PM101: Scope and Costs


Page 3

Class 2 Estimate (in house) within the budgeting process

squeamish 3

Okay, so maybe you are a little bit apprehensive about the reliability and robustness of the previously described Class 3 budgeting approach.

Good News: there is a much better way: timely and reliable. A “Unitized” or “Factored” approach based on specified equipment.

Bad News: needs some work ahead of time. Er…. a lot of work. For example, Exxon claims that developing their unitized approach to piping estimates required about $1,000,000 in 1970′s dollars.

Let’s start with… a story

gold mine

I flew into Santigo, Chile, to conduct some Value Improving Processes (VIP’s) for a major mining company. They had recently been benchmarked by IPA… at the bottom quartile for their industry. The Board of Directors estimated that moving into the first quartile could save the company $1 billion dollars over the next five to seven years.

While new to, and generally uncomfortable with, this whole oversight procedure, one of the mining company executives made this statement, which has stuck with me: “we are not now primarily a gold mining company, we are now primarily a gold mine development company “.

In other words, how well the company selected and executed its projects was the key to its success. When I heard this, I couldn’t help but hearken back to Exxon in the late 60′s and early 70′s… when they made a similar recognition regards oil refining and petrochemicals, and ushered in, what I consider, the golden years of excellence in Project Management. I came on board late to this development, but was a beneficiary, and now consider myself a champion of it.

Class 2 (in-house)

Before getting into the mechanism, benefits and limitations of the in-house, factored approach, let’s revisit scope; in particular, the timing in which key scope definition work products are published.

Scope Documents

Scope Doc Contractor

Scope Docs Owner


From an Owner’s perspective, it is vital to manage by “leading indicators“. Getting “good enough” data in time to make management decisions and take effective action is key.

Contractor organizations, like everyone else in the world, are not particularly fond of interference in their normal work flow, in having someone always looking over their shoulder. They do like to be definitive and accurate, however, and that takes time.

So the rub is this: as an owner, what will it take to get a “good enough” control estimate early?

Factored Estimates

There are two major concerns in a estimate: (a) what are the quantities, and (b) what are the unit rates. Allied with this: how can we generate accurate quantities from the most basic (e.g. early available) information.

“Factor estimating relies on the principle that a ratio or factor exists between the (controlling indicator) of a particular piece of equipment and the associated non-equipment items that need to be added to the project.”

In other words, given an equipment list, and a “controlling indicator” for each (e.g. horsepower for a pump) factors will produce all of the necessary quantities (and costs) for the associated piping, structural steel pipeway component, pipe painting and insulation, instruments, electrical, excavation / foundations, etc.

In addition, pro-rata shares of other non-equipment items are added, such as an incremental amount of paving, sewers, control house, lighting, etc.

And, in the better systems, also a pro-rata share for detailed design and engineering costs.

Example: let’s look at piping:

“Piping is the heart of any process unit, and estimating the quantities (pipe, valves, fittings, flanges, etc) is critical. Piping can equal 20%-25% of direct materials costs, and 40%-50% of direct labor costs.”


Unitized Piping 1

Unitized Piping 2


Unitized Piping 3-1Unitized Piping 3-2

Extending to other non-equipment items

“Similar methods can be developed for other bulk materials.”

“All of these methods would be developed primarily from the company’s past (data), or from data from others, adjusted to meet the needs and the specific manner in which a company executes its projects (i.e. company standards, etc).”

“Further, an effective feedback system would ensure that the method is giving reasonable, realistic results, or (else) to adjust the method where this is not happening.”

The (hidden) Cornerstone

Compliance Specs!

Oh, yeah, every company has their basic practices and design practices, standards and specifications. Often, these are bloated things, with an annotation for everything that has ever gone wrong in the past, plus ideas to correct other things that might go wrong. Yes, the “Customized Standards and Specifications” VIP uncovers these, but often the time and effort required to make things better means good intentions are deferred, hopefully for the next project to benefit.

But at least one major energy company, a large and successful one, has been built on compliance specs instead of “think-about-’em” specs. By this I mean, when you apply the practices and specifications, you get a reproducible result. Every API-650 pump by this company will have the same equipment specification details attached, and every 10,000 HP compressor. Suppliers will be familiar with this companies standard specifications; past costs will be indicative.

By contrast, a vast majority of companies have “think-about-’em” standards and specifications. They suggest that each project consider certain factors, but do not mandate anything. Give it your best shot, we will not interfere….

Of course, the compliance specs company had a practice of hiring only the best, and their experts tended to sit on the committees of the API and ANSI for their respective specialties. They also collected the feedback, and would issue “pink sheets” when changes needed to be incorporated.

So… it is easier to apply the factors and curves when you have good compliance standards. The piping lengths will reflect equipment spacing standards. Pumps will have the control valves, vents, drains and bypasses that typically work best in operating plants. Major equipment will be designed and estimated to the same standards.

And one last thing…

Getting the quantities right is very important. But so are the unit rates. During the “golden years” the large and successful company also conducted quarterly reports, visiting equipment and materials suppliers, updating factors and identifying trends.

I don’t think they perform these anymore; their project activity level doesn’t justify it. It would be good if someone did it, though (IPA?)


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