Bottom Up Cost Estimating

Test Your Knowledge

Quiz: Bottom-Up Cost Estimating in Oil & Gas

Instructions: Choose the best answer for each question.

1. Which of the following is a key characteristic of Bottom-Up Cost Estimating?

a) Estimating based on historical data from similar projects b) Breaking down the project into its smallest tasks c) Using a top-down approach to determine overall project costs d) Focusing primarily on the overall budget and less on individual tasks

2. What is the primary benefit of using a Work Breakdown Structure (WBS) in Bottom-Up Cost Estimating?

a) To identify potential risks b) To track project progress c) To ensure all project elements are accounted for d) To allocate resources effectively

3. Which of the following is NOT an advantage of Bottom-Up Cost Estimating?

a) Increased accuracy b) Improved communication and transparency c) Reduced project execution time d) Enhanced risk mitigation

4. What is a significant challenge associated with Bottom-Up Cost Estimating?

a) Lack of available historical data b) Difficulty in identifying potential risks c) The inability to accurately predict market fluctuations d) Limited stakeholder involvement

5. In the context of Oil & Gas projects, why is Bottom-Up Cost Estimating considered valuable?

a) It simplifies the budgeting process b) It promotes faster project completion c) It provides a detailed and accurate cost analysis d) It eliminates the need for top-down estimates

Exercise: Applying Bottom-Up Cost Estimating

Scenario:

You are a cost estimator working on a project to construct a new offshore drilling platform. Your team has identified the following major tasks:

1. Platform Design & Engineering: Requires specialized engineering expertise and software.
2. Material Procurement: Purchasing specialized steel, concrete, and equipment.
3. Construction & Installation: Assembling and installing the platform offshore.
4. Testing & Commissioning: Ensuring the platform meets safety and operational standards.

Task:

Using the information provided, create a simple Work Breakdown Structure (WBS) for this project, breaking down each major task into at least 2 sub-tasks. Then, describe how you would estimate the cost of each sub-task using Bottom-Up Cost Estimating.

Techniques

Diving Deep: Bottom-Up Cost Estimating in Oil & Gas

This document expands on the introduction to Bottom-Up Cost Estimating in the Oil & Gas industry, providing detailed chapters on key aspects.

Chapter 1: Techniques

Bottom-up cost estimating relies on several key techniques to ensure accuracy and completeness. These techniques are often interwoven and used in conjunction with one another:

• Detailed Work Breakdown Structure (WBS): The foundation of bottom-up estimating is a comprehensive WBS. This hierarchical structure decomposes the project into progressively smaller, manageable work packages. Effective WBS development involves clearly defining deliverables, identifying dependencies between tasks, and assigning responsible parties. Techniques like decomposition, numbering schemes (e.g., Work Breakdown Structure Dictionary), and the use of appropriate software are crucial for creating a robust WBS.

• Activity Sequencing and Duration Estimation: Once the WBS is established, activities within each work package must be sequenced logically (e.g., using precedence diagramming method or activity-on-node diagrams). Duration estimation for each activity relies on various techniques including expert judgment, parametric estimating (using historical data and statistical models), three-point estimating (optimistic, most likely, pessimistic), and analogy estimating (comparing to similar projects).

• Resource Identification and Costing: This involves identifying all resources needed for each activity (labor, materials, equipment, subcontractors). Costing these resources requires thorough market research, considering labor rates, material prices, equipment rental costs, and potential escalation factors. Detailed cost breakdowns for each resource should be included.

• Contingency Planning: A crucial element is incorporating contingency reserves to account for unforeseen risks and uncertainties. These reserves can be established at various levels (project, work package, or activity) based on a thorough risk assessment. The quantification of these reserves involves understanding the probability and impact of potential risks.

• Cost Aggregation and Roll-Up: Finally, the individual cost estimates for each activity are rolled up through the WBS to reach a total project cost. This process requires careful attention to detail to avoid errors and inconsistencies. Software tools significantly aid in this aggregation and reporting.

Chapter 2: Models

While bottom-up estimating emphasizes detailed cost analysis at the task level, several models can enhance the process and provide a structured approach:

• Parametric Models: These models use historical data and statistical relationships to estimate costs based on project characteristics (e.g., size, complexity, location). They provide a valuable initial estimate that can then be refined with bottom-up techniques.

• Analogous Estimating: This involves comparing the project to similar past projects to estimate costs. It's useful as a preliminary estimate but needs refinement with detailed bottom-up analysis for accuracy.

• Engineering Cost Estimating Models: These models are specifically developed for engineering projects and use detailed engineering data to estimate the cost of different components and systems. This is particularly useful in oil & gas projects with complex technical specifications.

• Cost-Capacity Models: In cases where scaling is involved (e.g., expanding an existing facility), these models utilize relationships between project capacity and cost to estimate the costs of different capacity levels.

• Earned Value Management (EVM): While not strictly a cost estimating model, EVM is a project management technique that integrates cost estimates with project schedule and performance. It's useful for monitoring and controlling costs during project execution, providing valuable feedback for refining future estimates.

Chapter 3: Software

Several software tools significantly enhance the bottom-up estimating process:

• Project Management Software (e.g., Microsoft Project, Primavera P6): These tools facilitate WBS creation, activity scheduling, resource allocation, and cost tracking. They often have built-in features for cost aggregation and reporting.

• Estimating Software (e.g., CostOS, AspenTech PIMS): Specialized software designed for detailed cost estimating, often including features for parametric modeling, database management, and cost escalation analysis. These tools are particularly relevant in complex projects requiring precise cost calculations.

• Spreadsheet Software (e.g., Microsoft Excel, Google Sheets): While less sophisticated than specialized tools, spreadsheets remain a widely used tool for organizing cost data, performing calculations, and generating reports.

• Data Analysis Software (e.g., R, Python): Statistical analysis packages are helpful for analyzing historical cost data, identifying trends, and developing parametric models.

The choice of software depends on project size, complexity, budget, and available resources. Integration between different software tools is crucial for seamless data flow and efficient project management.

Chapter 4: Best Practices

Effective bottom-up cost estimating necessitates following best practices:

• Establish a Clear Scope: Thorough definition of the project scope is critical to avoid omissions and ensure all work packages are accounted for.

• Use a Standardized Approach: Consistent methods for activity definition, duration estimation, and resource costing should be applied throughout the project.

• Engage Experienced Estimators: Accurate cost estimates require expertise and experience in understanding cost drivers within the oil & gas industry.

• Regular Data Updates: Market prices, labor rates, and material costs change. Regularly updating the cost database is crucial for maintaining accuracy.

• Risk Assessment and Contingency Planning: Proactive risk identification and quantification is essential for building in appropriate contingency reserves.

• Peer Review and Quality Control: Independent review of cost estimates helps identify errors and inconsistencies, ensuring the accuracy and reliability of the final estimate.

• Document Everything: Maintaining thorough documentation of assumptions, data sources, and calculation methods is critical for transparency and auditability.

Chapter 5: Case Studies

Several case studies demonstrate the application of bottom-up cost estimating in oil & gas projects:

(This section would require specific project examples, possibly anonymized for confidentiality. Each case study should detail the project's characteristics, the bottom-up estimating approach used, the results achieved, and any lessons learned. Examples could include offshore platform construction, pipeline installation, refinery upgrades, or exploration drilling projects. The case studies should highlight both successes and challenges encountered.) For example, one case study might detail the successful use of a specific software package to estimate the cost of a pipeline project, comparing the bottom-up estimate to the actual cost incurred and analyzing any variances. Another case study could illustrate the challenges of estimating costs in a remote location with fluctuating labor rates and material availability. A third case study might compare the accuracy of a bottom-up estimate against a top-down estimate for a similar project, demonstrating the benefits of the detailed bottom-up approach.