Digging Deeper – 3rd Party Estimate Reviews II

Independent third party estimate reviews are undertaken to give mine owners and their lenders more than just confidence in the quality of the estimate they just paid for.  These cost reviews give the owners insights in to the cost risks involved and a degree of certainty that the project can be completed for this cost (assuming the engineering and design are frozen at that point in time, which is a large assumption).

The reviewer will confirm all supporting documentation, perform ratio analysis, formulae checks, bench marking, labor rate buildup, agree on the indirects, contingency, etc. and work with the estimator to justify reasons for pricing items in a particular way.

While creating a cost estimate may sound simple, cost estimators, engineers, management and executives can make mistakes.

On top of their potential for error, some of the team may have different opinions of a labor rate buildup, productivity factors, contingency, or numbers of hours to install an item. They may also use different reference works when they are available (e.g. piping and electrical reference books are available but usually only cover smaller projects).

In the mining industry, reference works are not publicly available for installation costs of mechanical equipment, major electrical or mine development (e.g. mills, conveyors, mine trucks, flotation cells, large transformers, shaft sinking, etc.).  The cost databases with the greatest accuracy are managed by the large engineering firms or the large project management firms who are able to archive volumes of accurate cost details because of the large number of projects they work on.  It should be noted that these firms often have difficulty capturing owners’ costs for obvious reasons.

Smaller companies and individuals who do not have access to these private cost databases use their own experience or recent and similar estimates (I just said it…. we have seen small companies cut corners by building an estimate from an estimate…. unfortunately this is not uncommon in the mining sector). Most construction contractors don’t retain the actual quantity and cost information due to expense and time constraints.

The difficulty in the mining cycle is that when things are very busy, the estimators are under a lot of pressure to finish the estimates and then go onto the next project estimate.  Now that the estimating teams have been reduced through attrition and redundancy in this down market cycle, cost estimators should be catching up on project costs and updating historical man hours…. assuming their employer cares about the quality of their cost database and is willing to invest during these lean times.

An extra set of eyes is always a good idea, even after the peer reviews, to examine both the process utilized in building an estimate as well as price validity.  Therefore, it is a good idea to understand where the risks are when creating a cost estimate and to manage those risks through a rigorous independent third party review process.

Co-written with Derek Andrew

& Matthew Brook

Posted in Mining