17R-

97

COSTESTI
MATECLASSI
FI
CATI
ON
SYSTEM
 AACE International Recommended Practice No. 17R-97

COST ESTIMATE CLASSIFICATION SYSTEM

TCM Framework: 7.3 – Cost Estimating and Budgeting

Rev. November 29, 2011

Note: As AACE International recommended practices evolve over time, please refer to web.aacei.org for the latest
revisions.

Any terms found in AACE Recommended Practice 10S-90, Cost Engineering Terminology, supersede terms defined in
other AACE work products, including but not limited to, other recommended practices, the Total Cost Management
Framework, and Skills & Knowledge of Cost Engineering.

Contributors:
Disclaimer: The opinions expressed by the authors and contributors to this recommended practice
are their own and do not necessarily reflect those of their employers, unless otherwise stated.

Peter Christensen, CCE (Primary Contributor) Kenneth K. Humphreys, PE CCE

Larry R. Dysert, CCC CEP (Primary Contributor) Donald F. McDonald, Jr. PE CCE PSP
Jennifer Bates, CCE C. Arthur Miller
Jeffery J. Borowicz, CCC CEP PSP Bernard A. Pietlock, CCC CEP
Peter R. Bredehoeft, Jr. CEP Todd W. Pickett, CCC CEP
Robert B. Brown, PE Wesley R. Querns, CCE
Dorothy J. Burton Don L. Short, II CEP
Robert C. Creese, PE CCE H. Lance Stephenson, CCC
John K. Hollmann, PE CCE CEP James D. Whiteside, II PE

Copyright © AACE® International AACE® International Recommended Practices

AACE® International Recommended Practice No. 17R-97
COST ESTIMATE CLASSIFICATION SYSTEM
TCM Framework: 7.3 – Cost Estimating and Budgeting

November 29, 2011

TABLE OF CONTENTS

Table of Contents ..........................................................................................................................................................1

Purpose ..........................................................................................................................................................................1
Introduction ...................................................................................................................................................................2
Classification Methodology ...........................................................................................................................................2
Determination of the Cost Estimate Class .....................................................................................................................4
Definitions of Cost Estimate Characteristics ..................................................................................................................4
Maturity Level of Project Definition Deliverables (Primary Characteristic) ...............................................................4
End Usage (Secondary Characteristic) .......................................................................................................................4
Estimating Methodology (Secondary Characteristic) ................................................................................................4
Expected Accuracy Range (Secondary Characteristic) ...............................................................................................4
Effort to Prepare Estimate (Secondary Characteristic) ..............................................................................................5
Relationships and Variations of Characteristics ............................................................................................................5
Maturity Level of Project Definition Deliverables......................................................................................................6
End Usage ..................................................................................................................................................................6
Estimating Methodology ...........................................................................................................................................6
Expected Accuracy Range ..........................................................................................................................................6
Effort to Prepare Estimate .........................................................................................................................................7
Estimate Classification Matrix .......................................................................................................................................7
References .....................................................................................................................................................................7
Contributors...................................................................................................................................................................8

PURPOSE

As a recommended practice of AACE International, the Cost Estimate Classification System provides guidelines for
applying the general principles of estimate classification to asset project cost estimates. Asset project cost
estimates typically involve estimates for capital investment, and exclude operating and life-cycle evaluations. The
Cost Estimate Classification System maps the phases and stages of asset cost estimating together with a generic
maturity and quality matrix that can be applied across a wide variety of industries.

This guideline and its addenda have been developed in a way that:
• provides common understanding of the concepts involved with classifying project cost estimates,
regardless of the type of enterprise or industry the estimates relate to;
• fully defines and correlates the major characteristics used in classifying cost estimates so that enterprises
may unambiguously determine how their practices compare to the guidelines;
• uses the maturity level of project definition deliverables as the primary characteristic to categorize
estimate classes; and
• reflects generally-accepted practices in the cost engineering profession.

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An intent of the guideline is to improve communication among all of the stakeholders involved with preparing,
evaluating, and using project cost estimates. The various parties that use project cost estimates often misinterpret
the quality and value of the information available to prepare cost estimates, the various methods employed during
the estimating process, the accuracy level expected from estimates, and the level of risk associated with estimates.

This classification guideline is intended to help those involved with project estimates to avoid misinterpretation of
the various classes of cost estimates and to avoid their misapplication and misrepresentation. Improving
communications about estimate classifications reduces business costs and project cycle times by avoiding
inappropriate business and financial decisions, actions, delays, or disputes caused by misunderstandings of cost
estimates and what they are expected to represent.

This document is intended to provide a guideline, not a standard. It is understood that each enterprise may have
its own project and estimating processes and terminology, and may classify estimates in particular ways. This
guideline provides a generic and generally-acceptable classification system that can be used as a basis to compare
against. If an enterprise or organization has not yet formally documented its own estimate classification scheme,
then this guideline may provide an acceptable starting point.

INTRODUCTION

An AACE International guideline for cost estimate classification for the process industries was developed in the late
1960s or early 1970s, and a simplified version was adopted as an ANSI Standard Z94.0 in 1972. Those guidelines
and standards enjoyed reasonably broad acceptance within the engineering and construction communities and
within the process industries. However, in the 1980s, empirical research on the correlation of the maturity level of
project definition and cost growth and schedule slip led to better understanding of project risks and the wide
implementation of project phase or stage-gate scope development processes [3]. This recommended practice
guide and its addenda, in consideration of this research improve upon the earlier standards by:
1. providing a classification method applicable across all industries;
2. unambiguously identifying, cross-referencing, benchmarking, and empirically evaluating the multiple
characteristics related to the class of cost estimate; and
3. aligning with typical phase-gate project scope definition practices.

This guideline is intended to provide a generic methodology for the classification of project cost estimates in any
industry, and will be supplemented with addenda that will provide extensions and additional detail for specific
industries.

CLASSIFICATION METHODOLOGY

There are numerous characteristics that can be used to categorize cost estimate types. The most significant of
these are the maturity level of project definition deliverables, end usage of the estimate, estimating methodology,
and the effort and time needed to prepare the estimate. The “primary” characteristic used in this guideline to
define the classification category is the maturity level of project definition deliverables. The other characteristics
are “secondary.”

Categorizing cost estimates by maturity level of project definition is in keeping with the AACE International
philosophy of total cost management, which is a quality-driven process applied during the entire project life cycle.
The discrete levels of project definition used for classifying estimates correspond to the typical phases and gates of
evaluation, authorization, and execution often used by project stakeholders during a project life cycle.

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Primary
Secondary Characteristic
Characteristic

MATURITY LEVEL EXPECTED

OF PROJECT ACCURACY PREPARATION
END USAGE METHODOLOGY RANGE EFFORT
ESTIMATE CLASS DEFINITION Typical purpose of Typical estimating Typical +/- range Typical degree of
DELIVERABLES estimate method relative to index of 1 effort relative to least
Expressed as % of (i.e. Class 1 estimate) cost index of 1 [b]
complete definition [a]

Stochastic
Screening or (factors and/or
Class 5 0% to 2% 4 to 20 1
feasibility models) or
judgment
Concept study or Primarily
Class 4 1% to 15% 3 to 12 2 to 4
feasibility stochastic
Budget Mixed but
Class 3 10% to 40% authorization or primarily 2 to 6 3 to 10
control stochastic
Control or Primarily
Class 2 30% to 75% 1 to 3 5 to 20
bid/tender deterministic

Check estimate
Class 1 65% to 100% Deterministic 1 10 to 100
or bid/tender
Notes:
[a] If the range index value of "1" represents +10/-5%, then an index value of 10 represents +100/-50%.
[b] If the cost index value of "1" represents 0.005% of project costs, then an index value of 100 represents 0.5%.
Table 1 – Generic Cost Estimate Classification Matrix

Five cost estimate classes have been established. While the maturity level of project definition is a continuous
spectrum, it was determined from benchmarking industry practices that three to five discrete categories are
commonly used. Five categories are established in this guideline as it is easier to simplify by combining categories
than it is to arbitrarily split a standard.

The estimate class designations are labeled Class 1, 2, 3, 4, and 5. A Class 5 estimate is based upon the lowest
maturity level of project definition, and a Class 1 estimate is closest to full project definition and maturity. This
arbitrary “countdown” approach considers that estimating is a process whereby successive estimates are prepared
until a final estimate closes the process.

Table 1 provides a summary of the characteristics of the five estimate classes. The maturity level of definition is the
sole determining (i.e., primary) characteristic of Class. In Table 1, the maturity is roughly indicated by a % of
complete definition; however, it is the maturity of the defining deliverables that is the determinant, not the
percent. The specific deliverables, and their maturity or status can only be defined in the context of the specific
industry project scope.

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DETERMINATION OF THE COST ESTIMATE CLASS

The cost estimator makes the determination of the estimate class based upon the maturity level of project
definition based on the status of specific key planning and design deliverables. The percent design completion may
be correlated with the status, but the percentage should not be used as the Class determinate. While the
determination of the status may (and hence class) is somewhat subjective, having standards for design input data,
completeness and quality of the design deliverables will serve to make the determination more objective.

DEFINITIONS OF COST ESTIMATE CHARACTERISTICS

The following are brief discussions of the various estimate characteristics used in the estimate classification matrix.
For the secondary characteristics, the overall trend of how each characteristic varies with the maturity level of
project definition deliverables (the primary characteristic) is provided.

Maturity Level of Project Definition Deliverables (Primary Characteristic)

This characteristic is based upon the maturity or the extent of definition of key types of planning, design and other
input information and deliverables available to the estimating process. Such inputs include project scope
definition, requirements documents, specifications, project plans and schedules, drawings, calculations, learnings
from past projects, reconnaissance data, and other information that must be developed to define the project. Each
industry will have a typical set of deliverables that are used to support the type of estimates used in that industry.
The set of deliverables becomes more definitive and complete as the level of project definition (i.e., project
engineering) progresses; therefore, the percent completion will be somewhat correlated with the maturity level
(see Table 1) However, percent completion metrics lack necessary information as to whether key deliverables have
met quality goals or been completed in the proper sequence. A maturity matrix of key deliverables and their
required status for each class (e.g., issued for design) is the recommended characteristic determinant.

End Usage (Secondary Characteristic)

The various classes (or phases) of cost estimates prepared for a project typically have different end uses or
purposes. As the degree of project definition increases, the end usage of an estimate typically progresses from
strategic evaluation and feasibility studies to funding authorization and budgets to project control purposes.

Estimating Methodology (Secondary Characteristic)

Estimating methodologies fall into two broad categories: stochastic and deterministic. In stochastic methods, the
independent variable(s) used in the cost estimating algorithms are generally something other than a direct
measure of the units of the item being estimated. The cost estimating relationships used in stochastic methods are
often based on factors, metrics, models, etc. With deterministic methods, the independent variable(s) are more or
less a definitive measure of the item being estimated (can include quotes, bids, etc.). A deterministic methodology
reduces the level of conjecture inherent in an estimate. As the maturity level of project definition increases, the
estimating methodology tends to progress from stochastic to deterministic methods.

Expected Accuracy Range (Secondary Characteristic)

Estimate accuracy range is in indication of the degree to which the final cost outcome for a given project will vary
from the estimated cost. Accuracy is traditionally expressed as a +/- percentage range around the point estimate

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after application of contingency, with a stated level of confidence that the actual cost outcome would fall within
this range (+/- measures are a useful simplification, given that actual cost outcomes have different frequency
distributions for different types of projects). As the maturity level of project definition deliverables increases, the
expected accuracy of the estimate tends to improve, as indicated by a tighter +/- range.

Note that in table 1, the values in the accuracy range column do not represent + or - percentages, but instead
represent an index value relative to a best range index value of 1. If, for a particular industry, a Class 1 estimate has
an accuracy range of +10/-5 percent, then a Class 5 estimate in that same industry may have an accuracy range of
+100/-50 percent.

In addition to the maturity level of project definition, estimate accuracy is also driven by other systemic risks such
as:
• Level of non-familiar technology in the project.
• Complexity of the project.
• Quality of reference cost estimating data.
• Quality of assumptions used in preparing the estimate.
• Experience and skill level of the estimator.
• Estimating techniques employed.
• Time and level of effort budgeted to prepare the estimate.

Systemic risks such as these are often the primary driver of accuracy; however, project-specific risks (e.g. risk
events) also drive the accuracy range [3].

Effort to Prepare Estimate (Secondary Characteristic)

The level of effort needed to prepare a given estimate is an indication of the cost, time, and resources required.
The cost measure of that effort is typically expressed as a percentage of the total project costs for a given project
size. As the maturity level of project definition deliverables increases, the amount of effort to prepare an estimate
increases, as does its cost relative to the total project cost. The effort to develop the project deliverables is not
included in the effort metrics; they only cover the cost to prepare the cost estimate itself.

RELATIONSHIPS AND VARIATIONS OF CHARACTERISTICS

There are a myriad of complex relationships that may be exhibited among the estimate characteristics within the
estimate classifications. The overall trend of how the secondary characteristics vary with the maturity level of
project definition deliverables was provided above. This section explores those trends in more detail. Typically,
there are commonalties in the secondary characteristics between one estimate and the next, but in any given
situation there may be wide variations in usage, methodology, accuracy, and effort.

The maturity level of project definition deliverables is the “driver” of the other characteristics. Typically, all of the
secondary characteristics have the maturity level of project definition as a primary determinant. While the other
characteristics are important to categorization, they lack complete consensus. For example, one estimator’s “bid”
might be another’s “budget.” Characteristics such as “accuracy” is driven my many project risks and
“methodology” can vary markedly from one industry to another, and even from estimator to estimator within a
given industry.

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Maturity Level of Project Definition Deliverables

Each project (or industry grouping) will have a typical set of deliverables that are used to support a given class of
estimate. The availability of these deliverables is correlated to the maturity level or percent of project definition
achieved, but maturity level does not express required quality or sequence information. The variations in the
deliverables required for an estimate in specific industries are too broad to cover in detail here; however, it is
important to understand what drives the variations. Each industry group tends to focus on a defining project
element that “drives” the estimate maturity level. For instance, chemical industry projects are “process
equipment-centric”—i.e., the maturity level of project definition and subsequent estimate maturity level is
significantly determined by how well the equipment and process flow is defined. Architectural projects tend to be
“structure-centric,” software projects tend to be “function-centric,” and so on. Understanding these drivers puts
the differences that may appear in the more detailed industry addenda into perspective.

End Usage

While there are common end usages of an estimate among different stakeholders, usage is often relative to the
stakeholder’s identity. For instance, an owner company may use a given class of estimate to support project
funding, while a contractor may use the same class of estimate to support a contract bid or tender. It is not at all
uncommon to find stakeholders categorizing their estimates by usage-related headings such as “budget,” “study,”
or “bid.” Depending on the stakeholder’s perspective and needs, it is important to understand that these may
actually be all the same class of estimate (based on the primary characteristic of maturity level of project definition
achieved).

Estimating Methodology

As stated previously, estimating methodologies fall into two broad categories: stochastic and deterministic. These
broad categories encompass scores of individual methodologies. Stochastic methods often involve simple or
complex modeling based on inferred or statistical relationships between costs and programmatic and/or technical
parameters. Deterministic methods tend to be straightforward counts or measures of units of items multiplied by
known unit costs or factors. It is important to realize that any combination of methods may be found in any given
class of estimate. For example, if a stochastic method is known to be suitably accurate, it may be used in place of a
deterministic method even when there is sufficient input information based on the maturity level of project
definition deliverables to support a deterministic method. This may be due to the lower level of effort required to
prepare an estimate using stochastic methods.

Expected Accuracy Range

The accuracy range of an estimate is dependent upon risk. A number of characteristics of the estimate input
information and the estimating process are systemic risks. The extent and the maturity of the input information is
a highly important determinant of accuracy. However, there are systemic risk factors besides the available input
information that also greatly affect estimate accuracy measures. Primary among these are the state of technology
in the project and the quality of reference cost estimating data.

State of technology—technology varies considerably between industries, and thus affects estimate accuracy. The
state of technology used here refers primarily to the programmatic or technical uniqueness and complexity of the
project. Procedurally, having “full extent and maturity” in the estimate basis deliverables is deceptive if the
deliverables are based upon assumptions regarding uncertain technology. For a “first-of-a-kind” project there is a
lower level of confidence that the execution of the project will be successful (all else being equal). There is
generally a higher confidence for projects that repeat past practices. Projects for which research and development

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are still under way at the time that the estimate is prepared are particularly subject to low accuracy expectations.
The state of technology may have a significant impact on the accuracy range.

Quality of reference cost estimating data—accuracy is also dependent on the quality of reference cost data and
history. It is possible to have a project with “common practice” in technology, but with little cost history available
concerning projects using that technology. In addition, the estimating process typically employs a number of
factors to adjust for market conditions, project location, environmental considerations, and other estimate-specific
conditions that are often uncertain and difficult to assess. The accuracy of the estimate will be better when
verified empirical data and statistics are employed as a basis for the estimating process, rather than assumptions.

In summary, estimate accuracy will generally be correlated with estimate classification (and therefore the maturity
level of project definition), all else being equal. However, specific accuracy ranges will typically vary by industry.
Also, the accuracy of any given estimate is not fixed or determined by its classification category. Significant
variations in accuracy from estimate to estimate are possible if any of the systemic determinants of accuracy, such
as technology, quality of reference cost data, quality of the estimating process, and skill and knowledge of the
estimator vary. Finally, project-specific risks (e.g., risk events) also affect accuracy. Accuracy is also not necessarily
determined by the methodology used or the effort expended. Estimate accuracy must be evaluated on an
estimate-by-estimate basis in conjunction with some form of risk analysis process.

Effort to Prepare Estimate

The effort to prepare an estimate is usually determined by the extent of the input information available. The effort
will normally increase as the number and complexity of the project definition deliverables that are produced and
assessed increase. However, with an efficient estimating methodology on repetitive projects, this relationship may
be less defined. For instance, there are combination design/estimating tools in the process industries that can
often automate much of the design and estimating process. These tools can often generate Class 3 deliverables
and estimates from the most basic input parameters for repetitive-type projects. There may be similar tools in
other industry groupings.

It also should be noted that the estimate preparation costs as a percentage of total project costs will vary inversely
with project size in a nonlinear fashion. For a given class of estimate, the preparation cost percentage will decrease
as the total project costs increase. Also, at each class of estimate, the preparation costs in different industries will
vary markedly. Metrics of estimate preparation costs normally exclude the effort to prepare the defining project
deliverables.

ESTIMATE CLASSIFICATION MATRIX

The five estimate classes are presented in Table 1 in relationship to the identified characteristics. The maturity
level of project definition deliverables determines the estimate class. For this RP, Table 1 provides generally
indicative percent completions, but in industry-specific addenda RPs, design deliverable versus status matrix tables
will be included which are the determinate of class. The other four characteristics are secondary characteristics
that are generally correlated with the maturity level of project definition deliverables, as discussed above.

REFERENCES

1. Hollmann, John K., PE CCE, Editor, Total Cost Management Framework: An Integrated Approach to Portfolio,
Program and Project Management, AACE International, Morgantown, WV, 2006.
2. AACE International, Recommended Practice 10S-90, Cost Engineering Terminology, AACE International,
Morgantown, WV, (latest revision).

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3. AACE International, Recommended Practice 42R-08, Risk Analysis and Contingency Determination Using
Parametric Estimating, AACE International, Morgantown, WV, (latest revision).

CONTRIBUTORS

Disclaimer: The opinions expressed by the contributors to this recommended practice are their own and do not
necessarily reflect those of their employers, unless otherwise stated.

Peter Christensen, CCE (Primary Contributor)

Larry R. Dysert, CCC CEP (Primary Contributor)
Jennifer Bates, CCE
Jeffery J. Borowicz, CCC CEP PSP
Peter R. Bredehoeft, Jr. CEP
Robert B. Brown, PE
Dorothy J. Burton
Robert C. Creese, PE CCE
John K. Hollmann, PE CCE CEP
Kenneth K. Humphreys, PE CCE
Donald F. McDonald, Jr. PE CCE PSP
C. Arthur Miller
Bernard A. Pietlock, CCC CEP
Todd W. Pickett, CCC CEP
Wesley R. Querns, CCE
Don L. Short, II CEP
H. Lance Stephenson, CCC
James D. Whiteside, II PE

Copyright © AACE® International AACE® International Recommended Practices