Friday, October 30, 2009
Asril's Blog Wk#4
PT Inco is a mining and processing plant company producing an average 160mlbs nickel matte per year with annual capital spending average $200-250m in order to sustain and to financing the growth, environmental, license and other mandatory projects for Contract of Work undertaking.
Historically, annual actual capital spending is far away from the capital plan either under or over spending and so many factors identified as the root cause of these variances but one of the major contributions is inaccuracy of capital cost estimate produced through the project life cycle. Subsequently, its lead less credibility of the organization from the owner to manage the capital projects with regard to the annual cost spending and managing the cash flow. I’m pretty sure that the owner is right to complaint such situation. From an owner perspective, if the cost estimate is not accurate, the financial return from the capital investment may not be realized, and compounding this problem is the fact that the other deserving projects may not have been funded.
The current process and methodology of preparing the capital cost estimate is way out the process that I have learned in the ACCE course. The cost estimate methodology still not well established in which process and classification to determine the accuracy of the cost estimate. Cost estimate is generated mostly based on the historical project information, individual skills who accountable to provide the cost estimate on each cycle and combination of assumption, guessing and prediction. There is no system and procedure in place to guide the organization on how to produce an accurate cost estimate on each project management life cycle.
Looking at the life span management1, it’s clearly defined the step of project identification, assessment, and selection up to define the project. Each process has a decision making point during the project life cycle and typically requires cost estimates of increasing accuracy. Estimating is thus an iterative process that is applied in each phase of the project life cycle as the project scope is defined, modified and refined. As the level of the scope definition increases, the estimating methods used becomes more definitive and produce estimate with increasingly narrow probabilistic cost distributions2.
Sorowako, October 30th, 2009
Muhammad Asril
1 AACE Certification Prep Course Day 1, Paul D. Giammalvo, Page 37 0f 110
2 Skills & Knowledge of Cost Engineering, Chapter 9 Page 9.1
3 AACE International, Total Cost Management Framework Figure 7.3.1 Page 140
Historically, annual actual capital spending is far away from the capital plan either under or over spending and so many factors identified as the root cause of these variances but one of the major contributions is inaccuracy of capital cost estimate produced through the project life cycle. Subsequently, its lead less credibility of the organization from the owner to manage the capital projects with regard to the annual cost spending and managing the cash flow. I’m pretty sure that the owner is right to complaint such situation. From an owner perspective, if the cost estimate is not accurate, the financial return from the capital investment may not be realized, and compounding this problem is the fact that the other deserving projects may not have been funded.
The current process and methodology of preparing the capital cost estimate is way out the process that I have learned in the ACCE course. The cost estimate methodology still not well established in which process and classification to determine the accuracy of the cost estimate. Cost estimate is generated mostly based on the historical project information, individual skills who accountable to provide the cost estimate on each cycle and combination of assumption, guessing and prediction. There is no system and procedure in place to guide the organization on how to produce an accurate cost estimate on each project management life cycle.
Looking at the life span management1, it’s clearly defined the step of project identification, assessment, and selection up to define the project. Each process has a decision making point during the project life cycle and typically requires cost estimates of increasing accuracy. Estimating is thus an iterative process that is applied in each phase of the project life cycle as the project scope is defined, modified and refined. As the level of the scope definition increases, the estimating methods used becomes more definitive and produce estimate with increasingly narrow probabilistic cost distributions2.
AACE has classified the estimate class according to the level of project definition. Skills & Knowledge, 5th edition, Page 9.3, Table 9.2 clearly define in which process the level of accuracy on each step of the project life cycle and who supposed to be held accountable to prepare it. This process is typically not implemented in the current estimating process. Most of the time the estimate is generated directly by the owner without any feasibility process in between and for sure the capital estimate will then be only a mediocre estimate.
In order to make an improvement then the cost estimate process map has to be established. Process Map3 for Cost Estimating Figure 7.3.1 give a clear direction the steps in the cost estimating and budgeting process. Cost estimate involves the application of techniques that convert quantified technical and programmatic information about an asset or project into finance and resource information.
The following sections briefly describe the steps in the cost estimating & budgeting process:
1. Plan for cost estimating and budgeting
2. Quantity scope content
3. Cost of scope content
4. Price and cost estimate
5. Simulate and optimize the costs
6. Budget costs
7. Analyze cash flow
8. Bidding the cost estimate
9. Review and document the estimate
10. Develop and maintain methods and tools
It’s not an easy to have an accurate cost estimate when we looking at the process and expertise and experiences might need. However, it’s not difficult as well if all of the process established and consistently followed. The accurate cost estimate will be achieved overtime as long as we committed to make a CHANCE and the room now is available to MAKE IT HAPPEN.
The following sections briefly describe the steps in the cost estimating & budgeting process:
1. Plan for cost estimating and budgeting
2. Quantity scope content
3. Cost of scope content
4. Price and cost estimate
5. Simulate and optimize the costs
6. Budget costs
7. Analyze cash flow
8. Bidding the cost estimate
9. Review and document the estimate
10. Develop and maintain methods and tools
It’s not an easy to have an accurate cost estimate when we looking at the process and expertise and experiences might need. However, it’s not difficult as well if all of the process established and consistently followed. The accurate cost estimate will be achieved overtime as long as we committed to make a CHANCE and the room now is available to MAKE IT HAPPEN.
Sorowako, October 30th, 2009
Muhammad Asril
1 AACE Certification Prep Course Day 1, Paul D. Giammalvo, Page 37 0f 110
2 Skills & Knowledge of Cost Engineering, Chapter 9 Page 9.1
3 AACE International, Total Cost Management Framework Figure 7.3.1 Page 140
# posted by Asril Muhammad @ 10/30/2009 04:13:00 PM 
Comments:
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Good posting, Pak Asril!! Very impressive the way you are linking the course materials to your day to day working life.
I don't remember if you have selected a topic for your paper yet, but what you described above would make an excellent paper. Simply compare "best practices" as defined by AACE against what you are doing and use your paper as a recommendation to management to implement changes.
To help you get started, you may want to download papers written by Steen Lichtenberg http://www.lichtenberg.org/ I think if you were to feature his approach in your analysis, your paper would be well received and I am confident it would make a huge difference in the accuracy of your estimates.
Best of luck to you!!
BR,
Dr. PDG, back in Jakarta
I don't remember if you have selected a topic for your paper yet, but what you described above would make an excellent paper. Simply compare "best practices" as defined by AACE against what you are doing and use your paper as a recommendation to management to implement changes.
To help you get started, you may want to download papers written by Steen Lichtenberg http://www.lichtenberg.org/ I think if you were to feature his approach in your analysis, your paper would be well received and I am confident it would make a huge difference in the accuracy of your estimates.
Best of luck to you!!
BR,
Dr. PDG, back in Jakarta
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