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    Chapter 3

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    This document discusses cost estimation techniques that are useful for engineering economy studies. It presents the top-down and bottom-up approaches to cost estimating. The three major components of cost estimation are the work breakdown structure, cost and revenue structure, and estimating techniques/models. Common estimating techniques include indexes, unit costs, factor costs, parametric models like power sizing and learning curves. The document provides examples and explanations of how to apply these techniques to develop cost estimates.

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    Chapter 3

    Uploaded by

    xffbdgngf
    38 views40 pages
    This document discusses cost estimation techniques that are useful for engineering economy studies. It presents the top-down and bottom-up approaches to cost estimating. The three major components of cost estimation are the work breakdown structure, cost and revenue structure, and estimating techniques/models. Common estimating techniques include indexes, unit costs, factor costs, parametric models like power sizing and learning curves. The document provides examples and explanations of how to apply these techniques to develop cost estimates.

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    This document discusses cost estimation techniques that are useful for engineering economy studies. It presents the top-down and bottom-up approaches to cost estimating. The three major components of cost estimation are the work breakdown structure, cost and revenue structure, and estimating techniques/models. Common estimating techniques include indexes, unit costs, factor costs, parametric models like power sizing and learning curves. The document provides examples and explanations of how to apply these techniques to develop cost estimates.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    38 views40 pages

    Chapter 3

    Uploaded by

    xffbdgngf
    This document discusses cost estimation techniques that are useful for engineering economy studies. It presents the top-down and bottom-up approaches to cost estimating. The three major components of cost estimation are the work breakdown structure, cost and revenue structure, and estimating techniques/models. Common estimating techniques include indexes, unit costs, factor costs, parametric models like power sizing and learning curves. The document provides examples and explanations of how to apply these techniques to develop cost estimates.

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    © All Rights Reserved
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    of 40

    Engineering

    Economy

    Chapter 3: Cost Estimation Techniques


    Objective ;

    Present various methods / techniques


    which are useful for estimating the
    costs for an engineering economy
    study.
    Results of cost estimating can be
    used for;

    • Setting selling prices for quoting, bidding,


    or evaluating contracts.

    • Determining if a proposed product can be


    made and distributed at a profit.
    The two fundamental approaches to
    cost estimating “top-down” and
    “bottom-up.”
    • Top-down uses historical data from similar
    projects.

    • Bottom-up is more detailed method and works


    best when the detail concerning the desired
    output (product or service) has been defined and
    clarified.
    HOW??
    Unfortunately
    The cost estimation approach has three
    major components;

    1. Work breakdown structure (WBS)


    2. Cost and revenue structure (classification)
    3. Estimating techniques (models)
    Work Breakdown Structure (WBS)

    • Also called work element


    structure
    • A framework for defining
    all project work elements
    and their relationships
    • Developing relevant cost
    and revenue data, and
    management activities.
    • Each level of a WBS divides
    the work elements into
    increasing detail.
    YOU NEED TO DO IT IN YOUR FINAL
    PROJECT
    Example; Construction of a small commercial
    building
    Cost and Revenue Structure
    • Used to identify and categorize the costs and
    revenues that need to be included in the
    analysis.
    • WBS are important aids in developing the cost
    and revenue structure for a project.
    • Perhaps the most serious source of errors in
    developing cash flows is overlooking
    important categories of costs and revenues.
    Some categories of costs and revenues
    which you have to make sure it is accurate
    1. Labour costs
    2. Renting costs
    3. Material costs
    4. Maintenance costs
    5. Property taxes and insurance
    6. Market (or salvage) values
    7. Overhead costs (costs not directly related to the manufacture of a product or delivery of a service
    e.g.. rent to administrative costs to marketing costs )

    8. Disposal costs
    9. Revenues based on sales, etc.
    10. Quality (and scrap) costs
    Estimating Techniques
    REMEMBER! The purpose of estimating is to develop cash-
    flow projections—not to produce exact data about the
    future, which is virtually impossible.

    Cost and revenue estimates can be classified according to


    detail, accuracy, and their intended use.

    • Order-of-magnitude estimates; initial


    evaluation stage of a project (±30%)
    • Semidetailed, or budget, estimates (±15%)
    • Definitive (detailed) estimates (±5%)
    The level of detail and accuracy of
    estimates depends on
    • Time and effort available as justified by the
    importance of the study,
    • Difficulty of estimating the items in question,
    • Methods or techniques employed.
    • Qualifications of the estimator(s), and
    • Sensitivity of study results to particular factor
    estimates.
    Cost of estimate vs Accuracy
    • As estimates become more detailed making the estimate cost
    increases dramatically.
    A variety of sources exist for cost
    and revenue estimation.
    • Accounting records: good for historical data, but
    limited for engineering economic analysis.
    • Other sources inside the firm: e.g., sales, engineering,
    production, purchasing.
    • Sources outside the firm: Government data, industry
    surveys, trade journals, and personal contacts.
    • Research and development: e.g., test marketing
    program, surveys.
    These models can be used in estimates;
    order-of magnitude and
    semi-detailed budget estimates

    •Indexes
    •Unit technique
    •Factor technique
    •Parametric (Power-sizing and Learning curve)
    Indexes, I, provide a means for developing
    present and future cost and price estimates
    from historical data.

    Cn = estimated cost or price of item in year n.


    Ck = cost or price of item in reference year (older) k (n>k).
    k = reference year for which cost or price is known.
    n = year for which cost or price is to be estimated (n>k) in the future.
    I = Indexes in specific year

    Indexes can be created for a single item or for multiple


    items.
    The developer of an index can assign
    different weights to the items in the index
    according to their contribution to total cost.
    Unit Technique
    • Capital cost of plant per kilowatt of capacity
    • Construction cost per square foot
    • Capital cost per installed telephone
    • Revenue per customer served
    • Temperature loss per 1,000 feet of steam pipe
    • Operating cost per mile

    When multiplied by the appropriate unit, give a total


    estimate of cost, savings, or revenue.
    Factor technique
    The factor technique is an extension of the unit
    technique where the products of several
    quantities are summed and then added to
    components estimated directly.

    C = cost being estimated


    Cd = cost of the selected component d estimated directly
    fm = cost per unit of component m
    Um = number of units of component m
    Example
    Estimate the cost of a house consisting of 2,000
    square feet, two porches, and a garage. Using a unit
    factor of $85 per square foot, $10,000 per porch,
    and $8,000 per garage

    The total estimate

    $8,000 + ($10,000 × 2) + ($85 × 2,000) = $198,000.

    Porch: a covered shelter projecting in front of the entrance of a building.


    Two commonly used to develop cost estimating
    relationships (CERs);

    Power-sizing technique
    Learning curve.
    The power-sizing technique (or exponential
    model) is frequently used for developing
    capital investment estimates for industrial
    plants and equipment.

    (both in $ as of the point in time


    for which the estimate is desired)
    (both in the same physical units)

    The value of the cost-capacity factor will depend on the type of plant or
    equipment being estimated. For example, X = 0.68 for nuclear generating
    plants and 0.79 for fossil-fuel generating plants.
    Example
    200-MW plant cost $300 million, find that the
    current cost of a 100-MW plant assuming the
    cost-capacity factor for a fossil-fuel power plant
    is 0.79.
    Learning Curve

    Reflects increased efficiency and


    performance with repetitive production
    of a good or service.

    The concept is that some input resources


    decrease, on a per-output-unit basis, as
    the number of units produced increases.
    learning curve
    Most learning curves assume a constant percentage
    reduction occurs as the number of units produced is
    doubled.

    Tx: The total time needed to assemble unit number x


    Example
    Assume the first unit of production required 3 hours
    time for assembly. The learning rate is 75%. Find
    (a) The time to assemble the 8th unit, and

    (b) The total time needed to assemble the first 6 units


    (u=1,2,3,4,5,6).
    Quiz;

    Assume the first unit of production required


    3 hours time for assembly. The learning rate
    is 75%. Find ;
    The total time needed to assemble the first 6
    units (u=1,2,3,4,5,6).

    3(1+0.75+0.633+0.563+0.513+0.475)
    Solar costs will fall 60% over next decade
    he International Renewable Energy Agency (IRENA) believes
    that Solar cost will fall 60% lower than today’s prices within a
    decade.

    https://www.pv-magazine.com/2017/10/23/solar-costs-will-fall-60-over-next-decade-to-fuel-pv-
    adoption-says-irena-head/
    Solar costs will keep falling
    New Solar Innovation Cuts Costs By
    60% While Increasing Efficiency By
    24%

    A novel technique developed by the


    California-based solar manufacturing
    company Rayton Solar might be able to cut
    the cost of production by a 60% while
    increasing efficiency of solar panels to 24%.
    http://www.iflscience.com/technology/new-solar-innovation-cuts-costs-by-60-while-
    increasing-efficiency-by-24/
    A cost estimating relationship (CER) describes
    the cost of a project as a function of design
    variables. There are four basic steps in
    developing a CER.

    1. Problem definition
    2. Data collection and normalization
    3. CER equation development
    4. Model validation and documentation
    Model Validation and Documentation
    The standard error (SE) measures the average amount by
    which the actual cost values and the predicted cost values
    vary.

    Cost i : is the cost predicted by using the CER


    yi; is the actual cost.

    A small value of SE is preferred.


    Model Validation and Documentation
    The correlation coefficient (R) measures the closeness of the
    actual data points to the regression line (y = b0 + b1x). It is simply
    the ratio of explained deviation to total deviation.
    Model Validation and Documentation
    The correlation coefficient (R)
    Values of R close to one (or minus one) are desirable in that they
    indicate a strong linear relationship between the dependent and
    independent variables.
    •Thank you

    Questions

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