An EPC Project Cost Breakdown: How Project Costs Are Estimated

December 9, 2022
Detail Engineering & Design
Fabrication & Construction
Front-end Planning

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With engineering, procurement, and construction (EPC) and design-build capital project delivery methods, project risk is transferred from the project owner to the contractor. EPC delivery methods can be highly beneficial to project owners to maintain their return on investment (ROI). EPC contractors should utilize the stage gate process during front-end planning (FEP) stages to obtain a robust scope definition and provide a highly accurate cost estimate to avoid potential cost overruns.

Let’s take a look into the EPC project cost breakdown through each stage of the stage gate process, including how EPC project costs are typically calculated and what variables influence the cost estimation.

EPC Project Cost Breakdown: Cost Estimations Through FEP Stages

During the stage gate process, we provide an initial cost estimation during FEP 1. As the project progresses through each gate, the estimate is refined. The certainty of the estimate becomes stronger as the project progresses from FEP 1 to FEP 3, resulting in a highly accurate cost estimation. It should be noted that the accuracy of estimations is strongly dependent on the level of scope definition. The project scope should be solidified as early and with as much detail as possible to increase the cost estimate certainty. Below, we detail the estimation and refinement process through the FEP stages of a project.

Improving Software Development Tracking and Estimation Inside the Cone of Uncertainty,” Pongtip Aroonvatanaporn, Thanida Hongsongkiat, and Barry Boehm, Center for Systems and Software Engineering, University of Southern California.

It’s important to note that during the estimation process, discipline-specific or overall project contingency is often added to estimations to account for unforeseen project costs that may arise during project execution and are based on detailed risk profiles for a given project.

FEP 1: Opportunity Identification and Assessment

In FEP 1, project plans are presented, the initial project scope is established, and a cost estimate is provided. This cost estimate is often created through a factor estimation for the completion of the project. Cost estimations established in FEP 1 should not be exceeded during the execution of the project. It should be noted that FEP 1 should primarily focus on assessing the project and its potential cost, not the actual cost of the project. 

At this stage, typically the only information available is what type of equipment is required for project execution. The size of the equipment may be unknown at this time, but requirements such as piping quantities and rough linear footage of piping can be factored along with potential labor costs, noting that quantities for items such as fittings are likely unknown. A factor estimation, often based on previous jobs or industry standards, can be applied to obtain the initial rough estimate of the project cost. At this stage, estimates are usually a Rough Order of Magnitude at +/- 50%. 

FEP 2: Scope Development and Conceptual Engineering

During phase two of the capital project stage gate process, FEP 2, the scope of the project is further defined and conceptual designs are created. During this phase, project owners receive quotes for the cost of materials and equipment that will be utilized throughout the project, including in the engineering and construction phases. The objective of the FEP 2 stage is to continue refining and developing the project scope while remaining within the initial cost estimate. 

During this stage, more effort is put into front-end engineering and design, resulting in a better understanding of the layout and routing required for the project as well as a higher definition of quantities. Due to the higher level of detail available, the estimate is further refined during FEP 2. This estimation usually involves some degree of factoring. Typically, the project is approved to move on to the next phase if the cost estimate is +/- 30% of the initial cost estimate.

FEP 3: Execution Planning and Basic Engineering

The final stage of front-end planning, FEP 3, is also referred to as FEED—front-end engineering development or front-end engineering design—as well as basic engineering. During FEP 3, preliminary engineering designs from FEP 2 become more detailed with better quantities and better layouts. At this stage, the scope of the project should be strong and fully defined, and the estimated cost should be as detailed as possible. 

During FEP 3, engineering packages for detail design (execution stage) should be fully defined. Issued for Design (IFD) or Issued for Bid (IFB) packages are available to solicit detail design and construction bids from EPC contractors. Drawings should be available to indicate the exact materials and quantities required for the work to be performed. As part of execution planning, the actual construction sequence, staffing and support plans, and construction equipment plans should be analyzed. The objective of FEP 3 is to provide a final budget estimate that is +/- 10-15% of the initial cost estimate. The cost estimate is considered finalized at this stage and the level of detail is acceptable to tender bids from contractors. Accuracy ranges can be categorized based on the level of project definition and placed into various estimation classes, as depicted below.

Look to Front-End Planning Experts at H+M Industrial EPC

At H+M Industrial EPC, we have the in-house capabilities and resources to help you make the best project decisions. Our proven front-end planning process includes process engineering, detailed project estimations, integrated project schedule development, feasibility studies, concept development, detailed scope development, and constructability analysis to drive project success from the very beginning.

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