AACEInternationalRecommendedPracticeNo.

34R05

BASISOFESTIMATE
TCMFramework:7.3CostEstimatingandBudgeting

Rev.May2,2014
Note:AsAACEInternationalRecommendedPracticesevolveovertime,pleaserefertowww.aacei.orgforthelatestrevisions.

Contributors:
Disclaimer: The opinions expressed by the authors and contributors to this recommended practice are their own
anddonotnecessarilyreflectthoseoftheiremployers,unlessotherwisestated.

ToddPickett,CCCCEP(Author) StephenM.JacobsonCCC
PeterR.Bredehoeft,Jr.CEP CarltonW.Karlik,PECEP
TedA.Downen ChristopherL.Kinney
LarryR.Dysert,CCCCEP DonaldF.McDonald,Jr.PECCEPSP
BruceG.Elliott,CCC BernardA.PietlockCCCCEP
JohnK.Hollmann,PECCECEP RichardA.Selg,CCE

CopyrightAACEInternational AACEInternationalRecommendedPractices
AACEInternationalRecommendedPracticeNo.34R05
BASISOFESTIMATE
TCMFramework: 7.3CostEstimatingandBudgeting

May2,2014

PURPOSE

AACEInternationalsTotalCostManagement(TCM)Frameworkidentifiesabasisofestimate(BOE)documentasa
required component of a cost estimate. As a recommended practice (RP) of AACE International, the template
outlinedinthefollowingsectionsprovidesguidelinesforthestructureandcontentofacostbasisofestimate.

IntheTCMFramework,theBOEischaracterizedastheonedeliverablethatdefinesthescopeoftheproject,and
ultimatelybecomesthebasisforchangemanagement.Whenpreparedcorrectly,anypersonwithcapitalproject
experience can use the BOE to understand and assess the estimate, independent of any other supporting
documentation. A wellwritten BOE achieves those goals by clearly and concisely stating the purpose of the
estimate being prepared (i.e. cost study, project options, funding, etc.), the project scope, pricing basis,
allowances,assumptions,exclusions,costrisksandopportunities,andanydeviationsfromstandardpractices.In
additiontheBOEisadocumentedrecordofpertinentcommunicationsthathaveoccurredandagreementsthat
havebeenmadebetweentheestimatorandotherprojectstakeholders.

Awellpreparedbasisofestimatewill:

Documenttheoverallprojectscope.
Communicate the estimators knowledge of the project by demonstrating an understanding of scope and
scheduleasitrelatestocost.
Alerttheprojectteamtopotentialcostrisksandopportunities.
Providearecordofkeycommunicationsmadeduringestimatepreparation.
Providearecordofalldocumentsusedtopreparetheestimate.
Actasasourceofsupportduringdisputeresolutions.
Establishtheinitialbaselineforscope,quantitiesandcostforuseincosttrendingthroughouttheproject.
Providethehistoricalrelationshipsbetweenestimatesthroughouttheprojectlifecycle.
Facilitatethereviewandvalidationofthecostestimate.

This RP is intended to be a guideline, not a standard. It is understood that not all organizations that prepare
estimatesemploythesameprocessesandpractices,andtherefore,mayopttousethisinformationeitherinpart
orinitsentirety.

RECOMMENDEDPRACTICE

TheprimaryintentofthisRPistoprovideaguidelineforthetopicsandcontentstobeincludedintypicalBOE.
However,beforedescribingthetemplatecontentsthereareafewpointsofsignificanceworthnoting.Abasisof
estimateshould:

Befactuallycomplete,butconcise.
Beabletosupportfactsandfindings.
Identifyestimatingteammembersandtheirroles.
Describethetools,techniques,estimatingmethodology,anddatausedtodevelopthecostestimate.
Identifyotherprojectsthatwerereferencedorbenchmarkedduringestimatepreparation.
Bepreparedinparallelwiththecostestimate.
Establishthecontextoftheestimate,andsupportestimatereviewandvalidation.

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Qualify any rates or factors that are referenced either in the estimate or BOE; e.g. productivity can be
expressedaseitherunits/time(linearfeet/hour)ortime/units(hours/linearfoot).

ThefollowingdescribesthesuggestedtopicsandcontentsincludedinatypicalBOE.

Purpose

In this initial sectionof a basis of estimate, the estimator should provide abrief and concise description for the
totalproject.Thetypeofprojectshouldbeidentified(i.e.,newfacilities,additiontoexisting,revampofexisting,
etc.),aswellasthetypeandcapacityoftheprocessunits,thelocationofthefacility,andtheoveralltimingofthe
project.

ProjectScopeDescription

Thissectionoftheestimatebasisshouldbeorganizedtocorrespondwiththeprojectsworkbreakdownstructure
(i.e., plant, building, floor, etc.). A semidetailed description of the scope of work should be provided for each
major segment of the project. Identify any major pieces of process equipment or components. Its also good
practicetoindicatetheprimarytradesthatwillbeinvolvedwiththeproject.Beasthoroughasnecessary,without
beingoverlydescriptive,soastoadequatelyexplainthescopeofworkbeingestimated.

Methodology

The BOE should indicate the primary estimating methodology used to prepare the cost estimate. This should
includedocumentationoftheuseofcostresources,historicaldataandprojectbenchmarking.Documentingthe
levelofeffortormanhoursusedinpreparationoftheestimateisalsorecommended.

EstimateClassification

TheAACEInternationalestimateclassificationshouldbeidentified,alongwithreasonsorjustificationusedinthe
selectionoftheestimateclassification.

DesignBasis

Companystandardswilltypicallyspecifythetechnicalandprojectinformationrequiredfortheclassificationofthe
estimatethatisbeingprepared.Inthissection,theestimatorwillidentifythetypesandstatusofengineeringand
design deliverables that were provided to prepare the estimate including any design basis assumptions. Two
attachmentstotheestimatebasisshouldbereferenced:1)anestimatedeliverableschecklistthatisalignedwith
thecompanysstandardprojectprocess;and2)alistingofallengineeringdrawings(includingrevisionnumberand
date), a well as other design information, such as specifications, equipment lists, units of measure (imperial vs.
metric),etc.

Inadditionitmaybeusefultodocumentspecificquantitymetricsforparticularprojects,suchasoverallexcavation
and backfill quantities, overall concrete volumes, overall piping quantities, etc. These may be organized by
facilities,processtrainormanufacturingunit.

Ifmaterialtakeoffs(MTOs)areprovidedtotheestimator,identifyspecificallywhodevelopedtheMTOsandthe
methodologyused.

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PlanningBasis

Thissectiondocumentstheprojectmanagement,engineering,design,procurement,fabrication,andconstruction
approachestotheproject.Thecontractingandresourcestrategiesshouldbeidentified,aswellasanyassumptions
that were made with regard to the workweek schedule (hours worked per day, days worked per week, shifts
worked per day, etc.) and planned use of overtime. Any assumptions made regarding constructability,
modularization,useofspecializedconstructionequipmentshouldalsobenotedhere.

Theoverallprojectscheduleandkeymilestonesshouldbeidentified.

CostBasis

Describe the methods and sources used for determining all material, labor and subcontract pricing. Identify the
following:

Pricingsourcesforallmajorequipment(vendorquotes,historicaldata,etc,).
Bulkmaterialandcommoditypricingsources,includinganydiscountstrategies.
The pricing source for all labor hours, and all labor productivity adjustments. Provide appropriate detail if
productivitiesvarybytradeand/orlocationwithintheproject(plant,etc.).
All wage rates used (including crew/craft rates, craft mix, etc.). Identify all items included in allin rates (if
used).
Pricingsourceandmethodologyforconstructionindirects.
Pricingsourceforallstartupcosts.
Pricing source and methodology for all home office costs (project management, engineering, design, etc.).
Documentthebasisforanycontractorfeecosts.
Pricingsourceandmethodologyforcostssuchasfreight,taxes,duties,etc.
Pricingsourceforanyownerscostsincludedintheestimate.
Currencyexchangeratesifapplicable,aswellasthestabilityand/orvolatilityofrates.
Escalationindicesused,andthemethodofcalculation(includingduration).
Contingencydevelopmentandbasis.
Locationfactorsusedandthebasisforthesefactors.
Influenceoflocalmarketconditions.
Capitalcostsvs.expensecosts,orothercategorizationasnecessary.
Anyotherpricingfactorsorexternalinfluencesthatmayhaveasignificantimpactonprojectcostshouldbe
identified.

Allowances

Inthissection,identifythelevelandtypesofallowancesusedintheestimate.Describethebasisforthecommon
estimatingallowancessuchasmaterialtakeoffallowances,overbuyallowances,designallowancesforengineered
equipment,congestionallowances,workingheightallowances,etc.

Thissectionshouldalsodescribeanyothercoststhathavenotbeendetailedinthebodyoftheestimate,suchas
lumpsum allowances for specific areas of scope or any other factored costs not described elsewhere in the
estimatebasis.
Assumptions

Any other assumptions made by the estimator but not documented elsewhere in the estimate basis should be
includedinthissection.Thismayincludesuchassumptionsasanadequatelaborsupplybeingavailable,adequate

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fundingavailable,siteconditions,etc.Minorassumptionsmaybecomemajorassumptionsthroughoutthelifeof
theproject;therefore,itisrecommendedtodocumentallassumptionsregardlessoftheiranticipatedimpact.

Exclusions

Inthissection,theestimatorshoulddocumentallpotentialitemsofcostwhichareviewermightassociatewith
theproject,butforwhichnocostshavebeenincludedintheestimate.Asbestosabatement,removalofhazardous
wastes, acquisition of land, taxes, financing costs, licensing costs, etc. are examples of potential items that may
needtobeidentified.

Exceptions

Theestimatorshouldidentifyanyanomaliesorvariancestoyourorganizationsestimatingpractices.Thissection
shoulddocumentanysignificantdeviationsfromtheprojectand/orengineeringdeliverablesnormallyrequiredfor
the applicable class of estimate. A good practice is to provide a checklist as an attachment to the BOE that will
document any exceptions that are identified. This checklist should correspond to your organizations estimating
practices.

RisksandOpportunities

Anyareasoftheestimatecontainingsignificantriskoropportunityshouldbeidentified.Ifaformalriskanalysis
studyhasbeenpreparedthenitshouldbedescribed(e.g.methodology,technique,etc.).Inparticular,thissection
shouldidentifythosecostelementsthathavebeenidentifiedwithhighorveryhighriskoropportunityvalues.The
riskanalysisreport(orsummary)shouldbeprovidedasanattachmenttotheBOE.

Containments

Containments are cost elements in the estimate related to measures included to prevent and/or mitigate the
identifiedrisks.Theactivitiesareindentifiedintheriskanalysisreport.Thesemayimpactnotonlycostbutalso
duration.

Contingencies

Contingencyisacostelementoftheestimateusedtocovertheuncertaintyandvariabilityassociatedwithacost
estimate,andunforeseeableelementsofcostwithinthedefinedprojectscope.Contingencycoversinadequacies
incompleteprojectscopedefinition,estimatingmethods,andestimatingdata.Contingencyspecificallyexcludes
changes in project scope, and unforeseen major events such as earthquakes, prolonged labor strikes, etc. The
amountofcontingencyincludedintheestimateshouldbeidentified,aswellasthemethodsusedtodetermine
the contingency amount. If risk analysis techniques were utilized to develop the contingency amount, the
associatedconfidencelevelshouldalsobeidentified.

ManagementReserve

Contingencyisnotintendedtocoverthecostsassociatedwithchangesinprojectscope.Iftheprojectneedsto
provideanallowanceforanticipatedchangesinscope,ortocoverthecostsforitemsthatmayberequiredbut

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havenotyetbeenspecificallyidentifiedasbeingincludedinthecurrentprojectscope,thenthatamountofcost,
typicallyreferredtoasmanagementreserve,shouldbeidentifiedhere.

The intended purpose and use of management reserve should be clearly identified. The approval process,
managementandtrackingofthemanagementreserveshouldalsobeclearlyidentified.

Reconciliation

Provide an overview of the major differences between the current estimate and the last published estimate
prepared for this project. Identify the cost impacts due to scope changes, pricing updates, labor productivity
adjustments,estimaterefinement,etc.Amoredetailedreconciliationorcosttrendingreportcanbeprovidedas
anadditionalattachmentifnecessary.

Benchmarking

This section should document any comparisons of overall estimate metrics, ratios, and factors with similar
projects, historical data, and industry data. References used in the benchmark comparisons should be similar in
processtypeandoverallvalue.Ifsignificantvariationsoftheestimatedvaluesversusthebenchmarksexistthose
inconsistenciesshouldbeidentified,explained,and/orreconciled.Amoredetailedbenchmarkanalysisreportmay
beincludedasanattachmenttotheBOE.

EstimateQualityAssurance

Sinceestimatereviewsarethemeansfortestingthequalityoftheestimate,thissectionoftheBOEshouldidentify
allestimatereviewsthathavetakenplacetodate,andanyadditionalreviewsthatareproposedtotakeplace.All
reviewcommentsoranalysisshouldbeincludedasanattachmenttotheBOE.Incaseofanexternalreviewthis
sectionshouldincludewhoexecutedthereview,whenitwasconducted,andwhatreferenceswereused.

EstimatingTeam

Inthissection,allmembersoftheestimatingteamshouldbeidentified,includingrolesandresponsibilities.

Attachments

Severalsupportingdocumentswillgenerallybeincludedwiththebasisofestimate.
1) AttachmentA:EstimateDeliverablesChecklist
AttachmentA:EstimateDeliverablesChecklist
Attachacompletedestimatedeliverableschecklistindicatingtheprojectandengineeringdeliverablesthatshould
be provided to supportpreparationof the estimate for theassociated estimateclassification, and whether they
wereinfactavailableduringpreparationoftheestimate.

AttachmentB:ReferenceDocuments
Document the drawings, manuals, texts, notes, specifications, and other references used in developing the
estimate.Identifytherevisionsanddateofissueforkeydocuments.

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AdditionalAttachments
Includeanyotherattachmentsthatmaybenecessaryorrequired(reconciliationreport,benchmarkingreport,risk
analysisreport,escalationcalculations,etc.).

LEVELOFDETAILINTHEBASISOFESTIMATE

ItisoftennotasimplemattertodeterminetheamountofdetailthatshouldbeprovidedinaBOE.Severalfactors
maycomeintoplayduringthepreparationoftheestimatethatwillhelpdeterminethelevelofdetail.However,it
istheestimatorsbestjudgmentthatwillultimatelydeterminetheappropriatelevel.

LevelofProjectDefinition

Estimates are prepared at various stages of a project. A more detailed estimate will generally require a more
detailedBOE,howeverthatisnotalwaysthecase.

A conceptual estimate will most likely be based on a limited amount of scope but may require a more detailed
BOE.It'snotuncommonforaBOEforaconceptualestimate(e.g.Class5orClass4)tobemorethoroughthanone
preparedforamoredetailedestimate(e.g.Class1orClass2)becausethereareoftenmoreassumptionsmadeat
theconceptualstageofanengagementthatrequiregreaterdocumentation.

Conversely, there may be times when the project definition is so complete or simplistic that a BOE does not
require a great amount of detail. A three or four page document may be sufficient to convey the information
providedintheBOE.

CostValueoftheProject

Typically,amoreexpensiveprojectwillrequireamoredetailedBOE.However,projectsoflessercostcanrequire
anextensiveBOEtofullycommunicatemajorassumptionsthatconstrainorreducethecost.

TypeofProject

ThetypeofprojectcanalsoaffecttheBOE.Forexample,theBOEforadirectpurchase(e.g.,singlepieceoflarge
equipment)maybelessdetailedthanaBOEforaconstructionproject

OtherFactors

OtherfactorsthataffectthelevelofdetailinaBOEare:workbreakdownstructure(WBS),considerationfornew
technologies,contractingstrategy,etc.

TheBOEshouldcontainaconciselevelofdetailtofullysupportthereviewoftheestimatebythosethathavenot
beeninvolvedinthepreparationoftheestimate.TheBOEprovidesadefinitionofthescopeoftheengagementas
estimated,andshouldestablishthebasisforchangemanagementsubsequenttopublicationoftheestimate.

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REFERENCES

1. Hollmann,JohnK.,PECCE,Editor,TotalCostManagementFramework:AnIntegratedApproachtoPortfolio,
ProgramandProjectManagement,AACEInternational,Morgantown,WV.(latestrevision)
2. AACE International, Recommended Practice 10S90, Cost Engineering Terminology, AACE International,
Morgantown,WV.(latestrevision)

CONTRIBUTORS

Disclaimer: The opinions expressed by the authors and contributors to this recommended practice are their own
anddonotnecessarilyreflectthoseoftheiremployers,unlessotherwisestated.

ToddPickett,CCCCEP(Author)
PeterR.Bredehoeft,Jr.CEP
TedA.Downen
LarryR.Dysert,CCCCEP
BruceG.Elliott,CCC
JohnK.Hollmann,PECCCCEP
StephenM.JacobsonCCC
CarltonW.Karlik,PECEP
ChristopherL.Kinney
DonaldF.McDonald,Jr.PECCEPSP
BernardA.PietlockCCCCEP
RichardA.Selg,CCE

CopyrightAACEInternational AACEInternationalRecommendedPractices