Cost Estimation Responsibilities: Cost Estimation Responsibilities: A Comprehensive Guide

1. What is Cost Estimation and Why is it Important?

cost estimation is the process of predicting the resources, time, and budget required to complete a project or a task. It is a vital skill for project managers, engineers, contractors, and consultants who need to plan, execute, and control their projects effectively and efficiently. Cost estimation helps to:

- Define the scope and objectives of the project or task

- identify and quantify the risks and uncertainties involved

- allocate and optimize the resources and schedule

- Monitor and control the project performance and progress

- Evaluate the feasibility and profitability of the project or task

- Communicate and negotiate with stakeholders and clients

There are different types of cost estimation methods, depending on the level of detail, accuracy, and complexity of the project or task. Some of the common methods are:

1. Top-down estimation: This method uses historical data, expert judgment, or analogy to estimate the total cost of the project or task based on its overall characteristics and requirements. It is usually done at the early stages of the project or task, when there is limited information and high uncertainty. It is useful for strategic planning, budgeting, and feasibility analysis. For example, a project manager may use the average cost per square meter of similar projects to estimate the total cost of a new building project.

2. Bottom-up estimation: This method uses detailed breakdowns of the work, resources, and activities involved in the project or task to estimate the cost of each component and then aggregate them to get the total cost. It is usually done at the later stages of the project or task, when there is more information and lower uncertainty. It is useful for detailed planning, execution, and control. For example, an engineer may use the unit costs of materials, labor, and equipment to estimate the cost of each construction activity and then sum them up to get the total cost of the project.

3. Parametric estimation: This method uses mathematical models, formulas, or algorithms to estimate the cost of the project or task based on one or more parameters or variables that affect the cost. It is usually done when there is a strong correlation or relationship between the cost and the parameters or variables. It is useful for estimating the cost of repetitive or standardized projects or tasks. For example, a contractor may use a regression model to estimate the cost of a painting project based on the area, quality, and complexity of the painting work.

2. How to Choose the Right One for Your Project?

One of the most crucial aspects of cost estimation responsibilities is selecting the most suitable method for each project. Different methods have different advantages and disadvantages, depending on the project scope, complexity, uncertainty, and available data. Choosing the right method can improve the accuracy, reliability, and credibility of the cost estimate, as well as facilitate the decision-making process and the allocation of resources. In this section, we will explore some of the most common cost estimation methods and how to choose the best one for your project.

There are many factors that can influence the choice of a cost estimation method, such as the project type, size, duration, objectives, requirements, risks, and constraints. However, some general criteria that can help you evaluate and compare different methods are:

- Level of detail: How much information and data are needed to apply the method? How detailed and granular is the output of the method?

- Accuracy: How close is the estimate to the actual cost of the project? How much uncertainty and variability are associated with the method?

- Reliability: How consistent and repeatable is the method? How sensitive is the method to changes in assumptions, parameters, or data sources?

- Credibility: How transparent and traceable is the method? How well does the method conform to the standards and best practices of the industry or organization?

- Ease of use: How simple and intuitive is the method? How much time and effort are required to apply the method?

- Flexibility: How adaptable and scalable is the method? How well can the method handle changes in the project scope, complexity, or environment?

Based on these criteria, some of the most common cost estimation methods are:

1. Analogous or top-down estimation: This method uses the historical data and experience from similar past projects to estimate the cost of the current project. It is a quick and easy method that requires minimal data and detail, but it also has low accuracy and reliability, as it does not account for the specific characteristics and differences of the current project. This method is best suited for projects that are relatively simple, small, short, and have a high degree of similarity with past projects.

2. Parametric or bottom-up estimation: This method uses statistical models and algorithms to estimate the cost of the project based on the relationship between the cost and one or more parameters or variables that affect the cost, such as the size, scope, quality, or complexity of the project. It is a more accurate and reliable method that requires more data and detail, but it also has higher credibility and transparency, as it can show the assumptions and calculations behind the estimate. This method is best suited for projects that are relatively complex, large, long, and have a low degree of similarity with past projects.

3. Three-point estimation: This method uses three different estimates for the cost of the project: the most likely, the optimistic, and the pessimistic. These estimates reflect the range of possible outcomes and the uncertainty and risk involved in the project. The final estimate is calculated as a weighted average of the three estimates, using a formula such as the PERT (Program Evaluation and Review Technique) or the triangular distribution. It is a more realistic and flexible method that requires more data and detail, but it also has higher accuracy and reliability, as it can account for the variability and probability of the cost. This method is best suited for projects that are relatively uncertain, risky, or dynamic, and have a high degree of variability in the cost.

4. Expert judgment: This method uses the opinions and insights of experts or stakeholders who have relevant knowledge and experience in the project domain or industry to estimate the cost of the project. It is a subjective and qualitative method that requires minimal data and detail, but it also has low accuracy and reliability, as it depends on the quality and availability of the experts and their judgment. This method is best suited for projects that are relatively novel, innovative, or unique, and have a low degree of similarity with past projects.

These are some of the most common cost estimation methods, but there are also other methods that can be used, such as the Delphi method, the learning curve method, the cost-plus method, the value engineering method, and the life cycle cost method. The choice of the best method for your project depends on the specific context and characteristics of your project, as well as the purpose and scope of your cost estimate. You should always consider the advantages and disadvantages of each method, and use a combination of methods if necessary, to ensure that your cost estimate is as accurate, reliable, credible, and useful as possible.

3. How to Use Them Effectively?

One of the most important aspects of cost estimation is choosing the right tools and techniques to apply in different situations. There are many factors that can affect the accuracy and reliability of cost estimates, such as the scope, complexity, uncertainty, and risk of the project. Therefore, it is essential to use appropriate methods and tools that can account for these factors and produce realistic and credible estimates.

Some of the common tools and techniques that are used for cost estimation are:

- Analogous Estimating: This technique uses historical data from similar projects to estimate the cost of the current project. It is based on the assumption that the past performance can be a good indicator of the future performance. This technique is useful when there is limited information available about the current project, or when the project is relatively simple and has a low level of uncertainty. However, this technique may not be accurate if the current project is significantly different from the previous ones, or if there are changes in the market conditions, technology, or resources. For example, if a software development company wants to estimate the cost of developing a new mobile app, they can use analogous estimating by comparing the cost of developing similar apps in the past. However, if the new app has some unique features or requirements that are not present in the previous apps, then the cost estimate may not be reliable.

- Parametric Estimating: This technique uses mathematical models or formulas to estimate the cost of the project based on one or more parameters or variables. The parameters are usually derived from historical data or industry standards, and they represent the characteristics or attributes of the project that affect the cost. For example, the cost of building a house can be estimated by using a parametric model that takes into account the size, location, design, and quality of the house. This technique is useful when there is a strong correlation between the parameters and the cost, and when the parameters can be measured or quantified. However, this technique may not be accurate if the parameters are not well-defined, or if there are other factors that influence the cost that are not captured by the model. For example, if the cost of building a house depends on the availability and price of the materials, labor, and equipment, then the parametric model may not reflect these fluctuations.

- Bottom-Up Estimating: This technique involves breaking down the project into smaller and more detailed components or work packages, and estimating the cost of each component separately. Then, the cost of each component is aggregated to obtain the total cost of the project. This technique is useful when there is a high level of detail and accuracy required for the cost estimate, and when the project team has a clear understanding of the scope and requirements of the project. However, this technique may be time-consuming and costly, as it requires a lot of data collection and analysis. For example, if a construction company wants to estimate the cost of building a bridge, they can use bottom-up estimating by dividing the project into various activities, such as design, engineering, procurement, fabrication, installation, testing, and commissioning. Then, they can estimate the cost of each activity by considering the resources, materials, equipment, and labor required. Finally, they can add up the cost of all the activities to get the total cost of the project.

- Three-Point Estimating: This technique uses three different estimates to represent the most likely, optimistic, and pessimistic scenarios of the project cost. The most likely estimate is based on the best available information and assumptions, the optimistic estimate is based on the best possible outcome, and the pessimistic estimate is based on the worst possible outcome. Then, these three estimates are combined using a weighted average formula to obtain a single estimate that reflects the uncertainty and risk of the project. This technique is useful when there is a high level of variability and unpredictability in the project, and when the project team wants to account for the potential opportunities and threats that may affect the cost. However, this technique may not be accurate if the three estimates are not realistic or reliable, or if the weighting factors are not appropriate. For example, if a research and development company wants to estimate the cost of developing a new product, they can use three-point estimating by considering the different scenarios that may occur during the project, such as technical challenges, market demand, customer feedback, and regulatory compliance. Then, they can assign a probability or a weight to each scenario, and calculate the expected cost of the project.

4. How to Avoid or Mitigate Them?

Cost estimation is a vital process in any project, as it determines the feasibility, scope, and budget of the project. However, cost estimation is not a simple task, as it involves many challenges and risks that can affect the accuracy and reliability of the estimates. Some of the common challenges and risks are:

- Uncertainty and variability: Cost estimation is based on assumptions and predictions about the future, which are often uncertain and variable. For example, the cost of materials, labor, equipment, and other resources may change over time due to market fluctuations, inflation, or availability. The project scope, schedule, and quality may also change due to unforeseen events, changes in requirements, or stakeholder feedback. These factors can introduce uncertainty and variability into the cost estimation process, which can lead to overestimation or underestimation of the project cost.

- Complexity and interdependence: Cost estimation is also affected by the complexity and interdependence of the project components, activities, and deliverables. For example, a software project may have hundreds or thousands of features, functions, modules, and interfaces, each with its own cost drivers and dependencies. The cost of each component may depend on the cost of other components, as well as the cost of integration, testing, and maintenance. The cost of each activity may depend on the cost of other activities, as well as the cost of resources, tools, and methods. The cost of each deliverable may depend on the cost of other deliverables, as well as the cost of quality, standards, and regulations. These factors can increase the complexity and interdependence of the cost estimation process, which can make it difficult to account for all the relevant factors and interactions.

- Bias and error: Cost estimation is also influenced by human factors, such as bias and error. For example, the cost estimators may have cognitive biases, such as optimism bias, anchoring bias, or confirmation bias, that can affect their judgment and decision making. The cost estimators may also make errors, such as calculation errors, data errors, or methodological errors, that can affect their accuracy and reliability. The cost estimators may also face external pressures, such as deadlines, expectations, or incentives, that can affect their objectivity and integrity. These factors can introduce bias and error into the cost estimation process, which can lead to unrealistic or inaccurate estimates.

To avoid or mitigate these challenges and risks, cost estimators should adopt some best practices, such as:

- Use multiple methods and sources: Cost estimators should use multiple methods and sources to estimate the project cost, such as parametric, analogous, bottom-up, top-down, or expert judgment methods, and historical, empirical, or benchmark data. Using multiple methods and sources can help to cross-check, validate, and improve the estimates, as well as to reduce the uncertainty and variability of the estimates.

- Use appropriate tools and techniques: Cost estimators should use appropriate tools and techniques to support the cost estimation process, such as cost models, software tools, risk analysis, sensitivity analysis, or contingency analysis. Using appropriate tools and techniques can help to simplify the complexity and interdependence of the estimates, as well as to identify and quantify the risks and uncertainties of the estimates.

- Use professional standards and guidelines: Cost estimators should use professional standards and guidelines to guide the cost estimation process, such as the Project Management Institute (PMI) cost Management knowledge Area, the international Cost Estimating and analysis Association (ICEAA) Professional Standards, or the Software Engineering Institute (SEI) Cost Estimation Body of Knowledge (CEBoK). Using professional standards and guidelines can help to ensure the quality, consistency, and credibility of the estimates, as well as to follow the ethical principles and practices of the cost estimation profession.

- Use feedback and review: Cost estimators should use feedback and review to monitor and improve the cost estimation process, such as peer review, independent review, or stakeholder review. Using feedback and review can help to detect and correct the bias and error of the estimates, as well as to update and refine the estimates based on the actual project performance and changes.

By following these best practices, cost estimators can overcome or reduce the challenges and risks of cost estimation, and produce more accurate and reliable estimates for the project.

5. How to Improve Your Accuracy and Reliability?

Cost estimation is a vital skill for any project manager, engineer, or contractor. It involves predicting the resources, time, and budget needed to complete a project or a task. However, cost estimation is not an exact science, and it is often subject to errors, uncertainties, and risks. Therefore, it is important to follow some best practices to improve the accuracy and reliability of your cost estimates. Here are some of them:

- Use a systematic and consistent approach. Depending on the nature and scope of your project, you may choose from different methods of cost estimation, such as parametric, analogous, bottom-up, or top-down. Whatever method you use, make sure you apply it consistently throughout the project lifecycle, and document your assumptions, data sources, and calculations. This will help you avoid inconsistencies, omissions, and errors in your estimates, and make them easier to review and update.

- Gather reliable and relevant data. The quality of your cost estimates depends largely on the quality of your data. You should use data that is accurate, up-to-date, and specific to your project context. You can obtain data from various sources, such as historical records, industry standards, market research, expert opinions, or vendor quotes. However, you should always verify and validate the data before using it, and adjust it for inflation, currency exchange, or other factors that may affect its applicability.

- Consider all the cost elements. A comprehensive cost estimate should include all the direct and indirect costs associated with your project or task. Direct costs are those that can be easily traced and allocated to a specific project component, such as labor, materials, equipment, or subcontractors. Indirect costs are those that are not directly attributable to a specific project component, but are necessary for the overall project execution, such as overhead, administration, contingency, or profit. You should also account for any taxes, fees, permits, or licenses that may apply to your project.

- perform a sensitivity analysis. A sensitivity analysis is a technique that helps you identify and measure the impact of various factors on your cost estimate. These factors may include uncertainties, risks, assumptions, or changes in scope, schedule, or quality. By performing a sensitivity analysis, you can determine which factors have the most influence on your cost estimate, and how they affect the range and variability of your estimate. This will help you prioritize and mitigate the risks, and prepare for possible scenarios and outcomes.

- review and update your cost estimate regularly. A cost estimate is not a static document, but a dynamic and evolving one. As your project progresses, you may encounter new information, changes, or issues that may affect your cost estimate. Therefore, you should review and update your cost estimate regularly, and communicate any changes to the relevant stakeholders. This will help you monitor and control your project performance, and ensure that your cost estimate reflects the current reality and expectations of your project.

6. Who Does What and When?

Cost estimation is a vital process in any project, as it determines the feasibility, scope, and budget of the project. However, cost estimation is not a one-person job. It requires the collaboration and coordination of various stakeholders, each with their own roles and responsibilities. In this section, we will explore who does what and when in the cost estimation process, and how they work together to achieve the best results.

Some of the key roles and responsibilities involved in cost estimation are:

- Project manager: The project manager is the person who initiates, plans, executes, monitors, and closes the project. They are responsible for defining the project objectives, scope, and deliverables, as well as identifying and managing the project risks, issues, and changes. The project manager also oversees the cost estimation process, ensuring that it is aligned with the project goals, schedule, and quality standards. The project manager works closely with the cost estimator, the project team, the sponsor, and other stakeholders to review and approve the cost estimates, and to secure the necessary funding and resources for the project.

- Cost estimator: The cost estimator is the person who performs the cost estimation analysis, using various methods, tools, and data sources to estimate the total cost of the project. They are responsible for collecting and validating the cost information, applying the appropriate cost models and techniques, and documenting and presenting the cost estimates. The cost estimator also updates and revises the cost estimates as the project progresses, reflecting any changes in the project scope, schedule, or quality. The cost estimator works closely with the project manager, the project team, the sponsor, and other stakeholders to ensure that the cost estimates are accurate, realistic, and transparent.

- Project team: The project team is the group of people who execute the project tasks and deliver the project outputs. They are responsible for providing the cost estimator with the necessary input and feedback on the project scope, schedule, and quality, as well as any assumptions, constraints, or risks that may affect the cost estimation. The project team also supports the cost estimator in collecting and validating the cost data, and in applying the cost models and techniques. The project team works closely with the project manager and the cost estimator to ensure that the project is delivered within the estimated cost, time, and quality.

- Sponsor: The sponsor is the person or organization who provides the financial and political support for the project. They are responsible for approving the project charter, the project scope, and the project budget, as well as authorizing any changes that may impact the cost estimation. The sponsor also provides the cost estimator with the necessary information and guidance on the project objectives, expectations, and constraints, as well as any external factors that may influence the cost estimation. The sponsor works closely with the project manager and the cost estimator to ensure that the project is aligned with the strategic goals and priorities of the organization.

- Other stakeholders: Other stakeholders are the people or organizations who have an interest or influence in the project, such as the customers, users, suppliers, regulators, competitors, etc. They are responsible for communicating their needs, requirements, and preferences to the project manager and the cost estimator, as well as providing any relevant information or data that may affect the cost estimation. Other stakeholders also review and validate the cost estimates, and provide their feedback and approval. Other stakeholders work closely with the project manager, the cost estimator, the project team, and the sponsor to ensure that the project meets their expectations and delivers value.

The cost estimation process typically follows these steps:

1. Define the project scope, objectives, and deliverables, and identify the project risks, issues, and changes.

2. collect and validate the cost information from various sources, such as historical data, benchmarks, market research, expert judgment, etc.

3. Apply the appropriate cost models and techniques, such as parametric, analogous, bottom-up, top-down, etc., to estimate the total cost of the project.

4. document and present the cost estimates, along with the assumptions, uncertainties, and contingencies, to the project manager, the sponsor, and other stakeholders for review and approval.

5. update and revise the cost estimates as the project progresses, reflecting any changes in the project scope, schedule, or quality, and communicating them to the project manager, the sponsor, and other stakeholders.

For example, suppose that a software company wants to develop a new mobile app for its customers. The project manager would define the project scope, objectives, and deliverables, such as the app features, functions, and design, and identify the project risks, issues, and changes, such as the technical complexity, the user feedback, and the market demand. The cost estimator would collect and validate the cost information from various sources, such as the previous projects, the industry standards, the customer surveys, etc. The cost estimator would then apply the appropriate cost models and techniques, such as the parametric, analogous, or bottom-up methods, to estimate the total cost of the project, such as the development, testing, deployment, and maintenance costs. The cost estimator would document and present the cost estimates, along with the assumptions, uncertainties, and contingencies, to the project manager, the sponsor, and other stakeholders for review and approval. The cost estimator would also update and revise the cost estimates as the project progresses, reflecting any changes in the project scope, schedule, or quality, and communicating them to the project manager, the sponsor, and other stakeholders.

7. How to Share Your Results and Recommendations?

After completing the cost estimation process, you need to communicate your findings and recommendations to the relevant stakeholders. This is a crucial step that can influence the decision-making and approval of the project. However, communicating cost estimates is not a simple task. You need to consider several factors, such as:

- The audience of your communication: Who are you presenting your results to? What is their level of expertise and interest in the project? How do they prefer to receive information? What are their expectations and concerns?

- The purpose of your communication: What are you trying to achieve with your communication? Do you want to inform, persuade, or educate your audience? What are the key messages and takeaways that you want to convey?

- The format of your communication: How will you deliver your communication? Will you use a written report, a presentation, a dashboard, or a combination of these? What are the advantages and disadvantages of each format? How will you ensure clarity, accuracy, and consistency in your communication?

- The content of your communication: What information will you include in your communication? How will you organize and structure your information? How will you highlight the main findings and recommendations? How will you address the assumptions, uncertainties, and risks involved in your cost estimation?

To help you communicate your cost estimates effectively, here are some best practices that you can follow:

1. Tailor your communication to your audience. Use appropriate language, tone, and style for your audience. Avoid technical jargon and acronyms that may confuse or alienate them. Use visuals, such as charts, graphs, and tables, to illustrate your data and make it easier to understand. Provide clear and concise explanations for your calculations and methods. Anticipate and address the questions and objections that your audience may have.

2. Align your communication with your purpose. Define the objective and scope of your communication. Focus on the most relevant and important information that supports your purpose. Emphasize the benefits and value of your cost estimation for the project. Provide clear and actionable recommendations based on your analysis. Include a call to action that specifies the next steps and responsibilities for your audience.

3. Choose the right format for your communication. Consider the pros and cons of different formats, such as reports, presentations, dashboards, etc. Choose the format that best suits your audience, purpose, and content. For example, a written report may be more suitable for a detailed and comprehensive communication, while a presentation may be more effective for a brief and persuasive communication. A dashboard may be useful for providing a quick and interactive overview of your cost estimation. Use consistent and professional formatting, such as fonts, colors, and layouts, for your communication.

4. ensure the quality and credibility of your communication. check and verify your data and calculations for accuracy and completeness. Document and disclose your sources, assumptions, methodologies, and limitations. Use appropriate tools and techniques, such as sensitivity analysis, scenario analysis, and monte Carlo simulation, to account for the uncertainties and risks in your cost estimation. Provide supporting evidence and references for your findings and recommendations. Seek feedback and validation from experts and peers before finalizing your communication.

Here is an example of how you can communicate your cost estimation results and recommendations for a hypothetical project:

> cost Estimation report for Project ABC

> Executive Summary

> This report presents the results and recommendations of the cost estimation for Project ABC, which aims to develop a new software product for the XYZ market. The report covers the following aspects of the cost estimation:

> - The scope and objectives of the cost estimation

> - The methodology and approach used for the cost estimation

> - The data sources and assumptions used for the cost estimation

> - The results and analysis of the cost estimation

> - The recommendations and next steps based on the cost estimation

> The main findings and conclusions of the cost estimation are as follows:

> - The estimated total cost of Project ABC is $1.5 million, with a range of $1.2 million to $1.8 million, based on a 90% confidence interval.

> - The estimated cost breakdown by major cost categories is as follows:

> - Labor: $900,000 (60% of total cost)

> - Hardware: $300,000 (20% of total cost)

> - Software: $150,000 (10% of total cost)

> - Travel: $75,000 (5% of total cost)

> - Contingency: $75,000 (5% of total cost)

> - The estimated cost breakdown by project phases is as follows:

> - Planning: $150,000 (10% of total cost)

> - Design: $300,000 (20% of total cost)

> - Development: $600,000 (40% of total cost)

> - Testing: $300,000 (20% of total cost)

> - Deployment: $150,000 (10% of total cost)

> - The estimated cost drivers and risk factors are as follows:

> - The complexity and uncertainty of the software requirements and specifications

> - The availability and quality of the labor resources and skills

> - The compatibility and reliability of the hardware and software components

> - The volatility and competition of the XYZ market

> - The impact of external factors, such as economic, legal, and environmental conditions

> The main recommendations and next steps based on the cost estimation are as follows:

> - Approve the cost estimation and allocate the budget for Project ABC

> - monitor and control the cost performance and variance of Project ABC

> - Update and revise the cost estimation as the project progresses and new information becomes available

> - communicate and report the cost status and issues of Project ABC to the stakeholders

> - Evaluate and review the cost outcomes and lessons learned of project ABC

> The report provides more details and explanations for each aspect of the cost estimation in the following sections.

8. How to Apply Cost Estimation to Your Future Projects?

You have learned about the importance, benefits, and challenges of cost estimation in project management. You have also explored the different types of cost estimates, the methods and techniques for creating them, and the best practices for presenting and communicating them. Now, how can you apply this knowledge to your future projects? Here are some tips and recommendations:

- Start early and update frequently. cost estimation is not a one-time activity, but a continuous process that should begin as soon as possible in the project life cycle and be revised and refined as the project progresses. This will help you avoid surprises, manage risks, and align expectations with stakeholders.

- choose the appropriate level of detail and accuracy. Depending on the stage, scope, and complexity of your project, you may need to use different types of cost estimates, such as rough order of magnitude (ROM), budgetary, definitive, or control. You should also consider the level of uncertainty and contingency in your estimates, and use techniques such as range estimating, sensitivity analysis, or Monte Carlo simulation to account for them.

- Use reliable and relevant data sources. The quality of your cost estimates depends largely on the quality of your data. You should use historical data from similar projects, industry standards and benchmarks, expert opinions, and market research to inform your estimates. You should also document your data sources, assumptions, and calculations for transparency and traceability.

- Apply suitable methods and tools. There are various methods and tools for cost estimation, such as analogous, parametric, bottom-up, top-down, three-point, or hybrid. You should select the ones that best fit your project characteristics, objectives, and constraints. You should also use software tools, such as spreadsheets, databases, or specialized applications, to facilitate and automate your cost estimation process.

- Validate and verify your estimates. Before presenting and communicating your cost estimates, you should check and confirm their accuracy, completeness, and consistency. You should also compare your estimates with other sources, such as independent estimates, peer reviews, or audits, to ensure their validity and credibility.

- Communicate and present your estimates effectively. Your cost estimates are only useful if they are understood and accepted by your stakeholders. You should communicate and present your estimates in a clear, concise, and compelling way, using charts, graphs, tables, or dashboards. You should also explain the rationale, assumptions, and limitations of your estimates, and address any questions or concerns that may arise.

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