Tuesday, May 5, 2015

What is Project Cost Estimate? How Accurate it Could Be? Why is it Required?

A couple of decades ago, I attempted to construct a house on a piece of land owned by me. The most important thing for me, to take a decision whether I should attempt to make it or not, was to know accurately how much it would cost me. Would the proposed construction ruin my finances and my dream by producing an unfinished work?

Many individuals and corporates face this dilemma. Planning a project implementation with limited finances is a big challenge. The question every one want to know in advance is whether the project could be completed within the estimated cost without over shooting the budget allocation.

How accurate is the project cost estimate? 

Successful Engineering Infrastructural Projects
(A city view from Malaysia) 

The answer to that question bluntly would be this. A cost estimate is an estimate and it can never be accurate!

Then any layman would be tempted to ask this. Then why do you want to have an estimate made?

A cost estimate for any project, not alone an engineering project, has some purpose. While it cannot be accurate, it still gives the decision maker the necessary facilitation for taking the decision.

Now let me come back to the story of my first house making project some three decades ago. I knew my income sources and my possible sources for mobilization of funds and eventually the budget I can safely earmark for my house building project. From the partly correct feedbacks from others who had ventured in to similar projects earlier, I could guess that my house project would take around two years to complete. Within this two years time, I could get some loans and other funds which totalled about Rs.500,000. And that was my maximum budget for my house project. My house project should cost less than this if I did not want to risk an imcomplete project!

Now my house design had to be planned in such a way that its completion cost would be within my budget. I being an engineer who had been  in the field of working out engineering projects costing several millions, a simple home architecture plan and cost estimation should not have been some thing very difficult. But as I had stated earlier, no engineering estimate or project estimate is accurate. Only prices are accurate, but not a cost estimate. An estimate becomes translated in to price or cost when money is actually transacted and the deal is settled. Estimate is before you settle the cost and price is after you settle the cost!

With all my engineering skills, my own cost estimate for my house project failed me. The result was an unfinished house and a finished budget!

Yet, it is possible for experienced professional engineers to make project cost estimates within certain limits of confidence levels and guide the project to be completed within the stipulated budgets. 

And that is indeed an art of professionalism. But it can never be some thing very accurate. In other words, a project can be predicted to be completed within say, plus minus 10 % of an estimated cost and that prediction could really be achieved. If a project is completed as predicted with regard to its costs, time of completion and usefulness (or returns) it is indeed a successful project.

Getting a project cost estimation within a reasonable limits of confidence is indeed an art. In the case of engineering projects, this could be done only by experienced engineers with multifaceted experience and expertise. On the other hand, any one can attempt to make a cost estimate. As the estimate is essentially a guess work fine tuned with experience and expertise, an estimate without the applying the latter would result only in a figure which might vary widely from the completion costs.

Experienced engineers keep tracking the market trends with regard to the costs of materials, labor , equipment , technology, etc and use that information while designing new engineering projects. Project cost estimates are required for the decision makers for taking decions for going ahead with the project and hence such estimates are required immediately. Due to this, often it would be necessary for the engineers to provide the estimate for a particular project for various options quickly. Reliable project cost estimates in such situations would be possible only by experienced engineers conversant with the scope and technology of the project concerned.

Hence, the decision makers, if they do not want to get a failed project in the future, should be very careful in assigning the task of project cost estimation including the project feasibility study reports. If these are assigned without ascertaining the professional competency of the engineer concerned or the group of engineers, the likelihood of future project failure increases.

When an engineering project cost estimate is prepared by an experienced engineer or an expert engineering group, it would be better not to debate over it much. It is not a good idea to debate over a judgement pronounced by a judge. If you do it, you are likely to open a pandora box  which will make things much difficult to arrive at any conclusion and you land in to much confusion. Similarly, for any cost estimate prepared by a professional engineer, either you accept it or reject it, but never debate over it. 

Experienced professional engineers do consider past prices and costs but never make those as the direct basis for their cost estimate. The basis of engineering cost estimate should be the experience of the engineer and it is not wise to dilute the engineers' experience and expertise with supporting documents such as price quotes or budgetary quotes or price lists. The engineer may consider such information for deriving his own estimate, but should never make such documents as the direct basis. If it is done, then it means that the engineer is not willing to take any responsibility on the cost estimate as prepared by him. The cost estimate sheet produced or worked out by a professional engineers should be accepted as the base document and it should never be based on other documents such as previous prices, price catalogues, vendor price lists, etc.

People who are not well conversant with the various complexities involved with engineering projects often make the mistake of neglecting or overruling the professional integrity of experienced engineers by casting aspersions or expressing doubts on the estimates prepared by professional engineers. Only incompetent engineers with no professional standing accept such an attack on their professional integrity and competence. Unfortunately, such lots are plenty now-a-days which actually causes degradation of engineers' work and role.

Cost estimates could be done mechanically by any one by or even using computers by multiplying unit costs with quantity involved and adding up the whole with further percentage additions on taxes, duties, contingencies, etc. However, such cost estimates lack the essence of experience of the engineer and hence, cannot be relied with assured confidence. It should be remembered that each and every engineering project is unique in some way and no two projects could be considered as equal. Every engineering project, even while looking similar on broader aspects are different when examined in detail.

Engineering, Procurement and Construction (EPC) contractors are often required to quote for engineering projects on a firmed up basis and their prices are often compared with the estimated costs for negotiations and price justifications. EPC contractors quoting prices much higher or lower than the estimated costs of the purchaser is quite common. This is because, the EPC contractors also do the cost estimations from their side based on their own assessment and assumptions. EPC conctractors bagging contracts after tough competition may lose money in the contract if they do not adopt proper micro planning in project management. Many EPC conctactors are forced to do unfair means for getting large engineering contracts when the prevalent market conditions are unprofessional.

Engineers are the key persons for ensuring success of any project. But when they are treated shabbily with least respect to their professional competence, shabby projects result. 

It is an important lesson I learnt long back. If you treat your cook or the person who prepare food for you with utter disrespect, it might result in you eating something which  you would not like even your enemies to have. The cook might not retaliate directly, but will do so indirectly at some opportunistic time! If that could happen with  a low level worker class, the higher worker class could do even worse!

So project cost estimates are useful and beneficial when they are made by experienced professional engineers who have professional integrity and also when such estimates are sought from them giving due respect to their professionalism. In such a case, the project cost estimate would serve as a right pointer for proper decision making.

If the engineering estimates are made with total disregard to the above, the result is some estimate which most likely misleads and cause a project failure if proceeded with.

Are you anyway connected with this topic? 

Could you enhance the idea with your thoughts?

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