‘Cost Engineering and Cost Control of Large and Medium Capital Projects’
This important book was among the three books launched by Engr. Johnson Awoyomi in February this year at Lagos. We intend to carry chapter four of the book here because of its significance to the topic, which is Cost Engineering and Cost Control, especially, in Medium and Large Projects.
CHAPTER 4: COST ESTIMATING
4.3 AACE INTERNATIONAL CLASSES OF COST ESTIMATE
By the AACE International Recommended Practice No. 18R-97 – Cost Estimate Classification System as Applied in Engineering, Procurement, and Construction for the Process Industries, there are five classes of Cost estimate:
Class 5 – Screening or Feasibility
Class 4 – Conceptual or Feasibility
Class 3 – Budget, Authorization, or Control
Class 2 – Control or Bid/Tender
Class 1 – Check or Bid/Tender
The goals of AACE Cost estimate classification include:
Integrating estimating with the project scope development and phase-gate processes
Figure 4 9: AACE Cost Estimate Classification
Figure 4 10: AACE Cost Estimate Classification
The space outside the bell-shaped figure is unsuitable for the project manager’s career and reputation (Figure 4 11).
Figure 4 11: Project Management safety Zone
PRELIMINARY COST ESTIMATES
Class 5 and 4 Cost Estimates
Another name for Class 5 and Class 4 Cost Estimate is Order of Magnitude Estimating. It is a quick method of determining an approximate probable cost of a project without the benefit of a detailed scope definition. It is often based on cost-capacity curves or ratios and does not require preliminary design work. A Class 5 cost estimate is usually applied when the design is up to 5% complete, and its accuracy range is from +50% to –30%. It is used to determine project feasibility at the early stages of research or design development and decide among competing alternatives in economic studies. These early estimates (AACE Class 5 and 4) support decisions about design alternatives and approval to move to the next stage of project development.
The methods for the preparation of Class 5 or 4 cost estimate include:
End-Product Unit Method
Scale of Operations Method
Ratio or Factors Method (capacity Factor, Lang factor, or Hand factor)
Physical Dimensions Method
Parametric Estimates
Other names for Class 4 and 5 cost estimates are:
Parametric
Conceptual
Stochastic
Ball pack
Quickie
Calculation methods
Stochastic methods
The stochastic methods to prepare class 5 or Class 4 cost estimate encompass using the Cost estimating Relationship (CERs), which are highly subject to conjecture (stochastic). These are often called parametric CERs. They tend to aggregate a vast chunk of scope and cost into relatively simple algorithms. For example, a CER may estimate the total cost of a building as follows:
Total Building Cost = (Gross Floor Area X Cost Per Unit of Floor Area).
The CER above is unlikely to be an accurate predictor; however, it does not follow that all parametric CERs are highly uncertain. “Cost Models” are another type of stochastic algorithm, which are usually complex (usually a computer program). These are well suited for simulation and optimization in asset planning and decision making.
Lang factor and Hand Factor
Lang Factor is defined as the ratio of the total cost of equipment to the total installed of the plant. In contrast, the Hand Factor is the expanded factor for each type of equipment but excludes indirect costs
Some worked examples on preliminary cost estimates
Example 1:
Question:
An example of Class 4 cost estimate– End Product Unit method cost Estimate is:
A 1,000 Room Hotel built at $67,500 per room. What is the total cost? Answer:
The total cost is $67,500,000 Total Cost
(1000 x $67,5000)
Capacity factor or Exponential Method
Usually referred to as the sixth-tenths rule. An exponential factor is applied to adjust the cost of a known previous capacity for a similar plant of a new capacity. It yields reasonably accurate results, provided that the two plants under consideration are in the same capacity range.
The formula is as follows:
〖Cost〗_new=〖Cost〗_old*〖[〖Capacity〗_new/〖Capacity〗_old ]〗^X
Where: Cnew = Cost of new plant
Cold = Cost of old plant
Capacitynew = Annual capacity of new plant
Capacityold = Annual capacity of old plant
X = Exponential factor
X varies from 0.38 to 0.9 depending on the process, tending towards 1.0 as the process scale increases. Therefore, the exponential method is not recommended for scaling a plant capital cost estimate up or down by a factor of five or more than five, based on capacity since the scaling exponent is itself a function of scale.
An example is Example 2 below:
Example 2:
Question:
Another Class 5 or Class 4 cost estimate using sing Scale-of-Scale-of-Operations estimating method: A Process plant built in Location A in 2002 has a capacity of 5 million units per year. To produce 9 million units per year, a new and similar process plant is being considered for construction in 2005 in Location B. The cost of the 2002 plant was $57 million, and the exponential relationship for such plants was found to be 0.68. What is the estimated cost of proposed plant B using the Scale-of-Scale-of-Operations estimating method? Given that the Cost index for Location A in 2002 was 1644 and economists estimate the index will be 2091 at Location B in 2005.
Answer:
Using the scaling factor formula:
= $57 Million (9 Million/5 Million) exp 0.68
C1= $57 Million (1.49)
Q2= 9 Million
C2= $85 Million (w/o index) Q5Milli
Q1 = 5 Million
x = 0.68
Cost Index Plant A=CI=1644 Cost
Index Plant A = CI1= 1644 Cost Index Plant B = CI2= 2091
Indexed Cost Plant B = C2= (2091/1644) x $85 Million 2()$
C2= 1.27 x $85 Million C2= $108 Million (w/ index)
The cost of preparing estimates is not free, and the costs of estimating rise rapidly with accuracy required.
Factorial Method
This method relies on the principle that a ratio or factor exists between the cost of a particular equipment item and the associated non-equipment items that need to be added to the project to accomplish the complete installation of that particular equipment item. For example, if a storage tank needs to be added to a project, the associated non-equipment items would include the following:
Example 3:
S/N Description % of Tank equipment cost Total cost
1 Tank Equipment 100%
2 A foundation for placing the tank 2.5%
3 Excavation for foundation 2.5%
4 Bund wall (according to specs.) 2.5%
5 Instrumentation 7.5%
6 Structural steel for the platform 10%
7 Piping to connect tank to other facilities 10%
8 Supports for the piping 7.5%
9 Paint and insulation for the tank, steel, and piping 2.5%
10 Electrical lighting 5%
11 Total 50% 100%
12 Total installation cost (TIC) 150%
That is, the total installation cost is 1.50 X the cost of the tank. Usually, only the major equipment material cost will be known either from the estimating data books, vendors quotations, or other sources. Then, the remainder of the costs is calculated depending on the major equipment type from the ratios.
DETAILED COST ESTIMATES
Class 3 Cost estimate (FEED Cost Estimate)
This is a FEED Cost estimate and is also known as Budget estimate. It is defined as a deliberate method of determining the probable cost of a project with the benefit of scope definitions for systems and assemblies of the project. It is based on flow diagrams, general arrangement drawings, layouts, preliminary equipment descriptions, and specifications. It is usually applied when the design is 5% to 20% complete, with accuracy ranges from +30% to –20%. A Class 3 cost estimate is used to control design development by establishing cost ceilings within the owner’s financial limitations and establishing cost limitations for project components systems. Typically, an AACE Class 3 estimate is used to provide final project authorization, full funding to the project, and establish the cost control baseline for the project.
Class 1 and 2: Definitive Cost Estimate
Definitive estimating determines the probable cost of a project within a narrow range with the benefit of detailed scope definitions for work. The defined engineering data required includes site data, specifications, basic drawings, detailed sketches, and equipment quotations. This estimate type usually gets applied when the design is over 30% complete. The accuracy ranges from –15% to +20%. The class 1 and 2 cost estimates can be used to appraise the actual project cost and, in conjunction with a project schedule, the anticipated cash flows. It can also check bided amounts to sense-check for contractor errors, high-balling, and low-balling to aid in contractor selection. Definitive cost estimates are prepared by deploying any or all of the methods in Table 4 5
Table 4 5: Methodology of detailed Cost estimates preparation
S/N Descriptors Source of cost data
1 Cost of equipment and other tag items from firm purchase orders/quotes From equipment vendors or company’s project historical cost database or recently completed projects
2 Cost of bulk commodities from firm POs and mostly firm quotes
From bulk commodities vendors or company’s project historical cost database or recently completed projects
3 Cost of field labor by craft using labor contracts From equipment labour contractor or company’s project historical cost database or recently completed projects
4 Cost of field distributable costs by detailed itemization company’s project historical cost database or detailed itemization
5 Cost of home office costs by detailed itemization or percentage company’s project historical cost database or detailed itemization or based on an agreed percentage split
6 Owners’ costs company’s project historical cost database or detailed itemization
One approach to preparing a detailed cost estimate is a “bottom-up” approach, as shown in Figure 4-12.
Figure 4 12: “Bottom-Up,” detailed cost estimate development
Calculation methods
Definitive Estimate: The Detailed Approach
In the detailed approach, the estimate is based mainly on the specific requirements of the project. Information in the form of quantities, vendor quotations, execution plans, etc. are prepared by engineering & procurement. These data are then translated into the estimate of what it will cost to build the plant, based on the estimator’s judgement and experience.
Deterministic methods – (typically used for Class 3 to 1)
The CERs are more certain (deterministic) and are often called definitive, detail unit cost, or line item CERs. These types tend to disaggregate scope and cost into more clearly defined pieces. For example, a detailed CER may estimate the cost of one item as follows:
Valve type A installation hours=No of valves of type A X Hrs per valve of type A
COST ESTIMATING STAGES AND PROCESSES
As per Figure 4 13, the estimate process consists of the following steps: Preparation, Scoping, Take-off, Costing, Pricing (Adjustments, Conditioning, etc)
Figure 4 13: Cost estimating Stages
Quantity Takeoff
Quantity Takeoff – is the measuring and cataloging the quantities of work derived from the scope documents. It is a time-consuming activity especially in more detailed stages of the estimating works. The quantity and the quality of work items in project are tabulated from drawings & specifications. It is a specific type of quantification that is a measurement & listing of quantities of materials from drawings in order to support estimate costing process and/or to support material procurement process
Costing
This uses the take-off quantity and the information presented in scope documents to assign cost values to the previously cataloged work elements. It is often performed in unit prices: $/unit of work of a given type, and the amount should cover every expense distinctly allocable to the project. In other words, costing is the cost estimating activity that translates quantified technical and programmatic scope information into expressions of cost and resources required. In costing, this translation is usually done using algorithms or cost estimating relationships (CERs). Thus, costing follows scope determination/quantification in the cost estimating process, which precedes pricing/budgeting.
Pricing
Pricing determines project markup, which is added to earlier costs to ensure that all project costs, whether direct and indirect, are recouped. It includes allocable General and Administrative (home office) costs, plus the cost of risk (contingency and profit). The profits for projects must, on average, recoup the firm’s cost of capital, a measure of risk inherent in work the firm usually performs, or it will be unable to remain in business in the long run. Pricing determines the amount of money asked in exchange for the item, activity, or project, and it considers the business plus other interests (e.g., profit and marketing) in addition to inherent costs. It must be noted that price may be greater or less than cost depending on the business or other objectives. In the cost estimating process, pricing follows costing and precedes budgeting. Technically, an estimator’s job ends at costing- as others are more management actions depending on the desperations they are confronted with.
Adjustments – normally takes care location factors, geography, etc