Transcript for:
Insights on Total Cost Management Estimating

okay it is now half past seven so if you're all ready to go Lou I think we'll get started yep I'm ready to go excellent uh good evening everybody uh my name's Cameron Baker I'm the secretary of the AAC Australian section and Welcome to our webinar tonight on total cost management estimating our presenter tonight is Lou vadotto Who is the president of the AAC Australia section and also the chair of the Queensland chapter of the AAC Australian section if you have any uh questions that you want to ask during the presentation feel free to type them into the chat bubble and uh we'll read them out at an appropriate juncture so um over to you Lou thanks very much Cameron uh welcome everybody and um to this webinar um so tonight what I'd like to cover is for your scroll Cameron yep so I've got a bit of an agenda tonight so basically just an introduction I would like to talk a bit about total cost management um as the fine by the AAC I certainly want to talk about work breakdown structures and they're important uh talk a little bit about the estimate process the basis of estimate which is where you actually document what you've gone through in the estimate process talk a little bit about contingency and then open the floor to questions I think what we'll do is um maybe after the estimate process is about halfway through or maybe just take a short break to go through some questions otherwise we just keep going through to the end okay so good evening so last year um on one of our webinars I've talked about documenting the estimate and the importance of that document to understanding what's included in the project budget the importance of documenting the estimate is really about documenting the assumptions you've made in the estimate the backup uh reiterating the scope of the estimate and iterating the interface with certainly the strategy of the project uh and also to what the schedule looks like as we go through I certainly emphasize when when building an estimate the the key bits of an estimate line item are certainly the quantities the work hours equipment and material and certainly the the labor costs so we'll go through that a little bit more as we go through the the webinar tonight um Sorry can we just go back yeah sorry a big fast so yeah so tonight I'd like to share my experience about the estimating process and the critical relationship of the estimate to project success we've just come off a project um where the estimate was built it did not reflect the current scope of the project it did not reflect the current the sorry the the project quantities and it was The Nightmare we had to kick off a fairly intense change management process and it was very difficult to follow and the other bit that made it quite difficult was also to um the the basis of the estimate wasn't clear about how the estimate was built and what the assumptions were um what uh and what the strategy the data Incorporated was so it made it very difficult um so yeah so tonight the critical relationship of the uh of the estimate to project success from an estimator's point of view um sorry I came in the next one so who am I um Lou vadodo thank you for the introduction Cameron um I've had 45 years in resources and infrastructure projects uh around Australia and around the world so most of my career has been in Project controls so I've done a lot of cost engineering planning and scheduling and a lot of estimating and certainly headed up project controls teams project controls managers uh are a key uh part of the project management team and I can't uh and I can't estimate oh I can't stress enough the importance of that role in the overall project I've done a lot of project estimating um I've also developed some project controls training programs to share experience knowledge and and basic skills to our profession so my training is not is is primarily about the skills you need to run to work on a project including what it means to be a cost engineer what it means to be able to forecast what it means to be able to understand quantities and understand what field activities are really like thanks okay okay so total cost management um the total cost management is the total cost management as prescribed by the aace um and it's defined as total cost management is the sum of the practices and processes that an Enterprises Enterprise uses to manage the total life cycle cost and investment is portfolio of strategic assets so what does that mean I put in just a simple diagram that we use to to sort of describe the Project Life Cycle and if you start in the bottom left-hand corner you talk we talk about concept studies where an owner or a client says I want to develop something I want to build a railway line I want to build a new mine I want to build a new stadium what's it look like what's its purpose what's it going to serve and the owner put some put some um some criteria around that so the team that's engaged to actually bring that to Life Starts to look at what what is sorry the team that's engaged to to look at the project will look at the options that are available to achieve the business case and at the end of the pre-feasibility study that's what we call that phase we select one to which most which best fits the criteria developed by the owner or the client in a feasibility study is one option is studied uh one's recommended uh if it meets the uh if it meets the criteria for the cost and schedule and functionality um uh and quality if not um then really we recommend in a projects in a study scenario to go back and recycle and either it was the wrong it was the wrong option or it was also maybe not studied appropriately so once you've recommended a feasibility study option projects really go through okay John projects really go through a financial closure period where the project has to get funded or funds appropriated from a company treasury or something like that normally during that period we would then look at a thing a phase called project Readiness where Implement systems and processes do detailed planning and do project preparation uh a lock in your Contracting a procurement plan um and get ready to to deliver the project we had a webinar last year by the IPA uh who looked at at stats on Project successes and project failures and what they said was that a a project that has or a company that has project controls in place during the early stages of the phase of this of the Project Life Cycle is 40 percent more likely to be successful in the execution phase because you've got these systems ready you've got your detailed planning ready you've got your project preparation ready so I thought that was a pretty good stat uh execution phase um the approval of the project will mandate what is to be built in terms of scope schedule estimate uh Contracting strategy quality so one of the things that the estimate contributes to and we'll talk a bit more about that as we go along is it is the fundamental document that becomes the budget and the budget has to reflect how you're going to build the project and what you're going to build Etc and we'll talk a bit more about that at the end of the execution phase you hand over to operations to operate the project uh whatever that project is and it expects to have a return on investment that meets your Regional business criteria so a long way of going around and just to reinforce the AAC total cost management as I said which is the sum of the practices and processes the to manage the total life cycle cost investment um thank you go next one can so total cost management um AAC prescribes to plan do check at so what does that mean it means plan the asset Solutions or project activities um do execute initiate and perform the project or project activities in accordance with the plan uh check make measurements of asset project or activity performance and act act means assess the performance variances from the plan and taking action to correct or improve performance to bring it in line with the plan or to improve the plan so so what that means is that the your project team for whatever the the project needs to understand what the plan is they need to initiate the plan and the project in accordance with that plan um they need to check which is measure measure progress measure deliverables measure quality measure time if that's what's required then act if a Project's going off the off the rails then tell you corrective action and that's one of the things about project controls is really one of the functions as a project controls person is to recommend actions uh corrective actions when something's going off the off the rails so in order to recommend a corrective action you need to know what your Baseline and in a excuse me in the case of the budget is truly what the estimate was based on to build that budget so uh go on Cameron um and so the um so the cost estimating total cost management uh talks about cost estimating and they call it predictive process used to quantify cost and price the resources required by the scope of an investment option the resources required are quantities labor materials and equipment and time um budgeting they talk about uh the sub-process within the estimating uh use for allocating the estimated cost of resources into cost accounts against which cost performance will be measured and assessed one of the things that's important on projects in which we prescribe to an AAC certainly is the budget allocation process so that when a scope comes up for a ward or recommendation for reward or for Contracting that you allocate the budget in accordance with the scope of that work um so we always say that budget allocation is based on a scope for scope basis um not a dollar for dollar basis and in order to do that you need to understand what the scope is and how well it's documented in the estimate slash budget so again the estimating process becomes a key part of the project process and I can't reinforce that enough um building an estimate is not only about what is the cost going to look going to look like for the project it's really being able to give it to the project team to manage the budget and and help to manage the project uh next one can Okay so recommended practices the aace has many recommended practices now which have been in in place for a long time and they're also they're also being Rewritten and new ones developed so in terms of of estimating the three parts are plan the estimate uh develop an estimating plan um develop the work breakdown structure um and get ready so you understand what you're going to be doing uh do the estimate uh so the the recommended practices talk about the cost estimate classification system uh for Road and Rail and and um also two for oil and gas type projects mining projects so uh I I sort of certainly um recommend to everyone uh to go and and and look at the recommended practices because they give you a lot of information on how to do estimates in particular and they give you information about all sorts of things you know how to manage the schedule and manage risk Etc but tonight is certainly focused just on the estimating part of it document the estimate so again they've got recommended Pros practices on how to review validate and document the estimate and I'll talk a bit more about the importance of doing that later on and also they talk about the basis of estimate where you document the assumptions that you've made the labor rates you've assumed the Contracting plan you've issued what the quantities look like what the schedule looks like your production rates for the various Commodities so again this AAC have a fantastic library of recommended practices so if you're not sure about something talk to The Experts which are the aace recommended practices I've only listed some here there's there are many um and certainly that some of them are more applicable to the type of job that you're working on so certainly go through those okay thank you work breakdown structure um there's a lot of discussion there's a bit of background noise sorry um there's a bit the work breakdown structures a lot of discussion about work breakdown structure um so a work breakdown structure is really a common structure which captures the the scope of work by area and facility um it captures the execution strategy in terms of allocating work packages um to the against the scope of work um the work breakdown structure is used in the estimate to actually reflect the scope of work so if you when you're reviewing an estimate um you certainly have the scope of work uh scope document by WBS hand in hand with the estimate reviews we always when we're reviewing estimates the first thing we do is review the quantification and we go through with the project engineers and and just say have we have we captured the scope of the study or the project have we reflected what the intent of the quantities that you that you've developed for the project and then secondary to that is then reviewing the cost of of that work first thing is capture the scope reflect make sure you've captured the scope in an estimating package we certainly break up the estimate by by facility or area by commodity code or discipline code and then and then the third dimension is by packages or all our modern cost management tools talk about uh control accounts which is really allocating the budget into uh into a commodity facility and a work package and usually this comes directly out of the estimating process so so you can't really build your budget effectively if you haven't done the estimate effectively uh commodity code structure uh certainly it's um common work activities in in each WBS and also two commodity code structures uh uh the discipline work that you need to do to build each of the facilities and includes obviously Earthworks and concrete and steel and cable and equipment and mechanical Bolts Etc um the work breakdown structure also groups like items for estimating contract pricing progress measurement uh reporting and eventually historical data um one of the one of the benefits of having a well-structured um uh work breakdown structure and a reporting process process is that when you come to do an historical report you can actually match up where you started from how you've gone through the project and then we have ended up at the end it's a historical data then becomes extremely important to feedback into estimating process so how do so you've estimated a project whatever it is um where we're about to estimate a project for a tailings phrase on a on a mine site and certainly at the end of the job we would like to go back and say how did our how did our estimate perform compared to how it actually came out at the end where do we need to fine-tune it where do we where did we go wrong with production assumptions uh etc etc where do we go wrong with timing so that feedback loop is pretty important uh next one can so so the common structure as I said capture oh sorry the estimating estimating process uh really is about capturing what the scope of the project really is going to be I use this cartoon uh quite a bit and I started off when I do training particularly in estimating it's really how the owner explain what he wanted built um how the project leader project manager understood what the owner wanted how the project leader scoped it out so he understood something and Skyped it out um how the managers how the estimators managed to estimate what they thought was the scope of the project uh how the analysts captured the the estimate and the data or the npv um estimate backup what is the data that made up the estimate assumptions Etc and I've been on jobs before where the estimate backup is it is really good um so it says say it's very clear to understand what what the assumptions were in in the estimate but then uh same thing on other jobs there's no estimate backup so you start to think where did those assumptions come from where did they those labor rates come from where did those productivities come from so again estimate backup is important uh where's the estimate backup reflected in the base of the estimate and the and the supporting files uh for that for the estimate um how the owner was built um owners really rely on their engineering service providers or their contractors to build the project for them um and as as an engineering service provider or a project manager or contractor we have a responsibility to only build what only build and build what the owner has mandated us to do um and then roughly what did the owner really need so he really wanted something to fit the purpose uh functional and probably not what he probably not may not have gotten what he originally intended so so the estimating process is really about capturing the scope um and estimating the value of that scope in accordance with what the owner really intends um again a a built estimates that are too fat and I've built the estimates that are too skinny so both of them both of those are really don't fit the needs of the client um how do you get around it contingency analysis really picks up whether how good the base data is and I'll talk a little bit more about that towards the end um and the estimate is also need to be in tune with what the owners or the clients really want for their project some some owners can't afford um a really good standard of project or the the life of the mind or the asset might only be five or ten years rather than 25 years so so it's really important to be in tune with that as an estimator um because then you actually do a fit for purpose and estimate which reflects what the owner really wanted at the start uh next one Cameron so the estimate process so I've put out my diagram here which is really scope time cost um important for the for a project obviously is the scope uh the cost for that Skype and also the time it's also important to know when you when you're getting into a project whether the project is cost sensitive uh or time sensitive if a Project's time sensitive then really you need to make sure that there's enough cost in the estimate where you have to work overtime or or accelerate or have extra contingency in there for things that might impact the schedule uh and vice versa if your Project's cost sensitive to make sure that you've only got enough in there to actually build the job inequality of what the owner can afford I worked on a project a long time ago where the project was actually cost sensitive um they were developing a new metal industry for Australia and they had patents in place for the Alloys with that metal um and they had in their Pavements for the metals they had agreements about progressively building it into the manufacturing process making sure that they could test it and make sure it was fit for purpose Etc and they were cost restrained they didn't have a lot of money when the contract was awarded to the um the the the prime contractor the conditions of contract was such that if the re-estimate of the project was outside what the budget plus 10 was that they'd incur all sorts of penalties in terms of liquidated damages Etc so when we ended up doing the the re-estimate we were outside the the 10 because the the prime contractor had really made the process foolproof and he had redundant piping systems redundant uh equipment systems so there's no way that the project could build a job for what the budget was uh it failed um and the the lenders walked away and said well we can't lend you the money we said we'd lend you the money if you're within 10 over what the original budget was and it wasn't to be and that was a major blown it certainly taught me a bit of a lesson about being sensitive to whether a project is cost or time sensitive um so at any point in the Project Life Cycle an estimate is meant to um reflect the cost of this the cost of a scope of work based on um the documented then quantifies scope of the project I can't stress enough the importance of quantities by the commodity code structure and standard units of measure so you can estimate it um the proposed execution strategy um which depends on the project type some projects are owned are delivered some projects are re-pcm some projects are alliances or um partner or partnering type agreements uh the important thing is what is the Contracting purchasing plan that needs to be reflected in the estimate buildup small contracts require many many more contracts on a project which require more contractor overheads a lot of interfaces between the contracts Etc large contracts have their own set of of issues where you have large large contractor teams running the project and you don't always get the transparency as the owner or the or the managers to what's going on um again the schedule for the project is important a lot of costs at the early time based uh particularly a lot of your management team if a project schedule overruns then that it automatically overruns the time for a lot of your management team so it's important to know what the realistic schedule is for the job the risk profile uh when we're building estimates it's important to know what the risks are and and one of the things that we talk about a lot is what is the risk register um and that's really then comes to when you do your contingency analysis covering for those risks and the and the company or the owner will will take a view on whether they can afford that that risk or they need to put into the contingency um contractors estimates When contractors bid scopes of work they look at the risk profile on the contract they look at for example what um what's missing off the drawings or the the um quantity takeoffs and they'll make their own risk profile as to how how what their bid needs to be and how they're actually going to make money out of it at the end um next one Cameron so the aace again in the total cost management um have put to uh put together one of the charts they they do it it's based on plan do check act um so this estimating process I've just taken out of total cost management um so it's worth going into the total cost management and having a look at it but again they talk about plan for estimating and budgeting uh quantify the scope uh cost described content price the cost estimate simulate then and optimize the cost if you have to getting back to what can the what the owner can afford uh develop and maintain methods and tools uh and then you get into budget cost uh analyze cash flow uh review and document the cost estimate and then when you get into project execution you start to bid the cost estimate uh awarding scopes of work into into procurement and contracts and again there's a myriad of ways of doing that letting contractors buy all the equipment uh some of the equipment or all of the equipment or some of the materials or all of the materials so again that execution strategy for your project determines how that's actually built into the estimate um for example if if a contractor buys materials or equipment on a pro on a project then in the estimating process you would allow a margin for the contractor to go through that process if the owner is going to buy it or the epcm then that's reflected in the the size of the procurement organization to do that so um each of the project is sort of fit for purpose on how they want to be built but as the estimators need to make sure you understand how it's going to be built and make sure you've got estimated costs in there to to manage that execution strategy and again I I sorry I just recommend you just go back so I just recommend going to the AAC recommended practices and and have a look it's got a whole bunch of references and uh and and and uh interfaces so it's pretty valuable stuff sorry Kevin so again the estimating process is really about classes of estimate um in accordance with aace so they talk about class five estimates class four class three class two class one and they talk about maturity levels of of project definition deliverables where a class five is is concept or screening so a lot of the a lot of the estimate methodology is based on historical data parametric uh s parametric estimating maybe some equipment that sort of fits within what the Project's going to look like we've done a fair bit of analysis now on different sizes of different types and sizes of projects and we think that if if you know what the equipment estimate looks like what sort of value then there's enough data from history and projects to be able to determine what the what the capital costs for the directs looks like and also what the capital cost for the index looks like and obviously based on where the project is and and what region and what type of project but certainly um for that sort of level understanding what the equipment looks like and might be a a primary crashing system for for a mine which might cost you two million dollars so then you might think that the capital cost is going to be something like uh 20 million dollars or something like that [Music] um class four there's some maturity done in in Project definition uh it's usually for study or feasibility uh so you talk about cost per length um and some of the some of the islands will be factored for example electrics or electrical or even piping um the expected accuracy ranges vary depending on the definition um sorry I'm starting to get some questions which is good um so class three is really about a budget authorization or control a semi-detailed unit cost with assembly level line items again the range is -10 to minus 20 up to plus 10 to plus 30. uh class two class two is really a lot of definition um and so either a control or a bid tender we would call A Class 2 when you start to get up to about 60 or 70 percent uh engineering definition we talk about a definitive estimate where you've probably got a fair amount of definition on the quantities you've probably bought a lot of them the equipment already or at least contracted it and you've got some experience in the field and then that's reflected in the range of the expected accuracy range so your contingency starts to get less um but with more more confidence that you're going to meet the whatever the estimate comes up with uh class one is really a check estimate or a bid or a tender contractors will tend to do a bid or Tender estimate based on a bunch of quantities that have been taken off which are probably getting towards the IFC um um and the detailed takeoff if quantities aren't sort of designed yet then it's going to impact the accuracy range of that estimate um and also to contractors will then take a view on on what margin they need to allow or where they can actually um where they have to boost up the S and it will take a bit of a risk on what the quantities are like this diagram here the influence curve really when you start off in a class five you've got a a high range of accuracy and as you progress through the class as you start to to narrow down on the contingency that you need and certainly the accuracy range for for estimates um there's been a lot of studies done about what those numbers look like in reality and it's probably a lot of us reflected in the uh the estimating process um this estimate class table is really is the number of versions of that by aace so again depending on whether it's a an oil and gas project or an infrastructure project or a mining project it's slightly different but the function is still all the same as you get more definition you get better accuracy and a better value of the estimate that you're working on okay just uh next slide please Cameron yeah so we um did a bit of a diagram that we use on just talk when we talk about the estimate life cycle and we just say look during a concept phase you've got a fair amount of contingency and your estimate is whatever it's going to be so high level description only pre-feasibility studies your estimate gets a bit better and accordingly the your contingency gets a bit less during feasibility study a cost estimate again better accuracy so you have to quantify more of the scope again your contingency is a bit a bit less theoretically provided you've captured all the scope and it doesn't change as you go along um an execution phase you're really talking about having a budget and you've got contracts and purchase orders uh for all sorts of equipment and material and the contingencies less and you start to use that as you start to get overs and under on your contracts and purchase orders and then the key thing a key thing is at the end of the job you've got actual costs so as you start to go through closeout what did your your job actually cost and certain the scheduler said and what how long did it actually take so so during execution your engineering progressively gets up to sort of a hundred percent and then enclosed that out you're able then to determine what the actual costs are um and again one of the things to remember depending on on on where you work and and who you work for um try and and as an estimator try and get those actual costs to start to feed back into the cost estimate database to see okay our assumptions were right or we're wrong with with production errors how many cubic meters of dirt can a crew a scraper crew move per shift okay our assumption was five thousand cubic meters what did they actually get on that job more or less why so that analysis of historical report then become pretty powerful to make your estimating better I know that a lot of many companies now are starting to realize the value of that um as a as a project controls professional it's important to try and get involved in that contract and purchase order formation stage to to set up the pay item so that you can actually align actual cost back to your budget back to your budget items and started to get that correct uh real correlation back to how your estimate was built that's a bit that I find as a as a project controls person that's probably weaken a lot of companies that the contracts and purchase order line items in a contract are done by the procurement folk with sometimes little or no input from the cost Engineers so that's something that that I certainly try and promote get involved in the build up of the of the um of the bid bids for for contracts and procurements to align one with your cost cut with your work breakdown structure your commodity codes and back to your budget items so that's a bit of a giveaway for tonight um okay so next one so the estimating process so different participants in the project have different uh requirements uh certainly in the estimating process for an owner it's really things like securing sufficient funding to deliver the project uh make sure that you you've analyzed your options to support approve the business case do your financial modeling and profit profitability calculations uh operations Readiness get your get your operations team ready to to operate once that you hand the project over and that's certainly something that sometimes would be cloudy when do you actually hand a project over to operations and then when you convert from spending Capital costs to operating costs so people say you hand the project over once it's at nameplate or some people some companies say once you've done once the commission is complete you hand it over which is fine as long as that's defined as part of your estimating process when do you actually hand over hand over and then when you flick from from Capital cost to operating cost funding Reserve is really um your contingency analysis um based on your contingency analysis so we would normally quote a an estimate for a project based on a p50 accuracy um with then some contingency with some management Reserve which the owner really needs to understand whether it's a p80 or P90 or a P20 or a P10 and I will talk about that towards the end of this webinar for an epcn really it's about developing Technical Solutions for the project options and Delivery Solutions for the project option so an epcm is focused on how do I how do I solve the projects how do I implement or design the project scope to deliver an outcome for the project that's acceptable to the client a lot of times epcms are focused on their portion of the budget and then the owner certainly will consolidate that into the overall budget for the project and schedule obviously contractors and vendors estimate or provide bids for specific scopes of work and certainly they take a view on on What's Missing out of the um uh out of the drawings or what's missing out of the um uh pricing schedule and they'll take a view uh as to how they go about allowing for that and and how they pitch the initial tender or bid to the to the um owner so the estimating process is really a bit different for the different entities on a project but the processes are the same um I I've worked done bids for prepared bids for contractors and again building the estimate plan and doing the basis of estimate is something that we've done and it's always helpful because sometimes you find in a lot of companies that the estimators work almost a little bit independent to the project managers and construction managers so you get that misalignment between the estimate and the scope and and the strategy so again going back to what the AAC and we promote is do your do you your planning do the estimate then do the analysis of it um next one please can so what is your estimate structure look like it really has to be based on quantities by by a code of accounts which is the facilities and commodities it has to identify labor and Equipment resources uh labor cost and labor hours direct labor hours equipment and material cost uh and all allocated to work packages and the reason for that is that different different parts of the organization of the team need that information so the schedulers need to know how many man hours that are going to be on the job so they can actually do the resource curves the schedule is also need to know what the quantities are so they can look at do their commodity curves and know that they have to install X number of meters apart per month in order to meet the milestones the materials cost um where does the project need to buy what materials they need to buy where they're going to buy them from and how is it going to get to site uh is there materials available on site that they can use yes no if it's not where does it come from how much do they need and how much is it going to cost and then always allocated to work packages and again that come back to our modern cost management system to talk about control accounts so which is really a facility or an area a commodity code and a work package next one please can so sorry this one's a bit hard to read but uh it's just meant to illustrate that on the on the left hand side you've got your areas or your facilities uh this comes off a um a mining project that we worked on along quite a while ago and across the top it's really what the quantities are on a facility summary you wouldn't have your quantity summary because it an area is made up of different numbers and types of quantities but if you're doing this by commodity summary then you would have the quantities it's really what's sort of freight tons depending on where your project is Freight could be a significant issue if it's a remote site and you have to get stuff from overseas um what your um what your labor hours are for each of the the facilities which then uh gets reflected in the schedule what you plan equipment costs are uh your vendors reps another significant issue is really uh how much do you need to allow in your estimate for vendors to come during installation and then also during commissioning so that's something that could be significant depending on on your project the bulk material costs you know about materials are things like concrete and steel and cable and pipe Etc uh the freight cost which is really the cost to bring the the freight turns to site uh your labor cost is really how much of those hours going to cost for each of the facilities on the project uh we talk about subcontractor distribs um if I'm a contractor and I'm going to bill that project I'm going to have a number of men working on Cipher and for a man of time but my overheads are going to be things like my site Huts my site vehicles my head office expenses my camp cost my travel costs My Consumer customer supplier PPE and there's a whole raft of things that a contractor my my management cost my project management cost a whole raft of things that a contractor has to supply to support the labor to build the job so we do separate calculations of those on a project and we tend to do it by work package and that's why it's important when you're building an estimate to know what your execution strategy is um certainly an Earthworks contractor it's going to have bigger overheads than a than an electrical contractor so in terms of equipment used and things like that labor rates will be different because an electrical contractor will have probably higher labor rates because he's using um specialty electricians Etc whereas an earthwaste contract will have more labor although equipment operators cost a fair bit as well uh construction equipment on some projects it's really the construction equipped particularly for the Earthworks what's it's going what's it going to cost in order to deliver those those facilities and then obviously the total um and then also going down the left hand side you've really got some areas of uh direct facilities which is really what's going to end up on site when you walk away temporary facilities to to support the construction um things like site officers temporary fencing temporary roads Etc construction support is really things like concrete testing surveying and things like that pre-commissioning is really coming and making sure that all the equipment works that um underwater load usually and then you've got engineering and project management uh owners team owners management team now those will vary depending on on how the Project's being delivered um and certainly that's in your execution strategy so that needs to be taken into account of this is an estimator um Earnest management team um operations Readiness was the first one and then owners management team then legal costs it might be significant Insurance pre-production costs uh what's not on this item here um I probably cut it off a little bit too early is contingency and escalation escalation is a significant cost to projects that we often don't take into account depending on the duration of the job again it might be in your estimate planning you nominate a base date for the estimate and then you've got to say um okay all the costs in the areas of the date but in order to finish the job which is two years or one year or whatever we think the escalation is going to be XYZ and you often get that from your owners or you CPI or or different indices Okay so so this is pretty much uh on the estimate structure do you want to do some questions now or do you want to keep going and do them at the end Cameron sorry I had an intruder uh no we can do some questions now um we've got uh one from John Boyle does the aace give recommendations for p50s um it it gives recommendations on um the range of accuracy that you should allow in your estimating estimating um uh certainly the p50 is the accepted Norm for for a project budget and then companies are either to do an upper and lower limit of p80 and 20 or P90 and 10. uh we've got a couple from uh from Frank uh can you please provide recommendations regarding estimating escalation okay so when we calculate our escalation we we um look at and there's complex ways of doing it and simple ways of doing it um so really for example on the um uh estimate structure I've got on the screen you might look at um when for example area 27 000 which is product Handley when it starts and when it finishes and then you might look at okay you've got about a 12 month period um what sort of escalation rate could you have in that area a lot probably a lot of mechanical equipment and stuff so you might look at um CPI um and and there's also things like steel price index and things like that you might use and then calculate it out that way the way that I've done it at a high level is really to look at the overall schedule from the base date to the end of construction and do a centroid of expenditure so two-thirds along the way of a project very simplistically you've probably spent half your money and then how far is that along your schedule and then use things like a CPI or a a published s escalation rate the things that they think is going to happen so depending on on what your requirements are from your owner you can either do a very very detailed or when you're an estimator particularly during feasibility studies Etc you might look just doing a centroid of expenditure and I'm happy at some stage to go through and and show you what that looks like uh we've got another question from Frank what percentage of project definition is recommended before requesting approval for funding from the client uh probably requesting funding from a client is really towards the end of a feasibility study now that that varies from company to company normally in my experience it's usually about when when basic engineering is done which is about 30 to 35 percent maybe 40 percent engineered some companies like some of the big mining companies will want engineering to be a sort of 50 or 60 percent before you finish the feasibility study so what that does is gives you a bit more certainty in the in the estimating process but it takes longer um so depending on what the strategy needs to be you might want to go on on your 30 engineered a 35 engineered or or go up to 50 or 60 now during execution phase when you're engineering's at about 60 to 70 percent complete um in my experience it's time to sit back and do it get a quantity done on the project uh and re-estimate the job from that point in time you should be fairly sure that you know what the costs are going to be for the project unless there's stuff that's still in the Woodwork the claims and things like that that um maybe some things that haven't read that haven't read their ugly head on the site yet but generally you've done enough work at that stage to say okay we think that the quantities really reflect what the job is going to be and it's 67 is almost getting towards IFC anyway it might instead of be better in some of the commodity and discipline than a bit less in in the latter ones like electrical and stuff but generally around that so for a de a definitive estimate the criteria was always engineering to 60 70 complete all the major equipment at least committed and some experience in the field on construction contracts so you know what the labor rates are and you've got an idea of what production rates are and you can adjust your assumptions accordingly your now Victorian government contracts at the moment there uh you need to be about 80 percent confident on the cost before you go cap in hand and start the discussions so fair enough yeah yeah wow which which is fun um yeah um so so just to just uh on that one too I remember sitting in a presentation uh with the cost Australian cost engineering Society a number of years ago and Department of main roads we're always getting hammered because their estimates were going over um so what they did they decided to actually not go back to for funding until they're until it estimated the P90 accuracy level so they're pretty sure what the job wouldn't uh overrun but then the other side of the coin ended up with a lot of money left over and and so it put pressure on the treasury because they were talking about some big big projects at that time big road projects so yeah so 80 to Fair bit yeah uh Sogo I believe you had your hand up earlier did you want to ask a question you can unmute your microphone if you do maybe later you can type it in the chat and we'll answer it at the end okay I think we're going to the next next slide yeah please so why document the estimate because you've got to create a budget for cost management so you need to know what the what the assumptions are for the budget uh you need quantity and labor resources for the schedule and execution progress measurement you need to know what your quantity curves that your commodity curves are and what your labor resources are to install those quantities and that needs to be actually and that actually needs to be um uh Quantified you need to know what your risk register looks like what risk have you included in your contingency analysis which ones you're are you at risk you need to do the contingency analysis um and and look at how good your estimate is and then you also and it's all captured in the basis of estimate okay so the AAC defines a basis of estimate as a required document uh the one deliverable that defines the scope of the project uh can become the basis for change management not can does and certainly depends on the transparency of information if you have a baseline which is your budget which is comes from your estimate uh which is defined from the basis of estimate you can do change management um I remember on a on a project where um schedule wasn't finished by the time they got to execution stage and the Planner on that job kept changing the schedule because things kept changing and at the end of the day I had to say look look just Baseline it just say that's it and then start your change management management it's the same with your budget um and you've also got to build the base of estimate with the stakeholder in mind uh your owner your project team uh you might be negotiating a contract um and certainly the planning team to match the estimate with the plan so it's really about understanding what is in the estimate how you build fit and what the outcomes of that are um do the quantities uh reflect what what's in the scope um does it does the split of the estimate reflect what the Contracting strategy is and that's another thing too that um uh in Mike's View and experience if you change the Contracting strategy on a project for whatever reason that constitutes a scope change because suddenly you're changing the way you're delivering the project and changing one of the base pillars of the project okay build-based investment with the stakeholder in mind so yeah just next one Cameron so what do you include in the basis of estimate again that the work breakdown structure and commodity code structure this project scope reiterate the project scope generally on bigger projects you'll have a Skype document um on smaller projects you have a scope statement which you then put in the base of estimate just to reiterate what the scope is and it's all in one place the estimate methodology the execution basis things like the planning basis the labor rates and unit construction buildups unit construction is is often done from ground up uh say okay I've got to install this structural steel what sort of crew do I need how long is that going to take where's where's the lay down area a lot of times when you're building major estimate you don't have the luxury of being able to do that so you use Norms so to install Light structural steel for instance example you use somewhere 25 to 30 man hours per tonne um but certainly that needs to be based on some benchmarking data if nothing else and again I haven't talked about benchmarking but that's a key part of the estimate review process um I'll probably talk about benchmarking another time uh productivity uh what labor productivity you're going to get and why where's the job how far is the job site from the from the lay down area from the from the um from the gate the project gate and again the basis for materials and Equipment pricing um okay so next uh quality qualifications opportunities and exclusions tells you all about the estimate uh it tells you what's included and what's excluded uh it tells you what the risks are on the project the risk register um as an owner it's important to make sure that if you have had a an epcm or or a contractor give you an estimate with qualifications that you know what the what those qualifications and exclusions mean and if they're part of the overall produce skirt you've got to make sure that you've allowed for it um and that's where an owner's project controls team starts to add its value where they start to analyze what the gaps are and say look holy how the contractors or the engineer said that hadn't put this in but they've got no growth on the quantities for example so okay we need to make sure that we add it in so it's that understanding what in an estimate what's not in there as well as what is in there that's important and usually that it's documented in the basis of estimate um Mike uh sorry Cameron next next page so in my experience uh a good base of the mass of estimate enables constructive review of the estimate by an IPA and a peer review or an owner or investors Etc um it prevents in inference and suspicion by the reviewer if a Reviewer is reviewing an estimate and they don't know what's in the what's in it and of course with the base of estimate it's likely they'll question it and say what you know and make their own assumptions about what it should or shouldn't be so hence it's important to document it again document assumptions and qualifications and it provides the basis for change management next one so I've put a couple of slides in just for contingency ranging um again this was a table that came out of of a review where the base for the project was 3.5 billion um and once we looked at all of the the uh the estimate characteristics um and the schedule characteristics you know what how the quality of the estimate data and also some of the risk that we're inherent in the job we came up with a a p50 um estimate value of 4.6 million billion and then based on the the spread of the Monte Carlo curving it came up with the P10 of 4.075 and a p95.153 again um we would normally stay project estimated at a p50 but we talked about a management reserves again AAC states are about p80 which means you'd quote the estimate at a p50 plus the management reserve of another up to 4.4494952 but again some companies you go to the P90 in order to be um secure they don't want to overrun or under run um so that's that's all I've got for for tonight um on the estimating process uh certainly some of my experience I've talked about and I've certainly reinforced with the aace um recommend um so we probably um understand what's in there and and work to it or sometimes by default but we're not sure we'll defer back to their recommended practices um so what I'd like to do now is open the floor to questions um so the cameras will sort of yeah John's got his hand up you unmute yourself and ask a question John uh can you just go back to slide let me just go back one slide yeah just interesting here that you know and that's I asked the question about the p50 before I knew the answer but that if you look at if you look at this p50 here and then you ask yourself the question because a lot of people don't get this the the the the the pH the accuracy range is around the p50 so if you look at that estimate though it's plus 16 minus 14. that's quite a take to our system yep yep a lot of people miss that though they just think they just quote that number and they think it's around the base and it's not it's around it's around the p50 so I look at that and I go well that was that was a pretty bloody that was a bloody pretty tight range yeah for for around well that is a class three or a class work wherever it is but it's a tight range it was a class three estimate yeah if you go back to the other one class three you should be plus 50 minus 30 you know so I can't tell you what job it was but it had knobs on it the only other part I wanted to make is I do like the AAC classification system and I do you John I use John Holman's model quite a lot okay I think I think were that class system needs to go with the AAC is people quote you know percentages but really what what John's done is it he's really raised a good point around what those definitions are for maturity in certain aspects of their job right let's talk about geotechnical data and what really should be done at various class levels but I think that the wise I'm trying to educate my clients to try and say well okay your Gate Systems really should align and you should start to think what those various aspects of a job how mature they should be at various Gates when you're going through a class system and a lot of people don't realize that because I'm a risk manager but really you're right it is about scope and I think if clients can start to think about that class system and break down the classification system to another level you can really start to drive your deliverables of what needs to get done from maturing the scope by understanding what you need to get done for each class system it's just that's the best lesson I'm trying to push I think John's got John's on the mark you know yeah there's another table that I haven't put in here and it looks at what level of deliverables you need for each CL each stage of an estimate which stage of a project and Geotech certainly one where it says a at a pre-fees it's really historical data maybe for a feasibility studies you've done a bunch of drilling but they talk about preliminary they talk about conceptual they talk about final but then then it says the definition of the definitions yeah even getting raped and that's what John does in his model which is a great definition and what it helps people do and estimate is do saying well hey we're at this class where's the engineering deliverable that I need to make sure that I can assure that I'm at this class so that's the one takeaway for me from that is if understand the class system it's about scalp and your spot on and if you understand what you're going to deliver at a certain point you will deliver your project so anyway I'll cheer up there yeah thanks John um we've got to have a couple of queries can can we have a copy of the slides yeah look I think you're going to actually um put the slides up um I can save the presentation to the AAC Australian section um website and I'll send out a link to all the um people who registered to attend this evening um so they can get access to it and just so everybody knows the video of this or the recording of This will be um on the AAC Australian section YouTube channel um usually takes about a week to clean it clean up the recording and uh and post it so that that will be there and you'll get a link to that as well um sergey's gone and post the question how the costs can how cost contingency link to schedule contingency I'm struggling with my management to explain schedule contingency is needed to include into project Master Baseline okay so there's two things one is uh the the cost estimate the budget really reflects the cost of the scope and the schedule reflects the time taken to build that scope um in in this analysis we did we tried to link costs with schedule so a scheduled delay would cause the cost increase yeah and and all your better projects do have the cost and schedule links because if you don't if you don't have them linked to then there's a disconnect and people get more confused but and the pro and it's a lot harder to manage the project if you schedule a new and your cost basis aren't yeah um referring to referring to the same thing so yes your cost contingency and your schedule contingency should be representative against each other yeah yeah but it comes it all comes back to documenting everything so you need to have both your basis of schedule and your basis of estimating documents up to date and cross-referenced so that people can actually understand what each of them mean and how they work together yeah look at you're absolutely right Cameron um so tonight I sort of cut focused just on the estimate um and basis of estimate but certainly the parallel activity is the scheduled plan the schedule and the scheduled basis um some companies are also now going to a combined for example BHP when we do a fair bit of estimate excuse me estimating with them and they talk and talk about an estimate and schedule development plan as one document and also to this starting to go towards an estimate scheduled basis so because they are linked and a lot of the stuff in those bases are common okay I think that's it for the questions if anybody else has any questions I think that's it I really do think the whole issue of around uh sort of benchmarking and p50 guidance is a is an issue uh and on the one hand you've obviously got the likes of flyberg Sharon in his latest book you know how to how to build big things about uh you know guidance on around the main for you know for for various types of projects so I do think it's some of the AAC should think about a little bit uh you know and then obviously from a benchmarking point of view you know he's on that you know that that reference class forecast inside which obviously is seen John looks at that with you know funny eyes when he looks at that sort of stuff but I still think it's a good idea to sort of have that version that he's got and especially from the green book out the UK where there's a lot of great benchmarking there against Rail and roll projects for 350s and P90s which is an excellent reference information you know so yeah I really do think you know there's some good stuff out there that's been done elsewhere that you know parametric is great parametric you know uh contingency forecasting and I think there's that you know that systemic bit gets missed by Monte Carlo so I think that whole version of I call it the I could call it the Cyclops eye where I look at the moms here look at the parametric and I look at the you know the the uh the reference class forecasting to give me an idea what the condition should be don't be a one-eyed monster with Monte Carlo that's my so just my yeah for me for me John the benchmarking is a whole different uh subject um I've reviewed estimates where uh there's been benchmarking put in by uh and estimating a engineering service provider and they quote the projects that that I have experienced with and The Benchmark rates are nothing like what I know them to be yeah so the key thing for benchmarking is to get your historical your actual data on your projects yeah and feed them back into your estimating process so you know um that the different Commodities on different projects in different regions took so long to build and and cost so much to do cost a certain cost is certainly um different and and I tend not to Benchmark costs but certainly effort is what I think is important you know we'll cut the unit costs keep changing uh quite rapidly these days wow yeah that's right which is part of the problem the quantity the quantities though but the uh but the cost per quarter quality changes changes are a huge amount I was just going to say if people are interested in um um cost estimate accuracy range and contingency determination um they should have a look at the recommended practice 119 r-21 um it has links to a lot of the other recommended practices as well so if you start from that point and Branch out um it's a pretty dry read but uh it it will give you a um an idea of um way to head yeah so you know so just to wrap up I think the most important thing uh is to get your scope documented and the quantities for that scope documented then everything else should flow an old an old boss of mine uh but used to hammer me and used to say quantities build projects you know the dot oh so you've got to know what your quantities are okay well I think that's it for tonight thank you Lou for uh giving us that presentation and thank you to everybody who asked questions it's always good when people ask questions especially John thank you for your input um this presentation will be on our YouTube channel in within about a week um I'll send a link out to everybody who attended tonight um also a link to the present the presentation slides itself we'll put that on our website so that you can access them um so otherwise thank you and enjoy the rest of your evening or for those of you who are overseas it's probably more morning so enjoy the rest of your day yeah thanks very much everyone thank you for attending good night