CAPEX Estimation in Engineering Projects: Best Practices

Capital Expenditure (CAPEX) estimation is a critical process in the planning and execution of engineering projects. An accurate estimate allows optimizing the investment, mitigating financial risks and guaranteeing the viability of the project. However, errors at this stage can lead to cost overruns, budget deviations and profitability problems.

In this note, we will explore the key regulations, associated risks, cost estimation best practices, key issues to consider and the most common errors in CAPEX estimation.

Applicable Regulations

To ensure transparency and accuracy in cost estimation, several international regulations and standards establish methodologies and best practices in the financial planning of engineering projects. Some of the most relevant are:

International Standards

1. AACE International (Association for the Advancement of Cost Engineering)

   • AACE 18R-97 – Guide for Capital Cost Estimating.

   • AACE 56R-08 – Classification of Cost Estimates for Engineering Projects.

   • AACE 42R-08 – Risk Analysis in Cost Estimating.

2. ISO 55000 - Asset management and project life cycle assessment.

3. PMBOK (Project Management Body of Knowledge) - PMI standards on project cost management.

4. FIDIC (International Federation of Consulting Engineers) - Standards for infrastructure project contracts.

5. GAO Cost Estimating and Assessment Guide - Methodology for cost assessment in large investment projects.

   
   

Local Regulations (Chile and Latin America)

1. MOP Regulations (Chile) - Guidelines for cost evaluation in public infrastructure.

2. Financial Planning Standards for Construction (Mexico and Colombia) - Guidelines for the evaluation of public and private investment.

These regulations establish methodological criteria that allow for more accurate and reliable CAPEX estimates.

Risks Associated with Poor CAPEX Estimation

Inaccurate estimation of investment costs can have negative consequences on the planning and execution of a project. The main risks include:

1. Cost Overestimation

• Can cause a project to be unnecessarily discarded as it is considered financially unfeasible.

• Reduces competitiveness in bidding and financing processes.

2. Cost Underestimation

• Can lead to unforeseen cost overruns, unbalancing the project budget.

• Can generate cuts in critical phases, affecting the quality and functionality of the project.

3. Lack of Contingency Contemplation

• Projects without provisions for contingencies can be severely affected by variations in materials, timing or regulations.

4. Impact on Profitability and Financing

• A deficient estimate can generate problems in obtaining financing and affect the expected profitability of the project.

Best Practices in CAPEX Estimation

To optimize the accuracy of investment costs, it is essential to apply proven methodologies based on reliable data. The following are best practices in CAPEX estimation:

1. Estimation Classification

The AACE 56R-08 methodology establishes five estimating levels according to the maturity of the project:

Class	Accuracy (%)	Common Use
5 Class	±30-50%	Pre-Feasibility
4 Class	±20-30%	Feasibility
3 Class	±10-20%	Basic Engineering
2 Class	±5-15%	Detail Engineering
1 Class	±3-10%	Final Budget

2. Detailed Cost Breakdown Structure (WBS)

• Classify costs into specific items (labor, materials, equipment, permits, contingencies).

• Incorporate direct and indirect costs for greater accuracy.

3. Use of Cost Databases

• Implement up-to-date material and equipment pricing databases.

• Use estimating software such as CostX, PriMus, Sage Estimating, Cleopatra Enterprise.

4. Risk Factor Consideration

• Apply sensitivity analysis and Monte Carlo simulations to identify cost variations.

• Incorporate contingency margins based on project uncertainty.

5. Comparative Analysis of Similar Projects

• Evaluate previous projects with similar characteristics to improve estimation accuracy.

Key Issues in CAPEX Estimation

To ensure the viability of the project, it is necessary to consider critical aspects that impact investment costs:

1. Site Conditions and Location

   Evaluate accessibility, site preparation costs and logistical requirements.

2. Technologies and Equipment Used

   Include installation, maintenance and critical spare parts costs.

3. Regulations and Permits

   Costs associated with environmental regulations, safety and certifications.

4. Bidding and Contracting Strategy

   Selection of contract modality (EPC, EPCM, turnkey).

5. Inflation and Financing Costs

   Adjust the estimate according to projected economic conditions.

Common Errors in CAPEX Estimation

Even with robust methodologies, some errors can affect the accuracy of the cost estimate:

1. Omission of Indirect Costs

Failure to include engineering, permitting, logistics, and supervision costs can lead to budget mismatches.

2. Failure to Update Prices

Using outdated material and labor costs can negatively impact project feasibility.

3. Ignoring Contingencies and Risk Factors

Failure to consider price variations or operational contingencies can compromise project execution.

4. Dependence on a Single Estimating Method

Failure to compare analytical methods with historical data and simulations generates inaccurate estimates.

5. Failure to Validate with Project Experts

Failure to review with technical teams and specialists can lead to errors in projected costs.

Conclusion

CAPEX estimation is a determining factor in the profitability and success of an engineering project. Applying recognized standards, mitigating risks and adopting best practices allows optimizing costs and minimizing budget deviations.

At Acciomate Engineering & Projects, we have experts in cost management and financial planning that guarantee.