Issue

Forecasting The Cost of Major Equipment

For developing the estimated final cost of the item, the sum of both the approved in-scope extras should be compared against the development assigned to that item. If the order is fifty percent complete; then the revised development should be at least twice the value of the current extras.

The portion of a detailed project estimate that is associated with major equipment typically includes a development allowance for minor design changes, delays, and other areas of potential cost increases. Such a development allowance is often applied separately for each major equipment item, and is calculated as a percentage of the estimated value for that item. This percentage would have been developed from historical data and analyzed purchase orders for similar equipment items on previous projects.

During the life of the purchase order, this development allowance must be monitored and adjusted to reflect the status of an order. Requests for extras by the vendor must be logged and identified with the reason or cause for the requested extras. The reasons should indicate which extras are in-scope and which are out-of-scope. Often standard reason codes are used to classify each extra. These reason codes might include codes for engineering modifications, waiting for data, change in materials, client request for extra, etc.

Since the development serves as an allowance for in-scope changes, the value of changes must be compared against this development on a regular basis. Out of scope changes would not be considered when computing the remaining development, since they would be offset by change orders from a client change or from scope found elsewhere in the estimate.

In order to develop the estimated final cost of the item, the sum of both the approved in-scope extras should be compared against the development that was assigned to that item. In a simple approach, a straight-line calculation would be made. For example: if the order is fifty percent complete; then the revised development should be at least twice the value of the current extras.

Often a straight-line approach is not satisfactory. Due to the type of equipment item, the extras may be identified earlier in the life of the order than that of another type of item. Therefore, it is common for an organization to develop trends for different categories of equipment showing the growth of extras against the percent complete of those orders.

Using the theoretical chart, the forecast for a purchase order that is approximately 60 percent complete, would indicate that on previous orders, the extras would have been 72 percent of the total extras that would result for such an order. By dividing the approved in-scope extras by 0.72, an estimated final value for extras would result. This estimated final value of extras would be added to the initial order value.

In either approach the forecast equals the original order value plus approved changes plus remaining development. Any out-of-scope extras would be added to this forecast.

Of course, such a mathematical computation of a forecast should never be applied blindly. Experience and judgement by the Cost Engineer should identify any unique situations that might affect a specific order.

This approach is also applicable for subcontract orders. In this later case, the reason codes would be more extensive and include such reasons as mobilization and demobilization charges, interferences, and other schedule delays.