Key principles

In document Project Cost Estimating Manual.pdf (Page 60-63)

3.5 Cost estimate development

3.5.1 Key principles

Key principles required when preparing a Project cost estimate at any stage of a project include the following.

3.5.1.1 Integrity

Highest standards of ethical integrity are required. Cost estimates at any stage must be calculated through a transparent or open process. Any uncertainties should be well documented and explained in a manner easily understood. False precision and early optimism should be avoided to maintain the trust, support, and confidence in the Project personnel.

3.5.1.2 Cost estimate contents

Subject to the Client’s requirements, the Project cost estimate should include all costs and the value of any resources needed to complete the design, ROW activities, environmental mitigation, public outreach, construction, overall project management, specific management plans (e.g., transportation management plans), and appropriate reserves for unknowns, as well as costs and resources paid to others for work related to the Project such as utility adjustments or relocations and environmental mitigations.

Although this guidance will focus on developing a cost-to-complete estimate, the Estimator should include both expended and future costs when presenting the total cost of a project, ensuring that all components of the Project are estimated. Following are the usual cost components for acquiring a project. The estimate can include one or more of the components below depending upon the

• Alterations to public utility plant;

• Construction;

• Temporary works, including sacrificial works, and traffic management;

• Handover; and,

• Project management.

Estimating methods should be chosen commensurate with the expected accuracy and information available. More than one estimating method can be applied within an estimate, as different work items often have different levels of available details.

3.5.1.3 Year-of-expenditure

Project estimates should be expressed in out-turn value to reflect the actual project cost at completion. Out-turn costs are calculated by adding an allowance for escalation to the base cost estimate and contingencies, which have been developed in current year value.

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This can be performed by assigning an inflation rate per year (refer to Appendix C for additional guidance). The Estimator shall make certain that the selected year-of-expenditure reflects a realistic scenario, taking into account project planning and development durations, as well as construction. Potential schedule delays can also be accounted for in a project contingency. Clearly specify how inflation is considered in the estimate and clearly state that the estimate relates to year-of-expenditure. Consider multiple sources for determining the inflation rate, including nationwide and local references. Include consideration of any locality-specific cost factors that may reflect a growth rate significantly in excess of the inflation rate, such as land acquisition costs in highly active markets.

3.5.1.4 Cost estimate basis

Estimates should be developed using the best information available. When preparing any estimate, engineering judgement must be applied. For example, bid-based estimating is only good if the historical prices are for similar work and similar sized projects. Engineering judgement must also be applied to any assumptions made. The Estimator should maintain well-organised worksheets and documentation, whilst developing an estimate. These include the following:

• Definition of what is included in the total project cost.

• Methodology used to develop the estimate. This would include information such as any cost databases used, actual quotes, and any cost estimating relationships used.

• Description of direct and indirect costs.

• Explanation of site overhead rates.

• Operating costs if the estimate includes operations as well as construction activities.

• Details of escalation costs (source, application calculations, etc.)

• Analysis of how the contingency was developed.

• Any estimate history, if this is a change order estimate or revision to an existing estimate.

• Name, signature, and/or initials of the person preparing the estimate and the person reviewing it.

3.5.1.5 Risk and uncertainty

Risk is defined as the chance of something happening that will have an impact on project objectives. It is measured in terms of consequences and likelihood (AS/NZS 4360:2004 Risk Management). Costs for risks and uncertainties should be determined within an estimate. All of the Project elements must be expressed as a cost that can be budgeted and accounted. Risk identification can be initiated using a risk management workshop. It would be helpful at the outset in distinguishing between the concepts of risk, uncertainty, and contingency.

• Risk is experienced as being exposed to profit or the probability of suffering a loss. Risk is then a measure of the probability of a profit or loss occurring by a known means.

• Uncertainty represents unknown or ill-defined variables causing a loss or profit.

• Contingency represents the resources gathered to mitigate or address risk and uncertainty.

These resources can be in terms of time, costs, materials, or processes.

A comprehensive and disciplined method of assessing/reassessing project risk and uncertainty should be followed. Special consideration for major projects should be given for project risk and complexity in order to produce accurate contingencies. Contingency estimates should be well-defined and quantified throughout the Project development. As the Project estimate phase progresses and the available details are refined, the contingency should reflect the shift of contingencies into actual cost categories. Contingencies should be expressed in terms that can be

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easily presented and understood. Over optimism or appearance of false precision must be avoided as they will only cause problems as the Project progresses.

Many elements of the cost estimate have some element of uncertainty in relation to their scope. An allowance for uncertain elements of the scope is provided for within the Contingency and discussed in Sections 3.6 and 3.7.

3.5.1.6 Project delivery phase transitions

Estimates should include the phase of the Project that they corresponds to, such as feasibility study, preliminary engineering, final design, and construction; and should be tracked throughout the life of the Project. Assumptions and estimate information must be well documented and include any changes in the estimate.

3.5.1.7 Team of experts

When developing an estimate, an interdisciplinary team of skilled personnel should be involved and a clearly identified scope of work should be used. Estimates should always be prepared based on consultation and input from the Client’s experts, including all service authority requirements. For example, required diversion of any existing services should be determined in accordance with the standards of the service authorities affected, and ROW acquisition costs should be determined in consultation with the DoT.

Field studies, in accordance with the phase requirement, and reviews must be conducted prior to preparing any estimate. For work that is unusual, such as metro and buildings, consultation with outside agencies may be appropriate. Cost estimation teams shall be led by an experienced individual who is well versed in project cost estimating. This team should be comprised of experienced personnel with the requisite technical knowledge of cost estimating, managerial, and communication skills. This team should also have a thorough understanding of the Project scope and must be able to determine and evaluate critical issues and risks.

3.5.1.8 Schedule

Schedule can play an important role in the cost estimate because it can help identify the basis for budget cycle timing, any premiums on long-lead items to ensure their timely delivery, and the basis for escalation. Schedules used or developed with the cost estimate should be documented.

3.5.1.9 Documentation

Well-documented cost estimates withstand scrutiny; the more rigorous the documentation and estimation procedures, the higher the credibility of the estimate prepared. It is important to document all steps of the estimate process. Following items should be well documented and incorporated into the cost estimate:

• Type and/or purpose of the estimate.

Important Note

Early cost estimates usually contain a larger degree of uncertainty.

To account for this uncertainty, a Project cost estimate can be expressed as a range or can be expressed with an indication of the confidence level; however, this should not substitute the level of effort required to produce the estimate.

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• Detailed description of the scope of work, which should include the performance specification and the work activities required. It shall also identify work not included, any constraints or special conditions, ground rules, and assumptions.

• All backups of the estimate, including, but not limited to, quantity take-offs, calculations, databases used, historical data, cost estimating relationships, and actual quotes.

• Detailed description of indirect costs, a description of what is included, and how they were estimated.

• Explanation of site overhead rates.

• Basis of any operating costs with associated backup.

• Basis of escalation.

• Basis of the contingency and how it was calculated.

• Schedule in the form of a list, bar chart, or network diagram.

• Resource loading report, if appropriate.

• Cash flow.

• Details of how the WBS was developed and a correlating activity dictionary.

• Reviewed estimate.

In document Project Cost Estimating Manual.pdf (Page 60-63)