The high costs of low estimates
Underestimating the scope or cost of a project can have serious consequences. Our framework covers tools, processes and data to avoid unrealistic estimates.
Both the mining and oil and gas industries are well aware of the need for accurate estimating of project cost prior to sanction. Here, we identify five common mistakes in estimating and advise five strategies to avoid setting unrealistic targets and improve confidence in the results.
Five common mistakes in estimating
The five most common estimating mistakes are:
- The omission of undefined scope of work from the estimate
- Over optimistic performance is assumed
- Possible risk is omitted
- Inexperienced or biased estimator used for the type of estimate or project
- Inadequate duration allowed for estimate development
In our opinion, the most effective way to avoid these five common mistakes is to ensure that the estimator chosen for the project has sufficient experience for the type of project, as well as the right tools, data and processes for the required level of detail of the estimate. The estimator should ideally be independent of any project bias, which would mean engaging an estimator who would not be invited to tender for the FEED.
How stakeholders can affect the estimate
The motivations of the various stakeholders involved in the development process often affect the estimate.
Examples of this include:
- Owner – who is keen to deliver the project as quickly and cost effectively as possible to book reserves and maximize ROI. This can lead to pressure from management on the project team to reduce the cost estimate to aid the final investment decision process.
- The project team - who have a vested interest in the project being approved for job security and may be willing to accept a lower cost estimate than practical with the belief that, once the projects passes into execution, the cost is expected to rise anyway.
- Design engineer – who may deliver an estimate that is incomplete or understated to try and meet the expectation of the client with a view to securing engineering hours in the Front End Engineering Design (FEED) stage.
While owners have independent assurance teams review projects, these reviews are often designed to assure compliance with an internal corporate process rather than validate or confirm accuracy of an estimate against a scope of work and tend to be very broad and encompass many more technical aspects associated with the project rather than focus on the estimate scope, schedule and cost. As a result, low estimates are often sanctioned which are unachievable.
Five strategies to provide confidence in your estimate
Methodology: Establish an appropriate estimate methodology to ensure a reliable estimate. The estimate needs to be aligned to the project Work Breakdown Structure and schedule, and, depending on the operator, may need to meet any internal governance/approval processes.
Scope: Verify the level of scope definition and understand the cost drivers. Validating unit rates for labour, plant equipment, marine equipment and materials captures whether appropriate pricing has been applied, taking into account market conditions, geographical locations and the proposed procurement strategy. It is critical that the location, nature of the site access and working conditions are accurately assessed with regards to productivity.
Assure: Quality assure the estimate. Assurance services can be carried out either by an independent owner team or consultant.
Risk: Use industry recognized risk analysis processes. Further improve confidence in the results by assessing if the risks, opportunities and contingency allowances are proportional to the stage of design, basis of estimate information and schedule of the project.
Benchmark: Use data from similar projects. Benchmarking the estimate cost and schedule against similar projects which have already been completed can identify any final areas of concern.
In the current economic climate, the challenge to the natural resources industry to deliver projects safely, on time and on budget is more important than ever. It is therefore essential to have confidence the estimate has been produced using professional standards and methodologies, industry tools, and current data reflective of project and market conditions.