1.4 Preliminary Business Case Approval

A preliminary business case is required by the procuring entity to fund the steps of the procurement process up until the final investment decision is made. Such a business case will need to justify why project is important, and will obtain “buy-in” from senior decision makers as to the steps that will be followed, their cost, and any risks involved with the process.

At this stage a firm fixed price for the entire project is not practical. A good practice for estimating is to use a cost range based on project uncertainties and not a specific number. This can prove extremely important in obtaining funding and in explaining any future changes. With no detailed engineering completed it is not possible to provide a complete cost and schedule to complete a specific project. Detailed engineering needs to be completed, and significant planning for construction execution and all major procurement needs to be done.

The table below shows a suggested method for classifying estimate ranges recommended by AACE International.

Projects budgets for a given phase typically include a contingency reserve. This reserve is used by the project manager to fund known or predictable risks that have been identified before the start of a project phase (i.e. risks documented in the risk register). Also included in the project overall budget is a management reserve that is not under control of the project manager, but rather the project sponsor. Management reserves fund risks that are unknown or not predicted in advance of the particular project phase.