Cost estimate
A cost estimate is the approximation of the cost of a program, project, or operation. The cost estimate is the product of the cost estimating process. The cost estimate has a single total value and may have identifiable component values.
The U.S. Government Accountability Office defines a cost estimate as "the summation of individual cost elements, using established methods and valid data, to estimate the future costs of a program, based on what is known today".
The American Association of Cost Engineering defines a cost estimate as the prediction of the probable costs of a project or effort, for a given and documented scope, a defined location, and point of time in the future.
Potential cost overruns can be avoided with a credible, reliable, and accurate cost estimate.
Overview
The GAO reports that "realistic cost estimating was imperative when making wise decisions in acquiring new systems". A cost estimate is often needed to support evaluations of project feasibility or funding requirements in support of planning. A cost estimate is often used to establish a budget as the cost constraint for a project or operation.In project management, project cost management is a major functional division. Cost estimating is one of three activities performed in project cost management.
In cost engineering, cost estimation is a basic activity. A cost engineering reference book has chapters on capital investment cost estimation and operating cost estimation. The fixed capital investment provides the physical facilities. The working capital investment is a revolving fund to keep the facilities operating.
In system, product, or facility acquisition planning, a cost estimate is used to evaluate the required funding and to compare with bids or tenders.
In construction contracting, a cost estimate is usually prepared to submit a bid or tender to compete for a contract award.
In facility maintenance and operation, cost estimates are used to establish funding or budgets.
In manufacturing, costing plays a crucial role in cost estimation by identifying and calculating the expenses for materials, labor, and overhead required to produce a product.
In pricing and cost discovery negotiations, a "should cost" model is a documented calculation undertaken by a potential customer or their negotiator through which they understand the costs facing the supplier and are equipped to investigate or challenge proposed prices put forward by a supplier's cost estimator. The Society of Cost Engineers argues that the process of "should costing", with its intention to challenge or "stretch" a supplier's cost proposals, is different from an internal cost estimation process. A number of well-established should-cost solution providers actively maintain cost data used to model costing.
In an attempt to manage liability risk, some firms avoid the use of the word estimate and instead refer to the estimate as an "Opinion of Probable Cost".
Cost estimate types
Various projects and operations have distinct types of cost estimating, which vary in their composition and preparation methods. Some of the major areas include:- Construction cost detailed construction estimate abstract construction estimate
- Manufacturing cost
- Total delivery cost
- Software development cost
- Aerospace mission cost
- Resource exploration cost
- Facility operation cost
- Facility maintenance and repair cost
- Facility rehabilitation and renewal cost
- Facility retirement cost
Cost estimate classifications
- Order of magnitude
- Preliminary
- Definitive
| Estimate class | Name | Purpose | Project definition level |
| Class 5 | Order of magnitude | Screening or feasibility | 0% to 2% |
| Class 4 | Intermediate | Concept study or feasibility | 1% to 15% |
| Class 3 | Preliminary | Budget, authorization, or control | 10% to 40% |
| Class 2 | Substantive | Control or bid/tender | 30% to 70% |
| Class 1 | Definitive | Check estimate or bid/tender | 50% to 100% |
Methods used to prepare the estimates range from stochastic or judgment at early definition to deterministic at later definition. Some estimates use mixed methods.
Cost estimate classifications have been published by ASTM and AACE International. The American Society of Professional Estimators defines estimate levels in the reverse order as Level 1 – Order of Magnitude, Level 2 – Schematic/Conceptual Design, Level 3- Design Development, Level 4 – Construction Document, and Level 5 – Bid. The Association of Cost Engineers defines a Class I Estimate as definitive, a Class II Estimate as semi-detailed, and a Class III Estimate as pre-budget.
Other names for estimates of different classes include:
| Class 1 | Class 3 | Class 5 |
| Detailed estimate | Semi-detailed estimate | Conceptual estimate |
| Final estimate | Scope estimate | Pre-design estimate |
| Control estimate | Sanction estimate | Preliminary estimate |
| As-bid estimate | Pre-budget estimate | |
| As-sold estimate | Evaluation estimate | |
| CD estimate | DD estimate | SD estimate |
| Parametric estimate | ||
| Rough order-of-magnitude estimate | ||
| Very rough order-of-magnitude estimate | ||
| SWAG estimate | ||
| PIDOOMA estimate |
Estimate quality
Estimate quality refers to the delineation of quality requirements for the estimate. These requirements are set out in accordance with official quality assurance standards. There may also be other expectations for the estimate which are not specific requirements, but may affect the perceived quality of the estimate. Published quality requirements generally have to do with credibility, accuracy, confidence level, precision, risk, reliability, and validity of the estimate, as well as thoroughness, uniformity, consistency, verification, and documentation.“The result of bidding without good estimates is certain: jobs that end up with less profit, no profit, or a loss. The bidder ultimately will go out of business; the only question is how long will it take.”
Since a cost estimate is the approximation of the cost of a project or operation, then estimate accuracy is a measure of how closely the estimate is able to predict the actual expenditures for the project or operation. This can only be known after the project is completed. If, for example, a project estimate was $1,252,000 for a specific scope and conditions, and at completion the records showed that $1,172,451.26 was expended, the estimate was 6.8% too high. If the project ended up having a different scope or conditions, an unadjusted computation does not fairly assess the estimate accuracy. Predictions of the estimate accuracy may accompany the estimate. Typically this is expressed as a range higher or lower as compared with the point estimate with an expected probability that the actual cost will fall in the range. An example for a definitive estimate might be that the estimate has a -5/+10% range of accuracy with a 90% confidence that the final value will fall in that range. The accuracy of an early estimate relates to the estimate quality. Factors affecting the quality of the estimate include the people who prepared the estimate, how the estimate was prepared, and what was known about the project. For the same project, the range of uncertainty about the total estimate decreases over time, as illustrated in the cone of uncertainty diagram.
High-quality cost estimates are developed through a structured process that includes defining scope, identifying ground rules, collecting data, and analyzing risk. Thorough documentation—commonly referred to as the Basis of Estimate —is key for transparency and traceability. Supporting documents may include quantity takeoffs, methodology, vendor quotes, and cost assumptions.
Additional insights into industry practices are discussed in various estimation resources.
Although the pursuit of cost estimate accuracy should always be encouraged, a study in 2002 found that the estimates used to determine whether important infrastructure should be built were "highly and systematically misleading".
Contingency
A contingency may be included in an estimate to provide for unknown costs which from experience are indicated as likely to occur, but are not identifiable. When using an estimate which has no contingency to set a budget or to set aside funding, a contingency is often added to increase the probability that the budget or funding will be adequate to complete the project. The estimate or budget contingency is not intended to compensate for poor estimate quality, and is not intended to fund design growth, owner changes, or anything else unrelated to delivering the scope as defined in the estimate documentation. Generally, more contingency is needed for earlier estimates due to the higher uncertainty of estimate accuracy.Cost estimating methods and best practices
Estimating methods may vary by type and class of estimate. The method used for most definitive estimates is to fully define and understand the scope, take off or quantify the scope, and apply costing to the scope, which can then be summed to a total cost. Proper documentation and review are also important. Pricing transforms the cost estimate into what the firm wishes to charge for the scope. Early estimates may employ various means of cost modeling. The basic characteristics of effective estimating include: clear identification of task, broad participation in preparing estimates, availability of valid data, standardized structure for the estimate, provision for program uncertainties, recognition of inflation, recognition of excluded costs, independent review of estimates, and revision of estimates for significant program changes. Application of best practices helps ensure a high-quality estimate. “Certain best practices should be followed if accurate and credible cost estimates are to be developed. These best practices represent an overall process of established, repeatable methods that result in high-quality cost estimates that are comprehensive and accurate and that can be easily and clearly traced, replicated, and updated.”Tools that may be part of costs estimation are cost indexes. These factors promote time adjustment of capital costs, following changes in technology, availability of materials and labor, and inflation. Due to the inherent unavailability of up-to-date Chemical Process Engineering cost literature, several inflation or cost indexes are available.