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Development of Cost Estimate

 

for Engineering, Procurement and Construction

(EPC) Project in 3 Steps

 

FEATURED PAPER

By Yosep Asro Wain

Jakarta, Indonesia


ABSTRACT

Cost estimate is a product of a project planning activities, project here including the Engineering, Procurement, and Construction (EPC) project. As a planning document, cost estimates must be reliable, which is develop by considering various aspects, that are the scope of work, Uncertainty and Risks, as well as other factors including market conditions in which the EPC Project will be auctioned off.

For this reason, a cost estimate calculation method was developed to accommodate these various aspects, which carried out in 3 steps.

The first step is calculation of the base estimate which is solely based on the predetermined scope of work of the project. The result is a cost estimate in a certain single value, so it is also called as a deterministic cost estimate.

The second step is running Monte Carlo simulation to analyze the effect of Uncertainties and Risks on the base estimate value resulted in the first step. Monte Carlo simulation results the cost estimate value in the form of a probability distribution. When in the first step we got the cost estimate in a single value, then the simulation in this second step produces the cost estimate in the form of a range of values and their probabilities.

The third step is to develop a bidding model, to map other factors related to the project including market condition into a value equivalent to the cumulative probability value of the cost estimate resulted in the second step. So that it can be determined which value in the range is used as the cost estimate (recommended cost estimate).

  1. Introduction

In order to achieve the target in a project as it desired, implementation of the project must begin with good planning. Planning in various aspects, including one important aspect of the project, namely cost.

As a project document, the cost estimate contains details of the approximate cost of a project, a work or an activity to be carried out. Cost estimate is result of a cost estimating process, which is the process to predict the cost of the project. As the product of a prediction process, the cost estimate contains uncertainty. Uncertainty could come from the scope of work that has not been completely defined, it could also be due to variation in prices, error in cost modeling used in cost estimating process, and change in price that may occur before or during project execution.

Executing a project is not easy, there are many factors that influence it, both external and internal, which may have a negative impact to the project, which in the end could cause target was set in the planning is not achieved. These factors are known as project risks. Project risks have a negative impact on the project, including a decrease in the quality of the work products, delays in completion of the project and an increase in the final project costs. Mitigation of project risks is generally always carried out, however mitigation itself can usually only reduce the risk, it does not eliminate the risk completely, there is always a residual risk left there.

In general, projects are carried out by contractors, it is very rare that a project to be done by the owner himself. The appointment of a contractor to carry out a project is usually done through a bidding, which is participated by many bidders. During bidding, contractor always adds a number of costs in addition to the base cost of the project, which depends on the current market conditions. When the market is lonely with projects, where the level of competition is high, the contractor tends to reduce the cost of the project in order to win the competition. Conversely, when a project is in abundance in the market, the contractor will tend to increase the bid value.

Therefore, in order to obtain a reliable value, development of cost estimate for EPC project must take into account all of the above factors, namely const estimating uncertainty, project risks and market condition.

This paper will describe process of preparing a cost estimate, especially cost estimate for an engineering procurement construction (EPC) project in the oil & gas sector. As per the title of this paper, preparation of cost estimate is carry out in three steps, namely the preparation of a base estimate or deterministic cost estimate, Monte Carlo simulation to analyze impact of uncertainty and project risks, and development of bidding model to know the influence of market conditions (and other project related factors) to the project costs.

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How to cite this paper: Wain, Y. A. (2021). Development of Cost Estimate for Engineering, Procurement and Construction (EPC) Project in 3 Steps; PM World Journal, Vol. X, Issue V, May. Available online at https://pmworldlibrary.net/wp-content/uploads/2021/05/pmwj105-May2021-Wain-development-of-epc-project-cost-estimate-in-3-steps.pdf


About the Author


Yosep Asro Wain

Jakarta, Indonesia

 

 Yosep Asro Wain is a professional in oil and gas, especially in refinery fields with 30 years experiences. The most of his job are in the project management field, namely project engineering design, project budgeting, project cost estimating, project cost control, project scheduling, change management and contract engineering. He currently leads the change management team at Project Management, Refining and Petrochemical Business Group of Pertamina. Yosep holds a bachelor’s degree in electrical engineering (in Control Engineering field) from Bandung Institute of Technology (ITB) and is a Certified Cost Professional (CCP-AACEI). He is also a senior process control and instrumentation engineer. He lives in Jakarta, Indonesia and can be contacted at yosepasro@yahoo.com.