Cost Estimating Framework (ISO Rule 9.1.2) AESO Recommendations Date:

Cost Estimating Framework (ISO Rule 9.1.2)
AESO Recommendations
Date:
.
October 17, 2014
Table of Contents
Background ................................................................................................................................................. 1
Industry Working Group Members ............................................................................................................ 1
Association for the Advancement of Cost Engineering (AACE) Practices ........................................... 1
AACE Cost Estimate Framework ............................................................................................................................ 2
Option 1: Use AACE 17R-97 Core Practice ............................................................................................................ 3
Option 2: Use a Midpoint of the 17R-97 Low and High Ranges .............................................................................. 3
Option 3: Use AACE 56R-08 General Construction Practice .................................................................................. 4
AESO Recommendations ........................................................................................................................... 4
Adoption of AACE Practice 17R-97 ........................................................................................................................ 4
Project Definition ..................................................................................................................................................... 5
Accuracy, Contigency and Risk .............................................................................................................................. 5
Cost Estimating Templates ..................................................................................................................................... 6
Final Cost Reporting ............................................................................................................................................... 7
Next Steps .................................................................................................................................................... 7
Background
The AESO’s Transmission Cost Accountability Recommendation Paper, published in 2012,
recommended a review of ISO Rule 9.1 in the context of the current legislative framework and current
marketplace for the design and construction of transmission facilities. The AESO proposed to consult with
key industry groups prior to initiating specific ISO rule changes.
In 2013, the AESO formed an Industry Working Group to discuss challenges and opportunities with the
current ISO Rule 9.1. Through this Working Group, the AESO received feedback on the Cost Estimating
framework being used for transmission development.
Based on feedback received through the working group, the AESO has prepared recommendations to
modify the cost estimating framework as outlined in this paper.
Industry Working Group Members
The AESO hosted meetings with the Industry Working Group from January 2013 to July 2014.The
Industry Working Group includes representatives from:
•
AltaLink Management Ltd.
•
ATCO Electric Ltd.
•
EPCOR Transmission and Distribution Inc.
•
ENMAX Power Corporation
•
Industrial Power Consumers Coalition of Alberta
•
Alberta Direct Connect Consumers Association
•
TransCanada Corporation
•
TransAlta Corporation
Association for the Advancement of Cost Engineering
(AACE) Practices
After receiving full consensus to move forward with adopting the AACE cost estimating practice(s) from
the Industry Working Group, the AESO recommends adoption of the AACE practice(s) for application on
transmission projects in Alberta. The AESO views this as an industry practice that would be used for the
complete project life cycle costs of transmission projects in Alberta; i.e. Long-term Transmission Plan
(“LTP”) Estimates, Needs Identification Document (“NID”) Estimates, Proposal to Provide Service (“PPS”)
Estimates, 180 Day PPS and Approved Cost Estimate (“ACE”).
AACE International provides guidelines and practices for applying general principles of estimate
classification to asses project cost estimates. AACE International was founded in 1956 and has over
9,000 members in 92 countries.
The Industry Working Group discussed two AACE Practices:
•
AACE Practice 56R-08 (addendum to 17R-08)
•
AACE Practice 17R-97 (core practice)
Page 1
TFO representatives on the Industry Working Group provided feedback that the AACE 56R-08 practice
addresses general construction and is not well-suited for linear infrastructure such as transmission
facilities. Suggestions for the adoption of the AACE practice 17R-97 were provided as it provides for
larger accuracy ranges for projects where project definition is low; i.e. urban underground or building of
remote transmission facilities.
AACE Cost Estimate Framework
The following table below illustrates how the AACE Classes, Project Definition and Accuracy Ranges
would align with the Alberta Power Utility industry end usage and major deliverables. For example, the
AESO’s LTP project estimates could be considered a Class 5 estimate, the NID estimate used for
screening of alternatives could be a Class 4 level estimate, the TFO’s PPS could be a Class 3 level
estimate and the 180 days PPS or ACE could be a Class 2 level estimate.
Estimate
Class
Level of
Project
Definition
End Usage
Industry
Usage
Accuracy
Range
Major
Deliverables
Estimating
Method
Class 5
0% to 2%
Screening or
Feasibility
Long-term
Transmission
Plan
Feasibility
Assessment
Screening
Alternatives
L -20% to 50%
H +30 to
+100%
Conceptual
Layout
Project
Initiation
Long-term
Transmission
Plan
Parametric,
Judgment
or Analogy
Class 4
1% to
15%
Concept
Study of
Feasibility
Need
Assessment
Study Scope
Preferred
Option
L-15% to 30%
H +20 to
+50%
Preliminary
Functional
Spec
Single Line
Diagrams
Study Scope
Project Plan
Parametric,
Equipment
Factored
Class 3
10% to
40%
Design
Development
Budget
Authorization
Need
Assessment
Proposal to
Provide Service
Facility
Application
Preferred
Option
L -10% to 20%
H +10 to
+30%
Final
Functional
Spec
Siting &
Routing
Preliminary
Engineering
Approved
Budget &
Schedule
Semi
Detailed
Unit Costs
Class 2
30% to
75%
Control or
Bid/Tender
Post Permit &
License
Revised Budget
(180 day PPS)
Approved Cost
Estimate
(ACE)
L -5% to 15%
H +5 to
+20%
Completed
Detailed
Engineering
Permits &
Licenses
Geo Tech
Vendor
Detailed
Unit Costs
Page 2
Negotiation
Contracts
Class 1
65 to
100%
Bid Tender
Fixed Price
Contracts
L -3% to 10%
H +3 to
+15%
Contract
Final
Detailed
Unit Costs
After reviewing the comments provided from the Industry Working Group, in addition to the initial
recommendation provided by the AESO in the first draft recommendation paper; the AESO has
considered two additional options.
Option 1: Use AACE 17R-97 Core Practice
This option would adopt the ranges provided in the AACE practice 17R-97.
AACE
Accuracy
Range
Class 5
L:-20% to 50%
Class 4
L: -15% to 30%
Class 3
L: -10% to 20%
Class 2
L: -5% to 15%
Class 1
L: -3% to 10%
H: +30 to
+100%
H: +20 to
+50%
H: +10 to
+30%
H: +5 to
+20%
H: +3 to
+15%
Estimates would be provided using the above ranges in the table above. In this option, the TFOs would
specify contingency amounts for known project risks. Contingency would be included as a separate line
item in the cost estimate and provided in conjunction with a Risk Register.
This option also aligns with the ACE legislation, effective September 22, 2014, whereby the TFO would
apply to the Alberta Utilties Commission for an ACE on or before 180 days following issuance of Permit
1
and License .
Based on the nature of the project, the AESO may direct the TFO to provide an estimate at the lower end
of the accuracy ranges, if in discussion with the TFO, a lower accuracy range is attainable.
Option 1 aligns with the core AACE Practice 17R-97. It also provides greater flexibility in preparing cost
estimates based on the differences in the levels of project definition and complexity between projects.
Option 2: Use a Midpoint of the 17R-97 Low and High Ranges
In this option, midpoints of the low and high ranges provided in the AACE practice would be used to
define the accuracy ranges.
AACE Midpoint
Range
Class 5
L: -35%
Class 4
L: -25%
Class 3
L: -15%
Class 2
L: -10%
Class 1
L: -5%
H: +65%
H: +35%
H: +20%
H: +10%
H: +10%
Similar to Option 1, contingency would be identified as a separate line item in the cost estimate, and
would be provided in conjunction with a Risk Register. The AESO recognizes that in certain instances,
the project definition may be low for a project, specifically in the very early stages of a project. Thus, if the
1
The ACE would be a single cost estimate with contingency included in the estimate. For example, a TFO ACE estimate using a AACE Class 2 estimate may be $120 M ($100
M plus 20%), and would be assumed to include contingency.
Page 3
TFO cannot adhere to these suggested midpoint accuracy ranges, they could advise the AESO as to
what accuracy range can be attainable as per the AACE practice 17R-97.
Option 3: Use AACE 56R-08 General Construction Practice
This option uses the adoption of AACE 56R-08 Practice. This provides guidelines for applying the
principles of estimate classification specifically to project estimates for the building and general
construction industries and allows for narrower accuracy ranges.
AACE Accuracy
Range
Class 5
L: -20% to 30%
Class 4
L: -10% to 20%
Class 3
L: -5% to 15%
Class 2
L: -5% to 10%
Class 1
L: -3% to 5%
H: +30 to
+50%
H: +20 to
+30%
H: +10 to
+20%
H: +5 to
+15%
H: +3 to
+10%
The TFOs expressed that this practice is designed for general construction of facilities and is not meant
for the construction of linear infrastructure such as transmission lines. As such, confidence of providing
estimates within the stated accuracy ranges would be low.
AESO Recommendations
The AESO recommends generally adopting the AACE practice as it:
•
Uses the maturity level of project definition deliverables as the primary characteristic to categorize
estimate classes;
•
Reflects generally accepted practices in the cost engineering profession;
•
Provides a common industry understanding of concepts involved with classifying project cost
estimates, in an effort to improve communication among industry stakeholders;
•
Avoids misrepresentation of the various classes of cost estimates and avoids; and
•
Could provide for improved accuracy, enhanced project cost predictability and provides a framework
for higher consistency between projects and throughout the entire life cycle of the project.
Adoption of AACE Practice 17R-97
After considering feedback received from the Industry Working Group, the AESO agrees that the core
AACE practice 17R-97 should be adopted rather than the addendum 56R-08.
The AESO’s recommends that the Accuracy Low and High ranges, as provided in Option 1, be used to
provide flexibility for those transmission projects where project definition is deemed to be low. For
example, a large complex system project, may have low project definition and a NID Class 4 estimate
with a +50% / -30% accuracy range could be provided with confidence. However, an upgrade to a
substation may have a more project definition allowing for an estimate to be provided with a +20% / -15%
accuracy range.
The AESO also recommends that the TFO continue to manage contingency for known risks as a
separate line item within the estimate.
Page 4
AACE Accuracy
Range
Class 5
L: -20% to 50%
Class 4
L: -15% to 30%
Class 3
L: -10% to 20%
Class 2
L: -5% to 15%
Class 1
L: -3% to 10%
H: +30 to
+100%
H: +20 to
+50%
H: +10 to
+30%
H: +5 to
+20%
H: +3 to
+15%
Project Definition
The following table illustrates the relationships between the AACE 17R-97 classes, the project definition
percentage, the accuracy ranges and the project deliverables characteristics. The AESO completed the
Project Definition deliverables based on the information provided by one of the TFOs and reviewing the
AACE recommended practice. The AESO has interpreted what the classifications for each class and
delivery might be and intends to discuss this table in more detail with the Industry Working Group as we
work towards implementation of this practice.
Project Definition
Usage
AACE Accuracy Range
Scope
Capacity
Location
Geotechnical
Project Plan
Schedule
Escalation
Class 5
Class 4
Class 3
Class 2
0% to 2%
1% to 15%
10% to 40%
30% to 75%
Screening or
Feasibility
Concept
Study of
Feasibility
L: -20% to 50%
H: +30 to
+100%
General
L: -15% to 30%
H: +20 to
+50%
Assumed
Design
Development
Budget
Purposes
L: -10% to 20%
H: +10 to
+30%
Preliminary
Assumed
None
None
None
None
None
Preliminary
General
None
General
General
Assumed
Defined
Preliminary
Assumed
Preliminary
Preliminary
Preliminary
Class 1
65% to
100%
Control or
Bid Tender
Bid Tender
L: -5% to 15%
H: +5 to
+20%
Defined
L: -3% to 10%
H: +3 to
+15%
Defined
Defined
Defined
Defined
Defined
Defined
Defined
Defined
Defined
Defined
Defined
Defined
Defined
WBS
None
General
Defined
Defined
Defined
Cost Breakdown
None
General
Defined
Defined
Defined
Structure
Contract Strategy
Assumed
Assumed
Preliminary
Defined
Defined
Contingency
General
Assumed
Preliminary
Defined
Defined
Ranking Order: None, General, Assumed, Preliminary, Defined (as defined in the AACE practice)
Accuracy, Contigency and Risk
The chart below illustrates as the project definition increases for a project, both the contingency or known
and unknown risk decrease.
Page 5
The AESO recommends using the AACE definition for Accuracy, Contingency and Risk (see AACE No.
10S-90). According to AACE, accuracy is dependent upon estimate deliverables and maturity, in terms of
project definition. The accuracy range can be used to account for discrepancies in cost that you would not
normally expect and the extremes which could happen (unknown risk). It can also account for minor
discrepancies in the quality of the estimate for the various project items that are not accounted for in
contingency.
If it is expected that significant risks could happen then they should be considered in the contingency
calculation. Measures of these risks are generally “known” even at the earliest stages of project definition.
As such, contingency can be viewed as an allowance for “known” risk which is expected to occur; while
estimate accuracy is an allowance for “unknown” risk; which is not expected to normally occur.
AACE’s view is that contingency should be released from the project as remaining work becomes smaller
and the risk decreases and should never be held until project completion. In addition, contingency should
be treated as a source of funds to cover scope changes.
The AESO acknowledges that each TFO may have different methodologies for the treatment of risk and
contingency and that further discussion on this will be required as part of implementation. Several AACE
practices are applicable for this discussion; i.e. AACE No. 40R-08, 41R-08 and 42R-08.
Cost Estimating Templates
The AESO also recommends revisions to the Cost Estimating Template that can be used for all cost
estimates within the industry for efficiency and ease of use. This revised template will be used for
preparing estimates for the:
•
Long-term Transmission Plan
•
Needs Identification Document
•
Proposal to Provide Service
•
Facility Application (AUC Rule 007)
•
Approved Cost Estimate
Page 6
The AESO received feedback from the Industry Working Group and the Alberta Utilities Commission on
the proposed template and has made revisions accordingly. The following is a summary of the revisions
made to the template:
•
•
•
Additional tabs for:
- Transmission Line - Underground
- Management: Procurement, Project Management, Construction Management
- Escalation
- Contingency
Additional columns for:
- Quantity
- Types of Materials
- Subcontract Amount
- TFO Assumptions
Other Considerations:
- Greater detail for all project material and labour items
- Additional category for supply and install (turnkey) sourcing
- Industry wide use of a single template
Final Cost Reporting
In addition, the AESO recommends that reporting of final actual costs be provided by the TFOs in the
same level of detail that is provided in the cost estimates. In addition, the AESO will review how trailing
costs should be addressed for projects which have already been closed.
Next Steps
These recommendations will form the basis of changes to ISO Rule 9.1.2. The AESO will begin the
process for drafting rule changes in November 2014 and anticipates completion in late 2014 to early
2015.
Following revisions to ISO Rule 9.1.2, the Transmission Facility Owner will be required to submit
estimates using the AACE practice.
The AESO recognizes changes to AUC Rule 007 will also require revision to align with these changes
and will work with the AUC accordingly.
A revision to the cost estimating template does not require revisions to ISO Rule 9.1.2. The revised Cost
Estimating template and instructional guideline will be available for use on the AESO’s website in Q4
2014. The AESO will direct the TFOs to use the new template for all new requests (Direction Letters) for
NID Estimates and PPS Estimates. Transmission Facility Owners (TFOs) may choose to use the new
template immediately on projects for which Directions have already been provided.
Until such time that ISO Rule 9.1.2 is revised, the existing accuracy ranges will still be applicable.
Page 7