2016 Alaska Western Workshop Cost Estimating 101

Agenda Introduction Estimate Terminology Estimate Classifications Estimate Methodology Application of Estimate Methodology Understanding Direct & Indirect Costs Questions

Estimating – What does this mean? Cost estimating is the predictive process used to quantify, cost, and price the resources required by the scope. Cost estimating may be used to quantify, cost and price any investment activity, such as building an office building or process power plant, developing a software program, or producing a stage play. The basic estimating steps are the same: Understand the scope of the activity to quantify the resources and material required, then apply costs to those resources and materials

Estimate Terminology Cost Estimating Basis of Estimate Direct Costs Predictive process used to quantify, cost, and price the resources required by the scope of an investment option, activity, or project. A compilation of all the probable costs of the elements of a project or effort included within an agreed upon scope. Costs of completing work that are directly attributable to its performance and are necessary for its completion. Cost Estimating Basis of Estimate Direct Costs 1. Direct Costs 2. Basis of Estimate 3. Cost Estimating

Estimate Terminology In-Direct Costs Take-off Contingency Costs not directly attributable to the completion of an activity, which are typically allocated or spread across all activities on a predetermined basis. A specific type of quantification that is a measurement and listing of quantities of materials from drawings in order to support the estimate costing process An amount added to an estimate to allow for items, conditions, or events for which the state, occurrence, or effect is uncertain and that experience shows will likely result, in aggregate, in additional costs In-Direct Costs Take-off Contingency 1. In-Direct Costs 2. Contingency 3. Take-off

Estimate Terminology Allowances Escalation Benchmarking 1. Escalation Resources included in estimates to cover the cost of known but undefined requirements for an individual activity, work item, account or sub‐account. A provision in costs or prices for uncertain changes in technical, economic, and market conditions over time. A measurement and analysis process that compares practices, processes, and relevant measures to those of a selected basis of comparison with the goal of improving performance. Allowances Escalation Benchmarking 1. Escalation 2. Allowances 3. Benchmarking

Estimate Classifications AACE identifies five classes of estimates, which it simply designates as Class 1, 2, 3, 4, and 5. A Class 5 estimate is associated with the lowest level of project definition (or project maturity), and a Class 1 estimate is associated with the highest level of project definition. For each class of estimate, five characteristics are used to distinguish one class of estimate from another. The five characteristics used in the AACE Recommended Practice are: degree of project definition end usage of the estimate estimating methodology estimating accuracy effort required to produce the estimate

Estimate Classifications   ESTIMATE CLASS MATURITY LEVEL OF PROJECT DEFINITION DELIVERABLES Expressed as % of complete definition END USAGE Typical purpose of estimate METHODOLOGY Typical estimating method EXPECTED ACCURACY RANGE Typical +/- range relative to index of 1 (i.e. Class 1 estimate) [a] PREPARATION EFFORT Typical degree of effort relative to least cost index of 1 [b] 0% to 2% Screening or feasibility Capacity factored, parametric models, judgment, or analogy 4 to 20 1 1% to 15% Concept study or feasibility Equipment factored or parametric models 3 to 12 2 to 4 10% to 40% Budget authorization or control Semi-detailed unit costs with assembly level line items 2 to 6 3 to 10 30% to 75% Control or bid/tender Detailed unit cost with forced detailed take-off 1 to 3 5 to 20 65% to 100% Check estimate or bid/tender Detailed unit cost with detailed take-off 10 to 100 Class 5 Class 4 Class 3 Class 2 Class 1

Estimate Methodology In general, estimating methodologies commonly fall into two broad categories: conceptual and deterministic. Conceptual estimating methods usually involve modeling (or factoring), similar projects. Deterministic estimating methods are more or less a direct measure of the item being estimated.

Estimate Methodology Conceptual Estimating Methodologies End-Product Units Method Used when the estimator has enough historical data available from similar projects to re late the end-product units (capacity units) of a project to its construction costs. Example would be the construction cost of a hotel and the number of patient beds. Physical Dimensions Method Uses the physical dimensions (length, area, volume, etc.) of the item being estimated as the driving factor. For example, a building estimate may be based on square feet/meters or cubic volume of the building. Capacity Factor Method A capacity factored estimate is one in which the cost of a new facility is derived from the cost of a similar facility of a known (but usually different) capacity. It relies on the (typical) non-linear relationship between capacity and cost.

Estimate Methodology Conceptual Estimating Methodologies Ratio or Factor Method Ratio or factored estimating methods are used in situations where the total cost of an item or facility can be reliably estimated from the cost of a primary component. For example, this method is commonly used in estimating the cost of process and chemical plants where the cost of the specialized process equipment makes up a significant portion of the total project cost. This is often referred to as “Equipment Factor” estimating. Parametric Method A parametric model is a mathematical representation of cost relationships that provide a logical and predictable correlation between the physical or functional characteristics of a plant. For example Total Installed Cost/Dim in mile for pipelines.

Estimate Methodology Deterministic Estimating Methodologies A detailed estimate is one in which each component comprising a project scope definition is quantitatively surveyed and priced using the most realistic unit prices available. Detailed estimates are typically prepared to support final budget authorization, contractor bid tenders, cost control during project execution, and change orders (Class 3 through Class 1 estimates). The following steps comprise the activities undertaken during preparation of a detailed estimate: Prepare project estimate basis and schedule Prepare Direct Field Cost (DFC) estimate Prepare Indirect Field Cost (IFC) estimate Prepare Home Office Cost (HOC) estimate Prepare escalation estimates Prepare project fee estimate (for contractors) Prepare cost risk analysis/contingency determination Preview/validate estimate

Application of Estimate Methodology End Product Estimating Methodology If the construction costs for a 25 guest room hotel was $8,000,000 what would a 95 guest room hotel cost be utilizing the end product methodology? $30,400,000 If the construction costs for a 100 patient bed hospital was $18,000,000 what would a 185 patient bed hospital cost be utilizing the end product methodology? $33,300,000

Application of Estimate Methodology End Product Estimating Methodology If the construction costs for a 100 parking space garage was $13,000,000 what would a 30 parking space garage cost be utilizing the end product methodology? $3,900,000 If the construction costs for a 100 room storage complex was $1,800,000 what would a 150 room storage complex cost be utilizing the end product methodology? $2,700,000

Application of Estimate Methodology Physical Dimensions Estimating Methodology If the construction cost of a 2000 sf warehouse was recently built down the road for $600,000 what will your approximate construction cost be for a 3000 sf warehouse? $900,000 If the house next door which is 50’ wide x 100’ long cost $400,000 to build last week, what would your approximate cost be for your 5000 square foot house? $400,000

Application of Estimate Methodology Ratio or Factor Estimating Methodology In 1947, Hans Lang first published an article in Chemical Engineering introducing the concept of using the total cost of equipment to factor the total estimated cost of plant. Total Plant $ = Total Equipment $ X Equipment Factor Lang proposed three separate factors based on the type of process plant (see table below). Lang’s factors were meant to cover all the costs associated with the total installed cost of a plant. Lang Factor Type of Plant Factor Solid Process Plant 3.10 Solid-Fluid Process Plant 3.63 Fluid Process Plant 4.74

Application of Estimate Methodology Ratio or Factor Estimating Methodology If the total equipment cost for a gas liquid plant was $1,500,00 what would the Total Plant Cost be? Total Plant Cost = $1,500,000 x 4.74 Total Plant Cost = $7,110,000 If the total equipment cost for a wood pellet solid process plant was $5,000,000 what would the Total Plant Cost be? Total Plant Cost = $5,000,000 x 3.1 Total Plant Cost = $15,500,000

Deterministic Estimating Methodologies – Understanding Direct & Indirect costs The installation hours associated with a worker installing piping inside of a module would be considered a Direct or Indirect Man-hour? The travel time between hotel and the module where the worker is installing the pipe would be considered a Direct or Indirect Man-hour? Direct In-Direct 1. Direct 2. In-Direct

Deterministic Estimating Methodologies – Understanding Direct & Indirect costs Snow removal man-hours and equipment needed to get access to the module where the workers are installing piping inside of the module would be considered a Direct or Indirect cost? The installation hours and material costs associated with the structural crew who attaches lifting lugs to the module so that module can be set on truck with a crane would be considered a Direct or Indirect cost? In-Direct Direct 1. Direct 2. In-Direct

Deterministic Estimating Methodologies – Direct Examples Mechanical Man-hours Piping Man-hours Electrical & Instrumentation Man-hours Structural Man-hours Civil Man-hours Insulation Man-hours Painting & Coating Man-hours Architectural Man-hours Permanently Installed Material

Deterministic Estimating Methodologies – In-Direct Examples Fire watch Snow Removal Mobilization/Demobilization Construction Equipment Training Site Clean-up Small Tools and Consumables Travel to/from Job Site Safety Meetings

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