Cost Estimate (Estimation)

A. Definition
B. Estimate Classification
C. Cost Estimate Definitions
D. Institute

A. Definition

Estimate (Estimation) is a process of finding the estimate or approximation values that is the numerical value of unknown from incomplete data in a given set of circumstances or samples. The Estimate is to guess or calculate the cost, size, value, etc., by an estimator based on the knowledge and experiences.

Cost Estimate is an approximation or anticipated cost for the specified a scope of work, project, or operation that is the process of predicting a cost of the facilities and services through quantitative analysis of the work required by the design documents to evaluate a single total value and may have identifiable component values. A main purpose of the Cost Estimate is for a feasibility decision, funding arrangement and making a bid or contract. A reliable cost or an accuracy of estimates are necessary for responsible management at every stage of the project that is depended on the details of input information. A project underestimation of resources and costs is one of the most common contributors to project failure. 

Cost Estimate Classification applies the degree of project definition that is to define the budget, funding requirement, determine cash flow, and cost controls. The Cost Estimate Classification is improved by communications among all the stakeholders’ involvement with preparing, evaluating, and using cost estimates: the quality and value of information available to prepare cost estimates; the various methods employed during the estimating process; the accuracy level expected from estimates, and the level of risk associated with estimates.

The Cost Estimate Classification as the primary characteristic for determining an estimate’s classification: Factored Estimate (Capacity or Equipment); Budgetary Cost Estimate; Control Budget Estimate: Detailed Estimate, etc.

AACE developed: Level 1 Screening or Feasibility; Level 2 Conceptual Study or Feasibility; Level 3 Budget Authorization or Control; Level 4 Control or for Bid; Level 5 Check Estimate or for Bid.

ASTM E2516 - 11 Standard Classification for Cost Estimate Classification System.

B. Estimate Classification

Capacity Factored Estimate (Class 5) is a project cost estimate process for a new plant or process unit building cost at the initial feasibility study stage that is similarly defined by the AACE International as a Class 5 Estimate, or Concept Screening Estimate. The Capacity Factored Estimate is derived from the cost of a similar plant of different capacities utilising the appropriate exponential factor, parametric models, judgment, or analogy, and expected accuracy is Low: ‐20% to ‐50%, High: +30% to +100%.

Equipment Factored Estimate (Class 4) is a project cost estimate process during the early stage of design and engineering (e.g., Pre-FEED) that is similarly defined by the AACE as a Class 4 Estimate, or the Study or Feasibility Estimate. The Equipment Factored Estimate method is the equipment factors or parametric models with specifications for the major equipment utilising the equipment installation factors (capacity, etc.), and the expected accuracy is Low: -15% to -30%, High: +20% to +50%.

Budgetary Cost Estimate (Class 3) is a project cost estimate process during that is similarly defined by the AACE as the Class 3 Estimate, or Budget Authorization or Control. The project Budgetary Estimate methodology is semi‐detailed unit costs with assembly level line items, and the expected accuracy is Low: ‐10% to ‐20% and High: +10% to +30%. The Project Budgetary Cost Estimate is normally performed during the FEED and used for the FID (Final Investment Decision).

Control Budget Estimate (Class 2) is a project cost estimate work process that is similarly defined by the AACE Class 2 Estimate, or Control, or Bid/Tender Estimate. The Control Budget Estimate methodology is the detailed unit cost with bulk material take‐offs; budgetary or committed cost from the potential bidders and construction subcontractors for equipment and construction direct cost; the detailed and accurately developed project resources mobilisation plan; and the re-defined company guidelines of indirect costs for the specific project. The expected accuracy of control budget estimate is Low: ‐5% to ‐15% High: +5% to +20%. The Control Budget Estimate is one of the project baseline documents.

Detailed Estimate (Class 1) is a project cost estimate process that is similarly defined by the AACE Class 1 Estimate, or the Check Estimate, or Definitive Estimate. The Detailed Estimate methodology is the detailed unit cost with each component comprising a project scope definition has been quantitatively surveyed and priced using the most realistic unit prices available, and detailed material take‐off after the detailed engineering is completed, and the expected accuracy is Low: ‐3% to ‐10%, High: +3% to +15%.

C. Cost Estimate Definitions

Accuracy is 1) an ability to work or perform without making mistakes; 2) a ​fact of being ​exact or ​correct in the quantity and quality of information; 3) the degree of closeness between an estimate and actual value.

Ball Park Estimate is an approximate or rough estimate. (Refer to a ROM (Rough Order of Magnitude) Estimate)

Benefits and Burdens are the costs for employee benefits (e.g., vacation, life insurance, health insurance, pension funds, etc.) and statutory burdens (e.g., unemployment tax, worker's compensation Insurance, etc.) as specified by local governments, taxing authorities, and company policy. The Benefits and Burdens are based on the totality of the circumstances, both the burdens of the proposed action (e.g., short-term construction impacts) and its benefits (e.g., increased transportation options). One of the best ways to assess the totality of the circumstances is through a robust and inclusive company engagement program.

Budget is the quantitative expenses including money and effort hours for a planned or allowed to expend or to be expended for a work or project.

Budgetary Cost (or Cost Budget) is an estimated cost that used for only planning or studying purpose to understand the size of the business (project or work) and to make a business decision.

Cash Flow Forecasting or Cash Flow Management is a key aspect of the financial management of a business. The Cash Flow Forecasting is a cash balance planning for the future cash requirements to avoid a crisis of liquidity. The best way of the cash flow forecasting will be realistic; definition of incomes and cost for expenditures; factor in fixed and variable costs (indirect costs); develop multiple scenarios, etc.

CAPEX (Capital Expenditure or CapEx) is an amount of money invested to acquire the new business or upgrade fixed assets that is invested in to maintain existing levels of operation within a company or in something new to foster future growth. A CAPEX is used repeatedly in production processes at full cost price that can be tangible (such as buildings, machinery, equipment, and facility), or can be intangible (such as patent). (Refer to the OPEX (Operational Expenditure))

Check Estimate

D. Institute

Established in 1956, AACE International is the Association for the Advancement of Cost Engineering. Together with the AACE International Certification Institute, it serves over 10,000 members and certificants in 100 countries. Cost Engineering is a field of study using integrated means and methods to enable sound decision making in enterprise asset management. AACE’s Body of Knowledge is developed, refined, and deployed by industry professionals worldwide. (Source: web.aacei.org/about)

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