Risk Based Cost Estimation
Cost estimation for an engineering project traditionally involves development of an “engineer’s estimate” of the project cost to which contingency is added to develop the “total project cost.” Contingency is used to reflect the fact that regardless of the diligence and competence of the estimator, there is uncertainty in the final cost of the project. Material costs change over time, markups and markdowns vary from job to job, field conditions arise that were unforeseen during design, and other factors add to the uncertain nature of cost estimating.
This white paper outlines a technique to model each line item that makes up the engineer’s estimate as a probability distribution. The probability distributions can then be combined to create a statistical view of the total project cost. This approach shows the most likely construction cost and the probability that the cost will exceed any given contingency amount. This information allows decision makers to set budgets based on the amount of risk they are willing to accept.