This Issue - Icwai

PROJECT PROJECT MANAGEMENT
MANAGEMENT
and engineering, procurement & construction
management costs, (xix) first fills & reagents, (xx)
technical investigations, (xxi) taxes, duties and
surcharges, (xxii) fees and royalties, (xxiii) land
acquisition, (xxiv) owner pre-production and other
costs, (xxv) escalation, (xxvi) foreign currency, (xxvii)
allowances, (xxviii) accuracy assessment, (xxix)
contingency calculation, (xxx) estimate summary,
(xxxi) cash flow forecast, (xxxii) exclusions, (xxxiii)
assumptions, and (xxxiv) comparison with earlier
estimates about similar projects.
As the project estimate is being developed, all
potential cost risks should be recorded. During the
preparation of a project estimate, the estimator may
encounter a number of items that could present
potential cost risk to the project. The list of cost risks
may include such things as unquoted equipment,
unidentified engineering or construction resources,
potential labor issues (such as looming strikes or
shortage of qualified labor), unknown site conditions,
etc. All of these risks should be clearly identified
within the basis of estimate to ensure that’all project
team members are made aware of their existence.
Documentation is a key element in good estimating
practice. The estimate file should be a well-organized,
easy to follow history from the first estimate at the
beginning of the planning phase through preparation
of the final estimate. The basis of estimate document
contains recommended organization, topics and
format. Each estimate should track changes from the
previous estimate, updating the scope, assumptions,
quantity and price calculations, and risks from the
previous estimate. At each update the differences
between the previous estimate and the current
estimate should be highlighted. This contributes to
transparency and accountability in estimating and
promotes the consistency between estimates.
Several techniques can be employed to ensure
good documentation. It is recommended that
estimating be specifically scheduled in the project
management plan for each phase of the project. This
ensures that adequate time and resources are allotted
for performing the estimate. A specific schedule
should be developed for each estimate. As part of the
estimate review process, someone external to the
project team should perform a review of the estimate
file. This external review will help ensure that the
estimator has clearly recorded the assumptions and
decisions made in the estimating process.
A well prepared basis of estimate will (i) document
the overall project scope, (ii) document the items that
are excluded from the project scope, (iii) document
the key project assumptions, (iv) communicate the
estimator’s knowledge of the project by demonstrating
an understanding of scope and schedule as it
relates to cost, (v) alert the project team to potential
cost risks and opportunities, (vi) provide a record of
key communications made during estimate
preparation, (vii) provide a record of all documents
used to prepare the estimate, (viii) act as a source of
support during dispute resolutions and for bid
analysis, (ix) establish the initial baseline for scope,
quantities and cost for use in cost trend evaluation
throughout the project, (x) provide the historical
relationships between estimates throughout the
project lifecycle, (xi) facilitate the review and
validation of the cost estimate.
The following sections should be included in the
basis of estimate document :
i. Project objective and overview: This initial
section provides a brief and concise description of the
project. We may include all the following project
information within that description - the purpose, the
physical location, the position of the project within
the organizational structure, the sponsors of the
project, and the expected start and finish dates.
ii. Project scope description : This section should
be organized to correspond with the project’s work
breakdown structure (WBS). A brief description of
the scope of work should be provided for the major
segments of the project. We should select the major
WBS items that will apply to the estimate to be
prepared and list for each the WBS number, task/
item title, period of performance, and detailed
description including related trades.
iii. Estimate base sources : The base sources i.e.
the design basis, planning basis, and cost basis are
the referenced documentation that forms the
foundation for the estimate. For short items, we may
copy the information to the BOE. For larger items,
we should provide references to documents. The
listing against each item may include its name, brief
description, and document number. We should also
mention the primary estimating methodology that will
be used to prepare the cost estimate.
iv. Design basis : In this section, the estimator will
identify the types and status of engineering and design
deliverables that were provided to prepare the
estimate including any design basis assumptions. We
should record the items that will be used to form the
estimate e.g. drawings, requirements, operational
concept documents, specifications, equipment and
tools, and the deliverables.
v. Planning basis : This section documents the
project management, engineering, design, procurement,
fabrication, and construction approaches to the
The Management Accountant |September 2011 767