2020 AACE® INTERNATIONAL TECHNICAL PAPER

EST-3424

Supporting Estimates with Effective Scope

of Work Definition
Larry R. Dysert, CCP CEP DRMP FAACE Hon. Life; and
Todd W. Pickett, CCP CEP FAACE
Abstract–Most estimators realize that one of the essential ingredients for preparation of an
accurate cost estimate is the comprehensive and sufficient definition, and subsequent control of
project scope. Numerous studies have identified project scope definition as one of the most
critical factors that influence project success. In 1982, the Construction Industry Institute (CII)
Business Roundtable issued a report stating that “poor scope definition at the (budget) estimate
stage and loss of control of project scope rank as the most frequent contributing factors to cost
overruns." [1] Nevertheless, obtaining adequate scope definition to support cost estimating
continues to be one of the most persistent problems faced by estimators.

This paper discusses issues involved in dealing with scope development problems during the
preparation of capital facility cost estimates. Topics to be covered include:

• Introducing a stage-gate project development process

• Identifying the minimum requirements to prepare various classes of estimates
• Communicating information requirements to project teams and estimate providers
• Corelating estimating techniques to the level of scope information
• Utilizing a frozen for estimating design basis and incorporating late changes
• Presenting the estimate in relation to the level of scope definition

This paper expands upon an earlier AACE International paper Scope Development Problems in
Estimating [2], incorporating information from AACE International (AACE) recommended
practices on estimate classification, as well as from other sources.

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Table of Contents

Abstract .......................................................................................................................................... 1
Introduction ................................................................................................................................... 3
Project Development Process ........................................................................................................ 3
FEL 0: Identify Opportunity ...................................................................................................... 4
FEL 1: Business Case ................................................................................................................. 4
FEL 2: Select ............................................................................................................................. 5
FEL 3: Define ............................................................................................................................. 6
Execute Phase .......................................................................................................................... 6
Operate Phase .......................................................................................................................... 7
Notes Regarding the Project Development Process ................................................................ 7
Cost Estimates Should Be Aligned with the Project Development Process ............................ 8
Identifying the Minimum Requirements to Prepare Various Classes of Estimates ....................... 9
Communicating Information Requirements to Project Teams .................................................... 13
Correlating Estimating Techniques with Improved Maturity of Scope Definition ...................... 14
Frozen Design Basis/Late Changes ............................................................................................... 15
Present the Estimate in Relation to Scope Definition ................................................................. 17
Conclusion .................................................................................................................................... 17
References .................................................................................................................................... 18

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Introduction

It is universally recognized that accurate definition and effective control of project scope are key
to the successful outcomes of projects; [3] [4] [5] [6] [7] however, adequate scope definition to
support cost estimating during the project development process leading up to project sanction
(or authorization) continues to be one of the most persistent problems faced by estimators.
Zaheer and Fallows stated that “[t]he single largest impact on quality of estimates (estimate
accuracy) is project scope definition.” [8]

This paper discusses many of the issues involved with obtaining sufficient project scope definition
to support effective cost estimating for capital facility projects (projects to engineer, procure, and
construction capital facilities or assets). Topics covered include identifying the minimum
requirements to prepare various classes of estimates, communicating information requirements
to project teams and estimate providers, corelating estimating techniques to the level of scope
information, utilizing the concept of a frozen for estimating design basis, incorporating late
changes, and presenting the estimate in relation to the level of scope definition.

Although clearly focused on projects for the construction of facilities, the principles of identifying
the project and technical deliverables required for each class of estimate and ensuring that the
maturity of those deliverables meet the expectations for the desired class of estimate can be
applied to other types of projects.

Project Development Process

For large construction projects, most owner organizations follow some form of a stage-gate (or
phase-gate) project development process. This provides a governance process for the project
development activities leading up to project sanction (authorization); and extending through
project execution and eventual start-up of the facilities and turnover to facility operations. This
process also supports effective risk management for the owner since funds for project
development are “released in proportion to the decision maker’s understanding of and
willingness to accept risk.” [9]

A key purpose of estimate classification, described later in this paper, is to align the estimating
process with project stage-gate scope development and decision-making processes. The classes
of estimates are correlated with the maturity of technical and project deliverables that are
developed during each of the project development stages.

A generic stage-gate project development process is shown in Figure 1.

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Figure 1–Stage-Gate Project Development Process

In this project development lifecycle, project and technical deliverables to define the project are
developed incrementally in stages. At the end of each stage, a gate review is conducted, and a
decision is made by the owner on whether to proceed (and fund) the next stage. The specific
project and technical deliverables to be developed and an expectation of their maturity (or state
of completeness) are defined for each stage.

The stages leading up to project sanction (the authorization of full funds to execute and complete
the project) are known as the front-end loading (FEL) process (or sometimes as the front-end
planning process), and are described below:

FEL 0: Identify Opportunity

This stage is typically performed by a business unit of the owner organization without support of
a project team. This stage involves idea generation around opportunities to create a new asset,
or to modify or retire an existing asset. It provides early shaping for the potential business
opportunity and objective, usually at a very high level. A cost study (or unclassified cost estimate)
may be prepared by the business unit to support the Gate 0 decision of whether to include the
identified opportunity into the long-range capital planning budget of the organization.

In general, very little development of technical deliverables is accomplished to support a formal

estimate, which is why the estimates during this stage or most often simply described as cost
studies or unclassified estimates. Most often, these estimates are based on analogy estimating
techniques, and may be just a subjective assessment of costs; quite often prepared by a non-
estimator.

At some point, the owner organization may decide to further investigate the opportunity and will
authorize funds to organize a core project team to begin the FEL 1 stage. Note that this is not
authorizing full funding to develop the project, but only the funds necessary to complete FEL 1.

FEL 1: Business Case

This stage is used to identify potential alternatives (technical and non-technical) that may meet
the business objectives. Overall project definition (such as capacity, technology, etc.) are
established for each identified alternative. Project and technical deliverables are developed to
the defined maturity level specified. A preliminary business case is prepared. Typically, an AACE

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Class 5 cost estimate for complete development of the project is prepared to support the
business case and Gate 1 decision.

Class 5 estimates are typically based on limited scoping information using a conceptual
estimating methodology, such as analogy, capacity factoring, or parametric estimating. The
purpose of the Class 5 estimate is to identify a reasonable cost assessment of sufficient accuracy
to support the Gate 1 decision.

The Gate 1 review will validate that the stage deliverables (including the cost estimate) meet the
requirements (maturity or level of completeness expected); and the owner will make a decision
to proceed to the next FEL stage or not. If the decision is made to proceed to the next stage, then
the owner must authorize the funds to expand the project team and support the FEL 2 activities.
The funds to support FEL 2 are often based on a separate detailed estimate based on the scope
of the FEL 2 activities.

At Gate 1, the owner may also make the decision (based on the FEL 1 activities) that the project
is not justified to pursue and make the decision to cancel the proposed project. Alternatively, it
may decide that other alternatives should be considered and may authorize funds to continue
FEL 1 activities.

FEL 2: Select

During FEL 2, engineering is progressed, and scope is developed to generate sufficiently reliable
cost estimates and schedules to support an updated business case. During this stage, selection
of a preferred alternative is made. Integrated project plans are developed to a preliminary status.
Typically, an AACE Class 4 cost estimate for the complete development of the project is prepared
to support the updated business case and Gate 2 decision; and a more detailed estimate of FEL
3 activities is prepared to support the funding of FEL 3 if the Gate 2 decision is made to proceed.

Scoping information has typically progressed during this stage to provide confidence that all
elements of projects scope have been accounted for, including all supporting utilities and
infrastructure. Project plans have developed to indicate anticipated contracting, procurement,
fabrication, and contracting strategies. This level of information supports the Class 4 project cost
estimate, which typically employs a more comprehensive factoring approach than simply
capacity factoring or simple analogy; and often some portions of the estimate may use more
deterministic estimating methods. Once again, the goal of the estimate is to identify an
evaluation of project costs of sufficient accuracy to support the Gate 2 decision.

The Gate 2 review will again assess that the project and technical stage deliverables meets
requirements; and the owner will make the decision to proceed to FEL 3 or not. It the decision is
made to proceed, then the owner must authorize the funds for the additional project resources
to accomplish the FEL 3 activities.

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At Gate 2, the owner again has the opportunity to cancel the project if it does not appear to be
justified; or may decide to remain in FEL 2 to further develop project and technical deliverables
before making the go/no-go decision.

FEL 3: Define

FEL 3 is often referred to as front end engineering and design (FEED). This stage is used to
progress engineering and scope development to “freeze” overall design. This does not imply that
design or engineering are complete, but that the key defining engineering documents (as an
example for a process facility, this includes the plot plan, major equipment list, and piping and
instrumentation diagrams) are finalized and approved for design; subject to only minor updates
during detailed design. Comprehensive integrated project plans incorporating input from all
stakeholders is finalized. An AACE Class 3 cost estimate is prepared to support the final project
authorization request, project control during execution, and the Gate 3 decision.

For the owner, Gate 3 (at completion of FEL 3) is typically used to authorize full project funding,
and thus is extremely important. Validating that the project and technical deliverables are of
sufficient maturity and quality upon which to base the funding decision is critical. Ensuring that
the project and technical deliverables can be used to adequately quantify the scope to prepare
the Class 3 estimate is a responsibility of the cost estimator; and any exceptions to the expected
maturity and/or quality must be identified by the estimator in the basis of estimate document
[10] and considered during risk analysis to establish the expected estimate accuracy.

The Class 3 estimate is also used to establish the cost baseline (the control basis) during project
execution; and thus, must be prepared at a detailed level to support effective project control.
The estimate will be used to establish control budgets to support bid evaluations, monitor
procurements, evaluate construction performance, track and manage change to scope and
project execution strategies, etc. This reinforces the importance of finalizing the integrated
project plans to support the Class 3 estimate, which includes many specific plans required to
support effective project execution. These plans need to be comprehensive and finalized during
this stage to support the Class 3 estimate as they establish much of the basis for the labor and
material pricing, allowances, and assumptions incorporated into the estimate. When these plans
are incomplete, they directly affect the uncertainty and risk associated with the Class 3 estimate
used to support project authorization and establish the cost baseline for the project.

Gate 3 is typically used by the owner to support the final investment decision. If the established
business case based on the Class 3 estimate cannot support approval, then the project should be
cancelled. If the owner makes the decision to proceed, then the owner is typically authorizing
the full project authorization amount to complete the project through turnover to operations.

Execute Phase

During this phase, detailed engineering and design, procurement, fabrication, and construction
are performed through mechanical completion. Vendors and fabrication/construction
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contractors may be preparing detailed AACE Class 2 and Class 1 estimates to support their bids
for services, and to support on-going project change management during the execution phase.

Gate 4, at the end of the execute phase, is used to validate that the project facilities are ready to
begin commissioning and start-up, and eventual turnover to operations.

Class 2 and Class 1 estimates are generally very detailed as they are prepared based upon detailed
engineering and/or issued for construction deliverables. As owners have usually authorized final
project funding based a Class 3 estimates, generally the owner will not require a complete project
Class 2 or Class 1 estimate to be prepared; however , some owners will require a Class 2 estimate
to be prepared that incorporates all final vendor and construction bids received during this phase
before making the decision to proceed to construction. More often, owners will require Class 2
or Class 1 estimates only for small portions of the overall project to be used to selected bid
evaluations and for change order analysis; thus an owner may use a combination of the Class 3
project authorization estimate and Class 2 (or Class 1) estimates to support control during
execution.

Vendors and construction contractors will generally utilize the more detailed technical
deliverables developed during this stage as the cost basis for their bids; and as the basis for
change requests as required.

Operate Phase

This phase includes the commissioning and start-up activities (typically funded as a part of the
project authorization), and subsequent facility operations through the lifecycle of the asset.
During operations, estimating will support on-going maintenance and sustaining capital projects.

Notes Regarding the Project Development Process

It should be noted that the project development stages discussed above do not indicate who is
preparing the estimates. Although usually Class 5 cost estimates prepared during FEL 1 will be
prepared by the owner, there are also situations where the owner will have a contractor or
consultant prepare the estimate for them. For FEL 2, it is often more of a mix, where the
estimates may be prepared by owner or contractor resources. Due to the size of the projects and
the effort required for Class 3 cost estimates, most Class 3 estimates are prepared by engineers
or consultants.

In any case, whether prepared by in-house or third-party resources, the estimates eventually
become the property and responsibility of the owner. The owner is responsible for ensuring that
the estimates include all scope (including all owner-related costs) and are appropriate for the
gate decision at hand. During the gate review, it is the owner that must eventually determine
that the project and technical deliverables meet the expected maturity and quality intended. If
gaps exist, then the owner should (ideally) not proceed to the gate decision until the gaps are
closed or, if the decision is made to proceed, then should identify, assess, and account for all risks
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associated with that decision. Edward Merrow of Independent Project Analysis states that “FEL
is the single most important predictive indicator of project success.” [11]

Also, it is important to note is that if the estimate results in too high of a cost to justify the
business decision, then the correct decision is to stop the project and consider that decision to
be a success. One of the purposes of the stage-gate project development process is to halt the
pursuit of uneconomic projects as soon as possible and divert resources to those projects that
are economic and meet business objectives.

Cost Estimates Should Be Aligned with the Project Development Process

Project cost estimates are one of the primary elements in the decision-making process to
eventually sanction (or authorize) projects. It is recognized that economics will drive most project
decisions throughout the project process (i.e. during all stages of project development). Cost
estimates are used in the early stages of project development to ensure that the right project is
selected to pursue; one that best meets economic and other business objectives and provides
the best overall return on the capital investment. Eventually the cost estimate must provide an
achievable cost (in consideration of associated risk) to support the final investment decision and
establish the baseline for project control during execution.

Cost estimates continue to be important during project execution to support on-going change
and risk management; as well as during operations to support maintenance and sustaining capital
projects to ensure the facility or asset operates effectively.

Figure 2 illustrates these concepts – essentially emphasizing that cost estimates matter.

Figure 2–Cost Estimates Matter

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Identifying the Minimum Requirements to Prepare Various Classes of Estimates

AACE has developed several recommended practices to support cost estimate classification
based on the maturity of the defining project and technical deliverables available to prepare a
cost estimate. AACE RP 17R-97 provides a summary of the general principles of cost estimate
classification; and establishes the five estimating classes common to all of the recommended
practices on estimate classification (Class 5 to Class 1, from least defined to most defined). [12]

There are several more industry specific (or “As Applied In”) estimate classification
recommended practices that provide detailed Estimate Input Checklist and Maturity Matrix
tables for the indicated industry. Each of these tables identify particular project and technical
deliverables for the applicable industry, and the associated maturity status that must be achieved
for each class of estimate. This paper will utilize AACE RP 18R-97 (As Applied in Engineering,
Procurement, and Construction for the Process Industries) for discussion and examples. [13]

Table 1 provides a table from AACE RP 18R-97 that summarizes the characteristics of the five
estimate classes for the process industries:

Table 1–Cost Estimate Classification Matrix for the Process Industries

It is critically important to understand that the determination of what class an estimate falls into
is not made solely by reference to the percentage of complete definition identified in Table 1.
Rather, it is the maturity level of project deliverables based on the status of key planning and
design deliverables that is the determinant, not the percent complete. AACE RP 18R-97 expressly
states:

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“The maturity level of project definition is the sole determining (i.e. primary)
characteristic of class. In Table 1 [of the RP], the maturity is roughly indicated by
the percentage of complete definition; however, it is the maturity of the defining
deliverables that is the determinant, not the percent. The specific deliverables, and
their maturity or status are provided in Table 3 [of the RP]. The other
characteristics are secondary and are generally correlated with the maturity level
of project definition deliverables, as discussed in the generic RP [AACE RP 17R-97].”

And AACE RP 18R-97 adds:

“[T]he determination of the estimate class is based upon the maturity level of
project definition based on the status of specific key planning and design
deliverables. The percent design completion may be correlated with the status, but
the percentage should not be used as the class determinate.”

The process industry Estimate Checklist and Maturity Matrix from AACE RP 18R-97 is shown in
this paper as Table 2.

The other characteristics associated with each class of estimate (shown in Table 1) including the
end usage, methodology, and expected estimate accuracy are secondary; they are typically
correlated with the class of estimate but not determinate of the estimate class. Also, note that
“class does not speak to the requirements for or quality of an estimating process; i.e., class alone
is not a valid contract specification for estimating services (e.g., ‘Contractor will provide a Class 3
estimate’ only requires what deliverables that must be used as the estimate basis.) To obtain
quality, one must define, and assure, estimating requirements, processes, methods, and plans in
detail.” [9] AACE has a recommended practice specific to the preparation of an estimate
requirements document. [14]

For all of the estimate classification recommended practices, a consistent principle is that “there
is a level of scope definition at which the cost uncertainty (typically expressed as an accuracy
range) is reduced to a point that most reasonably prudent decision makers can make a full-funds
(sanction) project investment decision, at least in respect to the capital expenditure (capex)
element. For each industry, this full-funding uncertainty level is expressed by Class 3. That is not
to say that Class 3 is a standard; for example, in upstream oil, full funds may be committed early
(Class 4) due to the need to sign development agreements. On the other hand, for government
funded infrastructure, policy often dictates that commitment of funds be held off until tenders
are received (Class 2).” [9]

As a secondary characteristic, expected accuracy range does not determine the estimate class,
and conversely estimate class does not determine the estimate accuracy. AACE RP 18R-97 states
that it:

“provides an approximate representation of the relationship of specific design

input data and design deliverable maturity to the estimate accuracy and
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methodology used to prepare the cost estimate. The estimate accuracy range is
driven by many other variables and risks, so the maturity and quality of scope
definition available at the time of the estimate is not the sole determinant of
accuracy; risk analysis is required for that purpose.” [Emphasis added]

Table 2–Estimate Input Checklist and Maturity Matrix [Identified as Table 3 in 18R-97]

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What should be clear from this discussion is that for many industries, AACE has defined the
project and technical deliverables, and their associated maturity levels, required for each class of
estimate. Estimate classification correlates with the stage-gate project development process,
with Class 5 through Class 3 estimates matching the FEL 1 though FEL 3 stages leading to project
authorization, respectively.

The Estimate Input Checklist and Maturity Matrix tables in the estimate classification
recommended practices have been developed to represent the needs of greenfield facility
construction projects and are expected to be adapted to specific project needs. For example, a
small revamp project to replace a few instruments and wiring may not have an impact on
mechanical systems and therefore require mechanical design deliverables.

Also note that not all required deliverables and supporting information are necessarily technical
in nature, or to be provided solely by engineering and design resources. Of critical importance is
the status of the integrated project plan (or project execution plan). This plan documents the
means, methods and tools that will be used by the project team to manage the project. It is an
integration and alignment of individual project plans that addresses all project functions
including engineering, procurement, contracting strategy, fabrication, construction,
commissioning and start-up within the scope of work. It may also address stakeholder
management, safety, quality, project controls, risk, information management, communication,
and other supporting functions. The estimator requires much of this information to support
preparation of the cost estimate, particularly in costing and pricing many of the technical scope
items, as well as developing the estimates for project team activities during the project.

The maturity of the deliverables is intended as a threshold to be met, and not regarded as a
continuous metric to achieve. The estimate does not qualify as a certain class of estimate until
all key deliverables reach the indicated state of completion. If some deliverables have not
reached the desired status, then a determination needs to be made whether they are significantly
deficient to only qualify the estimate as a lessor class of estimate; or whether they are minor
enough to be described as Class X with Exceptions. In any case, the resulting class of estimate
should be clearly identified in the Basis of Estimate document, and if the estimate is specified as
a Class X with Exceptions then the specific exceptions should be noticeably documented for
consideration by the estimate stakeholders and the gate review team. [10] It is important that
the lead estimator make an unbiased determination and accurately represent their
determination in the basis of estimate; it should not be the project manager or an engineering
representative that makes the determination of estimate class. As noted in Figure 2, the input of
cost estimators is key to effective gate keeping and ensuring that the status of project and
technical deliverables are meeting the expectations of the project development process and
supporting estimate preparation.

This is probably a good time to mention that until the project is fully funded and authorized
(typically at Gate 3) there is no project, only a proposed project. It should always be kept in mind
that the project and technical deliverables developed during the FEL stages need to support

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preparation of sufficiently accurate cost estimates (and schedules) to support the project
decisions that may turn the proposed project into an authorized and funded project.

Communicating Information Requirements to Project Teams

As noted in the earlier paper, Scope Development Problems in Estimating, “One of the most
common problems in estimating is obtaining the proper level of information upon which to base
the estimate. Engineering may not necessarily understand the estimating process enough to
know the type of information required to produce an estimate or to meet a specific estimating
technique or methodology. It’s important to convey both estimating information requirements
and an understanding of the estimating process to engineering and project teams.” [2] In many
organizations, owner or contractor, the same issue persists; and the solution is the same as well,
training and communication.

Whether owner or contractor, the estimating department within the organization should develop
an Estimate Input Checklist and Maturity Matrix similar to that shown in Table 2, but adapted as
necessary to their industries and project types, and aligned with their project development
process. AACE RP 18R-97 provides a guideline, and serves as a great reference point; however,
many successful estimating groups will use 18R-97 as a template but expand it to include more
detail that is specific to their projects. See the AACE paper Maturity Assessment for Engineering
Deliverables [15] as an example for expanding upon this checklist and developing a more robust
method of scoring to ensure that project and technical deliverables support a specific class of
estimate.

This checklist then becomes a part of the estimating department procedures, and obviously a
part of the training program for all estimators in the organization. In many of the more successful
organizations, this checklist is also a part of the project management and engineering training
programs; and becomes a documented part of the overall project development process. It is also
recommended that business unit management is trained on the checklist so that they also
become familiar with the maturity of project and technical deliverables required to achieve each
class of estimate. In this way, both management and the providers of the deliverables are aware
of the technical efforts that will be required to support estimating.

It is always preferred when the project managers, engineering managers, lead discipline
engineers and other project team members are already familiar with the expectation of
deliverables to support estimating at the kickoff of each project estimate. Nevertheless, this
information should always be reviewed and discussed among all estimate stakeholders at
estimate kickoff meetings. It is the estimator’s responsibility to ensure that the project team fully
understand the required project and technical deliverables, and the maturity levels, to support
the desired class of estimate. During estimate kickoff, the estimators should work closely with
the information/deliverable providers to identify a schedule for when all the specific deliverables
will be available to the estimating team.

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Correlating Estimating Techniques with Improved Maturity of Scope Definition

As the level of project definition increases through the FEL stages of the project development
process and the maturity level of the project and technical deliverables increases, estimating
methodologies will evolve from factored (or stochastic) techniques to more deterministic
techniques. This is a natural progression to utilizing the more mature and detailed information
that becomes available.

Factored or stochastic estimating methods typically utilize cost estimating relationships in which
the independent variables are something other than a direct measure of the units of the item
being estimated. For example, we may factor piping costs (the dependent variable) from the
costs for major equipment (the independent variable). These stochastic estimating methods may
involve simple or complex modeling based upon inferred or statistical relationships between the
costs of the dependent variable and the costs (or other technical parameter) of the independent
variable.

Deterministic estimating typically relies on quantifying and pricing the scope at a detailed level.
The independent variables represent a (more or less) definitive measure of the item being
estimated, such as the lineal measure of the piping being installed. Piping costs (the dependent
variable) are then estimated by multiplying the unit costs for piping times the lineal measure.

Class 5 estimates (typically prepared during FEL 1) are often prepared using capacity factoring
techniques (based upon historical data from similar projects), other analogy techniques, or
specialized parametric models. Quantification to prepare the estimate is very high level, often
comprised of identification of overall facility capacity, technology selection, location, and other
key parameters developed during FEL 1 that describe the overall facility or asset.

Class 4 estimates (typically prepared during FEL 2) are generally prepared using equipment
factoring techniques, and similar stochastic estimating methodologies. These methods may be
supplemented with semi-detailed techniques for outside-the battery-limits and offsite areas of
the facility, for which the factoring relationships may not be reasonable. Often, project
management costs, engineering costs, and other non-direct costs will be estimated using ratios
to the direct construction costs based on historical analysis for similar projects. Quantification to
prepare the estimate is based on key FEL 2 technical deliverables such as preliminary process and
utility equipment lists, plot plans, process and utility flow diagrams, and design specifications.

Class 3 estimates (typically prepared during FEL 3) are usually based on detailed or semi-detailed
estimating techniques to prepare a line-time estimate (an estimate in which virtually all of the
individual components of the scope are identified within the line items of the estimate).
Generally detailed estimates for the supporting functions such as project management,
engineering, etc. are prepared using manpower forecasts, and other detailed assessments of the
required activities. Factoring and other conceptual techniques are minimized. Quantification to
support estimate preparation is based on key FEL 3 technical deliverables that should include the
completed process and equipment list, plot plans, piping and instrumentation diagrams, design
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specifications, general arrangement drawings, electrical on-line drawings, instrument lists; and
may include preliminary discipline drawings. Often a bill of materials (detailed quantification)
may be available from the engineering modeling tools (3D CAD or other modeling tools); although
it is important to recognize the engineering models are still incomplete at this stage and will not
include total quantities required for the facility.

No matter the FEL stage or class of estimate, it is always the estimator’s responsibility to interface
with engineering to identify and quantify all remaining scope that has not been identified in the
engineering inputs and deliverables provided to support the estimate. It is important to recognize
there may be a difference (sometimes substantial) between the scope as defined in the current
technical documents and the scope required to meet the business objectives for the project. The
estimator for a contractor that is preparing a bid estimate for services needs to ensure that the
total scope as per the contract is identified and included in the estimate; whereas the estimator
for the owner needs to ensure that the total requirements to meet the business objective
(whether implicit or explicit) are reflected in the estimate.

An often heard saying that engineering is responsible for quantities (or for scope) in the estimate
is not accurate. The estimator has full responsibility for scope, pricing, and any other element of
the estimate.

Frozen Design Basis/Late Changes

For large projects, the project development stages described earlier in this paper can take weeks
and sometimes months to complete, especially for the FEL 2 and FEL 3 stages. The associated
estimate preparation duration can also take weeks or months for large projects; and in almost all
cases the overall project schedule will not permit the FEL stages to complete their defined scope
definition requirements before starting preparation of the estimate. Therefore, the estimate is
often prepared in parallel with the scope development activities the estimate needs to rely upon.
This results in an obvious dilemma.

It appears quite evident that if estimating activities are proceeding based on preliminary (early
stage) engineering documents, and those engineering documents are then updated later in the
stage, this may result in a large amount of rework in estimate preparation. In large, complex
projects, it can be practically impossible for estimating to stay up to date with the thousands of
engineering documents being updated throughout the FEL stage, particularly for FEL 3; and may
lead to much confusion in current estimate preparation status.

It is important to realize that after estimating has received the frozen design basis, quantified the
scope and entered that into the estimate, there is substantial time and effort to account for
pricing of all labor and material requirements, apply project coding, evaluate required
allowances, prepare estimate reports, prepare estimate benchmarks, support multiple reviews,
prepare risk analyses to support contingency determination, and otherwise finalize the estimate.

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If the design basis was not frozen, then the continual update of design information would
interfere with all of these activities.

The recommended solution to this dilemma is to establish a freeze at some point during the FEL
stage for the purpose of identifying the engineering and technical deliverables that will be used
to prepare the estimate. Once again, this requires a significant amount of communication and
planning between estimating and engineering to establish the best point in time to freeze the
design basis for the estimate. It should be a point where the design is sufficiently developed to
support the expected accuracy objectives of the estimate, while still allowing enough time for
the effective preparation of the comprehensive estimate. The intended goal is to determine the
optimal point of design freeze that will minimize the overall uncertainty of the estimate, given
the tradeoff between scope quantification and all of the other pricing and estimate preparation
activities required.

At the point of the freeze, all required technical deliverables are provided to estimating to begin
preparation of the estimate (and all revision numbers/dates of those deliverables are identified).
Estimating then prepares the estimate on this static set of technical deliverables; and in in
parallel, engineering continues to update and develop the technical deliverables to the
completion objectives and status for that FEL stage. This allows estimating to prepare a complete
and comprehensive estimate without a significant amount of rework due to supporting technical
deliverables changing on a day-by-day or week-by week.

The technical differences between the static frozen design basis and the final revisions of the
technical deliverables at the end of the stage are not ignored. Instead, estimating and
engineering should work together to identify the key changes to the scope definition deliverables
between the frozen for estimating and final design basis; and the estimated costs for the updated
scope are incorporated as late changes to the estimate. Often, the cost estimates for the late
changes will be based on (conceptual) estimating techniques that are less deterministic than the
balance of the estimate, especially at FEL 3. If the design changes or potential cost are particularly
significant, then a more deterministic estimating technique may need to be used in order to
satisfy the intended classification of the estimate.

It is very important for the estimator to determine the significance of the difference of the scope
between the frozen for estimating design basis and the final end-of stage design basis, and of the
resulting cost for late changes. If these can be considered relatively minor, then they may not
result in a change to the classification of the estimate or may require that the estimate be
identified as Class X with Exceptions. If either the difference in scope or the estimated costs are
significant, it may require that the estimate be identified as a less-developed class of estimate
(e.g. Class 4 instead of Class 3). Regardless, the differences in scope, and a description of the
estimating techniques and costs to account for the updated scope need to be clearly identified
in the basis of estimate document and considered during the risk analysis that should be prepared
to determine estimate contingency.

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Present the Estimate in Relation to Scope Definition

Cost estimates are prepared to support decision making by the organization. An effective project
development process, such as described earlier in the paper, supports staged decision making to
make the best use of limited capital investment expenditures. As indicated, classification of
estimates and a stage-gate development process work collectively to support management
decisions. Thus, when management evaluates the gate documentation at the end of a project
development stage, they are often inclined to assume that a specific level of project scope
definition has been achieved and is reflected in the supporting costs estimate. The project
environment is not a perfect world; however, and project teams may be pressured to obtain
project approval without meeting the expected minimum levels of project scope definition.

The estimator should play a critical role in all gate reviews. It is the estimator that must describe
the level of project definition that is used to prepare each and every estimate (documented in
the basis of estimate). Despite the desire that a specific class of estimate be prepared at each
stage of project development, the estimator has the responsibility to identify the actual class of
estimate achieved based on the project and technical deliverables provided to support estimate
preparation. The estimator should clearly identify any exceptions to deliverables that did not
meet the intended level of maturity or completeness (including documenting estimation of all
late changes); and if necessary, classify the estimate as with exceptions or as a less defined class
of estimate. Estimating supports decision-making, and that requires that all information to
support that decision is provided accordingly. It is recommended that a detailed list of all project
and technical documents (with revision numbers/dates) be attached to basis of estimate
documents as an attachment.

The estimate should always be presented in relation to the level and maturity of scope definition
used to prepare the estimate. The estimate may be used to support a decision to proceed to the
next stage of project development or to provide project authorization and full funding to
complete a project. In this way, management is informed as to the actual level of project
definition maturity, and any associated deficiencies, in order to make an informed decision. If
management chooses to proceed to the next stage or full authorization based upon an estimate
with exceptions, they do so in consideration of the risks involved.

Conclusion

Obtaining adequate scope definition to support cost estimating has always been one of the most
persistent problems faced by estimators. A formalized project development process in
combination with a cost estimate classification system is key to solving this problem. With
communication, all supporting project-related departments and project teams will have a clear
understanding of the project and technical deliverables and the expected maturity that is
required to support each class of estimate. Estimating techniques can be adapted to the maturity
of the project and technical deliverables for each estimate. Close coordination between
estimating and engineering (as well as other information providers) will help to establish when
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deliverables will be available during the estimate preparation lifecycle, including establishing the
frozen for estimating design basis and incorporation of late changes.

Utilization of a stage-gate project development process and defining the level of maturity of
scope development to support each class of estimate provides management with better
information to support decision-making in relation to the gate decisions to proceed to the next
stage or to fully authorize projects. By identifying those areas of the estimate that may be lacking
in scope development or maturity, estimators play a critical role in supporting the decision-
making process.

References

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15. H.L. Stephenson and P.R. Bredehoeft Jr., "Maturity Assessment for Engineering Deliverables,"
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Larry R. Dysert, CCP CEP DRMP FAACE Hon. Life

Conquest Consulting Group
[email protected]

Todd W. Pickett, CCP CEP FAACE

Conquest Consulting Group
[email protected]

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