The Dangers of Overestimating

A recent study indicated that 90% oil and gas projects go over budget. To compensate for this many industry players are now conservatively overestimating their costs. Can playing too safe actually be dangerous?

Last week, over a cup of coffee, my best friend and I discussed the potential of flipping a neglected residential property. We’d purchase the property, sink a bit of money into cosmetics, and resell when the market turned around. After a bit of rough math on the back of a napkin, it became apparent that our calculated returns on investment vastly differed. While he was claiming it a foul ball, I had envisioned a home run. Why did our opinions differ?

It turns out last year my friend fell victim to the ol’ home renovation curveball. In an effort to sell the idea of a home theatre to his wife, he conservatively estimated the total cost to be somewhere around 20k, including materials and labor. As with many projects, the unforeseen expenses piled: he needed more material than anticipated, the mudder’s hourly rate was double etc etc. That 20k blossomed into 30k. Swing and a miss…

Consequently, when evaluating our proposed real estate venture and the obligatory renovations, his natural instinct is to aim high on costs – isn’t that the safest approach? The problem is by trade he is an accountant, and not a general contractor. What is the cost of inaccurate budget estimation?

Our real estate dilemma illustrates a problem that many organizations face when the economic climate turns harsh. By attempting to be shrewd and overestimating potential costs, an organization effectively only reduces one type of risk. Equally important when evaluating any business proposition is the risk of doing nothing, and losing the potential profit of pursuing a business opportunity. In a highly competitive environment where firms are struggling for available capital and resources, accurately understanding all potential avenues is sound business acumen. Adopting this strategy could mean the difference between striking out without taking a swing, and bunting to get on base.

Oil & Gas Advisor is a revolutionary estimating program for simulating the capital and operating costs of oil and gas facilities. Its standardization estimate algorithms are typically within +/- 10% of actual facility costs.