A Simulation Approach to Cost Estimation in the Project Contracting Industry

Abstract

In the project contracting industry (particularly in Third World and developing economies) one of the basic requirements for a company to produce a bid is an accurate estimate of the overall costs. A typical contract will involve several hundred quotes from different suppliers, and some of the figures will be inherently more risky than others.

This paper looks at the effect of component price uncertainties on the overall cost of a project and develops a company-based simulation model to evaluate this. The basic data is derived from the individual expertise existing within the company, and this is statistically tested for consistency.

The application of the simulation model is demonstrated, and it is also used to test some simple hypotheses about the existing modus operandi.

Keywords:

• costing
• risk
• simulation

^*Now with Ames Crosta and Babcock Ltd.

^*Now with Ames Crosta and Babcock Ltd.