Estimate Review and Validation Process - Part I

Part II of this article will be published at a later date.

The principal purpose of an estimate review process is to present information about the project and estimate in a way that allows the reviewer to evaluate that the estimate is of sufficient quality to meet its intended purpose. In general, an estimate is of critical importance to a project’s success, it makes sense that the estimate should undergo a rigorous review process. The estimate should be evaluated not only for its quality or accuracy but also to ensure that it contains all the required information and is presented in a way that is understandable to all team members. A structured estimate review process should be standard practice for all estimates prepared by any group within the company.

The following sequence of steps will discuss a formal process for an internally prepared estimate or in some cases an estimate prepared by an outside contractor. The level of detail and diligence used during the estimate review cycle will vary based on total project value, the purpose of the particular estimate or the strategic importance. The first review of the estimate should always be conducted by the project team – screening review to ensure that the estimate is documented correctly and includes a comprehensive basis of estimating document and that it adheres to all estimating related company established guidelines. Typically the lead estimator should conduct this review with all team members before submitting the estimate for review by the Estimating department manager. The following steps are necessary for any meaningful review:-

Basis of Estimate

The comprehensive basis of estimate (BOE) document or document of understanding (DOU) should be reviewed carefully to ensure that it is both correct and complete. The dollar amount indicated on an estimate is meaningless without knowing the parameters, or what is included and not included in the estimate. The BOE or DOU serves to clearly define the design basis, planning basis, cost basis, execution basis and risk basis of the estimate.

A well-prepared basis of estimate or document of understanding will:

?         Document the overall project scope.

?         Communicate the estimator’s knowledge of the project relative to overall scope and schedule as it relates to cost.

?         Alert the project team to potential cost risks and opportunities.

?         Provide a record of key communications made during estimate preparation.

?         Provide a record of all documents used to prepare the estimate.

?         Act as a source of support during dispute resolutions.

?         Establish the initial baseline for overall scope, quantities and cost for use in cost trending throughout the project.

?         Provide the historical relationships between estimates throughout the project lifecycle.

?         Facilitate the review and validation of the cost estimate.

Design Basis—The overall scope of the project should be summarized, with additional detail provided in each area/unit/work package of the project. Specific inclusions, and even more importantly, specific exclusions of items or facilities, should be documented. All assumptions regarding project scope should be documented. If available, equipment lists should be attached or referenced, and a listing of all drawings, sketches, and specifications used in the preparation of the estimate should be documented, including drawing revision date and number.

Planning Basis—This portion of the BOE should document important information from the integrated project plan that affects the estimate. It should include specific information about any contracting strategies for engineering, design, procurement, fabrication, and construction. It should include information about resourcing and project execution plans such as the length of the workweek, use of overtime, the number of shifts, etc. It should also include information about the project schedule and key milestone dates affecting the estimate.

Cost Basis—The source of all pricing used in the estimate should be documented in this section of the BOE. This would include the source of all bulk material pricing, the pricing of major equipment (referencing quotes or purchase orders if used), and all labor rates including office, engineering, fabrication, and construction. The source of all labor workhours should be documented, along with any assumptions regarding labor productivities. All allowances included in the estimate should also be clearly identified. It is also important to document the time basis of the estimate, and the basis for cost escalation included in the estimate.

Risk Basis—Since, by definition, every estimate is a prediction of probable costs, it is clear that every estimate involves uncertainty and risk. Contingency is typically included in an estimate to cover the costs associated with this uncertainty. This section of the BOE should document how the contingency was determined, and identify key areas of risk and opportunity in the cost estimate. It is important to ensure that the basis of estimate is clear and easily understood and to verify that all information and factors documented in the BOE have been consistently applied throughout the estimate, including such items as wage rates, labor productivities, material and subcontract pricing, etc. Again, the estimate can lose credibility if different pricing or labor rates have been used for the same item within the estimate detail.

Estimating Department Guidelines

A careful review should be done to verify that the cost estimate follows standard estimating guidelines for the department. This would include a review to verify that standard estimating procedures were followed regarding estimate format, cost coding, presentation, and documentation. This would include items such as the following.

?         Verify that the proper estimating methods, techniques, and procedures have used that match the class of project completeness. In other words, different estimating techniques will be used depending on the type and completeness of the engineering documents and deliverables available to create the estimate.

?         Confirm that the estimate summary and details are organized and presented in the properly established format. The estimate should follow the BDE work breakdown structure and code of accounts. Also, the estimate format needs to be consistent with the intended purpose of the estimate, and provide sufficient detail to meet this purpose.

?         Ensure that all estimate backup information is organized properly. All values on the summary page of the estimate should be traced to the estimate detail pages, and all information on the estimate detail pages should be traced to the estimate backup or source documents?

?         Verify that all allowances and factors being prepared are consistent with comparable projects and estimates. This level of estimate review helps to ensure that all estimates prepared by the department are using established guidelines, and are presented in a consistent manner from project to project.