Blog

22ndJanuary
5 Types of cost estimates

Estimating the surface area of a room or the number of marbles in a jar is relatively easy and can be done quite accurately with simple rules of thumb. However, estimating the total costs of an offshore LNG platform or a high speed railroad is a little more complex.

 

Luckily, there are numerous methods and techniques that can help you estimate those costs throughout the different phases of such projects.

Factor estimating

Right after idea generation, so as soon as you would like to know more about the feasibility of a plan, you will need an estimate to determine whether it won’t be a waste of time to continue to develop that idea. There are several methods of factor estimating with increasing accuracy, all used in situations where the scope of a project is not yet complete and the preparation of a detailed estimate would be too time-consuming (and of course too expensive). 

Parametric estimating

Parametric estimating entails the analysis of cost, programmatic and technical data to identify cost drivers and develop cost models. The approach essentially correlates cost and manpower information with parameters describing the item to be costed. This process results in sets of formulae known as “Cost Estimation Relationships” (CERS), which are applied to produce cost outputs for different elements of an estimate. Parametric Method generally involves the use of a regression analysis (linear and nonlinear) to determine the best algorithms for a model.

Equipment factored estimating

An equipment factored estimate is produced by taking the cost of individual types of process equipment, and multiplying it by an "installation factor" to arrive at the total costs. In practice, this has proven to be quite a useful method since a substantial part of total project costs are made up of equipment. As a result, it’s the basis for many factor estimating methods. 

The installation factor, or total installed cost (TIC) factor, includes subcontracted costs, associated direct labor costs and materials needed for installation of equipment.

Lang method

A method that is slightly more detailed and therefore needs some more project information, is the so-called Lang method. Its basis is the equipment prices free at site, of which it’s best to have quotations. The method differentiates for solids, liquids and mixed solids/liquids.

Hand method

This method, developed by W.E. Hand, is an extension of the Lang method and proposes to use different factors for each type of equipment (columns, vessels, heat exchangers and other units) rather than per process type. Hand’s factors exclude indirect field costs (IFC), home office costs (HOC), and the costs for OSBL facilities, all of which must be estimated separately.

Detailed estimating

Sometimes called bottom-up estimating. With this method, detailed estimates are made at relatively low levels in the work breakdown structure (WBS), typically at work-package or task level. This approach is closely related to scheduling, planning and resource allocation and is both time-consuming and costly. It requires a good knowledge of the activity and there also needs to be a reasonable level of definition for the exercise to be meaningful.

Often the material take-off or MTO of a project is used as a basis for a detailed estimate. Establishing such an estimate from an MTO can also be done automatically using cost estimating software and cost database.

 

Something to add to this article? Do you have a question for us, mail us at contact@costengineering.eu