Realistic Estimation Presentation Insights

REALISTIC ESTIMATION
ACES PRESENTATION 19TH JUNE 2012
INTRODUCTION Presentation by Stuart Chalmers: o A foundation member of ACES; o Has been involved with estimating and project controls for over 40 years with Fluor Australia; o Experience covers a wide range of large and small mining, petrochemical, and industrial projects. Presentation Content: This presentation will discuss: o Types of cost estimate and classification; o Accuracy and level of project scope definition; o Level of detail and complexity; o Scope of estimate preparation activities; o AACEI RP19R-97 and estimate preparation costs. Why cost and time estimates are important to every project: o Cost estimates are more than just how much money the owner needs to commit and when is it required; o The ability to accurately forecast completion cost and completion time of projects allows owners, builders, investors, users, and the general community to plan their operations with more certainty and without the adverse impacts that sudden and unexpected surprises give; o Even positive impacts, when unexpected, can have a reduced positive flowon effect.
1 AUSTRALIAN COST ENGINEERING SOCIETY A Technical Society of ENGINEERS AUSTRALIA Stuart Chalmers 19 June 2012
REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

TYPES OF COST ESTIMATE Estimate types can be described by: End Use: o Project screening and economic viability; o Selection of preferred development options and location; o Concept and feasibility studies; o Project financing, budget approvals and control baselines; o Tenders and bid check estimates; o Change management; o Completion cost forecasts. Methodology: o Factored estimate; o Detailed estimate. Level of Project Definition: o Stage gate estimate. Expected accuracy range: o Target estimate accuracy range.
CLASSIFICATION AACE International has defined five estimate class levels: o Class 5: 0% to 2% project definition, capacity factored estimate, typically -30%, +50% accuracy; o Class 4: 1% to 15% project definition, equipment factored estimate, typically -15%, +30% accuracy; o Class 3: 10% to 40% project definition, semi-detailed estimate, typically -10%, +20% accuracy; o Class 2: 30% to 75% project definition, detailed estimate, typically -5%, +15%accuracy; o Class 1: 65% to 100% project definition, detailed estimate, typically -5%, +10%accuracy; Classification level depends primarily on level of project definition with end use, methodology, accuracy and estimating effort secondary characteristics. While project definition is roughly expressed as a percentage complete, it is the degree of completion of project defining deliverables that define the classification. Estimating effort increases with increased project definition being available. For a fixed project definition, estimating effort measured as cost percentage of project total costs decreases as project size increases. 2 AUSTRALIAN COST ENGINEERING SOCIETY A Technical Society of ENGINEERS AUSTRALIA Stuart Chalmers 19 June 2012
The Recommended Practices include more detailed descriptions, end usages, estimating methodology, and alternate names. The AACE classifications are widely used for engineered projects by the engineering houses and their clients. The following are extracts from the Recommended Practices indicating various characteristics and expected accuracy ranges.

RECOMMENDED PRACTICE 18R-97 FOR PROCESS INDUSTRIES Industries that rely on process flow diagrams (PFDs) and piping and instrument diagrams (P&IDs) as primary scope defining documents.

RECOMMENDED PRACTICE 56R-08 FOR BUILDINGS & GENERAL CONSTRUCTION For building construction and site/civil projects and intended for projects which are repetitive and repeatable.

ESTIMATE ACCURACY Accuracy: the closeness to actual costs, excluding scope changes and extraordinary developments or occurrences [ AACEI, FJ Slattery]. expressed as a +/- percentage range around the point estimate after application of contingency with a stated level of confidence [RP 17R-97]. Accuracy applies to the total estimated cost and not to individual estimate items or sections of the estimate. Accuracy depends on a number of factors o Level of scope definition; o Complexity of the project; o Level of new technology; o Quality of reference cost estimating data; o Experience and skill level of the estimator; o Estimating techniques employed; o Time and level of effort budgeted to prepare the estimate; o Project implementation plan and schedule risk; o Project specific risk events. Accuracy is not determined by estimate class or level of detail. Accuracy must be evaluated on an individual estimate basis in conjunction with some form of risk and probability analysis.
LEVEL OF SCOPE DEFINITION Scope definition is the primary characteristic to determine the estimate class level. Scope definition percentage completion is only an indication of percentage of full project definition. The percentage complete usually refers to percentage of engineering and design completion but what is required is the degree of completion of project defining deliverables. Project definition rating index is a weighted percentage complete method that can be used by reviewing percentage completion status of general project data and engineering definition deliverable items. Project definition deliverables and target status are identified in the Recommended Practices for each estimate class and are included as Appendix 1.

LEVEL OF DETAIL Increased level of detail in itself does not improve the accuracy of an estimate but it does increase the cost of preparing the estimate: o Consider concrete footing quantities split up into concrete volume, formwork, rebar, embedded metalwork, and surface finishes compared with just concrete volume and types of concrete such as various footing, wall, and slab types (with typical formwork and rebar allowed for each concrete type); o If the footings design is still at a preliminary stage awaiting information to determine number and size of footings then providing more detail of current quantities is not going to improve estimate accuracy.
COMPLEXITY OF A WORK BREAKDOWN STRUCTURE The estimator needs to review the WBS to ensure it reflects the current scope and includes all cost components that may be needed such as Owners and other indirect type costs. The more complex the WBS is means that more effort is required to ensure that the source data and subsequent estimate items are correctly allocated. The more complex the WBS is also means that the estimator is probably dealing with more individual sources of data. Consider two examples a new country highway and a mine development including railway and port plus supporting infrastructure. What they indicate is that at a similar level of project definition a more complex and extensive WBS is likely to have more different types of items for the estimator to consider and thus more estimating effort is required. Example A A new country highway: o Land Acquisition o Bridges Individual bridges identified o Tunnels (if required) o Services relocations o Earthworks and drainage Individual road sections identified, and within each section types of earthworks and types of drainage. o Pavement Individual road sections identified, and within each section pavement types. o Signage and lighting Individual road sections identified o Traffic control (permanent facilities) o Environmental 7 AUSTRALIAN COST ENGINEERING SOCIETY A Technical Society of ENGINEERS AUSTRALIA Stuart Chalmers 19 June 2012

o Temporary construction and facilities Buildings and facilities (establishment and operation) Services (establishment and operation) Traffic management and diversions Environmental Accommodation Project implementation Project management Engineering and procurement Construction management Owners costs Other costs includes other project level costs such as contingency, escalation, and foreign exchange provisions.
o o
Example B New mine development (including rail and port): o Mine Mining Mine development (includes pre-production) Mine infrastructure (roads and buildings) Mining equipment Mine site materials processing Raw materials handling Processing Product materials handling Waste materials handling Mine site infrastructure Site development, roads and drainage Buildings and facilities Services (power, water) Mine off site infrastructure Access road Power supply Water supply Township o Rail Formation (including culverts and drainage) Individual track sections identified Bridges Individual bridges identified Tracklaying Individual track sections identified Signalling and train control Maintenance facilities Rolling stock

o Port
o o o
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Onshore materials handling Train unloading Stockpile development Stacking and reclaim (includes conveyors) Offshore materials handling Approach trestle and wharf Shiploader Materials handling (conveyors) Port site infrastructure (similar items as mine) Port off site infrastructure (similar items as mine) Mine temporary construction and facilities Buildings and facilities (establishment and operation) Services (establishment and operation) Camp facilities establishment Camp facilities operation Rail temporary construction and facilities Similar to mine includes quarries, multiple camp locations Port temporary construction and facilities Similar to mine Project implementation Project management Engineering and procurement Construction management Owners costs Other costs includes other project level costs such as contingency, escalation and foreign exchange provisions
COMPLEXITY OF TECHNOLOGY Introduction of new or complex technology generally causes problems for an estimate with increased effort and preparation cost. Engineering and design takes longer not only to develop the inputs for an estimate but also in the detail design phase by delaying the project (this then impacts on design, procurement and construction, and commissioning) and results in increased cost for acceleration of construction. There is an increased risk of significant changes being required between the estimate input and the final as constructed design. By contrast using previously used or known technology can allow an estimate to be prepared from previously generated material, and preparation of engineering and construction estimate input is generally following previously used methods and practices. 9 AUSTRALIAN COST ENGINEERING SOCIETY A Technical Society of ENGINEERS AUSTRALIA Stuart Chalmers 19 June 2012

SCOPE OF ESTIMATE PREPARATION ACTIVITIES There can be wide variation in the activities required to prepare an estimate. It is thus essential that the required activities are clearly established prior to commencing and preparing estimating plans and forecast costs. Minimum activities may consist of the following: o Set up a database or spread-sheet with WBS structure; o Create or copy and update unit rates; o Receive quantities for estimate items; o Receive current supply pricing for equipment, materials, and services; o Apply unit rates to applicable unit rate items; o Estimate cost of other direct cost items; o Estimate cost of indirect cost items; o Estimating team review and publish reports; o Collect and store relevant documentation. Other activities which may be required, particularly for more detailed class 3, class 2, and class 1 estimates. o Review estimating scope and estimating checklists; o Spending time gaining a clear understanding of the scope of the facilities, the scope of work for those facilities, and the scope of services for that scope of work (this being especially important for preparation of competitive tender estimates); o Coordination with engineering, procurement, construction, and client: Develop plan and guidelines for supply of estimate source data; Monitor supply of source data (including subsequent revisions); Attend progress meetings; o Develop estimate preparation guidelines and estimate preparation plan; o Monitor estimating progress against plan; o Develop and update WBS; o Training estimators in new software; o Prepare quantities; o Review supplied source data with originators; o Obtain current supply pricing for equipment, materials, and services; o Study option estimates; o Support to value engineering studies; o Operating cost estimates; o Life cycle cost estimates; o Risk analysis and contingency development; o Cash flow and escalation calculations; o Foreign exchange content; o Benchmarking key parameters; o Prepare basis of estimate documentation; o Analyse changes from previous estimates; 10 AUSTRALIAN COST ENGINEERING SOCIETY A Technical Society of ENGINEERS AUSTRALIA Stuart Chalmers 19 June 2012

o Prepare documentation and attend estimate reviews with project team, corporate management (at different levels) and client note required material varies with level of review; Maintain records of estimate revisions and distribution; Prepare documentation for feasibility study reports and other reports; Prepare documentation for tender bid submissions (pricing schedules, qualifications, inclusions and exclusions) and any follow up pre-award submissions; Convert estimate into control budget for project cost control; Prepare required estimating files for retention.
o o o
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From the above it follows that the cost of preparing an estimate will vary depending on the estimating activities required. It is absolutely critical that the estimating scope is clearly understood and specific estimate preparation guidelines and an estimate preparation plan be developed that includes not only estimating activities, but takes into account the supply of information to the estimator, and the various estimate reviews that are required before final estimate issue.
AACEI RECOMMENDED PRACTICE 19R-97 ESTIMATE PREPARATION COSTS AS APPLIED FOR THE PROCESS INDUSTRIES Published 1998 to provide benchmark information on costs to prepare cost estimates. Estimate preparation costs obtained from a limited number of sources and shown as 1997 values. Typical estimate preparation costs for class 3 estimates are shown graphically. Refer Figure 2 below:
This graph shows class 3 cost % of approximately 0.5% of project cost or $5,000 for $1 million, 0.15% or $15,000 for $10 million, and 0.06% or $60,000 for $100 million project cost. 12 AUSTRALIAN COST ENGINEERING SOCIETY A Technical Society of ENGINEERS AUSTRALIA Stuart Chalmers 19 June 2012

The following is a summary of estimate preparation costs for various class estimates for typical industrial/chemical projects and advanced industrial/chemical projects and for a $100 million project. Refer to Appendix 2 for details: Typical Cost % of Total Ratio to Class 5 1 2 12 17 33 Advanced Process Cost % of Total Ratio to Class 5
CLASS
5 4 3 2 1
$6,000 $10,000 $75,000 $100,000 $200,000
0.006% 0.011% 0.075% 0.10% 0.20%
$20,000 $40,000 $100,000 $200,000 $500,000
0.02% 0.04% 0.10% 0.20% 0.50%
1 2 5 10 25
Other information included in RP19R-97 show the impact of different technologies. For a $100 million class 3 estimate, typical estimate preparation costs are indicated as follows: o Nuclear $250,000 or 0.25% of project cost; o Pilot petrochemical $200,000 or 0.20% of project cost; o Advanced petrochemical $100,000 or 0.10% of project cost; o Typical petrochemical $75,000 or 0.075% of project cost; o Buildings $40,000 or 0.04% of project cost. Estimating scope and costs for the values published in RP 19R-97 included: o Establishing estimate requirements; o Planning and structuring the estimate; o Develop the estimate; o Risk analysis and contingency; o Document the project (estimate) basis and prepare reports; o Estimate review and benchmarking; o Issue the cost estimate; o Indirect and overhead activities included in billing rates. Estimating scope and costs excluded: o Developing cost data or tools for unique or special situations; o Value engineering studies; o Simulation, optimization, and life cycle costing; o Preparation of estimate input deliverables; o Ongoing support of project cost control and scheduling.

Key findings from RP19R-97: o Estimate preparation costs increase with level of project definition; o Estimate preparation costs as a percentage of total project cost decrease with increasing project size; o Estimate preparation costs increase with increased process complexity; o Estimating preparation costs increase with a more complex estimating organization. The effort or cost to prepare a cost estimate is now included as a secondary characteristic of the Generic Cost Estimate Classification Matrix in RP 17R-97 Cost Estimate Classification System Rev November 29, 2011:
This table shows the relative effort in preparing a Class 5 estimate: o Class 5 Relative effort 1; o Class 4 Relative effort 2 to 4; o Class 3 Relative effort 3 to 10; o Class 2 Relative effort 5 to 20; o Class 1 Relative effort 10 to 100.

AN EXAMPLE OF ESTIMATE PREPARATION COSTS This is an example of estimate preparation costs for a hypothetical mine, rail, and port development with a total cost of say $2,000 million cost. Details of estimate preparation costs are included as Appendix 3. Class 5 Capacity Factored Estimate o Total of 6 days estimating, say 50 hrs @ $200 = $10,000 = 0.0005% of project cost. Class 4 Equipment Factored Estimate: o Total of 25 days estimating, say 200 hrs @ $200 = $40,000 = 0.002% of project cost = 4 x Class 5 cost. Class 3 Feasibility Study (primarily a detailed estimate, with a small amount factored): o Total 47 weeks estimating, say 1,900 hours @$200 = $380,000 = 0.019% of project cost = 38 x Class 5 cost; o Note a feasibility study for financing and project go-ahead today requires the key parameters and documents defined and all items at least with preliminary design completed plus vendor pricing on all major equipment and materials. This is more detailed than described as class 3 in the AACEI Recommended Practices. Class 2 Detailed Definitive Estimate: o Total 70 weeks estimating, say 2,800 hrs @$200 = $560,000 = 0.028% of project cost = 56 x Class 5 cost. Class 1 Not considered as generally these estimates done progressively in sections. Above example project size larger than used in RP 19R-97 hence estimating costs as percentages of assumed total estimated cost are lower. Example project is more complex than in typical projects used in Recommended Practices. Compared to a class 5 capacity factored estimate, the detailed class 3 and class 2 estimates are indicating higher ratios for estimating effort than those indicated in RP 19R-97. This example assumes that information for factored estimates is readily available, and that at detailed estimating stages additional estimating activities and services are being provided.

SUMMARY AND CONCLUSIONS
Cost estimates are important to a range of stakeholders. There are many different types of estimate and uses for a cost estimate. A standard estimate classification system developed by AACEI is widely used for engineered projects. Estimate accuracy is determined not by class and level of detail, but by evaluation of the estimate and incorporation of risk analysis and probability results. The level of scope definition is the primary factor in determining estimate class. New and complex technology increases estimating effort and preparation cost. It is critical to understand the required estimate preparation activities and prepare specific estimating guidelines and an estimate preparation plan. AACEI review of some historical data confirmed estimating effort and preparation cost increase with increased project definition and process complexity. My local experience suggests that for large complex projects detailed estimating requires increased estimating effort compared with estimating effort for factored estimates. This is due to project complexity and more extensive estimating services being provided when preparing detailed estimates.

REFERENCES AACEI International Recommended Practices: o RP17R-97 Cost Estimate Classification System Rev November 29, 2011; o RP18R-97 Cost Estimate Classification System As applied in engineering, procurement, and construction for the process industries Rev November 29, 2011; o RP19R-97 Estimate Preparation Costs As applied for the Process Industries June 19, 1998; o RP56R-08 Cost Estimate Classification System As applied for the building and general construction industries Rev December 13, 2011. Australian Federation of Construction Contractors Fundamentals of Estimating for Engineering Construction; FJ Slattery, 1988. AACE International web site to obtaining Recommended Practices: o http://www.aacei.org/resources/rp/: Member access; Non member registered access.

APPENDIX 1 - PROJECT DEFINITION DELIVERABLES RP 18R-97 FOR PROCESS INDUSTRIES

APPENDIX 1 - PROJECT DEFINITION DELIVERABLES RP 56R-08 FOR BUILDINGS & GENERAL CONSTRUCTION

APPENDIX 1 PROJECT DEFINITION DELIVERABLES RP 56R-08 For Buildings & General Construction (continued)

APPENDIX 1 - PROJECT DEFINITION DELIVERABLES RP 56R-08 For Buildings & General Construction (continued)

APPENDIX 2 - ESTIMATE PREPARATION COSTS FOR VARIOUS CLASS ESTIMATES
From RP19R-97

APPENDIX 3 - AN EXAMPLE OF ESTIMATE PREPARATION COSTS This is an example of estimate preparation costs for a hypothetical mine, rail, and port development. Assume a mine, rail, and port development: o Mine allow $1,000 mill cost; o Rail allow $400 mill cost; o Port allow $600 mill cost; o Indirect costs assume included above; o Total say $2,000 mill cost. Class 5 Capacity Factored Estimate o Identify scope 1 day; o Identify source/base & capacity, location, escalation factors 3 days; o Prepare summary and estimate basis 1 day; o Review and revisions 1 day; o Total 6 days, say 50 hrs @ $200 = $10,000 = 0.0005% of project cost. Class 4 Equipment Factored Estimate: o Review scope 2 days; o Identify/review major equipment and key rail parameters 5 days; o Obtain equipment pricing - by others; o Develop total installed cost factors (Lang factors) 5 days; o Factored estimates for direct costs 5 days; o Factored estimates for indirect costs 4 days; o Prepare summary and estimate basis 2 days; o Estimate reviews and revisions 2 days; o Total 25 days, say 200 hrs @ $200 = $40,000 = 0.002% of project cost = 4 x Class 5 cost. Class 3 Feasibility Study (primarily detailed estimate, small amount factored): o Estimate scope review and planning 2 x 1 weeks = 2 weeks; o Ongoing management/coordination & estimate basis 1 x 5 weeks = 5 weeks; o Mine civil & structural 4 weeks, mechanical & piping 4 weeks, electrical & instrument/control 3 weeks = 11 weeks; o Rail civil & structural 4 weeks, signalling 2 weeks, mechanical & piping 1 week = 7 weeks; o Port civil & structural 4 weeks, mechanical & piping 4 weeks, electrical & instrument/control 3 weeks = 11 weeks; o Project level indirect and other costs = 1 x 2 weeks = 2 weeks; o Estimating and project review 5 x 1 week = 5 weeks; o Corporate and client reviews and finalise documentation 2 x 2 weeks = 4 weeks; o Total 47 weeks, say 1,900 hours @$200 = $380,000 = 0.019% of project cost = 38 x Class 5 cost; 23 AUSTRALIAN COST ENGINEERING SOCIETY A Technical Society of ENGINEERS AUSTRALIA Stuart Chalmers 19 June 2012

o Note a feasibility study for financing and project go-ahead today requires the key parameters and documents defined and all items at least with preliminary design completed plus vendor pricing on all major equipment and materials. This is more detailed than described as class 3 in the AACEI Recommended Practices.
Class 2 Detailed Definitive Estimate: o Estimate scope review and planning 2 x 1 weeks = 2 weeks; o Ongoing management/coordination & estimate basis 1 x 7 weeks = 7 weeks; o Mine civil & structural 6 weeks, mechanical & piping 6 weeks, electrical & instrument/control 5 weeks = 17 weeks; o Rail civil & structural 6 weeks, signalling 4 weeks, mechanical & piping 2 weeks = 12 weeks; o Port civil & structural 6 weeks, mechanical & piping 6 weeks, electrical & instrument/control 5 weeks = 17weeks; o Project level indirect and other costs = 1 x 4 weeks = 4weeks; o Estimating and project review 5 x 1week = 5weeks; o Corporate and client reviews and finalise documentation 2 x 3 weeks = 6 weeks; o Total 70 weeks, say 2,800 hrs @$200 = $560,000 = 0.028% of project cost = 56 x Class 5 cost. Class 1 Not considered as generally these estimates done progressively in sections. Above example project size larger than used in RP 19R-97 hence estimating costs as percentages of assumed total estimated cost are lower.

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REALISTIC ESTIMATION

ACES PRESENTATION 19TH JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

$6,000 $10,000 $75,000 $100,000 $200,000

0.006% 0.011% 0.075% 0.10% 0.20%

$20,000 $40,000 $100,000 $200,000 $500,000

0.02% 0.04% 0.10% 0.20% 0.50%

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

REALISTIC ESTIMATION ACES PRESENTATION 19th JUNE 2012

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