Cost Estimating
Cost estimating fundamentals
An estimate is a structured prediction of cost based on defined scope. Begin with the work breakdown structure (WBS), then choose an estimating method: analogous, parametric, bottom-up, or detailed. Estimate class reflects maturity of scope definition: lower class numbers (Class 1) are more definitive, while higher numbers (Class 5) are order-of-magnitude and carry wider accuracy ranges. Document assumptions, exclusions, productivity, labor rates, quantities, escalation, and indirect costs in the basis of estimate.
Separate direct costs from indirect costs and contingency from escalation. Contingency covers known-unknown risk within approved scope; escalation reflects anticipated price changes over time. A common trap is treating contingency as a padding percentage applied uniformly without risk analysis. Another is confusing estimate accuracy with estimate precision: a precise number can still be inaccurate.
Worked example
Use the capacity-factor rule of thumb for early parametric estimates: Cost₂ = Cost₁ × (Capacity₂ / Capacity₁)^n, where n is often about 0.6 for similar process facilities. If a 100-unit facility cost $1.0 million, a 200-unit facility is roughly $1.0M × 2^0.6 ≈ $1.52M. Treat this as a screening estimate, not a definitive bid. Always state the exponent, capacity basis, and scope adjustments.