When utilizing engineering, procurement, and construction (EPC) and design-build project delivery methods, the project owner transfers project risk to the contractor, benefiting from maintaining their return on investment (ROI). EPC contractors should implement the stage gate process during front-end planning (FEP) stages to establish a clear scope and accurate cost estimate, thus mitigating potential cost overruns. Exploring the breakdown of EPC project costs throughout each stage of the stage gate process, we will examine how EPC project costs are typically determined and the variables that impact cost estimation.
Throughout the stage gate process, initial cost estimation is provided at the beginning of FEP 1. As the project advances through each gate, the estimate is honed and refined, leading to a more robust and accurate cost estimation by the time it reaches FEP 3. Notably, the precision of these estimations is heavily influenced by the level of scope definition. Therefore, it is imperative to establish a firm project scope early on, with ample detail, to enhance the certainty of the cost estimate. The following sections outline the estimation and refinement process across the FEP stages of a project. It is essential to highlight that, during the estimation phase, discipline-specific or general project contingency is often included in the estimates. This contingency factor accounts for potential unforeseen project expenses that may arise during project execution, based on a thorough assessment of the project's risk profiles.
During FEP 1, project plans are outlined, the initial project scope is defined, and a cost estimate is presented. This estimate is typically derived using factor estimation techniques. It is crucial that the cost estimate established in FEP 1 is adhered to throughout the project execution phase. It is important to emphasize that the main objective of FEP 1 is to evaluate the project and forecast its potential cost, rather than focusing on the actual cost of the project.
During this phase, the only information available usually pertains to the type of equipment needed for project implementation. The specific size of the equipment may not be determined yet, but factors such as piping quantities and approximate linear footage of piping can be taken into account, along with potential labour costs. It should be noted that quantities for certain items like fittings may still be unknown. A factor estimation, which is often based on similar past projects or industry norms, can be used to generate the initial rough estimate of the project cost. At this point, the estimates are typically considered to be Rough Order of Magnitude with a margin of error of approximately +/- 50%.
In the second phase of the capital project stage gate process, known as FEP 2, the project scope is more clearly outlined and initial designs are developed. During this phase, project stakeholders obtain cost estimates for the materials and equipment needed for the project, including in the engineering and construction phases. The main goal of the FEP 2 stage is to continue refining the project scope while staying within the original cost estimate. Throughout this stage, there is a greater focus on front-end engineering and design to gain a better understanding of the project layout and necessary routing, as well as more precise quantity measurements. With more detailed information available, the cost estimate is adjusted further during FEP 2, often involving some degree of factoring. Typically, the project moves forward to the next phase if the updated cost estimate falls within a range of +/- 30% of the initial estimate.
The last phase of pre-project planning, known as FEP 3, is commonly referred to as FEED (front-end engineering development), front-end engineering design, or basic engineering. During this phase, initial engineering designs from FEP 2 are refined with more detailed quantities and layouts. It is crucial for the project scope to be well-defined and robust at this stage, and the estimated cost should be thoroughly detailed.
During FEP 3, it is paramount that engineering packages for detailed design (execution stage) are thoroughly defined. Issued for Design (IFD) or Issued for Bid (IFB) packages can be utilized to request detailed design and construction bids from EPC contractors. Drawings must be provided to specify the precise materials and quantities needed for the project. As part of execution planning, thorough analysis of the construction sequence, staffing and support plans, and construction equipment plans is essential.
The goal of FEP 3 is to present a final budget estimate with a margin of error of +/- 10-15% from the initial cost estimate. At this stage, the cost estimate is deemed as finalized and the level of detail is sufficient for soliciting bids from contractors. The accuracy levels can be classified according to the project's level of definition and grouped into different estimation categories.
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