A robust estimating procedure agreed with Proponents at the commencement of the ADA is essential to ensure that the TOC development process meets the requirements of the Owner's VfM Statement at a 'best-in-market' price. Such procedures will include a common set of tools and standards to achieve reliable estimates and also enable competent management of the financial aspects during the project delivery phase. An example of this is a well-defined Work Breakdown Structure (WBS) linking design tasks, estimate development and actual project execution costs in a common group of codes representing 'like' tasks such as 'Bulk Earthworks'.
In alliance contracting with the Participants' commitment to 'open book' and transparency, a comprehensive, effective and robust estimating procedure will need to:
• be easy to understand and use, so that it is transparent and does not require extensive analysis by the Owner to discover the make-up of any cost elements;
• have a common layout or format to allow easy assessment by the Owner;
• be comprehensive with sufficient detail of the interaction between, and obligation of, all parties including the review process and final approval;
• consist of simple processes and procedures with clearly defined outputs; and
• clearly articulate underpinning assumptions to be used in development of the TOC.
In the TOC development process, it is fundamental that the Proponents and the Owner use the same base information for the development and validation of the TOC, irrespective of whether it is a full price competition, partial price competition or non-price selection process. Issues such as the when the design is 'frozen', the level of Proponent self-performance of the works, the minimum number of third-party quotations, etc, need to be clearly spelt out in an estimating procedure.
Good examples of estimating procedures can be found in estimating guidelines such as the Project Cost Estimating Manual published by Department of Transport and Main Roads, Queensland.
Typical estimating procedures will include, as a minimum, the following sections:
• general introduction-brief statement about the project scope;
• purpose-a statement about the guidelines for TOC development;
• responsibilities-details of all Participants' inputs and accountabilities including the Owner's Estimator;
• design development, including value engineering, method of assessment and selection and definition of stage when design is 'frozen';
• estimate preparation-estimate structure (WBS), estimating software, method of preparation of Direct and Indirect Costs and procurement process;
• risk/opportunity and contingency assessment and quantification process;
• Construction Schedule including cash flow to facilitate escalation calculation;
• estimate review and approval regime including any reconciliation process; and
• Target Adjustment Events-including clear concise definition.
The estimating procedures should detail the approach to Proponent TOC evaluation. This is typically a process of validation using quantity surveying skills, elemental cost planning, benchmarking and first principles cost-estimating techniques. These requirements should be documented in the estimating procedures and agreed by both the Owner and the Proponent.
The process for the development of the Proponent's design and construction program will be documented within the estimating procedure. This will define scheduling tools and the necessary detail of construction logic required to identify any constraints and their cost implications. A cashflow based on the design and construction program with cost inputs from the TOC will be used to determine the escalation allowance.
Risks and opportunities will be addressed separately following a detailed understanding of the TOC estimate. The estimating procedure will document the process for the identification, qualification and quantification of the inherent and contingent risks12 based on the underpinning assumptions adopted during the alliance development. This would include consideration of current market conditions, design development, resource availability, construction risks and all other risk for which the alliance is responsible. A robust estimating procedure will detail the risk analysis technique and tools and the required output. Due to the increased transparency of and exposure to the cost consequences of risk, Owners must provide competent expertise to understand and review risk model inputs and outputs. This is discussed further below.
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12 Inherent risks (or opportunities) have a 100% likelihood of occurring although the consequences or impact of that event is not fully certain); contingent risk (or opportunities) have a less than 100% likelihood of occurring.