We are living in a world where the top expectation is how to get more for less. Companies in the design and construction business find it difficult to position themselves in the market if they do not stay competitive. Yes, the unique value proposition is a valid marketing approach. But, how do we deliver on that?
I called the cost data sourcing a “strategy” because so very often, under the pressure to get started on the cost estimate, we forget about it. I have been there, done that! We get a new project; the team is eager to start working on it; the cost estimator is setting up the cost estimating plan and has the stakeholders approve it, and everybody gets to work!
My definition of the ideal cost estimate is the one that takes the least effort to produce, incorporates the best design, constructability, and the best procurement and contracting strategy to deliver a project on optimal time and budget. Now that is a tall order!
Before starting working on a cost estimate, the cost estimator should have a very thorough understanding of the channels that the cost data is coming through and how he/she will incorporate such data into the cost estimate. This process is what I call the cost data sourcing strategy, and it should be a team effort.
From my experience in the field, most often a high level of procurement is discussed, but no real plan is analyzed and implemented. In the field of capital cost estimating, the data sourcing strategy is very relevant through all stages of the project. After all, it is the cost that defines a cost estimate. If we cannot, validate the cost from a qualified source, the cost estimate itself cannot be validated.
The best way to introduce the concept is to look at the “Kraljic Portfolio Purchasing Model”. Peter Kraljic created this model, and it first appeared in the Harvard Business Review in 1983. Even though this model applies to purchase, I find it useful for the cost estimator to understand it.
Most large EPCM firms have a purchasing department that assists with cost data sourcing for the support of a cost estimate. And, I am sure, the individuals in the purchasing department are professionals trained in purchasing. But, ultimately it is the cost estimator whose mission is to deliver the optimal cost estimate.
And to be able to do so, it needs to understand and implement a data sourcing strategy compliant with the cost estimate deliverables.
Ok, let’s take a bird’s eye look at the Kraljic Portfolio Purchasing Model. The purpose of this model is to help purchasers:
- Maximize supply security;
- Reduce costs;
- Make the most of the purchasing
There are four steps in utilizing this tool:
- Purchase classification.
- Market analysis;
- Strategic positioning and;
- Action planning.
How does all of the above apply to cost estimating you might wonder. This is how I see the cost estimator using the above steps to guide him/her through the data sourcing strategy set-up:
1. Purchase classification. During this step, all products, commodities, and services that will need to be included in the cost estimate are identified. When quantities and specifications become available, the list is updated. Depending on the type of CAPEX (class 5 to 1), this list can be empty, or quite comprehensive.
Each item on this list should be qualified according to the supply risk and competitiveness. This is a task that is more suitable to be completed by the purchasing department. In the absence of, the cost estimator should complete this step.
According to supply risk and competitiveness, there are four types of items:
- High availability of price sources, low risk. This is the category where we have suppliers/vendors/service providers who are highly motivated to supply pricing (budget to firm, depending on the type of estimate we are working on). In this category, we should spend very little effort to get the third parties involved in the pricing process.
- High availability of price sources, low risk for alternative products/services. If we can identify all the items for which we can use design/specifications alternatives and have the potential for high interest from suppliers/manufacturers/service providers, we want to find that out from the get-go.
- Bottleneck items. These are the items for which we might not be able to source cost data. It is important that we identify these items and weigh the impact on the overall cost estimate. For these items, we will need to find alternate data sources: previous projects, estimator’s judgment, etc. Such items will have an impact on the cost estimate accuracy, therefore, the contingency for the overall cost estimate will be affected. So, it is good to know that we know what we don’t know. Always important.
- Non-critical items. The items in this category will be those that have a very small impact on the overall cost estimate, those that we already have qualified cost data.
When the list is complete, the cost estimator can discuss it with the stakeholders and a decision on what party is responsible for cost data sourcing for each category should be made. We can monitor progress, get feedback and be able to adjust the course of action as we go. Without a data sourcing strategy and a good plan to implement it, a cost estimate is heading for disaster at high speed.
2. Market analysis. Either the cost estimator or purchasing department can perform this analysis. What is important is that we identify the availability of suppliers/vendors/service providers. It is very true that the market law supply and demand applies, and it is prudent to check availability and interest level for each high-risk item in the cost estimate. Just because we had a manufacturer who provided a budget price for a project three months ago, it does not necessarily translate into showing the same interest now.
Further, during the market analysis, we identify items that are critical from the perspective of supply and demand. It is useful to know how much the impact is on the cost estimate for the items that are in a high-demand market at the time the cost estimate is developed. It can be used during the contingency analysis and the determination of estimate accuracy.
3. Strategic positioning. Usually, in this step, the items identified in step 2 are further classified and categorized into high/low risk based on availability and market conditions.
4. Action planning. At this stage, we have all the information required to develop a plan of action. Based on the data we extracted from the first three stages, we know which are the high-risk items, the impact of each item on the cost estimate. It is time to come up with a plan and assign the appropriate resources to implement it.
If we follow the above steps, we are sure to have a process in place that will ensure cost data will be available to the development of the cost estimate when is needed and in the form and shape that is required. The project team can better review the risk associated with the costs, and a more appropriate contingency amount can be assigned.
