Cost Management
6.2 Cost Types
6.2.1 Cost Estimate
Cost estimates predict the likeliest costs of resources required for completing the project, and cost estimation is updated throughout the life of project. At the project's outset, proof-of- concept estimates are done to inform the decision that will need to be taken as to whether to allow the project to proceed. One such estimate is the
"order of magnitude" estimate. These can have an accuracy of 50 to 100 percent. As the project progresses, more accurate estimates are required. From company to company, the specified range of values
for a given estimate may vary as well as the name used to describe it. For example, "conceptual estimates" are those that have an accu- racy of ±30 to 50 percent. "Preliminary estimates" are those with an accuracy of +20 to 30 percent. "Definitive estimates" are those with an accuracy of ±15 to 20 percent. Finally, the "control esti- mate," with an accuracy of ±10 to 15 percent, is calculated. As there remains considerable uncertainty at its outset about what work is actually to be done in the project, there is little point in spend- ing more time than necessary to produce an estimate of a higher range of accuracy than required at each particular stage of the project.
Types of estimates are depending on the accuracy required for the cost estimate and amount of effort, there are several methods described in Michel (2005). Several types are in common use, which we now discuss.
6.2.1.1 Top-Down Estimates
Top-down estimates are used to estimate costs early in the proj- ect, when detailed information about the project is very limited.
The term "top-down" indicates that the estimate is made actually at the topmost level of the project, yielding a single overall "ball park" figure. This type of estimate requires little effort and time to produce. However, its accuracy is not as high as it might be with a more detailed effort.
6.2.2.2
Bottom-Up EstimatesBottom-up estimates are used when project baselines, or a cost- control type of estimate, are required. The approach is called
"bottom-up" because estimates of this type begin with estimat-
ing detailed costs of the project and summarizing these at their
appropriate level. The work-breakdown schedule (WBS) can be
used for this "roll-up." This kind of estimate is that it produces
accurate results. The degree of that accuracy is mainly a function
of the level of detail taken into account: as more and more detail
is added, the calculations converge statistically towards the most
likely cost estimate, or cost range estimate,. Of course: the cost
itself of the time required to complete such a relatively detailed
estimate is higher, as is the amount of time needed to produce
the estimate.
6.2.1.3 Analogous Estimates
Analogous estimation is a form of top-down estimate that makes use of the actual cost of previously completed projects to predict the cost of the current project. If the project being used as the ana- log of the project being estimated is a close match, the estimates could be quite accurate; on the other hand if the purported anal- ogy is more apparent than real, the estimate might not be very accurate at all.
This point is crucial. It frequently happens with software devel- opment projects that many analogous previous projects can be found and examined, often sharing an apparently similar design of many of the key code modules. At first it might appear that if the difficulties of the projects are similar, then a 30-per-cent greater size in total program code of the new project should lead to a 30-per-cent greater cost than the analog being taken as the bench- mark for comparison. However, if programmers' time-saving code productivity tools have improved in the interim, the new project could cost less even though it uses more code. Alternatively, if the previous project was using some of these newer productivity tools but those tools are not yet part of the planning of the current project, a 30-per-cent increase in coding will actually cost the new project more than an incompletely-informed analogous estimate would predict.
6.2.1.4 Parametric Estimates
Parametric estimates are similar to analogous estimates. They are also "top-down," and their inherent accuracy neither better nor worse than analogous estimates. The basis of parametric estimation is some parameter of the project being estimated that changes proportionately with project cost, and a model may be calculated based on one or more such parameters. For most types of estimates, the rated per-unit cost of resources to be con- sumed in creating the project must be known. With these figures known, adjustments in the parameter will enable revising the estimate without loss of accuracy. Accuracy of the estimate may be improved if there is a close relationship between parameters and costs, and if the parameters are easy to quantify. If there are historical projects that are both more costly and less costly than the project being estimated, and if the parametric relationship holds true for both of those historical projects, the accuracy of
Table 6.1 Cost estimate procedure What
Why
How
When
Who
The function of the estimate is to forecast a cost for a specified scope of work, enabling an accurate budget to be assembled for the business. Cost estimation by definition is uncertain, but different classes of estimation may yield improved levels of accuracy as a project's scope becomes better defined in its details.
A work breakdown structure (WBS) should be built from which estimates, schedules, from which cost controls may be derived.
Formal documents are produced for all levels of estimate.
Appraise: Order of Magnitude (COM) accuracy range of +/-50%.
Select: Class 3 accuracy range of + / - 30%.
Define: Class 2 accuracy range of +/-15-20%.
Class 1 is +/-10% (rarely used).
This is done to indicate to the business the predicted cost of the project, so that the project is financially viable and can become established.
The project leader and the asset development engineer develop a Work Breakdown Schedule. This is then discussed with the project team to allow the relevant discipline engineers input in the estimate. OOM estimate will normally be factored estimates based on the known high-level scope and equipment definition.
Class 3 estimates will be factored based on a developed scope and equipment definition including indirect costs. Class 2 estimates will be built up from the developed scope of the project and will be fit for purpose to give the accuracy range.
All projects must have a Class 2 at the end of Define for business sanction. An estimate will be produced at the end of each development stage. The accuracy of the estimate will reflect that particular stage.
The project leader is responsible and is supported by the estimator, discipline engineers, SPA, construction engineers, and commissioning engineer.
the estimate and the reliability of the parameter for this project will be better. Multiple-parameter estimates can be produced as well. In a multiple-parameter estimate, various weights are given to each parameter to allow for the calculation of cost by several parameters simultaneously.
"For example, houses cost $150 per square foot, software deve- lopment cost is $2 per line of code produced, an office building costs $260 per square foot plus $54 per cubic foot plus $2,000 per acre of land, and so on."
Responsibility for monitoring construction and installation costs, which comprise the largest part of the total project costs,is usually shared between the overall project manager and onsite project construction manager. The accuracy of calculating the esti- mated cost of construction is different from one stage to another.
The more accurate the data is, the more accurate the calculation of the cost.
Yet another complexity attending the monitoring, control and updating of construction cost estimates arises from the point-of- view informing the particular calculation method used. From the owner's perspective, the general tendency is to estimate costs on the basis of the project's design and construction drawings. On the other hand, a project contractor's approach to estimating costs will be applied with an eye to entering a tender that will qualify him to win the bidding on the project.
The initial cost estimate is made after preliminary studies of the project have identified industrial facility requirements such as the number of pumps, air pumps, and compressors and the size of pipes and lines in diameter, and so on.
The cost is determined at this stage on the basis of previous experience of similar projects. For example, calculating the cost is as follows:
Example:
Calculate the cost for a project consisting of 3 pumps with 1200 HP, with pipeline 10 inches in diameter and a length of 15 miles.
The pump cost estimate = 700$/HP.
Pump cost = 3 (700) (1200) = 2.52 M$.
Cost estimate for onshore pipeline = 14000 $/inch/mile.
Pipeline cost = 14000 (10) (15) = 2.1 M$.
Total cost = 2.52 M$ +2.1 M$ = 4.73M$.
Example:
Calculate the cost of one floor for a building with an area of 300 m2 from reinforced concrete.
In this case assume slab thickness is 250 mm for a slab beam and column as a practical estimate.
Approximate concrete quantity for slab and floor = 300 x 0.25 = 100 m3.
Assume the cost of concrete = $200 /m3 The concrete cost for one floor = $20,000
The calculation of the concrete price is calculated after deter- mining the type of concrete. The cost of reinforced concrete can be calculated by obtaining the following information:
• Quantity of steel per concrete cubic meter and the price of steel per ton
• Quantity of cement in concrete mix and the price of cement ton
• Quantity of coarse and fine aggregate and the price per cubic meter
• For ready mix, the price of each cubic meter by knowing the concrete grade, which is standardized at 30-25 N/mm2 for petrochemical projects
• Cost of shattering, bending bars, pouring, and curing per cubic meter of concrete
For ready mix concrete, obtain the following information:
• Quantity of steel in the meter cube of concrete and the price of a ton of steel
• The price of concrete from the nearest ready mix loca- tion to the site and the concrete pump
• The cost of wooden form, which is usually a special strong form to the pump concrete
• The cost of steel fabrication
• The cost of the pouring process and curing
Note that in calculating the reinforced concrete cost estimate the main item is the quantity of steel in concrete, and it is different
Calculate the approximate price for one meter cube of rein- forced concrete prepared onsite, noting that the approximate quantity of coarse aggregate is 0.8 m3 and for fine aggregate is 0.4 m3 and this value is required to provide characteristic cube strength 25 N/mm2:
Steel cost = $1000/ton Cement cost = $80/ton
Coarse aggregate cost = $5/m3 Sand cost = $l/m3
Steel quantity = 0.1 t/m3 as shown Steel cost = 0.1 x 1000
Cement cost = 7/20 x 80 Coarse aggregate cost = 0.8 x 5 Sand cost = 0.4x1
Material total cost = $133/m3 (as a
i in Table (6.2)
= $100
= $28
= $4
= $1 material only) Cost of fabrication of wood and steel and pouring Total cost
= $30/m3
= $163/m3
Table 6.2 Guide for estimating steel quantity in reinforced concrete Structure Element Type
Slab with beam Flat slab
Hollow block slab Columns
Isolated footing Raft foundation
Approximate Quantity of Steel Reinforcement in Concrete,
Kg/m3 90-100 250 150-180 90-120 100-120 200-300
according to the structure element. The following table is a guide for estimating the quantity of the steel reinforcement.
The data in Table (6.2) is considered a guideline and depends on the concrete characteristics, strength, and the member design, so it is an indicator for the quantity of steel reinforcement.
Table 6.3 Percentage of reinforced concrete building cost Activity Item
Design and site supervision Concrete works
Masonry work
Sanitary and plumbing Internal and external finishing
Percentage from the Total Cost, % 3
36 6 10 45
The percentage cost of the domestic and administration building will be a guide as shown in Table (6.3).