Processing Equipment: Pad Your Cost Estimate!

Take into account some often neglected issues as well as inevitable budget overruns

By Dirk Willard, Contributing Editor

The contractor’s estimator worked up an estimate that was far too low. I knew it was low because, as is my custom, I used “Means Facilities Construction Cost Data” and past estimates to do a 90% budget estimate of the project. For one thing, she forgot to consider the demolition of a salt pit. I told her it was double-rebar but she missed it in her estimate. Regardless, I was forced to take the low bidder — but I knew the project would incur unavoidable cost overruns.

Never use discounted equipment prices for estimates.

I spent the morning of the first day of the project getting buy-ins from stakeholders for a change I planned to make. When the contractor’s foreman approached to tell me the outfit was abandoning the job (because it figured the loss from completing the job would far outweigh forfeiting its deposit guarantee and the damage to its reputation), I asked him if he’d consider the change.

The contractor was to build a steel platform to replace a concrete floor. This second level contained the salt pit; the double-rebar concrete went down below the plant floor. Originally, management wanted an open all-steel construction with steel I-beam columns. My alternative was to replace two of the steel columns with concrete ones re-using the wall of the salt pit and cutting a doorway. “Your penalty for the budget error is paying for the civil engineer’s stamp,” I noted. The foreman was happy because the contractor actually made more profit on the job than expected. Not all budget problems end so amiably.

Let’s consider some ways that you can pad your budget to survive the cost overruns we all know will occur.

First, keep in mind that materials usually consume only about 20–25% of the budget. Labor costs account for the rest. This is a generalization, of course; the reverse often holds for instrument projects. I once worked at a company that thought it would make up for bad design estimates by scrounging for vendor discounts; it didn’t work out.

Second, never use discounted equipment prices for estimates. Instead, use the price of the highest bidder! Don’t forget to add in 5–10% for shipping and handling. If the project is expensed, as most are, taxes are excluded. Check state tax laws. For complicated equipment orders, knowing your customer’s needs in advance is crucial for avoiding labor overruns. (See: Rest Easy With a Good BEDD.)

This leads to my third point: If you’re a contractor making the estimate, track change orders! Don’t be shy. If a client alters a pump specification that causes you to re-order the pump, that’s a change order. On the other hand, if you didn’t get a sign-off on a specification, you’re holding the bag. Set up a spreadsheet early in a project to itemize dates, original state of the scope item, reference documents and, especially, who ordered the change. Provide this to the client on a regular basis, and have an exit strategy if the project folds. Demobilization can incur significant costs.

Fourth, don’t paint yourself into a corner. On an assignment in Cincinnati, I was told to single-source the coating work for an agitator shaft and impeller from a vendor in Louisville. However, that shop was busy then and quoted me six weeks and a high price for the job. After fifteen minutes of searching on the Internet, I found a qualified company in New Jersey that could do the work for half the cost in less than ten days. Even with shipping, it was a bargain. Besides, six weeks would have blown up my schedule. The same situation exists for labor: after a union labor shortage resulted in a disastrous reactor installation at one site, we planned for an additional contractor for the next job.

If you ever wonder why you need padded budgets, think of these often ignored but not incidental costs: 1) business development; 2) price increases; 3) project review delays; 4) vendor delays; 5) construction bidding; 6) hazard and operability study delays; 7) weather delays, etc. Clients need to be aware of these costs. The timidity of project managers in communicating problems in a timely manner is a key reason why the majority of engineering projects are over-budget and behind schedule.


dirk.jpgDIRK WILLARD is a Chemical Processing contributing editor. He recently won recognition for his Field Notes column from the ASBPE. Chemical Processing is proud to have him on board. You can e-mail him at dwillard@putman.net

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