Estimate costs in fragile and transitional contexts - July - 2014

Estimate costs in fragile and transitional contexts

23 July 2014

205680

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Table of Contents

List of Tables ........................................................................................................................................ iii

List of Figures ....................................................................................................................................... iv

List of Equations .................................................................................................................................... v

Abstract ................................................................................................................................................. 1

Introduction .......................................................................................................................................... 2

Estimates Costs within Fragile and transitional contexts ..................................................................... 3

Cost Effectiveness ................................................................................................................................. 3

Estimate Accuracy ................................................................................................................................. 4

Three-point estimating technique application into a fragile and transitional context ........................ 7

Assumptions ...................................................................................................................................... 8

Risk .................................................................................................................................................... 8

Three-Point Estimates Application ................................................................................................... 9

Conclusion ........................................................................................................................................... 11

Bibliography ........................................................................................................................................ 11

iii

List of Tables

Table 1, “Administrative costs comparison” 4

iv

List of Figures

Figure 1 “Relationship Between Estimate Accuracy and Engineering Progress” 5

v

List of Equations

Equation 1 “Triangular Distribution” 6

Equation 2 “Beta Distribution” 7

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Abstract The methods of cost estimation and techniques are very important for the development and

humanitarian sector, especially within fragile and transitional contexts. For the funding agencies

and for implementing partners these calculations are essential to the process of large funding.

This work presents the issues of estimating cost within the fragile and transitional contexts. Explain

how to define the three point estimating technique and its characteristics. Apply the three-point

estimating technique into the fragile and transitional context using Sudan context as an example.

Conclusions are presented to reflect the important application of this technique.

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Introduction

Planning and developing constructions project within a fragile and transitional context is not easy

for a planning team. ‘‘The three-point estimating technique considers estimation uncertainty and

risk and using three estimates to define an approximate range of activity’s cost, which could

significantly improve the single point activity cost estimates’’ [2].

Within development and humanitarian sector, challenging contexts are defined by unpredictable

post conflict environment, lack of capacity, weak infrastructure, and limited provision of basic

services, all of these factors together cost money. In addition, unstable economy including inflation,

currency fluctuation and market stagnation would also impact cost. In such situations cost

effectiveness of constructions projects appears to be more expensive compared to its counterparts.

This work presents part of the solution during the development phase since there are several root

causes of the problem of project cost management of constructions projects in fragile and

transitional context, which can be addressed separately. For example, protracted decision-making

process within an organization could affect cost management negatively. However, estimate costs

during the development phase considered as the most significant part of the solution. Accurate

estimate costs in the early development phase can affect positively on the project cost

effectiveness.

It’s significant for a planning team and an implementing team under such circumstances and

contexts, to have accurate calculations during estimating cost. Using the three-point estimating

technique is simple yet can be of more accurate result and impact into the cost. While describing

the technique in details with examples, practical application will be examined.

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Estimates Costs within Fragile and transitional contexts

Fragile and transitional contexts are characterized by unpredictable post conflict environment

which can trigger new violence. In addition, lack of capacity, weak infrastructure, limited provision

of basic services, unstable economy including inflation, currency fluctuation and market stagnation.

In such contexts a construction project can easily deviate from its plan, a deviation that cots money

or time and could result on negative consequences. These negative consequences appear to be the

result of insufficient analytical work prior to project design, the lack of baseline data, poor project

design. Therefore, under this circumstances estimate costs during the development phase should

consider these challenges. Unfortunately in the real life most of this factors and challenges that

affect the costs are being neglected and they are only faced during the implementation, where a

high cost extension will be requested, to address the uncertainty and the risks. While if it was

considered in the first place it would have cost less money and less time.

Cost Effectiveness

‘‘Cost effectiveness is a measure of how economically resources or inputs have been converted into

results. Of particular importance is whether alternative approaches would have achieved the same

results with fewer resources’’ [3]. The level of cost effectiveness can indicate how accurate the cost

estimates have been performed. The cost effectiveness of many construction projects within fragile

and transitional contexts found to be more expensive than their counterparts. Most of the time in

the real life estimating cost at the development phase for these projects uses limited techniques

like, expert judgment or analogous estimating which both rely on historical data of similar projects.

These methods are less costly and less time consuming than other techniques, but they are also

generally less accurate.

Table 1 show a comparison between the administration costs of two programs program A and

program B implemented in the same context. The last column shows higher administration costs

for program A compared to program B administration costs.

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Administrative costs comparison (Source – 2012, Independent Evaluation of the World Bank Administered Multi-Donor Trust Fund in

Sudan Final Evaluation Report)

Using proper estimates costs technique can improve the accuracy of estimating costs, by

considering estimation of uncertainty and risk, which address the fragile and the transitional

contexts cost issues.

Estimate Accuracy

Since estimate cost is a prediction of future expenses its accuracy will not be precise.

‘’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 is associated with uncertainty, and, therefore, is also associated

with a probability of overrunning or underrunning the predicted cost’’ [1].

Estimate cost is an iterated process gets more accurate by getting better picture of the project

overtime. ‘’cost estimate should be reviewed and refined during the course of the project to

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reflect additional detail as it becomes available and assumptions are tested. The accuracy of a

project estimate will increase as the project progress through the project lifecycle’’ [2].

‘’Estimate accuracy tends to improve (i.e., the range of probable values narrows) as the level of

project definition used to prepare the estimate improves. Generally, the level of project definition

is closely correlated with engineering progress; thus, as the level of engineering progresses,

estimate accuracy improves. This is shown in Figure 1.’’ [1]

Source (2012, Skills and Knowledge of Cost Engineering)

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Three-point estimating technique

‘‘Project cost management is primarily concerned with the cost of the resources needed to

complete project activities. The cost management planning effort occurs early in project planning

and sets the framework for each of the cost management processes’’ [2]. The Project Management

Body of Knowledge (PMBOK GUIDE) defines Estimate costs as the process of developing an

approximation of the monetary resources needed to complete project activities.

Three-point estimating technique: ‘’use three estimates to define an approximate range for an

activity’s cost considering estimation of uncertainty and risk’’[2].

For example:

If we ask Mohammed the followings:

Q. Mohammed how long does it take you to excavate a ditch?

A. Mohammed first answer, it takes me exactly (40 minutes)

Q. Then if we press Mohammed a little bit further what the longest it has ever taken you?

A. Mohammed in this case may say, well the worst ever took me 2hrs and 20 minutes – during

heavy rains, that would be (140 minutes)

Q. And if we push him further what the quickest you’ve ever done your excavation?

A. He might say 25 minutes and that was during a very soft soil (25 minutes)

So now we have three estimates that Mohammed has given us for his ditch excavation. He gave us

3 separate estimates:

- Exactly 40 minutes

o This is Mohammed’s Most Likely estimate as per the three-point estimating

technique.

- The worst case of 140 minutes. Again the three point estimating technique refer this as

o His PESSIMISTIC estimate.

- And the best case the twenty five minutes that he gave us – in very soft soil. (25 minutes)

o This is his Optimistic estimate.

How would we use these estimates? Let us assume that Mohammed’s ditch excavation is an

activity within a project with plenty of other tasks that rely on this one. What is the best time we

should put in the schedule 40 minutes or 140 minutes or the 25 minutes. Three-point estimating

could help us with that. Two commonly used formulas are triangular and beta distributions.

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The first formula adds optimistic to most likely to pessimistic and divides them by 3.

- Triangular Distribution. cE = (cO + cM + cP) / 3

cE = Cost Estimates

cO = Cost Optimistic

cM = Cost Most likely

cP = Cost Pessimistic

Mohammed commuting time = (25 + 40 + 140)/3

= 68 minutes

Remember when we first asked Mohammed about his excavation time he said 40 minutes and

Mohammed is the expert of his excavation. To give additional weighting to what Mohammed came

out with as most likely estimate. We use a second formula that adds optimistic to most likely

multiplied by 4 to pessimistic and divides them by 6.

- Beta Distribution (from traditional PERT analysis). cE = (cO + 4cM + cP) / 6

cE = Cost Estimates

cO = Cost Optimistic

cM = Cost Most likely

cP = Cost Pessimistic

Mohammed commuting time = (25 + (40X4) + 140)/6

= 54 minutes

This answer is closer to what Mohammed has given us as most likely. This technique of cost

estimation considers the uncertainty estimates like heavy rains, soft soil or hard soil, and any risk

occurrence like the appearance of huge rock while excavation.

Three-point estimating technique application into a fragile and transitional context

Again this work presents part of the solution since there are several root causes of the problem of

constructions projects costs management in fragile and transitional contexts that can be addressed

in a separate work. This work will handle estimate costs during the development phase which

considered being significant part of the solution, since it involves analysis that address uncertainty

and risk at the early stages of a project, which would improve the accuracy of estimating costs.

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Cost estimates are a prediction based on the information known at a given point in time. In

challenging contexts the unavailability of relevant information or the accuracy of the information

could be an issue.

Taking Sudan context as an example three-point estimates technique will be applied to a project to

examine the relevance of this technique, and how it considers the uncertainty and the risk

involved.

Our example will be estimate costs for Basic Education Project in Sudan in three states with one

state subject to renewed instability and insecurity. ‘’The project’s activities focus on improving

results in the following key area:

- The number of students enrolled in primary education in selected schools’’ [3].

To achieve these results we have identified the following scope of work:

1. To rehabilitate and furnish (9) schools in three states, three schools for each state.

2. To construct (3) new Teacher Training Institute (TTI) in three states, one TTI for each state.

3. To supply TTIs with furniture, computer and laboratory equipment, and other necessities.

The planning team will estimate costs using three –point estimates technique based on the

available details and assumptions.

Assumptions

a. The design and the constructions materials for the schools and for the Teacher Training

Centers are agreed.

b. Duration of the project is one year

c. Inflation is expected to increase by 30%

d. Currency fluctuation, the local currency is forecasted to drop down in front of USD

e. Local constructions market stagnation is expected with scarcity on construction materials as

a result

Risk

a. Renewed instability and insecurity in one state

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Three-Point Estimates Application

Using three-point estimates the team will estimate costs for the three components considering the

assumptions and risk as variables.

The team has calculated that each school’s rehabilitation and furnishing would cost $10,000.

Each TTI would cost $7,000.

And the TTI’s supply for each TTI would cost $6,000.

Being Optimistic means that: deliver project during the project duration, no major inflation

appeared, local currency was stable and local constructions market is also stable. In this case our

total project amount would show (9 X 10,000 + 3 X 7,000 + 3 X 6,000) = $129,000

Looking into the most likely case would be: deliver project during the project duration for two

states, while for the one state subject to renewed instability and insecurity, consider adding more

resources to complete faster, in anticipation to any expected delays due to any renewed instability

and insecurity. That will increase the cost of the three components in one state. It’s most likely that

the inflation will take place but with 15%. Therefore we will include inflation of 15% for all the

materials to be purchased for constructions and for the TTI supply, which increase the cost of the

three components in the three states. It’s most likely that local currency will remain stable and

local constructions market also will remain stable.

To reflect the increase of the costs in the three components in one state:

A = (3*school, increase by 3,500 per each)+(1*TTI, increase by 2,000)+(1*TTI supply, increase by

1,500) = (3*13,500)+(1*9,000)+(1*7,500) = $57,000

B = the other two states costs will remain as they are = $86,000

(A+B) = $143,000

To reflect the increase on the inflation:

(A + B)*15% = (57,000+86,000)*15% = $157,025

Therefore our project total cost is getting into = $157,025

Finally for the pessimistic situation: again with the state subject to insecurity and instability we are

expecting delays, therefore we will add more resources to complete faster, which will increase the

costs for the three components in the one state. While for the inflation we will apply the 30%

increase here. For the currency fluctuation we are considering local currency drop down which may

increase the prices in the market, which again be reflected into the costs. For the local construction

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market stagnation we will consider the scarcity of the constructions materials which means

reflected in its prices increase.

To reflect the increase of the costs in the three components in one state:

A = (3*school, increase by 3,500 per each)+(1*TTI, increase by 2,000)+(1*TTI supply, increase by

1,500) = (3*13,500)+(1*9,000)+(1*7,500) = $57,000

B = the other two states costs will remain as they are = $86,000

(A+B) = $143,000

Currency fluctuation included in the inflation calculation since the effect is reflected in the prices

increase.

To reflect the construction materials prices increase due to its scarcity. We will apply only on the

school and TTI constructions.

C = (9*school, increase by 1,500 per each)+(3*TTI, increase by 500 per each)

C = $15,000

To reflect the increase on the inflation:

(A + B + C)*30% = (57,000+86,000+15,000)*30% = $ 186,050

Our project total cost is = (A+B +C) = $ 186,050

Now we have our three estimates. Using the following three-point estimating formula we will

calculate the final project cost estimate:

Beta Distribution. cE = (cO + 4cM + cP) / 6

cE = Cost Estimates

cO = Cost Optimistic

cM = Cost Most likely

cP = Cost Pessimistic

The final project cost estimate = (129,000+(4*157,025)+186,050) / 6 = $ 157,192

As you can see the final cost is very close to the most likely amount. During this estimates we have

considered the uncertainty and risk. In addition, we have addressed the different variables of the

fragile and transitional context. We have increased the level of confidence of our costs to a reliable

level, with a simple method of calculation.

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Conclusion

The three-point estimating technique is a simple technique yet provides a good level of confidence

on the cost estimates. This work presented a technical review for the technique and its application

in fragile and transitional contexts.

The calculation is simple and straightforward and can be implemented by using a simple program.

Can be used by any type or size of projects with advanced costs analysis performed.

This technical review suggests that the three-point estimate is reliable for fragile and transitional

contexts costs estimations.

Bibliography

No. Description

1. AACE (2012). Skills and Knowledge of Cost Engineering: AACE.

2. PMI (2013). The Project Management Body of Knowledge: Fifth Edition. Newtown Square: Project

Management Institute.

3. ICF International GHK (2012). Independent Evaluation of the World Bank Administered Multi-

Donor Trust Fund in Sudan Final Evaluation Report.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/311988/Multi-

Donor-Trust-Fund-Sudan.pdf