PM101: Scope and Costs

cost estimate cartoon 1

A cost estimate is, to me, a useless number without a fit for purpose, clearly defined and documented (a) scope, (b) methodology and (c) range. Each is discussed below.

History seems to hold with three major categories of cost estimates:

  • Screening;
  • Budget;
  • Definitive .

Among these, there are five specific estimates:


  • Class 5: business planning; and
  • Class 4: facility planning;


  • Class 3: project planning / bid evaluation; and sometimes
  • Class 2: (in-house, factored) execution / cost control;


  • Class 2: (in-house, factored) execution / cost control; and
  • Class 1: (contractor, detailed) execution / cost control.

Estimates are linked, generally, to decision gates. For the most part, the scope definition and methods used for each estimate will be based on what’s reliable and available for the decision gates they inform.

One of many ways of visualizing these decision gates is presented below (gates are the five blue diamonds, the three major ones identified as Gate 1, Gate 2, and Gate 3). (source: IPA)

IPA Phases

Another, more detailed visualization, also with five gates (gates are the five red diamonds – three major ones: DG1, DG2 and DG3). (source: StatOil),

StatOil Gates


Screening Estimate(s) => Gate 1 (IPA) or Gate DG-1 (StatOil)

Budget Estimate(s) => Gate 2 (IPA) or Gate DG-2 (StatOil)

Definitive Estimate(s) => Gate 3 (IPA) or Gate DG-3 (StatOil)

Another way of looking at these is by Front End Loading (FEL) Phases (source: IPA’s founder and president Merrow, DOE report)

FEL123 from IPA DOE


I’ll try to harmonize a classic (in-house) and a contemporary (contractor-detail-reliant)presentation of cost estimates, relating these to decision gates (recognizing diversity in approach and terminology, as apparent even in the two images above) .

The classic approach is based on the 1978 first edition of Exxon chroniclers Forrest D. Clark and A. B. Lorenzoni’s “Applied Cost Engineering“; selected because I believe it is the finest approach ever developed. (I add some detail on scope documentation). The contemporary selection is from “Estimate Class Definitions” published by the Cascade Section of AACE (Association for the Advancement of Cost Engineering) International (selected because it googled up first).

Main emphasis, here – the difference between two interpretations of the Budget Estimate: an early, in-house version, using a factored approach (Class 2), and the typical, much later, contractor detailed approach (Class 1). The meat of this starts at page 3; some basics for perspective are presented first.

The Classic Approach

Forrest Clark

Class 0

For fun, let’s start at the end: a Class 0 Estimate. These are typically done at the completion of a project. In terms of the big two: (1) what are the quantities and (2) what are the unit rates – both are known with certainty and in detail.

If you have a methods group, they can collect a number of projects, and from these determine specific correlations. And if you have a data group, they can track historical and current factors to apply to these correlations.

Oh, there’s the one rub – often these Class 1′s are NOT done. That’s a problem. Because these can become the basis for producing reliable estimates on subsequent projects.

Reality: if your project is 9.7% over budget (or worse: 20.7% over) and the key players are already chomping for their new assignments, only the more disciplined and foresighted companies will collect and maintain good methods and data in-house. Others may need to look to reliable third parties, or just go with the flow (or “bottom desk-drawer” stuff). At the outset, take a moment to consider which situation you find yourself in.

note: some systems number the earliest estimates at 1, and move forward to more detail at higher numbers. My preference is with those who start with screening estimates at 5 and 4 and move to more details, more accuracy at 3, 2, and 1.

Screening Estimates


Business Decision: (1) Is this opportunity likely to be profitable, and within acceptable risk, worth pursuing? And if so, (2) which of several technologies / locations might be best ?

Hurdle: Commit resources to pursue Basic Design .

Timeframe: Business Planning, Facilities Planning

Scope Basis: May be a page or several pages, with a feed slate and product specifications, locations, general timeframe, rough economics and technologies to achieve it. May also include alternate cases to be evaluated. Assumes a typical Project Execution Plan.

Methodology: Varies. To answer the first business decision: gross proration (Class 5); to answer the second: curves or rough semi-detailed estimate (Class 4).

Effort: With appropriate curves available, a single estimator or small team in days or weeks.

Range: “Blue Skies” estimates from R&D groups have proven to overrun 100 – 300%; gross prorations from a centralized estimating group are generally within +/- 40%; rough semi-detailed estimates may be within +/- 30% .

Class 5

The most common methodology is (1) Gross Prorations

(1) Gross Prorations


Clas 5 Pro-ration

The above is most applicable under the following:

Clas 5 Conditions


Class 4

(2) Curves


Clas 4 Curves

Clas 4 Curve Basis

(3) Semi-detailed Curves

Clas 4 Semi 01

Clas 4 Semi 02

Note that the more detailed curves, above, generate only Materials and Labor for the direct associated costs, unlike the more general curves previously which were based on Total Erected Costs (TEC). Therefore, these more detailed curves may be better suited for studies between equipment / design alternatives. To generate a TEC from them requires additional detail on indirect costs, as per the budget estimates (Class 3 and Class 2, following).

Screening Estimates – What’s at risk: The decision to allocate resources to develop the Basic Design; not necessarily a lot of money, but there may be lots of potentially attractive other projects competing for the same scarce resources.

Screening Estimates – Reconciliation: Tracking the path from one estimate to the next is important for credibility. If the Class 3 is significantly different from the screening estimates, reconciliation may focus first on the proper application of site specifics. If these align, then focus may shift to the basic correlations used in the Class 5 and Class 4 estimates versus the reliability of the Class 3 basis.


Screening Estimates – Help! Okay, maybe you don’t have curves. Your company may not have built a lot of similar projects, or such data is inaccurate or just not available. Here are options :

1. Get third party expertise. Picking randomly from Google: Larkspur Associates has experienced cost engineers advertising conceptual estimating expertise, and uses the latest conceptual estimating software (lineage going back to Icarus, Icarus 2000, Quesstimate): Kbase (now owned by AspenTech). I have been aligned with Pathfinder, LLC, which of course I rate as excellent in this area, as well. And there is a rich, high quality data store in Independent Project Analysis (IPA’s) benchmarking databases; IPA is expanding the cost analysis services provided to their clients.

2. Partner with suppliers. I built a lube oil additives facility in Singapore, and there is a specialized machine used to “masticate” an elastomer / oil combination to produce the multi-viscosity additives (e.g. 10W30, instead of just 10W or 30W). There are only two suppliers in the world for these, so it made sense to involve them very early. Likewise, in the area of instrumentation and computer control, partnering with a supplier can make their expertise available very early in the the screening stages.

3. Use your contractors and subcontractors. This can be tricky, especially well ahead of contract bidding, much less award. I know of no success stories, here. But major Engineering-Procurement-Construction (EPC) firms have methods and data – especially which they use for lump sum bidding. If you are doing, say, a lot of refractory work in Fluid Catalytic Cracking Unit (FCCU) reactors and regenerators, you may have a preferred refractory supplier / installer who would benefit from your accurate assessment of his scope of work. Ditto with crane subcontractors and staging subcontractors, if these become significant factors. It is not now unusual for such as these to attend your Constructability Value Improving Process (VIP) sessions; who knows how willing some might be to also share at the screening stages of an estimate?

Bottom Line (Foreshadowing):

Question: How important are these “screening” estimates?

Emerson Influence

Answer: uh… pretty important!

And… you won’t get the costs to go along with business planning and pre-project planning and analysis if you are waiting for bid award/ early engineering/ contractor’s take-offs…. The pro’s will be timely in getting this right , and benefit!


Post a Comment

Your email is never published nor shared. Required fields are marked *