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  • Writer's pictureJohn Zhao

Cost Forecasting Technique

Major capital projects have a long tendency of cost overruns and schedule delays, based on abundance of research and historical cost data. Cost estimates, particularly the cost reimbursable and unit price contracts, seemed never right and the cost forecasts always go up. Lump-sum or fixed price contracts are not immune from cost overruns either, even though contractors have swallowed the large portion of “extra costs” the best their contracts could allow (i.e. claims).

There are many attributes to such cost overruns in projects that academia has done profound investigations, and industry practitioners have tried the best to minimize the phenomena. The development of modern project management process has lent a helping hand to better forecast project costs during project execution. However, to large extend, the cost forecasting approaches still stayed in “static and deterministic mode”, not yet adapt to the fast-paced agile management practice, dynamics of project changes and the stochastic nature of cost and schedule behavior. Traditional “Trending Method” or modernized “Earned Value Method” for cost forecasting are not capable techniques anymore as they can no longer cope with large scale, complex and technology-driven capital projects’ cost performances (by WBS and by CBS).

An alternative approach is proposed to conduct cost forecasts, in addition to the traditional methods, by incorporating the volatility of market pricing (materials and subcontracts), projected performance behavior (productivity) and dynamic and systemic project risk profiling. This is a Monte Carlo simulation based cost forecasting technique, that I am honoured to present at the AACE Chinook dinner conference.

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