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01stMay
3 cost estimation examples to learn from

Estimating a project’s cost is an art in itself. But it doesn’t stop when you find your totals. Interpreting and reporting your estimate is equally important. When the project progresses, an estimate allows you to look ahead, but also to look back at where you came from, to determine the performance of your project.

Three example projects

A common challenge we all encounter in cost estimation is the measuring and reporting of the accuracy of your estimate. To illustrate this, consider the following three projects:

Project 1

• Cost estimate     : $ 231,500,000

• Actual outcome : $ 234,244,600

Project 2

• Cost estimate     : $ 45,800,000

• Actual outcome : $ 53,950,000 

Project 3

• Cost estimate     : $ 100,000,000

• Actual outcome : $  77,428,000

Question

'For which project did we deliver the most accurate, and thereby the best estimate?'

Mind you, this often the only information that is communicated. Therefore, you might be tempted to say that cost estimate 1 is the most accurate one. The first question you should ask is: are we comparing apples to apples? Let’s see: 

Comparison

Estimate 1 is a Final Funding Estimate on chemical production facility (AACE Class 3 estimate). It shows a difference between the actual cost of +1.2%. However, after the estimate was approved, a number of scope changes were introduced: two storage tanks were removed, including the associated civil, piping, electrical and instrument costs. Additionally, the truck loading area was reduced from 4 to 2 bays. This all contributed to a reduction in scope of $ 55M. As a result, the difference between the estimated and actual cost of the project is +25%.

Estimate 2 is a Class 3 estimate as well, for a hotel resort, to which scope was added after estimate approval: improved quality finishing and additional landscaping. This contributed to an effective difference of +13% between estimated and actual cost.

Estimate 3 is only a screening estimate for the expansion of a refinery. The difference between estimated and actual cost amounts -22%. However, this is considered to be a much less accurate AACE Class 5 estimate. Even more, after the overall capacity increase, the difference became even less. 

Conclusion

The comparison shows that the last estimate might have seemed the less accurate one, it is actually pretty good: the Class 5 estimate was considered to be between +/- 50% of the actual outcome, which was achieved. The Class 3 estimates were supposed to be reported within +/- 15% of the actual project outcome, which estimate 1 did not achieve and estimate 2 only by a small margin.

This is why you always have to make sure you are comparing apples to apples!

 

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