The Industrial risk of Cost Estimation in the Bidding Process

Project cost estimation in the bidding process is a critical concern for the competitiveness and profitability of an engineering and contracting company. Estimates which diverge as little as possible from actual costs have to be made on the basis of relatively limited information. Of the macro-items contributing to the overall cost of a plant project, those
linked to engineering activities have been growing continuously in percentage terms for a number of years and have thus become the object of considerable interest. Moreover, since these items are difficult to standardize, estimation is particularly difficult. A method able to produce reliable estimates for these activities could certainly be usefully transferred to other project stages. The methodology proposed to formulate a bid estimate for a HAZOP study envisages the joint use of three tools to produce more accurate estimates and improve the quality of decisions through explicit assessment of the risk of over-estimating (or under-estimating) the cost.

First, an analytical estimation model based on improved structuring of available information provides more accurate estimates and facilitates the use of IT applications. Second, company knowledge gained in previous projects is structured and maintained in order to ensure continuous improvement in estimation. This information can be used to improve over time the understanding of the determinant values in the model itself, so obtaining increasingly accurate estimates and probability distributions which take account of historical errors. Finally, a simulation technique provides the probability distribution of the overall cost and thus the confidence interval of the estimates.

Project cost estimation in the bidding process is a critical concern for the competitiveness and profitability of an engineering and contracting company as it involves considerable risk. Indeed, with only the limited information available in the tender documents and the partial results of the basic engineering, an estimate must be drawn up which varies as little as possible from the effectively sustained costs. The reason for this is that the industrial goods market is becoming increasingly competitive and the typical contract is now the lump-sum, in which the contractor agrees to supply at a pre-determined price. Since the starting point for this price is the estimate prepared during the bidding, it is evident that this cost estimate is crucial to the competitiveness and profitability of engineering and contracting companies.

That’s why project cost estimation is always a critical process on the part of the engineers. The estimator must have to take great care in the estimating process to deliver an accurate calculation.