Section 1.

2 Elements of Cost Estimating

Introduction/Learning Objectives

Cost estimating is of integral importance to the quality of the cost and scheduling program on any project.
The integrity of the cost estimate is of paramount importance to the success of a project and this is
ensured by the use of the appropriate cost estimating methodology. The cost estimate becomes the basis
for setting up the cost budget, resources and the ensuing progress and schedule monitoring processes
during project execution. To achieve this, a cost estimating basis/framework is necessary. The key learning
objectives are:

• Understand the classification of cost estimates.

• Understand some of the common methodologies used in preparing cost estimates.
• Relate estimate accuracy to the level of scope information and methodologies used in preparing
cost estimates.
• Apply the knowledge gained to effectively integrate cost estimates into the risk assessment
process.

1.2.1 Cost Estimating Terminology

Cost estimating terminology provides the backbone of effective communication by a common

vocabulary. RP10S‐90, Cost Engineering Terminology, is the AACE source for just that, cost engineering
terminology. RP10S‐90 contains terminology from all aspects of cost engineering, including planning
and scheduling, asset management, etc., and is not limited to just estimating. It is recommended that
the examinee take time to review all terms in the publication. A PRMP will often interface with cost
estimators and must know their terminology for effective communication.

1.2.2 Cost Estimate Classification System

Cost estimates are important indicators for the economic evaluation of potential projects. However,
expectations and understandings of the various parties involved vary widely with respect to the
information available to prepare those estimates, the various methods employed during the estimating
process, the accuracy level expected from estimates, and the level of risk associated with estimates. A
strong system for classification of cost estimates provides a means of unifying the expectations of the
various parties interested in the estimates.

The AACE system for classifying estimates is identified in RP 17R‐97, Cost Estimate Classification System,
shown in Table 1. It is typical that a series of estimates will be prepared for a project, beginning with
ones based on less project definition, and progressing through Classes 5 to 1 as the level of project
definition increases. An organization may not necessarily prepare all classes of estimates for a single
project. The Introduction to this Study Guide lists other RPs for Cost Estimate Classifications within
other industries. Each are unique to that industry, but all are based on common principles.

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Table 1 – Generic Cost Estimate Classification Matrix

The primary parameter for the classification of estimates within all applicable RPs is the maturity level
of project definition upon which the estimate is based. Other characteristics associated with estimate
classes include the purpose of the estimate (anticipated end usage of the estimate), methodology used
in development of the estimate, the accuracy of the estimate, and the relative effort required to
produce the estimate.

1.2.3 Estimate Variability

The same exact activity can be performed in twenty projects and the resulting actual cost may be
twenty different numbers. This is the reason that it is called estimating and not “actualizing.”

Historical estimating databases are developed by normalizing the information from past projects and
identifying the “most likely value” by plotting a distribution curve. The value in the database is usually
the most likely occurrence, not necessarily the one that should be used in the estimate. To determine
the best number to use you need to understand what causes variability in estimates.

Additional variability can come from location, quantity, waste, overtime, spoilage, loss, market
competition, and even the type of contract. All of these considerations need to be taken into account
in an estimate. When developed and evaluated properly these variables should be included in the direct
cost estimate, not as contingency.

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 In addition to unit price variability, the class of the estimate can have a large impact on the variability
of the estimate. At the Class 5 level, there is only a limited definition of the project deliverables. Since
there is much still unknown, there is a likelihood of a large variance in the estimate. As the project
definition is refined through Class 1, there is more and more known to the point at 100% definition; the
unknowns are likely to reflect a small variability in the estimate.

1.2.4 Project Life Cycle

Project and life cycle costing take estimating into the fourth dimension of time. Simply put, life cycle
costs are the sum of every cost incurred for a particular item (project, product, etc.) over its lifetime
from inception through disposal. It is necessary to estimate these costs over time at an assumed
escalation rate and then convert it to a present‐day value for comparing with other options.

The estimate scope begins with the design, construction, and startup costs. In the next phase it is
necessary to determine the cost of operation including raw materials, labor, general and administrative
(G&A), and other factors. It must include anticipated maintenance and perhaps improvement costs
over the life of the plant. The final stage is the dismantling and salvage value of the remaining asset.

Terms to Know

• Accuracy
• Accuracy Range
• Allowance
• Basis of estimate
• Bid/Tender Estimate
• Budget Estimate
• Cash flow
• Code of accounts
• Concept Study
• Conceptual Estimate
• Constructability
• Control Estimate
• Cost Estimate Classification System
• Cost Estimating Relationship (CER)
• Costing
• Definitive Estimate
• Detailed Unit Costs
• Deterministic (Detailed)
• Escalation
• Feasibility
• Labor Productivity
• Learning Curve
• Location Factor
• Normal Curve
• Order of Magnitude (Conceptual) Estimate
• Overhead

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 • Parametric Estimate
• Preparation Effort
• Price
• Pricing
• Productivity
• Project Definition
• Scope
• Screening
• Stochastic
• Take-offs
• Weighted average

Key Points for Review

• Explain the importance of using a common terminology.

• Explain why it is important to understand the terminology of other cost engineering disciplines
• Understand the different classes of estimates in the cost-estimate classification system and the
characteristics used in classifying estimates.
• Understand the differences in the various types of estimating techniques and for which classes of
estimates they are typically used.
• Describe how accuracy of quantities or unit costs affects estimate variability.
• Understand how probabilities can affect the accuracy and the variability of estimates.
• Understand the factors that can cause variability in an estimate and how to adjust for them.
• Understand how to use risk analysis to reduce the impact of potential variables.
• Understand how the estimate class affects the potential variability.

Sample Questions for Section 1.2

1. From the contractor’s perspective, which of the following is not a scope change?
A. A prolonged labor strike
B. A force majeure event
C. An error in the concrete take‐off
D. A project delay by the owner

2. What class of estimate is an order of magnitude estimate?

A. Class 2
B. Class 5
C. Class 1
D. Class 3

3. An estimate prepared from well-defined engineering data is referred to as a .

A. Range estimate
B. Preliminary estimate

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 C. Conceptual estimate
D. Definitive estimate

4. Which of the following is recognized as the primary characteristic used in classifying estimates.
A. End usage or purpose of estimate
B. Level of project definition
C. Estimating methodology used in preparation of estimate
D. Expected accuracy range of estimate

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Solutions to Sample Questions for Section 1.2

1. C. An error in the concrete take‐off

2. B. Class 5

3. D. Definitive estimate

4. B. Level of project definition

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