Quality Assurance of Project Cost Estimate is Basic to Control Cost Escalations

Every time a major project faces cost escalation during middle of execution, the blame game among the senior management starts in earnest. The annals of projects with cost runs are replete with examples of poorly managed projects where final cost exceeded the control estimates by 1.X to several times over. In the subsequent soul-searching process, the absence of robust quality assurance of the estimate, during the various phases of development, is often regretted. Although the corporate executives often escape direct accountability, it must be remembered that every project with a cost over-run, represents a failed stewardship of shareholders capital.

This article is only for educational sharing of my opinion and can have inaccuracies and omissions.?This is not professional advice for any real situation of any kind. Readers assume all risks for any deduction or extrapolation. The Disclaimer at the end of this Article should be reviewed. It applies to the entire content and any comments or responses

One would expect management to get wiser after digesting the lessons learned from such cost over-runs and, in future projects, engage from the get go in a robust and structured quality assurance of estimates starting from the definition and conceptual phase to the development phase, but sometimes the project momentum overtakes such resolves.

So why management fails to see through an overly optimistic estimate and fails to address the hidden or low-balled costs? There are several factors, prominent among these are a lack of understanding and/or experience of the different components of a project, assignment of project managers with inadequate experience in either vetting the estimate or requiring the contractors to submit adequate details, limited experience discipline managers and a tendency among many design contractors to shield the in-house cost estimating process and provide to the customer only a one line estimated cost, often on the low side in order to improve the competitive position.

The base cost estimate for each phase of project from conceptual development to execution approval has specific characteristics, methodology and an expected level of accuracy. ?A detailed discussion on the intricacies of the estimate itself is beyond this brief article, so let’s talk in generic terms, on improving the estimate quality assurance during the conceptual and development phases.

The Quality Assurance is a team effort and should not be a performance goal of just the Project Manager, though PM has a big input on how to drive the assurance process. During the project definition or conceptual phase, a base cost is usually generated in-house by the company cost estimator. As the qualifications and background of estimators vary from company to company, (some has civil estimating backgrounds while others may be more adept in process plant construction), a guiding document from the PM to the cost estimator listing distinct difference between the project at hand and the typical ones done before, contracting & procurement strategies, local factors in terms of weather, culture and crafts availability, modularization strategy, an initial estimate of PMT size and roles and “must adhere” corporate policies on safety, quality and environment and estimated spend on commissioning & start-up and OE.

The delivered cost estimate from the company estimator should break it down between equipment, material and labor with appropriate notes on the methodology (vendor quotes or internal feedback and/or database), estimated project schedule, assumptions to bridge the gap between the previous and current jobs, accuracy & probability level, sources utilized to estimate labor and construction costs and the logic behind the contingency numbers.

As an additional step to ensure the quality, and if affordable to the company, a cold eyes review by an external specialist can enhance the confidence level in the estimate. The next step in many cases is a revisit to the previously economic analysis, based on a preliminary order of magnitude type of cost estimate, to short list cases for further sensitivity analysis. At this point it may also help to review the product prices, being used to calculate the netback and cash flows, to adjust basis the anticipated growth and demand cycles, macro-economic and political repercussions.

If the project is a go at this stage, to develop alternatives or pre-FEED, subsequent to gate & management reviews, further tuning of the estimate is generally done using inputs from the contractors. If there are licensed technologies involved, next step is to develop RFP to invite bids from competing technologies. For the sake of cost assurance, it is good idea to include in the RFP a cost template for the licensors to fill, for their black box part, broken down into equipment, materials and labor. Failing to do normally results in licensors providing a one-line cost number without any elaboration, and, in my experience, efforts to get more details during the clarification cycle don’t help enough

The incomplete cost information can be a big hurdle in technology evaluation since it makes it very difficult for an apples-to-apples comparison even if the company estimator lends a helping hand. Because of the proprietary nature of the technology the in-house specialists are handicapped and limited to just making a best guess number. The net result of the lack of transparency can sometimes lead to an choosing a technology not best suited to achieve project objectives even though the money spent may be same.

The next stops in improving the quality of the estimate are during the development of PDP – Process Design Package since it provides sized equipment list along with all the necessary instrumentation and control and material selection that allows additional tuning of the conceptual design phase estimate.

The last step in developing an authentic estimate before going to bid for EPC is in the FEED phase where almost 20-30% engineering is performed, equipment is sized, piping and other bulks spelled out, interfaces defined, environmental controls put in place, control systems fully defined and offsites and utilities data is generated in enough detail to develop the control estimate at the end of FEED. Its’ accuracy range varies for different projects and the quality and competency of the FEED contractor, but in general, may vary in the range of -5% to +10 or 15%. ?????

From this point on, the objective of the project should be single focus to deliver the project within the final control estimate, or the approved AFE. This objective, in my opinion, should be independent of the type of EPC contract, whether LSTK or reimbursable or a mix of two or a NTE type. Obviously as project progresses during execution change orders happens to adjust for minor details but as long as the work scope remains unchanged, these change orders can be accommodated with the allowed contingency of the control estimate. But if the scope of work needs to be added or changed in a significant way, this signal, in my opinion, a failure of owner’s PMT. ???

Disclaimer: This is not professional advice, directly or indirectly, and can be edited or deleted at any time. Anyone accessing this Blog unconditionally agrees that the expressed views are only the personal opinions of the Author for educational sharing only, basis author’s knowledge only, and may contain omissions and inaccuracies. It must not be used for any actual new project or on an existing facility. Readers accept all risks and responsibility for any interpretation or extrapolation and any consequences stemming from such reliance