Understanding Total Installed Cost in FEL
Updated: Jul 11, 2019
In the world of Front-End Loading (FEL) or Front-End Engineering and Design (FEED) the Total Installed Cost Estimate (TIC) is the result of the cumulative efforts that management and investors want to see to determine the viability of a project. The project may be driven by return on investments, regulatory necessity, safety concerns, and sometimes corporate good will. Whatever the driver, those who approve the funding want to know one thing – “How much will it cost?”.
FEL or FEED are synonymous. For this article we will be using FEL as the preferred term. It is the level of analysis, engineering, and design effort that takes place before a project is approved. In the commonly used, though often abused, Stage and Gate method the FEL is broken into typically three to four phases. In each phase the level of effort and deliverables leads ultimately to a TIC. Depending on that level of effort, level of stakeholder engagement, and level of risk assessment the TIC will be defined at a certain accuracy level. AACEI Recommended Practice 18R-97 defines the FEL levels of effort vs. accuracy as follows:
Once the Stage of the process has been completed, we reach the gate to the next Stage. The key to this gate is held by those who are responsible for obtaining and approving the funding. Often these are busy managers who look over a summary package and base the decision simply on what the project manager presents as the internal rate of return (IRR) on investment. With little more than a general understanding of the project scope and a TIC paired with an IRR the manager proceeds to open the gate or send the team back to the drawing board or, worse, shelve the project.
While the TIC is usually the heaviest weighted factor in the process, it is all too often the result of hurried schedule, half-cocked scopes of work, and the endless pressure of “Just give me a number!”. This is dangerous and leads to a massive amount of budget failures across all industries at about the same rate – 70%. That’s right – about 70% of all projects fail to meet their financial objectives.
Much of the problems that lead to this dismal failure rate are result of the factors mentioned above. Other factors include lack of understanding of the FEL process, misunderstanding what a TIC is and is not, a less-experienced workforce, fast-changing industries, and markets that are difficult to keep up with. Understanding these factors take more than just an estimator who knows how to use software or has all the right metrics in their head. It takes a holistic approach to project development and a team who understands their roles and responsibilities. A well-defined team who is collectively focused on producing the most accurate possible scope within the appropriate gate is going to do well. In order to align that team and assign realistic expectations from the individuals of that team it is best to start at understanding what the TIC is and is not, then work backwards to define the level of effort and needs of the project team.
What a Total Installed Cost Estimate is
The TIC is a budgeting and feasibility analysis deliverable based on limited information produced by a cost estimator experienced in the design and construction aspects of a given industry and sector. It is a single data point to be considered when going through the project development and approval processes. This data point applied as a factor in the IRR is usually the most scrutinized part of the FEL process.
The limited information provided to the cost estimator must be developed in alignment with the expected accuracy level requested for approval. The team leadership responsible for the development of this information should be knowledgeable enough to understand the appropriate level of effort required to meet said accuracy level.
What the Total Installed Cost Estimate is not
A TIC is not a ‘quote’, ‘educated guess’, ‘guestimate’, or ‘just a number’. It is not the mid-point number in the range, it is the entirety of the range with heavier weight given to the most probable point in the range. The TIC is often misrepresented as a single number when in fact it is a range of possibilities. The TIC is not that precise. A sophisticated PMO will base their decision on the most probable number within that range and take into serious consideration the rest of the possible outcomes.
It is common for the project team to slip away from the most suitable solution to a project’s challenge and develop deliverables for the wrong scope. This leads to a false sense of security because the TIC appears to check all the boxes and be precise. This is only precise on a non-solution, but completely inaccurate to the real solution. The outcome of this pitfall is either starting a project that will fail or killing a project that could have succeeded with the proper scope identified.
Why the TIC is critical to project success
Good numbers based on good scope lead to good decisions. As stated, the TIC drives most decisions made by management in the stage and gate process. In addition to providing a number to base budgets on, it also provides man-hours to base schedules on and plan procurement from. A well-developed TIC reflects a well-developed project scope. Using reliable standards in TIC development requires reliable standards in project scope development. When a quality TIC is the goal in FEL, it improves the basis upon which the detailed engineering will be built.
If you are in a capital-intensive industry, it is imperative to understand the role this estimate plays throughout the success of the business and its impact on the local economy. Jobs are created, goods and services procured, supporting industries are given a boost. Large scale projects go from $25MM into the billions. Some of these projects are the size of state economies. Small projects are innumerable and have a similar impact. It all starts at the FEL level. Sounds like a lot of responsibility, it is. But it is not born solely by the estimator. It is the project management office’s responsibility to educate, inform, and empower the team with creativity and the right resources. It is the team and PMO’s responsibility to control the processes of project development to produce the best possible outcome.
When viewed with this greater responsibility of the PMO, it is easier to appreciate the importance and influence they can have in their leadership roles. The TIC is more than “just a number” or an “estimate”, it is the spark that cranks the engine of the industrial project economy.
In the coming articles we will discuss how the TIC and FEL processes will change in relation to changing technologies like digitalization and machine learning, how the industrial FEL processes are changing by applying alternate Lean and Agile methodologies, and career topics within the world of FEL. We’ll also be breaking down some of the high-level topics here into greater detail as we move along. Teambuilding, basis information, data compilation and conditioning, indirect costs, reporting, and review and validation methods are all going to be topics of discussion in this series on the role and development of TIC estimating in the industrial project world.
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