Aacei Presentation

AACE International
Italy Section
Stima dei costi di investimento:
metodi e classi di preventivazione, definizione e
determinazione delle contingencies, problemi e
soluzioni secondo le recommended practices
AACE® international
Convegno Ordine Ingegneri – Roma
22/06/2018
www.aacei‐italy.org
www.aaceregion9.org
web.aacei.org
Alvaro Rigamonti
Education:
– Degree in Management Engineering at Politecnico di Milano
– Master Business Administration – MIP ‐ Politecnico of Milan –2002 – ASFOR CERTIFIED
Training experience:
– Professor at Master Construction Management held in Politecnico di Milano B.E.S.T Dipartment
– Visiting Professor at Master in Public Construction Works held in University of Novara
– Visiting Professor at Post‐Lauream Course in Project Planning and Control held by FORMAS, Politecnico di Lugano
SUSPI,
– Visiting Professor at Master in Construction Management held in Trieste consortium University ‐ Modules held:
Project Planning and Control; Risk Assessment e Risk Analysis; Budgeting and Strategical planning
– Visiting Professor at Master in Construction Management held in Brescia University ‐ Modules held: Project Planning
and Control; Risk Assessment e Risk Analysis; Budgeting and Strategical planning
– Professor at Master in Construction Management held in Politecnico di Milano Master School Pesenti ‐ Modules held:
Project Planning and Control
– Nominated Professor at Master in Construction Management held in Udine University ‐ Modules held: Project
Planning and Control; Risk Assessment e Risk Analysis; Budgeting and Strategical planning
Working Sector Experience:
– Petrochemical , Chemical, Primary and Secondary Pharmaceutical, BULK API pharmaceutical, Civil residential ,
Infrastructures (roads), High Rise buildings, Commercial shopping Centers, Fashion and luxury malls.
Employment:
– 2017 – Today ‐ Founder Oneplan srl
– 2007 – Today – Visiting professor in Project and construction management
– 2006 – 2007 – Worldwide Project Control Rizzani De Eccher
– 2003 – 2006 – Regional Director of Project Controls – Jacobs Europe
– 2000 ‐ 2003 – Project Control Department manager – Jacobs
– 1996 – 2000 ‐ Project Planner, Project Control Manager Foster Wheeler Italia – AMEC‐WOOD
2
References
fattori produttivi
AACE International object is to
enhance skills and knowledge
to improve the predictability
of cost and schedule
performance across the entire
life cycle of its assets,
programs, and projects.
3
Perché Associarsi
1 TCM Framework
Una mappa pratica dei processi del Total Cost Management. A
step by step guide per la piu’ efficace implementazione del TCM.
2 Pratiche Raccomandate
Oltre 70 Rp, pratiche raccomandate, preparate e approvate dai
migliori esperti internazionali e dalle migliori compagnie
mondiali.
3 Certificazioni
Tre tipi di certificazioni per Esperti, Tecnici, Professionali. 8
Certificazioni in Totale. Richiedi una presentazione dal vivo per
spiegare tutte le certificazioni.
4 www.aaceitalia.org www.aaceregion9.org web.aacei.org
Professional Certification
It is becoming important to obtain a certification that will prove
professional skills and knowledge that is benchmarked with
international cost engineering practices.
Some certification:
Certified Cost Professional (CCP)
Certified Estimating Professional™(CEP)
Certified Forensic Claims Consultant™(CFCC);
Earned Value Professional™(EVP);
Planning & Scheduling Professional™(PSP).
5
Come Associarsi
Per associarsi: https://www.tfaforms.com/442224
6
Agenda
Aace Estimate frameworks
– References AACE
– Estimate definitions AACE
– Cost structure AACE
– Stage Gate process and Class estimate AACE
– Cost Estimate classifications AACE
Estimate basis, process and validation
– Basis of estimate
– Cost Estimate plan
– Cost data sources
– Estimate process
– Estimate review and validation
«Contingencies»
– Definitions
– Contingencies calculation
• Estimate accuracy
• Range of variations
• Montecarlo simulation
– Escalation
Estimate Issues
Conclusion
7
Definitions
Cost estimating is the predictive process used to quantify,
cost, and price the resources required by the scope of an
investment option, activity, or project. The output of the
estimating process, the cost estimate, is typically used to
establish a project budget, but may also be used for other
purposes, such as:
o Determining the economic feasibility of a project
o evaluating between project alternatives; and
o providing a basis for project cost and schedule control.
8
Definitions
By its nature, an estimate involves assumptions and

uncertainties, and therefore some level of error.
We can correlate this level of error and uncertainty to

probabilities of over‐running or under‐running the predicted
cost
Instead of a single point ‐ AN ESTIMATE REFLECTS A RANGE OF
POTENTIAL COST OUTCOMES – each value within the range
associated with a probabilistic occurrence.
9
Agenda
Cost structure AACE
10
Elements of Cost & Costing Vs Pricing
ELEMENTS OF COST
– Direct Costs
– Indirect Costs
– Risk
CONSTRUCTION JOB INDIRECTS CHECKLIST
COSTING vs. PRICING
11 Copyright 2004‐2017, AACE International
ELEMENTS OF COST:
o Important to keep direct & indirect costs separate in
an estimate
o Many estimates based on historical database of
previous projects' data.
Less encumbered direct cost data is with indirect
costs, more reliable it is to apply to estimates for a
new project.
o Keeping indirects separate allows more accurate
accounting for unique conditions encountered in new
project
COST ESTIMATE
DIRECT COST INDIRECT COST
Labor Material Equipment Subcontract Taxes Gen. Cond. Risk Overhead
Profit Contingency
Figure C‐1 Components of a Construction Cost Estimate
Agenda
Stage Gate process and Class estimate AACE
14
Stage Gate Process
5 - La pianificazione di progetto © Oneplan

Anticipation
Effort
Feasibility
Project Execution
(Detailed
Conceptual
Design &
Planning Construction)
Business Detailed
Planning
*
Scope
Operations
Definition
FEASIBILITY Project Life Cycle
PRE‐PROJECT
PLANNING
DETAILED
ENGINEERING &
CONSTRUCTION
TURNOVER,
START‐UP &
*Final Authorization Decision OPERATIONS
5 - La pianificazione di progetto © Oneplan

Cost Estimate Classification
The AACE categorise the cost estimate into 5 classes defined

based primarily on the Maturity level of project definition
deliverbles.
These classes idenfies also the secondary characteristics:
End usage of the estimate;
Estimate methodology;
Expected accuracy range of the estimate;
The effort and time needed to prepare the stimate.
17
Cost Estimation Classification System (RP 17R‐97)
Primary criterion for classification: level of project definition
Expected Preparation
Estimate Level
End Usage Methodology Accuracy Cost/Effort
Class Definition
(Best is 1) (Least is 1)
Screening or Stochastic or
Class 5 0% to 2% 4 to 20 1
Feasibility Judgment
Concept Study Primarily

Class 4 1% to 15% 3 to 12 2 to 4
or Feasibility Stochastic
Budget, Mixed, but

Class 3 10% to 40% Authorization, Primarily 2 to 6 3 to 10
or Control Stochastic
Control or Primarily
Class 2 30% to 70% 1 to 3 5 to 20
Bid/Tender Deterministic
Check
Class 1 70% to 100% Estimate or Deterministic 1 10 to 100
Bid/Tender
Differences:
Basis of estimate for each gate by each business

Type of reference documentation by each business
How reference document may affect accuracy ( i.e.
geotechnical report for infrastructure vs P&ID utilities in
process design)
22
Accuracy Range
Accuracy improve as the level of project definition improves
As project definition
progresses,
project‐specific risks
become more
prevalent and also
drive the accuracy
range
23
Maturity level of project definition deliverbles is referred to the

definition of design, deliverables, planning and other input
information such as:
Project scope definition;
Requiremnts documentations, calculations,ecc;
Project plans;
Project schedule;
Learning from past projects;
Any other information that must be developed to define the
project
24
Maturity level of project definition deliverbles
Each project will have a typical set for deliverables that are used

to support a given class of estimate.
It is important to understand what drives the variation in the
deliverables.
Each industry group tends to focus on a defining project element
that «drives» the estimate maturity level.
Es. Architectural project tend to be «structure‐centric» –

chemical industry tend to be «process equipment‐centric»
25
Maturity level of project definition deliverbles
The Class of estimate classification can be identified based on

the extent and maturity of estimate input information that can
be divided into 2 groups:
General Project Data;
Engineering Deliverables;
The classification consider the status for the input information:
“not available”, “started (S)”, “preliminary (P)”, “Complete (C )”.
26
Ex. Estimate input checklist for process industries
27
28
CLASS 5 ESTIMATE
Based on very limited information (key deliverables) – prepared with a

very limited amount of time and effort
o Methodology: stocastic methods as cost/capacity curves and

factors, scale of operations factors and other parametric and
modeling techniques.
o End usage: strategic business planning, evaluation of alternatives,
project screening, evaluation of resource needs, etc.
o Expected accuracy range: ‐20% to ‐50% on the low side, +30% to
+100% on the high side.
29
CLASS 4 ESTIMATE
Based on basic information (engineering from 1% to 15% complete,

plant capacity, schematics, PDF, preliminary equipment lists) –
prepared with a very limited amount of time and effort
o Methodology: factored estimating methods, gross unit

costs/rations, and other parametric and medeling techniques
o End usage: detailed strategic planning, business development,
confirmation of economica feasibilty, preliminary budget, etc
o Expected accuracy range: ‐15% to ‐30% on the low side, +20% to
+50% on the high side
30
CLASS 3 ESTIMATE
Based on preliminary project information (engineering from 10%

to 40% complete, flow diagram and schematics, P&ID, layouts,
detailed equipment lists) – needs knowledge of main estimate
thecniques
o Methodology: basic deterministic methods

o End usage: project funding requests, preliminary project
budget
o Expected accuracy range: ‐10% to ‐20% on the low side, +10%
to +30% on the high side
31
CLASS 2 ESTIMATE
Based on quite detailed project information (engineering from 30% to

75% complete, P&ID, calculations, final plot plans and layouts, detailed
equipment lists) – needs knowledge of specific estimate thecniques
o Methodology: high degree deterministic methods applied to tens of

thousands of unit cost line items
o End usage: detailed contractor control baseline, funding decisions
o Expected accuracy range: ‐5% to ‐15% on the low side, +5% to +20%
on the high side
32
CLASS 1 ESTIMATE
Generally for discrete parts or sections rather than for the entire

project. Based on detailed project information (engineering from 65%
to 100% complete, complete project execution and commissioning
plans) – needs knowledge of specific estimate thecniques and require
a great amount of efforts
o Methodology: high degree deterministic methods applied to a very

detailed unit cost line items
o End usage: bid checking, vendor/contractor negotiations, claim
evalutaion, change management;
o Expected accuracy range: ‐3% to ‐10% on the low side, +3% to +15%
on the high side
33
Agenda
Basis of Estimate, Cost Estimate plan and Estimate process
34
Basis of Estimate (BOE)
A BOE defines the scope of the project and becomes the basis for
change management.
A well‐written BOE achives those goals by clearly and concisely

stating the purpose of the estimate being prepared (i.e. cost study,
project options, funding, etc) the project scope, pricing basis,
allowances, assumptions, exclusions, cost risk and opportunities,
and any deviations from standard practices.
35
A well prepared BOE will:
Document the overall project scope;

Alert the project team to potential cost risks and opportunities;
Provide a record of all documents used to prepare the estimate;
Establish the initial baseline for scope, quantities and costs for
use in cost trending troughout the project;
Facilitate the review and validation of the cost estimate;
etc
36
A BOE should:
Be factually complete, but coincise;

Be able to support facts and findings;
Identify estimating team members and their roles;
Describe the tools, techniques, estimating methodology, and
data used to develop the cost estimate;
Identify other project that were referenced or benchmarked
during estimate preparation;
etc
37
A BOE icludes:
Purpose (of the project);
Project Scope Description;
Methodology (estimating methodology);
Estimate Classification;
Design Basis (technical and project information required);
Planning Basis;
Cost Basis (pricing sources, currency exchange, escalation,
contingency, capital cost vs. expense costs, etc);
Allovances;
38
Cost Estimate Plan
In general a separate estimate plan will be developed for each individual
estimate.
39
Cost Estimate Plan
A good estimate plan will make the estimate development process
more efficient.
Owner organization may have predetermined dates when approvals

are considered (ex. Board meetings). Delay in the estimating process
may cause the project to miss a critical window of opportunity
Estimate data (quantities, hours, costs) should be coded in a manner that

considers how the estimate is prepared, reviewed and how it will be used for
cost control;
Project execution plan should be established (contractor strategies, work
shcedul, labor sourse, ecc);
The use of checklists in the estimate plan can be an effective aid to ensure

portions of scope are not omitted.
40
Cost Estimate Plan
The estimate plan should consider:
Purpose of Estimate: what the estimate will be used for and by whom
and identify the expected estimate class;
Key Estimate Milestones:
Project scope: (major project component, capacities, size, ecc);

Execution plan summary;
Location paramiters: weather conditions, infrastructure availability,ecc;
Schedule;
41
Cost Estimate Plan
Estimating methodology;
Estimating tools;
Coding and formatting: work breakdown structure (wbs);
Estimate report format: levels of details and summaries;
Unit of measure;
Currency and exchange rates;
Labor work week and overtime;
Construction subcontracts: logistic, construction infrastructure;
Construction indirect costs:construction management, temporary
facilities, utility consumption, construction equipment (cranes, man lift,
etc), temporary services (gas dedection, weather protection, etc),
consumable, travel and housing costs;
Engineering and home office: hours, wages and costs;
42
Cost Estimate Plan
Allowances;
Freight;
Spares and initial stock inventory;
Commissioning and start‐up;
Escalation: single % for escalation could be applied to the entire project
or separate escalatation factors for: labor, material, equipment, etc (see
AACE International Reccomended Practices No 58R‐10 and 68R‐11);
Risk Analysis (see AACE International Recomended Practices No 40R‐08);
Exclusions;
Estimate review and Validation;
Estimate schedule;
Etc.
43
Cost data sources
In addiction to internal company cost data source, some

official data are available in each country as reference for cost
estimating.
Some official Italian cost data sources:
«prezziari DEI»;
«prezziari regionali»;
«prezziari ANAS»;
«Listino prezzi Comune xxx per opere pubbliche»;
etc
44
Cost data sources
Some international data source:
Various compliers and

publishers maintain
databases of costs
CostDataOnLine.com
(formerly Richardson
Engineering Services)
publishes several estimating
standards, including one for
general construction & one
for process plants
45
Cost Estimate Process
For contractor bids, there is another step of pricing, including determination

of profit and other mark‐ups and allocations appropriate to the contract
situation.
46
Estimate review and validation
47
48
Review Estimate
The Estimate “review” determines if the estimate was
developed using contractually or procedure required practices,

tools and data;
whether it covers the entire project scope;
whether it is free from errors and omission;
whether it is structured and presented in the corrected format;
etc;
49
Validation Estimate
The Estimate “validation” is focused on ensuring that the estimate
meets the project expectations and requirements in regards to its
appropriateness, competitiveness and identifying improvement
opportunities.
The estimate is typically benchmarked against or compared to
various cost metrics and/or cost target, including third party
published data, similar completed projects from company’s
historical data or past detailed estimates.
50
Validation Estimate
At a given phase, depending on the detail and importance of the
estimate, multiple reviews are performed with varying purposes, scope
and participants.
For large estimates, different parts of the estimate (i.e. divided by wbs)
may be reviewed separately.
Specialized scope in any estimate should be reviewed by the appropriate
specialists or subject matter expert.
Those preparing the estimate review should be reasonably free from

undue influence by stakeholders (i.e. their pay or career is not primarily
determined by the recipient of the estimate)
51
CONTINGENCIES
Contingencies
52
Contingencies
«CONTINGENCIES» are:
Allowance;
Contingency;
Escalation;
Management Reserve
53
Definitions
ALLOWANCES
Resources included in estimates to cover the

cost of known but undefined requirements for
an individual activity, work item, account or
subaccount. Typically are extra‐quantities.
54
Contingency Definitions
CONTINGENCY (rif. AACE 40R‐08)
It’s used to cover the uncertainty and variability associated with

a cost estimate and unforeseeable elements of cost within the
defined project scope.
It’s used to cover inadequacies in:
‐ project definition;
‐ estimating methods;
‐ Estimating data.
If risk analysis is utilized to develop the contingecy, the

associated confidance level should be identified
55
ESCALATION (rif. AACE 58R‐10)
It’s a provision for an increase in the cost of

equipments, material, labor, etc. for changes
conditions over time in:
‐ technical;
‐ economic (inflation);
‐ market;
‐ regulation.
56
MANAGEMENT RESERVE
Contingency is not intended to cover costs associated with

changes in project scope.
If the project needs to provide an allowance for anticipated
changes in scope or to cover the costs for items that may be
required but have not yet been specifically identified as been
included in the project scope, that amount of cost typically
referred to as management reserve.
The intended purpose and use of management reserve should

be clearly identified.
57
58
Most of the final users of the estimate need a single point value

as a reference of some decision.
CONTINGENCY is than used for taking into account the

uncertainty associated with an estimate.
There is a broad range of contingency estimating methodologies

each method has its advocates – AACE has defined a
«recommended practice»
59
Contingency Estimating
There are 4 classes of methods:
Expert Judgment
Predetermined Guidelines
Simulation Analysis (range estimating, expected value)
Parametric Modeling
60
Probability & Statistics
How to calculate Contingency, defining
Estimate accuracy and range of variations
61
Backgroung
– Probability Distribution
– Mean
– Deviation
– Standard deviation
62
Comparing the distribution of 12 samples each one referred
to 6 or to 24 items, we can see how change the mean
distribution.
63
Considering thousands of samples instead of only 12 we can
see how change the frequency mean distribution in
consideration of the number of items (n) in each samples.
64
The standard deviation of the mean can be calculated as follows:
The mesures the estimation accuracy that depends on standard

deviation (variability of the items) and the number of items
considered (n)
Smaller is the standard deviation and bigger is the number of items

considered and better accuracy will have the estimation.
65
C1
C2
C3
C4
C5
C6
C7
C8
C9
C10
C11
C12
C13
C14
C15
C16
C17
66
Typical distribution ‐ NORMAL
The area between two values is the probabilty of occurrence;

The standard deviation mesures the spread of a distribution
67
Mean = 0 Mean = 0

Standard deviation = 1 Standard deviation = 1
Area between Area between
and is 68% and is 95%
68
Lower the standard deviation is and the smaller is the spread of

the distribution
69
Probability and Statistics
Montecarlo Risk Analysis
70
Montecarlo Analysis
Performs risk analysis by modeling the input (ex. costs) as a
probability distribution to consider his inherent uncertainty.
Define correctly the probability distribution for each sets of
imput.
71
Montecarlo Analysis
Typical distributions:
o Normal (simmetrical);
o Longnormal (skewed, not simmetrical)
o Unifor (all values have equal chance to occure)
o Triangular (values around the minimum, most likely
and maxium value)
o Pert (values around teh most likely are more likely to
occur)
72
C1
C2
C3
C4
C5
C6
C7
C8
C9
C10
C11
C12
C13
C14
C15
C16
C17
73
Contingency Calculation is the solution of a statistical test where
is fixed:
Distribution and accuracy level desired
The calculation define the amount to add to average value to
ensure to reach the accuracy level defined.
P(variable < X) = Pc(Z)
Accuracy range are defined where the area of the probability
distribution is equal to the accuracy level defined
74
Confidence level
If we know a probability distribution of an event, we may
predict the future with a certain degree of certainty.
Confidence is the level of certainty which is possible to
associate to a prediction
In other words:
There is a probability of 80% ( called P80) that estimate
evaluation is included in accuracy range ( or certainty range).
Accuracy range values are strictly related to probability
distribution and probability P(X)
75
Montecarlo Analysis
Summary Information
Distribution for FORECAST/BD94 Workbook Name RIsk.xls
6 Number of Simulations 1
Mean=2,847938E+07
Number of Iterations 10000
5
Values in 10^ -6
Number of Inputs 70
4 Number of Outputs 2
Sampling Type Monte Carlo
3
Simulation Start Time 16/03/2004 14:28
2 Simulation Stop Time 16/03/2004 14:28
Simulation Duration 00:00:20
1 Random Seed 603263603
0
28,1 28,275 28,45 28,625 28,8 Summary Statistics
Values in Millions Statistic Value %tile Value
5% 90% 5% Minimum 28.155.020 5% 28.357.522
28,3575 28,6037 Maximum 28.784.796 10% 28.383.414
Mean 28.479.382 15% 28.402.116
Std Dev 74.833 20% 28.415.432
Distribution for FORECAST/BD94 Variance 5600025096 25% 28.428.124
1,000 Skew ness 0,042499508 30% 28.438.608
Mean=2,847938E+07
Kurtosis 3,002474404 35% 28.449.408
0,800 Median 28.479.134 40% 28.459.282
Mode 28.502.382 45% 28.469.290
0,600
Lef t X 28.357.522 50% 28.479.134
Lef t P 5% 55% 28.488.890
0,400
Right X 28.603.670 60% 28.498.124
Right P 95% 65% 28.507.956
0,200
Dif f X 246.148 70% 28.518.092
0,000 Dif f P 90% 75% 28.529.282
28,1 28,275 28,45 28,625 28,8 #Errors 0 80% 28.542.254
Values in Millions Filter Min 85% 28.557.112
5% 90% 5% Filter Max 90% 28.575.648
28,3575 28,6037 #Filtered 0 95% 28.603.670
76
Montecarlo Analysis
Sensitivity
Regression Sensitivity for Rank Name Regr Corr
FORECAST/BD94 Changes to be approved up to 23rd
#1 Feb. 0,353 0,336
Changes to be approved up .../BB80 ,353 #2 FUTURE CHANGES 0,329 0,309
FUTURE CHANGES / RISK ETC/.../BB88 ,329
#3 Sistema Conta particellare 0,283 0,261
Sistema Conta particellare.../BB85 ,283
CIVIL GENERAL / RISK ETC/BB49 ,28 #4 CIVIL GENERAL 0,280 0,276
Construction Commissioning.../BB92 ,276 Construction Commissioning and
Strumentazione di banco / .../BB83 ,275 #5 Validation services 0,276 0,268
AUTOMATION - P.A.S. / RISK.../BB69 ,236
CONTINGENCY on subcontrac.../BB72 ,219 #6 Strumentazione di banco 0,275 0,275
Integrity tests systems / .../BB84 ,207 #7 AUTOMATION - P.A.S. 0,236 0,211
CONTINGENCY on Procuremen.../BB45 ,175 #8 CONTINGENCY on subcontracting 0,219 0,202
INSTRUMENTS CALIBRATION / .../BB71 ,168
Arredi inox / RISK ETC/BB82 ,146 #9 Integrity tests systems 0,207 0,197
ELECTRICAL & LOW CURRENT S.../BB64 ,142 #10 CONTINGENCY on Procurement 0,175 0,176
ULTRAFILTRATION - SKID / R.../BB27 ,135 #11 INSTRUMENTS CALIBRATION 0,168 0,148
CIP / RISK ETC/BB32 ,117
DRYER / RISK ETC/BB25 ,117 #12 Arredi inox 0,146 0,150
ELECTRICAL & LOW CURRENT
-1 -0,75 -0,5 -0,25 0 0,25 0,5 0,75 1
#13 SYSTEM 0,142 0,143
Std b Coefficients #14 ULTRAFILTRATION - SKID 0,135 0,128
#15 CIP 0,117 0,103
#16 DRYER 0,117 0,114
77
Accuracy Range ‐ Example

Referring to
point estimate
before
contingency the
accuracy range
at 80% of
confidence si
‐20%+40%
78
Accuracy Range
Accuracy is traditionally expressed as +/‐ percentage around the
point estimate after application contingency with a stated level
of confidence that the actual cost outcome would fall within this
range.
When accuracy is expressed as a percentage it is always

important to note whether it is the percentage range around the
point estimate before contingency or around the value including
contingency
79
Accuracy Range ‐ exemple

Referring to
point estimate
after
contingency the
accuracy range
at 80% of
confidence si
‐27%+27%
80
Accuracy Range
In addition to the degree of project definition, estimate
accuracy is also driven by:
Level of non‐familiar technology in the project;
Complexity of the project;
Quality of reference cost estimating data;
Quality of assumption used in preparing the estimate;
Experience and skill level of the estimator;
Estimating techniques employed;
Time and level of effort budgeted to prepare the estimate;
Unique/remote nature of project locations and the lack of
reference data for these locations
The accuracy of the composition of the input and output;
81
Accuracy Range
Typical class 5 estimate for a process industry project may have an accuracy
range as broad as ‐50% to +100% or as narrow as ‐20% to +30%
The estimating accuracy
ranges overlap the
estimate classes.
Class 5 for a particular
project may be as
accurate as a Class 3
estimate for a different
project
82
Escalation
83
Cost Estimate ‐Escalation
Escalation is a provision in costs for changes in technical,
economic and market conditions over time.
In volatile times, it may be a large cost account in an

estimate, in stable times it may seem insignificat but could
change suddenly.
Among, changes in market conditions, technolgy, regulation,
etc, escalation is mainly drived by inflation.
Escalation estimating is used to either bring past costs to a

current basis or to forecast what costs will be in the future.
84
Price index Forecast
Many economists study historical trends and build economic
models that forecast future price index value.
The models are usually tied to macroeconomic models that
define the underlying economic conditions.
Some economists rely less on models and more on expert
opinion, market surveys, etc.
The suggestion is to use a hybrid methods, overriding or
adjusting modes based on judgement or other inputs.
85
Basic Escalation Cost Estimate Relationship (CER) using IndiXes
The primary sources of historical price and other economic indices are
government agencies:
‐ U.S. Bureau of labor Statistics;
‐ Erostat;
‐ Statistics Canada;
‐ Etc;
86
Addressing Costs Over Time
Cash flow (C.F) can be used to represent spending distributed over
time, so one can apply the CER using a discrete point of time in the
future based on C.F.
87
Mid‐point spending method
Target date as mid‐point between the start and the end C.F.
‐ Simple and most amenable for Class 5 and 4 cost estimate
Mid‐point spending method
Target date as median date of the C.F.
‐ Requires some knowledge of the spending pattern and most amenable for Class
5 and 4 cost estimate
Period spending method
Breaks the spending into time increments (month, quarter, year) and the CER is
applied for each time with the target date as the mid‐point of the incremental
period.
‐ Requires specific knowledge of the spending pattern and it is amenable for any
cost estimate (particularly from class 3 to 1)
88
Probabilistic CF
CF Probabiistic CF Input regression
Oneplan Copyright
89
CER and C.F. treatments can be applied to any level of detail of
cost breakdown (from overall to very detail)
However neither a single account nor an extremely detailed
breakdown is reccomented – (the former fails to address differential
price changes between cost accounts and complicates the method without
adding value din improved accuracy)
Material, office labor, and filed labor cost accounts typically
have different price trends and need to be segregated
Segregating items by major commodity type is typically
advisable.
90
Estimate issues
Factors affecting estimate accuracy
91
Estimate Issues
There are a lot of factors that affect the Estimate’s Accuracy
92
Estimate Issues
Empirical estimate accuracy
data has been researched for
over 50 years.
Estimate accuracy and cost
uncertainty data from 12
empirical studies are
summarized in table 1.
These include over 1.000
project with samples ranging
from about 20 to 250 project
each.
93
Estimate Issues
The accuracies are summarized at a confidence levels as follows:
The «accuracy» shown is the percentage variation of the final actual cost

from the reference estimate.
The key observation is that in no case was the nominal P90 value ever less

than +34% of the funding estimate and the average mean or median
overrun is about 21%.
94
Estimate Issues
Estimate Accuracy Progression Versus level of Scope Definition.
Less defined the project scope is, the wider the estimate accuracy range will be.
There is a huge
potential for
overruns if the
scope is more
poorly defined
than Class 3
95
Estimate Issues
What estimates say and what owners want, usually are not the same
In many industry
risk analyses by
owner
companies and
their EPC
contractors P90
forecast is rarely
great than 30%
over the base
estimate
excluding
contingency
96
Estimate Issues
Figure 1 shows the average of table 1 and table 3 as long‐normal curves with
P10/50/90 values comparable to the table 1 (reality) and 3 (as estimated)
averages for those confidence levels
97
Estimate Issues
Project size dichotomy
Looking at an entire company project portfolio the combined
distribution of accuracy data for small and large projects can look as a
normal distribution ( Example BL projects)
98
Estimate Issues
Accuracy is often misused as a measure of estimate «quality» or

estimating performance.
This is inappropriate because the only way for an estimator to
deliver a targeted accuracy for a given scope is to over‐estimate
the cost.
Risk and project performance are not in the estimator’s control
Accuracy should be used to measure the performance of the risk

management process in conjunction with project historical data
including casual information so that to improve the risk
identification, analysis and quantification.
99
queues
queues
queues Estimate issues
Probability distribution skewness

Use of triangolar distribution (no queues)
Cutting of fat queues
No correlations effects
100
Conclusion
101
References
‐ 2005 AACE International Transactions – RISK 09 “Risk analysis in transit project”
‐ 2005 AACE International Transactions – EST.13 “Improving Conceptual Cost Estimating
Performance”
‐ 2012 AACE International Transactions – RISK.1027 “Estimate accuracy: dealing with reality”
‐ AACE International recommended practice No. 17R‐97
102
GRAZIE
Convegno Ordine Ingegneri – Roma
22/06/2018
www.aacei‐italy.org
www.aaceregion9.org
web.aacei.org

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AACE International

By its nature, an estimate involves assumptions and

We can correlate this level of error and uncertainty to

Cost structure AACE

DIRECT COST INDIRECT COST

Labor Material Equipment Subcontract Taxes Gen. Cond. Risk Overhead

5 - La pianificazione di progetto © Oneplan

5 - La pianificazione di progetto © Oneplan

The AACE categorise the cost estimate into 5 classes defined

Concept Study Primarily

Budget, Mixed, but

Basis of estimate for each gate by each business

Maturity level of project definition deliverbles is referred to the

Maturity level of project definition deliverbles

Each project will have a typical set for deliverables that are used

Es. Architectural project tend to be «structure‐centric» –

Maturity level of project definition deliverbles

The Class of estimate classification can be identified based on

Based on very limited information (key deliverables) – prepared with a

o Methodology: stocastic methods as cost/capacity curves and

Based on basic information (engineering from 1% to 15% complete,

o Methodology: factored estimating methods, gross unit

Based on preliminary project information (engineering from 10%

o Methodology: basic deterministic methods

Based on quite detailed project information (engineering from 30% to

o Methodology: high degree deterministic methods applied to tens of

Generally for discrete parts or sections rather than for the entire

o Methodology: high degree deterministic methods applied to a very

Basis of Estimate, Cost Estimate plan and Estimate process

A well‐written BOE achives those goals by clearly and concisely

Document the overall project scope;

Be factually complete, but coincise;

Owner organization may have predetermined dates when approvals

Estimate data (quantities, hours, costs) should be coded in a manner that

The use of checklists in the estimate plan can be an effective aid to ensure

Project scope: (major project component, capacities, size, ecc);

In addiction to internal company cost data source, some

Some official Italian cost data sources:

Various compliers and

For contractor bids, there is another step of pricing, including determination

developed using contractually or procedure required practices,

Those preparing the estimate review should be reasonably free from

Resources included in estimates to cover the

It’s used to cover the uncertainty and variability associated with

If risk analysis is utilized to develop the contingecy, the

It’s a provision for an increase in the cost of

Contingency is not intended to cover costs associated with

The intended purpose and use of management reserve should

Most of the final users of the estimate need a single point value

CONTINGENCY is than used for taking into account the

There is a broad range of contingency estimating methodologies

The standard deviation of the mean can be calculated as follows:

The mesures the estimation accuracy that depends on standard

Smaller is the standard deviation and bigger is the number of items

Typical distribution ‐ NORMAL

The area between two values is the probabilty of occurrence;

Mean = 0 Mean = 0

Lower the standard deviation is and the smaller is the spread of

Accuracy Range ‐ Example

When accuracy is expressed as a percentage it is always

Accuracy Range ‐ exemple

In volatile times, it may be a large cost account in an

Escalation estimating is used to either bring past costs to a

Factors affecting estimate accuracy