W6-Musalllam Al Awaid-Cost Estimation Process


1. Problem Definition

 

In the operating plants, capital expenditure projects are raised annually with initial cost estimation. That cost estimation will differ by far from the actual cost in later stages in many cases. What is the best way to estimate CAPEX projects budget?

2. Feasible options Identification

By using the figure 1 below, accurate estimation can made on the project cost and hence budget allocation.

today

3. Development of the outcome for the alternative

By following the above process, the project cost is being estimated initially. Then, it is assessed again be difining the scope of the programm and hence getting clear picture of the project. Next, the project cost is challenged to get to the most accurate estimate. As the project progresses, the actual cost is upated.

4. Selection of acceptable criteria

The cost estimation obtained from the above process can be presented to the management with confidence.

5. Analysis and Comparison of the Alternatives

The table below shows five completed projects with their actual cost versus the allocated budget. There is big difference between the estimation and real cost except for project D and that reflects a real problem in the estimation process.

S. No. Project / Item Description Budget Budget Percentage of Actual Cost/ Budget
1 Project A 6889 2007 29
2 Project B 1111 637 57
3 Project C 1778 1012 57
4 Project D 1889 1871 99
5 Project E 889 1077 121

 6. Selection of the preferred option

Using the cost estimated process, provided by GAO’s “Best Practices in Capital Budgeting” is recommended to get best estimation of required budget for each project.

7. Performance Monitoring and the Post Evaluation of Result.

As the project progresses, the actual cost will be updated and monitored. The actual cost should not differ much from the estimated one. Otherwise, the process above has some deficiencies which we should find them out and get them fixed in the next estimation. However, that should not be the case.

Reference:

  1. GAO (March 2009). GAO Cost Estimating and Assessment Guide, A Reliable Process for Developing Credible Cost Estimates pages 8-11. Retrieved on 12th July 2014 from http://www.gao.gov/new.items/d093sp.pdf
  1. MS. Thomas (2011). The Practical Project Manager, Retrieved on 12th July 2014 from http://practicalprojectmanager.blogspot.com/2011/03/how-to-manage-project-budget-free.html
  2. Mountaintop (2014). Software Cost Estimation, Estimating Techniques, Retrieved on 12th July 2014 from http://216.54.19.111/~mountaintop/sam101/scopage_dir/l11_estovrvw/l11_t3estech.html

 

 

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One thought on “W6-Musalllam Al Awaid-Cost Estimation Process

  1. Great case study and you did a fair job on your analysis, but you missed a really important part of the assessment under Step 4. If you turn to my handouts from Day 3, please take a few minutes to review Slides 14-17, slide 19 and slide 21, you can see what the targets SHOULD have been and your estimates are clearly all over the place. (See slide 19 especially)

    Same goes for Step 7. What you should be targeting for each time you pass through one of the phase gate selection processes, your range of acceptable variance should start to narrow down. What it looks like is your cost estimating system is producing Class 5 estimates and never refining them?

    What I would like to see is you take the same case study but this time analyze it in terms of what class of estimate the data shows you are actually creating, and I think it will shock you.

    Then go HERE http://www.build-project-management-competency.com/wp-content/uploads/2010/09/Glenn.Butts-Mega-Projects-Estimates.pdf and read over the whole paper, but pay special attention to slides 10, 11 and 12 and slides 31 and 32.

    When you post your W7 blog using the same case study, analyze it in the context of what my handouts recommended plus what Glenn Butts from NASA has to say.

    Bottom line- great case study and you’ve picked an excellent way to generate a favorable return on training investment for your company.

    BR,
    Dr. PDG, Jakarta

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