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ABSTRACT: The subject of estimate accuracy is always guaranteed to be a topic of debate among cost engineering professionals. The phrase itself can be considered an oxymoron, which means that it is a conjunction of contradictory terms. From its definition to its application in the control of projects, ten different people will often have ten different views on the subject. This article will present the author's viewpoint on the topic. This article is reprinted from the 2006 AACE International Transactions, where it was listed as manuscript EST.01.
KEY WORDS: Contingency, cost estimating, profitability, and risk analysis
What is a Cost Estimate?
Cost estimating is the predictive process used to quantify, cost, and price the resources required by the scope of an investment option, activity, or project. The output of the estimating process, the cost estimate, is typically used to establish a project budget, but may also be used for other purposes, such as the following.
* Determining the economic feasibility of a project.
* Evaluating between project alternatives. And,
* Providing a basis for project cost and schedule control.
AACE International defines a cost estimate as, "an evaluation of the elements of a project or effort as defined by an agreed-upon scope [I]." While this definition does describe a cost estimate, I believe it fails to fully portray the uncertainty involved with estimates. I favor describing a cost estimate as, "a prediction of the probable costs of a project, of a given and documented scope, to be completed at a defined location and point of time in the future."
An estimate is a prediction of the expected final cost of a proposed project (for a given scope of work). By its nature, an estimate involves assumptions and uncertainties, and is therefore associated with some level of error. We can correlate this level of error and uncertainty to probabilities of over-running or underrunning the predicted cost. So given this probabilistic nature of an estimate, it should really not be regarded as a single point number or cost. Instead, an estimate actually reflects a range of potential cost outcomes, with each value within this range associated with a probability of occurrence.
Now typically we identify a single cost value (within the range of potential costs) as...