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Review of EPC Projects Cost Estimation and Minimum Error Technique

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 International Journal of
Science and Engineering Investigations vol. 2, issue 12, January 2013
ISSN: 2251-8843

Review of EPC Projects Cost Estimation and Minimum

Error Technique Introduction
Kamran Jamali Firoozabadi1, Saeed Rouhani2, Nazanin Bagheri3
123
Industrial Engineering Department , Islamic Azad University of firouzkoh, Tehran , Iran
([email protected], [email protected], [email protected])

Abstract— One of the most influential factors of why a for stakeholders, and when they are not met, these people
project becomes successful is estimating the cost. Though become dissatisfied.
there are bidding and auctions held in my country, Iran, based
on the cost estimation, they end costing an arm and a leg
because of inappropriate cost estimations. To avoid cost II. REVIEW OF THE PREVIOUSLY CONDUCTED
overrun, there should be a cost estimation approach to RESEARCHES INTO THIS FIELDS
minimize the risk, errors associated with techniques and to
provide the most appropriate usages to be applied in all EPC
projects. Here, the techniques measuring these standards and A. The applied approaches for practicing the cost estimation
goals are applied and studied based on the scope of PMBOK Though there were some interests in measuring the cost prior
and PRINCE 2 standards. Analogous, bottom-up and to the project before, our main focus is on today, especially
parametric approaches were used to stochastic and after 2000, when two researchers in England, Fitzgerald and
deterministic modeling. Stochastic models were simulated Akintoye, named the main reasons of being careless in cost
with Monte Carlo process. The results helped to comparisons estimations[2].Wallace and Jogensen proposed an algorithm
of three approaches with utilizing the qualitative and for simulating the overall cost (2000)[3]. Wang proposed a
quantitative criteria and MCDM and finally best cost model to identify the rational sale of a project using the SIM-
estimation approach is selected. UTILITY method for simulating cost estimation [4].M.
Elkjaer also proposed a stochastic budget simulation approach
[5]. In the U.S., Flybjerg and others understood the costs in
transportation project are estimated considerably low because
Keywords- Project Management, Cost Estimation, MCDM, of political and psychological aspects (2002)[6]. Nassar and
others used Statistical process control (SPC) (2005)[7]. In
Minimum Error Approach
Australia, Pasco and Aibinu found the manufacturing is
mainly influenced by project size in Australia (2008)[8]. Later
in 2010, Hemanta Kumar Doloi devised a meaningful model
I. INTRODUCTION SSM to create a standard for comparing the realistic situations
Cost overrun is a chronic problem across most projects. almost (2010)[9].In 2011, Xiangbai Gu in 'Hierarchy probability cost
one third of sampled projects experienced cost overruns of analysis model incorporate MAIMS principle for EPC'
150–200%, with an average overrun of 189% of the original introduced HICP model, regarding to MAIMS principle[10].
cost estimate[i] . This ratio has been 178% for corporations Meanwhile, since the deterministic value method does not
and large companies, 182% for medium-sized companies and compute the risks in a project efficiently, analyzing the risks
214% for small companies and firms. Unfortunately, there is has gained a remarkable amount of interest. In 2011, Jui-
no sufficient data or time and appropriate resources are not Sheng Chou applied Monte Carlo simulation to estimate the
available to estimate the costs. And more surprisingly, when costs[11].
the cost estimation is correctly measured, the CEO or American National Standards Institute(ANSI), as an
managers may order the cost to be reduced without a decrease international and remarkable standard, propose impeccable
in the work scope. And the consequences associated with cost hints to calculate the cost during running a project, which
overrun are often paid by the final consumers. deals with the project like a live entity.
The inappropriate computation of cost and time results in false
implementation of plans based on irrational estimations;
therefore, these plans are unrealistic and impractical. In B. Practice standard for project estimating
addition, such wrong estimations raise unrealistic expectations Principles underlying the life cycle stages of project
estimating include prepare to estimate, create estimates,

1
manage estimates and improving estimating process[12]. E. Mean Squared Error, the least flawed approach[21]
Baseline is an approved plan for a project, plus or minus MSE is a risk function and measures the mean square of
approved changes. It is compared to the actual performance to errors. The mean squared error (MSE) of an estimator is one
determine if performance is within acceptable variance of many ways to quantify the difference between values
thresholds[13]. implied by an estimator and the true values of the quantity
The stages of project estimating can be seen in the context of being estimated. MSE is the second moment of error and both
the project life cycle structure. Figure 1 shows that there is estimated variance and diagonal variance surround it. The
some overlap of project estimating stages within the project lowest square root or root-mean-square deviation is the
life cycle[14]. The process considered in this research typically used amount for measuring the defined deviations
specified separately by blue color. above.
MSE and RMSE for the estimator which estimated the
parameter are defined as follow:
Starting Carryin Closing = E [( − ) ]
Organizin
the g and g out the the

= = E [( − ) ]
Project Preparing Work Project

Prepare to Estimate
III. EXPLAINING THE STUDIED PROJECT AND SIMULATION
Create Estimates ANALYSIS
EPC project of an electrical substation in different voltages
Manage Estimates of 400KV, 360KV, 230KV and 132KV and extension of
66KV is created. Electrical substations are created to
Improve Estimating Process transform the high voltage flowing through the lines into low
voltage used in the industries. The finally transformed voltage
cannot be used for domestic consumers and another
Figure 1.Relationship of the Estimating Life Cycle[15] transformation is required to make it useable for them. These
substations are divided into outdoors and indoors.
While the estimating life cycle stages are the same for all Here in this paper, 20 electrical substations were studied
types of projects, there are some differences in estimation under the same circumstances. By 'under the same
metrics and models that are employed across industries. These circumstances', we mean the designs, equipment supplies,
variations are primarily related to the nature of the project's buildings and installing the equipment were the same with the
product[16]. same time intervals, resulting in planning and doing the
projects with the same costs. In the implementation phase, the
actual costs of doing a project differs because of the different
C. PRINCE2 INTRODUCTION reasons and situations which are not under control of the
PRINCE2 focuses on the products to be produced by a project, organization. Here, we applied the mean distribution of the
not the processes to produce them[17]. actual costs in measuring the MSE.
PRINCE2 gives a pragmatic tool through which one can put
A. The primary data of the project for preparing the
the flesh onto the introduction of PRINCE2. The perspectives
PRINCE2 deal with are the PRINCE2 process model, the estimation
PRINCE2 components, the PRINCE2 principles and the At first, the primary data of the project should be obtained
PRINCE2 documents[18].PRINCE2 offers only a few to use the aforementioned techniques. The entries for
techniques. You may already gave a technique that is practicing the estimations win this project were gathered from
satisfactorily covering that need. The exception is the product- the experts and project managers. It should firmly be noted
based planning technique[19]. Because of this attitude of that all the following data, assumptions and stated points were
PRINCE2, the techniques introduced in it are not considered entered into the software the same, because the primary data
in this paper. should be the same for all points to compare the data (because
of having more homogeneous and valid outcomes of
comparing different techniques). Moreover, the WBS level
D. Getting to know Pertmaster[20] was chosen to highlight the limits of estimation, regarding to
Pertmaster allows definition of both a riskless program and Xiangbai Gu research in 2011.
a program with different aspects of risks. Moreover, it can be 1. The scheduling of activities were considered as same
applied different tools, like Monte Carlo simulation. Using the as the similarly conducted project.
project risk analysis allows the possibility of accomplishing a 2. the links between activities considering predecessors
project in a certain time and with a certain budget to be and successors are demonstrated via FS (Finish to
measured. A program only shows one plausible way for Start) ،SS(Start to Start ) ،FF (Finish to Finish).Then,
accomplishing the project without risk analysis; however, press short F 9 key to create the primary schedule
using the risk analysis allows us to evaluate different outputs structure.
and ways of accomplishing a project. It should also be noted 3. The required sources of the projects in the
the most practical distribution for simulating time and cost of engineering sector (E) include the expert work force
an activity is the triangle distribution. and the designing work force were predicted similar

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 to the previously conducted projects. In the data is required to use different approaches, which may
procurement sector (P), expert human resource and not be available in this phase, clarifying the estimation
the budget resource were predicted. In the approach limits the approaches which can be chosen.
construction sector (C), since this sector is done Here, we tried to use all the mentioned approaches in
outsource, the mateDollars and machines were PRINCE2 standard and Practice standard for project
considered as limitless. estimating in PMI, elaborated sufficiently in the theatrical
4. The risks in this project was considered as principles. And among them, the one which shows the most
follow: appropriate and accurate results for estimation was chosen and
• the time risk for all activities was considered. we hope it will be applied in the future estimations.
• the resource risk for the activities in the procurement
and construction sectors was considered, because B. Practicing estimation approach
there is need to use a resource except the expert
human resource. Therefore, this risk is not considered In this process, the following steps should be done relying on
for the engineering sector, as there are sufficient accessing to the previously identified entries
numbers of human resource.NB. In this project, a • Define the estimation threshold for the project.
resource as the cost was assigned to the activities and
• Consider the points which should be updated during
the cost risk was specified to this resource; meaning,
accomplishing the project.
the cost risk was fully considered.
• Plan the contingency reserves.
• The contingencies relevant to the physical situation
and local conditions of the project are influential;
Based on the following proposed theoretical principles,
thus, a coefficient in the costs as contingency reserve
different models for practicing the estimation in different
was considered.
projects were defined. Some models are only effective in one
5. In this project, it was assumed that the resource project, as any project cannot be modeled via them. Some
calendar was definite and limitless, and all the models are not general enough to cover all the considered
resources were available due to the working points in the cost estimation. Some models are merely used for
calendar. the definite estimation practice, while others are not accurate
6. It was assumed that there are all the quality enough to be applied in indefinite estimation practice. In this
documents, like ISO1000, ISO9001and HSE, and paper, we tried that the chosen model to be a general approach
organization properties, such as processes, as much as possible; meaning, it can be modeled in all
instructions and procedures which have to be done so projects. Moreover, the chosen approach was tried to be
that the organization process becomes assuring, accurate and in the estimation management process can be
regarding to this organization work. controlled after running the project. Hence, the three common
7. The correlation between the activities (risks) can be approaches for estimating including all standards were used,
an amount from -100% to +100%. When the after we had studied and evaluated different models. They are
prolonging of one activity affects the other one and Analogous, bottom-up and parametric cost estimating
makes the activity longer, the correlation between approaches. To practice the estimation via applying each
them is considered as positive. By adding the approach, the practice confine is different.
correlation to the project avoids planning in an
unrealistic condition significantly. The correlation
can be computed by estimation. At any situation, this C. Contingency Reserve analysis
amount has been measured between correlated Contingency reserves are estimated costs to be used at the
activities in a team consisting of professional experts. discretion of the project manager to deal with anticipated, but
When the correlation coefficient is identified in the not certain, events. These events are "known unknowns" and
software, it calculates the correlation amount relying are part of the project scope and cost baselines. This type of
on Pearson and Spearman correlation. contingency reserve is defined based on the chosen approach22
8. The assumptions in this project are as followed: In the analogous and bottom-up approaches, all the known
• The activities are definite and probabilistic or risky unknowns are defined in the Pertmaster as risks. But in the
activities are not considered. parametric approach, the contingency reserve is considered as
• The links (the predecessors and successors) are not 3% of the total estimated cost of the project due to its definite
probabilistic, but definite. estimation. This number was defined in PMO.
• The calendars are definite and there is no probable There is another type of contingency reserve, called as
calendar. 'management contingency reserves'. They are budgeted
reserved for unplanned, but potentially required, changes to
To create the model of the estimation, it is decided to project scope and cost. These are "unknown unknowns" and
make the introduced work breakdown structure the project manager must obtain approval before obligating or
thresholds, in which the estimation is calculated via its spending this reserve. Management contingency reserves are
thresholds transparently. Considering all the not part of the project cost baseline, but included in the budget
aforementioned principles and assumptions, the models for the project[23]. Here, the management contingency reserve
were created in Pertmaster software. After receiving the for all techniques was defined.
entry data for practicing the cost estimation, it is
necessary to clarify the estimation approach relying on the
available information. Since it is possible that different

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D. Analogous approach probability of 50%? 45,448,725,024 Dollars
What is the total cost of finishing a project at the
In this method, a combination of three points estimation and probability of 80%? 46,723,737,699 Dollars
coefficient estimation was used. In this technique, for all Tarbiat 132-20KV GIS Substation
Entire Plan : Cost
activities of third level of WBS, the costs, taken from the 100% 50,510,868,824

similar project, were considered as most likely costs of the 95% 47,947,012,925
90% 47,409,768,334
project with consideration of 30% inflation ratio. Then, 10000
85% 47,041,028,492

professional experts were asked to estimate the lower and 80% 46,723,737,699

75% 46,458,534,264
higher costs than the most likely ones as 'optimistic costs' and 8000 70% 46,211,278,271

'pessimistic costs'. Moreover, the most likely costs were 65% 45,990,106,066

Cumulative Frequency
60% 45,784,819,338
balanced by these experts. 55% 45,591,212,261
6000

Hits
In this project, some activities did not have the previous 50% 45,393,973,134
45% 45,202,550,916
documentations; therefore, coefficient was applied to estimate 40% 45,012,131,635

them. In the coefficient estimation different coefficients, like 4000 35% 44,816,515,566
30% 44,616,316,574
local coefficients, and other coefficients in the price list were 25% 44,401,634,242

used[24]. When analogous approach was applied, because of 2000

20% 44,168,436,503

15% 43,898,628,421
the estimation practice of likelihood, the contingency reserve 10% 43,576,943,460

for all of them was considered. 5% 43,132,411,410

0 0% 40,975,600,326
To practice the estimation using the analogous technique, the 45,000,000,000 50,000,000,000

third level of WBS in the Pertmaster was defined. This is Distribution (start of interval)

because the ability of Pertmaster to analyze the time and cost

risk simultaneously. Using the project risk analysis, the Figure 2: Cost distribution using analogous estimation
possibility of finishing project is defined at the determined
time and cost. To apply analogous, at first, we entered the Now, by looking at the graph, we can identify the probability
most likely cost into the software and applied all the available in which the project with the primary estimated cost was
risks, based on what defined in 3-1-4.The triangle distribution finished without considering the cost risk. This cost in the
was used for entering the time and cost risk in the Pertmaster, second figure is 44, 700, 000, 000 Dollars. It can be implied
which is recommended as the most applicable distribution for the project will finish with the probability of 32%, a low
all stochastic simulations. probability, and the primary definite estimation, without
The analysis iterations must be at least 76,833, regarding to an considering the contingencies, if we look at the yellow line.
article Jui-Sheng Chou by (2011). Hence, the iterations in this The another conclusion reached by the carried out analysis is
project were set at 80,000 and then the simulation was run. the project with the probability of 0% is the project cannot be
The data provided by the software in terms of cost project ended at any cost lower than 40,975,600,326 Dollars.
simulation based on the analogous technique are shown in
table 1 E. Bottom-up approach
It allows to estimate the consumption amount of each source
Cost of Entire Plan in the project details, and then these estimations are added
together to measure the middle levels and all levels of the
Analysis project, which produces a clear and structure-based estimation.
Iterations: 80000 The requirements of this approach are list of the works in
which activities are defined and detailed specifications of the
Statistics project.
Minimum: 40,975,600,326 In the bottom-up approach, the three points estimation or
Maximum: 50,510,868,824 PERT can be used instead of single point estimation at both
Mean: 45,448,725,024 levels of activity and work package. Consequently, after
adding the estimations at project level, a more accurate and
Bar Width: 500,000,000 clear picture of all the required works and costs for the project
Highlighters is computed, helping to have a more accurate control[25].
Deterministic 32% To apply this method, at first, WBS of the project was entered
(44,700,000,000) in the Pertmaster to the level 4. The times and links based on
the project management team's view and experience are
50% 45,393,973,134
defined and entered in the software. Then, the identified
80% 46,723,737,699 sources based on 3-1-3 are coordinated with the activities and
the intended risks at different sectors are entered. Finally, the
Table 1: Total cost using analogous estimation correlations among different risk in the software are defined as
follow:
The average costs required for finishing the project, or the
• The time risk of engineering activities is correlated
cost which all activities with all of their probabilities are done,
is 45,448,725,024 Dollars. The followings are two possibilities with their cost risk.
which are the most important ones in statistics analysis, • The time risk of provision activities is correlated with
regarding to the software suggestion: their cost risk.
• The time risk of manufacturing activities of the
What is the total cost of finishing a project at the

International Journal of Science and Engineering Investigations, Volume 2, Issue 12, January 2013 4
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 products made from subproducts are correlated with The previous data used in the prepared model are
the time risk of producing them accurate.
• The time risk of construction engineering is The applied parameters in the model have the ability
correlated with its performance time risk. of being quantitative.
• The time risk of fundamental executive constructing The prepared model is capable of being measured in
activities is correlated with the time risk of installing order to be applied for project with lower scale, as it
equipment. can be applied for projects with larger scale.

When the bottom-up approach was applied, due to the In parametric approach, a definite model is devised by using
practicing statistical estimation, the contingency reserve the links between previous data and other variables for
for all contingencies was considered and there is no need estimating the cost of an activity. The cost of activities can be
to recalculate it. The results of simulation are shown in computed either by multiplying the required work amount by
the table 2. In terms of risk analysis, the cost distribution the time length or by its cost in the previous projects. The
was shown as follow: required work amount in this project is defined as follow:
Cost of Entire Plan • The required work amount in the engineering sector
equals the hours a person is designed. For each
Analysis designing sector, a designing expert and drawer is
Iterations: 80000 needed.
Statistics • The required work amount in the provision sector
Minimum: 44,018,311,081 equals the amount of goods which should be bought
along with man-hour needed for it. The required
Maximum: 47,868,584,497
work amount in the construction sector was
Mean: 45,910,291,597
forwarded by the contractor.
Bar Width: 250,000,000
• After practicing all estimations relying on the work,
Highlighters the overall estimated cost for the project is
Deterministic 49% 45,753,976,647 Dollars.
(45,889,126,218)
50% 45,909,345,686 G. Identifying the best approach for estimating the project
80% 46,378,649,779 cost (EPC)
Three processes, create schedule model, prepare to estimate
The average costs required for finishing the project, or the cost and create estimates were applied so far. In three approaches,
which all activities with all of their probabilities are done, is analogous, bottom-up and parametric, were applied for
45,910,291,597 Dollars. The followings are two possibilities practicing the EPC of electrical substations. To find out all
which are the most important ones in statistics analysis, results of each approach, we should know which one had the
regarding to the software suggestion: lowest error. As mentioned previously, mean squared error
(MSE) is the best approach to do so; therefore, by applying
What is the total cost of finishing a project at the this in the research, the following RMSD for all estimators
probability of 50%? 45,909,345,686 Dollars are shown in the table 3.
What is the total cost of finishing a project at the Table 2: mean squared error
probability of 80%? 46,378,649,779 Dollars

Now, by looking at the graph, we can identify the probability RMSD(Analogous) 942,681,976$
in which the project with the primary estimated cost was
finished without considering the cost risk (figure 3) . This cost RMSD(Parametric) 637,430,353$
in this graph is 45,889,126,218 Dollars. In this graph, the RMSD(bottom-up) 481,115,40$
probability is precisely shown 48% in the left side, which
implies the project will finish with the probability of 48% and
the primary definite estimation, without considering the
contingencies, if we look at the yellow line. According to the comparison between the estimated costs
The another conclusion reached by the carried out analysis is amounts via different approaches and the actual cost of the 20
the project with the probability of 0% is the project cannot be previous projects, it can be concluded that which approach
ended at any cost lower than 44,018,311,081 Dollars. was the most accurate one. Moreover, other factors for an
appropriate estimator can be defined except the deviation,
which are as follow:
F. Parametric approach
1. the Root-Mean-Square Deviation
Using this approach allows to estimate the details of fourth
and fifth level of WBS. 2. Being user friendly
The accuracy of this approach is highly valid and reliable, 2.1 the approach should not be sophisticated.
when the following criteria are met: 2.2 the size of entries should be appropriate or not
too much.

International Journal of Science and Engineering Investigations, Volume 2, Issue 12, January 2013 5
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 3. the approach should be controllable; meaning relying IV. CONCLUSION
on the approach, a baseline for identifying the budget and
the earned value management can be drawn A. results
4. cover the majority of known risks. In this article, the possible approaches were simulated using
5. does not depend on the experts in each field. In other the bottom-up and analogous approaches. They were
words, it should be practical without an expert in that simulated for 80,000 times in the Monte Carlo simulator
field, which decreases the costs significantly. inside the Pertmaster software, and their probable results were
6. does not depend on the previous data. This is because achieved. In addition, the definite estimation using parametric
the approach can be applied in the project which have not approach was carried out and the definite estimation of that
been done yet. was computed. In another step, the deviation of all estimators
Since the estimator team was consisted of professional from the realistic project information using the root-mean-
experts in different fields, AHP group decision making square deviation was computed. The results show the bottom-
technique was used for identifying the most tailored up cost estimation approach had lowest deviation comparing
approach for the estimation in the similar project in the to the actual data. Moreover, by considering the other factors
future. besides RMSD in the AHP group decision making approach,
To apply the AHP technique, modeling, data collection, the most appropriate approach for estimating the costs in EPC
processing and measuring the inconsistency rate should project was bottom-up cost estimation approach. This
be carried out. After drawing the decision making tree approach in the weighted deviation was also the best. It should
and collecting data, the coefficients and priorities of each also be taken into account that parametric approach in
attribute and alternative are computed. Then, the comparison with others was the best approach for managing
alternative earning the highest weight is considered as the the earned value in terms of controllability. However, it was
best. The alternatives considered are: weaker in terms of risk coverage standard and MSE than the
1. Analogous approach bottom-up.
2. Parametric approach
B. Suggestions
3. Bottom-up approach
First, it is worthy to find out the most appropriate approach
4. Table 3: Prioritized weighted attributes for managing estimation, because being unsure means a limit
for the baseline of project budget. Hence, estimation
Priority Weight Attributes management is obscure in terms of the probable estimations.
Next, as one of the major problems of project-oriented
1 0.285 .Root-Mean-Square Deviation
organizations is measuring the being thrifty in spending, the
2 0.270 Cover More risks actual cost of each sector and the baseline can be computed by
3 0.234 Being controllable estimating the costs in each sector of the project by the expert
4 0.097 Not depend on Experts team of the same sector. Finally, measuring the deviation by
5 0.067 Being user friendly the expert in each sector allows the calculation of the
5.1 0.750 Not be complicated expenditure and the cost conservation in each sector.
5.2 0.250 Not need much data entry
6 0.047 Not depend on previous data ACKNOWLEDGMENT
As shown in the table 4, RMSD earned the highest weight. The authors wish to thank an anonymous referee for
This standard presents the accuracy of the estimator, or in comments and suggestions that greatly improved the
other words, the estimation approach. In addition, the presentation of the paper.
consistency rate is 0.05, showing that the decision making is
rational and realistic.
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