This Issue - Icwai

PROJECT PROJECT MANAGEMENT
MANAGEMENT
Preparing the Basis of Estimate for a Project
On the Monday morning meeting Subimol’s
boss, the Project Manager, commented—”Do
you remember the estimate you prepared for
me a few months ago? Well the project is way over
budget.” Subimol’s immediate reaction is one of
anguish as his estimates are always carefully prepared
and contain appropriate details, supported by history,
and accompanied by a well-documented basis of
estimate.
Later on Subimol discovered that instead of being
months old, the estimate in question was actually
prepared over a year before the meeting; and with a
little effort he located all of the documentation that
was saved in a project estimate file. Everything is
there, including all of the technical documents,
applicable project plans and schedules, and, of course,
the basis of estimate. A meeting was conducted to
review the basis of estimate and to reconcile the
estimate with the project’s actual execution and costs.
It was found that scope has changed and different
drawings were used for construction, alternate
subcontractors were employed, and the quotation for
a major equipment significantly differed from that
used in the estimate. All of this had been well
documented in the basis of estimate, but had been
ignored or deviated during project execution.
Keeping in mind that projects vary in scope, time,
value, complexity, intent, and nature, this article
describes the content and major sections of a basis of
estimate.
First let us discuss the cost estimating process in
brief. There are three main parts to the cost estimating
process. The first part of the cost estimating process
is called Project Definition. In this part, the estimator
clarifies the reason for the estimate, defines
expectations, and elaborates the project that will be
estimated. A Work Breakdown Structure (WBS) and
technical description are obtained. These items help
define the project and form the basis for the estimate.
These steps may be revisited as new information is
obtained during the estimating process. Second part
of the cost estimating process, the Cost Methodology,
includes tasks that create the approach and framework
for the estimate. Developing the ground rules and
assumptions will be the most revisited task in this
part of the process. As methodologies are selected and
the data is gathered, the ground rules and assumptions,
methodologies, and even the cost model may
Subir Chakrabarty*
be refined if found necessary. Third part of the cost
estimating process, the Estimate, has tasks that
include the actual conduct, presentation, and
maintenance of the cost estimate. These tasks are
important and critical for a complete estimate.
Basis of Estimate is a method of documenting the
critical aspects of a project cost estimate for the
purpose of reducing project cost risk. A basis of
estimate should be sufficiently complete such that cost
estimating professionals can use the documentation
by itself. A well-written basis of estimate will achieve
those goals by clearly stating the purpose of the
estimate being prepared, the project scope, pricing
basis, allowances, assumptions, exclusions, cost risks
and opportunities, and any deviations from standard
practices. It is also a documented record of pertinent
conversations that have occurred and agreements that
have been made between the estimator and other
members of the project team. The basis of estimate
conveys to the owner and members of the project team
that the estimator understands the problem, the
proposed solution, and cost of that particular solution.
There may be multiple solutions to the problem in
which case the estimator must understand each and
every alternative and the resulting costs. .
The contents of the basis of estimate shall be
established by the estimator and approved by Project
Manager. Based on the requirement for a major
feasibility study, the basis of estimate may include
the following: (i) capital cost definition, (ii) scope/
battery limits, (iii) estimate base date, (iv) accuracy
requirement, (v) estimating responsibilities, (vi)
estimate work breakdown structure and cost coding
system, (vii) electronic system(s) used to compile the
estimate, (viii) estimating methodology including
overall philosophy, schedule basis, source documentation,
contracting plan, mining, mechanical
equipment, structural steelwork, plate work and
liners, piping, insulation, refractory, and electrical,
(ix) control & instrumentation, (x) civil works, (xi)
building, (xi) corrosion (e.g. cathodic) protection, (xii)
transport, (xiii) preliminary and general costs , (xiv)
contractors’ camp, (xv) installation & commissioning,
(xvi) current assets (consumable and insurance stores),
(xvii) project insurance, (xviii) project management
* BE (M), Gr (OR), FICWA, MFM Faculty of Bhavan’s
Institute of Management Science, Salt Lake
766 The Management Accountant |September 2011