3 PPM Cost Estimating

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Cost Estimating o  A project cost estimate

–  Is a prediction of the final cost. –  Informs the Project Sponsor, stakeholders, and participants of the

approximate scope and / or final cost of the project. –  Compares predicted final project cost with the projected benefits to

help decide if the project should proceed. –  To obtain preliminary or final funding for the project. –  Is a control tool to track actual/ forecast costs against an agreed

budget –  Helps evaluate alternative designs, processes, delivery strategies,

technologies, sites, etc. o  Understand philosophy behind acceptance of cost estimates:

–  GSK policy : projects should have an equal probability of over/ under run.

–  DO NOT RELY ON OVERSPEND GOVERNANCE RULES !!

The total investment in a project will be significantly higher than the capital cost of the equipment alone.

1.  Determine the plant and equipment cost, including costs of direct engineering (you!), procurement and delivery to site.

2.  Determine the total erected and installed cost (TEC) – the cost of the completed plant erected and ready to operate – includes constructional engineering, labour and materials, services, buildings and other infrastructure (roads, etc.) and so on. Use a Factorial approach (see example tables below).

3.  Determine the total capital employed (TCE) which also includes working capital (to cover the period between paying for supplies and receiving income for product) and financing charges.

Estimate accuracy vs cost Recommended nomenclature

Probable range of Accuracy

Cost as % of project expenditure

Order of magnitude estimate (Guestimate, ballpark, seat of the pants estimate)

±30 to ±50 % 0 to 0.1 %

Study estimate (Evaluation or predesign estimate)

±20 to ±30 % 0.1 to 0.2 %

Preliminary estimate (Sanction, funding or authorization estimate)

±10 to ±25 % 0.4 to 0.8 %

Definitive estimate (Control estimate)

±5 to ±15 % 1 to 3 %

Detailed estimate (Tender or contractor’s final cost estimate)

±2 to ±5 % 5 to 10 %

Estimations of Plant cost 1. Step count estimating (1)

Main plant item basis Capital cost of plant C = f x N x AUC x FM x FP x FT where f = Investment factor (Figure 4.1 in the “Guide”)

N = Number of all main plant items (not pumps) AUC = Average cost of main plant items = 21V0.675 where V = plant output in tonnes per

year FM = Factor for material of construction (see table

4.1 in “Guide”) FP = Factor for design pressure FT = Factor for design temperature (see figure 4.3

in “Guide”) Crude but often works as a first shot.

Investment Factor

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Temperature Factor

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Estimations of Plant cost 1. Step count estimating (2) Functional unit basis o  Each functional unit (main operating unit) has a capital cost

which is a function of Capacity, Temperature, Pressure and Material of Construction. There are a number of different methods (see the “Guide” pp 26-31) for estimating the cost. Most are based on expressions of the type:

o  C = A constant x N x Capacity (an exponent) x Factors for P

and T (with exponents) o  where N = the number of functional units

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Estimations of Plant cost Power Law or exponential estimating

C = ( S )n Cr ( Sr)n

where C = Capital cost of a plant (or an item) processing S units per year and Cr and Sr are reference (i.e. known) values. The units are those that are appropriate (could be mass, volume, number, etc.)

n is often quoted as 0.6 (the six-tenths rule) but it can vary with the type of plant and equipment (see example in table 4.3)

This can be applied (crudely on an “overall basis” to complete plants) or (in a more sophisticated way) on a simple breakdown of the plant into main cost areas.

Factorial estimation Factorial methods are used to estimate a TEC (and

TCE) when you have already obtained the costs of plant and equipment as delivered.

Installation factors (often called Lang factors) are used as

multipliers of plant/equipment costs to account for erection, piping, instrumentation, electrical services, civil works, structures and buildings, and lagging.

They may be applied to the whole plant or (more accurately)

to plant areas.

Estimate Factors

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Updating estimates – cost indices Inflationary effects have to be compensated for. This is done

by applying cost indices:

Cost at time B = cost at time A x Index at time B Index at time A

Sources of indices: UK: The PREDICT index (monthly) in Process Engineering (also

available on-line) Association of Cost Engineers in The Cost Engineer

USA: The Chemical Engineering (CE) Plant Cost Index published monthly in the (American) journal of that name

M&S (Marshall and Swift) Index for various industries also published in Chemical Engineering

Other countries: Also published in Process Engineering Note that the time base of Indices may change from time to time. e.g. The PREDICT Index was rebased (to 100) in January 2000

Typical Estimate Classifications

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No. Description

1 Inception Class 1 25-50% 50%

2 Feasibility Study Class 2 20-25% 20-25%

3 Concept Design Class 3 15-20% 15-20%

4 Scheme Design Class 4 10% 10%

Estimate Classifications

o  As the design proceeds, more information on which to base the estimate is available.

o  Estimating methods must become more detailed, and the resulting estimate becomes more accurate.

o  Not all project stages and estimates are required for every project.

o  Projects typically require a Class 4 Estimate (+/-10%) for the final/ full funding

Who Prepares Cost Estimates and How They Are Prepared

Class 1- 2 Estimates, Stages 1-2 o  Class 1 and some Class 2 Estimates are often produced

internally by the client. o  External consultants can often produce estimates from historical

& other data o  Building costs are usually estimated by multiplying a cost per-

unit area o  Manufacturing projects may be estimated by adjusting a cost

estimate or final cost from a similar project. o  Typical country cost factors compare local project costs vs. a

baseline (typically USA).

Class 1 & 2 Estimating Techniques

o  Earliest – ETCM tool using historic project data o  Capacity factors

Cost 2 = (C2/C1)n x Cost 1 where: C1 = known capacity or size Cost 1 = known facility

cost C2 = new capacity or size Cost 2 = new facility cost n = cost capacity factor

o  Equipment factors Cost 2 = Eq x factor where: Eq = Cost of all major pieces of equipment

factor = historical empirical data o  Area

Cost 2 = m2. required x /m2 Rate where: m2. required = m2. of new building

/m2. Rate = historical average cost per m2.

Who Prepares Cost Estimates and How They Are Prepared

Class 3 Estimate, Stages 3 o  Class 3 Estimates are typically developed by client engaged

Engineering or Construction Management contractors. o  The estimating approach must be consistent with the level of

design information available. –  Detailed estimating techniques such as material take offs and vendor

quotes should be used. when suitable documentation is available. –  Concept style estimating techniques such as cost/ m2a can be used when

detail information is not available – introduces risk

o  An Estimate Basis Document (EBD) helps the PM’s understanding of the estimate and facilitate further development.

o  Estimates should be compared & reconciled to previous class estimates, and significant differences understood & explained.

Who Prepares Cost Estimates and How They Are Prepared Class 4 Estimates, Stage 4 o  Class 4 Estimates set the amount of the final funding and

become the control budget for the rest of the project. –  Accuracy is critical. –  Require a well-planned, detailed, quantity-based approach. –  Require material take-offs from the scheme design drawings and

current unit prices for the project location. –  Responsibility to develop the cost estimate is with the contractor. –  Capability in this area is a key criteria for contractor selection. –  GSK PM is responsible for including GSK items in Class 4

Estimate. o  EBD (estimate basis document) is required to ensure PM and

others understand how estimate has been prepared.

Estimate Basis Document (EBD) o  EBD should cover:

–  Design documents used –  Key exclusions, what others need to estimate –  Who will actually do material take-offs? - potential subcontractors

and if so, how will the contractor ensure quality? (Will this affect the schedule)

–  The Work Breakdown Structure to be used. –  The economic/ time basis for all unit costs (present day or future). –  Currency assumptions –  Assumptions for use of growth & other estimating allowances –  Contingency included –  Risk Allowances –  Other estimating instructions including labour and schedule and

escalation assumptions. –  Area factors (using past project information from other international

locations).

Cost Estimate Summary

Template Tool 11B

Standardized format

Source data to align with major headings

Aligns to cost report 11E

COST ESTIMATE SUMMARYProject Name

Project No. : 1234Classification : 4 (+/-10%)

Date : 16-Jan-02Currency

CAPITALDirect Costs

Equipment 43.0Bulk Materials 32.0

Installation Subcontracts 76.0Automation 5.5

Subtotal Directs 156.5Professional Services

Engineering and Procurement 22.0Construction Management 11.0

Subtotal Professional Services 33.0GSK Costs

GSK Staff 5.0GSK Consultants 4.0Other GSK Costs 2.0

Subtotal GSK Costs 11.0Preliminaries

Contractor 11.0GSK 11.0

Subtotal Preliminaries 22.0

Escalation 0.0Contingency 22.5

Total Capital Costs 245.0

REVENUE EXPENSEDemolition 5.5

Asset Write-off 5.5Lease Costs 5.5

Other Project Expense 11.0Subtotal Revenue Expense Components 27.5

Escalation 0.0Contingency 2.5

Total Revenue Expense Costs 30.0

Total Project Costs 275.0

Risk Allowance 0.0

Project Leader: NamePrepared by: Name

Cost Estimating Lessons Learned Causes of Poor Estimating o  Lack of clear estimate preparation plan. o  Information (database) content or accuracy inadequate. o  Incomplete reflection of basic constraints, influences or

assumptions. o  Insensitive to change. o  Level of detail too high -- too low. o  Material specifications definition hazy, inconsistent (pricing

errors). o  Participant respect and full commitment lacking - patronisation. o  Inadequate cross-checking of calculations. o  Not used in regular decision-making process. o  Not relatable to activities. o  Accounts lack clear definition. o  Updating cycle slow -- data not timely / useful. o  Format complicated and inconvenient.

Cost Estimating Lessons Learned Causes of Poor Estimating (Continued) o  Inadequate site survey. o  Does not reflect specific project characteristics or

circumstances. o  Interfaces with schedule, WBS not clear, specific or consistent. o  No/weak subcontracting plan. o  Slighting of logistics problems. o  Failure to “sample check” data. o  No critical procurement program. o  No definition construction strategy. o  Does not include allowances, contingency or retreat

considerations. o  Distorted to cover-up resource deficiencies or fit conveniences. o  Estimate data (costs, escalations) - unrealistic /

undemonstrated.

o  Developed too late to provide pro-active tool for management. o  Inadequate ability of estimators. o  Not consistent with subordinate level “time” and “cost” control

techniques staffing. o  Failure to consider local regulations, union rules, assessments,

and customs. o  Incomplete / inadequate future economic trends. o  Inadequate analysis of contract bid/specification closure. o  Omission / inadequate treatment of taxes, benefit burdens,

depreciation insurance. o  Omission or commission errors / oversights.

Cost Estimating Lessons Learned Causes of Poor Estimating (Continued)

Doublespeak?

“..there are known knowns; there are things we know we know. We also

know there are known unknowns; that is to say we know there are some

things we do not know. But there are also unknown unknowns -- the ones

we don't know we don't know."

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Cost Estimate Conditioning

o  Growth Allowances o  Escalation o  Currency o  Risk Allowances o  Contingency

Growth Allowances o  Are not contingencies o  For ‘known unknowns’ o  The GSK project team must ensure that Class 4 Cost

Estimates include appropriate growth allowances for each of the following types of growth described below: –  ‘Natural’ design development –  Design quantity “creep” –  Equipment cost growth

o  Productivity and/or unit rate cost used by EPCM should reflect actual project experience.

• Conveyers, Air-handlers, Filter, Towers with Specialized Internals and Driers

6% to 8%

• Drums, Fillers, Reactors, Tublet Presses, Heat Exchangers

5% to 6%

• Pumps and Minor Compressors, Chillers, Boilers and Furnaces

3% to 5%

• Specialized Vendor Designs, includes GSK Standard Designs

2%

Typical Growth Allowances

• Civil • Structural Steel • Piping

10 % to 15 % Allowance

• Instrumentation • Electrical • Painting • Insulation

7 % to 10 % Allowance

Equipment

Works Packages

Escalation

o  An allowance for inflation in equipment, material, works packages pricing & professional fees

o  Based on market conditions, commodity & raw material pricing, political environment etc.

o  Should be based on the anticipated project schedule & cash flow –  Don’t just apply x% per year to the entire cost

Currency Fluctuations

o  Many different approaches o  Agree approach with finance/ governance rules

–  Fixed/ plan rate assumptions –  Buying forward cover/ hedging

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$ £ € ¥

Risk Allowances o  Defined Risk allowances may be added for high

impact/ high probability risks –  Refurbishment projects –  Technology projects –  Regulatory risks –  One off project risks

o  Risk workshop to identify whether any key risk allowances are required

o  Should be held as a separate risk budget and returned if not required –  Don’t use to fund other parts of the project (overspends,

changes)!

Contingency o  Contingency must be added to an estimate to cover

costs due to changes as the project moves to completion. (‘known unknowns’).

o  Not for: –  Changes in the fundamental delivery basis. –  Significant changes in fundamental scope of the project. –  Cost fluctuations outside agreed governance –  Labour disputes, Major new governmental regulations &

external events (force majeure).

o  If a significant change as above occurs, the PM must request additional funds for approval by the original approving authority.

o  Don’t make your own job impossible by being too accommodating !!

Contingency - continued o  Contingency should cover:

–  Minor scope changes –  Design changes –  Minor Project Plan changes –  Significant field developments –  Design errors and omissions –  Estimating errors and omissions

o  Contingency is intended to cover costs associated with future events that are expected to occur but cannot be identified at the time the estimate is prepared (‘known unknowns’)

o  Increased contingency is justified for ‘risky’ projects – e.g. refurbishment, new technologies.

JD Science of Contingency & Communicating estimates Slides

o  Right shifting to get 50:50 outcome o  Lessons in communicating estimates o  Impact of contract strategy

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Basis of Early Estimates

o  What you know –  Broad objective –  Location –  Capacity / size

o  What you don’t know –  Future options –  Other strategic impacts –  Aspirations –  Details of locality –  Condition of existing assets –  Complexity of product range –  Actual capacity –  Details of process, safety and technical requirements

P50 Estimating (Equal chance of under/overspend)

Early Estimates • Most likely cost estimated against the known • 50/50 cost is significantly higher due to unknown • Difference=contingency • 25-50%

Final Approval Estimates • Most likely cost estimated against the known • 50/50 cost is only marginally higher due to engineering • Difference=contingency • 10-15%

Consistent methodology for What You Know o  EarliEst o  Structured & Inclusive

Page 17John DysonJanuary 2005

GSK EngineeringEarly Cost Estimate Tool

Estimate Model

Boiler

HVAC

Equip

BuildingBoiler

Road

Pipe Bridge

Process Modules

Buildings

Shell

Fit-Out

Utilities

Infrastructure

Security, Fencing & Landscaping

DIRECT COST INDIRECT COSTPreliminaries

All Temporary Equipment, Structures, Accommodation and others works used to execute the project.

GSK Cost

Cross Charge of GSK personnel onto the project.

Includes project management, project support and VALIDATION. (Assumed)

Professional Services

All Engineering, Procurement, QS, Management and supervisory costs bought in. (Assumed)

Includes Material & Labour

Equipment Buildings Shell / Fitout

Services Indirects Prompts

Contingency

Business Requirements Scope unknowns

Execution unknowns

Typical Contingency Allocations

Action

All Business Case / Strategic Estimates to o  Follow EarliEst methodology o  Basis and assumptions clearly documented o  Apply appropriate Contingency based upon Stage o  Be Peer Reviewed by GCP leadership team member