PROJECT COST ESTIMATION, BUDGETING & CONTROL

ESTIMATION OF RESOURCES INTRODUCTION 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. BUDGETING METHODS PREAMBLE 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 project. In project budgeting inflows and outflows must be task linked. The WBS provides the account numbers for accumulation of this information. TOP DOWN BUDGETING 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. BOTTOM UP BUDGETING 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. BUDGET REQUESTS For more routine operations, previous costs are scaled by an predetermined percentage. Page 1 of 9

ranging from specified area to definitive estimates. 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. Estimate accuracy also improves during project execution. which is a forecast of the resources required to undertake the work on the project. Estimates can range from wild guesses to detailed studies. this information will come from: o The scope of work. 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. where at the conclusion of the project. Some feasibility study projects have as a major product an estimate of the cost. o The information available. materials. A second approach identifies the tasks to be accomplished and allocates resource based on these tasks. This approach is particularly useful for cash flow projections. A number of methods are used to estimate the cost of a project. The purpose of the estimate is often a function of the lifecycle stage of the project. A more general approach is to determine project budgets and aggregate these into a program budget. o The specification. ESTIMATE ACCURACY Estimate quality is based on o The time available. Estimates are used for many purposes on projects. for example phone. activity based budgets are assembled by what is done. Association for the Advancement of Cost Engineering's (AACE) classification of estimates is as shown Estimate Class Class 5 Class 4 Class 3 Class 2 Class 1 Level of Project End Usage Definition (purpose) 0% to 2% 1% to 5% 10% to 40% 30% to 70% 50% to 100% Concept Screening Study or Feasibility Budget. Authorization or Control Control or Bid/Tender Check estimate or Bid/Tender Expected Accuracy range -50% to 100% -30% to + 50% -20% to + 30% -15% to + 20% -10% to + 15% Page 2 of 9 . In normal operating companies. o The extent of risk and uncertainty in the project. o The contract. the cost of the project is a matter of history. These estimates can take 20 people 1 year to prepare. o The techniques employed. BUDGETING & CONTROL ACTIVITY VS TASK ORIENTED BUDGETS.PROJECT COST WESTIMATION. clerical work etc. ESTIMATES PREAMBLE The first step in developing a budget requires estimation.

labour. o break the scope into work packages.breaks project into small units and uses historical data. plant. the cost of a consultant to advise on lease arrangements etc. subcontract etc. o discipline. These direct costs may include the cost of concrete for a footing. BUDGETING & CONTROL The key success factor in estimating is to undertake the estimate in a methodical and systematic manner. They are readily monitored and easily estimated. o assemble and analyze the costs for this work. o present the estimate to the owner of the project. The extent of breakdown depends on the intended use of the information. COST CATEGORIES There are two major classes of costs incurred when undertaking a project. These include the hire of a site office.uses past data o Synthetic . o analyze the risks and assign a contingency to the estimate based on the risks. office expenses etc.PROJECT COST WESTIMATION. Excessively accurate unit rates have no value if the total scope of the project is not covered. o determine the unit rates for the classes of work in the work packages. o determine what other costs will be incurred by undertaking the project. Some costs may be incurred in the field and some in the organizations office. The second class of costs is related to undertaking the project and is termed indirect or distributable costs. Page 3 of 9 . service personnel. o determine the scope of the projects. TYPICAL ESTIMATING PROCESS The estimating process usually follows the following sequence shown on the following figure. These costs behave in different ways. The direct costs are a reflection of the cost to physically perform the work activities. project vehicles. If the project takes longer to perform then these costs will grow. In general this process involves.relies on skill and experience of estimator o Comparative . It is essential to have a costing system that can capture these costs to allow effective management of this parameter. Indirect costs are usually time related and are a function of the whole project. materials. Estimators spend a lot of time developing unit rates for work. Direct costs being work related are incurred as the work is done. Most code of accounts carry the following information: o location where cost is incurred o cost type. The codes vary from company to company and often from project to project. o determine the quantities of various classes of work in the work packages. Project companies often use a code of accounts to collect and analyze cost information. Costs can be incurred at a number of different locations during the execution of a project. The WBS can provide a solid framework for the estimate. MAJOR METHODS Three major traditional methods are used for estimating. o Subjective .

Process Costing Methods Methods commonly used in process industries are. $/floor square meter. These unit rates may cover $/hour of work. o Cost capacity curves o Capacity ratios raised to an exponent o Plant cost per unit of production o Equipment factored estimates Cost . hours/interview etc. 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. During the execution of the project it is worth monitoring the costs for undertaking the work and verifying that these unit rates are correct. Page 4 of 9 . tonnes of steel/building.Capacity Curves The basis for the information from this curve comes from completed jobs. o The total value of the project. The extent to which the unit rates are developed is a function of: o The need for the estimate.PROJECT COST WESTIMATION. cost basis and schedule execution basis. 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. 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. BUDGETING & CONTROL UNIT RATES Unit rate development a function of design.

100MM 100-1M 1-1.PROJECT COST WESTIMATION.68 0.250 20M .72 Tons/yr Lb/yr Tons/day Tons/day Gal/yr Tons/yr Cu ft/day Gal/yr Tons/day Tons/day MW(elec) Tons/yr Tons/day Page 5 of 9 0. The cost is estimated using the following formula. Typically x ranges from 0.88 0.Capacity Factor Tons/day 0.72 0.e.62 0. i.800M 500MM-10MM 5MM .73 Metric Tons/yr 0. equipment or even at a plant level. Some published exponents is shown on the following table Process Acetylene Aluminium (from alumina) Ammonia (by steammethane reforming) Butadiene Butyl alcohol Carbon black Chlorine Ethanol Ethylene Hydrogen (from refinery gas) Methanol Nitric Acid (50-60%) Oxygen Power Plants coal Styrene Sulphuric Acid Capacity 10 100M 100 100M 100MM 1 100 10MM 100M 100MM 10MM 100 100 100 10M 100 Cost. C ap ac ityf P ro ce ss n itA o U C o sto f P ro cess n itA = C o sto f P ro c ess n itB × U U C ap a cityf P ro cess n itB o U x is derived from historical data using curve fitting methods.83 0.55 0.5MM -700MM 1-150 10-800 3MM-200MM 20M .66 0.64 0.60 0.200M 100-3M 5M . BUDGETING & CONTROL Capacity ratios This method examines the effect of economies of scale on cost. It can be applied at all levels.65 0.88.1M ( ) (X .55 to 0.72 0.5 .300M 8.5M 100-1M 4M -200M 100 .53 0.67 Unit Capacity Range 3.76 Tons/day 0.

PROJECT COST WESTIMATION. BUDGETING & CONTROL Page 6 of 9 .

the cost of a total plant is based on a calculated average cost per unit of production. Equipment Factored Estimates A normalized cost is developed to take into account all costs in installation of.5 to 6 depending on. The TIC can vary from 2. The method estimates the cost by converting the equipment cost to total cost using a Total installed cost factor" (TIC). 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 = $60m. This method assumes a linear relationship between capacity and cost and is only appropriate over narrow ranges of capacity. For example. 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 Page 7 of 9 . 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. however the scale is often much wider. 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 is identical to the unit price method discussed previously.PROJECT COST WESTIMATION. BUDGETING & CONTROL Plant Cost per Unit of Production Using historical records.

o Stage payments to cover the manufacture's costs.0 2. Contingencies are often put into the estimates to make these targets realistic.3 2. o 90 days credit. o Payment on purchase.5 2. Timing of Cash flows In evaluation of cash flow. Cash flow Management The cash flow statement will be developed.0 7.5 2.5 2. Contingency is a measure of the risk of not meeting the budget for the work remaining and should be treated accordingly.3 4. o Monthly payments.0 To successfully manage costs over the duration of the project. labour.5 5. Typical timing of flows for projects is.000 gal) CONTINGENCIES Factor 2.5 2. interest and bought-in services. BUDGETING & CONTROL The factors for a range of equipment is shown on the following table Equipment Blender Blowers and fans inc motor Centrifuges Compressors Centrifugal Motor Driven less motor Steam turbine inc turbine Reciprocating Motor Driven less motor Steam turbine inc turbine Tanks Process Storage Fabricated and field erected (> 50. o Expenditures (cash out-flows) are wages.0 6. overheads.0 2.5 4.1 8. COST CONTROL Two major components of costs are controlled.1 3. realistic cost targets are required.0 2.PROJECT COST WESTIMATION. o 30 or 60 days credit. If effectively used the cash flow statement has all the advantages of an explicitly designed financial planning and control system. materials. Page 8 of 9 . normal terms for bought-in items. Many project companies view contingency as a standard cost code to be used to execute the project. The cash flow statement is a document which models the flow of money in the project. cash flow and commitments. this is normal practice with retailers. telephone and other office expenses. timing is critical.0 2. which is one of the most powerful tools available for cost management. used where the payee has considerable power over the supplier.8 4. o Part payment with placement of order. Contingency is not a standard cost for the project.0 Equipment Heat exchangers Instruments Motors Electric Ejectors (vacuum units) Furnaces (packaged) Refrigeration (packaged unit) Towers and Columns Pumps Centrifugal motor driven less motors steam turbine Positive displacement (less motor) Factor 4. rent.0 2. Flows Flows that control cash flow on a project are: o incomes (cash in-flows) from the monthly progress payments. The time frame is usually monthly so as to coincide with the normal business accounting cycle.

stage payments or progress payment one month after invoice. Use of CPM for cash flows CPM networks are often used to calculate cash flows. o Add the cost values vertically to get period totals. Commitment management requires early information that is often more aligned to the engineering function rather than the procurement function. cash on delivery (COD). up-front payment. o Income from client. o Material costs c an vary from an up-front payment. o Labour costs are usually paid in the month they are used.PROJECT COST WESTIMATION. 2 or 3 months later depending on the supplier. o Accumulate the period values from left to right. When considering the project as a whole. This will produce the distinctive S curve. o Plot the period total costs on a graph of costs against time to obtain the period rate of expenditure curve. Labour costs are generally uniform over the duration of the activity. To give the total to time now. however each project should be evaluated for timing deviations. 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. o Assign values linearly per period. BUDGETING & CONTROL The payment for typical project goods and services are. to 1 to 3 months credit. If the S curve for the Early Start and Late Start are drawn on the same graph they produce a distinctive banana type curve. For ease of calculation the activity's cost is usually assumed to be linear over the duration of the activity. if there are more than a hundred activities any distortions caused by non-linear cash flow would tend to be smoothed out. Whereas the cost of materials and other bought-in items may need to be qualified. 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. o Plot accumulated figures on a graph of cost against time. as they can vary from up-front payments to 1. o Bought-in services and plant hire costs can be paid within 1 to 3 months after delivery. 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. Page 9 of 9 .

Sign up to vote on this title
UsefulNot useful

Master Your Semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master Your Semester with a Special Offer from Scribd & The New York Times

Cancel anytime.