Working as a cost consultant, I get lots of questions from my clients about how to define the types of cost estimates, the methodologies used for estimating and where to find applicable guides. I thought I would write a blog post to share some quick knowledge.
To help us understand how we decide what method(s) to use in the development of the cost estimate, let’s look at the cost estimate classification system.
There are detailed classification systems issued by a few organizations:
- The International Association of Cost Engineers (AACE) classification system is the one that is most commonly used in the construction industry. It is geared mostly towards the process and manufacturing industries, but it is adopted widely across industries. You can find a link to this document here.
2. The AACE issued an amended classification system as it applies to the building and general construction. You can find a link to this document here.
3. The Canadian Construction Association, in conjunction with the Canadian Institute of Quantity Surveyors and the Federal Government, issued a jointly researched document that includes a cost estimate classification system as applies to the Canadian government-funded projects. You can find a link to the document here.
The common element of all cost estimate classification systems is that it follows a project throughout the various life cycle stages. The variation between the classification systems is mostly regarded as the type of industry and construction sector.
The type of cost estimates and the cost estimating methodology are intimately tied into the project life cycle. Typically, a project delivery life cycle goes like this:
- Project initiation,
- Project planning,
- Project execution and,
- Project closure.
There are more classifications of a project life cycle, but I like the above the most because it illustrates the various levels of information available for the cost estimator. Typically, an experienced cost estimator should have the knowledge to follow a project through all four stages.
- Project Initiation Stage. In this stage, the design information is very limited. Most often than not, there is only an idea, a concept of what needs to be built. I compare this more to a “project title”. We know the name of the facility that is desired to be built, a few details about desired capacity and maybe the desired throughput for industrial projects, or building area for building projects, capacity for an airport, etc.
Simply stated, the high-level project performance parameters are available. Many times, a few options are considered and narrow it down eventually to two or three to analyze and choose from as the best project option, as the engineering design progresses to more detail. In this stage, an order of magnitude cost estimate is developed. The methodology used in the development of the cost estimate varies from analogue, judgement or parametric, or a combination of these. The cost estimate developed during this stage will be the equivalent of a class 5 cost estimate, as defined by the AACE.
- 2. Project Planning. During this stage, some engineering details become available, the project design moves through a few iterations (pre-feasibility to feasibility), the final design option is chosen, and the budget for detail engineering is approved. During this stage of the project, classes 4 and 3 cost estimates (AACE classification) are developed. Depending on the industry and the information that is available to the cost estimator (previous similar projects for example), the cost estimating methodologies used are a combination of parametric, equipment factored, semi-detailed and unit rates.
- 3. Project Execution. In this stage, I would include the class 2 and 1 cost estimates. During this stage, the cost estimator developed the control (budget) and the bid tender cost estimates. The control/budget cost estimate is developed using the detail/bottom-up/first principles cost estimating methodology. The bid/tender cost estimate is based entirely on the firm pricing received from contractors. I also include in this stage, the change order pricing during the construction. The cost estimator should be updating the cost estimate budget with all the cost changes throughout the construction phase.
- 4. Project Closure. For a cost estimator who is working for an organization that has the opportunity to see a project through all four stages, this is the time to collect actual cost data and update the database.
Depending on the industry and part of the world, the EPCM contracts are not very common to have the same entity engaged in all stages. It is very common to have an engineering firm develop the concept through the feasibility stages of a project and then have another firm do the detailed design and the construction management.
For the cost estimator who is the fortunate one to work for a firm that is engaged from start to finish in a project, life is a lot easier. There is data available within the organization to develop cost estimates using all the methods mentioned above.
In reality, most cost estimators are working on either stages 1 and 2, or 3 and 4. In my practice, I met cost estimators who are developing stages 1 and 2 cost estimates, without having any experience with stages 3 and 4, and vice-versa. It is my conviction that a good cost estimator should have a great deal of experience in all four stages of a project.
The challenge is how do you deal with the other half of the project life cycle when you do not have any previous related experience. The good news is that it can be learned. There is data available to fill in the missing parts. All that is required is knowing where to find applicable data, learning and understanding how to use it and developing the skill that is critical for a good cost estimator: knowing what you do not know.
Some cost estimators fall into the trap of thinking that just because it says so, it must be true. A typical example is the cost estimator who uses factored cost estimating, using factors inherited from various sources, without being able to justify such factors.
Follow my blog for a follow-up on this post about data sources available for cost estimating. Until then, I hope you enjoyed reading this article. Please leave your comments below. Feedback is always welcome!
