Cost estimation

Every unit has its own cost estimator who estimates project costs for his or her own unit.

Mega projects have nominated MUP cost estimator who collects cost estimates of every unit together and makes the summary of cost estimation for the whole project.

Cost estimation work depends on the phase of the sales process. The phases of the sales process are illustrated in Figure 12. Cost estimation work is done for indicative proposal, budget proposal and firm proposal. In every phase, cost estimation work should be done with minimal effort to still provide the required accuracy.

Figure 12. Phases of the sales process

To indicative proposal, cost estimators should be able to give an indicative price for the project without detailed cost estimation. At budget proposal, cost estimation should be more accurate with detailed cost estimation. Finally, at the firm proposal phase, in addi-tion to detailed cost estimaaddi-tion, cost estimaaddi-tions should include for example cash flow curves, currency basket and MUP pricing summary (introduced later). Thus, it requires cooperation with for example procurement and treasury experts.

Procurement department has a critical input to cost estimation as it tries to make a pro-curement plan already in the sales phase of the project. Especially, the main equipment of the project is tried to ask from suppliers for the procurement plan. Sometimes procure-ment also makes preliminary agreeprocure-ments with suppliers. Cost accuracy is tried to en-hance in cost review meetings where procurement goes through cost uncertainties with cost estimators.

Mega projects in the case company can be divided to multiple delivery entities called islands. Usually, every island includes deliveries from many technology units, and they can consist of parts which are delivered by a different business line. These parts of the islands have their own cost estimators. Thus, every part of the island has its own cost estimation. These cost estimations are summarized by cost estimator of the main deliv-ery. MUP cost estimator, in turn, summarizes cost estimations of all islands to MUP pric-ing summary.

MUP pricing summary is made based on cost estimates of different units involved in the project. MUP cost estimator is responsible for collecting cost estimates of different units and combining them to one document: MUP pricing summary. MUP cost estimator makes pricing summary in cooperation with the sales director. Process of creating MUP pricing summary is illustrated in Figure 13.

Figure 13. Simplified process of creating MUP pricing summary

MUP pricing summary is an Excel document which includes what will be delivered to the customer. It contains a lot of information about costs and prices, which is why one of the interviewees called it ‘Excel monster’. Pricing summary includes a summary sheet where user can easily see costs, contingencies, warranty provisions, project margins and net sales divided for business and technology units. Other sheets of pricing summary have more detailed information about costs. MUP pricing summary is used as a basis for sell-ing price to the customer. It is therefore important that pricsell-ing summary is accurate and comprehensive for the use of sales director.

In addition to sales, pricing summary is needed to create the project structure to the case company’s internal reporting and monitoring. When the contract is signed, the mega con-troller should organize currency hedges and create project structure as soon as possible.

He or she base project structure on MUP pricing summary. However, according to inter-viewed mega controllers, MUP pricing summary and cost estimates of technology units don’t serve mega controller’s needs very well. For example, they don’t include infor-mation related to pass through parts, transfer pricing or legal companies. Also, division to onshore and offshore parts is unclearly defined in MUP pricing summary.

MUP pricing summary includes also a currency basket. The currency basket is a group of currencies with different weightings. It is used to hedge the project from currency fluc-tuations. Cost estimator of every unit creates the currency basket based on currencies the project will use. To create the currency basket, cost estimator needs help from treas-ury experts because they provide exchange rates for the currency basket. Procurement has a critical role in defining currency basket because they determine where the pur-chases of the project are made from, which in turn, has a direct influence on currencies used in the cost estimate. According to interviewed treasury manager, cost estimators and procurement should actively understand what currency rates are used. He empha-sized that old currency rates must not be used. Hence, the latest currency rates should be investigated and used in project pricing.

MUP cost estimator will collect currency baskets of every unit together and make a col-lective currency basket for the whole project. MUP cost estimator will then discuss with treasury expert about currency basket. If it appears in discussions that currency basket should be modified, new currency baskets should probably be collected from units. This, however, demands quite a lot of work. Interviewed MUP cost estimator was unsure what actions should be taken if the currency basket is assessed to be modified.