Estimating the Scope vs. Estimating the Project – The Folly of Taking Scope at Face Value

“If we have firm quotes on 80 percent of the equipment list, then the estimate will be very accurate.”

“The contractor says his estimate has an accuracy of ±10 percent, therefore we’re good to go.”

How many of you have heard comments like these while reviewing a project final investment decision? 

What project reviewers sometimes fail to take into account is that there is a subtle difference between estimating the scope “as defined in the documents” and estimating the scope that will be required to achieve the business requirement. Too many reviewers focus on the estimate methodology and fail to consider the basic scope upon which that methodology is working. For this reason, it is all too easy to accept that one has a highly accurate estimate, but fail to recognize that the estimate is of an incomplete scope. An accurate estimate of an incomplete scope can be highly misleading if the mismatch is not picked up in the estimate accuracy range and contingency setting.

While it is true that having firm quotes on 80 percent of the items in the equipment list sounds impressive, our staff at AP-Networks have seen projects where it was later discovered that an additional tank farm was needed for intermediate storage, a new sub-station was needed to provide sufficient power, or none of the equipment quoted actually complied with corporate standards—to quote just three very simple, but ultimately costly examples.

When reviewing the contractor’s estimate, it is always instructive to go over the list of “assumptions and exclusions” in the contractor’s “Basis of Estimate” document. While competent contractors can generally be relied upon to give an accurate estimate of the defined scope, it is by reading the “assumptions and exclusions” list that it will quickly become apparent whether the contractor has also taken into account the magnitude of undefined scope that will be required to achieve the project’s business objective. 

This uncertainty and risk can be covered in two ways. One can review the scope to find gaps, and then plug those gaps before updating the estimate. For this, the typical route is that of creating thorough checklists of required deliverables and conducting rigorous “cold eye” peer reviews. This method allows the team to ensure that the cost estimate accuracy will fall within the range needed for the review board.

Alternatively, one can accept the gaps in the scope and include them as uncertainties and risks in the calculation of the estimate accuracy level and contingency requirements. In this case, it is important to ensure that the uncertainty and risk analysis take full account of such “systemic” issues as gaps in the design definition.

These approaches come down to the following: working to get your scope sufficiently defined for the estimate accuracy level you need, or setting the accuracy range and contingency requirements in a way that reflects the lack of scope definition. Whichever path you choose, it is imperative that you avoid the mistake that too many teams make: confusing estimating the scope with estimating the project.