General Scope Document: Cost Estimates

Accurately estimating project costs is crucial to the success (and subsequent approval and completion) of a project. Therefore, any under or overestimates of the project can result in an undesirable outcome. This would be especially true when underestimating a project.

What Is Project Cost Estimation?

Project cost estimations—the 10th part of a general scope document (GSD)—forecast the resources and financial investment needed to execute a project successfully. The objective of a realistic estimation is to identify all the costs associated with the project in order to create an accurate budget and timeline allowing the engineering, procurement and construction (EPC) bidders to prepare a viable specification/proposal. As one would expect, cost estimation and, ultimately, budget management, are two of the most difficult challenges for project managers. I have witnessed many heated discussions when, in the process of preparing cost estimates as well as midway through a project, costs ran over budget. The better the estimation, the better you will be able to plan your project. As I have stated throughout this GSD series, it is a team effort. Developing an accurate cost estimate is no exception. Each team member should provide estimates for their area of responsibility. Remember, each team member has specific concerns. Make sure each member provides feedback/estimates.

Walking a Fine Line

The greatest challenge to any project cost estimation is to find the balance between over and underestimating. Because project managers have the responsibility to deliver projects on time and on budget, it can be tempting to play it safe and overestimate the costs of the project. That way, you are more likely to come in under budget and exceed expectations. Unfortunately, there is a downside, as that project may not be approved. On the other hand, come in too low and you risk blowing the budget and having an unhappy project manager, plant manager, etc. This is not a good strategy. Remember, you are submitting this as part of the GSD. EPC bidders will be using the document to develop the project specification and subsequent proposal based on your team’s input. Be as accurate as possible with your estimates.

Cost Estimation Methods

There are two methods for developing cost estimates that I have found effective for pumping system projects: analogous and analytic.

Analogous

This method makes cost projections based on historical costs for similar projects. In other words, if your team repeats similar projects (such as specific equipment repairs or other regular initiatives), you can compare those past projects and their associated costs to your current project specs. This method is most effective for projects that have a high degree of similarity in deliverables, scope and context. The more variations or complexity between projects, the more difficult it will be to make accurate estimations. Make sure you update the costs based on your historical cost. Costs do not often go down over time.

Analytic

An analytic estimate (also called bottom-up estimating) is one of the most accurate cost estimation techniques—but it can also be time-intensive. Bottom-up estimating breaks the project down into smaller parts and then creates cost estimates for those variables. This involves participation by each team member analyzing both what resources/components need to be purchased and what specific tasks need to be completed for their area of responsibility, then enlisting subject-matter experts to estimate costs for each item and task.

Takeaways for Project Cost Estimation

• Work as a team.
• Do your homework and develop accurate estimates.
• Use historical data and update costs where applicable.

So, there you have it. Project cost estimation is another critical component of the GSD. If handled/executed properly, all parties will be pleased with the outcome. Next month, we will cover cost benefit analysis.