Welcome back to cost estimation. In this lesson, we'll define the term cost estimate, discuss the uses of a project cost estimate, describe the estimate work process, discuss estimating standards, and the various classes of estimates. A cost estimate is an approximation of the money or effort, it will take to complete a project, or part of a project. A cost estimate may include the product scope of a project, or what we actually deliver to the customer. It also includes the services scope, with the activities we'll need to create the product, or may include both of these, the estimate maybe for the entire project or just one phase. So what are project clusters typically used for? First and foremost, an estimate is used to evaluate the economic viability of a project. Early estimates were input to the project business case and the project charter. The estimate is also used for various aspects in monitoring and controlling our project is indicated on this list. In the change control process, cost estimates are part of the assessment process. Cost assessments are also a help in the bid process. Whether we are bidding a project, or warranting to bid to someone else. Remember, cost is one of the three parts of the iron triangle, along with schedule, and scope. The cost estimate provides the basis for this cost plan. In order to produce an estimate that can be used for all of these activities, it must meet certain criteria. An estimate must have context, an estimate only makes sense as part of a comprehensive project baseline. It cannot be viewed in isolation. Second, the methodology must be well documented. To make sense of an estimate and use it to monitor control of a project, the methodology must be well documented. We must be able to repeat it so that during the change control process, we can fully understand what is changed. An estimate should also be run like a project. The purporation of an estimate can be considered a project in and of itself. A well run estimate follows all the steps of a well run project. An estimate should also use accepted standards that can be repeated. In order for others to have confidence in our estimates, they must follow standards that would have been approved by the organization, or at least approved by an industry group. Over the course of the next few lessons, we'll cover each one of these points in greater detail. First, let's start with the estimate work process. An outline of a good work process is shown here. We start with a description of the scope of the estimate, and the estimate plan. What is it that we'll be estimating, and how will we be doing it? Next we move to the actual quantification. During these processes, we establish the quantities of each item in the estimate, and develop a price per item. After quantification, we assemble the final estimate in a usable format and complete all the math. It's also important at this stage to check your estimate against known bench marks to see if your estimate is reasonable. Finally we should review and check the results through a formal process both internally and with our customer before transmitting the validated estimate. This process should happen whether the customer is an internal or external customer. The work process I just described is pretty standard across most engineering industries. It provides a good basis for you to develop your own estimate plans. A good source of information estimating standards and procedures is AACE International. AACE International is a recognized source of recommended estimating practices across multiple industries. They have published recommended practices that have been reviewed by experts on estimate preparation, earned value, risk management, contingency, and other estimating related areas. Over the rest of this module, we were refer to AACE practices as we've discussed how to develop and review an estimate. If you become familiar with and use these practices, they provide a recognized approach to estimating that can be repeated and defended in most arenas. In order to describe an estimate and establish the guidelines for estimate preparation, AACE has divided the types of estimates into five classes. The five estimate classes shown here are recognized across several industries. The chart here is for the process industries and the building and construction industries. The ones for other industries will be very similar. Let's start at the bottom of this table. The lowest level on the chart and the most accurate class of estimate is a Class 1 estimate. This estimate is completed when the engineering for your project is virtually complete. Is based on a high-level design, and it involved making an accurate list of the material and activities required to finish the project. Pricing those based on bids, or actual values, and adding this to the actual cost-to-date. A Class 2 estimate is the next level up. It's prepared after the project is started, and it's based on engineering being 30 to 75% complete. In this case, we have most of the major elements fully defined and quantified. The minor elements, which are not defined at this point, are pro-rated from the elements defined, or estimated based on experience. A Class 2 estimate typically is used to establish the control base for project. The next level of investment is a Class 3 estimate. A Class 3 estimate is typically a high estimate, and is typically called the funding level estimate. This type of estimate is typically used for file authorization or project before significant costs had been incurred. The estimate is done after 10 to 40% of the engineering's complete. My personal experience is that it's typically done around 20% complete for the process engineering industry, and maybe 10% complete for the building industry. Higher percentages may occur if we're trying to bid lump sum projects. In a Class 3 estimate, we will use a combination in a detailed take offs and ratios by some experience. The last two classes of estimate are called, top down estimates. This is because we start with the big picture, and then create some detail to define the cost. Class 4 estimates require that the concept be developed to some extent, and that we put some definition in the product or service we're estimating. The key for this type of estimate is, to define the critical parameters in such a way that we can use historical data to factor the cost. Class 4 estimates are prepared to confirm the economics of a project and to assist the team with the project definition. The lowest level of accuracy is a Class 5 estimate. This class of estimate is typically refered to as a concept screen or feasibility estimate. We would produce this type of estimate early in a project, before much engineering's complete, and we're just starting to define the concept. This is the estimate class which might be used in the first business case for a project. A Class 5 estimate is usually based on taking a similar project estimate, and adjusting it based on experience to use for our project. Obviously, the accuracy of the five estimate classes varies widely. This chart shows estimating accuracy versus scope definition for the process industry. The x asis on the chart is percent complete engineering, and indicates where the five classes of estimate are located. The y axis gives an expected range of accuracies. As an example for a Class 3 estimate, 20% of the engineering complete. We can expect to get an estimate tha's between plus or minus 20% accurate, and between minus 30 to 40% accuracy. This means that we would expect the final values after the project is complete to be within this range. Considering all the unknowns, and after contingency has been applied. Same chart for the billing industry will show better accuracies for less engineering. For instance it may only take 10% of the engineering to achieve this same level accuracy, as our 20% case in the process industry. Each industry will have it's own charts and standards for accuracy and estimate class definition. Each organization will adapt these to their own experience and provide guides to the team. I recommend that you visit the AACE International site to get information for your industry. Also check with your organization to see what estimating standards do they use and recommend. Many will have taken these standards and adopted them for their own specific use. In this lesson, we looked at the definition of an estimate. We looked at the estimate work process, and we learned how to define different classes of estimate. This language and approach provides the solid foundation to compare different estimates and understand how they can be used. In the next lesson, we'll discuss the estimate basis. The estimate basis should match the class of estimate we've defined in this lesson, in order to achieve the target level of accuracy. So let's get started discussing estimate basis.
