INDEPENDENT COST ESTIMATESAND

COST REVIEWS

Michael Peek, PE CCE CFMOffice of Engineering and Construction Management

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EINSTEIN’s

Abbreviated

Guide To

INDEPENDENT COST ESTIMATESAND COST REVIEWS

Michael Peek, PE CCE CFM

But what should it

really cost?

E = Mc2 = TPC =

Why Independent Cost Estimatesand Cost Reviews?

• Support Secretarial/Acquisition Executive decision making

• Logical “next step”… increase focus on front-end planning

• Address External Stakeholder Concerns– Consistent with GAO Best Practices Guidelines (GAO-09-3SP)– Adopt Industry Standards

• Requirements addressed in DOE O 413.3B• Statutory requirement … mandated in FY2012

Consolidated Appropriations Act (P.L. 112-74)

We cannot solve our problems with the same thinking we used when we created them.

Albert Einstein

• With the implementation of DOE Order 413.3B, Program and Project Management for the Acquisition of Capital Assets, the Office of Engineering and Construction Management is required to conduct an Independent Cost Review (ICR) and/or develop an Independent Cost Estimate (ICE) to support the Secretarial Acquisition Executive’s (SAE)/Acquisition Executive’s (AE) decision at various Critical Decision (CD) milestones …

Requirement DOE O 413.3B

Cost Reviews(App C, Sec 18.)

• For projects > $750M, OECM must conduct ICR prior to CD-0• For projects > $100M, OECM must conduct:

Prior to CD-1, ICE and/or ICR Prior to CD-2, ICE Prior to CD-3, ICE (if warranted)

DOE O 413.3B Requirements

If you can't explain it simply, you don't understand it well enough. Albert

Einstein

FY2012 Consolidated Appropriations Act Requirements (P.L. 112-74)

• Sec 308: None of the funds made available in this title may be used to approve critical decision-2 or critical decision-3 under Department of Energy Order 413.3B, or any successive departmental guidance, for construction projects where the total project cost exceeds $100,000,000, until a separate independent cost estimate has been developed for the project for that critical decision.

A perfection of means, and confusion of aims, seems to be our main problem. Albert Einstein

Best Practices

• GAO Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Costs, March 2009 (GAO-09-3SP)

• Association for the Advancement of Cost Engineering International (AACEI)– Recommended Practices– Professional Practice Guides

• Society of Cost Estimating and Analysis (SCEA)– Cost Estimating Body of Knowledge (CEBok)

• DOE G 413.3-21 Cost Estimating Guide, May 2011

The only source of knowledge is experience. Albert Einstein

High Quality Cost Estimate

• Characteristics:– Comprehensive … addresses all known costs

appropriate for the level of project definition – Well-documented ... basis of estimate allows for

independent replication and updating – Accurate … is free from errors and omissions– Credible … is well structured and presented in an

industry accepted format

Any intelligent fool can make things bigger and more complex... It takes a touch of genius - and a lot of courage to move in the opposite direction.

Albert Einstein

Basis of Estimate

• A well prepared Basis of Estimate (BOE):– Documents overall project scope …– Facilitates review and validation of the cost estimate …– Alerts project team to potential cost risks and opportunities …– Record of key communications made during estimate

preparation …– Establishes initial baseline for scope, quantities and cost for

use in cost trending …– Source of support during dispute resolutions …– Provides historical relationships between estimates …

Everything should be made as simple as possible, but not simpler. Albert

Einstein

Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.

Albert Einstein

• Identify/Focus on Cost Drivers– Cost drivers require a detailed independent estimate

– Early technical, cost and schedule risk identification

• Methodology– Bottom-up

– Parametric Cost Models & Cost Estimating Relationships

– Engineering judgment

– Vendor quotes/vendor proposals

• Updated throughout the project cycle …– Trend should cost versus will cost

The Cost Estimate

• Historical Cost Data– Identify useful Cost Estimating Relationships … focusing

on 10 selected projects

• Percent of TPC devoted to specific project phases

• Evaluation of Program Cost Estimates

• Start-up & Commissioning CERs of special interest

• WBS Best Practices Handbook– Product oriented … collaborate on standardization by

project type…

– Common element structure to capture cost data for common scope across projects …

Other InitiativesI have no special talent. I am only passionately curious

Albert Einstein

• Evaluating existing data sources and estimating tools across DOE …– CEES @ Oak Ridge; ECAS @ EM CBC

– PARS II & ACDB (ACEIT) @ OECM

• Promote cost estimating consistency …– Common framework within each Program

– Increased sharing of existing cost data

• Address inflation indices …

• Program Office/PMSO and EFCOG support critical for success …

Other InitiativesThe only thing that interferes with my learning is my education.

Albert Einstein

Bottom Line

A cost estimate is only as good as the project’s components …• Upfront planning - design maturity and technology

readiness …• Risk identification and management …• Stable funding commitments …• Properly resourced staffing - numbers and skill sets …• Credible and consistent contract management and

alignment …• Optimized oversight and reporting …

Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either.

Albert Einstein

Take Aways

• Independent Cost Estimates and Independent Cost Reviews should:• Enable Risk Informed Cost Effective Decisions• Support Mission, Program and Project Execution

- Emphasis on Program and Project Accountability- Should Cost vs. Will Cost

• Be based on industry accepted standards and processes

Strive not to be a success, but rather to be of value. Albert Einstein

Questions?

OECM

I

Unthinking respect for authority is the greatest enemy of the truth.Albert

Einstein