EARLY ESTIMATES

GROUP 4
Mira-ato, Jalal
Pabroa, Adrian
 Early stage estimates or Order of magnitude
estimates
by their very nature, are based on preliminary
data and will not have a high degree of accuracy.
By comparison, estimates prepared late in the
development project life cycle are based on a
much wider set of information and thus are
more accurate. In other words, early stage
estimates are inaccurate and difficult to make,
yet they become the basis for project comparison
and for developing guidelines for the final
project funding.
 IMPORTANCE OF
EARLY ESTIMATES
 Forengineering and construction projects,
accurate early cost estimates are extremely
important to the sponsoring organization and the
engineering team. For the sponsoring
organization, early cost estimates are often a
basis for business unit decisions, including asset
development strategies, screening of potential
projects, and committing resources for further
project development. Inaccurate early estimates
can lead to lost opportunities, wasted
development effort, and lower than expected
returns.
CLASSIFICATION OF
EARLY ESTIMATES
There are many estimates and reestimates for a project,
based on the stage of project development. Estimates are
performed throughout the life of a project, beginning
with the first estimate through the various phases of
design and into construction as shown in Figure 4-1.
Initial cost estimates form the basis to which all future
estimates are compared. Future estimates are often
expected to agree with
ESTIMATING WORK
PROCESS
Estimating is a process, just like
any endeavor that requires an end
product. Information must be
assembled, evaluated, documented,
and managed in an organized
manner. For a process to work
effectively, key information must be
defined and accumulated at critical
times. The primary factors in
preparing estimates are shown in
Table 4-1.
TABLE 4-1
PRIMARY FACTORS IN PREPARING
ESTIMATES.

1. Standardization of the cost estimate

preparation process
2. Alignment of objectives between the customer
and team
3. Selection of estimate methodology
commensurate with the desired level of accuracy
4. Collection of project data and confirmation of
historical cost information
5. Organizing the estimate into the
desired format
6. Documentation and
communication of estimate basis,
accuracy, etc.
7. Review and checking of estimate
8. Feed-back from project
implementation
 IMPORTANCE OF
TEAM ALIGNMENT
IN
PREPARING
EARLY ESTIMATES
BENEFITS OF TEAM ALIGNMENT.
1. Establishes a clear understanding between the
customer and the team of the project's
parameters
2. Assists in determining the level of effort required
of the estimating team to deliver the
estimate
3. Enables the estimating team to establish a work
process and staffing plan to provide the
deliverables required to meet the customer's
expectations
4. Highlights issues that might not otherwise have
been considered in the development of the
estimate
5. Improves and documents the level of scope
definition and the information that is known
about
the project
6. Assists the customer's understanding of
what is included in the estimate and what is
not
included in the estimate
7. Establishes the responsibility of all project
team members and the customer in the
preparation
of the estimate
8. Serves to establish a cohesiveness between
the project team and the customer
SCOPE DEFINITION
AND EARLY
ESTIMATES
Good scope definition is extremely
important in preparing estimates.
However, early estimates are usually
prepared based on very limited scope
definition and scant information
regarding specific needs of the
proposed project. It is common
knowledge that the accuracy of any
estimate depends on the amount of
information that is known about the
project when the estimate is prepared.
PREPARING EARLY
ESTIMATES
As the estimate is being prepared it is important to
perform periodic "reality checks" to make sure the
costs developed are within reason. Based on
estimator experience and familiarity with the
project, this may include:

 Simple "intuitive" checks for reasonableness

 Comparisons with similar projects

 Comparisons with industry data ($/square foot,

costlmegawatt, indirect/direct costs, etc.)
 Check ratios such as lighting costs/fixture, fire
protection, costs/sprinkler, etc.
ORGANIZING TO
PREPARE
ESTIMATES
The lead project estimator is responsible
for initiating and leading the effort to
develop a plan for preparing the
estimate. In almost all situations,
higher-quality estimates can be produced
by professional cost estimators with an
engineering or technical background.
Like any technical specialty, estimating
requires specific skills, training, and
experience. Involvement of the
estimating team early in the project is
essential in the business development
process.
ESTABLISHING AN
ESTIMATE WORK
PLAN
The estimate work plan is a
document to guide the team in
preparing accurate estimates and
improving the estimating process. It
identifies the work that needs to be
accomplished to prepare the estimate:
who is going to do it, when it is to be
done, and the budget for preparing the
estimate. After the work plan is
finalized, it serves as a document to
coordinate the estimating work and
as a basis to control and maintain
the estimating process.
METHODS AND TECHNIQUES
 Cost capacity curves
 Capacity ratios raised to an
exponent
 Plant cost per unit of production
 Equipment factored estimates
 Computer-generated estimates
COST-CAPACITY CURVES
A cost-capacity curve is simply a graph that plots
cost on the vertical axis and capacity on the
horizontal axis. These curves are developed for a
variety of individual process units, systems, and
services. Cost-capacity curves are normally
prepared by a conceptual estimating specialist who
develops, maintains, and updates the cost-capacity
curves on a regular basis.
CAPACITY RATIOS RAISED TO AN
EXPONENT

Capacity ratios raised to an

exponent is another estimating
technique for conceptual
estimating. This approach takes
into account the effect of economy
of scale on the total installed cost.
PLANT COST PER UNIT OF PRODUCTION
This conceptual estimating technique
is used to estimate the total plant cost
based on the average plant costs per
unit of production on previously
completed projects. This is a very
simple and broad estimating approach
where the only information available
is the product description and the
plant capacity.
EQUIPMENT FACTORED ESTIMATES
For the process industry, equipment factored estimates
are derived by applying various factoring techniques to
estimated equipment costs. The factors used are
developed and updated utilizing return cost data from
completed projects. The estimated total installed cost of a
normalized unit is
 Direct equipment costs
 Direct bulk material costs
 Subcontract costs
 Construction labor costs
 Construction indirect costs
 Home office services costsdefined to include the
following costs:
COMPUTER-GENERATED ESTIMATES
There are numerous commercially available
computer software systems for estimating capital
costs for a number of different types of industries,
including the process industry, building
construction industry, and the heavyhighway
infrastructure industries. These systems can be
simple or very sophisticated.
ESTIMATE CHECK
LISTS
Check lists are valuable tools to
reduce the potential of overlooking a
cost item. Check lists act as reminders
to the estimator by:
 Listing information required to
prepare the early estimate
 Listing miscellaneous other costs
that may be required in the estimate
 Listing the project scope that may be
required but not identified in the
definition provided for the estimate
ESTIMATE DOCUMENTATION
Effective communication is necessary during the
estimating process. A support document should be
developed and available for presentation, review,
and future use of the estimate. A thorough
documentation of the estimate forms a baseline for
project control, so decisions during project
execution can be made with a better awareness of
the budget, thereby improving the overall outcome
of the project.
Inaccurate cost estimates are often the
result of omissions in the estimate,
miscommunications of project information,
or non-aligned assumptions. Documenting
the estimate will minimize these
inaccuracies by:

 Improving communications among all

project participants
 Establishing" a mechanism for review of
the estimate
 Forming a solid basis for project controls
Estimate documentation improves the outcome of
the estimate through:

 Sharing information
 Identifying items that require clarification

 Helping the estimator obtain and organize

information needed for the estimate
 Avoiding confuqion over what is covered and not
covered by the estimate
 Providing useful information for future estimates

 Highlighting weak areas of the estimate

 Increasing the credibility of the estimate

ESTIMATE REVIEWS
Well-executed estimate reviews will
increase the credibility and accuracy of the
estimate. They also help the team and
project management to know the level of
scope definition and the basis of the
estimate. The review of estimates is an
important part of the estimating process
because it helps the customer to understand
the contents and level of accuracy of the
estimate, allowing the customer to make
better business decisions.
RISK ASSESSMENT
Assessing risk and assigning contingency to the base
estimate is one of the most important tasks in
preparing early estimates. Risk assessment is not
the sole responsibility of the estimators. Key
members of the project management team must
provide input on critical issues that should be
addressed by the estimators in assessing risk.
Risk assessment requires a participatory approach
with involvement of all project stakeholders
including the business unit, engineering,
construction, and the estimating team.
RISK ANALYSIS
Typically, risk analysis is a prerequisite to
assigning contingency. Based on the acceptable
risks and the expected confidence level, a
contingency is established for a given estimate.
Risk analysis and the resultant amount of
contingency help the business unit to determine
the level of economic risk involved in pursuing a
project. The purpose of risk analysis is to improve
the accuracy of the estimate and to instill
management's confidence in the estimate.
CONTINGENCY
Contingency is a real and necessary component of
an estimate. Engineering and construction are
risk endeavors with many uncertainties,
particularly in the early stages of project
development. Contingency is assigned based on
uncertainty and may be assigned for many
uncertainties, such as pricing, escalation,
schedule, omissions, and errors.
In simple terms, contingency is the amount of
money that should be added to the base estimate
in order to predict the total installed cost of the
project.