Still Using Parametric Cost Estimations for your Early-Stage Project Evaluations? Yes? There IS a Better Approach!

Figure 1: Example of a parametric cost curve. (USBM, Cost Estimating System Handbook, 1987)

As a brief reminder, parametric cost estimating is a technique in which an algorithm (or curve) is used to rapidly calculate costs based on historical data and project parameters (cost drivers such as capacity or production rate).  In the mining industry, we may look to the U.S. Bureau of Mines Cost Estimating System (CES) as an example centered on parametric cost modeling. (Figure 1)

Alternatively, itemized or engineering-based cost estimating is a bottom-up approach that utilizes a few (or many) key inputs (e.g. resource size, mine production rate, or haul distances) to arrive at estimates based on site-specific engineering algorithms.  See Figure 2 for a typical progression of the process.

Initially, the factored and/or parametric cost estimating methods were developed to both save time and to provide results where actual data did not exist. Their basis in statistics and historical data, though not site specific, provided a means for the calculation of relatively rapid, scoping level mine cost estimates when very little engineering knowledge is known. Engineered approaches, because they are calculation-rich, were simply impractical. At the time, if an evaluator used a calculator and an engineering pad, it would take weeks or months to build a thorough estimate, and it was prohibitively time consuming to evaluate alternative development scenarios. With the advent of the spreadsheet and published data sources, evaluators could now build backlogs of spreadsheet-based engineering estimates via a vastly more efficient process.

Figure 2: Example of the progression of an engineered cost estimating approach…input basic project parameters, select equipment based on those site-specific parameters, and determine costs. (Partial screenshots taken from Mining Intelligence Evaluate software.)

The most important distinction in the results of the two (parametric and engineering-based) is client confidence. That is, the basis of the estimate should be apparent…how many hours the trucks need to operate, their size and number, the size of the crushers, flotation cells, and ball mills, the number of stopes or active faces, the size of the crew and the facilities (shop, warehouse, office, etc.), the number of mechanics, etc. With this information, the client can understand whether or not the design fits their specific project, and subsequently whether the cost estimates are representative. Parametric cost estimates did not provide this level of transparency at the project level, even if adjustment factors were utilized.

Of secondary importance, but important none-the-less, is the fact that parametric approaches are really designed only to produce one number – a cost. Engineering approaches, however, provide a significant amount of supporting information – the type of information that is really needed in the preliminary design process. When estimates are based on powder factors and cycle-times, and alternatives are easily evaluated, clients can use the information to compare operational and design parameters such as equipment combinations, facility locations, opening sizes, development configurations, and workforce combinations, to name just a few.

Some might argue that the engineered approach to cost estimating requires too many unknown parameters for early-stage prefeasibility level projects.  This is a common misconception, as reasonable cost estimates may be calculated with only a few simple parameters such as resource size and rough dimensions, mining method, ore/waste haulage distances, and production rate. Estimates can then be easily refined as new technical data is made available.

In summary, parametric cost estimating techniques once served a vital role for engineers and geologists in the mining industry. Today, however, their lack of transparency and inability to fully capture project specifics makes the engineered approach to mine cost estimating the preferred option.  The bottom-up approach permits estimates that are supported by a full understanding of the underlying assumptions and early design criteria.

If you need assistance with your engineered cost estimates, be sure to visit https://www.miningintelligence.com/Consult/ to learn more about our team and to tell us about your project!