Cost

Estimation
Fundamental
and basics

2012 PETROLIAM NASIONAL BERHAD (PETRONAS)

All rights reserved. No part of this document may be reproduced, stored in a retrieval system or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise) without the permission of the copyright owner.

1.0 Introduction

A cost estimate is the approximation of the cost of a Process, Product, Project, or Service.

Major Project Determining Factors

Safety

u
so
Re

Scope (Functionality)

e)
rc

Tim
e(

(
st

Sc
he
du
le)

Co

Quality

Cost Estimate Propose and Classification

A. Traditional Method (Before developing Professional Software, Methods)
Estimate Class

Accuracy

Order to Magnitude (Ratio estimate)

-30% , +50%

Preliminary (Budget Authorization Estimate)

-15% , +30%

Definitive (Project Control Estimate)

Estimate
Class

-5% , +15%

B. Modern (Base on The U.S. Department of Energy Definition & ANSI Z94.21998)
Level of Definition
Name

Purpose

Class 5

Order of
Magnitude

Screening or Feasibility

Class 4

Intermediate

Concept Study or
Feasibility

Class 3

Preliminary

Class 2
Class 1

(% of Complete
Definition)

Expected
Accuracy

Methodology

0% to 2%

4 to 20

Stochastic or
Judgment

1% to 15%

3 to 12

Primary Stochastic

Budget, Authorization, or
Control

10% to 40%

2 to 6

Mixed, but Primary

stochastic

Intermediate

Control or Bid/Tender

30% to 70%

1 to 3

Primarily Deterministic

Definitive

Check Estimate or
Bid/Tender

50% to 100%

Deterministic

The estimate class designations are labeled Class 1-5. A Class 5 estimate is based upon the lowest level of
project definition and a class 1 estimate is closest to full project definition and maturity.

Relation between project phases, estimating type and

expected accuracy
60%
50%

35%
30%

Final Cost
Above Estimate

40%

40%

20%

Oute r Range :
Minimum accuracy, minimum information available,
new technology
25%
15%

10%

20%

Inne r range :
Maximum accuracy, good project definition, known
technology
5%

0%

Final Cost
Below Estimate

-15%
-20%

-25%
-40%

-5%
85%

60%
70%
80%
Expected probability that base estimate will be within range

-10%
-15%

-5%

-10%

-25%

-40%

-60%

IDENTIFICATION
Feasibility

Class 4
Screening

DEFINITION

Studies

Basic or FEED

Class 3
Budget

EXECUTION
Detail Engineering

Class 2
FEED/EPC

Class 1
Detail

Construction

Control Estimate

Commissioning

Close Out

Cost Estimation Propose

1. FeasibilityStudies
2. SelectionfromamongalternateDesigns
3. SelectionfromamongalternateSites

4. SelectionfromamongalternateInvestment
5. Presentationofbids
6. Appropriationoffunds

Cost Estimate Contingency

Terms:
Uncertainties
Risks
Known-unknowns (Favorable to use by Cost Estimator Engineers)
The contingency allowance is designed to cover items of cost which are not
known exactly at the time of the estimate but which will occur on a statistical
basis.
The Association for the Advancement of Cost Engineering (
AACE International), has defined contingency as "An amount added to an
estimate to allow for items, conditions, or events for which the state,
occurrence, or effect is uncertain and that experience shows will likely result,
in aggregate, in additional costs.

Cost Estimate Contingency (2)

Most important aspects should be foreseen on Estimation
Contingency

A.Unanticipated market conditions

B.Scheduling delays
C.Acceleration issues
D.Lack of bidding competition
E.Subcontractor Defaults
F.Design contingency (definition, Growth)
G.Change order contingency Allowances
Excluded from Estimation Contingency
Major scope changes such as changes in end product specification,

capacities, building sizes, and location of the asset or project

Extraordinary events such as major strikes and natural disasters
Management reserves
Escalation and currency effects

Cost Estimating Methods and Best Practices

A. Fully define and understand

the scope

B. Take off or quantify the scope

C. Apply costing to the scope

Clear
identification of
task

Broad
participation in
preparing
estimates

Availability of
valid data

Standardized
structure for the
estimate

Provision for
program
uncertainties

Recognition of
inflation

Recognition of
excluded costs

Independent
review of
estimates

Revision of
estimates for
significant
program changes

Sample Cost Estimation Flow Chart

The Tools required for estimating

Information
Recent Experience in Similar work
Professional and Reference material
Knowledge of shop or Office Operations
Market and Industrial Survey

The Tools required for estimating

Methods
Detail Estimating
Direct Estimating
Estimating by Analogy (Rules of Thumb)
Firm Quotes
Hand Book Estimating
The Learning Curve
Man Loading Method
Statically And Parametric Estimating

The Tools required for estimating

Schedule

The Kick-Off Meeting

The Review of Ground Rules Meeting
The Resource input and Review Meeting
Summary meeting and presentations

The Tools required for estimating

Skills

Business and Finance Skills

Engineering and Technical Skills
Manufacturing and Assembly Skills
Marketing and Management Skills
Mathematical and Statistical Skills
Production planning and industrial Engineering
Skills

Computer (IT) Skills

Cost estimating Methods

Analogous estimating: Also called top-down estimate,

means using the actual cost of previous similar project
as the basis for estimating the cost of the current
project.

Bottom-up estimating: This technique involves

estimating the cost of individual work items, then
summarizing or rolling-up the individual estimates to get
a project total cost.

Computerized tools: Using Cost Estimating softwares

and spreadsheets to assist with cost estimating. e.g.

Cost Estimating - Methodology

Scaling / Cost Capacity Equation: Cost capacity assumes a relationship

between the cost and maximum output capacity of a factory or process
plant.

Cost Indexing: Indexing takes known costs based on similar projects and
brings these up to date by applying indices for changes in the cost base over
the intervening years.

Factored Estimate: This method relates the costs of two elements of the
project and determines one from the other.

Detailed Estimate: Cost estimating builds up the cost from the lowest
level. Each contributing discipline estimates. their resource requirement
and/or likely costs and these are then rolled-up to calculate the overall
project cost.

Cost Curves

Cost Estimating - Scaling / Cost Capacity Equation

Scaling / Cost Capacity Equation:

Where:

Cx = Cost of Plant and / or equipment item of

Size Ex
Ck = Known Cost of Plant and / Or equipment of
Size Ek
n = Cost Capacity exponent

The Rule of Six-tenths: Approximate costs

can be obtained if the cost of a similar item
of different size or capacity is known. A rule
of thumb developed over the years known
as the rule of six-tenths gives very
satisfactory results when only an
approximate cost within plus or minus 20%
is required. (Class 2-3) 0.6

(ratio)

Cost Estimating - Scaling / Cost Capacity Equation (2)

Sample: Price of a Carbon Steel
centrifugal pump with 15 hp rated
power is 2000 USD what is the price of
a pump with same characteristic but 30
hp rated power?
Base on Table n = 0.67
Cx = 2000 (30 hp/ 15 hp)0.67 = 3182 USD
Base on Rule of Six-tenths: (Quick
Estimation)
Cx = 2000 (30 hp / 15 hp)0.6 = 3031 USD
Error (Difference): - 4.7%

Cost Estimating - Lang Factor

It is extremely important to understand the basis behind the equipment factors being
used, and to account for all costs that are not covered by the factors themselves.
The factors may apply to all installed costs (TICs) or direct field costs (DFCs) for the
facility. Usually, the factors generate costs for inside battery-limit facilities (ISBL) and
require outside battery-limit facilities (OSBL) cost to be estimate the cost of complete
facilities.
Base on Hang Lang concept (1,2): Total Plant Cost (TPC) = Total equipment
cost (TEC) * Equipment Factor

3.1 x delivered cost of equipment for Solid processing plant (e.g. Cement Plant)
3.63 x delivered cost of equipment for Solid-Fluid plant (e.g. Fertilizer process)
4.74 x delivered cost of equipment for Fluid process plant (e.g. oil and gas
plants)
These factor were meant to cover all the cost associated with the TIC of a
plant, including the ISBL costs and OSBL costs.
Sample: If the total Equipment cost (TEC) of fluid process plant is estimated: $ 10.5 M
then the TPC will be
1.5 * 4.74 = 78.435 M USD (Total of ISBL and OSBL)

Cost Estimating - Cost Indexing (How to Use a cost

Index)

A cost indices is table of value that relates the cost of

specific items at carious dates to a specific time in the
past. Cost indices are useful to adjust costs for
inflation over time.

Of particular importance to CPI are the Chemical

Engineering Plant Cost Index (CEPCI) and
Marshal & Swift Equipment Cost Index

The CE Cost Index provided Values fro several plantrelated

costs, including various types of
equipment, building, construction labor and
engineering fees. These values relate cost of overall
plants over time, Using the 1975-1959 time frames as
the base period (Value = 100)

The Marshal & Swift indices provide equipment

cost-index values arranged in accordance to the
process industry in which the unit is used. This index
uses the year 1926 as the base period.

To use one of the these indices to account for cost

Cost Estimating - Cost Indexing (How to Use a cost

Index)
For example, Suppose you want
to determine the cost of a new oil
production unit using capacityfactored estimates.
The similar plant build in 2004
cost 25 MMUSD, before applying the
capacity-factor equation, the cost of the
2004 must be normalized for 2009
The CE index for 2004 is 444.2, and for
February 2009 value is 521.9. The
escalated cost of the plant is therefore:
25 MMUSD * (521.9 / 444.2)
= 25 * 1.175
= 29.4 MMUSD

Cost Estimating Cost Curve

Check the Data validation before use the curves.

Use escalation methods for updating the prices

Cost Estimating: Direct Costs

Process Equipment
Site Preparation: Cut, Fill, Disposal, Soil Stabilization, grading, .
Site Improvement: Drainage ditches, culverts, canal, dikes, roads, park lots,
Concrete: Equipment foundation, reinforcement steel, .
Structural Steel: framing structure, equipment support, walkways, ladders,

Building: include all civil work, utility, HVAC, Plumbing, paint,

Underground and above ground Piping
Underground and above ground Electrical
Instrumentation
Insulation

Painting
Paving and Fencing
Proratables: include all cost of daily area cleaning, scaffolding, final tests and startup

Construction Equipment

1 Rental or Purchase
2 Service labor
3 Fuel, Oil, Grease,
Supplies

Cost Estimating: Engineering Office

Cost Estimating: Overhead and Indirect

Utilities
Rent
Audit and legal
Administrative staff
Equipment rental
Maintenance

Generator
Security
Telephone
Bill expense
Apportion of sales cost

Business travel expenditure

Output: Supporting Detail

The Cost Estimates should include:

A Description of the SCOPE of work estimated

Documentation of the BASIS for the estimate
Documentation of any ASSUMPTIONS made
An indication of the RANGE of possible results

Cost Estimate Accuracy

The Accuracy of the estimate is heavily dependent on the

TIME and MONEY expended on its preparation.