A Cost Estimate is the
approximation of the cost of a program, project, or
operation. The cost estimate is the product of the cost estimating process. The
cost estimate has a single total value and may have identifiable component
values. A problem with a cost overrun can be avoided with a
credible, reliable, and accurate cost estimate. An estimator is the
professional who prepares cost estimates. There are different types of
estimators, whose title may be preceded by a modifier, such as building estimator, or electrical estimator, or chief estimator. Other
professional titles may also prepare estimates or contribute to estimates, such
as quantity surveyors, cost engineers,
etc.
Overview
The U.S. Government Accountability Office (GAO)
defines a cost estimate as, "the summation of individual cost elements,
using established methods and valid data, to estimate the future costs of a
program, based on what is known today." The GAO reports that
"realistic cost estimating was imperative when making wise decisions in
acquiring new systems." A cost estimate is often needed to support
evaluations of project feasibility or funding requirements in support of
planning. A cost estimate is often used to establish a budget as the cost constraint for a project or
operation.
In project management,
project cost management is a major functional division. Cost estimating is one
of three activities performed in project cost management.
In cost engineering, cost estimation is a basic
activity. A cost engineering reference book has chapters on capital investment
cost estimation and operating cost estimation. The fixed capital investment
provides the physical facilities. The working capital investment is a revolving
fund to keep the facilities operating.
In system, product, or facility acquisition
planning, a cost estimate is used to evaluate the required funding and to
compare with bids or tenders.
In
construction contracting, a cost estimate is usually prepared to submit a bid or
tender to compete for a contract award.
In
facility maintenance and operation, cost estimates are used to establish
funding or budgets.
In
an attempt to manage liability risk, some firms avoid the use of the word
estimate and instead refer to the estimate as an "Opinion of Probable
Cost."
Cost Estimate Types
Various projects and operations have distinct types
of cost estimating, which vary in their composition and preparation methods.
Some of the major areas include:
§ Construction Cost
§ Software Development Cost
§ Aerospace Mission Cost
§ Resource Exploration Cost
§ Facility Operation Cost
§ Facility Maintenance & Repair Cost
§ Facility Rehabilitation & Renewal Cost
§ Facility Retirement Cost
Cost Estimate Classifications
Common cost estimate classifications historically
used are
§ Order of Magnitude
§ Preliminary
§ Definitive
These correspond to modern published classes 5, 3,
and 1, respectively.
The U.S. Department of Energy and many others use a
system of five classes of estimates:
Estimate
Class
|
Name
|
Purpose
|
Project
Definition Level
|
Class 5
|
Order of Magnitude
|
Screening or Feasibility
|
0% to 2%
|
Class 4
|
Intermediate
|
Concept Study or Feasibility
|
1% to 15%
|
Class 3
|
Preliminary
|
Budget, Authorization, or Control
|
10% to 40%
|
Class 2
|
Intermediate
|
Control or Bid/Tender
|
30% to 70%
|
Class 1
|
Definitive
|
Check Estimate or Bid/Tender
|
50% to 100%
|
Methods used to prepare the estimates range
from stochastic or
judgment at early definition to deterministic at later definition. Some
estimates use mixed methods. Cost estimate classifications have been
published by ASTM and AACE International. The American Society of
Professional Estimators (ASPE) defines estimate levels in the reverse order
as
Level 1 – Order (Range) of Magnitude,
Level 2 – Schematic/Conceptual Design,
Level 3- Design Development,
Level 4 – Construction Document, and
Level 5 – Bid.>.
” ACostE defines a Class I Estimate as
definitive, a Class II Estimate as semi-detailed, and a Class III Estimate as
pre-budget. Other names for estimates of different classes include:
Class 1
|
Class 3
|
Class 5
|
Detailed Estimate
|
Semi-Detailed Estimate
|
Conceptual Estimate
|
Final Estimate
|
Scope Estimate
|
Pre-Design Estimate
|
Control Estimate
|
Sanction Estimate
|
Preliminary Estimate
|
As-Bid Estimate
|
Pre-Budget Estimate
|
|
As-Sold Estimate
|
Evaluation Estimate
|
|
CD Estimate
|
DD Estimate
|
SD Estimate
|
Parametric Estimate
|
||
Rough Order-of-Magnitude (ROM) Estimate
|
||
Very Rough Order-of-Magnitude (VROM) Estimate
|
||
SWAG (Scientific, Wild-Ass Guess)
Estimate
|
||
PIDOOMA (Pulled It Directly Out Of My Ass) Estimate
|
Estimate Quality
Estimate quality refers to the
fulfillment of quality requirements for the estimate. This is in accordance
with formal quality assurance. There may also be other expectations for the
estimate which are not specific requirements, but may reflect on the perceived
quality of the estimate. Published quality requirements generally have to do
with credibility, accuracy, confidence level, precision, risk, reliability, and
validity of the estimate, as well as thoroughness, uniformity, consistency,
verification, and documentation.
“The result of bidding without good
estimates is certain: jobs that end up with less profit, no profit, or a loss.
The bidder ultimately will go out of business; the only question is how long
will it take.”
Since a cost
estimate is the approximation of the cost of a project or operation, then
estimate accuracy is a measure of how closely the estimate is able to predict
the actual expenditures for the project or operation. This can only be known
after the project is completed. If, for example, a project estimate was
$1,252,000 for a specific scope and conditions, and at completion the records
showed that $1,172,451.26 was expended, the estimate was 6.8% too high. If the
project ended up having a different scope or conditions, an unadjusted
computation does not fairly assess the estimate accuracy. Predictions of the
estimate accuracy may accompany the estimate. “Estimate accuracy is
traditionally represented as a +/- percentage range around the point estimate;
with a stated confidence level that the actual cost outcome will fall within
this range.” An example for a definitive estimate might be that the estimate
has a -5/+10% range of accuracy with a 90% confidence that the final value will
fall in that range. “The accuracy of an estimate is measured by how well the
estimated cost compares to the actual total installed cost.
The accuracy of an
early estimate depends on four determinants:
(1) who was
involved in preparing the estimate;
(2) how the
estimate was prepared;
(3) what was known
about the project; and
(4) other factors
considered while preparing the estimate.”
For the same
project, the range of uncertainty about the total estimate decreases, as
illustrated in the cone of uncertainty diagram.
Credible cost
estimates can be produced by following a rigor of 12 steps outlined by the U.S.
GAO. Detailed documentation is recommended to accompany the estimate. “The
documentation addresses the purpose of the estimate, the program background and
system description, its schedule, the scope of the estimate (in terms of time
and what is and is not included), the ground rules and assumptions, all data
sources, estimating methodology and rationale, the results of the risk
analysis, and a conclusion about whether the cost estimate is reasonable.
Therefore, a good cost estimate—while taking the form of a single number—is
supported by detailed documentation that describes how it was derived and how
the expected funding will be spent in order to achieve a given objective.” This
documentation is often titled Basis of Estimate (or BOE). Additional
documentation may acompany the estimate, including quantity takeoff
documentation and supporting calculations, quotes, etc.
Contingency
A
contingency may be included in an estimate to provide for unknown costs which
are indicated as likely to occur by experience, but are not identifiable. When
using an estimate which has no contingency to set a budget or to set aside
funding, a contingency is often added to improve the probability that the
budget or funding will be adequate to complete the project. Being unable to
complete a project risks public ridicule. See cost
contingency for more
information. The estimate or budget contingency is not intended to compensate
for poor estimate quality, and is not intended to fund design growth, owner
changes, or anything else unrelated to delivering the scope as defined in the
estimate documentation. Generally more contingency is needed for earlier
estimates due to the higher uncertainty of estimate accuracy.
Cost
Estimating Methods and Best Practices
Estimating
methods may vary by type and class of estimate. The method used for most
definitive estimates is to fully define and understand the scope, take off or
quantify the scope, and apply costing to the scope, which can then be summed to
a total cost. Proper documentation and review are also important. Pricing
transforms the cost estimate into what the firm wishes to charge for the scope.
Early estimates may employ various means of cost modeling. The basic
characteristics of effective estimating include: clear identification of task,
broad participation in preparing estimates, availability of valid data,
standardized structure for the estimate, provision for program uncertainties,
recognition of inflation, recognition of excluded costs, independent review of
estimates, and revision of estimates for significant program changes.Application
of best practices helps ensure a high-quality estimate. “Certain best
practices should be followed if accurate and credible cost estimates are to be
developed. These best practices represent an overall process of established,
repeatable methods that result in high-quality cost estimates that are
comprehensive and accurate and that can be easily and clearly traced,
replicated, and updated.”
Tools that may be part
of costs estimation are cost indexes. These factors promote time adjustment of
capital costs, following changes in technology, availability of materials and
labor, and inflation. Due to the inherent unavailability of up-to-date
cost literature, several inflation or cost indexes are available
Construction Cost Estimates
Estimates for the cost of facility construction are
a major part of the cost estimate domain. A construction general contractor or subcontractor must normally prepare
definitive cost estimates to prepare bids in the construction bidding process
to compete for award of the contract. Although many estimators participate in
the bidding and procurement processes,
those are not a necessary function of cost estimate preparation. Earlier
estimates are prepared by differing methods by estimators and others to support
the planning process and to compare with bids.
Definitive Estimates (Class 1)
A definitive estimate is prepared from fully
designed plans and specifications (or nearly so), preferably what are called
contract documents (CD). The standard method is to review and understand the
design package and take off (or perform a quantity survey of) the project scope
by itemizing it into line items with measured quantities. RSMeans refers to
this as, "Scope out the project," and, "Quantify." Some
jurisdictions or areas of practice define the itemization and measuration in certain
terms, such as RICS and may have
specific rules for development of a Bill of quantities, or BOQ. The ASPE proposes a
best practice standard method for the quantity survey. This includes using the Construction Specifications Institute Uniform
Numbering System (MasterFormat) to ensure that all work is accounted for.
Then costs are applied to the quantified line items.
This may be called costing or pricing. In estimating for contracting, the cost
is what something costs you to build, and price is what you charge another
party for building it. RSMeans refers to this as, "Price the
quantities." ASPE recommends the "quantity times material and
labor costs format" for the compilation of the estimate. This format
is illustrated in the handwritten spreadsheet sample. For labor, the estimator
should, "Determine basic production rates and multiply them by the units
of work to determine total hours for the work." and then multiply the
hours by the per hour average labor cost.Labor burdens, material costs,
construction equipment costs, and, if applicable, subcontractor costs are also
extended on the estimate detail form.Other costs and pricing are added, such as
overhead, profit, sales or use taxes, payment and performance bonds,
escalation, and contingency.
Courtesy : Wikipedia, the
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