Cost Model

What is a cost model? How does it differ from a cost database? What is a cost model used for? Are there different types of cost models?

A cost model is an expression of the scope and cost of an asset or type of asset including specific assumptions regarding schedule. Usually, a cost model is a detailed expression of actual scope in terms of quantities and their respective historic cost and productivities. A detailed cost model complete with actual scope and cost database can be converted to elemental cost models, unit costs, or even system cost models.

A well-developed cost model can enable an owner or contractor to turn around a fairly high quality estimate to management during the conceptual and planning periods in the project life cycle. It is important that owners recognize however that a cost model regardless of the detail supporting it carries with it significant risks that must be addressed with contingency allowances etc.. A cost model requires adjustment for period escalation, location factors, market adjustments and other factors.

A cost model based estimate can also provide detail to actually allow the owner or contractors team to understand changes in cost as design progresses.(such as quantities or types of material or equipment)

A cost model system that tracks, for example the cost of major units ( equipment) and their installation can help a project team make informed decisions very quickly.

In actuality, cost models can vary significantly in complexity and purpose.
A simple square foot cost model at an asset component level can be developed and maintained fairly simply and inexpensively and can yield a valuable tool to an owner if managed correctly. It does have its limitations however, when a need arises to evaluate escalating costs of a new facility compared to the historically based cost model. Data you would need to develop and maintain might include total cost , total square feet, total pieces of equipment etc., for each building.

A detailed asset cost model is potentially more expensive to initially develop and because it is more detailed, also more involved to maintain. Data needed here might include material quantities, material costs, labour hours, labour costs, equipment costs etc. It has the strengths of providing detail to allow analysis of changes in scope and cost that the higher level approach does not afford. It also is advantageous because of the ability to develop system cost models, equipment unit cost models, material unit costs etc. Also, detail can always be rolled up to provide higher level cost models. A cost model that is based only on high level data cannot be broken down into detail quite so easily if at all.

Summary:
Cost modeling using actual scope, cost and schedule can be very useful when an owner expects to build multiple like kind facilities.

To be most likely to succeed, planning for the cost modeling effort would begin with the planning for construction of the model scope.

There are many types and levels of cost models.

A detailed cost model does not answer the question of what a like facility will likely cost without consideration of many other factors:

Ø  Project Time Period

Ø  Project duration

Ø  Project location

Ø  Economic and Market conditions

Ø  Site differentials

Ø  Scope refinements

An owner or contractor will want to consider the cost versus the benefits of building the various types of cost models and chose the approach that best matches their specific needs.

How to get the advantages from cost models & How to maintain the cost model

On a recent project, found that an owner who had built similar facilities with many consistent elements many times had not collected its actual costs in sufficient detail to be able to determine historical unit costs or productivities save at a very high level. A new asset development program began and a determination was made to structure this new programs data such that historical data would be able to be reconstructed. (as a basis for cost model development.)

As the first phase of the program entered construction, realized that the construction contracts were not structured in such a way as to provide detailed actual cost for many scopes. In order to mitigate this we performed detailed reconciliations of scope and cost during the bid phase of the program.

When phase 2 was begun, set about developing cost models for use in phases 2 and future using the best data available from phase one. Many of the assets were originally expected to be exactly like those of phase 1.

The starting point for our cost model was the phase 1 definitive estimate.
We chose this as a starting point because the estimate had all the detail scope and structure already established. We proceeded to update a copy of this detail with issued for construction or better quantities, (as-built) when available. We also updated our cost model detail with the best actual productivity information available from phase 1.

Next we adjusted labor rates and subcontractor overheads to reflect the best actual experience we had from phase 1. Finally, we adjusted equipment and materials to reflect actual experience as best we could. The result was a very detailed reflection of the best scope and cost data available in our model. From there when we needed to develop a quick estimate of an element of that model, we were able to split that part out and apply escalation and any other risk factors we found appropriate. We could turn around a very detailed cost model picture of a scopes cost very quickly. Iterations were also simplified when what ifs were needed.