Reality Check

Organizations and Project Leaders Can Take These Steps to Make Megaproject Cost Estimates More Accurate

 

By Francesca Bodini

Massive infrastructure projects frequently gain attention not only for their architectural or technical features but also for their incredible cost overruns. Accurately estimating the costs of megaprojects will always be a challenge: There's extensive funding, marathon construction and a plethora of divergent stakeholders. However, organizations and project leaders who incorporate four critical pieces into their cost estimating process can improve their accuracy.

1. Establish an estimating department with subject matter experts. Project cost estimating is a discipline that requires competencies and experience. Cost estimators are usually specialized in very particular niches, so organizations need to invest in their resources for years to develop experienced estimators in the necessary sectors.

2. Focus on basic metrics. Each sector uses simple metrics to check, quickly and roughly, if the cost estimate is reasonable. In the oil and gas sector, for example, the overall cost for a new wellhead platform in Asia usually ranges from US$18-US$25 per kilogram (US$8-US$11 per pound). If your organization produces an estimate for this kind of facility that falls considerably outside this range, there might a specific justification, such as technical peculiarities or specific market conditions. If not, the estimate needs to be double-checked.

3. Ensure accessibility to a widely recognized benchmarking tool. Cost estimating involves a benchmarking analysis to compare the performed cost estimate with actual costs available in the same sector or field. This means your estimators need access to a reliable data source in the sector. In the oil and gas sector, for example, third parties manage databases of industry projects. Oil and gas companies pay an annual fee to participate, then provide yearly data regarding their own projects. In exchange, these organizations can access benchmarking tools to compare their own projects against the average performance of the other members.

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4. Get information from recently awarded contracts. Recent contract data is the most trust-worthy source for making cost estimations. It seems obvious: The procurement department should pass along data from every recently awarded contract to the estimating department. However, often this doesn't happen, especially in large and highly structured companies. As a result, cost estimators miss out on important information about market trends.

Although this is not a full recipe for sound cost estimates, following these tips can help ensure that teams don't overlook the essentials. Ultimately, these four steps can help your organization answer the evergreen question, “How much will it really cost?” PM

img Francesca Bodini is a project control, cost estimating and risk management manager at Eni SpA, Milan, Italy.

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