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Comment PDF Project Management

Facts At Your Fingertips: Cost Estimation and Risk

By Scott Jenkins |

Understanding project risks is critical to arriving at useful cost estimates. Since each capital project in the chemical process industries (CPI) is somewhat unique, it can be difficult for engineers and project leaders to price risks in their estimates and project budgets. This one-page reference provides information on project risk, contingency and accuracy in cost estimation. Cost estimates include two main parts: the “base,” which encompasses the risk-free costs, other than specific allowances, and the “risks,” which include contingency, reserves, escalation and currency exchange. Definition of terms The following terminology is associated with cost estimates and risk. Risk. An uncertain event or condition that could affect a project objective or business goal. Base estimate. Estimate including allowances, but excluding escalation, currency risk, contingency and management reserves. Allowances. Resources included in (base) estimates to cover the cost of known, but undefined, requirements for an individual activity, work item, account or sub-account. Contingency. An amount added to allow for items, conditions or events for which the state, occurrence or effect is uncertain, and that experience shows will likely…
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