General

Owner Vs Contractor Estimates

Vikas KhaitanLeave a comment

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.

Estimate Ownership

Vikas KhaitanLeave a comment

In one of my earlier posts, I presented a template for an estimate summary which highlighted some minimum requirements to make it look professional. One of the items was the estimator’s initials and the date of the estimate in the estimate summary. This is not a minor formatting issue; I think it is something crucial about taking responsibility and in turn providing reliability.

Without any date and a name / signature or even an initial, an estimate would be incomplete and it would only be a set of numbers with limited credibility and difficult to use. Anybody else looking at the estimate would find it difficult to trace the logic behind it and/or the validation process. The estimator himself could find it difficult to remember his or her own logic at a future date.  Even a brilliant estimate might end up being ignored for this seemingly small reason.

Anybody preparing an estimate should be able to take responsibility for their work. His or her name / initials or signature shows that responsibility. There are bound to be questions / challenges on any estimate. A good estimator should always be prepared and willing to respond to such queries. And even after the immediate context is long forgotten, somebody might pick it up, and then they would want to know more about it. The estimator’s name at least gives it an ownership and a possibility to query the numbers, adding traceability. The date also helps put a time and context to the historical work done and could be useful for any future updates when the cost basis, technology and/or client requirements change.

I have seen many estimates without any date or initials. I have personally struggled to understand them or even enquire who did it in the first place, let alone establish the old estimate basis.

I think, if nothing else, it is good practice. The quality of work and presentation changes considerably if it is to be initialled by the estimator herself. Some businesses require final estimates to be approved and signed by more than one person. This requirement just brings in that extra rigour in what you prepare and present. Even if there is no formal procedure / requirement for any signatures, I would recommend that at least the person who is preparing the estimate signs it. It will show to the rest of the team that there is at least one person who is willing to own the numbers and if needed explain them. In my view it will definitely contribute to most company’s teamwork and work-ownership ethos.

I have made it a personal practice / habit to put my initial down on any estimate I do, even if it is a back of an envelope type very quick calculation. To start with it reminds me later what I did, why I did it and what the reason behind it was. I am then able to better explain what I did if anybody questions the basis of the estimate.

By definition estimates are wrong and it does take a lot of confidence to stand behind them.

80/20 Rule Applied to Estimating Effort

Vikas KhaitanLeave a comment

Estimating can easily become a tedious exercise and estimators can sometimes unknowingly spend a considerable amount of time on items or issues which might not add much value to the overall estimate. This could even compromise the accuracy & quality of an estimate. Even managers and reviewers could end up spending time and effort resolving issues which might be very important for project execution, but might not make much difference to the overall estimated number.

The natural tendency is to spend about equal amount of effort for each line item of the estimate. As shown by the blue bars in the below example. But looking closely will reveal that only about 20-25% of the items actually contribute to nearly 75-80% of the total estimated cost. Which is true for most estimates. Thus it would be illogical to spend so little effort on those high value items. It would be more logical to spend more effort on those high value items. I would recommend making the effort proportional to the cost of the individual items. See the black line in the below graph.

20160520 Effort Vs Cost

To correctly use the estimator’s and the rest of the team’s time and effort during any estimate preparation, I would suggest that the commonly known 80/20 rule (Pareto Principle) be applied as an approach in the estimate preparation. This can also be formalised in the estimate methodology if needed. This will help guide the team’s efforts in the right direction. Thus more effort should go into fine-tuning and making sure the estimates of the high value items of the estimate. Quantities, prices and allowances applied to those line items should be cross-checked and double checked as any errors in those will have a much bigger impact on the bottom line than those of the smaller value line items.

Case in point:

In a particular project, the team started concentrating in the type of access roads that were needed to be built to the construction site and spent a lot of time and effort trying to resolve the issue during the tendering stage. The access roads accounted for only less than 1% of the overall project cost. It no doubt was a major issue for the project manager, but did not help the tendering stage. A lot of resource was wasted in resolving the issue without affecting the estimate.

In the same project there were issues like the design pressure selection, corrosion allowances, etc. which considerably impacted the thickness of pressure parts thus directly impacting the high value cost items in the estimate. More effort on those items could have had a much bigger impact on the overall number.

In another project, the team spent a considerable amount of time trying to resolve the issue of whether the electrical cables where to be installed underground or over-ground. The cable installation cost on the project was a fraction of the overall cost.  In the same project the cost of the packaged gas turbines and compressors accounted for more than 20% of the overall project cost. The team could have spent a bit more time optimising the turbine package thus making a much bigger impact to the overall estimate.

After the first draft of the estimate is prepared, the high level estimate breakdown can be used to help plan the team’s effort. The suggestion is to spend more time on the high value items and not spend too much time resolving issues which do not make much difference to the estimate.

This approach will also allow the estimator to take a more active role in the engineering effort that goes into preparing the inputs for the estimate. This will lead to a true teamwork, guiding the whole estimating process and optimising the use of resources.

I have seen this mistake happening time and again and want to share the lesson learnt with anybody directly or indirectly involved in any estimate preparation.

Note:

In some instances, there might be a need to spend the technical team’s effort in issues which might make very little or no difference to the cost estimate, but does make a real difference to the execution strategy and thus the viability of the project itself.

This article was published as an opinion piece in Sep-2017, in the Project Control Professional which is the journal of The Association of Cost Engineers.

 

 

Estimate Presentation

Vikas KhaitanLeave a comment

The one of the most important things of an estimate is its final presentation.

The final presentation of an estimate should look professional for generating any level of confidence in the estimate. The following items are a must have on Estimate Summary sheets:

  • Project name
  • Project location
  • Project / proposal number
  • Estimate currency
  • Estimator initials
  • Approver initial
  • Date of estimate
  • Revision number
  • Pricing Basis
  • Validity of the estimate

The above items are generally divided between the header and footer of the estimate summary, and even the most rough Order of Magnitude estimate should have this information for the estimate to look professional and complete.

This also creates a sense of ownership of the estimate.

Below is a blank format for reference

Blank Template (Excel Version)Download
Blank Template