Engineering Cost Estimate

Test Your Knowledge

Quiz: Engineering Cost Estimate (ECE)

Instructions: Choose the best answer for each question.

1. What is the primary purpose of an Engineering Cost Estimate (ECE)?

a) To provide a rough guess of project costs. b) To estimate the potential profits of a project. c) To provide a detailed and accurate assessment of project costs. d) To determine the feasibility of a project based on available resources.

2. Which of the following is NOT a common cost estimation technique used in an ECE?

a) Parametric Estimation b) Unit Cost Estimation c) Top-Down Estimation d) Detailed Engineering Estimate

3. What does the "bottom-up" approach in an ECE refer to?

a) Starting with a broad overview of project costs and then breaking it down. b) Starting with individual tasks and components and then aggregating them to get the total cost. c) Using historical data to estimate future costs. d) Including a contingency buffer for unforeseen expenses.

4. What is the significance of including a "Contingency" in an ECE?

a) To ensure profit margins are met. b) To account for potential cost overruns or unforeseen expenses. c) To provide a buffer for negotiating with contractors. d) To track the actual cost of project implementation.

5. Why is an ECE considered a vital tool in the oil and gas industry?

a) It allows companies to estimate potential profits. b) It helps secure funding for projects from investors. c) It ensures the financial viability and success of projects. d) It enables informed decisions regarding resource allocation and project management.

Exercise:

Scenario: You are working on an oil and gas project to build a new drilling platform in the North Sea. Your task is to create a simplified ECE for the project.

Instructions:

1. Identify the major components of the project (e.g., platform construction, equipment installation, transportation, etc.).
2. Break down each component into smaller tasks (e.g., fabrication, assembly, transportation, installation).
3. Estimate the cost of each task using a combination of parametric estimation (using historical data) and unit cost estimation (based on cost per unit).
4. Add a contingency buffer for each component to account for unforeseen expenses.
5. Calculate the total cost of the project, including contingency.

Note: This is a simplified exercise. In a real-world scenario, the ECE would be much more detailed and would involve collaboration with various stakeholders.

Techniques

Chapter 1: Techniques for Engineering Cost Estimation

This chapter delves into the various techniques used to estimate costs in engineering projects within the oil & gas sector. Each method has its strengths and weaknesses, and the choice depends on factors such as project complexity, available data, and the desired accuracy level.

1.1 Parametric Estimation

• Definition: This method leverages historical data and established relationships between project variables (like size, capacity, and location) to estimate costs.
• Strengths: Quick, cost-effective, and suitable for early-stage planning when detailed information is limited.
• Weaknesses: Relies on accurate historical data and may not account for unique project features.
• Example: Estimating the cost of a new pipeline based on the length, diameter, and terrain, using data from similar pipelines built in the past.

1.2 Unit Cost Estimation

• Definition: This method estimates costs based on the cost per unit of work, such as cost per ton of steel, per meter of pipeline, or per hour of labor.
• Strengths: Relatively simple, readily applicable for standardized components and processes.
• Weaknesses: Can be inaccurate for projects with complex or customized elements.
• Example: Estimating the cost of concrete foundation based on the cost per cubic meter of concrete.

1.3 Detailed Engineering Estimate

• Definition: This method uses detailed drawings, specifications, and vendor quotations for a highly accurate cost assessment. It involves breaking down the project into its smallest components and estimating the cost of each element.
• Strengths: Provides the most accurate cost estimate, ideal for complex projects where precision is critical.
• Weaknesses: Time-consuming and resource-intensive, requiring a high level of detail and engineering expertise.
• Example: Calculating the cost of an offshore platform by estimating the cost of each component, including steel fabrication, welding, transportation, and installation.

1.4 Other Techniques

• Analogous Estimation: Uses historical data from similar projects to estimate costs.
• Bottom-Up Estimation: Starts with the lowest level of project detail and aggregates costs up to the total project cost.
• Expert Judgement: Relies on the experience and knowledge of industry experts to estimate costs.

1.5 Importance of Choosing the Right Technique

Selecting the appropriate cost estimation technique is crucial for achieving accurate project budgets. Each method has its own advantages and disadvantages, and the choice should be made based on the project's specific characteristics and the desired level of accuracy.

Chapter 2: Models for Engineering Cost Estimation

This chapter explores common cost estimation models used in the oil & gas industry. These models provide a framework for organizing and calculating costs, facilitating accurate and consistent estimates.

2.1 Cost Breakdown Structure (CBS)

• Definition: A hierarchical structure that breaks down the project into its components, subcomponents, and work packages.
• Purpose: Provides a systematic framework for identifying and organizing all project costs.
• Example: A CBS for a new oil well would include categories for drilling, wellhead equipment, completion, production facilities, etc.

2.2 Cost Estimation Software

• Definition: Computer programs designed to assist in cost estimation, automating calculations, data management, and report generation.
• Benefits: Improved accuracy, efficiency, and consistency in cost estimates.
• Example: Software tools like Primavera P6, CostX, and AccuCost are used in the oil & gas sector for cost estimation and project management.

2.3 Cost Drivers and Sensitivity Analysis

• Definition: Identifying key factors that influence project costs and analyzing their impact on the overall estimate.
• Purpose: Understanding how changes in cost drivers (like labor rates, material prices, or regulatory requirements) affect the project budget.
• Example: Conducting sensitivity analysis to determine the impact of a 10% increase in steel prices on the estimated cost of a new pipeline.

2.4 Contingency Planning

• Definition: Allocating a portion of the budget to account for unforeseen costs or risks.
• Purpose: Protecting the project from unexpected cost overruns.
• Example: Adding a 10% contingency to the budget to cover potential changes in design, delays, or material shortages.

2.5 Risk Assessment

• Definition: Identifying potential risks that could impact project costs and assessing their likelihood and potential impact.
• Purpose: Developing strategies to mitigate or manage these risks.
• Example: Identifying the risk of a major equipment failure during construction and developing a backup plan to minimize delays and cost overruns.

Chapter 3: Software for Engineering Cost Estimation

This chapter explores the diverse software options available for cost estimation in the oil & gas industry. These tools streamline the estimation process, enhance accuracy, and facilitate collaboration among stakeholders.

3.1 Types of Software

• Stand-alone Cost Estimation Software: Designed specifically for cost estimation, offering features for data management, calculations, and report generation.
• Integrated Project Management Software: Combines project management functions with cost estimation capabilities, enabling comprehensive project planning and control.
• Cloud-based Cost Estimation Software: Hosted on cloud platforms, offering flexible access, data storage, and collaboration tools.

3.2 Features of Cost Estimation Software

• Data Management: Storing and organizing project data, including historical cost data, vendor quotes, and project specifications.
• Calculation Engines: Performing automated calculations for cost estimation, based on user-defined inputs and formulas.
• Reporting and Visualization: Generating comprehensive reports, charts, and graphs to present cost estimates and analyze cost drivers.
• Collaboration Tools: Facilitating communication and collaboration among stakeholders, allowing for real-time updates and sharing of cost estimates.
• Integration with Other Tools: Interfacing with other software systems, such as CAD software, project management tools, and accounting software.

3.3 Examples of Software used in Oil & Gas

• Primavera P6: A leading project management software with robust cost estimation features.
• CostX: A specialized cost estimation software designed for construction projects.
• AccuCost: A cloud-based cost estimation software offering flexible access and collaborative features.
• OpenBOM: A cloud-based platform for managing bill of materials and cost estimation, integrating with various engineering and design tools.

3.4 Importance of Choosing the Right Software

Selecting the right software for cost estimation depends on the project's size and complexity, the company's IT infrastructure, and the specific features required. It's essential to consider factors such as ease of use, data management capabilities, reporting features, and integration with other tools.

Chapter 4: Best Practices for Engineering Cost Estimation

This chapter outlines best practices for developing accurate, reliable, and defensible cost estimates in the oil & gas sector. Adhering to these principles ensures project success by facilitating informed decision-making and minimizing the risk of cost overruns.

4.1 Early Engagement of Cost Estimators

• Rationale: Involving cost estimators early in the project lifecycle allows them to provide valuable input during design and planning, influencing cost-effective decisions and mitigating risks.
• Benefits: Reduced rework, improved accuracy of estimates, and better control over project costs.

4.2 Comprehensive Scope Definition

• Rationale: A clear and comprehensive definition of the project scope is crucial for accurate cost estimation.
• Benefits: Reduces ambiguity, ensures all project elements are accounted for, and minimizes the risk of scope creep.

4.3 Detailed Cost Breakdown

• Rationale: Breaking down the project into its smallest components provides a granular level of detail for estimating costs.
• Benefits: Improved accuracy, enhanced understanding of cost drivers, and facilitates cost control.

4.4 Use of Industry Standards and Best Practices

• Rationale: Following industry standards and best practices for cost estimation ensures consistency and reliability.
• Benefits: Reduced bias, improved accuracy, and increased confidence in estimates.

4.5 Data Validation and Quality Control

• Rationale: Ensuring the accuracy and reliability of data used in cost estimation is essential.
• Benefits: Reduced errors, improved consistency, and increased confidence in estimates.

4.6 Documentation and Audit Trails

• Rationale: Maintaining a detailed record of all assumptions, data sources, and calculations provides transparency and facilitates audits.
• Benefits: Increased accountability, improved communication, and facilitated learning from past projects.

4.7 Regular Review and Updates

• Rationale: Cost estimates should be regularly reviewed and updated throughout the project lifecycle to reflect changes in scope, design, or market conditions.
• Benefits: Ensures estimates remain accurate and relevant, facilitates informed decision-making, and helps mitigate cost overruns.

Chapter 5: Case Studies of Engineering Cost Estimates

This chapter presents real-world examples of how engineering cost estimates have been used in the oil & gas industry, demonstrating the importance of this process in achieving project success.

5.1 Case Study 1: Greenfield Oil & Gas Development

• Project: Development of a new oil and gas field, including exploration, drilling, production facilities, and pipeline infrastructure.
• Challenge: Estimating the cost of a complex, multi-phase project with significant uncertainties.
• Solution: A detailed engineering cost estimate was developed, incorporating historical data, vendor quotes, and risk analysis.
• Outcome: The accurate cost estimate enabled the company to secure financing, plan the project effectively, and manage costs throughout the lifecycle.

5.2 Case Study 2: Offshore Platform Construction

• Project: Construction of an offshore platform for oil and gas production.
• Challenge: Estimating the cost of a highly specialized project with unique engineering challenges and weather-dependent operations.
• Solution: A parametric cost estimation model was used to estimate the cost of similar platforms, adjusted for project-specific variables.
• Outcome: The cost estimate provided a reliable baseline for project planning and budgeting, mitigating the risk of cost overruns.

5.3 Case Study 3: Pipeline Rehabilitation

• Project: Rehabilitation of an existing pipeline to extend its service life and improve safety.
• Challenge: Estimating the cost of a complex rehabilitation project with limited historical data.
• Solution: A combination of detailed engineering estimates and expert judgement was used to develop a cost estimate.
• Outcome: The cost estimate facilitated informed decision-making regarding the scope and timing of the rehabilitation project.

5.4 Case Study 4: Downstream Refinery Upgrade

• Project: Upgrading an existing refinery to meet new environmental regulations.
• Challenge: Estimating the cost of a complex retrofit project with significant operational constraints.
• Solution: A detailed engineering cost estimate was developed, incorporating vendor quotes, labor rates, and contingency planning.
• Outcome: The cost estimate helped the company secure funding and plan the upgrade effectively, minimizing disruptions to refinery operations.

Conclusion

Engineering cost estimates are a critical component of project success in the oil & gas industry. By employing sound techniques, utilizing robust models, and adhering to best practices, companies can develop accurate, reliable, and defensible cost estimates that facilitate informed decision-making, control project expenses, and mitigate risks. These case studies demonstrate the real-world impact of effective cost estimation in achieving project success.