For downstream capital project cost engineers, the opportunity to concentrate on the effective application of project cost metrics and share ideas about cost estimating practices happens once a year—at IPA’s Cost Engineering Committee (CEC) conference.
Cost engineers, representing more than 20 owner companies, participated in the 17th annual CEC conference from September 28 to 30, 2015, in McLean, Virginia. This year’s CEC conference program emphasized reducing unknowns and risks.
“By doing a better job of identifying risks up front, we get an improved sense of how we can plan for them” from the cost engineer’s perspective, Luke Wallace, Associate Director, IPA Project Research Division (PRD) Cost Analysis Group, told conference attendees. To help in diagnosing risks earlier in the project development work process, IPA briefed attendees on a newly developed probabilistic model that measures the probability of a risk’s occurrence and the risk’s effect on project outcomes should it occur. The output of this model enables CEC users to calibrate their own risk modeling tools.
IPA Subscriptions Services Director Dean Findley, in delivering keynote remarks, outlined some challenges and opportunities cost engineers face today, including field labor productivity uncertainties that can lead to increased costs.
Practices used on projects, such as ensuring delivery of quality engineering designs and vendor data, can reduce variation in labor productivity estimates. The preponderance of project teams that implement these work process Best Practices end up delivering projects that experience little or no cost growth, schedule slip, or operations issues, Findley said.
“Yet we still cut corners and skip steps.” Unrealistic cost and schedule targets pushed by business executives may be to blame, he said.
So a real challenge is getting business executives to understand the cost engineering function’s role in producing project data that really matters to them—especially cost performance and predictability information. The CEC metrics can be used to help cost engineers better engage with business representatives, Findley said.
In sessions led by IPA research analysts, CEC conference participants were briefed on the 2015 CEC metrics and how the metrics can be used for cost estimating. The metrics—plus all other data reviewed by the CEC—are derived from IPA’s Project Evaluation System (PES®) that includes databases with detailed cost information on more than 17,000 downstream projects worldwide.
The CEC metrics’ purpose is to support conceptual estimate development and detailed estimate validation and review. The CEC includes more than 3,000 different cost and schedule metrics derived from actual projects, and these data can be used throughout the project development cycle, from early equipment factored estimates to bottoms-up deterministic estimates.
Summary cost metrics, for instance, allow cost engineers to develop cost estimates quickly based on cost ratios developed using IPA’s Summary Cost Categories. Detailed, unit quantity metrics, which CEC member companies also received at the conference, let cost engineers drill into the detailed metrics to develop more granular cost estimates. Such estimates are useful for quantity-based trade and discipline account evaluations.
“Ultimately, the goal is for owners to use the metrics to improve the cost effectiveness and competitiveness of their capital projects. By knowing a project’s competitive position relative to its peers, owners can push back on conservative targets,” Wallace said.
In addition, location cost metrics are included with the CEC metrics, giving owners the ability to compare the cost of delivering projects in different world regions. The dataset uses the quantity-based metrics through a “bottoms-up” approach to identify regional cost trends.
CEC Metrics Tools
CEC member companies receive the raw metrics, but IPA has also developed tools to help them quickly screen the metrics and highlight gaps in generating estimates for their projects.
The Summary Cost Metric Tool allows cost engineers to easily select summary metric sets (e.g., ratio to total) and subcategories (e.g., project size and location) to determine general project cost estimate figures. The Detailed Cost Metric Tool is able to highlight the differences between the cost and schedule metrics for a particular project against corresponding CEC cost and schedule metrics.
New at this year’s CEC conference was the distribution of tables illustrating cost factors for five metrics designated as Key Performance Indicators (KPIs) for project cost performance: 1) project management cost/direct cost, 2) detailed engineering cost/bulk materials cost, 3) construction labor cost/bulk materials cost, 4) piping labor hours/feet of pipe, and 5) structural steel labor hours/tons of steel. IPA then broke out a subset of the KPI metrics for “Best Projects”—projects with cost performance 10 percent better than industry average.
“The industry average is always skewed toward negative outcomes,” Wallace said, explaining how the chances of something going wrong is normally higher than the project being executed smoothly. The intent of providing the five KPI metrics for the Best Projects is to show cost engineers a new set of metrics that drive results in better than industry average cost results.
New Cost Research
IPA research analysts unveiled several new project cost studies at the conference. The research presentations covered the following topics:
Accurate Estimates at FEL 2: Is It Luck or Is There a Better Way to Estimate?—Observing that projects are developing more accurate estimates by the end of concept selection, IPA examined current estimate development practices use.
Accurate Estimates for Indirect Costs—To help shed light on both the estimating practices and the norms for indirect costs, this study focused on the common components that comprise indirect costs. The study looked at estimating methodologies and their accuracy and found that more detailed data and methodologies yield better and more competitive estimates.
What Do the Best Change Management Processes Look Like?—Using IPA’s projects database and the findings of a survey on change management, this CEC study dissects Industry’s change management processes to uncover the mechanics of a thorough change management system.
Breakout sessions and workshops held during the 3-day CEC conference gave attendees opportunities to share knowledge on estimate reconciliation, validation, and change management processes. Several networking opportunities were also held.
The CEC is a subcommittee of the Industry Benchmarking Consortium (IBC), a voluntary association of owner firms facilitated by IPA. The owner companies belonging to the CEC and IBC sponsor many of the world’s largest downstream projects.
Originally published in the December 2015 IPA Newsletter (Volume 7,Issue 4)