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Feature Report

Engineering Practice

Making Sense of Your


Project Cost Estimate
John C. Lagace Jr.
Commonwealth Engineering Using different estimation levels,
and Construction Co.
determined throughout the engineering

I
f your estimate for a project’s capi-
tal cost is too high or too low, incom-
phase of a project, can save time
plete or wrong, a poorly developed
scope is the mostly likely cause. In
and avoid surprises when it comes time to bid
almost all cases, project cost estimat-
ing is more accurate than the scope most to least influential, they are: have other important duties? You want
used to develop the estimate. (To de- to know who will be on your team, and
• Project complexity
velop a good project scope, please refer to be sure of their commitment, so you
• Technological requirements
to “Get Your Scope Straight for Project can have confidence in them. Try to in-
• Project information
Success,” CE, February, pp. 36–38). Yet fluence the makeup of the team so that
• Project team requirements
good scope definition is only part of you do have confidence and get them to
• Contract requirements
the answer. “office together” for good communica-
• Project duration
tions — people on the team should be
• Market requirements
What happens in estimating? located near each other.
A project estimate is a series of activi- Even small projects can be very com-
ties building on each other. plex. In some cases, a project may Timing is important
• Scope development, or defining what have multiple stakeholders, each Project timing might be a problem if
will be done, by series of specific en- with a differing view of the project re- you are handed an old project and are
gineering documents sult. Managing multiple stakeholders told to do it at last year’s estimated
• Estimating or gathering cost data complicates a project. cost. A lot can change in a year. Metal
and applying algorithms to deter- Technology requirements create and energy prices especially, have
mine costs based on experiential complexity. Consider new technolo- moved steadily upward. Look over the
factors gies that may not be familiar to you, old project and re-estimate these items
• Applying risk-management meth- such as continuous emission monitors before committing to old cost numbers.
ods to better define a cost basis for (CEMs) for flares, or technology for Look at schedule impacts, too, as cur-
major impact items reducing NOx emissions or sulfur in rent deliveries of pumps and vessels
• Developing a contingency based on fuels. Smaller companies without an can take longer than your old plan an-
the above environmental knowledge-base can ticipated. Some projects are currently
Each step depends on the prior steps. be frustrated getting up to speed on paying premiums for shorter deliver-
In practice, project estimating is more these technologies, and that increases ies. Not only must the old numbers be
accurate than scope development be- your project’s complexity. brought up-to-date, but forward esca-
cause if we can think of something, we The next item of importance is proj- lation will need to be added, too.
can usually place an accurate value on ect information. A good part of this re-
it based on experience. Most inaccu- quirement lies in scope definition, dis- Cost estimators
rate estimates are caused by things we cussed in the article referred to above. Project-cost estimators look at the fol-
forgot to include, things we decided to A good estimate is not possible without lowing things to develop the cost of
leave out, wishful thinking, and things good input, and a bad scope document your project, and each of these can be
in the realm of “known unknowns.” cannot reasonably be expected to lead a source of uncertainty:
to a good project. • Items that must be purchased, and
Zeroing in on the uncertainty Project-team requirements may or how much they cost. (equipment,
A study undertaken in 2000 [1] looked may not influence your estimate much. bulk materials and proratables)
at 24 variables and 84 contractors and Is your team local, or are you relying • The sales tax rate and applicability
determined that the following seven on distant team members with infre- (sales tax)
factors are relevant to producing a good quent meetings? Is your team commit- • Delivery costs for equipment and
project cost estimate. In order from ted, or are you sharing members who materials (freight)
54 CHEMICAL ENGINEERING WWW.CHE.COM AUGUST 2006
TABLE 1. A MATRIX FOR ESTIMATING DELIVERABLES
The Estimate quality desired dictates the engineering deliverables required for sound price estimating.
The matrix below can be used for planning your estimate package
Estimate classes: Class V Class IV Class III Class II Class I
Descriptions: Order of magnitude Preliminary Budget Control Definitive
estimate estimate estimate estimate estimate
Also called: Curve quality es- Equipment factored Software conceptual Modified software Detailed estimate
timate or cost ca- estimate or con- estimate estimate or project or check estimate
pacity estimate ceptual estimate estimate
Typical purpose: Early cost indica- Studies/planning/ Studies/planning/ AFE estimates/ Lump sum bids
tion/planning evaluate alternative some AFEs cost-plus bids
processes
Method of preparation: Cost-capacity TIC factored from Estimator, with per- Combination of Primarily manual,
curves, historical equipment cost haps minor amount computer and using in-house pro-
or published data using Lang/Guthrie of manual estimat- manual methods. grams, but other soft-
(dollars per barrel, factors via est. pro ing. Adjusted at sum- Fewer quotes used ware may be used as
etc.) program mary level for unit than in class I supplemental tool
rates
Normal accuracy range: +50%/-30% +35%/-20% +25%/-15% +15%/-10% +10%/-5%
General information V IV III II I
· Plant capacity X
· When & where plant will be built X X X X X
· Narrative scope of work X X
· Process flow diagrams (PFDs) X
· Plot size X
· Plot plan X X X
· General arrangement dwgs. X X
· Project schedule X X X
· Project execution plan X X
· P&IDs X X X
· Soils & other site data X X X
Process equipment V IV III II I
· Sized equipment list X X X X
· Equipment layouts X X
· Equipment data sheets/specs. X X X
· Equipment pricing X X X
· Equipment setting manhours X X X
Electrical V IV III II I
· Electrical equipment list X X X X
· Electrical layouts/sketches X X
· Electrical equipment pricing X X X
· Electrical one-line drawings X X X
· Electrical bulk MTOs X X X
· Electrical bulk-pricing X X X
· Electrical manhours X X X
(Continues on p. 56)

• The timing of the project and the • Engineering cost (engineering) can break your budget and focus more
possibility that costs might rise be- • Management team (management) attention on them. The common de-
fore purchase orders are placed or • “Known unknowns,” such as bad nominator of these items is that:
before labor is expended (escala- weather, labor problems or material • A wrong decision is very costly and
tion) shortages (contingency) may throw you over your budget if
• Site preparation requirements (hours • Permits, legal costs and other over- you guess wrong, and
and direct labor/hour, rentals, sub head (overheads) • They can be anticipated and dealt
contracts) • Non-direct field labor with by not wearing blinders and
• Equipment-installation costs (hours • Insurance using knowledgeable resources in
and direct labor/hour, rentals, sub To assist in getting a good estimate, the scope development and estimat-
contracts) you must understand how risky each ing stages
• Installation costs for bulk materials one of these line items is to your par- To use risk management to reduce
(piping, foundations, structural steel, ticular project. project risk, look at your estimate
and so on; hours and direct labor/ by line item and identify those items
hour; “tagged” items, such as electri- Risk management with the most uncertainty and hav-
cal equipment, instruments, DCS, You understand the Pareto principle, ing a large cost risk. Your project-cost
and so on; hours and direct labor/ which states that 20% of causes drive estimator can help you identify these
hour) 80% of outcome, or that 20% of your items. They can tell you which items
• Construction-indirect costs (con- project activities will account for have a fuzzy basis and can easily get
struction equipment, temporary fa- roughly 80% of the potential risk. The more expensive if the assumptions are
cilities, small tools, and so on) trick is to identify the few items that wrong. An example might be whether
CHEMICAL ENGINEERING WWW.CHE.COM AUGUST 2006 55
TABLE 1. A MATRIX FOR ESTIMATING DELIVERABLES (Continued from p. 55)
Estimate classes: Class V Class IV Class III Class II Class I
Instrumentation V IV III II I
· Instrument list /MTO X X X
· Instrument pricing X X ENG/PUR
· Instrument MTO Computer EST/ENG ENG
· Instrument bulk pricing Computer Computer PUR/EST
· Instrument manhours Computer Computer/EST EST
· DCS/control system pricing Computer/ENG ENG ENG/PUR
Structural V IV III II I
· Structural sketches/definition ENG ENG
· Structural MTO Computer Computer/EST EST
· Structural materials pricing Computer/EST PUR/EST PUR
· Structural manhours Computer Computer/EST EST
Civil V IV III II I
· Concrete sketches ENG
· Civil/sitework definition ENG ENG ENG
· Concrete & civil MTO Computer Computer/EST EST
· Concrete & civil materials pricing Computer/EST Computer/EST EST/PUR
· Concrete & civil manhours Computer Computer/EST EST
Architectural V IV III II I
· Building sizes & descriptions ENG ENG ENG
· Building pricing Computer/EST EST/SUB SUB
Piping V IV III II I
· Piping sketches EST
· Piping & fitting MTO Computer EST/Computer EST
· Valve MTO (incl. PSV & CVs) Computer EST EST
· Valve pricing (large bore) Computer/EST PUR/EST PUR
· Offsite pipe fabrication pricing Computer Computer/EST EST/PUR
· Pipe material pricing Computer/EST PUR/Computer PUR/Computer
· Piping manhours Computer EST/Computer EST
Protective coatings V IV III II I
· Paint, Insul., FP MTO Computer Computer EST
· Paint, Insul., FP pricing Computer EST/SUB EST/SUB
Overhead & indirects V IV III II I
· Indirect cost estimate Computer/EST CONST/EST CONST/EST
· Eng. / home office estimate Computer/ENG X/ENG X/ENG
· Escalation Computer/EST EST EST
· Contingency/risk Computer/EST EST EST
CONST = by Construction ENG = by Engineering X = by Project EST = by Estimating
PUR = by Purchasing SUB = by Subcontracts TIC = total installed cost AFE = authorization for expenditure

a single large reactor or two smaller risk item, especially if a lot of big-bore checking for additional breaker space
ones will be used, and not having a pipe is required and racks are nearly in the MCC; getting a better look at
solid estimating basis for how the full. that 24-in. valve capacity; getting your
larger one can be shipped, transported Contamination remediation for lead annual temperature profile for your
to the site and rigged into place. paint, asbestos and contaminated soils cooling water tower; or obtaining your
In many cases, instrumentation and can drive up costs if not anticipated. cooling-water-pump curves to see if
electrical work and materials are the Don’t forget permits. You will require you can really make capacity in sum-
biggest risk factors in a project. In- permits to have contaminated mate- mer. By identifying such major risk
strumentation/electrical (I/E) is often rials handled and disposed of legally, items and further working to define
the last thing to be engineered. It can and remediation companies may do them, you reduce your estimate risk.
represent 20% (or more) of the total the actual work at hourly rates above As a guideline, watch any single
project cost. In addition, it isn’t well your local-labor rate. items approaching 0.05% of your total
understood by the average person, so New flares and process-discharge estimate. On a $100-million project,
it often doesn’t draw the attention it points will require a lot of preliminary these are items exceeding $500,000. A
needs at early project stages. Finding effort to secure state and federal per- 20% uncertainty on such an item’s cost
out after you bid on a project that you mits. Don’t forget required analyzers is $100,000 at risk! Of the thousands
will need a new electric substation, for point sources, such as CEMs for of total items, only a few — about 20%
motor-control center (MCC), process- flares. — will be at this level. You can surely
control-computer components, new un- Your project-cost estimator can show justify some engineering time to miti-
derground conduit or new cable racks you the line items that might be prob- gate a $100,000 risk.
in tight racks can add cost quickly. Do lematic. These are cost risks that you
some homework here, and it will be can mitigate by doing more targeted Contingency
time and money well invested. engineering work, such as: getting a Contingency is the last item you will
Pipe racks represent another early better idea of field electrical capacity; determine for your estimate. Contin-
56 CHEMICAL ENGINEERING WWW.CHE.COM AUGUST 2006
Engineering Practice

low probability of occurring, but that


are very expensive when they do. Or-
dinarily we use insurance as much as
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these occur, but we do not budget con-
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tingency money in the estimate for
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good start.
A last contingency issue is the use
of hidden contingency to fatten an es-
timate. Each line-item cost must have
an auditable basis, such as feet of pipe
���������������������������������������������������������������� (dollars per linear foot) or labor hours
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the estimate and make rational judg-
FIGURE 1. Shown here is a so-called estimating tunnel. Different estimation levels ments on its validity. So do not use
are used during the course of a project. As the engineering gets closer to comple- hidden contingency; keep it as a single
tion, the cost estimate approaches the actual project cost to +10/–5% line item.

TABLE 2. ESTIMATE LEVELS AND WHEN TO USE THEM What estimate level to request?
Type Range Used for: Preparing an estimate costs time and
Order-of-magnitude estimate +50%/–30% Early-cost indication/ money. Not only do you have the costs
planning of preparing the estimate, reviewing
Preliminary estimate +35%/–20% Studies/planning/evaluating alter- it and finalizing it, but you also have
native processes
the costs of all the engineering work
Budget estimate +25%/–15% Studies/planning/some AFEs*
required to prepare the estimate de-
Control estimate +15%/–10% AFE estimates/cost-plus bids
liverables. Ask yourself why you need
Definitive estimate +10%/–5% Lump-sum bids
a project estimate, and whom it will be
* AFE = authorization for expenditures
presented to. This is a good way to de-
termine the accuracy level you will re-
gency represents “known unknowns”. • Anticipated but immeasurable im- quire. The matrix provided in Table 1
Contingency must be protected and pacts due to storms. Excessive rain shows what deliverables are normally
used properly. outs or hurricanes in the U.S. Gulf required for each level of estimate, al-
For example, contingency is not used Coast, tornadoes, and floods all though this distinction is subjective
for the following: qualify and varies somewhat by estimator,
• Additions to the project scope; these • Labor strikes company and job. Estimates typically
are handled as scope changes, and • Vendor problems, such as bank- fall into standardized ranges (percent-
are estimated separately for cost ruptcy age over/percentage under estimated)
and schedule impacts using project- • High labor turnover due to market based on what they will be used for, as
change notices forces creating high labor demand shown in Table 2. These estimate lev-
• Handling last-minute changes to and high wages els are explained further below.
governing standards or regulations; Known items are things we tried our Order-of-magnitude estimate
these should be handled as scope best to estimate, but upon which we (+50/–30%): For an order-of-magni-
changes as in the point above need to hedge our bet: Examples in- tude estimate, very little is required
• Making up for time lost to avoid- clude price adders for expensive equip- except for the desired plant capacity
able interferences, such as rework ment that must be fully engineered and the location of where the plant
for engineering error; these are before you can get a locked-in cost; or will be built. The estimate validity will
variances and may or may not be things you are negotiating for, such as be based on how closely this project
compensated based on your engi- rights of way. follows past similar projects.
neering and construction (E&C) Known-unknowns are items that Order-of-magnitude estimates are
contract. They are also handled as can happen, but you aren’t sure will sometimes called cost-capacity esti-
project changes happen, such as bad weather, labor mates, being based on a new process
• Acts of God (or force majeure) shortages and labor turnover. unit costing, say $X per barrel of prod-
Contingency is used for: Unknowns are things with a very uct produced daily. But they can also
CHEMICAL ENGINEERING WWW.CHE.COM AUGUST 2006 57
Engineering Practice

be produced by factoring from the cost million example project, we might ex- of your scope, the estimate will be
of a known unit of a given cost, instal- pect to spend 2% to 5% of the total engi- on target and the appropriate con-
lation date, capacity, and location. neering for the estimate deliverables. tingency level will make it manage-
For example, you might say, “a simi- Everything is estimated from this able to within 10%, which is what a
lar project back in 1990 that was half information using a conceptual esti- +15%/–10% estimate achieves
of this capacity and was built in the mating program, and there are many • We spend too much time micro-man-
Northwest instead of Gulf Coast cost good software programs available. We aging costs on small jobs and waste
us $48 million, so this one is about: may have a good idea of site prepara- money doing so. Small capital jobs
tion costs, labor rates and engineer- can be lumped into one pool of funds
$48,000,000 . fe . fl . (2.0)0.6 =
ing costs, and use these in place of and managed so that the pool does
$76,000,000
software-produced results. The con- not exceed its funding. The cost to
where:
tingency at this level of estimate will micro-manage 1,000-hour engineer-
fe = factor for 15 years of escalation be high to cover things we know of ing jobs exceeds the value it returns
(in this example, fe = 1.1) but could not include, such as under-
ground obstructions or enough insula- Final thoughts on contingency
fl = factor for location adjustment (in
tion and tracing. Typically defined at Contingency, as discussed above, is a
this example, fl = 0.949 because its
the end of a project, they simply are list of “knowns and known unknowns”
cheaper to build in the new region)
not known at this point and we will that you are aware of, don’t expect to
(2.0)0.6 = capacity factor to the 0.6 use factors2 to create a dollar value happen, but could happen. You esti-
power (0.6 is a commonly assumed ex- for these things. With a good software mated that local productivity is 80%
ponent for total plants. Tables can be program, if we tell it that a new DCS but it can be as low as 70%, so you
found for various equipment types.) or substation is needed, it will esti- will cover this in the contingency. If
The estimate mean value is $76 mil- mate those items based on the motor you build in the Gulf Coast area dur-
lion with a range of + 50% (or $38 mil- and other power loads and the instru- ing hurricane season, you might want
lion) and –30% (or $22.8 million). Pay mentation required. If we proceed to to add the cost of battening down the
particular attention to the +50% side authorize the project with this esti- hatches and stopping work for three to
of the number; this is the upper 95% mate, we would find that while we are four days to your contingency allow-
confidence limit. There is only a 5% only likely to exceed the upper limit ance. If there is a pending labor strike,
chance of exceeding $114 million, but 2.5% of the time (5%/2), we have a 50% add some contingency for loss of time,
there is a 50% chance of going over $76 chance of exceeding the mid point. possible extra security, and so on. Con-
million. In fact, it is an even bet that Definitive estimate (+10/–5%): The tingency is not the sum of all “knowns
the project will exceed $76 million. definitive bid is used for lump-sum and known unknowns”, but a percent-
Preliminary estimate (+35%/–25%): bids and funding authorization. As age to cover the statistical likelihood
A preliminary estimate is used to com- the estimate matrix shows, a lot of en- that some on the list will come true.
pare competing project options. In a gineering is required to produce this Many Monte Carlo packages exist to
gated-project process1, alternatives quality of estimate. Figure on being help you determine an appropriate
are compared using project-economic 75% to 90% complete with engineer- contingency percentage based on your
indicators, such as net-present value ing in order to have the information analysis of how good your scope is in
(NPV). NPV requires installed cost required. You are essentially complete most areas. ■
and annual operating/maintenance with engineering at this stage. Edited by Gerald Ondrey
costs for its evaluation.
References
A few engineering deliverables, typi- What estimate level to pay for? 1. “Construction Management and Economics,”
cally by process engineers and piping I can’t answer this question for you. I Routledge, Vol. 18, No 1, January 1, 2000.
designers are sufficient for this level can, though, give you some opinions
of estimate. A plot plan, PFDs, sized- to help orient you. In general, the es- Author
John Lagace is director
equipment list, and a preliminary motor timate mean value will not change of process engineering for
H.P./electrical-load list are enough. very much if your scope is good. The Commonwealth Engineering
and Construction Co. (10255
Budget estimate (+25/–15%): An esti- estimate bands, or uncertainty will Richmond, Suite 300, Hous-
mate of this level is often used for de- improve however, as the engineering ton, Tex. 77042. Phone: 713-
979-2769; Fax: 713-784-8984;
tailed studies or for project funding au- is closer to complete. Email: jlagace@teamcec.com),
thorization. This level estimate requires • It is my opinion that a good +25/– and has over 30 years of expe-
rience in polymers, chemicals
significant preliminary engineering by 15% estimate can be a useful autho- and petroleum-oil refining.
He was formerly with Shell,
all disciplines. Refer to the cost estimate rization estimate. If you are certain Exxon and S&B Engineers and Constructors
matrix (Table 1) for details of engineer- in various technical and management positions
and has extensive overseas experience from an
ing deliverables required. For our $76 2. Factored estimates depend on databases of owner’s perspective, having lived in Saudi Ara-
experience to predict things, such as how much bia and Malaysia. Lagace holds a B.S. in chemi-
insulation and tracing will be required. Factors cal engineering from the Lowell Technological
1. A gated-project process is a sequential methodol- being factors, the estimator and engineer must col- Institute (now the University of Massachusets
ogy used by management to evaluate a project at laborate to determine if the result makes sense. at Lowell) and a M.S. in chemical engineering
critical points to determine whether to commit ad- Consider personnel-protection insulation as well from The Pennsylvania State University. Lagace
ditional funding to it or to cancel it. as hot-cold insulation. is a registered P.E. in Texas.

58 CHEMICAL ENGINEERING WWW.CHE.COM AUGUST 2006

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