Conceptual Estimating and Target Costing

Glenn Ballard1 & Ari Pennanen2

1Research Director, Project Production Systems Laboratory, University of California, Berkeley, ballard@ce.berkeley.edu
2Adjunct Professor (Tampere University of Technology). Partner of Haahtela Project Management Group, Finland. ari.pennanen@haahtela.fi www.haahtela.fi

Abstract

In an earlier paper, the first author argued that project budgets should be set based on the worth to the client of the asset to be designed and constructed, adjusted as needed for capital availability. However, cost estimates also play a role in the process of feasibility assessment and budgeting. When the client’s allowable cost, what they are willing and able to pay is less than what the asset is expected to cost, the project’s feasibility must be assured. The first step is to estimate the gap between allowable cost and expected cost. The accuracy of conceptual estimates, estimates made from programmatic data, prior to design, are generally assumed to be around +/- 30%. Yet target costs are set prior to design. How can achievable target costs be set when cost estimates are so inexact? This paper reports on research currently underway to document conceptual estimating processes that are substantially more accurate than +/-30% and explains the role played by conceptual estimating in the process of determining a project budget. It is proposed that estimate accuracy is in some degree a misleading conceptualization, encumbered as it is by the implicit assumption that the estimator does not act to cause the estimate to be achieved.

Keywords

Cost management, conceptual estimate, lean project delivery, project definition, target cost, target value design.

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Reference

Ballard, G. & Pennanen, A. 2013, 'Conceptual Estimating and Target Costing' In:, Formoso, C.T. & Tzortzopoulos, P., 21th Annual Conference of the International Group for Lean Construction. Fortaleza, Brazil, 31-2 Aug 2013. pp 217-226

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