The profitability of a capital project relies heavily on cost estimation. The better the cost estimate accuracy, the higher the chances of the success of the project. Below, we detail the importance of accurate cost estimations and the best practices to follow for capital project cost estimates.
The Importance of Accurate Capital Project Cost Estimates
With the engineering, procurement, and construction (EPC) capital project delivery approach, developing an early and strong scope is critical to estimating accurate costs. A well-defined and detailed scope captures all of the requirements of a project including timeline, tasks, and deliverables to estimate an initial budget. In the front-end planning (FEP) phase, the stage gate process refines both the scope and the initial cost estimate of the project. As the project progresses, the cost estimate narrows from a Rough Order of Magnitude of +/- 50% in FEP 1 to +/- 10-15% in FEP 3. This highlights the importance of accurately defining the project scope to improve the cost estimate certainty.
The importance of having accurate capital project cost estimates is also reflected in the execution strategy. Cost estimates help gauge the ROI of the project, letting a project owner justify carrying out the project or canceling it altogether.
Though capital project cost estimates are critical to the outcome of a project, their accuracy can be easily impacted by various factors including:
- Scope definition: A lack of scope definition is the biggest factor that can lead to inaccurate cost estimates. If a project owner is unsure of the project requirements, it is difficult to forecast all of the potential costs. For example, cost estimate figures can be significantly influenced by the addition of a single piece of equipment, as it involves civil foundation work, steel supports, piping, instruments, and electrical components to make the equipment function.
- Timeline: The time needed to prepare cost estimates depends on the size of the project. While two weeks can be sufficient to prepare estimates for a small-cap project, the time frame can be up to one month depending on scale. A tighter timeline could potentially lead to incorrect estimates due to decreased time for analysis.
- Market conditions: Capital project cost estimates often depend on current material indexes to establish pricing. However, fluctuations in materials and steel pricing can make it difficult to calculate accurate cost estimates during the FEP 1 and FEP 2 stages, thereby adding more escalation risk. Labor costs and regional per diem rates also vary frequently, further impacting project cost estimates.
- Communication: No capital project cost estimate is completed by a single person. Communication among the project stakeholders is a key aspect for arriving at accurate cost estimates. A lead estimator can facilitate the cost estimation process and receive the current prices of the requirements only when supported by the entire project team as well as by any subcontractors.
- Knowledge and experience of estimators: An estimator’s experience, combined with the practical knowledge of the construction process, can significantly improve the accuracy and quality of capital project cost estimates.
Best Practices for Quality Estimates
An accurate and high-quality capital project cost estimate is based on the variables that influence the current pricing of materials, equipment, and labor costs as well as the detailed risk profile of a given project and any unforeseen costs that may arise during the execution phase. The following best practices help ensure accurate cost estimation for capital projects.
Well-Defined Project Scope
A robust, well-defined, and early project scope allows for engineering and construction teams to advise on the best execution strategy at an earlier stage in the project. A well-defined project scope also includes as many of the project requirements as possible, enabling project owners and contractors to estimate a budget more accurately.
One way to increase the confidence of the project scope is to do field visits as early on in the estimate phase as possible. This practice can provide significant inputs for capital project cost estimates and pay major dividends in the long run.
Utilization of Stage Gate Process
The initial cost estimation gets refined as the project passes through each gate. By the time a project completes the FEP 3 phase in the stage gate process, the cost estimate is considered finalized to accept tender bids from contractors.
Detailed Tender Documentation/Bidding Process
Detailed tender documentation with accurate and complete engineering drawings and Material Take Offs (MTOs) can help avoid discrepancies in prices quoted by contractors or subcontractors. Consistent quotes during the bidding process result in better cost estimates for the project.
Cost Estimating Tools & Estimator Competency
An estimator’s knowledge and experience in estimating construction disciplines, combined with proven estimating tools, can heavily influence the projected costs. Lack of practical knowledge in the construction process or inexperience in dealing with the complexity of capital projects can cause estimate inaccuracy.
Sufficient Time
Timing can prove to be a challenge while preparing cost estimates. It takes a considerable amount of time to communicate back and forth with the project stakeholders and to align everyone involved in the project regarding the projected costs. Further, subcontractors need to be engaged in the process to get accurate estimates on the current pricing of materials and equipment.
The H+M Approach for Cost Estimation
At H+M Industrial EPC, the coordination between our engineering, procurement, and construction departments in the bid phase of a capital project ensures accurate cost estimates from the very beginning. Our lead estimators have extensive experience in executing construction projects in the field and are supported by an integrated team to evaluate every projected cost estimate. Our strategic EPC approach and in-house capabilities provide the potential for cost savings through value engineering.
