This Newsletter is intended as a reference on the topic of Accuracy/Contingency & Allowances definitions (Cost Estimating Best Practices) as well as a call to Project Management Team members to use reliable practices and speak properly about the matter.
We will gain an understanding of these topics, and also we will learn about:
- Factors affecting the accuracy of cost estimates.
- Statistics from different sources to help about how should be the approach to move on.
- Definition / clarification about Contingency and;
- Definition / clarification about Allowances.
Accuracy as International Knowledge Reference:
Gate based cost estimates:
Every single Gate based cost estimates is vital for business unit decisions which include strategies for asset development. Accuracy Range for Gate based approval is extremely important for the sponsoring organization and the project team.
–AACE Estimate Classification System
–Owner Company Classification of Estimates Example
–Accuracy Reference Studies
–Cost Estimating Classification
–CE Accuracy Practices & Statistics
AACE’s 17R-97 Classification of Estimates:
- There are numerous characteristics that can be used to categorize cost estimate types, but the “primary” is the level of project definition1; in other words, “The Design Maturity”
- Each firm and organization has its own set of definitions and nomenclatures, and approves full funding at different stages of a project. The team defines an estimate class as ‘‘any estimate that has been prepared from inception of the project up to and including funding approval, represented as a Gate to pass to the next stage”.
- An AACE International guideline has developed a cost estimate classification in the late 1960s or early 1970s, and a simplified version was adopted as an ANSI Standard Z94.0 in 1972.
- Those guidelines and standards have reasonably broad acceptance within the engineering and construction communities and within the process industries, or they are base references to define their classification.
(1) AACE International Recommended Practice No. 17R-97
AACE: Association for the Advancement of Cost Engineering
The AACE's 18R-97 Recommended Practice introduced some tips that are connected with the interpretation of the learning curve behavior and the fact that it is not necessarily a symmetric curve, indeed most probably it is not.
The meaning of the accuracy level curves
Probably somebody could say that this is not relevant, but believe me, since the level of confidence requested in your estimate (P90-P50-P10) makes narrower or wider the distances between the curves, now you could say oh yes, yes ... is very important.
When the distance between the curves is wider the probability to reach an expected value is higher (P90), otherwise when is narrow the probability is lower (P10), .... Ok, OK .. you could insert a curve in the meddle of them to represent the (P50) - confidence value.
Accuracy Statistics Best Practices
Accuracy is one of the main features of an estimate and it is always described as “accuracy range”. These ranges represent limits the gatekeeper will have to take into o account when assessing the project cost Estimate for a specific gate.
The Measurement Dilemma2
I have taken this good reference from Mr John K. Hollmann, PE CCE CEP, to make richer this part of the article.
- Unfortunately, accuracy (i.e., actual/estimated cost) is often misused as a measure of estimate “quality” (as in “a high quality estimate is an accurate estimate”) or estimating performance.
- The only way for an estimator to deliver a targeted accuracy for a given scope is to over-estimate the cost; risk and project performance are not in the estimator’s control. Faced with overruns, estimators and the team tend to hide behind the excuses.
- Accuracy should be used to measure the performance of the risk management process (not the estimating process) in conjunction with project historical data including causal information so we can improve our risk identification, analysis and quantification, and treatment.
- Accuracy measures must always be accompanied by measures of project control process discipline and project cost competitiveness.
(2) Reference: Estimate Accuracy: Dealing with Reality John K. Hollmann, PE CCE CEP
Cost Estimate Contingency Practices & Statistics
- Contingency is the amount of money added to the Base Cost Estimate to absorb the monetary impact of the risks/uncertainties in order to arrive at the desired level of confidence that, the total project cost will not overrun the estimate (base estimate plus contingency). It is the amount added to allow for items, conditions or events for which there is uncertainty or risk in the estimate assumption and which will result in an additional cost.
- Contingency covers costs that may result from incomplete design, unforeseen/ unforeseeable conditions, or uncertainties within the defined Project Scope. The level of contingency depends on the status of design, procurement, and construction; also on the complexity and uncertainties surrounding the components of the Project.
- Contingency usually excludes major scope changes (e.g. changed process capacity), extraordinary events (e.g. labour strikes, earthquakes), management reserve funds and currency or escalation effects.
- Contingency must be included in all cost estimate summary totals and as part of a project budget it is expected to be spent. A confidence level is typically set at a point probability (P value) for the project cost estimate total including contingency, Company typical value is P50. Exceptions to this P50 expectation need to be clearly documented in the Project documentation.
- Contingency should not be reduced from the P50 confidence level. Any changes must be documented in the Estimate Report, highlighting that the project now has a higher risk of cost overrun than P50 expectations.
Cost Estimate Allowances Practices & Statistics
Allowances are resources included in estimates to cover the cost of known but undefined requirements for an individual activity, work item, account or sub-account 3.
Allowances are amounts of money included in the line items base cost and are meant for specific items that are not or cannot be fully specified at the time of the estimate:
- Technical allowances,
- Design development allowances,
- Material take off allowances,
- Procurement allowances,
- Weather allowances.
An allowance is the amount added within estimate line items to bring them to a reasonable cost level based on historically experienced variability.
These allowances will vary with the level of phase maturity, as technical deliverables mature, the size of allowances should decrease.
(3) Recommended Practice No. 10S-90 - COST ENGINEERING TERMINOLOGY
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Is associated with owner gate approval policies
Is associated with Project risks and uncertainties
Is associated with knowns technical items that are not, or cannot be fully specified at the time of the estimate
-design development allowances,
-material take off allowances,
- AACE international recommended practice no. 17r-97 – Cost estimate classification system
- AACE international recommended practice no. 18r-97 – COST ESTIMATE CLASSIFICATION SYSTEM –AS APPLIED IN ENGINEERING, PROCUREMENT, AND CONSTRUCTION FOR THE PROCESS INDUSTRIES
- Risk Analysis at the Edge of Chaos - John K. Hollmann, PE CCE CEP
- Estimate Accuracy: Dealing with Reality John K. Hollmann, PE CCE CEP
- Recommended Practice No. 41R-08 - RISK ANALYSIS AND CONTINGENCY DETERMINATION - USING RANGE ESTIMATING
- Recommended Practice No. 10S-90 - COST ENGINEERING TERMINOLOGY
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