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    Tips on Estimating and Risk Management for the Construction Industry

    In the highly competitive construction industry, knowing and anticipating a project’s expenses correctly provides a definite advantage when competing for a contract. But, even in the best of circumstances, cost estimating is complicated and there are a myriad of risks and uncertainties to consider.

    With all the uncertainties that are inherent to construction projects, there are some key best practices when it comes to developing a credible cost estimate:

    • an accurate project scope
    • access to detailed documentation and historical data
    • standard processes and work break down structures to ensure that no portions of the estimate are omitted and make it easier to make comparisons to similar projects
    • a risk analysis—known costs should be included and unknown costs should be allowed for
    • an independent review to establish confidence in the estimate

    Deriving high-quality cost estimates depends heavily on the quality of data; for example, historical databases, comprehensive project plans, and standard work break down structures make it easier to make comparisons to similar projects.  In most cases, the better the data, the better the resulting estimate will be.  But you should always be on the lookout for common items that significantly increase risk in the planning and budgeting phase of projects, such as:

    • Faulty Assumptions—clearly articulate and validate all assumptions.
    • Lack of supporting documentation—all estimates should link back to relevant data.
    • No historical data on similar projects for comparison.
    • Out-of-date data—economic conditions and market dynamics are continually changing and must be considered when referencing historic data. It is always a good idea to also consider current trends and pricing projections as well as historical data.

    As the project progresses it is important to keep a pulse on how the estimate is holding up.  The McGraw Hill report “Mitigation of Risk in Construction: Strategies for Reducing Risk and Maximizing Profitability” indicates that nearly one fifth of large infrastructure projects are over budget and the average overrun is more than 14%.

    It is important to keep abreast of whether there is a significant difference between estimated cost to complete and budget for remaining work, whether there are work phases/tasks with no budget left and if there is frequent allocation of contingency reserve for newly identified in-scope effort.

    A project’s approved cost estimate is generally used to create the project budget. Because a reasonable and supportable budget is essential to a project’s efficient and timely execution, a competent estimate is the key foundation of maximizing project profitability.

    How does your company minimize risk in the estimating process and what best practices do you have to share?