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The success of the estimation and control of resources have a major impact on the overall success
of the project. The overall process by which resources are controlled is often termed budgeting. The
estimate is a model of the cost performance of the project.
Estimates do not exist in isolation and a number of factors impinge on the estimate. Time, resource
availability, materials, equipment requirements and quality all have a major impact on the estimate.
The budget serves as a baseline for measurement. Deviations of cost plans from original estimates
should be examined and analyzed.
As projects are usually funded from external sources, the importance of the budget from the client’s
point of view has become pervasive. Budgets are often used as a straight jacket that can inhibit the
investigation of opportunities that arise during a project.
Budgets should always be investigated to determine the expected resource usage at the relevant
stage of execution. This allows corrective action to be taken before the budget is exceeded.
Development of a project budget is more difficult than an operating budget. The ability to use past
data is limited and the use of this data for project budgeting should be undertaken with care.
Past data can serve as a guide to the budget for the project in question. Many corporations have
extensive historical records of past projects that allow information to be transferred from project to
In project budgeting inflows and outflows must be task linked. The WBS provides the account
numbers for accumulation of this information.
Cost estimates are determined at a senior level based on judgment and experience. These estimates
are successively broken down by lower level managers.
It is assumed that this process will prevent lower level managers from building an excessive scope
based contingency into estimates.
To maintain this contingency intense rivalry can occur between lower level managers.
This method provides some stability to the budgeting process. This method also reduces the need
for excessively detailed estimates.
Elemental tasks are costed and added to form the project budget. Man-hours and materials are
costed for direct work items and accumulated to provide the project budget.
At the conclusion of this process, management will assign indirect costs, a contingency and profit
to determine the final cost for undertaking the project.
It is essential that all items are included. Budgetary games do occur including scaling and lobbying.
This method is associated with participative management and provides the possibility of greater
commitment to the budget by lower order managers.
For more routine operations, previous costs are scaled by an predetermined percentage.

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In normal operating companies, activity based budgets are assembled by what is done, for example
phone, materials, clerical work etc. A second approach identifies the tasks to be accomplished and
allocates resource based on these tasks. This approach is particularly useful for cash flow
A more general approach is to determine project budgets and aggregate these into a program
The first step in developing a budget requires estimation, which is a forecast of the resources
required to undertake the work on the project.
Estimates are used for many purposes on projects. The purpose of the estimate is often a function of
the lifecycle stage of the project. A number of methods are used to estimate the cost of a project,
ranging from specified area to definitive estimates.
Estimate quality is based on
o The time available.
o The information available.
o The techniques employed.
o The expertise and experience of the estimating personnel
The accuracy of the estimate will depend on the level of detail it is based on, this information will
come from:
o The scope of work.
o The contract.
o The specification.
o The extent of risk and uncertainty in the project.
There is some evidence to suggest that estimates that contain a lot of detail may not be as accurate
as broader estimates due to implicit allowances for unknowable items. Estimates can range from
wild guesses to detailed studies. Some feasibility study projects have as a major product an estimate
of the cost. These estimates can take 20 people 1 year to prepare.
Estimate accuracy also improves during project execution, where at the conclusion of the project,
the cost of the project is a matter of history.
Association for the Advancement of Cost Engineering's (AACE) classification of estimates is as
Estimate Level of Project End Usage Expected
Class Definition (purpose) Accuracy
Class 5 0% to 2% Concept Screening -50% to 100%
Class 4 1% to 5% Study or Feasibility -30% to + 50%
Class 3 10% to 40% Budget, Authorization or Control -20% to + 30%
Class 2 30% to 70% Control or Bid/Tender -15% to + 20%
Class 1 50% to 100% Check estimate or Bid/Tender -10% to + 15%

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The key success factor in estimating is to undertake the estimate in a methodical and systematic
manner. The WBS can provide a solid framework for the estimate. Estimators spend a lot of time
developing unit rates for work.
Excessively accurate unit rates have no value if the total scope of the project is not covered.
Three major traditional methods are used for estimating;
o Subjective - relies on skill and experience of estimator
o Comparative - uses past data
o Synthetic - breaks project into small units and uses historical data.
There are two major classes of costs incurred when undertaking a project. The direct costs are a
reflection of the cost to physically perform the work activities. These direct costs may include the
cost of concrete for a footing, the cost of a consultant to advise on lease arrangements etc.
The second class of costs is related to undertaking the project and is termed indirect or distributable
costs. These include the hire of a site office, service personnel, project vehicles, office expenses etc.
These costs behave in different ways. Direct costs being work related are incurred as the work is
done. They are readily monitored and easily estimated. Indirect costs are usually time related and
are a function of the whole project. If the project takes longer to perform then these costs will grow.
Costs can be incurred at a number of different locations during the execution of a project. Some
costs may be incurred in the field and some in the organizations office. It is essential to have a
costing system that can capture these costs to allow effective management of this parameter.
Project companies often use a code of accounts to collect and analyze cost information. The codes
vary from company to company and often from project to project. The extent of breakdown
depends on the intended use of the information.
Most code of accounts carry the following information:
o location where cost is incurred
o cost type, labour, plant, materials, subcontract etc.
o discipline.
The estimating process usually follows the following sequence shown on the following figure;
In general this process involves;
o determine the scope of the projects.
o break the scope into work packages.
o determine the quantities of various classes of work in the work packages.
o determine the unit rates for the classes of work in the work packages.
o assemble and analyze the costs for this work.
o determine what other costs will be incurred by undertaking the project.
o analyze the risks and assign a contingency to the estimate based on the risks.
o present the estimate to the owner of the project.

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Unit rate development a function of design, cost basis and schedule execution basis. The extent to
which the unit rates are developed is a function of:
o The need for the estimate.
o The total value of the project.
o The value of the item when compared to the total value of the project.
The unit rates for undertaking a class of work are specific to the type of project undertaken. These
unit rates may cover $/hour of work, tonnes of steel/building, $/floor square meter, hours/interview
etc. During the execution of the project it is worth monitoring the costs for undertaking the work
and verifying that these unit rates are correct. This will allow the data to be updated to allow the
next project to be correctly priced and also assist in highlighting changes in scope.
Process Costing Methods
Methods commonly used in process industries are;
o Cost capacity curves
o Capacity ratios raised to an exponent
o Plant cost per unit of production
o Equipment factored estimates
Cost - Capacity Curves
The basis for the information from this curve comes from completed jobs. The estimated cost is
determined by finding the required capacity on the x axis and finding the y intercept for a particular
type of machine as shown.
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Capacity ratios
This method examines the effect of economies of scale on cost. It can be applied at all levels, i.e.
equipment or even at a plant level.

( )
The cost is estimated using the following formula;
C ap ac ity
o f P ro ce ssU n itA
C o sto f P ro cessU n itA = C o sto f P ro c essU n itB ×
C ap a city
o f P ro cessU n itB
x is derived from historical data using curve fitting methods. Typically x ranges from 0.55 to 0.88.
Some published exponents is shown on the following table
Process Capacity Unit Cost- Capacity Capacity
Factor Range
Acetylene 10 Tons/day 0.73 3.5 - 250
Aluminium (from alumina) 100M Metric Tons/yr 0.76 20M - 200M
Ammonia (by steam- 100 Tons/day 0.72 100-3M
methane reforming)
Butadiene 100M Tons/yr 0.65 5M - 300M
Butyl alcohol 100MM Lb/yr 0.55 8.5MM -700MM
Carbon black 1 Tons/day 0.53 1-150
Chlorine 100 Tons/day 0.62 10-800
Ethanol 10MM Gal/yr 0.60 3MM-200MM
Ethylene 100M Tons/yr 0.72 20M - 800M
Hydrogen (from refinery 100MM Cu ft/day 0.64 500MM-10MM
Methanol 10MM Gal/yr 0.83 5MM - 100MM
Nitric Acid (50-60%) 100 Tons/day 0.66 100-1M
Oxygen 100 Tons/day 0.72 1-1.5M
Power Plants coal 100 MW(elec) 0.88 100-1M
Styrene 10M Tons/yr 0.68 4M -200M
Sulphuric Acid 100 Tons/day 0.67 100 - 1M

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Plant Cost per Unit of Production

Using historical records, the cost of a total plant is based on a calculated average cost per unit of
production. For example, if the cost of equipment and installation of a gas turbine power station is
$500 per KW of installed capacity then the cost of a 120MW facility would be 120 x 1000 x 500 =
This method assumes a linear relationship between capacity and cost and is only appropriate over
narrow ranges of capacity. The method is identical to the unit price method discussed previously,
however the scale is often much wider.
Equipment Factored Estimates
A normalized cost is developed to take into account all costs in installation of;
o Direct equipment cost
o Direct bulk materials cost
o Subcontract costs
o Construction labour costs
o Construction indirect costs
o Home office service costs.
The method estimates the cost by converting the equipment cost to total cost using a Total installed
cost factor" (TIC). The TIC can vary from 2.5 to 6 depending on;
o Equipment Sizes
o Pressure
o Metallurgy
o Degree of prefabrication
o Site conditions
o Equipment Costs
o Special conditions
The information needed to implement this technique requires sufficient technical definition. This
should include
o Process flow diagram
o Equipment list
o Equipment Specifications
o Project Location
o General Site Conditions
o Construction Labour Information
o Project Schedule

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The factors for a range of equipment is shown on the following table

Equipment Factor Equipment Factor
Blender 2.0 Heat exchangers 4.8
Blowers and fans inc motor 2.5 Instruments 4.1
Centrifuges 2.0 Motors Electric 8.5
Compressors Ejectors (vacuum units) 2.5
Motor Driven less motor 2.0 Furnaces (packaged) 2.0
Steam turbine inc turbine 2.0
Refrigeration (packaged unit) 2.5
Reciprocating 2.3
Motor Driven less motor 2.3 Towers and Columns 4.0
Steam turbine inc turbine
Tanks Pumps
Process 4.1 Centrifugal
Storage 3.5 motor driven less motors 7.0
Fabricated and field erected 2.0 steam turbine 6.5
(> 50,000 gal) Positive displacement (less motor) 5.0
To successfully manage costs over the duration of the project, realistic cost targets are required.
Contingencies are often put into the estimates to make these targets realistic.
Many project companies view contingency as a standard cost code to be used to execute the
project. Contingency is not a standard cost for the project. Contingency is a measure of the risk of
not meeting the budget for the work remaining and should be treated accordingly.
Two major components of costs are controlled, cash flow and commitments.
Cash flow Management
The cash flow statement will be developed, which is one of the most powerful tools available for
cost management. If effectively used the cash flow statement has all the advantages of an explicitly
designed financial planning and control system.
The cash flow statement is a document which models the flow of money in the project. The time
frame is usually monthly so as to coincide with the normal business accounting cycle.
Flows that control cash flow on a project are:
o incomes (cash in-flows) from the monthly progress payments,
o Expenditures (cash out-flows) are wages, materials, overheads, interest and bought-in
Timing of Cash flows
In evaluation of cash flow, timing is critical. Typical timing of flows for projects is;
o Part payment with placement of order.
o Stage payments to cover the manufacture's costs.
o Payment on purchase; this is normal practice with retailers.
o Monthly payments; labour, rent, telephone and other office expenses.
o 30 or 60 days credit; normal terms for bought-in items.
o 90 days credit; used where the payee has considerable power over the supplier.
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The payment for typical project goods and services are;

o Labour costs are usually paid in the month they are used.
o Material costs c an vary from an up-front payment, cash on delivery (COD), to 1 to 3
months credit.
o Bought-in services and plant hire costs can be paid within 1 to 3 months after delivery.
o Income from client; up-front payment, stage payments or progress payment one month after
Use of CPM for cash flows
CPM networks are often used to calculate cash flows. For ease of calculation the activity's cost is
usually assumed to be linear over the duration of the activity.
Labour costs are generally uniform over the duration of the activity. Whereas the cost of materials
and other bought-in items may need to be qualified, as they can vary from up-front payments to 1, 2
or 3 months later depending on the supplier.
When considering the project as a whole, if there are more than a hundred activities any distortions
caused by non-linear cash flow would tend to be smoothed out, however each project should be
evaluated for timing deviations.
Preparing a Cash flow Curve
Preparation of a Cash flow curve follows the following steps
o Draw an Early Start bar chart for the project.
o Assign values linearly per period,
o Add the cost values vertically to get period totals.
o Plot the period total costs on a graph of costs against time to obtain the period rate of
expenditure curve.
o Accumulate the period values from left to right. To give the total to time now.
o Plot accumulated figures on a graph of cost against time. This will produce the distinctive S
If the S curve for the Early Start and Late Start are drawn on the same graph they produce a
distinctive banana type curve.
Managing Commitments
The management of commitments is vital to allow project management to make informed decisions
in relation to the control of the cost of a project.
Commitment management requires early information that is often more aligned to the engineering
function rather than the procurement function.
The difference between the value committed and the budget gives the project manager an indication
of the extent to which he can change the cost performance of the project.

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