Module 4: Project Cost Estimation

This module we’re going to be discussing and creating estimates

and project budgets

How much can budget affect a project? Have you ever been on a project that
was severely under budgeted? If so, how did that affect the project?
 Module 4
Learning Objectives Do you recall the concepts from last
•Understand the types of estimates module on Critical Path Method? Write
and their accuracies your thoughts on how it can help in
deciding the timeline for the project.
•Describe the difference between
top down and bottoms up estimates
•Create parametric estimates
•Create and define a project budget

In last module we discussed:

• Creating a Project Sequence
• Building a Gantt Chart
• Constructing a Critical Path
Schedule
• Allocating time to each activity
• Automation tools for network and
critical path analysis
• Schedule control
Module 4
Preparing an Estimate
Definition of an estimation
A cost estimate may be defined as an approximation of the monetary or effort
hours required to complete a project or a project phase.

Estimates are prepared to quantify the cost required to complete a scope of

work:

• Product Scope – cost of the facility, product or other deliverable

• Services Scope – cost of the services to deliver a specified product,
deliverables, or services

Purposes and uses

• Evaluate the economic viability of a project
•Input to NPV or IRR calculations
•Evaluation of various alternative configurations/approaches

• Provide a cost baseline against which a project team can monitor the
Project
• Provide data for schedule and progress measurement
• Evaluate the cost impact of a change in the scope of facilities or services
• Provide the basis for bidding
• Establish a benchmark for evaluating a third party bid/proposal

Your Notes:

Project Management Institute, A Guide to the Project Management Body of Knowledge

(PMBOK R Guide) – 5th edition, Project Management Institute Inc., 2013, Page 220
 Module 4
Preparing an Estimate Continued
Key Criteria
• An estimate must have context
• The methodology must be well documented
• It should be run like a project
• Use accepted standards that can be repeated

The Estimating Process

Scope Installation
Scope
Documents Labor
Quantified
Prepared Priced Assemble Conduct
External Estimate Reviews Transmit
Authorization Estimate Plan Material
Pricing for Final to Client
to Proceed Developed Pricing Benchmark Approval
Solicited
Various
Generate Price Home Components
Internal Office
Pricing Services

General Sequence of events

An estimate should be viewed as a Project within the Project and executed as such.

Your Notes:
Module 4
Preparing an Estimate Continued
Estimating Standards
• AACE International is a recognized source of recommended practices
(RPs) for estimating in multiple industries and geographies.
• AACE International have published Recommended Practices (RPs) on
earned value, risk management, contingency and other estimating
related areas.
• In the following sections, we will reference the AACE RPs as a basis for
estimates.

Estimate Classes

Estimate Project End Usage Methodology

Class Completeness

Class 5 0% to 2% Concept Size Factoring, parametric

Screening or models, analogy or
Feasibility Judgement
Class 4 1% to 15% Study, Equipment Factored or
Feasibility or Parametric Models
Concept Study
Class 3 10% to 40% Design Semi- detailed costs with
development, Assembly Level line items
budget
authorization or
control
Class 2 30% to 75% Control or Detailed unit cost with
Bid/Tender forced detailed take-off
(Bottoms Up)
Class 1 65% to 100% Check estimates Detailed unit cost with
or Bid/Tender, detailed take-off
Change Order (Bottoms Up)
Based on various AACE International recommended practices on cost
estimate classification
Module 4
Preparing an Estimate Continued
Accuracy versus scope definition

Based on AACE International Recommended Practice 118R-97: Cost Estimate

Classification System – As Applied in Engineering, Procurement, and Construction
for the Process Industries

Your Notes:
 Module 4
Estimate Bases
Basis of Estimate
Estimate Plan/Basis
All of the Baseline elements are part of
A typical estimate plan
the Basis of Estimate:
describes how the estimate
•Project Charter or Contract will be prepared and is later
including Business Case (Project converted to the basis which
Framework) then contains:
•Scope Baseline (Services and • Product/Services Scope
Product)
• Work Breakdown
•Project Management Plan
Structure / Cost Elements
•Cost Baseline
• Source and Values of
•Schedule Baseline
Pricing and Labor Costs
•Risk Register
• Drawings and
Red items are those cited by PMI as the Specifications
baseline
• Contractual Requirements
The Estimate does not make sense except
/ Labor Posture
in this context.
• Project Execution Plan /
Notes: Project Schedule
• Approach to Contingency
/ Escalation / Currency
• Approach to Allowances /
Exclusions / Qualifications
• Estimate Schedule and
Resource requirements

Project Management Institute, A Guide to the Project Management Body of Knowledge

(PMBOK R Guide) – 5th edition, Project Management Institute Inc., 2013, Page 202
Module 4
Estimate Bases Continued
Estimate documents for each class of estimate
Typical key documents needed to produce estimates:

High Level Description: Overall configuration, unit capacity/size

Class 5
agreed, simple written scope of facilities

Conceptual Design Available; Schematic Design with materials

Class 4
defined.

Project Proposal or Plan: sketches, project and product

Class 3 description, basic design completed; pricing on major
components from bids

Detailed Engineering: Major items sized and specified, product

Class 2 layouts complete, key drawings complete, electrical drawings,
civil drawings; detailed pricing on most of the cost items.

need as much detailed information as possible (including digital

Revamp
photos) – these are the most challenging estimates to produce

Your Notes:
 Module 4
Types of Estimates
Analogous Estimates
• Based on a similar project or a
similar section of a project.
Analogous Parametric • Some adjustments are made to
account to know differences
Basic approach is:
“The last time we did something
similar it cost X; this time should be
Semi- about the same.”
Detailed
Detailed Relies on judgment and experience to
estimate the costs.
Parametric estimates
• Capacity Factored
• Equipment Based

Capacity Factored Estimate Equipment Based Estimate (Factor or

A capacity factored estimate is one in Modeling Based Estimate)
which the cost of a facility is derived A factored estimate is one in which
from statistical relationships between the cost of a battery-limits facility is
historical costs and plant capacity derived from the major elements in
Basic Formula that facility through the use of
( A / B ) E x C = D installation factors or modeling.
Where There are two major approaches:
A = Capacity, size or weight of new
•Factoring – Price of major elements
unit. (structural steel, equipment, etc.)
B = Capacity, size or weight of times a factor to cover the cost of
bulk material and labor.
existing unit.
C = Purchased cost of existing unit •Equipment Modeling – Using third
party software to develop a direct
D = Required cost of new unit cost base on conceptual
configuration and design
E = Exponent (Typically Range from
specification.
0.5 to 0.9)
Module 4
Types of Estimates Continued

Semi-Detailed Estimate
A semi-detailed estimate is one employing either capacity or
factor/modeling based techniques in estimating direct field costs for
some portions of the project with the balance of the direct field costs
estimated in a detailed manner using some method of quantification and
unit pricing. May employ frequency data and factors in the
determination of quantities

Detailed Estimate
A detailed estimate is one in which each component or group of
components has been quantitatively surveyed and priced, using the
most realistic unit prices available. Quantities are determined from
drawings or sketches and specifically identified

Estimate Reviews
Estimate reviews are the key to quality. There are several levels of
review.
1. Functional Peer Review
2. Discipline Review
3. Project Review
4. Project Sponsor Review
5. Customer Review

Your Notes:
Module 4
Cost Baseline
Cost Baseline
It is typically divided into WBS work packages and then time-phased using the
project schedule. Estimate contingency and risk contingency are time phased
per their related component.

Typical Cost Baseline

•May be tracked at the project level or by major WBS elements
•On a project, we would track actual costs against the Baseline forecast to
determine whether we are on track

Key Take Aways

• An estimate must be placed in context with the other baseline elements –
it is meaningless by itself
• An estimate must have a documented basis that states how it was
developed and the source of the data
• An estimate should match the Project WBS to facilitate preparation of the
Cost Baseline and Project Control
• An estimate’s preparation should be run like a project
• An estimate should be prepared in accordance with accepted standards
and be repeatable

Project Management Institute, A Guide to the Project Management Body of Knowledge

(PMBOK R Guide) – 5th edition, Project Management Institute Inc., 2013, Page 534
Module 4 Conclusion
Modules objectives:
❑ Review the types of estimates and accuracies
❑ Describe the difference between top down and bottoms up estimates
❑ Create parametric estimates
❑ Create and define a project budget

Module Assignments:
❑Peer Review: Project Assignment
❑Discussion: Kaz and Tom weekly conclusion
❑Quiz: End of Module 4 Quiz

Summarize this Module and jot down how you will personally use this material: