Predicting Accuracy of Early Cost Estimates Using Factor Analysis and Multivariate Regression

Abstract

The importance of accurate estimates during the early stages of capital projects has been widely recognized for many years. Early project estimates represent a key ingredient in business unit decisions and often become the basis for a project's ultimate funding. However, a stark contrast arises when comparing the importance of early estimates with the amount of information typically available during the preparation of an early estimate. Such limited scope definition often leads to questionable estimate accuracy. Even so, very few quantitative methods are available that enable estimators and business managers to objectively evaluate the accuracy of early estimates. The primary objective of this study was to establish such a model. To accomplish this objective, quantitative data were collected from completed construction projects in the process industry. Each of the respondents was asked to assign a one-to-five rating for each of 45 potential drivers of estimate accuracy for a given estimate. The data were analyzed using factor analysis and multivariate regression analysis. The factor analysis was used to group the 45 elements into 11 orthogonal factors. Multivariate regression analysis was performed on the 11 factors to determine a suitable model for predicting estimate accuracy. The resulting model, known as the estimate score procedure, allows the project team to score an estimate and then predict its accuracy based on the estimate score. In addition, a computer software tool, the Estimate Score Program, was developed to automate the estimate score procedure. The multivariate regression analysis identified 5 of the 11 factors that were significant at the α = 10% level. The five factors, in order of significance, were basic process design, team experience and cost information, time allowed to prepare the estimate, site requirements, and bidding and labor climate.