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Major Project Execution Cost Forecasting–

Back to Basics

Moses Y. Nkuah, CCP EVP

Abstract–The success of any project is assessed by how well its outcome achieves project objectives within budget
and schedule to satisfy the stakeholder. The project team’s ability to reliably forecast the cost at any point in time is
paramount to meeting the budget expectations. As a cost forecast, by definition, is the prediction of the final cost
of the project based on status and trends, it includes both objective and subjective elements. Therefore, risk and
uncertainty are central to any project cost forecasting, and usually there will be some variance between the final
project actual and forecasts. The aim of the project team in the cost forecasting process is to minimize this variance
as much as possible. However, due to the abundance of project controls software in the project management
environment, there has been an overreliance on system generated cost forecasts rather than an in-depth analysis
by project teams. The purpose of this paper is to examine some of the forecasting techniques that can be applied
during project execution to produce a reliable projected final cost.

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Table of Contents

Abstract .........................................................................................................................................................................1
Introduction ...................................................................................................................................................................3
Basic Project Control Cycle Steps ..................................................................................................................................3
What Is Project Cost Forecasting? .................................................................................................................................4
Key Elements that Impact Project Cost Forecasting ...............................................................................................4
Project Cost Forecasting Tools ...............................................................................................................................8
Project Cost Forecasting Techniques ....................................................................................................................14
Forecast Review, Documentation and Presentation ............................................................................................16
Conclusion ...................................................................................................................................................................16
References ...................................................................................................................................................................17

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Introduction

During project execution, the project controls team is routinely consulted to predict the final cost of a specific scope
or for the total project. The main objectives of these requests are two-fold: (a) to provide a forecast final cost for
the project based on current status and trends (b) to highlight trends or potential budget deviations [4]. The
deviations are assessed by management to determine the need for corrective or proactive actions.

The project cost forecast is prepared, reviewed, and finalized according to the project reporting calendar or
whenever the need for one arises. During the management review of each forecast report, every account projected
to be over the budget is to be assessed to see if cost can be reduced. Those accounts under the budget should also
be analyzed.

Therefore, the project controls team’s ability to monitor, assess and provide a reliable project cost forecast cannot
be underestimated. However, on some projects, not much effort is expended in the development of the cost
forecast. The situation is also compounded by the over reliance on project control software in the performance of
the project controls professionals’ duties. In these instances, project cost forecasts are produced without full
consideration of actual trends and performances resulting in cost information which does not support project
decision making.

It is worthy to note that project cost forecasting is not an exact science, and neither is it linear, empirical, or
contrived. Application of intuition, experience and other soft factors are necessary to accomplish a good forecast.

This paper examines some of the basic but important key elements, tools and techniques that can systematically be
applied on a construction project to produce a reliable cost forecast.

Basic Project Control Cycle Steps

The project control life cycle involves six general sequences of steps. How each is accomplished will be different
based on elements like contract type, project governance, project management structure, etc. Forecasting is an
element of the basic control cycle steps of project execution. The steps are intertwined so without the initial steps
in place, it would be a challenge to achieve the other elements like forecasting.

The six general steps of project controls are really a roadmap and comprise of the following:

Step 1 – Set the Plan: Establish a control budget detailed enough to allow tracking and analysis. The control budget
must be available before the start of work and kept current as changes occur.
Step 2 – Track Performance: Collect data from contractor’s reports, project documents supplemented by interactions
with contractor and project management team. Develop timely and accurate reports providing actual performance
data relative to the control budget.
Step 3 – Analyze: Analyzing is the starting point of control. It involves comparison of actual with expected
performance, identifying and isolating significant deviations, and investigating and understanding these deviations.
Analysis is pro-active and ongoing throughout project lifecycle.
Step 4 – Forecast: Develop a prediction of final cost and schedule based on demonstrated performance and
estimate of remaining work.
Step 5 – Corrective Actions: Identify and implement corrective actions to bring performance in line with
expectations.
Step 6 – Verify: Check results of corrective actions.

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What Is Project Cost Forecasting?

The Merriam-Webster’s English dictionary defines a forecast as “to calculate or predict (some future event or
condition) usually as a result of study and analysis of available data”. With regard to project cost forecasting, it is the
ability to predict the final cost of a unique scope [2]. For example, a single piece of long lead equipment, construction
labour, home office engineering or construction indirects.

The individual forecasts developed for each facet of a project may be consolidated with other elements to form the
overall project cost forecast at any point in time. Forecast should include the most recent project cost performance
and trends. It should also be based on sound reasoning, judgement and have a thorough basis. One of the highest
value functions of project controls occurs when actual progress is used to track current project performance and the
results are used by management in making project decisions.

Key Elements that Impact Project Cost Forecasting

The compilation of a project cost forecast relies on the use of both objective and subjective elements. Understanding
these elements are key in producing a credible project cost forecast. The following are some key elements that
impact the quality and reliability of a project cost forecast.

Project Scope

The project scope provides a basis to determine estimated installation workhours, material, subcontract, and other
associated project costs. Therefore, there must be a clear understanding of what the scope of the project is
comprised of. The required scope elements must be clearly identified in project documents, drawings, execution
plans, etc. The elements of scope documentation determine the level of scope definition which is used to prepare
the project cost estimate and baselines.

As the project scope evolves through the design process, the scope will become clearer and project definition
increases. This is very important because the scope definition impacts the accuracy of the project estimates and the
project cost forecast. Thus, there must be a system in place to pro-actively track and document the scope evolution
process. This ensures that there is a solid scope basis to support the project cost forecast at any point in time.

Work Breakdown Structure and Code of Accounts

To be able to perform effective project control, the project scope elements must be divided using a work breakdown
structure (WBS). The WBS is a hierarchical breakdown of the project scope from top to bottom, into successive levels
of detail. All elements of engineering, procurement, construction, and subcontract services are displayed relative to
each other, and to the overall project, within the WBS. Each vertical subdivision into greater detail represents a level
in the WBS.

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Figure 1–Work Breakdown Structure

Account codes are used to define levels in the WBS, organizational elements, type of activities, work packages,
estimates, budget, and cost information. It furnishes a standard means of defining, receiving, monitoring, reporting,
and auditing information on the project. Standard codes also ensure uniformity and completeness of setting up
project budgets, in analyzing or comparing project performance and in recording and reporting project financial
data.

Cost and Schedule Baselines

A very important step in the project cost forecasting process is the establishment of cost and schedule baselines.
Data from the control estimate and schedule are used to set up the baselines to provide the background against
which all subsequent cost and schedule performance are measured for each account code in the work breakdown
structure (WBS).

The baseline budget must be set up prior to starting work and incurring actual costs. At a minimum, the budget
codes should be in a format and logic on how costs and hours will be tracked on the project. The objective should
be to have just enough codes to know where the project is over or under budget and to be able to identify specifically
how each task is performing [5].

Similarly, a schedule baseline should be established for each account code in the WBS. Resource loading curves
should be created for each discipline. At each reporting period the schedule is updated for actual progress and
expected start and finish dates for all current and remaining activities. In addition, a review should be carried out
about the impact from productivity and availability of resources including resource levelling, personnel availability,
staffing peaks, physical restraints, bulk commodity production rates and adequacy of equipment.

Progress and Performance Measurement

Good project cost forecasting requires a good progress and performance measurement system. At each reporting
period, physical progress should be measured for the actual work performed. Progress should be measured via a
quantity-driven earned value method, independent of actual workhours and cost. Earned values may be in terms of
workhours, quantities, or costs, based on the units used to establish the budgets for the work packages (a subset of
the project that can be assigned to a specific part for execution). Earned value methodology can be applied to
measure engineering, material/equipment, and construction progress.

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Performance indicators are calculated from the planned, actual and earned data developed from the earned value
system. These unitless performance indicators depict how cost or schedule performance is deviating from the
expected. Knowing the actual indicators on the work done to date help to make the forecast estimates to be much
more objective.

Change Management System

On every construction project, changes are inevitable. Changes have serious impact on a project cost and schedule.
For a credible forecast, the project control budget should be current and reflective of all change orders. There must
also be a robust system in place to identify, communicate, track, and process change orders quickly and clearly.

The change management program must be established as soon as the project baseline budget is approved. All the
team members must be conversant with the project’s change management program to correctly identify a change,
evaluate its impact and approve or reject it.

As part of the change management program, there must be an updated change management log at any reporting
period. The logging of each change notice ensures that all identified changes are considered when preparing the
cost forecast, and tracking allows the project team to understand where in the process the change is captured – is
the change pending, potential or approved?[3].

Quantity Development and Reporting

Material quantities have a direct bearing on material costs as well as direct field labour hours and costs. Quantities
are also a key component of a credible earned value management system to assess progress. The project should
have a system in place for quantity development and reporting. Take-off, tabulation, and reporting of all quantities
should be based on the project code of accounts and standard units of measure. A standard form may be used for
the summarization of quantities. The standardization ensures that the project team knows exactly what is required
and allow for easy reconciliations.

It is worth mentioning that equipment items are usually less difficult to track than bulk materials. For bulk materials,
the quantities generated by the final design drawings and bill of materials will differ from the quantities contained
in the estimate. Also, the final quantities actually installed during construction will differ from the quantities
indicated in the final design drawings and bill of materials [1].

Prior to developing the forecast, a review must be done of the status of quantity take-offs based on the latest issued
or approved drawings, for example issue for construction (IFC). Furthermore, total installed quantities if any must
be updated.

Commitment Tracking

Up-to-date commitment information is very crucial for establishing a good projected final value for major
equipment, bulk materials, subcontracts, and other costs. The project control department should liaise with the
procurement/contracts department for data on purchase orders or subcontracts to be committed.

The value of the commitment may vary depending on how a project defines it. For example, the initial commitment
of a major equipment may comprise of the purchase order value, freight, escalation, foreign exchange rate, vendor
representatives and duty while commitment for bulk materials will be the forecast/budget quantity at purchase
order unit rate. Revisions to purchase orders and subcontracts must be included. Blanket purchase orders (e.g.,
fabricated pipes, valves, fittings, cables, etc.) need to be reviewed periodically to ensure that the estimated
quantities for commitments are valid.

At any forecast cut-off period, project controls must ascertain that the procurement status report includes items on
the latest equipment list issued by engineering. A review must be made of the status of open purchase requisitions
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to ensure any additional scope or cost is identified. Others that require review are items such as shipment and
delivery status reports and final purchasing and delivery dates.

Actual Cost and Schedule Reporting

At any given point in time during project execution, the actual cost and workhours of the activities completed-to-
date should be recorded. Having knowledge of actuals-to-date is a basic requirement for effective cost forecasting.
Costs and workhours should be accumulated according to the project work breakdown structure and recorded in a
manner consistent with the control budget. Example of costs to be recorded are construction labour workhours and
costs, home office workhours and payroll costs, home office non-payroll cost and expenses, overhead and escalation.

Similarly, as the project progresses, the baseline schedule should be updated with the recorded time worked. The
schedule baseline can be updated using several methods such as actual time and finish dates, actual work or current
percent complete.

Cost Analysis

Cost analysis provides an indication of how an activity performed. It is a means of identifying at each reporting
period, the deviation between the actual performance and plan or budget for the activity under consideration. These
deviations can be used to extrapolate from the reporting date to the activity completion date.

At any reporting period, the data generated from the accounting, cost control and progress measurement systems
can be analyzed to produce key indicators such as follows:

• Engineering
o Manpower expenditure versus budget
o Productivity/performance versus target
o Drawing production rate versus plan
o Actual wage rates versus plan
• Procurement
o Purchase commitment rate versus target
o Actual vendor delivery time versus promise
• Construction
o Labour workhour expenditure versus budget
o Labour productivity/performance versus budget
o Crew mixes versus plan
o Actual crew rates versus plan
o Actual production rates versus plan.

Good Interaction between Project Team Members

A good cost forecast cannot be prepared by project controls personnel working in isolation. There must be a good
interaction between project controls and other project team members. Project controls will seek critical information
from other departments that would be used to perform the forecast exercise.

For example, information on equipment list, bulk materials and quantities, engineering change notices will be
provided by the engineering team. Information on bid evaluations, purchase orders, contract terms/conditions and
contract price breakdowns will be provided by procurement/contract department while data on quantities installed,
construction schedules, manpower forecasts, progress and productivity reports will be provided by the construction
team.

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Project Cost Forecasting Tools

Numerous project controls tools are available to aid the preparation of a credible cost forecast. It should be
emphasized that these tools should be established as part of the overall project controls system but not on an
individual or on an ad-hoc basis. The tools would be used to collect, analyze, and report the data and information
required to prepare the project cost forecast.

Additionally, the tools help to determine if project objectives are being met and to identify adverse trends.

Some of the project tools that can be useful when developing a project cost forecast are described below:

Progress and Productivity Measurement

The progress percentage values are determined from the progress measurement system at each reporting period.
For example, for engineering progress, workhours are earned by producing tangible deliverables. The workhours
associated with each deliverable will be progressed via labour weighted milestones which represents steps from
start to completion of the deliverable. Deviation from the planned progress is then investigated. Plotted
cumulatively, actual and forecasted progress are shown relative to the original or revised schedule curves, Figure 2.
The overall progress is developed from the individual curves developed for each discipline. Progress curves can be
developed for engineering, procurement, and construction activities.

120%

100% Cumulative Progress (P)

Cumulative Progress (A)
Percent Complete

Cumulative Progress (F)

80%

60%

40%

20%

0%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2016 2017
Cumulative Progress (P) 2.0% 4.0% 8.0% 12.5 17.5 22.5 27.5 32.5 37.5 42.5 47.5 52.5 57.5 62.5 67.5 73.5 78.5 83.5 87.5 90.0 93.0 96.0 98.5 100.
Cumulative Progress (A) 1.5% 3.5% 6.0% 9.0% 13.0 17.0 22.0 27.0 32.0 38.0
Cumulative Progress (F) 1.5% 3.5% 6.0% 9.0% 13.0 17.0 22.0 27.0 32.0 38.0 44.5 51.5 59.0 66.0 71.0 76.0 81.0 85.0 89.0 92.0 95.0 97.0 99.0 100.

Figure 2–Progress Curve

Productivity reflects the effectiveness of the work effort and is assessed by comparing the earned workhours (earned
value) against the number of actual workhours. In the chart below (Fig. 3), the productivity index is calculated as
earned hours divided by actual hours. Using this formula, an index more than 1.0 indicates good productivity. An
index less than 1.0 indicates poor productivity and an index equal to 1.0 shows average productivity. This is a
powerful forecasting tool in combination with progress curves in monitoring contractor performance.

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1.20

1.00

0.80
Productivity

0.60

0.40

0.20

Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16

Control Curve Period Productivity

To-Date Productivity Target Productivity Week Ending

Figure 3–Productivity Curve

Resource Histograms

The resource histogram (Fig. 4) is a bar chart that depicts the quantity of a specific resource required over a
predetermined and specific period of time. For example, baselines can be established for the equivalent staff
associated with engineering discipline hours. Resource histograms provide a quick view of what resources are
available (plan), what resources are being utilized at the present time (actual) and what resources are required in
the future (forecast).

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60

50
Workers (P)
Workers (A)
Workers (F)
40
No. of Workers

30

20

10

0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Workers (P) 17 24 27 27 30 38 39 46 46 47 47 47 48 50 52 53 55 56 56 53 52 42 27 21
Workers (A) 9 18 21 27 30 33 36 44 45 48
Workers (F) 9 18 21 27 30 33 36 44 45 48 52 50 51 51 52 52 53 54 55 56 42 39 33 21

Month

Figure 4–Resource Histogram

Personnel Deployment Chart (Staffing Pan)

For work being performed on a cost reimbursable basis, a personnel deployment chart (staffing plan) is paramount
for forecasting home office engineering and field non-manual labour costs. The staffing plan is the time phasing of
the staffing budget in terms of people assigned to the project and it has the following components:

• Listing of all positions to be filled on the project, including a position title/description

• The name of the individual filling the position
• Start and finish date for each position
• Attributes for each position to support cost forecasting (wage rates, total duration, and others).

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2020 2021

Staff Description Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Total Mths Cost Code

Planned 0.42 0.82 0.81 0.80 0.75 1.00 1.00 1.00 0.50 0.50 1.00 1.00 9.60
Joe Brown Forecast 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 4.00 010112
Actual 0.30 1.00 1.00 1.00 1.00 1.00 1.00 1.00 7.30 010112
Construction Manager Planned 0.00 0.00 0.42 0.82 0.81 0.80 0.75 1.00 1.00 1.00 0.50 0.50 1.00 1.00 9.60
Construction Manager Forecast 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 4.00 010112
Construction Manager Actual 0.00 0.00 0.30 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 7.30 010112
Planned 1.00 1.00 1.00 1.00 1.00 1.50 1.00 0.50 0.50 0.50 0.50 0.50 10.00
John Doe Forecast 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 4.00 010113
Actual 1.00 1.00 1.00 1.00 1.50 1.00 1.00 1.00 8.50 010113
General Superintendent Planned 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.50 1.00 0.50 0.50 0.50 0.50 0.50 10.00
General Superintendent Forecast 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 4.00 010113
General Superintendent Actual 0.00 0.00 1.00 1.00 1.00 1.00 1.50 1.00 1.00 1.00 0.00 0.00 0.00 0.00 8.50 010113
Planned 0.50 0.50 1.00 1.00 0.50 0.50 1.00 1.00 6.00
June May Forecast 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 010115
Actual 0.73 0.72 1.00 1.00 1.00 0.70 1.00 1.00 1.00 8.15 010115
Planned 0.50 0.50 0.50 1.00 1.00 1.00 1.00 0.50 6.00
Alan Green Forecast 0.00 0.00 0.00 1.00 1.00 0.00 2.00 010115
Actual 0.32 0.77 0.70 1.00 1.00 3.79 010115
Project Coordinators Planned 0.00 0.00 0.50 0.50 1.00 1.50 1.00 1.00 2.00 2.00 1.00 1.00 0.50 0.00 12.00
Project Coordinators Forecast 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 0.00 0.00 2.00 010115
Project Coordinators Actual 0.00 0.73 0.72 1.00 1.00 1.32 1.47 1.70 2.00 2.00 0.00 0.00 0.00 0.00 11.94 010115
Planned 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.50 0.50 9.00
Dave Black Forecast 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 3.00 010116
Actual 0.20 1.30 2.50 1.40 1.10 1.00 1.00 1.00 9.50 010116
Planned 1.00 1.00 1.00 1.00 0.80 4.80
Jordan Man Forecast 0.00 0.00 0.00 0.00 1.00 1.00 010116
Actual 0.47 0.88 0.65 1.00 1.00 1.00 5.00 010116
Safety Coordinators Planned 0.00 0.00 1.00 1.00 1.00 2.00 2.00 2.00 2.00 1.80 0.50 0.50 0.00 0.00 13.80
Safety Coordinators Forecast 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.00 1.00 1.00 0.00 4.00 010116
Safety Coordinators Actual 0.00 0.00 0.20 1.30 2.97 2.28 1.75 2.00 2.00 2.00 0.00 0.00 0.00 0.00 14.50 010116

Totals Planned 0.00 0.00 2.92 3.32 3.81 5.30 4.75 5.50 6.00 5.30 2.50 2.50 2.00 1.50 45.40
Totals Forecast 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.00 4.00 3.00 2.00 14.00
Totals Actual 0.00 0.73 2.22 4.30 5.97 5.60 5.72 5.70 6.00 6.00 0.00 0.00 0.00 0.00 42.24

Figure 5–Personnel Deployment Chart

Equipment Deployment Chart (Equipment Schedule)

Like a personnel deployment, construction equipment schedule is the time phasing of each specified piece of
construction equipment including rental rates, freight in/out costs, equipment utilization, fuel pricing, and
maintenance costs. The construction equipment schedule should include items like:

• Equipment Number
• Ownership Status (On Rent, Off Rent, Owned, Sold)
• Hourly Rate and / Purchase Price
• Actual On/Off Dates
• Forecasted On/Off Dates.

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2021 2022

Total

May

May
Aug

Nov

Dec
Sep
Mar

Juy

Feb

Mar
Apr

Jun

Apr
Jan
Oct
Equipment Description Cost Code
Months

P 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 15.00
Tractor/Trailer Unit F 010302 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 15.00
A 0.00
P 24.00 20.00 12.00 5.00 10.00 15.00 15.00 20.00 20.00 16.00 12.00 8.00 177.00
Heaters F 010307 24.00 20.00 12.00 5.00 10.00 15.00 15.00 20.00 20.00 16.00 12.00 8.00 177.00
A 0.00
P 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 60.00
Air Compressors F 010311 1.00 4.00 4.00 5.00 5.00 5.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 60.00
A 1.00 1.00
P 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 30.00
Zoom Boom F 010314 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 30.00
A 0.00
P 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 45.00
Manlifts F 010319 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 45.00
A 0.00
P 1.00 1.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 1.00 1.00 1.00 1.00 1.00 21.00
Cranes Less than 80 Ton F 010351 1.00 1.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 1.00 1.00 1.00 1.00 1.00 21.00
A 0.00
P 2.00 3.00 4.00 5.00 5.00 5.00 5.00 5.00 4.00 3.00 2.00 2.00 2.00 1.00 1.00 49.00
Truck - 1/2 or 3/4 Ton F 010351 1.00 4.00 4.00 5.00 5.00 5.00 5.00 5.00 4.00 3.00 2.00 2.00 2.00 1.00 1.00 49.00
A 1.00 1.00
P 1.00 1.00 1.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 1.00 1.00 1.00 1.00 1.00 22.00
Truck - 1 Ton 4x4 Flat Deck F 010351 1.00 1.00 1.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 1.00 1.00 1.00 1.00 1.00 22.00
A 0.00
P 1.00 1.00 1.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 1.00 1.00 1.00 1.00 1.00 22.00
8 to 12 Passenger Van F 010351 1.00 1.00 1.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 1.00 1.00 1.00 1.00 1.00 22.00
A 0.00

Figure 6–Equipment Deployment Chart

Wage Rate Curve

This is a chart developed to show the period and cumulative actual cost of the engineering workhour rate (for
example, Fig. 7). It can be developed by evaluating the wage rate for each discipline, and then adding them together
on a weighted basis. Deviation of actual versus planned can indicate a potential cost overrun.

Engineering Average Wage Rate

$140.00

Budget $122.63

$120.00

$100.00

$80.00

$60.00

$40.00

$20.00

$-
Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07
Period $125.9 $129.7 $122.4 $111.1 $107.8 $117.2 $105.6 $108.4 $110.7 $108.9 $111.5 $113.8 $117.2
Cumulative $125.9 $129.0 $125.1 $119.4 $113.9 $114.8 $112.8 $111.9 $111.7 $111.4 $111.4 $111.5 $111.5

Figure 7–Engineering Wage Rate Curve

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Craft Mix – Average Wage rate Curve

This profile represents cumulative planned and actual hourly wage rate of the direct labour (Fig. 8). The wage rate
is calculated by dividing the total direct labour cost by the total direct labour hours. Significant deviation of actual
versus planned values can indicate a potential overrun.
Craft Average Wage Rate

$100.00

$90.00

$80.00 Budget $78.58

$70.00

$60.00

$50.00

$40.00

$30.00

$20.00

$10.00

$-
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Oct-14 Oct-14 Dec-14 Jan-15 Jan-15
Period $76.90 $81.70 $82.04 $84.65 $85.30 $78.99 $77.83 $71.45 $75.20 $80.90 $85.45 $88.60 $90.00
Cumulative $85.00 $83.20 $82.00 $83.90 $84.00 $80.00 $78.00 $75.00 $75.00 $78.00 $80.00 $82.00 $84.00

Figure 8–Craft Wage Rate Curve

Work Unit Tracking (Placement Rates)

Work unit tracking curves are a significant measure of productivity during a project’s construction phase. They
measure actual direct workhours against physical units of work completed. For example, hours per cubic meter of
concrete for foundations, hours per linear meter for pipe erection, hours per linear meter for wire and cable, hours
per ton for structural steel. These indicators reflect the production efforts by key quantities of each craft discipline
and are good indicators of future performance.

Change Order Log

The purpose of the log is to provide a current summary of the change order activity for a project. As illustrated in
Fig. 9, components of a change order log may include:

• Change Order Number

• Description
• Change Type
• Originator
• Date Initiated
• Whether Approved, Rejected or Cancelled
• Date Approved, Rejected or Cancelled
• Cost and Schedule Impacts.

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CLIENT
JOB TITLE
JOB NO.

Tagged
Other Total Potential
Change Notice Change Initiation Date App./Rej. Equipm ent
Rev. Change Type Description Eng'g $ Field $ Costs Cost Schedule
No. Status Date Issued Date / Materials
$ Im pact Im pact
$

CHANGES TO DATE
Figure 9–Change Order Log

Commitment Register

Commitments serve as a reference against the budget. Generally, a purchase order, an executed contract or
subcontract is the source document for commitments. Each commitment must be coded and properly recorded as
per the project code of accounts.

Project Cost Forecasting Techniques

Once the key elements that impact cost forecasting have been identified and the necessary tools to support
forecasting have been established, then the project controls team are able to develop realistic and credible project
cost forecasts.

As mentioned previously, project cost forecast is mainly dependent on contract type. As a result, not all the
techniques discussed below would be applicable to every project in execution. For instance, most of the techniques
would be relevant to forecast the cost for a reimbursable type of contract while others would be applicable to a
lump sum or unit rate type of contract.

The following describe cost forecasting techniques for some major project activities.

Home Office Engineering

A review of to-date cost and hours should be made at any given cut-off date during the project period. The to-go
workhours for each discipline should be developed based on known remaining work scope and application of the
latest performance factors and staffing plans. The to-go costs should be based on the unit rates developed from the
assessment of to-date costs and workhours. The to-go unit rates must be adjusted where necessary. The unit rates
may be affected by events such as escalation, department mix, increase or decrease in other costs.

The to-go forecast is then developed by applying the unit rates to the to-go workhours for each discipline. The total
home office engineering cost forecast is the total of the cost to-date and the estimated cost-to-complete.

Engineered Equipment

A review should be made of the latest tagged equipment list to ensure that all items are included in the forecast.
Also review major equipment orders for potential bonus and penalty impacts. Development allowances are usually
included on equipment costs to absorb minor modifications to initial purchase orders. These allowances should be
run down as purchase order award progresses to close out. Other allowance items such as tax, freight, duties, and
vendor representatives should be incorporated in the equipment cost forecast.

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Bulk Materials

Cost forecasting of bulk materials involves two components – quantity and unit costs. To support proper cost
forecasting, a material register system must be implemented that show unit costs, total costs, commitment to date
and latest forecast quantities. A review should be made of actual purchase order unit prices and commitments to
date. Uncommitted material costs must be based on the estimate-to-complete quantities at one of the following
unit rates: recent rates in other similar purchase orders, budget estimates or specific vendor quotes. Also, to be
considered in the material cost forecast are allowances such as tax, freight, duties, and vendor representatives
where applicable.

Construction Labour

The construction labour cost forecast consists of two steps: (1) evaluating the remaining quantities and labour
performance to develop a workhour forecast (2) pricing the workhours to develop a cost forecast. A review should
be made of the completed quantities of each discipline and the corresponding expended hours. Evaluate the
remaining quantities, to-date, and estimate-to-complete wage rates (including overtime requirements). The
remaining labour cost forecast would be based on to-go quantities, production rates (based on productivity) and to-
go craft wage rates. The final construction labour forecast cost is obtained by adding to-go and to-date costs.

Site Office and Support Staff

Review site manpower schedule in accordance with remaining site schedule duration for each cost code in
accordance with the approved staffing plan. An analysis should be made of the labour cost trends to-date and
estimate-to-complete hours and wage rates for remaining field supervision and site support staff. Estimate-to-
complete costs is based on expected staff durations and to-go wage rates.

Indirect Costs

The project schedule should be reviewed to determine requirements for items such as temporary construction
facilities, consumables, and other site indirect items. An analysis should also be made of the item costs and quantities
used to-date. Estimates of to-go costs should be based on expected durations, quantities, and costs of identified
indirect items.

Construction Equipment

The project should develop and maintain a construction deployment chart (equipment schedule) for both owned
and rented equipment to determine the number of equipment items required at any point in time. Remaining
equipment should be based on known equipment rental rates, including mobilization and demobilization costs and
to-go durations. Also, to be included are fuel and maintenance costs where applicable.

Escalation

Each cost category must be reviewed for potential escalation in current pricing levels over the remaining duration
of the project. Procurement packages must be aligned to the forecast schedule and the escalation required for each
package must be calculated based on the year that costs were forecast to be committed. That is, a placement of a
purchase order, as that would represent a locking in of cost commitments for a vendor procurement package.

For contracts, escalation must be calculated on a yearly basis aligned to the forecast schedule for when committed
and contract escalation terms.

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Forecast Review, Documentation and Presentation

Before the project cost forecast is published, it must be reviewed by and presented to concerned members of the
project team such as contractor representatives, package leads, engineering leads, procurement, construction, and
project management. The aim of the presentations and review meetings are to provide a forum for the project team
to discuss the to-date, estimate-to-complete costs and any other factors included in the cost forecast. This enables
the project team to determine risks and changes in the project scope and costs.

Typical formal reviews for a major project cost forecast include:

Scope/Quantity Review: This review is held with the Engineering team to ensure that the estimate of the to-go direct
costs adequately represents the technical scope as defined in the contract documents. The review among other
things should cover items such as accuracy of quantities, verification of technical assumptions, adequacy of scope,
inclusion approved changes, etc.

Construction Review: This review is held so that the construction team may verify items such as total estimated field
workhours, labour productivity, craft wage rates and site indirects included in the forecast.

Procurement Review: This meeting is held to assess the validity of bulk materials and equipment pricing.

Management Review: This review is held to obtain project leadership team approval of the forecast including any
allowances. Topics to discuss during this review may include scope changes, cost increases, schedule extension, craft
retention issues and general site conditions.

Following the approval of management of the project cost forecast, all cost and schedule systems should be updated
to reflect the latest forecast data.

Conclusion

The importance of effective forecasting in the cost control of construction projects cannot be over-emphasized. Cost
forecast information and data are used by management to make crucial decisions for a project and/or company.
Consequently, a poorly developed project cost forecast can lead to severe consequences for a project’s financial
outcome.

Development of the project cost forecast must be based on methods and techniques that can be defended by the
project controls team. The project team must be conversant with the key elements that impact a project cost
forecast and maintain the necessary tools that can be used to support the preparation of a credible cost forecast.

It is also essential that those developing the cost forecast be familiar with the project’s scope and past performance.
Another important factor in developing a credible forecast is collaborative work as actual costs, commitment, project
performance and other data and information must be sort from other departments within the project team.

With these elements in place and using a disciplined as well as a systematic approach, the preparation of a credible
project cost forecast is achievable.

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References

1. Arthur E. Kerridge & Charles H. Vervalin (Editors). Engineering & Construction Project Management, Gulf
Publishing Company. 1986, Houston, Texas.
2. James E. Barr & Stephen M. Jacobson. Forecasting - What a Responsibility. Cost Engineering Vol.46/No.1 January
2004, Morgantown, WV.
3. James E. Barr & Stephen M. Jacobson. The Keys to Forecasting. Cost Engineering Vol.46/No. 4 April 2004,
Morgantown, WV.
4. Leslie E. MacMullan. Cost Forecasting - Beyond the Crystal Ball. AACE International 1996 Transactions -
C&S/M&C.20, Morgantown, WV.
5. Scott Kimpland. Your Bad Project Just Got Worse: The Basics of Cost-to-Complete Forecasting.
https://www.fminet.com/fmi-quarterly/article/2013/09/your-bad-project-just-got-worse-the-basics-of-cost-to-
complete-forecasting/. Septemebr 1, 2013.

Moses Y. Nkuah, CCP EVP

Hatch Ltd.
moses.nkuah@hatch.com

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