Project Management in the Oil and Gas Industry

4.2.1 Cost 
Estimate
A cost estimate is a prediction of the likely cost of the resources that will be 
required to complete all of the work of the project.
Cost estimating is done throughout the project. In the beginning of the 
project, proof of concept estimates must be done to allow the project to 
go on. An ‘‘order of magnitude’’ estimate is performed at this stage of the 
project. Order of magnitude estimates can have an accuracy of 50 to 100 
percent. As the project progresses, more accurate estimates are required. 

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Project Cost Control 117
From company to company, the specified range of values for a given esti-
mate may vary as well as the name that is used to describe it. For example, 
conceptual estimates are those that have an accuracy of 30 to 50 percent. 
Preliminary estimates are those that have an accuracy of 20 to 30 percent. 
Definitive estimates are those that have an accuracy of 15 to 20 percent. 
Finally, the control estimate of ten to fifteen percent is done. Early in the 
project, there is much uncertainty about what work is actually to be done 
in the project. There is no point in expending the effort to make a more 
accurate estimate than the accuracy needed at the particular stage that the 
project is in.
Types of estimates are described by Michel N.W. (2005). Several types 
of estimates are in common use. Depending on the accuracy required for 
the estimate and the cost and effort that can be expended, there are several 
choices.
4.2.1.1 Top-Down 
Estimates
Top-down estimates are used to estimate cost early in the project when 
information about the project is very limited. The term top-down comes 
from the idea that the estimate is made at the top level of the project. That 
is, the project itself is estimated with one single estimate. The advantage of 
this type of estimate is that it requires little effort and time to produce. The 
disadvantage is that the accuracy of the estimate is not high as it would be 
with a more detailed effort.
4.2.1.2 Bottom-Up 
Estimates
Bottom-up estimates are used when the project baselines are required or a 
control type of estimate is needed. These types of estimates are called ‘‘bot-
tom-up’’ because they begin by estimating the details of the project and 
then summarizing the details into summary levels. The WBS can be used 
for this ‘‘roll up.’’ The advantage of this kind of estimate is that it will pro-
duce accurate results. The accuracy of the bottom-up estimate depends on 
the level of detail that is considered. Statistically, convergence takes place as 
more and more detail is added. The disadvantage of this type of estimate is 
that the cost of doing detailed estimating is higher and the time to produce 
the estimate is considerably longer.
4.2.1.3 Analogous 
Estimates
Analogous estimates are a form of top-down estimates. This process uses 
the actual cost of previously completed projects to predict the cost of the 

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Project Management in the Oil and Gas Industry
project that is being estimated. Thus, there is an analogy between one proj-
ect and another. If the project being used in the analogy and the project 
being estimated are very similar, the estimates could be quite accurate. If 
the projects are not very similar, then the estimates might not be very accu-
rate at all. For example, a new technology in enhanced oil recovery is like a 
low salinity project, multiphase pumps, or subsea projects. The modules to 
be designed are very similar to modules that were used on another project, 
but they require more lines of code. The difficulty of the project is quite 
similar to the previous project. If the new project is 30 percent larger than 
the previous project, the analogy might predict a project cost 30 percent 
greater than that of the previous project.
4.2.1.4 Parametric 
Estimates
Parametric estimates are similar to analogous estimates in that they are 
also top-down estimates. Their inherent accuracy is no better or worse 
than analogous estimates.
The process of parametric estimating is accomplished by finding a 
parameter of the project being estimated that changes proportionately with 
project cost. Mathematically, a model is built based on one or more param-
eters. When the values of the parameters are entered into the model, the 
cost of the project results can be obtained.
Resource cost rates must be known for most types of estimates. This 
is the amount that things cost per unit. For example, gasoline has a unit 
cost of $1.95 per gallon, labor of a certain type has a cost of $200.00 
per hour, and concrete has a cost of $100.00 per cubic meter. With these 
figures known, adjustments in the parameter will allow revising of the 
estimate.
If there is a close relationship between the parameters and cost and if 
the parameters are easy to quantify, the accuracy can be improved. If there 
are historical projects that are both more costly and less costly than the 
project being estimated and the parametric relationship is true for both of 
those historical projects, the estimating accuracy and the reliability of the 
parameter for this project will be better.
Multiple parameter estimates can be produced as well. In multiple 
parameter estimates, various weights are given to each parameter to allow 
for the calculation of cost by several parameters simultaneously.
For example, houses cost 150 dollars per square foot, software develop-
ment cost is two dollars per line of code produced, an office building costs 
260 dollars per square foot plus 55 dollars per cubic foot plus 2,000 dollars 
per acre of land, and so on.

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Project Cost Control 119
The cost of the construction and installation is the biggest part of the 
total cost of the project and it is the largest share of the cost of the project. 
This cost is under control by the project manager and the project construc-
tion manager on site. The accuracy of calculating the estimated cost of con-
struction is different from one stage to another. The more accurate the data 
is, the more accurate the calculation of the cost is.
The estimated cost of construction is calculated from more than one 
point of view, as from the owner perspective the cost estimated will be 
calculated based on the design and construction drawings. On the other