How does cost estimating work? 6 steps to learn
6 steps - a guideline when creating an estimate
Although there are many things you need to pay attention to when creating a project cost estimate, the following 6 steps provide a guideline when creating such an estimate:
1. Agree on estimating basis.
Before starting with the actual estimate, the parties involved must agree on the way the estimate is set up. This includes determining the cost estimating software, methodology, labor productivity, labor rates, equipment/material pricing, MTOs, allowances, indirect costs, engineering and the scope allocation. All inputs to the estimate and required outputs should be identified at this point. If requirements are not clear, meetings should be held to obtain alignment.
2. Collect scope documentation
Scope documents delivered to the estimate team have to be frozen; otherwise decisions are not based on costs that honestly reflect the design. Revision control is critical for this to work. Collecting and interpreting all scope documents such that your estimate covers the entire project can be challenging.
3. Estimate direct cost
Based on the scope you estimate the quantities and cost of the required resources. Depending on project type, size and the current phase of a project’s lifecycle, different tools and techniques may be used.
4. Estimate other costs and apply factors, indexation and escalation
Other cost types like allowances, indirect costs and overhead costs are often calculated with the direct costs as basis. The estimate is further adjusted to project-specific conditions by applying location and productivity factors. At this point information from risk management and finance are used to determine the proper amount of contingency and escalation funds to be added.
5. Peer review
An estimate should always be peer-reviewed by another estimator. Check the scope completeness, assumptions and perform spot checks to verify quantities and costs. Lessons learned from the prior phase can be a source of opportunities to reduce costs or highlight significant gaps in past practices which need to be addressed before completing the estimate. Any assumptions that can be removed or clarified should be.
6. Finalize basis of estimate report and send estimate for approval
Preparation of the basis of estimate document while the estimate is being prepared is preferred to completing it after the estimate when time is short and key information may have been forgotten or gone missing along with personnel that is no longer available. Stating the planned sources of estimating basis such as project historical data is important for obtaining owner and contractor alignment and confirming validity. This also applies to the estimating tools, processes, and estimator qualifications.
During the project, scope changes and information gets updated continuously. Likewise, the estimator is never done predicting the cost outcome of the project.Estimating is always a continuous process.
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