W24_HI_Cost Estimating Method

  1. Problem Definition

Company A, a PSC Oil & Gas Company, is evaluating the development of a new gas field development. Strategic management decision in the preliminary screening stage shall be taken considering many aspects. One of the critical aspects is development cost of the gas processing plant. Since the decision shall be taken early, there is no sufficient time to conduct good and fully complete engineering study. In this stage the research is going to select qualitatively what is the most suitable cost estimation method.

  1. Development of Feasible Alternatives

AACE International identifies five classes of estimates. A Class 5 Estimate is associated with the lowest level of project definition (or project maturity), and a Class 1 Estimate is associated with the highest level of project definition.

Below matrix provides the Cost Estimate Classification for the Process Industries, including the preparation effort for each estimate class.

W24_HI_Fig 1

Figure 1. Cost Estimate Classification Matrix for the Process Industries [1]

From matrix above, in the column “METHODOLOGY Typical estimating method”, we can see several estimating method, which the selection were driven by the estimate class, level of project definition, and end usage (typical purpose of estimate).

  1. Development of the Outcomes for Alternative

Then we need to know what each method means and how those methods different with each other.

Cost estimation methodologies in general divided into two categories:

  1. Conceptual Estimating Methodologies

This method is often defined as Order of Magnitude Estimate. It is typically used for Class 5 to Class 3 AACE Cost Estimate. The method generally generated from little project definition therefore subjects to wide range estimate accuracy. Its accuracy depends on level of project definition, the quality of past historical cost data, judgments and experience of the estimator. Conceptual estimating methodologies commonly used are:

1) End-Product Units Method

This method is used if the estimator as enough historical data available from similar projects to relate the end project units (capacity units) of a project to its construction cost

2) Physical Dimensions Method

Similar with End-Product Units, this method uses the physical dimensions      (length, area, volume, etc.)

3) Capacity Factor Method

This is a factored estimation method. The cost of new equipment or facility is calculated from similar equipment or facility with known capacity. The formula is described below:

W24_HI_Fig 1a

If the capacity of facilities being factorized is relatively close in size, and if the capacity factor can represent the actual value, then this estimation can be quite accurate.

4) Ratio or Factor Method (Equipment Factor Method)

This group of methods is when the total cost of an equipment or facility can be reliably estimated from primary component cost. Several methods can be categorized as Ratio or Factor Method:

  • Lang’s Method
  • Hand’s Method
  • Miller’s Method
  • Wroth’s Method
  • Chilton’s Method

5) Parametric Method

The parametric method is the advance model of capacity and equipment factor methods. It is more sophisticated, and involves:

  • cost model scope determination,
  • data collection,
  • data normalization,
  • data analysis,
  • data application,
  • testing, and
  • documentation
  1. Deterministic (Detailed) Estimating Methodologies

In a completely detailed estimation, the following steps comprise the activities undertaken during preparation:

  • prepare project estimate basis and schedule,
  • prepare direct field cost (DFC) estimate,
  • prepare indirect field cost (IFC) estimate,
  • prepare home office cost (HOC) estimate,
  • prepare sales tax/duty estimates,
  • prepare escalation estimates,
  • prepare project fee estimate (for contractors),
  • prepare cost risk analysis/contingency determination, and
  • review/validate estimate.
  1. Selection of the Acceptable Criteria

The criteria of cost estimation selection are using the Estimate Classification from AACE International Recommended Practice No.18R-97. The criteria described below:

Table 1. Estimate Classification Criteria[2]

W24_HI_Table 1

  1. Analysis and Comparison of the Alternatives

Then, we compile the data from various department such Engineering, SubSurface, Planning, and other related department. The data availability in current stage based on the research described as follows:

Table 2. Current Development Data Register

W24_HI_Table 2

Then, from Table 2 data above, we translate them to match with Table 1-Estimate Classification Criteria, to identify belong to which class that those data are suitable.

The result of data classification criteria as per below table :

Table 3. Current Data Classification Criteria

W24_HI_Table 3

  1. Selection of the Preferred Alternative

Based Table 3 above, the nearest estimate classification suitable for this current stage of development is Class 4. We can conclude that the current project development stage is in feasibility or study stage. To do the Class 4 estimate, based on matrix in Figure 1 above, the recommended estimating method that we can use are equipments factored and/or parametric model.

  1. Performance Monitoring and Post-Evaluation of Results

After we determine the method, we can continue to do the cost estimate using the chosen method with utilizing the available data. It is also important to monitor and maintain the information or data updates such update on engineering deliverables, execution plan, master schedule, contracting strategy, etc, which could potentially impact to the level of project definition and suitable cost estimating classification criteria.



  1. Amos, S. J. (2012). Skills & Knowledge of Cost Engineering: A Continuing Project of the AACE International Education Board (5th ed.). Section 2, Chapter 9. Morgantown, WV: AACE International.
  2. Christensen, P.et.al.(2011). AACE International Recommended Practice No. 18R-97. United States of America: AACE International.
  3. Azwar, N. (2014). W2_NA_Cost Estimation Method Selection for A Gas Processing Plant. Retrieved from https://kristalaace2014.wordpress.com/2014/03/05/w2_na_cost-estimation-method-selection-for-a-gas-processing-plant/
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3 Responses to W24_HI_Cost Estimating Method

  1. Dear Dr.Paul.
    Please find my W24 blog here.
    As per your request, after this I will write the lesson learned in my W25 blog.
    Thank you

    Best regards,
    Harnadi Irawan


  2. drpdg says:

    Great Pak Harnadi……. See you on Monday morning…..!!!
    Dr. PDG, Jakarta


  3. Pingback: W7_OAN_Cost Estimation by Ratio and Proportion – EMERALD AACE 2017 – WEEKLY BLOG

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