Estimate Validation Is a Key Practice for Improved Project Outcomes

IPA’s research over the last decade has identified owner estimate validation as a Best Practice. It is an important element in setting competitive and predictable cost targets and is recognized by AACE International as a recommended practice.[1] Moreover, a recent IPA study of over 2,500 projects identified significant benefits associated with owner estimate validation. Projects with good quality estimates have an average cost savings of 6 percent for large projects and 4 to 5 percent for site and sustaining projects.

What Is Needed to Perform Reliable Estimate Validation?

Estimate validation assesses a project estimate’s competitiveness and conformance to project and business expectations and targets. Critically, it uses metrics different from those used in estimate preparation to compare the estimate with key costs and labor hours and quantity-based metrics derived from previously completed projects.

Estimate Validation vs. Estimate Review

It is important to note that estimate validation is not the same as estimate review. These are two separate activities with different goals, processes, and skills. Estimate review checks if the estimating process is following the estimate plan and industry-accepted practices. Estimate validation is a quantitative process to evaluate an estimate’s competitiveness and conformance to the business targets. Information from the estimate review is essential to provide context to the estimate validation results. Therefore, estimate validation should follow estimate review as a separate process. Project processes that combine the two activities have worse cost outcomes than those that separate them.

As shown below, three Best Practices support effective estimate validations:

Process-Driven Estimate Validation

IPA research shows that using a defined work process for estimate validations improves cost performance, decreasing costs by about 9 percent (compared with projects that did estimate validation but did not follow a defined process). The work process provides the structure for estimate validation and includes features such as checklists, procedures, and guidelines.

About 75 percent of companies observed by IPA include an explicit estimate validation step as part of their work process and many have similar process requirements, but the following practices that further reduce costs stand out:

• Including estimating requirements in FEED/basic engineering contracts reduces cost by 5 percent on average
• Developing a change management process reduces cost by 5 percent on average

A closeout review is an important part of the estimate validation process. It consists of capturing project data (practices, cost, schedule, scope) in an explicit process step and using the data as input for the company’s databases. Historical databases provide quantitative data and information for future estimate validations and are correlated with better outcomes, but only 30 percent of companies conduct closeout reviews.

Lack of resources and discipline prevent many companies from completing closeout reviews. The reviews require resources and staff to collect project data at closeout and substantial work is needed to maintain historical databases (including data collection, data normalization). Finally, if the project data are not collected within a few weeks (or days) of project close out, they are lost forever.

Another key part of the estimate validation process is estimate reconciliation. Estimated costs tend to increase as projects move through the definition or Front-End Loading (FEL) phase. Estimate reconciliation quantifies these changes and enables a root cause analysis to be done. Implementing a formal and disciplined estimate planning process is essential to estimate reconciliation and traceability.

An estimate reconciliation requires a consistent work breakdown structure (WBS) and code of accounts (COA). Using a consistent COA enables an “apples-to-apples” comparison between company projects. Cost definitions and assumptions for soft costs (allowances, indirects) must be consistent and understood, and these definitions must be defined as part of the estimate planning process at the start of project definition. Most companies require an estimate reconciliation to be done, but many are incapable of conducting it during FEL.

Independence and Authority

Having a cost estimator who has both independence and authority is another key Best Practice for estimate validation.

Independence refers to the estimate decision-making process. The validation exercise should be a truly unbiased and “cold-eye” exercise. Any project team member will have too much stake in the outcomes to provide an unbiased assessment. Therefore, having a company cost engineer who is not a part of the project team do the estimate validation is more likely to result in an unbiased assessment. Independence is maintained if the validation results are reported directly to the gatekeeper or estimating manager outside the project team’s authority.

Discussing the cost validation results in an interactive meeting that includes the core owner project team, gatekeeper, and estimate validator (at a minimum) further improves project cost effectiveness over only sending a report or memo. Only half of industry respondents included a formal review meeting as part of their estimate validation step.

Data Driven

Effective estimate validation requires diverse and comprehensive cost data. The required data may take on a range of forms and structure and include:

• Cost metrics and ratios
• Results from parametric models or other related conceptual estimating tools
• Project scope and technical data
• Details from a check estimate
• In-house vs. external data sources

The use of key performance indicators (KPIs) is associated with improved cost outcomes. KPIs generally include a set of cost metrics that are checked as part of every estimate validation and serve as the foundation for the estimate validation report.

Using data from multiple sources improves cost performance whereas relying on a single data source is not associated with better outcomes. Companies with strong in-house estimating systems may focus too much on internal data, which can perpetuate the poor practices used in previous company projects. Using company and industry data provides a comprehensive assessment.

Estimate Validation in Industry

Most owner companies include an estimate validation or review within their capital project work process. However, the application of estimate validation varies within Industry and among companies, with only 44 percent of projects completing an owner estimate validation using detailed metrics before authorization. For the companies that do perform estimate validation, some are missing critical aspects, such as an independent review or high-quality data.

How your company conducts and manages the estimate validation review affects its effectiveness:

• Estimate review and estimate validation should not be considered the same process
• Simply conducting an estimate review (or assurance check) is not a Best Practice

An estimate validation process should be:

• A separate and independent process that is not combined with other assurance steps
• Managed using a formal, driven process
• Independent and free from external bias and have oversight authority
• Comprehensive using a diversity of data sources

Any improvement plans should consider your organization’s structure relative to Best Practices. If you are currently conducting estimate reviews and validations within an integrated structure, consider a process change to make the estimate validation an independent step. If the estimate validation reports are not being considered as part of the project’s assurance review, implement a review meeting to include all project stakeholders to review the estimate validation results. If your system is lacking with respect to data sources and methods, implement a closeout review process to begin to capture data and consider external data sources and third-party tools to augment your current data.

IPA Data Helps Support Estimate Validation

Although estimate validation is a Best Practice, IPA recognizes that owner systems are often short on the data and experience needed to perform it properly. To support this critical activity, for over 20 years we have provided our Cost Engineering Committee (CEC) members with industry-level data and metrics from our database of 23,000+ projects. Beginning in 2024, CEC members now have exclusive access to the all-new CEC Validator software, which enables accurate estimate validation to be done in a matter of minutes.

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