Estimating What the Project Requires, not Merely what is Included on the Drawings
A common error, when assessing and deciding whether to proceed with a capital project is to assume that the cost estimate is more accurate than it really is.
Very often, the assessor is lulled into a false sense of security by statements such as “We have firm quotes for 80% of the items on the equipment list”, or “Our contractor has given us an estimate and told us the accuracy of that estimate is ±10%.”
The problem with these two statements is that they focus on an estimate of what is defined in the drawings and documents; they don’t necessarily cover the entire scope that will eventually be needed to achieve the business objective of the project. Or to put it another way, they may be very accurate estimates of the scope, as defined in the drawings; but the defined scope may not be enough to complete the project.
To say that “we have firm quotes” indicates that the estimate for the items on your list, is probably very accurate. But what of the items that are not on your list?
Similarly, the contractor may be wholly justified in saying his estimate is ±10%. But take a look at the “Assumptions and Exclusions” section in the “Basis of Estimate” document that accompanies the contractor’s estimate. Reading through that section will soon give an indication of whether the contractor is estimating only what’s on his drawings, or whether the contractor is estimating what will be needed to complete the project.
So, how to account for this uncertainty and risk regarding things that are not shown on the drawings? Well, this can be addressed in two ways:
One option is to improve the estimate accuracy range by doing more design work and hence improving the level of definition of the scope.
The second option is to widen the accuracy range (and consequently increase the contingency requirement) to take account of the amount of uncertainty and risk that remains in the scope design.
Whichever of the two routes you choose, it’s important to remember that you want an estimate of the project, not merely an estimate of what’s on the drawings.
If you are wrestling with the problem of how to gain confidence in the accuracy range and contingency requirement in your capital project cost estimates, then contact a Becht expert for advice and support.