Project Practitioners > Do You Always Under Estimate Your Projects?

Do You Always Under Estimate Your Projects?

By Morley Selver, P.Eng IPMA B

I got a request the other day looking for someone to do a workshop on estimating. Some engineers were interested in what projects really cost and how are these costs developed. It sounded like they were doing the estimating and were always wrong. If you do not understand what goes into an estimate and the process involved you will always end up with a poor estimate. In this article I want to give them, and you, the detail that goes into an total installed cost (TIC) estimate for a complex project (multi-disciplined project). This is an estimate that covers the on site field work as well as the engineering and owners costs. 

The  first thing needed for an estimate is a frozen scope. You can not estimate a moving target. There can be no gray areas, everything should be black and white.  If there is some scope you are not sure about, then decide whether to include it or not. Usually we error on the more expensive side to ensure we get the scope covered. If management decides not to include the item, the scope can be decreased. It is always easier to lower the estimate than to try to add to it. Never give out the estimate value until you are ready. Owners always want to know what the value is before you are finished. They will always remember the first number given to them and if the official estimate is higher it is nothing but trouble for you.

The project phase you are in affects how the estimate is done. In the early phases the estimate is factored based on historical data. You need equipment and material pricing with material take offs (MTO’s) and hours to do the work, then the estimate is factored based on direct field hours. These estimates are in the  - 30% to + 50% or higher range. When you get into the final phases, (Define and Execute Phases) the estimates are based on quotes, design drawings with material take offs, and manpower take offs. This is the type of estimate I will talk about.

The estimates are broken down into direct costs and indirect costs. Direct costs are costs that can be specifically identified with a particular item or activity. Indirect costs cover those items that can not be assigned to a particular item or activity such as overhead and profit. 

Direct Costs

 You will have direct costs for labour and material. The material will include not only the piece of equipment or pipe etc, but also the bulk materials. Once the scope is determined and the design complete, your disciplines can develop their MTO’s. These are lists of the materials the discipline see as being required to cover the scope. Depending on your disciplines, they can sometimes  estimate the man-hours required to do the various construction tasks. If not then you or your estimator have to determine the manpower required from experience and historical records you may have. 

For direct labour hours, you need to look at: 

  • The labour available to do the work, who will be doing it and when. Do they have experience working at this particular location? If not, what will it take to get them trained to work here? 
  • What is the make up of the crews? Will it be union or non-union? This will affect the base rate in the labour rate build up. The labour rate build up includes the base rate, fringes, payroll burdens, small tools and consumables, overhead and profit.
  • What will be the labour productivity? Not all tasks are performed under ideal conditions. They may have to work in hazardous conditions which can have a tremendous affect on the productivity. I had a project where we had to install a slide valve in a floor trench in a area of the plant where it was hot and hydrogen sulfide (H2S) gas was present. The crew had to wear protective gear with external breathing apparatus and could only work for 20 minutes before being replaced by another worker. 
  • Will the work be performed during a shutdown? Work done during shutdowns will affect the labour rate and length of time to do the tasks. 
  • Will the work be performed after hours? Electrical tie-ins are usually done after hours.
  • What is the workweek for the crews, 4 x 10 hours or 5 x 8 hours? This affects how you manage the job and your overhead.
  • Is there a per diem cost involved? This is a daily living allowance the contractor pays some of his personal to work at the site. This is based on distance the person is from their normal home or union hall.

You have to look at the equipment and material costs you have. Are they firm price quotes, budget pricing, or have you purchased it yet? Firm pricing will require less escalation and contingency.  Budget pricing will have an adjustment factor added. This factor will be based on historical information. There needs to be some allowance for bulk material the contractor has to purchase. The bulks cover things like nuts and bolts, electrical conduit, electrical cable and other small items that do not require any engineering input. 

You will have to add an allowance for  the MTO’s and bulks to cover the unknowns. What are your MTO’s based on? Owner approved drawings or preliminary design? Your allowances will be greater for the preliminary design. How will the equipment be installed? If it is a “normal” piece of equipment then the manpower requirements can be readily determined. For equipment out of  “normal” you may have to talk to contractors to determine how to install it and estimate the manpower requirements accordingly.

Indirect Costs

These costs are usually a percentage of direct field labour. These are historical numbers based on the area the estimate is being prepared for and every project is different. When you have schedule slippage, the indirect costs have to be taken into consideration and a lot of times they are not. When you have schedule slippage it means the indirect costs have to be paid out for a longer period of time. For contractors, the labour indirect costs required to support the work include: 

  • mobilizing and de-mobilizing, tool rooms, firewatch, manhole watch ,etc. 
  • administrative staff on site and back at head office working on the project. Again these are historical percentages based on direct field hours. 

There are also non-labour indirects that are not based on a percentage of direct field hours but are a dollar value per direct field labour hour, such as:

  • temporary facilities such as contractor trailers, parking, utilities, etc. 
  • Small tools and equipment. Contractors provide equipment and small tools calculated as a dollar value per direct field labour hour. The dollar value of what constitutes a small tool is subject to change. At one time it was any tool with a value of $250.00 or less.  

Other costs that have to be added are owners costs. These should be developed by the owner and covers his personnel assigned to the project, plus other project related costs (such as rental vehicles and equipment). Sales tax has to be included along with escalation and contingency. Escalation is not a straight line percentage as items with a fixed price will have a smaller escalation value than a budget price. Contingency is a percentage as well and changes with the project phase you are in and the makeup of the estimate. The more defined the project estimate, the lower the contingency. On large projects, an estimate risk analysis may be run. Based on the probability of the different estimate inputs increasing or decreasing the analysis will determine the range of the estimate and a contingency value to be used. If any project funding from previous phases has been accrued to the project these costs should be included in the overall TIC estimate.

As you can see, an estimate is a lot more than doing an MTO and factoring it up. There is a lot of detail that goes into an estimate and there is lots of opportunity for error. When doing estimates it is advisable not to do them yourself but to work with estimators who have a data base of historical information, are familiar with your industry, and familiar with the area where the work will be carried out. 


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Fundamentals of Project Management

Are you struggling with your projects? Need an understanding of what is happening and what to do? Then plan to attend our popular Fundamentals Of Project Management workshop on August 29-31, 2011 in Calgary, AB Canada.

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 Fundamentals of Project Management

 August 29-31, 2011 - Calgary, Canada

 Course Overview

This practical workshop will equip participants with the tools, skills, behavioral attributes, and competencies needed to manage design and construction projects. Using lecture, discussion, and case studies, the focus will be on practical applications and techniques for immediate implementation and project results. Participants learn "what" to do, "how" to do it, and "why" they need to do it. The course is designed for people involved in managing the design and construction of projects in operating facilities, including engineers, technologists, technicians, tradesmen, and maintenance personnel. Participants will receive a copy of the instructor's published book, "Plant Project Engineering Guidebook".

Course Outline 

Introduction & Definitions

Project Manager Behaviors

Budgeting & the Staged Gate Process

Project Authorization and Scope of Work

Engineering Control


Request For Proposals & the Bidding Process

Construction Management

Contract Administration and Earned Value Analysis

Commissioning Procedures


Commissioning & Startup



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