A list of information on which the estimate is based
The proposed contract strategy
The assumed installation techniques
The project schedule milestones
The currency exchange rates used and estimated inflation
The assessment of project risks and contingency
The base date of the estimate and its estimated accuracy.
The principles of estimating are the same for all disciplines, and it involves a number of distinctly different components:
A database
An algorithm
The effect of people's attitudes
Definition of scope
Definition of method of execution
Identification of the risks.
The estimating approach depends on:
The status of the estimate basis (see 2c below)
The end use of the estimate:
funding of the project
preparation of tender documents
tendering for project
finalizing project funds
The need for details
Previous historical data
The tools available
The time and budget available for preparing the estimate.
This last item is perhaps the overriding determinant. If a senior executive asks for an ‘off the cuff’ number, it could be anything from +/–50 per cent to +/–100 per cent, depending on our experience and ability to interpret the crude project description. The problem is that the first number quoted is always remembered. Consequently, one should quote a range. However, if we are allowed to spend £500,000, and have three months, we could probably give a figure accurate to within +/– 3 per cent.
1 Types of Estimate
There is a hierarchy to estimates (see Figure V.E.1), and unfortunately every company or industry sector has their own definition. The following are reasonably generic definitions.
1.1
A conceptual order of magnitude estimate is based on past costs or estimates of costs of similar plants using cost versus capacity curves and adjusted for scope, size and escalation. Other factors which may have to be taken into account are plant location and time of construction.
Accuracy varies from –30 to +40/50 per cent.
1.2
A preliminary feasibility estimate is based on costings using in‐house data or vendor quotes for items of equipment with preliminary specifications and/or data sheets and factoring the cost of bulk items (see Part I, Section F The Owner and Client, Paragraph 2.1).
Accuracy +/–25 per cent.
1.3
A detailed tender/appropriation estimate is compiled from data sheets for equipment, P&IDs, piping specifications, preliminary plant layout and elevation drawings, construction studies, detailed ‘take offs’ for all bulk materials. They are all priced from vendor's quotations and from reliable in‐house data.
In order to be meaningful, that is to be successful, the overall accuracy needs to be +/–5 per cent.
1.4
A definitive estimate is produced during a contract at or near completion of engineering. It is put together when equipment orders have been placed and quotes obtained from vendors for bulk materials based on preliminary layouts. At this stage the construction plan and work packages representing approximately 30 per cent of the estimate will be sufficiently well defined for them to be estimated within +/–10 per cent, giving an overall estimate accuracy of +/–3 per cent.
1.5
Why knowing accuracy is important.
Sensitivity to economics
Cash flow/budgeting
Determine which estimating method/approach to use
Know where to improve methods
Helps establish contingency levels
Develop confidence/management support.
2 Estimate Planning Sequence
Estimating is a project in its own right and a team effort between project management, design, procurement, and installation. It involves:
Kick‐off meeting.
Prepare estimate plan:
Define responsibilities
Define work breakdown structure (and code of accounts)
Develop contracting plan
Establish estimate schedule
Establish estimate reviews.
Prepare estimate basis:
Define quantity details
Define productivity factors
Define material unit rates
Define labour and subcontract rates
Define indirect costs
Define exchange rates.
Reviews:
Project review
Project management review
Company management review.
Presentation to management or client.
3 The Estimating Process
3.1
The following examples are to give guidance on the concepts involved with different methods of estimating for different types of estimate.
3.2
For a conceptual order of magnitude estimate, an exponential method can be used:6
P2 = Required cost of new plant or item.
C1 = Capacity of plant or item of known cost.
C2 = Capacity of plant or item of new plant.
F = Exponential factor.
CF = Correction factor for say, inflation.
P1 = Cost of plant item of known capacity C1.
“Of course the question is: “Where do we get the factors from?” Answer: historical data.”
3.3
During a feasibility study, we may be able to use a factorial cost estimation method5. If we have formed a judgement on the market price (our cost) of a main plant item, we can then apply factors for associated costs.
For example: a heat exchanger may cost £20,000, and appropriate factors for the associated costs might be:
Pipework
0.35
Instrumentation
0.15
Civils
0.10
Structural and Building
0.00
Insulation
0.15
Electrical
0.15
Design
0.15
____
1.05
Thus the total cost is = £20,000 × (1.05 + 1) = £41,000
Again we get the factors from historical data. This also demonstrates that there are 101 small items that add up to as much as the cost of the main item, thus giving credibility to the rule of thumb that when you have ‘guestimated’ the main components of your estimate, double it.
3.4
Examples of other formulas are for a process plant: count the number of major equipment items and multiply by the number of pipework connections (normally four or five). Then multiply by the average length of a pipework run, and finally multiply by the rate per meter (including valves and instruments).
For standard building work, you need a cost per square meter.
For a journey on the London tube: count the number of stops and multiply by 2.5 minutes (2 minutes on the Piccadilly line). Add five minutes for a change, and you will always complete your project journey on time.
Of course, all of these are qualified by assumptions and exclusions (for example, fees) and then ‘it depends on the specification and so on’. But they all depend on historical data.
All more‐detailed estimates need to be divided into categories, and the four sections listed below show the typical percentages making up an onshore process plant.
Direct Costs:
%
Major equipment
15
Bulk material
20
Labour
20
fabrication
construction labour and/or
subcontractor installation and/or
subcontractor supply and installation
Indirect Costs:
Construction facilities
10
temporary facilities
temporary utilities
supporting services
construction equipment
tools and consumables
Management Services:
engineering, procurement,
and construction management
10
Other Elements:
Management fee/profit
5
Escalation
10
Contingency
10
____
Total Project
100
Whilst the above is a model in a particular industry, it is important to understand the proportions in one's own business context.
For example: for standard building work, 50 per cent of the total cost will be the structure and external doors and windows and 50 per cent for internal trades, fixtures, and finishes.
For building renovation work, 50 per cent of the cost will be materials and 50 per cent labour.
Road, rail and piping route wayleaves/right of way
Dock, jetty, and quayside requirements
Water supply – bore holes
Sewage and waste disposal
Congestion charges, parking fees, fines – for urban projects.
4.2 Main Process Units
All process plant and equipment including standby plant
Costs of process development and any prototype testing
Special erection costs, for example, heavy lifts, special cranes, or clean rooms/conditions
Costs due to special materials, refractories
Costs due to special manufacturing techniques, glass lined, high pressures, or manufacturing capacity
Inspections and tests, such as string tests
Delivery costs particularly for heavy, long, oversize, or wide loads and any restrictions or consents required
Consumables to be charged as capital, for example, catalysts
Safety equipment and any costs associated with a safety incentive scheme
Containment of any hazardous operations
Fire protection equipment
Ventilation for hot conditions, toxic gasses and vapours, dust and fire risks
Equipment to meet the requirements of the factory inspector, alkali inspector, and other statutory inspections
Effluent treatment plant (including development costs)
Instrumentation and controls and development costs
Pipework and valves
Cathodic protection
Insulation and aluminium cladding and painting
Mechanical handling facilities
Allowance for modifications after erection.
4.3 Off‐sites and Utilities
Boilers, fired heaters, and steam raising plant and auxiliaries
Electricity connection charges
Transformers and switchgear
Cabling
Starters
Standby power supplies
Plant and pipework for water storage and distribution for process and potable supplies
Conventional cooling towers and pipework
Raw water clarification plant/water treatment plant
Heating, ventilating and air conditioning
Lighting conductors
Compressed air system
Refrigeration, local or centralized
Inert or special gas supplies
Telephones, communications, and computer costs
Test equipment
Capital plant spares
Cranes, jigs, and maintenance equipment
Internal transport for movement and storage of raw materials, intermediate finished products, and associated fuel costs
Operating and maintenance manuals, drawings, and so on.
4.4 Civil Works
Piling, vibroflotation, and other ground improvements/stabilisation
Foundations, special vibration‐proof foundations
Main entrance road, gate house, and public road modifications
Main plant buildings
Buildings for service plant
Product storage buildings
Stores, warehousing, laboratories, workshops, and offices
Medical and first‐aid centres, fire station
Canteen, showers, changing rooms, and lavatories
Vehicle maintenance workshops and inspection pits
Garages, car parks, and cycle sheds
Customs and excise offices and weighbridge
Building services
Bund walls
Storage tank foundations
Slip form structures – chimneys, cooling towers
Structural steelwork
Drainage – surface, chemical, and soil water
Pipe and cable ducts
Permanent roads and lighting
Site security, fencing, clocking stations, and gate houses
Land reinstatement, landscaping, and so on.
4.5 Associated Costs
Design/Engineering Costs
Process and detailed design
Use of company associates, local offices
Purchasing, expediting and inspection
Use of specialists and consultants
Departmental overheads
CAD, Design/construction models
Lloyd's Insurance or special inspection
Design personnel involved in construction and commissioning
Travel and living costs.
Direct Construction Costs.
Contractor's overheads and profit – OH&P
Subcontract or direct labour
Subsidies to labour – transport, changing rooms, canteen meals
Specialists for rotating equipment – Millwrights
Transport costs – ship charters, air freight
Overtime working, abnormal weather conditions, local customs, religious holidays and regulations.
Temporary Facilities Required for Construction.
Client, project manager, construction manager and site staff offices and furniture
Temporary power and water supplies
Ground water pumping
Communications equipment and computers
Temporary road access and storage areas and associated lighting
Cost of screening site with hoardings
Special scaffolding
Temporary construction workshops (if permanent project workshops unavailable)
Training School for welding and so on
Site fabrication facilities
Labour camp and canteen
Site security, fencing, clocking stations and gate house – (If permanent facilities not available).
Overseas Project.
Camp for expatriate construction personnel
Housing for couples, kitchen equipment and furniture
Household and food supplies
Bachelor quarters, furniture and canteen
Social club Swimming pool
Packing and transport of personal effects.
Miscellaneous Overhead Items.
Process or patent fees Agent's fees
Import/customs duty
Legal and insurance fees
Consultants' fees
Tendering costs
Cost of finance, cost of Bonds
Proportion of company's research expenditure
Proportion of company's central administration expenditure
Cash flow funding/financing cost
Negotiating margin
Client involvement/interference
Company's margin/profit.
4.6
In addition to the estimated project cost, other elements are part of the total investment cost, namely the ‘owner’s costs.'
Land acquisition and right of way costs
Licenses and royalties fees
Feasibility study costs
Financing and interest charges during construction
Costs for owners supplied project insurances
Support duties and taxes
Cost of contract and tendering documents
Cost for training of operating personnel
Owners staff during construction
Purchase and transport costs for `First fill' of the plant
Operating spares and mobile equipment – if not part of the main contract
Operating supplies and consumables
Catalysts and chemicals
Commissioning staff costs.
We can thus see that, the more accurate we require the estimate to be, the more data we require and the more work we must do.
5 Contingency Estimation
5.1
In order to arrive at a reasonable contingency, it is useful to divide all the components of the estimate into different categories, depending on the degree of uncertainty.
5.2
As an example, there could be five areas of risk defined as follows (any more are not needed):
very low risk
low risk
medium risk
high risk
very high risk
5.3
Multiply the proportion of each of the above categories in the total estimate by the agreed contingencies to come up with an overall contingency figure. For example, say the total of items, for which it is considered there is a very low risk, represents 5 per cent of the whole of the initial estimate, the low risk items represent 10 per cent, medium risk items total 20 per cent, high risk items total 45 per cent, and very high‐risk items 20 per cent. Assuming that the contingency figures chosen are 2 per cent for very low risk, 5 per cent for low risk, 10 per cent for medium risk, 15 per cent for high risk and 25 per cent for very high risk, then the total contingency calculation would be as follows:
Breakdown of initial estimate %
Contingency %
Contingency to be added %
Very low risk
5
2
0.10
Low risk
10
5
0.50
Medium risk
20
10
2.00
High risk
45
15
6.75
Very high risk
20
25
5.00
100
14.35
5.3.1
A total contingency of 14.35 per cent would be added to the estimate. This would be quite a low level of contingency at the start of a project. It would not be unusual to include a total contingency of 20 to 25 per cent or more.
5.4
As the job develops and more items become firm, the percentage of low risk items increases, and the overall contingency should be decreased accordingly. Where the cost of an item has been underestimated in the original budget, funds have to be transferred from contingency to that item. Where the cost of an item has been overestimated, the spare money can be transferred into contingency. A more disciplined approach is to transfer any surplus to the gross margin on the bottom line.
5.5
By regularly reallocating the percentages of the various levels of risk, it is possible to check the original estimate of contingency required.