Depending on who is looking at an estimate and for what purpose, the actual estimate could be different for the apparently same scope or project. For example, owner estimates could be different from a contractor’s estimate.
Generally, when an estimate is prepared by a contractor, it is for a defined scope of work. But when an owner company wants to estimate for its own internal budget approvals, it is for a “Project”. This means that even if an initial scope is defined, there is always a high chance of scope creep during the course of the project sanctioning process. It is not easy to define all the requirements during the initial stages and with time generally more scope is added to the project for completeness. The estimator in the client’s estimating team should thus be able to correctly pitch the overall number to the funding body in order to encompass possible future scope additions. This adds certain challenges to the process of preparing the estimate.
Contractor estimates are generally for bidding purposes or to generate indicative numbers alongside front-end engineering design work; these are related to a particular scope definition. Any change in scope goes through a change management process and could require additional funding. The point is that somebody has to pay that additional amount, and if the client’s original budget did not envisage those changes, then there will be no budget to pay from. This is different from the contingency amount generally added to the estimates for design refinement and other estimate deficiencies for that particular scope.
The contractor’s estimator always tries to prepare the estimate taking into account the entire scope as defined in the “Scope of Work” document. But when an estimator in the client’s team looks at the same document, they need to double check with their own team whether that particular scope will really deliver the project or if additional facilities / scope will be needed to actually complete the work. The answer can be found by understanding the overall process requirement and also from evaluating previous projects of a similar nature. It is worth keeping in mind here that the ultimate body which approves the overall budget, does not approve a scope of work but a project which promises to deliver a product spec of some fashion. It could be a plant which processes a certain capacity of treated water at a particular purity, or certain oil production rate at a particular specification, or generates certain capacity of power, or a pipeline which is able to transfer certain quantity of fluids.
Several additional items might not be in the initial scope or part of a contractor’s estimate but are needed for the overall approval and actual completion of the project. Examples of such items, which should be considered by the estimator in the client’s team are as follows:
- Owner’s management costs
- Land costs
- Social and environmental impact costs (which could be a significant amount for some projects and could also impact the viability of the project)
- Cost of treating the by-products (which might not be part of the initial scope definition, but is essential to estimate the project cost completely, without which the project would become unviable)
- Cost of additional utilities like gas or power without which the current project will not deliver
- Cost of tying into existing facilities or additional peripheral facilities to export the product
- Cost of additional infrastructure required in the region or the country without which the project could not be completed
It might not be always possible to estimate these items at the initial stages during the funding approval process as proper definition might not be available, thus making the job of the estimator in the owner’s team quite difficult. But a very rough high level assessment of these costs could be useful. Nothing should be actually excluded when getting the overall project sanctioned.
Professionals in this field are aware that generally large projects are approved against competing projects which address the current industry, business, political, environmental and social needs in different ways. Thus giving a complete picture helps the approving bodies with the selection and the decision making as the chances of any future surprises are greatly reduced.
This article was published as an opinion piece in July-2017, in the Project Control Professional which is the journal of The Association of Cost Engineers.