Bottom Up Cost Estimating

Test Your Knowledge

Bottom-Up Cost Estimating Quiz:

Instructions: Choose the best answer for each question.

1. What is the fundamental principle of Bottom-Up Cost Estimating? a) Starting with a broad project overview and gradually refining details. b) Analyzing each component of a project individually to build a comprehensive cost estimate. c) Using historical data to predict project costs without detailed analysis. d) Relying on expert opinions to estimate project costs.

2. Which of these is NOT a key element considered in Bottom-Up Cost Estimating? a) Labor costs b) Material costs c) Project management fees d) Equipment costs

3. What is the main purpose of a work breakdown structure (WBS) in Bottom-Up Cost Estimating? a) To organize project tasks into a hierarchical structure. b) To create a detailed project schedule. c) To identify potential risks in the project. d) To allocate resources to different project phases.

4. Which of the following is NOT an advantage of Bottom-Up Cost Estimating in oil & gas projects? a) Enhanced accuracy b) Reduced project duration c) Greater transparency d) Improved risk management

5. What is a crucial factor for effective Bottom-Up Cost Estimating? a) Using only the latest market data. b) Utilizing reliable historical data from previous projects. c) Eliminating contingency allowances. d) Relying solely on the experience of one senior estimator.

Bottom-Up Cost Estimating Exercise:

Scenario: You are tasked with estimating the cost of a drilling rig for a new oil exploration project. The rig consists of the following components:

• Drilling platform
• Drilling equipment (drill pipe, mud pumps, etc.)
• Support vessels (supply boats, tugboats)
• Crew (drillers, engineers, technicians)
• Logistics and transportation

Instructions:

1. Create a simple work breakdown structure (WBS) for the drilling rig.
2. Identify the key cost elements for each component.
3. Estimate the cost of each component based on your knowledge of the oil & gas industry or research online resources.
4. Aggregate the costs of each component to arrive at a total estimated cost for the drilling rig.

Techniques

Bottom-Up Cost Estimating in Oil & Gas: A Comprehensive Guide

Chapter 1: Techniques

Bottom-up cost estimating relies on breaking down a project into its smallest constituent parts and estimating the cost of each. Several techniques enhance this process:

• Work Breakdown Structure (WBS): The foundation of bottom-up estimating. A hierarchical decomposition of the project into manageable work packages, each with a defined scope and deliverables. Different WBS structures (e.g., resource-oriented, activity-oriented) can be used depending on the project's complexity and requirements. Proper WBS development is crucial for accurate cost estimation.

• Activity-Based Costing (ABC): This technique assigns costs directly to specific activities or tasks, providing a granular view of resource consumption. This helps identify cost drivers and areas for potential savings. ABC complements WBS by providing a cost perspective to individual tasks.

• Parameter Estimating: Uses historical data and relevant parameters (e.g., square footage, pipeline length, well depth) to estimate costs for similar tasks or components. This technique is particularly useful when detailed information is scarce, especially during the early project phases.

• Engineering Estimating: A detailed approach used when design specifications are finalized. It involves a comprehensive review of engineering drawings, specifications, and material lists to develop precise cost estimates.

• Unit Cost Estimating: Determines the cost per unit (e.g., cost per meter of pipeline, cost per wellhead) based on historical data. This unit cost is then multiplied by the number of units required for the project.

Chapter 2: Models

While bottom-up estimating emphasizes granular detail, various models can structure and support the process:

• Spreadsheet Models: Simple spreadsheets can effectively track individual task costs and roll them up to the project level. However, complex projects may require more sophisticated tools.

• Cost Database Systems: Centralized databases store historical cost data for various activities, materials, and equipment. This allows for consistent and reliable parameter estimation and unit cost calculation.

• Simulation Models: Monte Carlo simulation can incorporate uncertainty and risk into cost estimates by generating numerous scenarios based on probability distributions for cost inputs. This helps assess the range of possible outcomes and manage project risks.

• Integrated Project Management Software: Software packages integrating cost management with scheduling and resource allocation provide a comprehensive overview of project costs and their interdependencies. This improves cost control and supports effective decision-making.

Chapter 3: Software

Numerous software applications support bottom-up cost estimating:

• Microsoft Excel: A widely used spreadsheet program suitable for smaller projects. Add-ins and macros can enhance functionality.

• Primavera P6: A robust project management software incorporating cost management features, including WBS development, resource allocation, and cost tracking.

• Microsoft Project: Another project management software with cost estimating capabilities, suitable for various project sizes.

• Specialized Cost Estimating Software: Several vendors offer software specifically designed for cost estimation in the oil and gas sector, providing features like integrated databases, advanced modeling capabilities, and risk assessment tools.

Chapter 4: Best Practices

Successful bottom-up cost estimating requires adhering to these best practices:

• Clearly Defined Scope: A precise project scope is critical for accurate task definition and cost estimation. Ambiguity leads to inaccuracies and omissions.

• Accurate Data Collection: Reliable historical data is crucial. Regularly update databases with accurate information from completed projects.

• Experienced Estimators: Utilize estimators with extensive experience in the oil and gas industry and knowledge of specific equipment and processes.

• Contingency Planning: Include a contingency buffer to account for unforeseen risks and cost overruns. The size of the contingency should reflect the project's complexity and inherent uncertainties.

• Regular Monitoring and Updates: Monitor actual costs against the estimate throughout the project lifecycle. Regular updates reflect changing conditions and ensure the estimate remains relevant.

• Integration with Scheduling: Align cost estimates with the project schedule to optimize resource allocation and identify potential conflicts.

Chapter 5: Case Studies

(This section would require specific examples of bottom-up cost estimating projects in the oil and gas industry. Each case study should detail the project, the methodology employed, challenges encountered, successes achieved, and lessons learned. Examples might include cost estimation for a new pipeline, offshore platform construction, or well drilling project.) For example:

• Case Study 1: Offshore Platform Construction: This would detail a specific offshore platform project, outlining how the bottom-up approach was used to estimate the cost of various components (structural steel, equipment, labor), challenges in estimating subsea components, and the final cost accuracy compared to actual spending.

• Case Study 2: Pipeline Installation: A case study focusing on a pipeline project might highlight the use of unit cost estimating for different pipeline sections, the inclusion of contingency for environmental risks, and the impact of material price fluctuations on the final estimate.

By providing concrete examples, this section would illustrate the practical application of bottom-up cost estimating and its effectiveness in managing oil and gas projects.