Cost Insights
by PowerAdvocate

Intelligence for energy companies seeking a data-driven approach to cost management

5 Steps to Preventing Cost Overruns: Step 2, Develop Market Data Assets

February 25, 2015 at 10:55 PM / by PowerAdvocate

Curious about using market data to inform more accurate estimates? In this installment of our 5-step guide to improving project estimates, we'll show you how to use data to make your estimates reflect actual market conditions.

The 5 Steps to More Accurate Project Estimation

Step 2: Diversify Your Data Assets with Market Data

5 Steps to Better Estimates
Time and again, we see midstream project estimators left to their own devices when it comes to gathering market data. The result is that data collection is duplicated, insights aren't shared among projects, and knowledge doesn't become progressively more accurate over time.

And where data is lacking, estimators end up relying on experience and rules of thumb susceptible to bias and omission.

To move away from the idiosyncratic approach to estimation, we suggest that midstream companies develop two data gathering processes:

Develop a Company-Wide Repository of Market Data

In order to leverage past project insights, you'll need market data that gives you insight into costs in the past, present, and future. 

Internal vs. External Data

The most successful midstream companies develop those data assets by creating a centralized database that includes:

  • Indices that measure changes in the key commodities that drive project costs, many of which are publicly available from government agencies and industry organizations or from market intelligence subscription services
  • Cost models that show the extent to which those indices affect major categories of project costs
  • Standardized, company-wide forecasts for key project categories, based on qualitative and quantitative market data gathered from market research, expert commentary, and internal Subject Matter Experts
  • Risk factors that quantify commodity exposure for each project category

With a combination of good historical and predictive market data, you'll be able to forecast project costs at the time of procurement as well as model future O&M costs to assess ongoing project profitability. 

Tip: Category-level insight is critical. Different WBS categories, each comprising different percentages of total project costs, are exposed to different risk profiles. Single measures of inflation or escalation can't capture the true differences between past market costs and future ones.

Tip: Take a page from Supply Chain. One of the best ways for estimation teams to develop their market data assets is to engage their colleagues in Supply Chain, who likely have the most visibility into market costs and trends.

Acquire Up-to-Date Market Pricing Data

The most accurate way to access market cost data is to run sourcing events to gather pricing information from suppliers early in the estimation process. In fact, we've seen midstream companies generate estimates of ±5% contingency using this process, where they had previously contracted engineering firms (for hundreds of thousands of dollars) who maxed out at ±20%.

Tip: Match your market data to your estimation needs. While it's best to rely on aggregate market data for earlier stage estimates, we recommend using supplier-submitted pricing information to lower contingency numbers on later stage estimates.

There are three approaches by which midstream companies can gather pricing data from their suppliers:

  • The Supplier Meeting Process: Hold informal meetings with suppliers to build relationships and discuss market pricing. While this process yields interesting market insights, it's time-consuming for all parties and often results in vague and uncertain pricing information.
  • The RFP Process: By issuing blanket RFP's, midstream companies can collect more pricing information more quickly, allowing them to compare prices among suppliers along with metrics such as safety and financial risk. However, RFP's often lack the pricing rigidity that the most accurate estimates require.
  • The Firm-Fixed Pricing Process: By soliciting firm-fixed pricing from suppliers early on in the estimating process, midstream companies can lock in fixed price data points to use in their financial models. But for many midstream companies, the time it takes to collect and compare those responses is prohibitive.

To fix that problem and take advantage of the vast wealth of pricing information available from suppliers, we suggest that midstream companies establish quick-execution sourcing processes.

You can do that by leveraging sourcing technology to quickly accelerate the rate at which you conduct bid events and the amount of pricing data that you can analyze. The best sourcing processes allow you to quickly issue RFI's, RFP's, and firm-fixed pricing requests to the market and compare responses in a way that allows the most competitive pricing to float to the top.

Whether market indices and forecasts for early-stage estimates or supplier-submitted pricing information for later ones, market data is critical to generating accurate project cost information. Stay tuned for next week's installment to learn how to use that market data to account for project cost drivers.

Interested in learning about the rest of the steps to accurate project estimation?

eBook Click here to download our eBook:
The Guide to Midstream Project Estimation

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