Cost

Estimating the cost of proposed capital projects provides critical information for decision-makers who must decide how to best use available funds aligned to strategy.

There are numerous characteristics that can be used to categorize cost estimate types. The most significant of these are the maturity level of project definition deliverables.

Depending on the technical and project deliverables, variables and risks associated with each estimate, the accuracy range for any particular estimate is expected to fall into the ranges identified.

Class 1 estimate is closest to full project definition and maturity. The cost estimator makes the determination of the estimate class based upon the maturity level of project definition based on the status of specific key planning and design deliverables. The percent design completion may be correlated with the status, but the percentage should not be used as the Class determinate.

Note that in table 1, the values in the accuracy range column do not represent + or ‐ percentages, but instead represent an index value relative to a best range index value of 1.

Stochastic methods often involve simple or complex modeling based on inferred or statistical relationships between costs and programmatic and/or technical parameters. Deterministic methods tend to be straightforward counts or measures of units of items multiplied by known unit costs or factors.

The Table 1 is a generic classification system applicable to a variety of industries; each estimate class offers several ranges of expected accuracy. The applicable ranges depend on the state of technology and the quality of reference cost estimating data. The state of technology refers primarily to the programmatic or technical uniqueness and complexity of the project. There is generally a higher confidence for projects that repeat past practices. Expected accuracy also depends on the quality of reference cost estimating data, history and risks.

The maturity of the input information is a highly important determinant of accuracy.

QUESTION: What´s the real accuracy of capital project cost estimates by comparing project development (FEL) results to final project costs (Capex)?

In a comparison between AACE and FEL models, there is no distinction between them by the use, very similar way of doing, (TABLE 2).

Budget

Considering the maturity level of project deliverables be achieved, adding risks associated, the accuracy is expected to fall into the ranges.

The next step is identify the cost baseline approved, excluded any management reserves, which only be changed through formal change control procedures and is used as a basis for comparison to actual results.

Figure below indicates the various components of the project budget and cost baseline. Activity cost estimate for the various project activities along with any contingency reserves for these activities are aggregated into their associated work package work package cost. The work package cost estimates, along with any contingency reserves estimated for the work packages, are aggregated into control accounts. The summation of the control accounts make up the cost baseline.

Management reserves are added to the cost baseline to produce the project budget. As changes warranting the use of management arise, the change control process is used to obtain approval to move the applicable management reserve funds into the cost baseline.

Since the cost estimates that make up the cost baseline are directly tied to the schedule activities, this enables a time –phased view of the cost baseline, which is typically displayed in the form of an S curve.

Cost Reports

The report contain all information about costs, such as:

• All costs incurred at the date of the report, where they are known and can be accurately valued in accordance with the particular contract conditions

• All costs incurred at the date of the report, where they are known and can be estimated in accordance with the particular contract conditions

• The forecast of costs to be incurred as can reasonably be foreseen at the date of the report and estimated in accordance with the particular contract conditions; and the risk allowances necessary as can reasonably be foreseen at the date of the report.

A Detailed cost reports gives a greater level of detail within a construction project, as:

• Elemental cost reports: report costs at an elemental level. This type of cost reporting can assist in value management and value engineering when budgets have been established for each project element.

• Building cost reports: cost reports for individual buildings across a project comprising several buildings.

• Budget holder reports: cost reports prepared for the elements of the construction works under the control of individual budget holders.

• Cash flow report

• Reporting of loss and expense

• Reporting of a liquidated damages

• Reporting of tender adjustments

Considerations:

•          The accuracy of your cost estimation process can make or break project success.

•          As you prepare a project estimate, you are setting many goals.

•          Only by gathering accurate and timely cost information will you be able to gauge performance, and keep your estimating information up-to-date.

•          Being able to control costs is largely a matter of adhering to established guidelines, oftentimes by learning from previous projects and reacting to current circumstances efficiently and effectively.

•          Without an effective risk management plan, the project cost management is going to be a fatal failure.