Section 2

Cost Estimating
AACE INTERNATIONAL ESTIMATING

Chapter 9

Estimating1

Larry R. Dysert, CCC

INTRODUCTION LEARNING OBJECTIVES

Cost estimating is one of the cornerstones of cost engineering After completing this chapter, the reader should be able to
and total cost management. The objective of this chapter is to
introduce the reader to the various classifications of cost esti- • understand the classification of cost estimates,
mates, and the estimating methodologies and procedures • understand some of the common methodologies used in
used to prepare cost estimates. preparing cost estimates,
• relate estimate accuracy to the level of scope information
Cost estimating is the predictive process used to quantify, cost, and methodologies used in preparing cost estimates,
and price the resources required by the scope of an investment • understand how to apply risk analysis to determine con-
option, activity, or project. The output of the estimating process, tingency in an estimate,
the cost estimate, may be used for many purposes, such as • understand how to present and review estimates, and
• apply the knowledge gained to specific project estimat-
• determining the economic feasibility of a project, ing situations.
• evaluating between project alternatives,
• establishing the project budget, and
ESTIMATE ACCURACY
• providing a basis for project cost and schedule control.
As potential projects are considered, there are many decision
Cost estimating may be used to quantify, cost, and price any points at which to decide whether a specific project should be
investment activity, such as building an office building or continued to be developed. Each subsequent decision-making
process power plant, developing a software program, or pro- point during the project life cycle typically requires cost esti-
ducing a stage play. The basic estimating steps are the same: mates of increasing accuracy. Estimating is thus an iterative
process that is applied in each phase of the project life cycle as
• understand the scope of the activity to quantify the the project scope is defined, modified, and refined.
resources required,
• apply costs to the resources, The cost estimate is obviously of paramount importance to the
• apply pricing adjustments, and success of a project. The capital cost of a proposed project is one
• organize the output in a structured way that supports of the key determinants in evaluating the financial viability and
decision-making. business case of the project. From an owner’s perspective, if the
cost estimate is not accurate, the financial return from the capi-
For the purposes of this chapter, the primary focus will on tal investment may not be realized; and compounding this
estimating as applied to support the creation of capital assets problem is the fact that other deserving projects may not have
(a building, industrial facility, bridge, highway, etc.); howev- been funded. It is obvious that estimating is critical for the eco-
er, the estimating processes described can be applied to any nomic and optimal use of an owner’s limited capital budget.
investment activity.
From a contractor’s perspective, accurate estimating is just as
important. In a lump-sum bidding situation, the profit margin
1 For more information on definitive estimating, see Appendix C.
of the contractor is dependent on the accuracy of his estimate.
If the project is exceptionally large, the loss from an inaccurate

9.1
ESTIMATING AACE INTERNATIONAL

estimate on a lump-sum bid can potentially put a contractor • use degree of project definition as the primary charac-
out of business. For cost-plus projects, the contractor will face teristic in categorizing estimate classes; and
less direct economic risk from an inaccurate estimate, but the • reflect generally accepted practices in the cost engineer-
damage to the contractor’s reputation can be severe. ing profession.

The cost estimate, however, serves other purposes besides AACE 17R-97 maps the phases and stages of project estimat-
establishing the budget for a project. It also serves as a tool or ing with a maturity and quality matrix; providing a common
resource used for both scheduling and cost control of projects. reference point to describe and differentiate various types of
The estimate not only establishes a project budget, but plays an cost estimates. The matrix defines the specific input informa-
equally important role in monitoring the budget during project tion (i.e., design and project deliverables) that is required to
execution. It is the relationship between estimating, scheduling, produce the desired estimating quality at each phase of the
and cost control, which is typically identified by the term “cost estimating process. The matrix defines the requirements for
engineering” that serves as a driver for successful and cost- scope definition and indicates estimating methodologies
effective projects. Thus, an effective estimate must not only appropriate for each class of estimate. Table 9.1 shows the
establish a realistic budget, but must also provide accurate generic AACE cost estimate classification matrix.
information to allow for scheduling, cost monitoring, and
progress measurement of a project during execution. AACE identifies five classes of estimates. A Class 5 Estimate is
associated with the lowest level of project definition (or project
ESTIMATE CLASSIFICATIONS maturity), and a Class 1 Estimate is associated with the highest
level of project definition. Five characteristics are used to dis-
Estimate classifications are commonly used to indicate the tinguish each class of estimate from another. The five charac-
overall maturity and quality for the various types of esti- teristics used in the AACE recommended practice are
mates that may be prepared; and most organizations will use
some form of classification system to identify and categorize • degree of project definition;
the various types of project estimates that they may prepare • end usage of the estimate;
during the life cycle of a project. Unfortunately, there is often • estimating methodology;
a lack of consistency and understanding of the terminology • estimating accuracy; and
used to classify estimates, both across industries as well as • effort required to produce the estimate.
within single companies or organizations. Degree of project definition is the primary (or driving) char-

AACE International (AACE) Table 9.1—Generic Cost Estimate Classification Matrix

developed the “Recommend-
ed Practice for Cost Estimate
Classification” (AACE 17R-97,
see appendix E) to provide
generic guidelines for the gen-
eral principles of estimate clas-
sification that may be applied
across a wide variety of indus-
tries. This document has been
developed to

• provide a common
understanding of the
concepts involved in
classifying project cost
estimates;
• fully define and correlate
the major characteristics
used in classifying cost
estimates so that differ-
ent organizations may
clearly determine how
their particular practices
compare to the AACE Notes:
[a] If the range index value of “1” represents +10/-5%, then an index value of 10 represents +100/-50%.
guidelines;
[b] If the cost index value of “1” represents 0.005% of project costs, then an index value of 100 represents 0.5%.

9.2
AACE INTERNATIONAL ESTIMATING

acteristic used to identify an estimate class. The other charac-

teristics are “secondary,” with their value typically deter-
mined by the level of project definition. GLOSSARY TERMS IN THIS CHAPTER

In addition to the generic estimate classification system, a allowance ◆ battery limits ◆ basis ◆ basis of estimate
more specific version has been created for the process indus- budget ◆ budgeting ◆ code of accounts (COA)
tries (Table 9.2). The term “process industries” is intended to contingency ◆ cost ◆ cost estimate
include firms involved with the manufacturing and produc- cost estimating relationship (CER) ◆ direct cost
tion of chemicals, petrochemicals, pulp/paper and hydrocar- price variation ◆ profitability ◆ sunk cost
bon processing. The commonality among this industry (for taxation ◆ taxes ◆ time value of money
the purpose of estimate classification) is their reliance on
process flow diagrams (PFDs) and piping and instrument
diagrams (P&IDs) as primary scope defining documents.
These documents are key deliverables in determining the
level of project definition, and thus the extent and maturity of
Included with the supplemental guideline for the process
estimate input information, and subsequently the estimate
industries is a chart that maps the maturity of estimate input
class for an estimate for a process industry project.
information (project definition deliverables) against the class-
es of estimates (Table 9.3 on page 9.4).
This estimate classification system for the process industries is
meant to supplement the generic standard. Over time, addi-
tional matrices will be developed which are specific to other
This is a checklist of basic deliverables found to be in common
industries (such as general construction, highway construction,
practice in the process industries. The maturity level is an
software development, etc.).

Table 9.2—Cost Estimate Classification Matrix for the Process Industries

Notes:
[a] The state of process technology and availability of applicable reference cost data affect the range markedly. The +/-
value represents typical percentage variation of actual costs from the cost estimate after application of contingency
(typically at a 50% level of confidence) for given scope.
[b] If the range index value of “1” represents 0.005% of project costs, then an index value of 100 represents 0.5%. Estimate
preparation effort is highly dependent upon the size of the project and the quality of estimating data and tools.

9.3
ESTIMATING AACE INTERNATIONAL

Table 9.3—Estimate Input Checklist and Maturity Matrix for the Process Industries

approximation of the degree of completion of the deliverable. other than a direct measure of the units of the item being meas-
The degree of deliverable is indicated by the following letters: ured. They usually involve simple or complex modeling (or
factoring) based on inferred or statistical relationships between
• None (blank)—Development of the deliverable has not costs and other, typically design-related, parameters. Often, the
yet begun. cost estimating relationships used in conceptual estimating
• Started (S)—Work on the deliverable has begun. methods are at least somewhat subject to conjecture.
Development is typically limited to sketches, rough out-
lines, or similar levels of early completion. For deterministic estimating methods, the independent vari-
• Preliminary (P)—Work on the deliverable is advanced. ables used in the estimating algorithm are more or less a
Interim cross-functional reviews have usually been con- direct measure of the item being estimated, such as straight-
ducted. Development may be near completion except for forward counts or measures of items multiplied by known
final reviews and approvals. unit costs. Deterministic estimating methods require a high
• Complete (C)—The deliverable has been reviewed and degree of precision in the determination of quantities, pric-
approved as appropriate. ing, and the completeness of scope definition. Of course, any
particular estimate may involve a combination of conceptual
and deterministic methods.
ESTIMATING METHODOLOGIES
There is another key difference between conceptual and deter-
In general, estimating methodologies commonly fall into two ministic estimating methods. Conceptual estimating methods
broad categories: conceptual and deterministic. As can be require significant effort in data-gathering and methods devel-
seen from the cost estimate classification matrices (Tables 9.1 opment before estimate preparation ever begins. There is a sig-
and 9.2), as the level of project definition increases, the esti- nificant effort in historical cost analysis to develop accurate fac-
mating methodology tends to progress from conceptual (sto- tors and estimating algorithms to support conceptual estimat-
chastic or factored) methods to deterministic methods. ing. Preparing the conceptual estimate itself takes relatively
little time, sometimes less than an hour.

With conceptual estimating methods, the independent vari- In contrast, a deterministic (or detailed) estimate requires a
ables used in the estimating algorithm are generally something large effort during the actual preparation of the estimate. The

9.4
AACE INTERNATIONAL ESTIMATING

evaluation and quantification of the project scope can take a End-Product Units Method
substantial amount of time, sometimes weeks or even This conceptual estimating method is used when the estima-
months for extremely large projects. Research and applica- tor has enough historical data available from similar projects
tion of accurate detailed pricing information, and application to relate the end-product units (capacity units) of a project to
of specific estimating adjustments to the quantified scope, its construction costs. This allows an estimate to be prepared
can also take considerable time. relatively quickly, knowing only the end-product unit capac-
ity of the proposed project. Examples of the relationship
The estimating method used for any particular estimate will between construction costs and end-product units are
depend on many factors: the end use of the estimate, the
amount of time and money that is available to prepare the • the construction cost of an electric generating plant and
estimate, the estimating tools and data available, and, of the plant’s capacity in kilowatts,
course, the level of project definition and design information • the construction cost of a hotel and the number of guest
on hand [1]. rooms,
• the construction cost of a hospital and the number of
Conceptual Estimating Methodologies patient beds, and
Conceptual estimating methods are typically used for Class 5 • the construction cost of a parking garage and the num-
and Class 4 (and sometimes Class 3) estimates. They are often ber of available parking spaces.
referred to as “order-of-magnitude” (OOM) estimates in ref-
erence to their typically wide range of estimate accuracy (as To illustrate, consider a client that is contemplating building
previously defined in the estimate classification matrices). They a 1,500 luxury hotel in a resort area. The client needs an
provide a relatively quick method of determining the approxi- approximate cost estimate for the proposed hotel as part of
mate probable cost of a project without the benefit of detailed the feasibility study. Assume that a similar luxury hotel has
scope definition. As indicated in the estimate classification been recently completed at a nearby resort and the following
matrices, these estimates may be used for the following: information is available:

• establishing an early screening estimate for a proposed The hotel just completed included 1,000 guest rooms, as well
project or program, as a lobby, restaurants, meeting rooms, parking garage,
• evaluating the general feasibility of a project, swimming pool, and nightclub. The total construction cost
• screening project alternatives (such as different locations, for the 1,000 room hotel was $67,500,000. The resulting cost
technologies, capacities, etc.), per room is thus calculated as $67,500,000/1000 = $67,500 per
• evaluating the cost impacts of design alternatives, and room.
• establishing a preliminary budget for control purposes
during the design phase of a project. Therefore, we can use this information to determine the cost
of the 1,500 room hotel of comparable design and a nearby
Conceptual estimates are generally based on little project def- location as $101,250,000 ($67,500/room x 1,500 rooms).
inition (i.e., engineering deliverables), thus subjecting them to
a wide range of estimate accuracy. Their accuracy can depend While this cost estimate may serve to meet the needs of the
on several factors, including the level of project definition, the feasibility study, it has ignored several factors that may
quality of the past historical cost data used in development of impact costs.
the factors and algorithms, as well as the judgment and expe-
rience of the estimator. These limitations should, of course, be For example, it has ignored any economies-of-scale that may
recognized in using conceptual estimating methods. be generated from constructing a larger hotel and has
Nonetheless, there are many cases where conceptual esti- assumed that the cost of the common facilities (lobby, restau-
mates can be very reliable, especially in estimating repeat rants, pool, etc.) vary directly with the increase in the number
projects. Generally, the emphasis with conceptual estimating of rooms. If the data exists to understand the cost impact of
is not on detailed accuracy, but on obtaining a reasonable cost these differences, then adjustments may be made to the ini-
estimate of sufficient accuracy to insure that the results are tial cost estimate. Similarly, if the location or timing of the
meaningful for management to make the decision at hand. proposed hotel had differed significantly from the known
cost data point, then cost indices can be used to adjust for
There are a wide variety of conceptual or OOM estimating these differences.
methodologies. Several of the more commonly used methods
are end-product units, physical dimensions, capacity factor,
various ratio or factor methods, and parametric modeling. Physical Dimensions Method
Most conceptual estimating methods rely on relationships of Somewhat similar to the end-products units method is the
one form or another. physical dimensions estimating methodology. The method
uses the physical dimensions (length, area, volume, etc.) of

9.5
ESTIMATING AACE INTERNATIONAL

Table 9.3—Estimate Input Checklist and Maturity Matrix for the Process Industries

approximation of the degree of completion of the deliverable. other than a direct measure of the units of the item being meas-
The degree of deliverable is indicated by the following letters: ured. They usually involve simple or complex modeling (or
factoring) based on inferred or statistical relationships between
• None (blank)—Development of the deliverable has not costs and other, typically design-related, parameters. Often, the
yet begun. cost estimating relationships used in conceptual estimating
• Started (S)—Work on the deliverable has begun. methods are at least somewhat subject to conjecture.
Development is typically limited to sketches, rough out-
lines, or similar levels of early completion. For deterministic estimating methods, the independent vari-
• Preliminary (P)—Work on the deliverable is advanced. ables used in the estimating algorithm are more or less a
Interim cross-functional reviews have usually been con- direct measure of the item being estimated, such as straight-
ducted. Development may be near completion except for forward counts or measures of items multiplied by known
final reviews and approvals. unit costs. Deterministic estimating methods require a high
• Complete (C)—The deliverable has been reviewed and degree of precision in the determination of quantities, pric-
approved as appropriate. ing, and the completeness of scope definition. Of course, any
particular estimate may involve a combination of conceptual
and deterministic methods.
ESTIMATING METHODOLOGIES
There is another key difference between conceptual and deter-
In general, estimating methodologies commonly fall into two ministic estimating methods. Conceptual estimating methods
broad categories: conceptual and deterministic. As can be require significant effort in data-gathering and methods devel-
seen from the cost estimate classification matrices (Tables 9.1 opment before estimate preparation ever begins. There is a sig-
and 9.2), as the level of project definition increases, the esti- nificant effort in historical cost analysis to develop accurate fac-
mating methodology tends to progress from conceptual (sto- tors and estimating algorithms to support conceptual estimat-
chastic or factored) methods to deterministic methods. ing. Preparing the conceptual estimate itself takes relatively
little time, sometimes less than an hour.

With conceptual estimating methods, the independent vari- In contrast, a deterministic (or detailed) estimate requires a
ables used in the estimating algorithm are generally something large effort during the actual preparation of the estimate. The

9.4
AACE INTERNATIONAL ESTIMATING

ty sizes. In reality, as facility capacities increase, the exponent

tends to increase as illustrated in Figure 9.2. As an example, Thus, if the facility size being estimated is reasonably close to
between the capacities A and B (in Figure 9.2), the capacity the size of the known facility, and a realistic capacity factor
factor exponent may have a value of 0.6; however between exponent is used, error from the capacity factoring algorithm
the capacities B and C, the exponent has a value of 0.65. is small. However, this error can be compounded by other
Between the capacities C and D, the value of the exponent assumptions we must make in an actual estimating situation.
may have risen to 0.72. Eventually, as the facility capacity Typically, we must also adjust for differences in scope, loca-
increases to the limits of existing technology, the exponent tion and time between the estimated facility and the known
tends towards a value of 1. At this point, it becomes more facility. Each of these adjustments can also add to the level of
economical to build two facilities of a smaller size than one error in the overall estimate.
large facility. In other words, cost becomes a linear function
of capacity, and scales of economy are no longer obtained. Let’s examine a typical situation where we need to estimate
the costs of a 100,000 BBL/day hydrogen peroxide unit to be
Capacity factored estimating can be quite accurate. If the built in Philadelphia and completed in 2004. We have recent-
capacity factor used in the estimating algorithm is relatively ly completed a 150,000 BBL/day plant in Malaysia with a
close to the actual value, and if the facility being estimated is final cost of $50 million in 2002. Our recent history shows a
relatively close in size to the similar facility of known cost, capacity factor of 0.75 is appropriate. The simple approach is
to just use our capacity factor algorithm:

$B = ($A)(CapB/CapA)e
$B = $50M X (100/150).75 = $36.9M

This would be fine for as far as it goes, but as we have noted

in our earlier discussions of estimating methodologies, we
have thus far ignored differences in quality (or scope), loca-
tion, and time.

For this example, let’s adjust for the differences in scope,

location, and time. The plant in Malaysia included piling,
tankage, and owner costs that will not need to be included in
the proposed plant for Philadelphia. Construction in
Philadelphia is expected to cost 1.25 times the construction
costs in Malaysia (location adjustment). Escalation will be
included as a 1.06 multiplier from 2002 to 2004 (an obviously
simple approach). There are costs for additional pollution
requirements in Philadelphia that were not included in the
cost of the Malaysian plant. Taking these into account, the
estimate now appears like this:

Figure 9.2—Capacity Factor Exponents Are Not Constant

Across All Capacity Ranges 150,000 BBL/day plant in Malaysia $50M
deduct piling, tankage, owner costs -$10M
adjusted cost for scope =$40M
then the potential error from capacity factoring is quite small, Malaysia to Philadelphia adjustment (x 1.25) = $50M
and is certainly well within the level of accuracy that would escalate to 2004 (x 1.06) = $53M
be expected from such a conceptual estimating method. For
factor = $53M x (100/150).75 = $39M
example, if the new facility is triple the size of an existing
add pollution requirements (+$5M) = $44M
facility, and the actual capacity factor is 0.80 instead of an
assumed 0.70, you will have underestimated the cost of the
new facility by only 10 percent, calculated as (3 .8 – 3 .7)/3.7. The key steps in preparing a capacity factor estimate, there-
Similarly, for the same threefold scale-up in facility size, but fore, are the following:
the actual capacity factor should be 0.60 instead of an
assumed 0.70, you will have overestimated the facility cost • Deduct costs from the known base case that are not
by only 12 percent, calculated as (3.7 – 3.6)/3.6. applicable in the new plant being estimated.

9.7
ESTIMATING AACE INTERNATIONAL

• Apply location and escalation adjustments to normalize generate costs only for the Inside Battery Limits (ISBL) facili-
costs. (This now determines what the adjusted scope for ties, and require the Outside Battery Limit Facilities (OSBL)
the base case will cost in the new location and time costs to be estimated separately; however sometimes appro-
frame.) priate factors are used to estimate the costs of the complete
• Apply the capacity factor algorithm to adjust for plant facilities. Therefore, it is extremely important to understand
size. the basis of the particular factors being used in an equipment
• Add any additional costs which are required for the new factored estimate.
plant but which were not included in the known plant.
In 1947, Hans Lang first published an article [11] in Chemical
The capacity factor estimating method provides a relatively Engineering introducing the concept of using the total cost of
quick and sufficiently accurate means to prepare early esti- equipment to factor the total estimated cost of a plant:
mates during the concept screening stage of a project. The
method requires historical cost and capacity data for similar Total plant $ = total equipment $ x equipment factor
plants and processes. Although published data on capacity
factors exists, the best data would be from your own organi- Lang proposed three separate factors based on the type of
zation and requires a level of commitment to maintain. When process plant (Table 9.4). Lang’s factors were meant to cover
using this method, the new and existing known plant should all the costs associated with the total installed cost of a plant
be near duplicates, and reasonably close in size. You must including the Battery Limits Process Units (ISBL Costs) and
account for differences in scope, location, and time. Each of all Offsites Units (OSBL Costs).
the adjustments that you make adds additional uncertainty
and potential error to the estimate. Despite this, capacity fac-
tor estimates can be quite accurate and are often used to sup- The following is an example of a Lang Factor estimate for a
port decision-making at the pre-design stage of a project. fluid process plant:

Ratio or Factor Methods Total estimated equipment cost = $1.5M

Ratio or factored estimating methods are used in situations Total plant cost = $1.5M X 4.74
where the total cost of an item or facility can be reliably esti- Total plant cost = $7.11M
mated from the cost of a primary component. For example, this
method is commonly used in estimating the cost of process and Table 9.4—Lang Factors
chemical plants, where the cost of the specialized process
equipment makes up a significant portion of the total project Type of Plant Factor
cost. This is often referred to as “equipment factor” estimating. Solid Process Plant 3.10

Equipment factored estimates are used to develop costs for Solid-Fluid Process Plant 3.63
process and utility units for which the behavior of the costs
of the direct labor and bulk materials used to construct the Fluid Process Plant 4.74
facilities is correlated with the costs (or the design parame-
ters) of the major equipment. Typically, this estimating
methodology relies on the principle that a ratio or factor
exists between the cost of an equipment item and costs for Lang’s approach was rather simple, utilizing a factor that var-
the associated nonequipment items (foundations, piping, ied only by the type of process. Since that first publication,
electrical, etc.) needed to complete the installation. many different methods of equipment factoring have been pro-
posed, and some methods have become very sophisticated. The
An equipment factored estimate can typically be generated term “Lang Factor,” however, is often used generically to refer
when project definition (engineering complete) is approxi- to all the different types of equipment factors.
mately 1 percent to 15 percent complete (Class 4). An equip-
ment list should be available at this point in the project. This In 1958, W. E. Hand [10] elaborated on Lang’s work by pro-
estimate is often a feasibility estimate used to determine posing different factors for each type of equipment (columns,
whether there is a sufficient business case to pursue the proj- vessels, heat exchangers, etc.), rather than process type.
ect. If so, then this estimate may be used to justify the funding Hand’s factors estimated DFCs, excluding instrumentation.
required to complete the engineering and design required to Hand’s published equipment factors ranged from 2.0 to 3.5
produce a funding or budget estimate (Class 3). (which might correlate to approximately 2.4 to 4.3 including
instrumentation). Hand’s factors excluded indirect field costs
Depending on the particular factoring techniques and data (IFC), home office costs (HOC), and the costs for offsite or
used, the factors may estimate Total Installed Costs (TIC) or outside battery limit (OSBL) facilities. These costs would
Direct Field Cost (DFC) for the facility. Usually, the factors need to be estimated separately.

9.8
AACE INTERNATIONAL ESTIMATING

Note the various equipment factors displayed in this exam-

An example of an estimate prepared for a fluid processing ple. Total equipment cost to DFC is a factor of 2.8 (a typical
plant using Hand’s equipment factoring techniques appears range would be 2.4 to 3.5). Total equipment cost to TFC is a
in Table 9.5. In this example, the total cost of all equipment factor of 3.6 (with a typical range being 3.0 to 4.2). Total
items for each type of equipment was multiplied by a factor equipment cost to total project cost, including contingency, is
for that specific type of equipment to derive the DFC for that a factor of 5.1 (a typical range would be 4.2 to 5.5). This cor-
equipment type. For instance, the total cost of all vertical ves- relates closely with Lang’s original overall equipment factor
sels ($540K) was multiplied by an equipment factor of 3.2 to of 4.74 for fluid plants.
obtain an installed DFC of $1,728K. The DFC costs for all
equipment types totals $7,753K. Direct Field Labor (DFL) Arthur Miller proposed another enhancement to the concept
was estimated at 25 percent of DFC or $1,938K. The IFC were of equipment factors in 1965 [13]. Miller recognized the
then estimated at 115 percent of the DFL costs, totaling impact of three specific variables that affect the equipment
$2,229K. The sum of the DFC and IFC costs make up the total material cost to a greater degree than they affect the cost of
field costs (TFC) of $9,982K. HOC are factored as 30 percent the associated bulk materials and installation. These three
of DFC, which totals $2,326K. For this estimate, the project factors are: the size of the major equipment, the materials of
commissioning costs were factored as 3 percent of DFC, and construction (metallurgy) of the equipment, and the operat-
contingency was factored as 15 percent. The total installed ing pressure. Miller noted that as the size of a piece of major
cost (TIC) for this estimate thus totals $14,422K. equipment gets larger, the amount of corresponding bulk
materials (foundation, support steel, piping, instruments,

Table 9.5—Equipment Factored Estimate Example

9.9
ESTIMATING AACE INTERNATIONAL

etc.) required for installation does not increase at the same HOC, or OSBL Costs.
rate. Thus, as the equipment increases in size, the value of the
equipment factor decreases. Development of the actual equipment factors to be used in
preparing process plant estimates is a tedious and time-con-
A similar tendency exists for metallurgy and operating pres- suming affair. Although some published data exists on
sure. If the equipment is made from more expensive materi- equipment factors (see the articles included in the refer-
als (stainless steel, titanium, monel, etc.), the equipment fac- ences), much of this data is old, and some of the assumptions
tor will become smaller. If the operating pressure increases, in normalizing the data for time, location, and scope are
the equipment factor gets smaller. Again, as the equipment incomplete or unavailable. A clear explanation of what is or
becomes more costly due to expensive materials of construc- what is not covered by the factors is sometimes missing.
tion or higher operating pressures, the costs for the associat- Lacking anything better, the published data provides a start-
ed bulk materials required for installation increase at a lower ing point for your database of equipment factors; however
proportion or rate, and the resulting equipment factor the best information will be data that comes from your own
becomes smaller. organization’s project history and cost databases and that
matches your engineering and construction techniques.
Miller suggested that these three variables could be summa-
rized into a single attribute known as the “average unit cost” Overall equipment factors from total equipment cost to
of equipment. The average unit cost of equipment is DFC/TIC (true “Lang” factors) are the easiest to generate.
Historical data from completed projects should be normal-
Total cost of process equipment/number of ized to a common time and location/labor productivity base-
equipment items line. The total equipment costs, direct field costs, and total
installed costs should be very easy to derive from the histor-
If the average unit cost of equipment increases, then the ical data. The results can then be analyzed, plotted, and test-
equipment factor is scaled smaller. The correlation between ed to establish overall equipment “Lang” factors.
increasing average unit cost of equipment and decreasing
equipment factors was statistically validated in subsequent Developing individual equipment factors that vary based on
studies [16, 18]. the type of equipment, or separate factors for each discipline,
is much more complicated. Generally, it is difficult to derive
Thus far, the equipment factors we have discussed have been the required data from the actual cost histories for completed
used to generate all in DFC or TIC costs. Another method of projects. Project accounting and cost coding typically does
using equipment factors is to generate separate costs for each of not collect actual cost data in the necessary format. Instead,
the disciplines associated with the installation of equipment. these types of equipment factors are typically developed by
Using this methodology, each type of equipment is associated generating detailed estimates for a matrix of equipment
with several discipline-specific equipment factors. For exam- types, size ranges, metallurgies, operating pressures, etc. The
ple, one discipline equipment factor will generate costs for con- estimates are then carefully analyzed to develop individual
crete, another factor will generate costs for support structural equipment and adjustment factors so that equipment size,
steel, another generates the cost for piping, etc. An advantage metallurgy, and operating pressure can be accounted for.
to this approach is that it provides the estimator with the capa-
bility to adjust the costs for the individual disciplines based on The factors developed in this manner can then be tested and
specific knowledge of the project conditions, and improves the calibrated against actual project histories. The proposed
accuracy of the equipment factoring method. It also allows the equipment factors (and adjustment factors, if necessary) are
costs for each specific discipline to be summed and compared applied to the actual equipment costs for completed projects,
to other similar projects. Miller, and later, Guthrie [9] described and the results from the factoring exercise are compared to
this methodology. the actual project costs to determine if a reasonable degree of
accuracy has been obtained. If the factoring results vary
An example of using discipline specific equipment factors is widely from the actual costs, or are consistently low or con-
shown in Table 9.6 on page 9.11. The example shows disci- sistently high, then an analysis to determine the reasons will
pline equipment factors for a 316SS shell & tube heat need to be performed, and development of the factors will
exchanger with a size range of 350 to 700 m2. In this example, continue until sufficient accuracy can be obtained.
the equipment cost of $10,000 is multiplied by each of the
indicated factors to generate the DFC costs for that discipline. When preparing an equipment factored estimate, the first
For example, the equipment installation labor is factored as step, of course, is to estimate the cost for each piece of process
$10,000 x 0.05 = $500; piping material and labor is factored as equipment. The equipment list needs to be examined care-
$10,000 x 1.18 = $11,800; etc. The total DFC costs for installa- fully for completeness, and compared against the process
tion of this heat exchanger is $28,600 (including the equip- flow diagrams (PFDs) and/or the piping and instrument dia-
ment purchase cost of $10,000). This equates to an overall grams (P&IDs). When an equipment factored estimate is pre-
DFC equipment factor of 2.86. These costs do not include IFC, pared, the equipment list is often still in a preliminary stage.

9.10
ESTIMATING AACE INTERNATIONAL

• Apply location and escalation adjustments to normalize generate costs only for the Inside Battery Limits (ISBL) facili-
costs. (This now determines what the adjusted scope for ties, and require the Outside Battery Limit Facilities (OSBL)
the base case will cost in the new location and time costs to be estimated separately; however sometimes appro-
frame.) priate factors are used to estimate the costs of the complete
• Apply the capacity factor algorithm to adjust for plant facilities. Therefore, it is extremely important to understand
size. the basis of the particular factors being used in an equipment
• Add any additional costs which are required for the new factored estimate.
plant but which were not included in the known plant.
In 1947, Hans Lang first published an article [11] in Chemical
The capacity factor estimating method provides a relatively Engineering introducing the concept of using the total cost of
quick and sufficiently accurate means to prepare early esti- equipment to factor the total estimated cost of a plant:
mates during the concept screening stage of a project. The
method requires historical cost and capacity data for similar Total plant $ = total equipment $ x equipment factor
plants and processes. Although published data on capacity
factors exists, the best data would be from your own organi- Lang proposed three separate factors based on the type of
zation and requires a level of commitment to maintain. When process plant (Table 9.4). Lang’s factors were meant to cover
using this method, the new and existing known plant should all the costs associated with the total installed cost of a plant
be near duplicates, and reasonably close in size. You must including the Battery Limits Process Units (ISBL Costs) and
account for differences in scope, location, and time. Each of all Offsites Units (OSBL Costs).
the adjustments that you make adds additional uncertainty
and potential error to the estimate. Despite this, capacity fac-
tor estimates can be quite accurate and are often used to sup- The following is an example of a Lang Factor estimate for a
port decision-making at the pre-design stage of a project. fluid process plant:

Ratio or Factor Methods Total estimated equipment cost = $1.5M

Ratio or factored estimating methods are used in situations Total plant cost = $1.5M X 4.74
where the total cost of an item or facility can be reliably esti- Total plant cost = $7.11M
mated from the cost of a primary component. For example, this
method is commonly used in estimating the cost of process and Table 9.4—Lang Factors
chemical plants, where the cost of the specialized process
equipment makes up a significant portion of the total project Type of Plant Factor
cost. This is often referred to as “equipment factor” estimating. Solid Process Plant 3.10

Equipment factored estimates are used to develop costs for Solid-Fluid Process Plant 3.63
process and utility units for which the behavior of the costs
of the direct labor and bulk materials used to construct the Fluid Process Plant 4.74
facilities is correlated with the costs (or the design parame-
ters) of the major equipment. Typically, this estimating
methodology relies on the principle that a ratio or factor
exists between the cost of an equipment item and costs for Lang’s approach was rather simple, utilizing a factor that var-
the associated nonequipment items (foundations, piping, ied only by the type of process. Since that first publication,
electrical, etc.) needed to complete the installation. many different methods of equipment factoring have been pro-
posed, and some methods have become very sophisticated. The
An equipment factored estimate can typically be generated term “Lang Factor,” however, is often used generically to refer
when project definition (engineering complete) is approxi- to all the different types of equipment factors.
mately 1 percent to 15 percent complete (Class 4). An equip-
ment list should be available at this point in the project. This In 1958, W. E. Hand [10] elaborated on Lang’s work by pro-
estimate is often a feasibility estimate used to determine posing different factors for each type of equipment (columns,
whether there is a sufficient business case to pursue the proj- vessels, heat exchangers, etc.), rather than process type.
ect. If so, then this estimate may be used to justify the funding Hand’s factors estimated DFCs, excluding instrumentation.
required to complete the engineering and design required to Hand’s published equipment factors ranged from 2.0 to 3.5
produce a funding or budget estimate (Class 3). (which might correlate to approximately 2.4 to 4.3 including
instrumentation). Hand’s factors excluded indirect field costs
Depending on the particular factoring techniques and data (IFC), home office costs (HOC), and the costs for offsite or
used, the factors may estimate Total Installed Costs (TIC) or outside battery limit (OSBL) facilities. These costs would
Direct Field Cost (DFC) for the facility. Usually, the factors need to be estimated separately.

9.8
ESTIMATING AACE INTERNATIONAL

Capacity factor and equipment factor estimates are simple well as any other information that may affect costs.
examples of parametric estimates; however sophisticated The type of data to be collected is usually decided upon in
parametric models typically involve several independent cooperation with the engineering and project control com-
variables or cost drivers. Yet similar to those estimating munities. It is usually best to create a formal data collection
methods, parametric estimating is reliant on the collection form that can be consistently used, and revised if necessary.
and analysis of previous project cost data in order to develop
the cost estimating relationships (CER’s). After the data has been collected, the next step in the process
of developing a parametric model is to normalize the data
The development of a parametric estimating model can before the data analysis stage. Normalizing the data refers to
appear to be a daunting task; however, the use of modern making adjustments to the data to account for the differences
computer technology (including popular spreadsheet pro- between the actual basis of the data for each project, and a
grams) can make the process tolerable, and much easier than desired standard basis of data to be used for the parametric
it would have been years ago. The process of developing a model. Typically, data normalization implies making adjust-
parametric model should generally involve the following ments for escalation, location, site conditions, system specifi-
steps [3, 7]: cations, and cost scope.

1. cost model scope determination, Data analysis is the next step in the development of a para-
2. data collection, metric model. There are many diverse methods and tech-
3. data normalization, niques that can be employed in data analysis, and are too
4. data analysis, complex to delve into in this chapter. Typically, data analysis
5. data application, consists or performing regression analysis of costs versus
6. testing, and selected design parameters to determine the key drivers for
7. documentation. the model. Most spreadsheet applications now provide
regression analysis and simulation functions that are reason-
The first step in developing a parametric model is to establish ably simple to use. The more advanced statistical and regres-
its scope. This includes defining the end use of the model, the sion programs have goal-seeking capabilities, which can also
physical characteristics of the model, the cost basis of the make the process easier.
model, and the critical components and cost drivers. The end
use of the model is typically to prepare conceptual estimates Generally, a series of regression analysis cases (linear and non-
for a process plant or system. The type of process to be cov- linear) will be run against the data to determine the best algo-
ered by the model, the type of costs to be estimated by the rithms that will eventually compose the parametric model. The
model (TIC, TFC, etc.), the intended accuracy range of the algorithms will usually take one of the following forms:
model, etc. should all be determined as part of the end-use
definition. The model should be based on actual costs from Linear Relationship
complete projects, and reflect your organization’s engineering
practices and technology. The model should generate current $ = a + bV1 + cV2 + …
year costs or have the ability to escalate to current year costs.
The model should be based on key design parameters that Nonlinear Relationship
can be defined with reasonable accuracy early in the project
scope development, and provide the capability for the esti-
$ = a + bV1x + cV2y + …
mator to easily adjust the derived costs for specific complex-
ity or other factors affecting a particular project.
where
Data collection and development for a parametric estimating
model requires a significant effort. The quality of the result- V1 and V2 are input variables;
ing model can be no better than the quality of the data it is a, b, and c are constants derived from regression; and
based upon. Both cost and scope information must be identi- x and y are exponents derived from regression.
fied and collected. The level at which the cost data is collect- The various relationships (cost versus design parameters) are
ed will affect the level at which the model can generate costs, first examined for “best-fit” by looking for the highest “R-
and may affect the derivation of the CERs. It is best to collect Squared” value. R2 has the technical sounding name of “coef-
cost data at a fairly low level of detail [19]. The cost data can ficient of determination,” and is commonly used as a meas-
always be summarized later if an aggregate level of cost ure of the goodness of fit for a regression equation. In simple
information provides a better model. It is obviously impor- terms, it is one measure of how well the equation explains the
tant to include the year for the cost data in order to normal- variability of the data. The resulting algorithms from the
ize costs later. The scope information should include all pro- regression analysis are then applied to the input data sets to
posed design parameters or key cost drivers for the model, as determine on a project-by-project basis how well the regres-

9.12
AACE INTERNATIONAL ESTIMATING

Note the various equipment factors displayed in this exam-

An example of an estimate prepared for a fluid processing ple. Total equipment cost to DFC is a factor of 2.8 (a typical
plant using Hand’s equipment factoring techniques appears range would be 2.4 to 3.5). Total equipment cost to TFC is a
in Table 9.5. In this example, the total cost of all equipment factor of 3.6 (with a typical range being 3.0 to 4.2). Total
items for each type of equipment was multiplied by a factor equipment cost to total project cost, including contingency, is
for that specific type of equipment to derive the DFC for that a factor of 5.1 (a typical range would be 4.2 to 5.5). This cor-
equipment type. For instance, the total cost of all vertical ves- relates closely with Lang’s original overall equipment factor
sels ($540K) was multiplied by an equipment factor of 3.2 to of 4.74 for fluid plants.
obtain an installed DFC of $1,728K. The DFC costs for all
equipment types totals $7,753K. Direct Field Labor (DFL) Arthur Miller proposed another enhancement to the concept
was estimated at 25 percent of DFC or $1,938K. The IFC were of equipment factors in 1965 [13]. Miller recognized the
then estimated at 115 percent of the DFL costs, totaling impact of three specific variables that affect the equipment
$2,229K. The sum of the DFC and IFC costs make up the total material cost to a greater degree than they affect the cost of
field costs (TFC) of $9,982K. HOC are factored as 30 percent the associated bulk materials and installation. These three
of DFC, which totals $2,326K. For this estimate, the project factors are: the size of the major equipment, the materials of
commissioning costs were factored as 3 percent of DFC, and construction (metallurgy) of the equipment, and the operat-
contingency was factored as 15 percent. The total installed ing pressure. Miller noted that as the size of a piece of major
cost (TIC) for this estimate thus totals $14,422K. equipment gets larger, the amount of corresponding bulk
materials (foundation, support steel, piping, instruments,

Table 9.5—Equipment Factored Estimate Example

9.9
ESTIMATING AACE INTERNATIONAL

Table 9.7—Cost and Design Information for Recent develop a simple spreadsheet model that will accept the
Cooling Tower Projects design parameters as input variables, and calculate the costs
based on the parametric estimating algorithm.

Parametric cost models can be a valuable resource in prepar-

ing early conceptual estimates. They are often used during
both the concept screening and feasibility stages of a project.
Parametric models can be surprisingly accurate for predict-
ing the costs of even complex process systems. Parametric

Table 9.9—Data for Cost Graph Based on Parametric

Estimating Example

flow rates affect costs in a nonlinear fashion (i.e., they are

raised to an exponential power), while the approach affects
costs in a linear manner. In addition, the approach is nega-
tively correlated with costs. Increasing the approach will
result in a less costly cooling tower (as it increases the effi-
ciency of the heat transfer taking place). These appear to be
reasonable assumptions. In addition, the regression analysis
resulted in an R2 value of 0.96, which indicates the equation
is a “good-fit” for explaining the variability in the data, and
the F-Test shows statistical significance between the input
data and the resulting costs.

In Table 9.8, the design parameters are displayed as used in the

model (raised to a power where needed) and shown against the
actual costs and the predicted costs from the estimating algo-
rithm. In addition, the amount of the error (the difference
between the actual and predicted costs), and the error as a per-
cent of actual costs are shown. The percentage of error varies
from -4.4 to 7.1 percent for the data used to develop the model.

Using the estimating algorithm developed from regression

analysis, we can develop tables of costs versus design
parameters (Table 9.9), and plot this information on graphs
(Figure 9.3).
This information can then be rapidly used to prepare esti-
mates for future cooling towers. It would also be very easy to

Table 9.8—Predicted Costs for Cooling Tower Parametric

Estimating Example

9.14
AACE INTERNATIONAL ESTIMATING

Table 9.6 - Discipline Equipment Factor Example

Although the major equipment is identified, it may be neces- Once the equipment factored costs have been developed, you
sary to assume a percentage for auxiliary equipment that has must account for the remainder of the project costs that are
not yet been defined. not covered by the equipment factors. Depending on the par-
ticular type of equipment factors used, this may require
Equipment sizing should also be verified. At this preliminary developing the costs for indirect field costs, home office (proj-
stage of engineering, a common problem is that equipment is ect administration and engineering/design) costs, outside
often sized at 100 percent of normal, operating duty. However, battery limit costs, etc.
typically, by the time the purchase orders have been issued,
some percentage of oversizing has been added to the design Equipment factored estimates are typically prepared during
specifications. The percentage of oversizing that occurs varies the feasibility stage of a project. They can be quite precise if
by the type of equipment, and an individual organization’s the equipment factors are appropriate, the correct adjust-
procedures and guidelines. It is prudent to check with the ments have been applied, and the list of process equipment is
process engineers and determine if an allowance for oversizing complete and accurate. They have an advantage over capaci-
the equipment as listed on the preliminary equipment list ty factored estimates in that they are based upon the specific
should be added before pricing the equipment. process design for the project. It is extremely important to
understand the basis behind the equipment factors being
The purchase cost of the equipment may be obtained by sev- used, and to account for all costs that are not covered by the
eral methods: purchase orders or cost information from recent factors themselves.
equipment purchases, published equipment cost data, prelim-
inary vendor quotations, or firm vendor quotations. Since the Ratio or factored methods may often be used in other situa-
material cost of equipment can represent 20 percent to 40 per- tions, such as estimating the cost for outside battery limit
cent of the total project costs for process plants, it is extremely facilities (OSBL) from the cost of inside battery limit facilities
important to always estimate the equipment costs as accurate- (ISBL); or estimating the costs of indirect construction cost
ly as possible. When using equipment factoring methods to from the direct construction costs. Derivation of the appro-
develop the project estimate, this becomes even more impor- priate multiplying factors from accurate historical cost infor-
tant. If historical purchase information is used, you must mation is critical to the resulting accuracy from this estimat-
ensure that the costs are escalated appropriately, and adjusted ing methodology.
for location and/or market conditions as required.
Parametric Method
Once the equipment cost is established, the appropriate A parametric cost model is an extremely useful tool for
equipment factors need to be established and applied. Ensure preparing early conceptual estimates when there is little tech-
that adjustments for equipment size, metallurgy, and operat- nical data or engineering deliverables to provide a basis for
ing conditions are included if necessary. Also, any specific using more detailed estimating methods. A parametric model
project or process conditions need to be evaluated to deter- is a mathematical representation of cost relationships that
mine if additional scope-based adjustments to the factored provide a logical and predictable correlation between the
costs are required. For example, the particular plot layout of physical or functional characteristics of a plant (or process
the project being estimated may require much closer equip- system) and its resultant cost [NASA]. A parametric estimate
ment placement than is typical. Therefore, you may want to comprises cost estimating relationships and other parametric
make some adjustment to account for the shorter piping, con- estimating functions that provide logical and repeatable rela-
duit, and wiring runs than the factors would normally tionships between independent variables, such as design
account for. Locating a project in an active seismic zone may parameters or physical characteristics and the dependent
require adjustments to foundations, support steel, etc. variable, cost.

9.11
ESTIMATING AACE INTERNATIONAL

project activities. The appropriate wage rates are then

The estimate schedule should be prepared, documenting applied to the workhour estimates. Home office overhead
when the various engineering deliverables are to be sup- factors are determined and applied to develop the home
plied, when each of the major sections of the estimate should office overhead costs and expenses. The HOC estimate is
be completed, and when estimate reviews will be scheduled. then summarized, formatted, and reviewed.
The estimate basis and schedule should be reviewed with the
project team at an estimate kickoff meeting prior to estimate Other miscellaneous activities and costs are then estimated. If
preparation. The estimate kickoff meeting provides an sales tax is applicable to all (or portions) of the facility, they
opportunity for the entire project team to understand the will need to be estimated using the appropriate local sales tax
roles and responsibilities of the various participants, and to rates. If materials are to be imported, duties may be charged
review the plans for the estimate preparation activities and and will need to be estimated. Escalation costs should be esti-
estimate schedule. On very large projects, it is often beneficial mated based on the project schedule. Depending on the proj-
to establish a few key contacts that will act as the liaisons ect delivery method and contracting strategy, appropriate
between estimating and engineering. Any questions devel- project fee estimates will need to be calculated and included.
oped by the estimators during estimate preparation are fun- Finally, a cost risk analysis study should be performed and
neled through a liaison that will then work with the respon- appropriate contingency is included in the estimate.
sible engineering representative to develop the answers.
As with an equipment factored estimate, particular attention
Preparing the DFC estimate is the most intensive activity of should be paid to pricing the process equipment for a
preparing the detailed estimate. The project scope should be detailed estimate as it contributes such a large share of the
reviewed and understood, and all technical deliverables costs (20 to 40 percent of the total installed cost of the facili-
assembled. On large projects, the engineering drawings and ty). Estimating the costs for process machinery and equip-
technical information may be submitted to estimating over ment requires many sources of input. The minimum infor-
time. As each drawing or other information is received from mation requirements for pricing equipment include the
engineering, it should be logged and kept track of. process flow drawings, the equipment lists, and the equip-
Performing the estimate takeoff (described in more detail ment process data sheets (usually prepared by the process
below) should take place according to the estimating depart- engineering group). Often, the equipment process data
ment (and any special project) guidelines. This involves sheets are provided to the mechanical/vessels engineering
quantifying all the various material and labor components of group to prepare narrative specifications and request for
the estimate. Care should be taken to ensure that all quanti- quotation (RFQ) packages.
ties are accounted for, but not double-counted. Material pric-
ing is applied to the material quantities using the best pricing Whenever possible, these engineering groups (perhaps in
information available. The labor hours are assigned to the association with the procurement group) should be responsi-
labor activities, adjusted for labor productivity, and wage ble for providing the equipment material purchase costs to
rates applied. Any estimate allowances are established. Any the estimator for inclusion in the project estimate. Although
owner supplied materials or other owner costs are accounted estimating is typically responsible for pricing the material
for. The DFC estimate is then summarized and formatted. costs for bulk materials, the process and mechanical engineers
Finally, the DFC estimate should be reviewed for complete- are best able to accurately determine equipment material pric-
ness and accuracy. ing, and are generally in close contact with potential equip-
ment vendors. Slight differences in equipment specifications
can sometimes result in large differences in pricing which an
After the DFC estimate has been prepared, the IFC estimate estimator may be unaware of. Formal vendor quotes for
is started. The DFC estimate should be reviewed, and the equipment pricing are preferred; however sometimes time
total labor workhours identified. The labor workhours are constraints in preparing the estimate do not permit solicita-
typically a basis for factoring many of the of IFC costs. The tion of formal vendor quotes. In this case, equipment pricing
indirect estimate factors should be determined and applied. may depend on informal quotes from vendors (i.e., phone
Indirect labor wage rates and staff labor rates are established discussions), in-house pricing data, recent purchase orders,
and applied, and any indirect estimate allowances are capacity factored estimates from similar equipment, or from
accounted for. The IFC estimate is then summarized, format- parametric pricing models.
ted, and reviewed for completeness and accuracy. The con-
struction manager should be specifically involved in the ini- The estimator should be responsible for checking the equip-
tial review of the IFC estimate. ment list against the flow diagrams (or P&IDs) to ensure that
all equipment items are identified and priced. The estimator
The HOC estimate is then prepared. For a detailed estimate, must also be responsible for verifying that the costs for all
the various project administration and engineering disci- equipment internals and accessories (trays, baffles, ladders,
plines should provide detailed workhour estimates for their etc.) are included with the cost of the appropriate equipment.

9.16
AACE INTERNATIONAL ESTIMATING

As opposed to most bulk commodity accounts (where the

materials are generally available locally), freight costs for As mentioned previously, estimating take-off is the process of
equipment can be significant and should usually be identi- quantifying the material and labor quantities associated with
fied explicitly. Also, any vendor assistance and support costs the project. The term take-off is also used to refer to the quan-
should be identified and included with the material costs of tities themselves (often known as a bill of quantities). Take-
the equipment. Major spare parts for process equipment will off involves a detailed examination of the engineering draw-
also need to be accounted for and included in the estimate. ings and deliverables to count the number of each item
appearing on the drawings. The quantities of like items are
Equipment installation costs are usually prepared by the esti- then summarized according to the control structure
mator, with assistance from construction where required. (WBS/RBS) of the project. Once the take-off is complete, and
Construction assistance is usually needed for heavy lifts, or total quantities for each like item summarized, the items can
where special installation methods may be used. The place- be costed (or priced), and the results added together resulting
ment of large process equipment in an existing facility may in the estimated direct field costs for the project.
also require special consideration. Workhours for equipment
installation are usually based on weight and equipment Generally, the process of “take-off” for the estimate is much
dimensions, which are obtained from the equipment process more efficient when standard estimating guidelines are
data sheets). Using the equipment weights (or dimensions), established and followed. This provides advantage enough
the installation workhours are typically determined from when a single estimator is preparing a specific estimate, but
curves based on historical data. Other forms of in-house or is even more important when multiple estimators are work-
published data may also be used. When referencing the labor ing on the same project. Guidelines for preparing an efficient
workhour data for equipment, the estimator must be careful take-off include the following:
to include all labor associated with the pieces of equipment
(vessel internals, etc.). Depending on the information avail- • Use preprinted forms for the orderly sequence of item
able, the labor hours to set and erect a heavy vessel may not descriptions, dimensions, quantities, pricing informa-
include the hours to erect, takedown, and dismantle a guy tion, etc.
derrick, gin poles, or other special lifting equipment. Special • Abbreviate (consistently) whenever possible.
consideration may also be required to ensure costs for cali- • Be consistent when listing dimensions (i.e., length x
bration, soil settlement procedures, special internal coatings, width x height).
hydrotesting and other testing costs are included in the esti- • Use printed dimensions from drawings when available.
mate. Some equipment may be erected by subcontractors or • When possible, add up the printed dimensions for a
the vendor, and included in the material purchase costs. Care given item.
must be taken to identify these situations. • Measure all dimensions carefully.
• Use each set of dimensions to calculate multiple quanti-
As with the rest of the estimate, the responsibility of the esti- ties where possible.
mator is to make sure that all costs are accounted for. For • Take advantage of design symmetry or repetition.
equipment in particular, this requires attention to detail, • List all gross dimensions that can be used again to rough
working closely with engineering and construction, and ask- check other quantities for approximate verifications.
ing the right questions. With chemical process plants being so • Convert imperial dimensions (feet/inch) to decimal
“equipment-centric,” the costs for purchasing and installing equivalents.
equipment make up a significant portion of the total installed • Do not round until the final summary of quantities.
cost of the facility. • Multiply the large numbers first to reduce rounding
errors.
Detailed estimates are the most accurate of the estimating • Do not convert the units until the final quantities are
methods, but also require the most time and effort to prepare. obtained.
Although detailed estimates are desirable for final budget • Items should be measured/converted to the same units
authorization, the level of engineering progress needed and consistently throughout the take-off.
the time required for estimate preparation will sometimes • Mark the drawings as quantities are taken off. Use dif-
preclude them from being used for this purpose. In today’s ferent colors to identify various types of components or
economy, budgeting and investment decisions are often need- items, as well as to identify items on hold, etc.
ed sooner than a detailed estimate would allow. Semi-detailed • Verify the drawings taken-off versus the approved draw-
and forced-detailed estimates will often be employed for final ing list to be used with the estimate. Check off drawings
budget authorizations, and a complete detailed estimate may on the drawing list as take-off is completed.
be prepared later to support project control. • Keep similar items together, different items separate.
• Organize the take-off to match the control structure and
format of the estimate.
TAKE-OFF • Identify drawing numbers, section numbers, etc. on the

9.17
ESTIMATING AACE INTERNATIONAL

take-off forms to aid in future checking for complete- For example, to a concrete contractor preparing a bid for a
ness, and for incorporating late changes later on. defined scope of foundation work, his costs will include the
• Be alert for notes shown on drawings, changes in scale direct material and labor costs associated with pricing and
used on different drawings, drawings that are reduced installing the foundations. However, the price reflected by
from original size, discrepancies between drawings and his bid will include not only his costs, but also an allowance
specifications, and changes in elevation that may not be for his overhead and profit; so the price reflected in his bid is
obvious, etc. higher than his cost.
• Be careful to quantify all labor operations that may not
have a material component. Pricing also includes adjustments to costs for specific project
conditions. Depending on the specific cost information used in
By keeping a uniform and consistent take-off process, the preparing the estimate, material costs may need to be adjusted
chance of error or omission is greatly reduced, and produc- for location, materials of construction, or to account for differ-
tivity is increased. Multiple estimators will find it easier to ences between the item being installed and the item you may
work on the same project; and if a personnel change takes have an available cost for. Labor hours may require productiv-
place, it is much easier for a new estimator to pick up. ity adjustments for a variety of conditions such as weather,
amount of overtime, interferences from production, material
After the take-off is completed, the quantities can be extended, logistics, congestion, the experience of the labor crews, the level
consolidated, and priced. If a procurement department or other of contamination control, etc. Labor rates may also need to be
resources will be utilized to investigate certain pricing (major adjusted for location, crew mix, open shop versus union issues,
equipment, large bulk material purchases, subcontracts, etc.), a and specific benefit and burden requirements.
listing should be compiled and sent to the appropriate person.

With today’s computerized estimating software, the process of ESTIMATE ALLOWANCES

take-off is often performed directly into the estimating soft-
ware, rather than compiled manually onto forms. The software Allowances are often included in an estimate to account for
will often prompt for key dimensions and/or parameters for the predictable but undefinable costs associated with project
the specific item being quantified and perform many of the scope. Allowances are most often used when preparing
required calculations automatically. In some cases, electronic deterministic or detailed estimates. Even for this class of esti-
digitizers can be used which automate the time-consuming mate, the level of project definition may not enable certain
task of measuring quantities from drawings and can help to costs to be estimated definitively. There are also times when
reduce errors. Using a digitizer, an estimator can measure the it is simply not cost-effective to quantify and cost every small
area of a concrete slab, the length of a piping run, or count a item included with the project. To account for these situa-
quantity of valves by tracing a boundary, touching end points, tions, an allowance for the costs associated with these items
or selecting items from a paper drawing. In combination with may be included in the estimate.
the estimating software, the digitizer performs the required
calculations required to accurately quantify the various items. Allowances are often included in the estimate as a percentage
The estimating software can also summarize quantities, and of some detailed cost component. Some typical examples of
apply pricing. allowances that may be included in a detailed construction
COSTING VERSUS PRICING estimate are

Costing is the process of applying unit costs to the individual • design allowance for engineered equipment,
quantities of items associated with the estimate. For a detailed • material take-off allowance,
estimate, this is usually in the form of labor hours, wage rates, • overbuy allowance,
material costs, and perhaps subcontract costs. These costs may • unrecoverable shipping damage allowance, and
come from a variety of sources such as an estimating database • allowance for undefined major items.
(either in-house or commercial), vendor quotes, the procure-
ment department, estimating experience, etc. A design allowance for engineered equipment is often
required to account for continuing design development that
Pricing, on the other hand, is adjusting the costs that have occurs even after placement of a purchase order for the
been applied for specific project conditions, and commercial equipment. At the time of a detailed estimate, vendor quotes
terms. Pricing includes adjustments to cost to allow for over- are usually available to account of the purchase cost of the
head and profit, to improve cash flow, or otherwise serve the equipment. However, for specialty engineered equipment, it
business interests of the party preparing the estimate. Thus, is often likely that the quoted cost is not the final cost
the level and type of pricing adjustments depends on the par- incurred by the project. We don’t necessarily understand
ticular party preparing the estimate. when or how the costs will increase, but we can often predict
that they will based on past project experiences. After initial

9.18
ESTIMATING AACE INTERNATIONAL

Table 9.7—Cost and Design Information for Recent develop a simple spreadsheet model that will accept the
Cooling Tower Projects design parameters as input variables, and calculate the costs
based on the parametric estimating algorithm.

Parametric cost models can be a valuable resource in prepar-

ing early conceptual estimates. They are often used during
both the concept screening and feasibility stages of a project.
Parametric models can be surprisingly accurate for predict-
ing the costs of even complex process systems. Parametric

Table 9.9—Data for Cost Graph Based on Parametric

Estimating Example

flow rates affect costs in a nonlinear fashion (i.e., they are

raised to an exponential power), while the approach affects
costs in a linear manner. In addition, the approach is nega-
tively correlated with costs. Increasing the approach will
result in a less costly cooling tower (as it increases the effi-
ciency of the heat transfer taking place). These appear to be
reasonable assumptions. In addition, the regression analysis
resulted in an R2 value of 0.96, which indicates the equation
is a “good-fit” for explaining the variability in the data, and
the F-Test shows statistical significance between the input
data and the resulting costs.

In Table 9.8, the design parameters are displayed as used in the

model (raised to a power where needed) and shown against the
actual costs and the predicted costs from the estimating algo-
rithm. In addition, the amount of the error (the difference
between the actual and predicted costs), and the error as a per-
cent of actual costs are shown. The percentage of error varies
from -4.4 to 7.1 percent for the data used to develop the model.

Using the estimating algorithm developed from regression

analysis, we can develop tables of costs versus design
parameters (Table 9.9), and plot this information on graphs
(Figure 9.3).
This information can then be rapidly used to prepare esti-
mates for future cooling towers. It would also be very easy to

Table 9.8—Predicted Costs for Cooling Tower Parametric

Estimating Example

9.14
ESTIMATING AACE INTERNATIONAL

Most of the end-uses of an estimate require a single

point value within the range of probable values to be
selected. For example, when used to develop a project
funding amount or budget, we must select a single
value to represent the estimate. When taking into
account the uncertainty associated with an estimate, we
will often add an amount (contingency) to the initially
developed point value to represent the final estimate
cost. When doing so, we must take into account such
things as the accuracy range of the estimate, confidence
levels, risk issues, and other factors in selecting the best
single point value to represent the final value of the esti-
mate.

Estimate accuracy is an indication of the degree to

which the final cost outcome of a project may vary from
the single point value used as the estimated cost. It
should generally be regarded as a probabilistic assess- Figure 9.4—Relationship Between Estimate Accuracy and
ment of how far a project’s final cost may vary from the sin- Engineering Progress
gle point value that is selected to represent the estimate.
Accuracy is traditionally represented as a +/- percentage Although the percent of engineering complete (or level of
range around the point estimate; with a stated confidence project definition) is an important determinant of estimate
level that the actual cost outcome will fall within this range. accuracy, there are many other factors that also affect it. Some
This common +/- percent measure associated with an esti- of these other factors include the state of new technology in
mate is merely a useful simplification given the reality that the project, the quality of reference cost information used in
each individual estimate will be associated with a different preparing the estimate, the experience and skill of the esti-
probability distribution explaining its unique level of uncer- mator, the estimating techniques employed, the level of effort
tainty. budgeted to prepare the estimate, and the desired end use of
the estimate. Other important factors affecting estimate relia-
Estimate accuracy tends to improve (i.e., the range of proba- bility are the project team’s capability to control the project,
ble values narrows) as the level of project definition used to and the capability to adjust the estimate for changes in scope
prepare the estimate improves. Generally, the level of project as the project progresses.
definition is closely correlated with engineering progress;
thus, as the level of engineering progresses, estimate accura- Consideration of all of these factors is the reason that the high
cy improves. This is shown in Figure 9.4. and low ranges of typical estimate accuracy are themselves
variable. It is simply not possible to define a precise range of
estimate accuracy based solely on the percentage of engineer-
This chart is intended only as an illustration of the general ing complete or class of estimate. Any specific estimate may not
relationship between estimate accuracy and the level of engi- exhibit the patterns shown above. It is possible to have a Class
neering complete. As shown in Figure 9.4, and described in 5 estimate with a very narrow estimate range, particularly for
the Recommended Practices on Estimate Classification, there repeat projects with good historical costs upon which to base
is no absolute standard range on any estimate or class of esti- the estimate. Conversely, it is possible to have a Class 3 or Class
mate. For the process industries, typical estimate ranges are 2 estimate with a very wide accuracy range, particularly for
illustrated as follows: first-of-a-kind projects or those employing new technologies.

• Typical Class 5 Estimate: The +/- percent accuracy range of the estimate should be
High range from +30 to +100% determined from an assessment of the design deliverables
Low range from -20 to -50% and estimating information used in preparation of the esti-
• Typical Class 4 Estimate: mate. Cost risk analysis studies will often be used for indi-
High range of from +20 to +50% vidual projects to determine their accuracy range based on
Low range of from -15 to -30% this type of information. The resulting output of the cost risk
• Typical Class 3 Estimate: analysis model should then establish a final estimate cost
High range of from +10 to +30% based on the level of confidence (or risk) acceptable to man-
Low range of from -10% to -20% agement in order not to overrun the project budget.

9.20
AACE INTERNATIONAL ESTIMATING

recent purchase orders, current labor rates, subcon-

tract quotations, project schedule information (to
determine escalation requirements), and the con-
struction plan (to determine labor productivity and
other adjustments).

In a completely detailed estimate, all costs are

detailed including the DFC, IFC, HOC costs, and
all other miscellaneous costs for both the ISBL and
OSBL facilities. One variation of the detailed esti-
mate is a semi-detailed estimate in which the costs
for the ISBL process facilities are factored, and the
costs for the OSBL facilities are detailed. Another
variation is the forced-detailed estimate in which
detailed estimating methods are used with incom-
plete design information. Typically in a forced-
detailed estimate, detailed takeoff quantities are
generated from preliminary drawings and design
information.

Figure 9.3–Graph of Cooling Tower Costs Based on The following steps comprise the activities undertaken dur-
Parametric Model ing preparation of a detailed estimate:

estimating models can be developed using basic skills in esti- 1. prepare project estimate basis and schedule,
mating, mathematics, statistics, and spreadsheet software. It 2. prepare direct field cost (DFC) estimate,
is important to understand that the quality of results can be 3. prepare indirect field cost (IFC) estimate,
no better than the quality of the input data, and great care 4. prepare home office cost (HOC) estimate,
should be taken during the data collection stage to gather 5. prepare sales tax/duty estimates,
appropriate and accurate project scope and cost data. 6. prepare escalation estimates,
7. prepare project fee estimate (for contractors),
Deterministic (Detailed) Estimating Methodologies1 8. prepare cost risk analysis/contingency determination,
A detailed estimate is one in which each component of a proj- and
ect scope definition is quantitatively surveyed and priced 9. review/validate estimate.
using the most realistic unit prices available. Detailed esti-
mates are typically prepared to support final budget author- The first step in preparing a detailed estimate is to begin
ization, contractor bid tenders, cost control during project establishing the project estimate basis and schedule. This is
execution, and change orders (Class 3 through Class 1 esti- essentially the preplanning phase for the estimate. As men-
mates). Detailed estimates use a deterministic estimating tioned, a detailed estimate for a large industrial facility may
methodology and require a substantial amount of time and take weeks to prepare, and involve several estimators and
cost to prepare. It is not unusual for detailed estimates on extensive support from engineering. The estimate basis doc-
very large projects to take several weeks, if not months, to uments the activities and course of action that will be used to
prepare and can require thousands of engineering hours to prepare the estimate. The first activity is to review the orga-
prepare the required technical deliverables. nization’s estimating guidelines and procedures with the esti-
The following is a description for detailed estimating activities mating team. The project work breakdown structure (WBS)
associated with a process or industrial project, but could easily should be reviewed with the project controls team, and agree-
be adopted for other types of construction-related projects, ment should be reached on the estimate format, structure, and
such as commercial construction. At a minimum, the required deliverables. The detailed estimate is typically used to sup-
engineering and design data required to prepare a detailed esti- port cost control during execution of the project and should be
mate include process and utility flow drawings, piping and structured to accomplish that purpose. The listing of engi-
instrument diagrams, equipment data sheets, motor lists, elec- neering and technical deliverables to be used to prepare the
trical one-line diagrams, piping isometrics (for alloy and large estimate should be reviewed, and the procedures for receiv-
diameter piping), equipment and piping layout drawings, plot ing and tracking the drawings and other design information
plans, and engineering specifications. Pricing data should established. The estimating team should identify the estimat-
include vendor quotations, current pricing information from ing resources, techniques, and data that will be used during
estimate preparation. Any estimate exclusions that are known
at this time should be reviewed and documented.
1See Appendix C for additional refernce material.

9.15
ESTIMATING AACE INTERNATIONAL

project activities. The appropriate wage rates are then

The estimate schedule should be prepared, documenting applied to the workhour estimates. Home office overhead
when the various engineering deliverables are to be sup- factors are determined and applied to develop the home
plied, when each of the major sections of the estimate should office overhead costs and expenses. The HOC estimate is
be completed, and when estimate reviews will be scheduled. then summarized, formatted, and reviewed.
The estimate basis and schedule should be reviewed with the
project team at an estimate kickoff meeting prior to estimate Other miscellaneous activities and costs are then estimated. If
preparation. The estimate kickoff meeting provides an sales tax is applicable to all (or portions) of the facility, they
opportunity for the entire project team to understand the will need to be estimated using the appropriate local sales tax
roles and responsibilities of the various participants, and to rates. If materials are to be imported, duties may be charged
review the plans for the estimate preparation activities and and will need to be estimated. Escalation costs should be esti-
estimate schedule. On very large projects, it is often beneficial mated based on the project schedule. Depending on the proj-
to establish a few key contacts that will act as the liaisons ect delivery method and contracting strategy, appropriate
between estimating and engineering. Any questions devel- project fee estimates will need to be calculated and included.
oped by the estimators during estimate preparation are fun- Finally, a cost risk analysis study should be performed and
neled through a liaison that will then work with the respon- appropriate contingency is included in the estimate.
sible engineering representative to develop the answers.
As with an equipment factored estimate, particular attention
Preparing the DFC estimate is the most intensive activity of should be paid to pricing the process equipment for a
preparing the detailed estimate. The project scope should be detailed estimate as it contributes such a large share of the
reviewed and understood, and all technical deliverables costs (20 to 40 percent of the total installed cost of the facili-
assembled. On large projects, the engineering drawings and ty). Estimating the costs for process machinery and equip-
technical information may be submitted to estimating over ment requires many sources of input. The minimum infor-
time. As each drawing or other information is received from mation requirements for pricing equipment include the
engineering, it should be logged and kept track of. process flow drawings, the equipment lists, and the equip-
Performing the estimate takeoff (described in more detail ment process data sheets (usually prepared by the process
below) should take place according to the estimating depart- engineering group). Often, the equipment process data
ment (and any special project) guidelines. This involves sheets are provided to the mechanical/vessels engineering
quantifying all the various material and labor components of group to prepare narrative specifications and request for
the estimate. Care should be taken to ensure that all quanti- quotation (RFQ) packages.
ties are accounted for, but not double-counted. Material pric-
ing is applied to the material quantities using the best pricing Whenever possible, these engineering groups (perhaps in
information available. The labor hours are assigned to the association with the procurement group) should be responsi-
labor activities, adjusted for labor productivity, and wage ble for providing the equipment material purchase costs to
rates applied. Any estimate allowances are established. Any the estimator for inclusion in the project estimate. Although
owner supplied materials or other owner costs are accounted estimating is typically responsible for pricing the material
for. The DFC estimate is then summarized and formatted. costs for bulk materials, the process and mechanical engineers
Finally, the DFC estimate should be reviewed for complete- are best able to accurately determine equipment material pric-
ness and accuracy. ing, and are generally in close contact with potential equip-
ment vendors. Slight differences in equipment specifications
can sometimes result in large differences in pricing which an
After the DFC estimate has been prepared, the IFC estimate estimator may be unaware of. Formal vendor quotes for
is started. The DFC estimate should be reviewed, and the equipment pricing are preferred; however sometimes time
total labor workhours identified. The labor workhours are constraints in preparing the estimate do not permit solicita-
typically a basis for factoring many of the of IFC costs. The tion of formal vendor quotes. In this case, equipment pricing
indirect estimate factors should be determined and applied. may depend on informal quotes from vendors (i.e., phone
Indirect labor wage rates and staff labor rates are established discussions), in-house pricing data, recent purchase orders,
and applied, and any indirect estimate allowances are capacity factored estimates from similar equipment, or from
accounted for. The IFC estimate is then summarized, format- parametric pricing models.
ted, and reviewed for completeness and accuracy. The con-
struction manager should be specifically involved in the ini- The estimator should be responsible for checking the equip-
tial review of the IFC estimate. ment list against the flow diagrams (or P&IDs) to ensure that
all equipment items are identified and priced. The estimator
The HOC estimate is then prepared. For a detailed estimate, must also be responsible for verifying that the costs for all
the various project administration and engineering disci- equipment internals and accessories (trays, baffles, ladders,
plines should provide detailed workhour estimates for their etc.) are included with the cost of the appropriate equipment.

9.16
AACE INTERNATIONAL ESTIMATING

Note: Contingency does not increase the overall accuracy of

the estimate—it doesn’t change the overall accuracy range of
approximately of $18.5M to $32.5M.

Contingency does, however, reduce the level of risk associat-

ed with the estimate and improve project evaluations when

Table 9.10—Sample Cumulative Probability Distribution

Table

Figure 9.7—Graphical Cumulative Probability

Distribution

• material vs. labor vs. subcontracts,

• direct costs vs. indirect costs vs. home office costs, and
• concrete vs. structural steel vs. piping vs. other construc-
tion disciplines.

The control structure should be established as early as possi-

ble in the project life cycle, because it will set the pattern for
properly used. accumulation of project costs, and it should be used to form
the basis for the structuring the estimate. The process of pro-
Appropriately applied, risk analysis provides an effective ducing the project’s control structure, often known as work
means of determining an amount for estimate contingency, breakdown planning, is often an ongoing process requiring
and of providing management with information about the updates as the scope of the project is refined during the proj-
variability of project estimates. In addition, the process of ect life cycle. The segregation of costs can be referred to as
preparing a risk analysis model typically identifies specific establishing the project “coding” structure, and more specifi-
project areas associated with both risk and opportunity. cally as the “code of accounts.” Codes are the umbilical cords
Those areas identified with high risk can then become focus between cost accounting and cost engineering (estimating
areas in order to reduce and mitigate any risk issues, and the and cost control).
areas of low risk can become focus areas in order to capital-
ize on the opportunities they may provide. Large projects will often use work breakdown structures
(WBS) and resource breakdown structures (RBS) as compo-
nents of the overall coding structure. Smaller projects will
STRUCTURING THE ESTIMATE often use a simpler code of accounts based simply on the dis-
ciplines or construction trades used on the project.
The control structure for a project is the breakdown of the
The WBS and RBS are basic project management tools that
total work into manageable units or packages for the pur-
define the project along activity levels that can be clearly
poses of estimating and control of cost and schedule. The
identified, managed, and controlled. The WBS is the division
structure will vary with the size and complexity of the proj-
of a project, for the purposes of management and control,
ect, as well as the reporting requirements. The proper struc-
into sub-projects according to its functional components. The
turing of a project for control purposes contributes greatly to
WBS typically reflects the manner in which the work will be
the effective implementation of project control procedures
performed, and should reflect the way in which cost data will
and the success of the project itself.
be summarized and reported.
To maintain some kind of order in the estimate (and later in
A WBS should be customized to be specific to a particular
project execution), it is necessary to segregate costs into vari-
project, and is usually organized around the geographical
ous categories:

9.23
ESTIMATING AACE INTERNATIONAL

take-off forms to aid in future checking for complete- For example, to a concrete contractor preparing a bid for a
ness, and for incorporating late changes later on. defined scope of foundation work, his costs will include the
• Be alert for notes shown on drawings, changes in scale direct material and labor costs associated with pricing and
used on different drawings, drawings that are reduced installing the foundations. However, the price reflected by
from original size, discrepancies between drawings and his bid will include not only his costs, but also an allowance
specifications, and changes in elevation that may not be for his overhead and profit; so the price reflected in his bid is
obvious, etc. higher than his cost.
• Be careful to quantify all labor operations that may not
have a material component. Pricing also includes adjustments to costs for specific project
conditions. Depending on the specific cost information used in
By keeping a uniform and consistent take-off process, the preparing the estimate, material costs may need to be adjusted
chance of error or omission is greatly reduced, and produc- for location, materials of construction, or to account for differ-
tivity is increased. Multiple estimators will find it easier to ences between the item being installed and the item you may
work on the same project; and if a personnel change takes have an available cost for. Labor hours may require productiv-
place, it is much easier for a new estimator to pick up. ity adjustments for a variety of conditions such as weather,
amount of overtime, interferences from production, material
After the take-off is completed, the quantities can be extended, logistics, congestion, the experience of the labor crews, the level
consolidated, and priced. If a procurement department or other of contamination control, etc. Labor rates may also need to be
resources will be utilized to investigate certain pricing (major adjusted for location, crew mix, open shop versus union issues,
equipment, large bulk material purchases, subcontracts, etc.), a and specific benefit and burden requirements.
listing should be compiled and sent to the appropriate person.

With today’s computerized estimating software, the process of ESTIMATE ALLOWANCES

take-off is often performed directly into the estimating soft-
ware, rather than compiled manually onto forms. The software Allowances are often included in an estimate to account for
will often prompt for key dimensions and/or parameters for the predictable but undefinable costs associated with project
the specific item being quantified and perform many of the scope. Allowances are most often used when preparing
required calculations automatically. In some cases, electronic deterministic or detailed estimates. Even for this class of esti-
digitizers can be used which automate the time-consuming mate, the level of project definition may not enable certain
task of measuring quantities from drawings and can help to costs to be estimated definitively. There are also times when
reduce errors. Using a digitizer, an estimator can measure the it is simply not cost-effective to quantify and cost every small
area of a concrete slab, the length of a piping run, or count a item included with the project. To account for these situa-
quantity of valves by tracing a boundary, touching end points, tions, an allowance for the costs associated with these items
or selecting items from a paper drawing. In combination with may be included in the estimate.
the estimating software, the digitizer performs the required
calculations required to accurately quantify the various items. Allowances are often included in the estimate as a percentage
The estimating software can also summarize quantities, and of some detailed cost component. Some typical examples of
apply pricing. allowances that may be included in a detailed construction
COSTING VERSUS PRICING estimate are

Costing is the process of applying unit costs to the individual • design allowance for engineered equipment,
quantities of items associated with the estimate. For a detailed • material take-off allowance,
estimate, this is usually in the form of labor hours, wage rates, • overbuy allowance,
material costs, and perhaps subcontract costs. These costs may • unrecoverable shipping damage allowance, and
come from a variety of sources such as an estimating database • allowance for undefined major items.
(either in-house or commercial), vendor quotes, the procure-
ment department, estimating experience, etc. A design allowance for engineered equipment is often
required to account for continuing design development that
Pricing, on the other hand, is adjusting the costs that have occurs even after placement of a purchase order for the
been applied for specific project conditions, and commercial equipment. At the time of a detailed estimate, vendor quotes
terms. Pricing includes adjustments to cost to allow for over- are usually available to account of the purchase cost of the
head and profit, to improve cash flow, or otherwise serve the equipment. However, for specialty engineered equipment, it
business interests of the party preparing the estimate. Thus, is often likely that the quoted cost is not the final cost
the level and type of pricing adjustments depends on the par- incurred by the project. We don’t necessarily understand
ticular party preparing the estimate. when or how the costs will increase, but we can often predict
that they will based on past project experiences. After initial

9.18
AACE INTERNATIONAL ESTIMATING

Figure 9.10—Sample Project Breakdown Structure

Table 9.11—Sample Project Coding Structure

the estimate or the schedule drive the other down to an inap-

One approach is to breakdown the estimate to the level of propriate level of detail. It is also important not to integrate
schedule activities. This can result in a tremendous amount at too high of a summary level.
of detail in the cost estimate and compromise efficient cost
and schedule control. Some of the problems resulting from Integrating at a sufficient level of detail involves keeping the
the one-to-one approach are the following: estimate and schedule structures identical to a certain level of
WBS. Below this level, additional cost accounts and schedule
• Collecting costs by detailed schedule activities is gener- activities are defined separately as required by each. The
ally not feasible. desire is to interface at a level where meaningful relation-
• Schedule activities are subject to much more change ships exist.
within the project than traditional cost codes.
• Tracking bulk material costs by activity is cumbersome Figure 9.11 illustrates a typical cost or estimate structure for a
and requires high administrative costs. process plant, while Figure 9.12 illustrates a sample schedule
• Costs are often not incurred at the same time as con- structure for the same project. At some point, the cost and
struction activities. schedule WBS structures will diverge to meet each struc-
ture’s particular control needs.
The goal must be to determine an appropriate level of detail The basic methodology for integrating the cost estimate and
to correlate cost and schedule. It is important not to let either schedule, therefore, is to let the estimator and scheduler com-

9.25
ESTIMATING AACE INTERNATIONAL

municate on the high-level WBS, and determine the levels at identification fields to the estimate line items as possible (i.e.,
which cost items and schedule activities can be correlated. building location, room number, system number, piping line
Then each further defines the lower level of detail required for number, foundation number, etc.). This will greatly assist in
particular needs. Meaningful information can then be trans- transferring estimate cost data and resource needs to the
mitted at the appropriate level of detail between the two. schedule. Computerized estimating and scheduling systems
are making great strides in providing two-way communica-
It should be acknowledged that one-to-one relationships tion between systems.
between estimate cost items and schedule activities are not
possible. Early and continuous communication between the The cost estimate can be very sensitive to, and is usually pre-
estimator and scheduler can determine the best level at pared in correlation with, a specific schedule. If the schedule
which to maintain compatibility and exchange information. is undefined or subject to change, the estimate is compro-
The estimator can promote integration by assigning as many mised and should reflect the appropriate cost risk. Changes

Figure 9.11—Cost/Estimate WBS Structure

Figure 9.12—Schedule WBS Structure

9.26
AACE INTERNATIONAL ESTIMATING

to the project plan that affect either schedule duration or ESTIMATE REVIEW
completion dates may significantly affect project cost. The
basis estimating algorithm is as follows: Because an estimate is of critical importance to a project’s suc-
cess, it makes sense that the estimate should undergo a rigor-
Total $ = (Qty x unit material $) + ous review process. The estimate should be evaluated not only
(Qty x unit labor hours x wage rate) for its quality or accuracy, but also to ensure that it contains all
the required information and is presented in a way that is
The unit material $, unit labor hours, and wage rate can all be understandable to all project team members and client person-
dependent on the assumed schedule and plan. Unit material nel. A structured (if not formal) estimate review process should
costs are schedule dependent for impacts of inflation and sea- be a standard practice for all estimating departments.
sonal variations. Unit labor hours are schedule dependent for
seasonal labor availability, climate, and schedule impacts due The following sequence of steps will discuss a formal review
to execution plan changes (affecting productivity). Wage process for an internally prepared appropriation grade esti-
rates are also sensitive for impacts of inflation, seasonal vari- mate (an estimate submitted for capital budget authoriza-
ation, and execution plan changes (affecting overtime and/or tion). The level of detail and diligence used during the esti-
shift premiums). mate review cycle will vary both with the strategic impor-
tance, total value, and purpose of the particular estimate.
Many costs in a project are very dependent on the duration. These steps can be easily adapted on a fit-for-use basis. In this
project management and related costs are often estimated (and discussion, we are focused on reviewing and validating an
incurred) on a “level of effort” basis. If the project duration is estimate—we are not discussing bidding strategies which
extended, cost for these activities is directly affected. can involve many other factors and decisions.
Construction indirect costs, such as construction management,
field office, construction equipment rental, security office, and Estimate Review Cycles
site maintenance, etc., are also affected in a similar way. The principle purpose of an estimate review process is to
present information about both the estimate and the project
Some costs are dependent on when they occur in the calen- in a way that allows the reviewer to evaluate that the esti-
dar year. Labor productivity can be adversely affected by mate is of sufficient quality to meet its intended purpose. The
weather (both snow and rain in the winter, or hot weather in estimate review process usually comprises a series of esti-
summer). Construction indirects, such as weather protection mate reviews, beginning with internal estimating depart-
or other construction support costs, can also be similarly ment reviews, engineering reviews, project team reviews,
affected. and continuing with reviews by various levels of manage-
ment, depending on the importance of the project.
Project costs can also be affected by schedule impact of exe-
cution plan changes. Changes to the execution plan to short- Estimating Team/Estimating Department Review
en the project duration may cause out-of-sequence construc- The first review of the estimate should, of course, be held by
tion, overtime, shift premiums, congestion, and inefficient the estimating team that prepared the project estimate. This
labor usage, etc., adversely impacting costs. A delay in equip- is essentially a screening review to ensure that the math is
ment delivery may extend the project schedule increasing correct (extensions of pricing are correct, summaries add up
duration dependent costs. On the other hand, this may also properly, etc.), that the estimate is documented correctly
result in increased efficiencies if labor resources can be allo- (comprehensive basis of estimate document is prepared), and
cated more efficiently, perhaps resulting in less overtime and that it adheres to estimating department guidelines.
shift premiums. Typically, this review is held by the lead estimator with the
members of his estimating team. On very large projects or
It is thus important to evaluate the effects of schedule and those of significant importance, this review may be held by
duration when preparing the estimate. Besides the obvious of the estimating department manager or supervisor.
accounting for the escalation costs to incorporate into the
estimate, schedule impacts may directly affect labor produc-
Check the Math
tivity as well as labor and material pricing. It is also essential
The first item to review is to ensure that all of the math used
to plan early for estimate/schedule integration so that esti-
in the estimate is correct. With today’s computerized esti-
mate results can be shared with the schedule as required to
mating systems, this is much less of a concern than twenty
assist in resource loading, and to aid in earned value analysis
years ago when estimates were primarily prepared by hand
and progress reporting.
using simple calculators; however math errors can still occur.
This can be a major concern when using an electronic spread-
sheets, such as Excel, for preparing the estimate (as opposed
to a commercial computerized estimating system).

9.27
ESTIMATING AACE INTERNATIONAL

Surprisingly, it is very easy to make a formula error in a It is important to ensure that the BOE is clear and easily
spreadsheet, such as inserting a row or column which does understood, and to verify that all information and factors
not get included in a subtotal. All spreadsheet formulas, documented in the BOE have been consistently applied
subtotals and totals should be examined carefully for correct- throughout the estimate (i.e., wage rates, labor productivi-
ness. From a client’s point of view, nothing will help to lose ties, material pricing, subcontract pricing, etc.). Again, the
credibility in the entire estimate faster than a finding a math estimate can lose credibility if different pricing or labor rates
error that went undetected. have been used for the same item within the estimate detail.

Basis of Estimate Estimating Department Guidelines

The comprehensive basis of estimate (BOE) document should A careful review should be done to verify that the cost esti-
be reviewed carefully to ensure that it is both correct and com- mate follows standard estimating guidelines for the depart-
plete. The BOE is an extremely important document. The dol- ment. This would include a review to verify that standard
lar amount indicated on an estimate is meaningless without estimating procedures were followed regarding estimate for-
knowing the parameters, or what is included and not included mat, cost coding, presentation and documentation. This
in the estimate. The BOE serves to clearly define the design would include items such as the following:
basis, planning basis, cost basis, and risk basis of the estimate.
• Verify that the proper estimating methods, techniques,
• Design Basis: The overall scope of the project should be and procedures were used that match the stage of proj-
summarized, with additional detail provided for each ect completeness. In other words, different estimating
area/unit/work package of the project. Specific inclusions techniques will be utilized depending on the type and
and, even more importantly, specific exclusions of items or completeness of the engineering documents and deliver-
facilities should be documented. All assumptions regard- ables available to create the estimate.
ing project scope should be documented. If available, • Confirm that the estimate summary and details are
equipment lists should be attached or referenced, and a organized and presented in the proper format (i.e., fol-
listing of all drawings, sketches, and specifications used in lowing the project WBS and code of accounts); and that
the preparation of the estimate should be documented, the format is consistent with the intended purpose of the
including drawing revision date and number. estimate (i.e., an estimate serving as a basis for cost con-
• Planning Basis: This portion of the BOE should docu- trol contains sufficient detail).
ment information from the integrated project plan that • Ensure that all estimate backup information is organized
affects the estimate. It should include specific informa- properly. Can all values on the summary page of the esti-
tion about any contracting strategies for engineering, mate be traced to the estimate detail pages, and can all
design, procurement, fabrication, and construction. It information on the estimate detail pages be traced to the
should include information about resourcing and project estimate backup or source documents?
execution plans such as the length of the workweek, use • Verify that all allowances and factors are appropriate for
of overtime, and number of shifts, etc. It should include the type of estimate being prepared and are consistent
information about the project schedule and key mile- with comparable projects and estimates.
stone dates affecting the estimate.
• Cost Basis: The source of all pricing used in the estimate This level of estimate review helps to ensure that all esti-
should be documented in this section of the BOE. This mates prepared by the department are utilizing established
would include the source of all bulk material pricing, the guidelines and are presented in a consistent manner from
pricing of major equipment (referencing quotes or pur- project to project.
chase orders if used), and all labor rates including office,
engineering, fabrication, and construction. The source of
all labor workhours should be documented, along with ENGINEERING/DESIGN REVIEW
any assumptions regarding labor productivities. All
allowances included in the estimate should also be clear- The next level of estimate review should be held with the
ly identified. It is also important to document the time engineering team and should evaluate the estimate in terms
basis of the estimate (i.e., what point in time is assumed), of accurately representing the project scope. The core mem-
and the basis for cost escalation included in the estimate. bers of the engineering team are key participants in this
• Risk Basis: Since, by definition, every estimate is a pre- review, along with the lead estimator and estimating team.
diction of probable costs, it is clear that every estimate
involves uncertainty and risk. Contingency is typically Completeness of Engineering Deliverables
included in an estimate to cover the costs associated with
One of the first items to review is the listing of all drawings,
this uncertainty. This section of the BOE should docu-
sketches, specifications, and other engineering deliverables
ment how the contingency was determined, and identi-
used in preparing the estimate to ensure that it is complete
fy key areas of risk and opportunity in the cost estimate.

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AACE INTERNATIONAL ESTIMATING

(see design basis above). The lead engineers need to cross-ref- PROJECT MANAGER/PROJECT TEAM
erence this listing against their own engineering drawing and REVIEW
deliverables lists to make sure that all relevant information
was passed on to the estimating team. The revision numbers
Once the estimate has been reviewed closely by the estimat-
of drawings should be checked to ensure that they match the
ing and engineering teams, it is ready for review by the
intended revision for the estimate. If late changes to the engi-
Project Manager and the rest of the project team. The objec-
neering drawings have occurred, and are intended to be
tive now is to gain the entire project team’s support of the
incorporated into the estimate, this needs to be checked to
estimate, and especially that of the project manager. This is
ensure that all late changes have been included.
also the first point where the estimate should be able to pass
overall validation tests, in addition to a quality review.
Equipment List
For those projects involving major equipment, the equipment
Estimate Documentation
list and equipment pricing should be double-checked by the
The first part of this review should be the examination of the
engineering team for completeness and accuracy. Equipment
estimate documentation by the project team and project man-
is often one of the key drivers of cost and scope, and needs to
ager. This includes the BOE, as well as the estimate summa-
be checked carefully for completeness and accuracy.
ry and estimate detail pages. The purpose is to ensure that
the estimate is presented in an understandable manner. If
Design Basis of Estimate standard estimating guidelines have been followed (as dis-
The engineers should review the BOE and summary of proj- cussed above), all estimates should be presented in a consis-
ect scope carefully to verify and correlate their understand- tent, and understandable style. It is very important that the
ing of the project scope with that expressed in the estimate. project manager fully understand how the estimate is pre-
All exclusions expressed in the BOE should be agreed to, and pared because he/she often becomes the person responsible
all allowances and assumptions verified. If an estimator has for presenting (and defending) the estimate to upper man-
had any questions about interpretation of the drawings or agement, and later to the eventual customer. The entire proj-
engineering deliverables, now is the time to discuss the esti- ect team should also understand the entire estimate package,
mator’s interpretation with the engineers and to make sure format and contents.
that the project scope is accurately reflected in the estimate.
All drawings used for the estimate should be available during
Cost Review
this review. Sometimes it can help to have the estimator explain
Engineering should have already reviewed the engineering,
how each drawing was used in the preparation of the estimate
design, and associated support costs. Now is the time for the
(i.e., was a hard takeoff performed from isometric drawings;
other key members of the project team (project manager, proj-
was a quantity developed from a P&ID and plot plan, etc.).
ect controls, procurement, construction manager, commis-
sioning manager, etc.) to examine their respective costs,
Engineering/Design Costs which are included in the estimate, and to obtain agreement
The engineering team should also review the assumptions that they are correct. Although primarily the responsibility of
and costs associated with the engineering and design portion the estimating team, the scope related costs should also be
of the estimate. The engineering team needs to feel comfort- reviewed by the rest of the project team to gain consensus. In
able that the amount of money included in the estimate for particular, the following areas should be discussed:
engineering, design, and support is adequate for the level of
effort expected to be expended on the project. • Verify that the latest project schedule agrees with the
estimate (particularly as it relates to escalation).
Risk Basis of Estimate • Examine the project administration and other home office-
Lastly, the engineering team should review the risk basis of related costs for reasonableness (engineering/design costs
the estimate, and be in position to agree with the analysis of should have already been reviewed).
cost risk associated with the estimate. The level of risk asso- • Conduct a final constructability review to ensure that the
ciated with scope definition, and with engineering/design methods of installation and construction assumed in the
costs should be of particular interest to the engineering team, estimate are reasonable and cost-effective.
and concurrence sought. • Review the construction indirect costs (i.e., field staff,
temporary facilities, temporary services, construction
As mentioned, the goal of this portion of the estimate review equipment and services, construction tools and consum-
is to make sure that the scope of the project as understood by ables, etc.) to make sure they are reasonable.
engineering is reflected in the estimate. At the end of the • Ensure that all required start-up and commissioning
engineering review, the estimate should have the full support materials are included (if necessary). This is often an area
of the engineering team during subsequent reviews. of costs which is overlooked.

9.29
ESTIMATING AACE INTERNATIONAL

For international projects, there may be many more items of Reconciliation to Past Estimates
cost that should be carefully reviewed. These may include Lastly, the project manager will usually be interested in rec-
such items as international labor adjustments for productivi- onciliation of the current estimate to the preceding estimate
ties and wage rates, adjustments for workweek variations, (or estimates). This is an important, but often overlooked,
material cost adjustments for both local and globally sourced aspect to the overall estimate review process. The current
materials, international freight costs, international duties and estimate can gain credibility by comparing it with earlier esti-
taxes, labor camp costs, premiums for expatriate costs, etc. mates and clearly explaining the differences and reasons for
the differences. The reconciliation can usually be presented at
Estimate Validation a high level without excessive detail, but the backup should
In most organizations, the project manager is ultimately held be available in case it is required during the review.
responsible for the execution of the project. Therefore, the
project manager has a vested interest in performing “sanity Management Reviews
checks” or otherwise validating the estimate as reasonable. The last series of reviews is usually held by various levels of
Most experienced project managers will have various rules- corporate management. The number of upper management
of-thumb that they will want to use to verify against the esti- reviews and the level of management they are presented to
mate. Regardless, the estimate should include an estimate typically varies with the strategic importance and/or total
review “metrics” report which summarizes and compares estimated cost of the particular project. These reviews are
several key benchmark ratios and factors versus historical typically held at a very high level of analysis and usually do
(and sometimes estimated) values from similar projects. not involve the details of the estimate. Upper management
reviews often focus on substantiating the overall adequacy of
The goal is to ensure that key metrics from the estimate are in the estimate in regards to its intended use. In other words,
line with the same metrics from similar projects. If there is a can management be assured that the level of detail available
large discrepancy, it must be explainable by the particular cir- for the estimate, the estimating methods employed, and the
cumstances of the estimated project versus the similar com- skills of the estimating and project teams support their deci-
pleted projects. Such comparison metrics may includes val- sion-making process on whether to proceed?
ues such as percent of administration (home office) costs, per-
cent of engineering/design costs, equipment to total field As with the project manager review, estimate validation is a
cost ratios, equipment to totals project cost ratios, cost per key element of the upper management reviews. It is impor-
piece of equipment, workhours per piece of equipment, cost tant to be able to explain and demonstrate that metrics for the
to plant capacity ratios ($/BBL, $/SM), etc. Sometimes the current estimate are in line with data from other similar proj-
metrics will be generated down to the discipline level where ects—i.e., that the estimate is reasonable. It is also important
you may look at ratios, such as cost per diameter inch of pip- to show where the metrics may be substantially different from
ing, cost per cubic meter of concrete, cost per ton of steel, etc. other projects, and provide explanations for the differences.
In addition to examining key benchmark metrics and ratios,
another form of estimate validation may involve preparing a Management will also be interested in the cost-risk assess-
quick check estimate using order-of-magnitude estimating ment. It is important to clearly and concisely explain how the
methods. Again, any large discrepancies between the esti- contingency amount was developed and what the levels of
mates should be explainable by the peculiarities of the project. risk are. It is then up to management to accept the level of
risk indicated or change the amount of contingency and
Estimate validation is a very important activity during the accept more or less risk for the project. When reviewing the
project review cycle, and the proper tools need to be in place risk analysis, it is always important to discuss the areas of
to allow this to occur. Benchmarking key estimate ratios and high risk, and what is being done to mitigate those risks.
metrics depends upon having a project history database in
place to collect, analyze, and present the required informa- Up until the management reviews, the estimate review will
tion. Similarly, the capability to provide quick-check esti- have typically concentrated on the project as defined by the
mates depends on having the correct strategic and conceptu- project scope documents. If the project was built according to
al estimating information and tools ready for use. the defined project scope alternative, what will it cost?
Usually, the recommended alternative for project scope has
Risk Basis of Estimate long since been determined and agreed to by the project
The project manager and project team should again review team, and the engineering deliverables created for preparing
the risk basis of the estimate and agree with the analysis of the estimate have been focused on a single design alternative.
cost risk associated with the project. The project manager, in However, many times management will start asking ques-
particular, should agree with the risk assessment and contin- tions concerning other alternative scopes or designs. One of
gency amounts, and be able to defend it in subsequent the certainties is that management will always think the proj-
review to upper or corporate management. ect cost is too high and will now be probing to determine if
there are lesser cost options. Therefore, it is important to have

9.30
AACE INTERNATIONAL ESTIMATING

available for the management reviews any earlier Estimating Personnel Used
design/cost alternatives, and the decision tree leading to the Next, you will want to know who prepared the estimate, and
selected design. what their level of estimating experience is. Do they have
established estimating procedures and guidelines? Was the
The effectiveness of an estimate review relies on the informa- estimate checked and reviewed before publication?
tion presented and the manner in which it is presented. The
above discussion has concentrated on how to structure a Estimating Methodology and Procedures
sequence of estimate reviews for internally prepared estimates What estimating methods, techniques and procedures were
to ensure that estimates are well-documented, consistent, reli- used in preparing the estimate? Are they appropriate for the
able, and appropriate for their intended use. After this review level of information available and project type? Were differ-
cycle, the level of estimate accuracy should be apparent, reflec- ent estimating methods used for different parts of the esti-
tive of the scope information available for preparing the esti- mate? Is the level of detail in the estimate sufficient for the
mate, and capable of supporting the required decision-making purpose of the estimate? Were parts of the project difficult to
process for the project. Next, we will discuss techniques for estimate, and why? Was sufficient time available to prepare
reviewing estimates prepared by others. the estimate? What adjustments were made to the estimate
for location, complexity, etc., and are they reasonable? Was
the estimate prepared utilizing a code of account structure?
REVIEWING ESTIMATES PREPARED
BY OTHERS Estimate Documentation
Is the estimate documented clearly? Are the estimate sum-
The foregoing discussion has focused on structuring an esti- mary and detail pages well-organized and presented at an
mate review process for the estimates that we internally pre- appropriate level of detail? Is every cost appearing on the
pare to ensure that the estimate is of a high quality and sup- estimate summary traceable to the estimate detail and other
ports the decision making process of our management. estimate backup?
Often, we may also find ourselves in a position to review
(and/or approve) estimates prepared by others and that may
or may not have gone through a rigorous internal review Estimate Validation
cycle as described above. When reviewing estimates by oth- Hopefully, the estimate for review will include a metrics
ers, we always want to keep in mind the basic fundamentals report showing key estimating metrics and benchmark ratios
previously described. Complicating the matter, however, is for the estimate and similar past projects. You should review
the problem that many times the amount of time allowed for this report and question any significant differences. You
a complete estimate review is very short. Thus the review of should also have your own set of metrics and statistics from
an estimate prepared by others is usually accomplished by a your own project history to compare against.
critical assessment of the estimate and its documentation,
and a series of questions to assist in evaluating the level of At this point, you may also develop your own quick-check
diligence used in preparing the estimate. The following dis- estimate (using conceptual estimating techniques) for com-
cussion centers on guidelines that we can use to efficiently parison purposes. This is always a good technique to see if
review estimates prepared by others. the estimate being reviewed is reasonable. If there is a signif-
icant difference, then question the estimator and listen to
Basis of Estimate their explanations and opinions for the deltas. Significant dif-
The first thing to assess is the BOE. Is it well-organized and ferences between the check estimate and the estimate being
complete? Does it provide the required information regard- reviewed may indicate the need for taking a more thorough
ing the design basis, planning basis, cost basis, and risk basis examination of the estimate detail.
of the estimate? Does the design basis clearly document the
scope of the project, and have all engineering deliverables Estimate Detail
used in developing the estimate been identified? Have all If the preceding inquiry (or should we say interrogation) has
scope assumptions been acknowledged? Is the planning gone well, and you are confident that the estimate appears to
basis (schedule, resource plan, construction plan, etc.) rea- have been prepared in a professional manner, you are ready
sonable? Is the basis of cost (material prices, labor rates, labor to delve into some of the estimate details to verify estimate
productivities) reasonable, in line with expectations, and con- quality. The goal is to check that selected areas of the estimate
sistently applied throughout the estimate? Has the risk basis can withstand further scrutiny. The key here is to not get too
been clearly defined, and is it reasonable for the level of infor- deep into the details and lose sight of the forest for the trees.
mation available to prepare the estimate? An important point to remember here is the “80/20
rule.”This principle generalizes that 80 percent of the cost
will come from 20 percent of the estimate line items. For any

9.31
ESTIMATING AACE INTERNATIONAL

particular estimate, the significant cost drivers may vary. general, a complete estimate report will include the following:
Sometimes, the main cost driver may be a particular process
unit of the project; other times it may be the type of process • basis of estimate (BOE),
equipment or machinery throughout the project; and still • estimate summaries,
other times it may be the overall bulk material quantities or • estimate detail,
labor hours. You should examine the estimate summary and • estimate benchmarking report,
detail pages closely to ascertain which aspects of the estimate • estimate reconciliation report, and
you may want to examine in closer detail. Basically, you • estimate backup.
should examine in detail those items of the estimate that will
have the most significant cost impact if estimated incorrectly. We have previously talked about the BOE in the prior dis-
cussion on estimate reviews. This is a critically important
One review technique that is often employed is to thorough- document in describing the scope that is represented by the
ly examine and review the estimating steps that were used estimated cost and in conveying all the assumptions that
for a particular part of the estimate. Select an area of the esti- have been embedded into the estimate. A well-written BOE
mate, and ask how the quantities were derived. Don’t just document can go a long ways towards providing confidence
take their word for it, however. Ask the estimators to show in the estimate itself.
you the drawings from which the quantities were generated.
Perform a quick takeoff to see if the quantities can be verified. Typically, various estimate summaries may be prepared
Ask what the basis was for the unit material price and labor according to the project WBS. For example, one estimate
workhours. Have these been consistent throughout the esti- summary may be prepared by project area, and then broken
mate? What adjustments were made and why? If the answers down by process system, while another summary may be
to your questions are evasive, it may call into question the prepared by process system and then broken into project
credibility of the entire estimate, and a more thorough review areas within each process system. The various parties inter-
of the complete estimate may be necessary. If your questions ested in the estimate will all have different ways in which
are answered confidently, and the answers can be verified they want to see the estimate summarized, depending on the
against the engineering deliverables and scope information, classification and end-use of the estimate being prepared. It
then you may decide to check the rest of the estimate details is very important that every value appearing on an estimate
in a more cursory fashion. summary be easily tracked back to the estimate detail.

Typically in this situation, once you have shown the where- The Estimate Detail typically shows all of the individual cost
withal to compel the estimator to back up any claims or estimating relationships (CERs) used in preparing the esti-
explanations, then he discovers he can’t just “pull the wool mate. For a conceptual estimate, it may be a page or less of
over your eyes.” From that point forward, you will usually calculations; however, for a large detailed estimate it may
find that you are getting honest answers to your questions. include hundreds of pages of individual line items. This
report is also prepared according to the project WBS, and
The goal of an estimate is to predict the probable cost of a may be provided in a variety of different sort options.
project. The goal of an estimate review is to determine that a
high quality and sufficiently accurate estimate has been pre- An estimate benchmarking report will often be included. It
pared. The review should ensure that the proper estimating should show benchmark information and metrics with other
methods, procedures, techniques, data, and guidelines have similar projects. For example, for a building estimate, this
been employed in the preparation of the estimate. The use of report may show the cost per square meter of building area
a structured estimate review cycle and estimating review ($/m2) compared to recent similar projects. The key bench-
techniques will help to ensure that quality estimates are con- mark metrics and ratios presented may include the following
sistently prepared which effectively support the decision- items:
making process by management.
• project administration costs as percent of total project cost,
• engineering costs as percent of total project cost,
PRESENTING THE ESTIMATE • ratio of equipment cost to total project cost,
• construction labor as percent of total field cost,
The method in which you present an estimate to your customer • total field costs as percent of total project cost,
(internal company management or external client) is extremely • project cost per unit of capacity, and
important. An estimate should never be presented as just a list • average composite crew rate by trade.
of numbers, or estimating calculations. A number (or even a
range of numbers) is meaningless without the supporting An estimate reconciliation report should also be prepared
information that describes what the number represents, and, that reconciles the current estimate with any previous esti-
sometimes even more importantly, what it doesn’t represent. In mates prepared for the same project. This report should iden-

9.32
AACE INTERNATIONAL ESTIMATING

tify the cost differences dues to changes in scope, changes in should also be maintained. Many of these are now available
pricing, changes in risk, etc. on the Internet. These may provide technical information,
pricing information, and other data required by an estimator.
Lastly, all estimate backup should be compiled and available. There are hundreds of sources published every year that con-
This information may not need to be presented to the esti- tain useful information for an estimator. This includes AACE
mate customer, but should be available if questions arise. publications: (Recommended Standards and Practices,
This will include all notes, documentation, drawings, engi- Professional Practice Guides, Cost Engineering Magazine, etc.), as
neering deliverables, and vendor quotes, etc., that were used well as publications from other professional organizations
in preparation of the estimate. and commercial sources.

Estimating software is another important resource.

ESTIMATING RESOURCES Estimating software can enhance the accuracy and consisten-
cy of estimates, while reducing the time required to prepare
Reliable estimate preparation depends on information. estimates. The software may be commercial estimating soft-
Besides the engineering and design information needed to ware or be developed in-house. When using the cost data-
quantify the scope of the project, other information is also bases supplied with commercial estimating software, it is
required, such as always important to calibrate the data to your specific needs
and estimating situations. Estimating software should also be
• conceptual estimating factors; regarded as simply a tool to facilitate the preparation of esti-
• material cost and pricing information; mates by estimators. Estimating software can’t convert a non-
• labor workhour charts and information; estimator into an estimator.
• labor productivity information;
• labor wage rates, composite crew mixes, etc.; and
• other estimating factors and information. All of the resources described above serve to help the most
Successful estimators will rely on a myriad of resources to important resource to successful estimating—well trained and
obtain this information. Estimating guideline and procedure experienced estimators. Estimating is a profession requiring an
manuals will be used to promote standard estimating meth- ongoing commitment to training and development.
ods and procedures. In-house cost history manuals will pro-
vide historical cost data for completed projects. Special cost
studies may have been developed to serve as resources for CONCLUSION
particular estimating applications, such as special scaffolding
studies, concrete placement studies, labor productivity stud- As potential projects are considered as investment opportu-
ies, etc. Engineering and design manuals and specifications nities, management will require various estimates to support
will be used to identify the specific materials of construction, key decision points. At each of these points, the level of engi-
and all related labor operations required to complete the neering and technical information available to prepare the
scope of work. estimate will change. Accordingly, the techniques and meth-
ods to prepare the estimates will also vary. The basic estimat-
Every completed project should be documented by a final ing techniques are well established, and this chapter has been
job report covering everything about a project from design intended to review the estimating process and relevant esti-
considerations to construction execution strategy to cost mating methodologies for the various types of estimates.
summaries. Selected data from the final job reports should
be collected and stored in a computerized database and The determination of using a conceptual approach versus a
made available to all estimators. Estimators continually rely detailed approach will depend on many factors: the end use
on past project information and cost data in the preparation of the estimate, the amount of time and money available to
of new estimates. prepare the estimate, the estimating tools available, and the
previous historical information available. A conceptual esti-
Collections of labor charts will typically provide standard mating approach (capacity factored, equipment factored,
labor workhour units by task. These are generally normal- parametric) requires a significant effort in data-gathering and
ized for location and time and serve as a base for estimate methods development before estimate preparation ever
preparation, and then are adjusted for specific project begins. In contrast, a detailed estimating approach requires a
requirements. They will often be supplemented by commer- large effort during the actual preparation of the estimate.
cial estimating database publications. In-house and commer-
cial material cost databases and publications will also be With either approach, the challenge for the estimator is to
needed. Current wage rate information should be main- evaluate the unique combination of required material and
tained, including union agreements, for all locations the esti- labor resources in order to prepare a cost estimate for a proj-
mator may be involved with. A library of vendor catalogs ect to be completed in the future. The use of structured esti-

9.33
ESTIMATING AACE INTERNATIONAL

mating techniques and tools, high-quality engineering deliv- 12. Lang, H. J. 1948. “Simplified Approach to Preliminary
erables, and good historical data and pricing information, Cost Estimates.” Chemical Engineering. June.
combined with estimating skill and experience, will assure 13. Miller, C. A. 1965. “New Cost Factors Give Quick
that the best possible estimate is prepared. The desired end Accurate Estimates.” Chemical Engineering. September.
result is to prepare estimates that are well-documented, con- 14. Miller, C. A. 1978. “Capital Cost Estimating – A Science
sistent, reliable, appropriate, accurate, and that support the Rather than an Art.” Cost Engineer’s Notebook.
decision-making process for the project. Morgantown, West Virginia: AACE International.
15. NASA. Parametric Cost Estimating Handbook.
Estimating is obviously a vital component to project success. 16. Nishimura, M. 1995. Composite-Factored Engineering.
Estimates are used not only to establish project budgets, but AACE Transactions. Morgantown, West Virginia: AACE
also to provide accurate information to support scheduling, International.
cost monitoring, and progress measurement of a project dur- 17. Querns, Wesley R. 1989. “What is Contingency,
ing execution. Estimating is, thus, but one component to total Anyways?” AACE Transactions. Morgantown, West
cost management—the integration of cost engineering and Virginia: AACE International.
cost management principles used in managing the total life 18. Rodl, R. H., P. Prinzing, and D. Aichert. 1985. Cost
cycle cost investment in strategic assets. Estimating for Chemical Plants. AACE Transactions.
Morgantown, West Virginia: AACE International.
19. Rose, A. 1982. “An Organized Approach to Parametric
Estimating.” Transactions of the Seventh International Cost
Engineering Congress.
20. Williams, R., Jr. 1947. “Six-Tenths Factor Aids in
REFERENCES Approximating Costs.” Chemical Engineering. December.
21. Woodward, Charles P., and Mark T. Chen. 2002. “Cost
1. AACE International. Recommended Practice for Cost Estimating Basics.” Skills and Knowledge of a Cost
Estimate Classification. 17-R-97. Morgantown, West Engineer. 4th Edition. Morgantown, West Virginia: AACE
Virginia. International.
2. AACE International. Recommended Practice for Cost 22. Woodward, Charles P., and Mark T. Chen. 2002. “Order-
Estimate Classification—As Applied in Engineering, of-Magnitude Estimating.” Skills and Knowledge of Cost
Procurement, and Construction for the Process Industries Engineering. 4th Edition. Morgantown, West Virginia:
18-R-97. Morgantown, West Virginia. AACE International.
3. Black, Dr. J. H. 1984. “Application of Parametric 23. Woodward, Charles P., and Mark T. Chen. 2002.
Estimating to Cost Engineering.” AACE Transactions. “Definitive Estimating.” Skills and Knowledge of Cost
Morgantown, West Virginia: AACE International. Engineering. 4th Edition. Morgantown, West Virginia:
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Complete Plant Costs,” Chemical Engineering. April.
5. Dysert, L. R. 1999. “Developing a Parametric Model for
Estimating Process Control Costs.” AACE Transactions,
Morgantown, West Virginia: AACE International.
6. Dysert, L. R. and Elliott, B. G. 2000. “The Estimate
Review and Validation Process.” AACE Transactions,
AACE International, 2000
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an Estimating Department.” AACE Transactions.
Morgantown, West Virginia: AACE International.
8. Guthrie, K. M. 1969. “Data and Techniques for
Preliminary Capital Cost Estimating.”Chemical
Engineering. March.
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Estimation.” Chemical Engineering. October.

9.34