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.
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.