Many of the recent small projects that Independent Project Analysis (IPA) has benchmarked have set conservative cost estimates. What does that mean? It means there is “fat” in the estimate, fat that often gets spent during execution, resulting in higher than average final costs. Many of these projects should achieve good cost performance because they have good teams and are well defined. However, setting soft targets usually gets you uncompetitive results. So here are the top 5 factors that drive fat in small project cost estimates. Eliminate these and you can be on your way to saving your site money.
IT'S THE PROJECT MANAGER'S FAULT...
1. You Set Contingency Too High
The typical small project that IPA benchmarks sets contingency in the authorization estimate at close to 12 percent. Given that the typical small project we see is reasonably well defined and technically straightforward, a more appropriate contingency would be closer to 5 percent.
2. Your Material Estimate is Out of Date
IPA has closely tracked material price changes over the past 15 years. Industry was slow to respond to the rapid escalation in 2005 and many projects overran. Unfortunately, Industry was equally slow to respond when material prices stabilized and even declined a bit. Many recent small projects are underrunning their material estimates, which is a sign that estimates are still being set too high and don’t reflect the current market environment.
3. You Make Conservative Assumptions
Maybe your project is going to be installed in a shutdown and you “think” you’ll get to use the crane that maintenance will use. But you estimate for a separate crane “just in case.” Maybe you think you’ll do 50 percent of the work before the shutdown and the rest in the shutdown – but you estimate as if all of the work will take place in the shutdown. Maybe you think you’ll be able to use the on-site construction force, but you estimate for travelers “just in case.” Constantly assuming the worst case scenario adds up to lots of extra money in the estimate.
IT'S THE PLANT MANAGER'S FAULT...
4. You Don’t Do Good Portfolio Management at Your Site
If you haven’t invested in tools to manage your portfolio of projects, you create very tough conditions for your project managers. As a result, they don’t know what resources will be available when – and then see reason #3 above.
5. You Hate Overruns
If a cost overrun at your site results in immediate criticism, it shouldn’t surprise you that your project managers will set soft estimates to ensure an underrun – and to ensure their job security. See reasons #1 and #2 above – these factors can be driven by an environment that penalizes overruns. In contrast, a less punitive approach to overruns (remember, p50 estimating means that about half of projects will overrun and half will not, even in a great project system) can encourage project managers to set more competitive estimates.
Do any of these issues plague your small projects? If so, you are probably spending more money than you need to on your small projects. Let an IPA benchmarking help you identify the fat – contact me at pkulkarni@ipaglobal.com.
As IPA’s Manager of Plant-Based Systems, Phyllis Kulkarni oversees all global small project benchmarking, turnaround benchmarking, and licensing of the FEL Toolbox software. Phyllis joined IPA as a Project Analyst in 2002 and has led numerous site benchmarkings, project evaluations, and onshore and offshore megaproject assessments. She is fluent in English, Spanish, and Portuguese. Phyllis can be reached at pkulkarni@ipaglobal.com.