estimates before submission to avoid making errors

Question 24

14. Outdated estimate used

Answer 24

Projects and estimates that are delayed or shelved need to be updated to make the proper allowances for current market conditions

Question 25

15. No consideration for normal cost inflation

Answer 25

Consideration for industry specific cost inflation should be given

Question 26

16. Pressure to meet limited budget

Answer 26

Estimates should not be altered to meet limited budgets. If the estimate exceeds the budget, owner should achieve the intended result by either increasing the budget or modifying the scope of work

Question 27

Recommendations for improved cost predictability

Answer 27

1. Utilize qualified estimating personnel throughout the life of the project
   
   2. Ensure all stakeholders have input early and often. Clear definition of project objectives, program and scope will avoid potentially expensive surprises, such as scope growth
   3. Give designers sufficient time to finalize bid documents
   4. Consider developing and maintaining a usable construction cost database
   5. Include sufficient contingency to address market volatility, timing of construction, and other exclusions in the estimate

Question 28

Before tender

Answer 28

• Consider possible scope variations in the tender as a contingency to adjust to the owner’s budget
  
  • Give designers sufficient time to finalize 100% big documents for the pre-tender estimate
  • Allow cost consultants or estimators sufficient time to prepare and finalize pre-tender estimates

Question 29

During Tender

Answer 29

• Keep the cost consultant involved during the tender period
  
  • Monitor addenda changes and bidding environment
  • Revise estimates to reflect scope changes and addenda

Question 30

After tender

Answer 30

• Involve the cost consultant in the post tender review
  
  • Analyze bid results against estimates for lessons learned
  • Keep a record of historical estimate versus bid data

Question 31

When a capital project gets completed consider carrying out a …

Answer 31

post-completion assessment to determine whether the project was carried out successfully, how contractors performed, the risks encountered and whether you have achieved overall project objectives

Question 32

Cost predictability guarantee

Answer 32

There is no guarantee that pre-tender estimates will precisely match bid prices, just as there is no expectation that all bid prices will be the same. In reality, there are too many variables influencing final bid prices to expect 100% accuracy. However, there are many proven recommendations and methodologies one can follow to help improve and define the cost predictability of projects