Project Management in the Oil and Gas Industry

4.1 Introduction
The first question to define whether the project is successful or not is if the 
project finishes within the budget or not.
You may think you are a hero if you save 50 percent of the project bud-
get, but really you are loser if you do not define the scope well, reduce the 
activity, do not reach the target, or do a very conservative cost estimate. The 
project manager will say, “I save your company money”. No sir, you lose the 
company money because, in most cases, the company will keep the money 
for this project to have a continuous cash flow to avoid project stoppers. 
About 50 percent of the budget is keeping hold and not investing in other 
projects. You should have a wide vision.
The cost involves many subjects as we will discuss the cost of a project as 
a whole from a decision-making point of view.
In the start of a project, the cost estimate is the main target data to obtain 
in order to define the project budget. During project execution, we apply 
cost control methodology to control and follow up the project.
The cost estimate calculation is usually done in more than one phase dur-
ing the project. In the initial phase of studies, as in the appraisal phase, the 
4
Project Cost Control

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114 
Project Management in the Oil and Gas Industry
cost is calculated by a simple principle and the borders of right and wrong 
are very large. The accuracy of the cost estimate calculation increases with 
the forthcoming phases of the project.
The possibility of increasing the actual cost of the project decreases with 
time until reaching the end of the project, where we reach 100 percent of 
the cost of the project.
The phase of feasibility studies needs people with very high experi-
ence in similar projects to provide an accurate value to the cost. Therefore, 
it must be made through specialized expertise from those familiar with 
such projects. Residential building projects are different than factories and 
petroleum projects, all of which have distinctive characteristics and needs 
of their own.
To illustrate the steps in estimating the cost, we will use a traditional 
example of going to a friend to purchase land for a new villa. Your friend 
requires a rough budget cost estimate, but this will be very complicated to 
obtain, as you have no drawings, calculations, or concrete data to calculate 
cost.
So your estimate value will contain high uncertainty. Someone with 
experience from an engineering office can provide a budget, but he or she 
at least needs to know the number of floors and the location of the land and 
then he or she will have a cost as per (USD/m
2
) for this land location, the 
number of floors, and so on.
The previous example has a very preliminary stage and it is commen-
surate with small projects such as building a home. In the case of large 
projects, a budget is required for this stage by making surveys and taking 
soil boreholes and then calculating the cost of the project. Then, the entire 
project will be studied again to obtain the profit from it after minor clarity.
In major projects, such as large-scale and high-cost industrial projects, 
especially where the equipment and machinery for production are unique, 
the estimated cost in the initial phase of studies could be within plus or 
minus 50 percent accuracy.
The difference between the expected and real value is very large, but 
when there is a similar project then the smaller will be the difference 
between the actual and estimate cost, but in industrial facilities a large 
proportion of the cost depends on the equipment and machinery used in 
manufacturing.
On the other hand, there are some projects, such as the replacement 
and renovation of residential or industrial facilities, that have a very low 
percentage of accuracy and will also be about plus or minus 50 percent.
After finishing the FEED engineering, the estimate cost accuracy will be 
about plus or minus 30 percent.

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Project Cost Control 115
After finishing the detail construction drawing for the whole proj-
ect, the estimate cost will be calculated based on the quantity and will 
provide an approximate cost for each item. Then, we have an estimate 
cost for the project with a predicting, small deviation nearer to the 
actual and accepted accuracy, which is about plus or minus 15 percent 
in this stage.
After determining the cost of the project, the project has a budget that 
can run the project. After a while, you discover that the cost may be over 
15 percent and the project may completely or partially stop. On the other 
hand, if the cost is less than the budget lower and less than 15 percent, you 
could book the amount of money you don’t use and see whether or not the 
owner can invest it in another projects. Therefore, the cost estimate is very 
critical and vital to project success.