There is a constant drive to improve the quality of estimates. This is not the same as improving the accuracy. The two are separate issues. If however we improve the quality, there will be a knock on effect of improving the accuracy.

    AACE International Recommended Practice 18R-97 establishes the classes of estimates that are followed by most of the companies within the Oil, Gas and Chemical sectors. The recommended practice lays out usage, preparation methodology and accuracy for the classes of estimate. It also establishes which class of estimate is appropriate for a give phase of project. This is all well and good because it recommends an industry standard. It does not however address what we as estimating professionals can do to actually improve the quality of the various classes of estimates.

    If we are to improve the quality of estimates, we must improve those things, which have a direct effect on the quality of the estimate. This includes: well-trained estimators, inputs, execution strategy, project schedule, unit costs and well identified project risks.

    Well-trained estimators is listed first as I believe there are too many “estimators” in the industry who are no more than software jockeys. There are the people who believe that because they can use a piece of software they can call themselves an estimator. When in reality they have no understanding of how a project is to be executed or what it takes to execute the work. As such they do not know whether an estimate is good or bad. To improve the quality of the estimators, both owners and contractors must be willing to spend the money to train the estimators so that the estimators understand the work processes. Similarly the estimators must be willing to spend time in the field on projects as part of their education and development. There is a belief that a good estimating software package can make up for estimators that are not well trained. This is a misconception, which must be wiped out. It does not matter how good a software package is if the estimator does not have the required fundamentals.

    Inputs encompasses more than just the quantities, work-hours and other data that makes up the estimate. It is the actual entering of data into the estimate. Unfortunately it is not uncommon to see input errors where there is a missed decimal, incorrect design parameters being used when using programs such as Aspen Capital Cost Estimator or incorrect unit of measure being used for the input of unit cost on bulk materials. The best ways to improve the inputs to the estimates is to improve the training of the estimators and to provide the estimators sufficient time to prepare the estimate and have a thorough review cycle which includes discipline reviews, department reviews and a project review before going to corporate reviews. I have seen all too often where engineering and procurement slip but estimating must hold to the original schedule. When this happens, the review process is cut short and input errors are missed.

    A good understanding of the execution strategy is important, as it will have a direct impact on costs. For example, on a project where there are significant cut and fill quantities knowing where cut quantities will be stockpiled or disposed of is key as it affects the unit cost to transport the soils. Similarly if an estimator estimates the cost for a portion of the scope as direct execution when it is to be subcontracted, the costs will be incorrect, as it will have missed the subcontractor’s mark-ups.

    The project schedule is important, as it will allow the estimator to properly identify the cost of the time related items and forward escalation costs. A well-developed schedule is a joint effort by planning and estimating. Planning needs the final estimated quantities from estimating to validate the durations and the work-hours to establish manpower histograms. These histograms can be used to identify any congestion issues, which may affect labor productivity and the costs. Once the schedule has been validated, the estimator can better estimate the cost of the time sensitive costs.

    The importance of good unit costs is well understood. Having firm quotes with fixed validity periods is key for contractors’ proposals. Firm rates will go along way towards improving the accuracy of the estimate. Those unit rates, regardless of source, are meaningless if not applied properly. The incorrect application of unit rates is directly related to not having well trained estimators who are responsible for inputs to the estimate. Unfortunately, the application of the incorrect unit rate to a line item is not uncommon.  One of the leading causes of the misapplication of unit rates is not using the correct estimate or cost code for a database estimating system. I have encountered this on numerous in-depth assurance reviews. Other times it is due to a missing unit rate and the estimator puts in a plug value figuring that it is good enough. Regardless of the reason, the misapplication of unit rates can have a significant impact on the estimate.

    The project risks are all together separate from the uncertainty ranges set in the Monte Carlo analysis to establish project contingency. These risks are discrete events, which may occur during execution. The project team must decide how the risks are to be treated. If a risk is to be mitigated, the mitigation costs must be included in the base estimate. It is unfortunate that mitigation costs are left out of the cost estimate. The residual or remaining risk (post-mitigation) then becomes part of the Monte Carlo risk analysis. It is always a good idea to be able to identify the cost of the mitigation actions in the estimate. When the inevitable cost reduction exercise begins, it will be easy to identify those values and the impact to contingency and overall project value if the mitigation actions are not taken.

    In closing, if we are to improve the quality of estimates, we must first focus on improving the quality of the estimators by investing in their training. As their knowledge of what they are doing and why they are doing it improves, then the other focus areas should take care of themselves. A well-trained estimator is an integral part of the project team. He or she will have the required skills to be able to work with the other disciplines to ensure the estimate reflects the scope of work and execution strategy.

    What can be done to improve the quality and accuracy of cost estimates?
    Improving Estimate Quality
    • Training. Having well-trained estimators tops the list when striving to improve the quality of estimates.
    • Data Entry. This is an area where seemingly minor errors can have a major impact on an estimate.
    • Execution Strategy.
    • Project Schedule.
    • Unit Costs.
    • Project Risks.
    • Conclusion.
    more
    What are the total fixed cost total variable cost and total cost of a firm?
    The sum of total fixed cost and total variable cost is called the total cost. 1) TFC curve remains constant throughout all the levels of output as fixed factor is constant in short run. 2) TVC rises as the output is increased by employing more and more of labour units. more
    How do you calculate total cost from marginal cost and fixed cost?
    Table of Given Data. A chart will typically provide information regarding the cost of producing one good, the marginal cost ,and fixed costs. Let's say the cost of producing one good is $250, and the marginal cost of producing another good is $140. The total cost would be $250 + $140 = $390. more
    How do you find fixed cost from marginal cost and total cost?
    To find the marginal cost for a given quantity, just substitute the value for Q into each expression. For total cost, the formulas are given. Fixed cost is found when Q = 0. When total costs are = 34Q3 – 24Q + 9, fixed costs are 34 X 0 – 24 X 0 + 9 = 9. more
    When marginal cost is below average variable cost average variable cost must be?
    decreasing When marginal cost is less than average variable or average total cost, AVC or ATC must be decreasing. When marginal cost is greater than average variable or average total cost, AVC or ATC must be increasing. more
    Which costs are measured on per unit basis fixed costs average cost average variable cost variable costs and marginal cost?
    Out of the list, average cost, average variable cost and marginal cost are are measured on per-unit basis. more
    What is variable cost and fixed cost?
    Meaning. In accounting, fixed costs are expenses that remain constant for a period of time irrespective of the level of outputs. Variable costs are expenses that change directly and proportionally to the changes in business activity level or volume. Incurred when. Even if the output is nil, fixed costs are incurred. more
    What is cash cost and book cost?
    A cash cost is a cash transaction, or cash flow. If a company purchases an asset, it realizes a cash cost. A book cost is not a cash flow, but it is an accounting entry that represents some change in value. When a company records a depreciation charge of $4 million in a tax year, no money changes hands. more
    How do you calculate total cost marginal cost average variable cost and ATC?
    Marginal Cost (MC) & Average Total Cost (ATC)
    1. TC=VC+FC. Now divide total cost by quantity of output to get average total cost.
    2. ATC=TC/Q. Average total cost can be very handy for firms to compare efficiency at different output or when adjusting different factors of production.
    3. MC = Change in TC / Change in Q.
    more
    How do you find total cost from marginal cost and average total cost?
    Marginal Cost (MC) & Average Total Cost (ATC)
    1. TC=VC+FC. Now divide total cost by quantity of output to get average total cost.
    2. ATC=TC/Q. Average total cost can be very handy for firms to compare efficiency at different output or when adjusting different factors of production.
    3. MC = Change in TC / Change in Q.
    more
    What are total fixed cost total variable cost and total cost of a firm How are they related?
    The sum of total fixed cost and total variable cost is called the total cost. 1) TFC curve remains constant throughout all the levels of output as fixed factor is constant in short run. 2) TVC rises as the output is increased by employing more and more of labour units. more

    Source: www.linkedin.com

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