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(EST-3454) Base Estimate, Estimate Accuracy, and Contingency

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Level: Intermediate
TCM Section(s): 7.3. Cost Estimating and Budgeting
Venue: 2020 AACE International Conference & Expo

Abstract: This paper explores the definitions and relationships of three total installed cost (TIC) estimate elements: base estimate, estimate accuracy, and contingency.These elements have various meanings and applications in process industries and the author seeks to present a clear perspective for their consistent use and quantification.Base estimate represents the most likely cost outcome of a project, within a range of probable outcomes, and is the basis for quantifying other estimate parameters.The base estimate value includes direct costs, indirect costs and design allowance, but does not include contingency or management reserve.Estimate accuracy is best measured from the base estimate value, rather than the TIC estimate value (base estimate plus contingency). Although the latter method is commonly used, it may undermine the purpose and definition of a base estimate by shifting the accuracy range high enough to exclude the base estimate itself (if contingency is much greater than the interval between the lower accuracy boundary and the base estimate). Contingency is used for a variety of purposes, sometimes insufficiently and sometimes excessively.The author presents contingency as an addition to the base estimate for the purpose of establishing the TIC estimate value at a desirable confidence level for project funding.