Diving into the Basis of Estimate (BoE): Challenges and Tips

What is a Basis of Estimate (BoE)?

A Basis of Estimate (BoE) is a structured document that provides the contextual framework for understanding and validating a cost estimate. It serves as a detailed record of how an estimate was developed, ensuring that decision-makers have the necessary background to assess its accuracy and reliability. The BoE typically includes the project scope, estimation methodologies, estimate classification, data sources, assumptions, constraints, and associated risks.

According to industry best practices, a well-structured BoE should be comprehensive enough that any experienced professional can independently interpret and assess the estimate without requiring additional clarification. It documents the estimator’s understanding of the project requirements, the chosen estimation approach, and the justification for key assumptions.

Components of a BoE

According to AACE International’s Recommended Practice 34R-05, a well-structured BoE should document the estimator’s understanding of the project, including critical elements such as cost rationale, risks, and scope details. A comprehensive BoE typically includes the following elements:

• Purpose of the estimate: Clarifies why the estimate is being prepared (e.g., feasibility study, project funding, cost validation).
• Scope description: Defines the work being estimated, including key deliverables and objectives.
• Methodology: Explains the approach used to estimate costs, whether historical data, parametric modeling, expert judgment, or bottom-up estimation.
• Pricing basis: Describes the foundation for cost calculations, including labor rates, material costs, vendor quotes, or industry standards used in the estimate.
• Allowances: Describe the basis for the estimating allowances such as material take-off allowance, design allowances, etc.
• Assumptions: Outlines the assumptions made during estimation, such as labor rates, material availability, and external conditions.
• Exclusions: Specifies what is excluded in the estimate to prevent misunderstandings.
• Risk and uncertainty analysis: Identifies potential risks, contingencies, and their impact on the estimate.
• Benchmarking: Outlines any comparisons of overall estimate metrics, ratios, and factors with similar projects, historical data and industry data.
• Deviations from standard practices: Highlights any deviations from standard estimating procedures or guidelines.
• Stakeholder communications and agreements: Record of pertinent communications that have occurred and agreements that have been made between the estimator and other project stakeholders.

Why the Basis of Estimate (BoE) is so important in project management

The BoE plays a vital role in project management by:

• Ensuring consistent reporting: Establishes a standardized structure for building and reporting estimates across projects.
• Providing a clear understanding: Helps the project team get a clear view of what makes up the estimate and what it is based on.
• Facilitating a smooth handover: Offers a solid foundation for other project members, such as cost controllers and schedulers, to effectively manage the project.
• Facilitating future reuse & analysis: A BoE helps understand the basis of historical numbers for future project estimates and data analytics, leading to more accurate and relevant analysis.
• Supporting decision-making: A well-prepared BoE reduces reliance on intuition, helping decision-makers make informed choices to maximize capital investment value and minimize risk.
• Mitigating risks: Identifies potential risks and uncertainties, helping the team plan accordingly and avoid cost overruns.
• Improving accountability: Clearly documents the assumptions and methodologies, ensuring that the team is accountable for their estimates.

Challenges of preparing a Basis of Estimate

Creating a BoE comes with several challenges that can impact its effectiveness and usability:

• Lack of awareness: Some team members may not recognize the importance of a BoE or fully commit to its use.
• Time constraints: Teams may not have or take the time to write a BoE.
• Inconsistent standards: Without a standardized format, BoEs can vary each time, making them harder to interpret.
• Limited knowledge or data: A lack of knowledge or necessary information can make it difficult to develop a complete and accurate BoE.
• Poor document management: The BoE may be overlooked, lost, or not properly integrated into project workflows.

Without a properly prepared BoE, decisions and follow-up actions may be based on incomplete or unclear information regarding what is included or excluded in the numbers. This can lead to misinterpretations, project issues, and difficulties in interpreting the numbers later, ultimately affecting project outcomes and cost control.

BoE best practices

To create a comprehensive and effective Basis of Estimate (BoE), consider following these best practices:

• Ensure all team members understand the importance of the BoE and its role in successful project planning and execution.
• Plan the estimate, so that a starting point to create the BoE is already there and write the BoE while estimating, not just wait till the end (refer to AACE RP “Estimate Plan”).
• Use templates to speed up the creation of the BoE and ensure consistency.
• Start on time, begin the BoE preparation during the estimating process. Especially when combining this with templates, it will become a fairly quick activity to finalize the BoE at the end of the estimating process.
• Store historical BoEs, and the cost estimates themselves, for future reference.

References:

AACE International. 2013. Recommended Practice 34R-05: Basis of Estimate. AACE International.