36R-08: Development of Cost Estimate Plans – As Applied in ...

36R-08

DEVELOPMENT OF COST ESTIMATEPLANS - AS APPLIED IN ENGINEERING, PROCUREMENT,AND CONSTRUCTION FORTHE PROCESSINDUSTRIES

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AACE® International Recommended Practice No. 36R-08

DEVELOPMENT OF COST ESTIMATE PLANS – AS APPLIED IN ENGINEERING, PROCUREMENT, AND CONSTRUCTION FOR

THE PROCESS INDUSTRIES

TCM Framework: 7.3 – Cost Estimating and Budgeting

Rev. October 10, 2019 Note: As AACE International Recommended Practices evolve over time, please refer to web.aacei.org for the latest

revisions.

Any terms found in AACE Recommended Practice 10S-90, Cost Engineering Terminology, supersede terms defined in other AACE work products, including but not limited to, other recommended practices, the Total Cost Management

Framework, and Skills & Knowledge of Cost Engineering. Contributors: Disclaimer: The content provided by the contributors to this recommended practice is their own and does not necessarily reflect that of their employers, unless otherwise stated.

October 10, 2019 Revision: Dave Kyle, CCP CEP (Primary Contributor) Rodolfo Arellano, CEP

Peter R. Bredehoeft, Jr. CEP FAACE Donny Lai

June 12, 2009 and February 14, 2015 Revision: Gregory C. Sillak (Primary Contributor) Bruce E. Bradley Keith R. Didriksen Fabiana Francis, PSP Dr. Paul D. Giammalvo, CCE Ambrish Gupta John K. Hollmann, PE CCE CEP Carlton W. Karlik, PE CEP Christopher L. Kinney Paul S. Kupakuwana

Paratharajan N. Pille L. Ron Rowland Terence M. Stackpole T. Mac Sumrall, CCC David A. Williams, CEP Charles P. Woodward, PE CCE CEP Joseph Yang, CCE Nor Y. Yazid James G. Zack, Jr. CFCC

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AACE® International Recommended Practice No. 36R-08

DEVELOPMENT OF COST ESTIMATE PLANS – AS APPLIED IN ENGINEERING, PROCUREMENT, AND CONTRUCTION FOR THE PROCESS INDUSTRIES

TCM Framework: 7.3 Cost Estimating and Budgeting

October 10, 2019


TABLE OF CONTENTS

Table of Contents .......................................................................................................................................................... 1

Introduction ................................................................................................................................................................... 4

Scope ......................................................................................................................................................................... 4

Purpose ...................................................................................................................................................................... 4

Background ................................................................................................................................................................ 4

Recommended Practice ................................................................................................................................................. 6

Estimate Plan Development Process ............................................................................................................................. 6

Inputs to the Estimate Plan ....................................................................................................................................... 7

Estimate Recipient and Objectives ........................................................................................................................ 7

Estimate Developer ............................................................................................................................................... 7

Scope and Execution .............................................................................................................................................. 8

Project and Estimate Schedule .............................................................................................................................. 8

Coding Structures and Formatting ......................................................................................................................... 8

Uncertainty (Risks and Opportunities) .................................................................................................................. 8

Lessons Learned ..................................................................................................................................................... 8

Benchmarking ........................................................................................................................................................ 9

Review and Validation Process .............................................................................................................................. 9

Cash Flows ............................................................................................................................................................. 9

Recasting................................................................................................................................................................ 9

Prepare Draft Estimate Plan .................................................................................................................................... 10

Estimate Plan Reviews ............................................................................................................................................. 10

Estimate Plan Approval ............................................................................................................................................ 10

Estimate Kickoff Meeting ......................................................................................................................................... 10

Estimate Development Process ............................................................................................................................... 11

Estimate Plan Format and Content.............................................................................................................................. 11

General .................................................................................................................................................................... 11

Purpose of Estimate ............................................................................................................................................. 11

Project Scope Summary ....................................................................................................................................... 12

Estimate Confidence ............................................................................................................................................ 12

Key Estimate Development Milestones ............................................................................................................... 12

Input Deliverables ................................................................................................................................................ 13

Project Execution Plan Summary ......................................................................................................................... 14

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Construction, Fabrication, and Operating Parameters ........................................................................................ 14

Social, Cultural, Environmental, Security and Sustainability Parameters ............................................................ 14

Estimating Methodology ......................................................................................................................................... 14

Estimating Tools................................................................................................................................................... 15

Coding Structure .................................................................................................................................................. 15

Estimate Report Format ...................................................................................................................................... 15

Filing Structure..................................................................................................................................................... 15

Design Basis ......................................................................................................................................................... 16

Units of Measure ................................................................................................................................................. 16

Currency and Exchange Rates .............................................................................................................................. 16

Rounding .............................................................................................................................................................. 16

Quantity Basis ...................................................................................................................................................... 16

Cost Basis Refer to Appendix I and J for Class 4 and 5 estimates ........................................................................ 17

Clarifications, Qualifications and Assumptions.................................................................................................... 23

Exclusions ............................................................................................................................................................ 23

Exceptions ............................................................................................................................................................ 24

Late Changes ........................................................................................................................................................ 24

Escalation ............................................................................................................................................................. 24

Risk Analysis and Contingency ............................................................................................................................. 24

Management Reserve .......................................................................................................................................... 25

Appendices to the Estimate Plan ............................................................................................................................. 25

Reconciliation ...................................................................................................................................................... 25

Estimate Quality Assurance ................................................................................................................................. 25

Cash Flow ............................................................................................................................................................. 25

Estimate Development Schedule ......................................................................................................................... 25

Estimate Responsibility Matrix ............................................................................................................................ 26

References ................................................................................................................................................................... 26

Contributors................................................................................................................................................................. 27

Appendix A. Example Table of Allowances .................................................................................................................. 28

Appendix B. Example Summary Format for Quantity Take-Off and Pricing ................................................................ 29

Appendix C. Examples of Planned Bulk Material Quantity Basis ................................................................................. 30

Appendix D. Examples of Clarifications, Qualifications and Assumptions ................................................................... 32

Appendix E. Examples of Key Metrics .......................................................................................................................... 33

Appendix F. Examples of Activities to Include in the Estimate Development Schedule .............................................. 34

Appendix G. Example Estimate Responsibility Matrix Format (Adapted from RP No. 18R-97 [6]) ............................. 36

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Appendix H. Checklist of Potential Owner Cost Items ................................................................................................. 37

Appendix I. Example of One Type of Class 4 Estimate Plan Structure ......................................................................... 39

Cost Basis ................................................................................................................................................................. 39

ISBL (Inside Battery Limits) Costs ......................................................................................................................... 39

OSBL (Outside Battery Limits) Costs .................................................................................................................... 40

Offsite Fabrication ............................................................................................................................................... 40

Offsite Module Assembly..................................................................................................................................... 40

Construction Subcontracts Strategy .................................................................................................................... 40

Allowances ........................................................................................................................................................... 40

Construction Indirects ......................................................................................................................................... 40

Engineering, Procurement and Construction Management ................................................................................ 41

Appendix J. Example of One Type of Class 5 Estimate Plan Structure ......................................................................... 42

Cost Basis ................................................................................................................................................................. 42

ISBL (Inside Battery Limits) Costs ......................................................................................................................... 42

OSBL (Outside Battery Limits) Costs .................................................................................................................... 42

Other Scope ......................................................................................................................................................... 42

Construction Indirects ......................................................................................................................................... 43

Engineering, Procurement and Construction Management ................................................................................ 43

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INTRODUCTION

Scope

This recommended practice (RP) is a guideline for the development of cost estimate preparation plans for engineering, procurement and construction (EPC) projects for the process industries. For the purposes of this document, the term “process industries” (as defined in RP 18R-97 [6]) is assumed to include firms involved with the manufacturing and production of chemicals, petrochemicals, hydrocarbon, and wastewater processing. The common thread among these industries (for the purpose of estimate classification) is their reliance on process flow diagrams (PFDs) and piping and instrument diagrams (P&IDs) as primary scope defining documents. This estimating methodology is also suitable for other equipment-centric industries such as mining process plants, power generation, pumping stations etc. The main body of this document refers to deterministic (Class 3, 2, and 1) estimates. Conceptual (Class 5 and 4) estimates require a very different approach and are defined in Appendix I and J. These sections provide basic guidelines for the development of a basis of estimate for some of the more common methodologies used in the development of these classes of estimate. Conceptual estimating is a highly creative process, and these sections do not reflect the wide variety of possible methodologies. Purpose The Total Cost Management (TCM) Framework [1] section 7.3.2.1, Plan for Cost Estimating and Budgeting highlights the need to develop estimate plans. This document addresses the need to develop effective estimate plans and addresses the steps before and after the “Plan for Estimating and Budgeting” step to the extent necessary for an effective estimate plan. A key principle is that the estimate provider clearly understands the various requirements that the estimate should meet when submitted to the estimate requestor. This recommended practice (RP) is intended to provide a guideline (i.e. not a standard) for establishing and communicating how to prepare, review and approve an estimate plan. The estimate plan should be developed to be in alignment with the estimate requirements document prepared by the estimate requestor. The estimate plan should be approved by the estimate requestor before significant estimate preparation begins. After estimate completion the estimate plan is transformed into the basis of estimate. This recommended practice (RP) is intended to provide a guideline (i.e. not a standard) for establishing and communicating how to prepare, review and approve an estimate plan, to be issued from the estimate requestor to the estimate provider. The estimate provider should prepare an estimate plan in alignment with the requirements document. The estimate plan should be approved by the estimate requestor. After estimate preparation, the estimate provider prepares the basis of estimate to provide final documentation of the cost estimate. Background The cost estimate preparation plan (herein referred to as “estimate plan”) is a planning document used to establish and communicate how the preparation, development, review and approval of the estimate will be completed. This RP delineates industry-specific practices for development of an estimate plan as they are applied to EPC projects in the process industries. Cost estimating in the processing industries (e.g.; chemical, refining, petroleum production facilities, etc.) has evolved to a relatively advanced state. These industries have developed many common practices and identified

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industry-specific best practices through benchmarking and knowledge-sharing. The practices reflected in this document are a result of compiling notes made by industry practitioners, lessons learned and publicly available documents. The basic principles are applicable to all execution strategies and asset owner (herein referred to as “owner”) configurations. For example, contracting strategies may be in the form of reimbursable engineering with fixed price procurement and construction and/or EPC alliances, etc. Owner configurations may include self-perform, partnerships with a named operating company or consortiums responsible for managing the project/program. Note that the term owner refers to the estimate owner and may be an owner company, or a party within the providers organization. It simply refers to the party soliciting the estimate. The owner should prepare a draft requirements document estimate provider(s). Any clarifications or changes are documented, and a final requirements document is approved and signed by owner and estimate provider representatives. Upon approval of the requirements document, estimate kickoff sessions are held to communicate the approved requirements in order to proceed with estimate development. Any subsequent changes required should be approved and documented through a formal change management process. The requirements document may become a contractual document. The estimate plan should be aligned with the estimate requirements document and documents all aspects of the planned development and preparation of the estimate. The main body of the document is focused on deterministic (Class 1, 2, and 3) estimates where the primary method of cost development is through the use of semi-detailed or detailed unit hours and costs. Class 3 estimates may be developed by a basic engineering or front-end engineering and design (FEED) contractor, consulting or in-house estimating staff working closely with the owner in an open book manner to provide a full-funds sanction decision. Scope is still evolving during Class 3 and the contractor is generally not at risk for the resultant cost. Class 2 estimates are usually developed as tender estimates based on well advanced design. The tender may be for a reimbursable contract where the estimate is open book similar to Class 3. However, if the contract form does not require open and/or detailed cost reporting (e.g., lump sum), that significantly affects the requirement specification. However, the loss of insight as to the estimate development and content (which is a determinant of the control basis) adds significant uncertainty as to the contractor’s ability to perform (particularly in the case of low bids). In general, more insight is better than less (e.g., favoring conversion from open book to lump sum). In short, contracting and legal input and requirements become more important at Class 2 and add challenges to requirements development, and later difficulties in estimate review and validation. Conceptual (Class 4 and 5) estimates are primarily developed through the use of more stochastic and varied cost estimating relationships (CER’s; e.g. parametric, factoring, etc.) and are often prepared in-house by the owner estimating organization with input from others as needed. Also, multiple scope and value improvement options are usually still being dynamically assessed during these phases, so estimating tends to be iterative and interactive between the owner and contractor. The estimate plan will be significantly different than for a deterministic estimate. A guideline for some common methods for both Class 4 and 5 can be found in Appendices A and B. These appendices are intended to replace the sections from “Cost Basis” through “Engineering and Home Office” of this document. Note that the conceptual estimating process and these appendices give only an overview of suggested formatting of the document, based on some of the more common methodologies. The extent (comprehensiveness) to which the following sections of the estimate plan are completed will be dependent on the type of project, the class of estimate, and other variables. It is recommended to keep the document concise, but to include as much of the following relevant information as possible.

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RECOMMENDED PRACTICE The primary intent of this RP is to provide a guideline for the topics and contents to be included in a typical plan. However, before describing the template contents there are a few significant points worth noting. Some key principles are:

• The cost estimate plan should convey the expectations of the cost estimate deliverable and the intent of the deliverable (budgeting, funding, tender estimate, check estimate etc.).

• Preparation of an estimate plan helps to ensure successful estimate completion in an effective and timely manner.

• Estimate and schedule development must be integrated, as such their plan documents should align as appropriate.

• Align with the project implementation basis.

• Ongoing mid-stream reviews of the estimate development should be a standard part of the process. This allows corrective action to be taken early, as opposed to major rework after estimate delivery.

• Ensure that the risk management plan is integrated into the plan.

• Engaging key stakeholders in the estimate planning process prior to the start of the estimate development process improves the likelihood of meeting estimate objectives.

• The estimate plan defines what information is required from who and when.

• An approved estimate plan provides a duly authorized basis to proceed with the estimating effort.

• It clarifies methodology, processes, requirements, and responsibilities.

• Be factually complete, but concise.

• Identification of estimating team members and their roles.

• Describe the tools, techniques, estimating methodology, and data to be used to develop the cost estimate.

This recommended practice is divided into three main sections:

1. The Estimate Plan Development Process defines the main steps and discusses issues to be considered in preparing an estimate plan.

2. The Estimate Plan Format and Content provides a suggested format for a Class 3-1 estimate plan along with annotations. It is designed to allow practitioners to use and modify it as needed for their specific situation.

3. The Appendices contain sample formats which are used in conjunction with the estimate plan, and sample formats for Class 5 and 4 estimates using some of the more common methodologies.

ESTIMATE PLAN DEVELOPMENT PROCESS This section defines the main steps and discusses issues to be considered in preparing an estimate plan. In general, a separate estimate plan will be developed for each individual estimate but integrated as appropriate with other related estimates. Some projects may lend themselves towards having a single estimate plan for all individual scopes of the project.

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36R-08: Development of Cost Estimate Plans – As Applied in ...

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