University:
California State University, Northridge
Course:
MSE 604 | Engineering Economy and Financial Analysis
Academic year:

2024
Views:

180

Pages:

19
Author:

ck5o8fauc

CHAPTER 7 Cost Estimation Part 1 Cost Estimation • What is estimating? – A forecast, a best guess, a projection into the future • For the most part, Engineers generally have the responsibility of cost estimation • Future costs are very critical to the analysis of a project • Revenue generation generally comes from marketing or sales areas Applications • What is the purpose of estimating? – – – – – – – quoting, bidding, or evaluating bids; profitability analysis; basis for make versus buy decisions; investment justification; basis for comparing manufacturing methods; basis for cost reduction; planning new products and services; • All these involve developing cash flows for feasible alternatives Costs to Estimate • What costs are to be estimated? – First cost elements • • • • • Equipment cost; Delivery charges; Installation costs; Insurance costs (premiums); Training of personnel for equipment use. • The first important cost – Given the interest rate and the estimated life of the asset • Calculate the Capital Recovery Costs Annual Operating Cost Estimation • Estimate the AOC using: – – – – – Direct Labor Costs Direct materials costs Periodic maintenance costs Rework and rebuilt Other costs could be • On-line testing and calibration; • “Proofing runs before actual production. Work Breakdown Structure (WBS) • The WBS technique organizes activities into a hierarchical structure based on either functional or physical categories • See Figures 7-2 and 7-3 • WBS - Organizational Schemes • Functional – Logistical Support, Project Management, Marketing, Engineering, System Integration • Physical – Products, Outputs, or Parts that make up the structure WBS-Tabular Format 1.0 Commercial Building Project 1.1 Site Work and Foundation 1.1.1 Site Grading 1.1.2 Excavation 1.1.3 Sidewalks/Parking 1.1.4 Footing/Foundation 1.1.5 Floor Slab 1.2 Exterior 1.2.1 Framing 1.2.2 Siding 1.2.3 Windows 1.2.4 Entrances 1.2.5 Insulation 1.3 Interior 1.3.1 Framing 1.3.2 Flooring/Stairways 1.3.3 Walls/Ceilings 1.3.4 Doors 1.3.5 Special Additions Cost Estimation Approaches • Bottom-Up Approach – Treats the final cost as an independent (output) variable and the associated costs as input or dependent variables • Top-Down Approach – Treats the competitive cost as an input variable and the associated cost estimates as the output variables – Also called Design-to-Cost Approach Two Cost Estimating Approaches Bottom-Up Approach • Treats the final cost as an independent (output) variable and the associated costs as input or dependent variables. – Cost components are first identified; – Cost elements are estimated; • Price = DC + TIDC + Profit • Traditional costing approach; • Applied in industries where competition is not the dominant factor in pricing the product or the service Top-Down Approach • Treats the competitive cost as an input variable and the associated cost estimates as the output variables. • Applied in the early stages of new or enhanced product design • Price estimates are conducted to set “target” values • Detailed design and equipment needs are not yet defined • Becoming more popular especially in high competition markets • Places greater emphasis on the accuracy of the estimation process • Common practice in Eastern cultures (Japan and other Asian countries) Accuracy of Estimates • NO estimate is intended to be “exact” • But must be reasonable and accurate enough to provide a robust economic analysis. • In Preliminary Design Phase: – Estimates are viewed as “first cut” estimates. – Serve as inputs to the project initial budget. – The “unit method” is often applied here • Accepted Range of Accuracy – Per Unit approaches should fall into the ±5% to ±15% range for total costs – Estimates outside of the ±15% range are not reliable! Cost Estimation Techniques • Expert Opinion; • Past experience in the field • Cost Indexes where available; • Cost Estimating Relationships (forms of regression analysis based upon historical data) • Combinations of the above. Cost Index • Cost Index is a ratio of a cost NOW to some cost back in time. • The index is a dimensionless number. • Example: The Consumer Price Index (CPI) • Cost Index Notation – IN = Index for some current year, N – Ik = Index for some base year, k – Ck = cost of some item during base year CN = Ck ( IN / Ik ) – CN = cost of the item during the current year Sources: • • • • • Chemical Engineering plant cost index; Engineering News Record; Marshall & Swift equipment cost index; Many others…… Most are web-based but require a subscription fee to access detailed values Index Example • Need to estimate skilled labor for a construction project; • 5 years ago the cost was documented to be $360,000. • Skilled labor index then was 3,496.27. • Today the index is 4,038.44. • What is the estimated labor cost today based upon this information? • CN = Ck ( IN / Ik ) Warnings to Heed • For manufacturing and servicing industries tabulated cost indexes are not readily available • Cost indexes may vary with the region of the country • Cost indexes are very sensitive over time to technological changes. Development of Cost Index-Example • A manufacturing engineer with Hughes Industries is interested in estimating the cost of plant expansion. Two items used in the manufacturing process are A and 2. Consulting through Purchasing Department, he found the following historical data. Make the first quarter of 2001 the base period, and determine the cost indexes using a basis of 100. Year 1999 2000 2001 2002 Quarter Q1 Q2 Q1 Q2 Q1 Q2 Q1 -------------------------------------------------------------------------------------------------Item A, $/unit 57.00 56.90 56.90 56.70 56.60 56.40 56.25 Item B, $/Unit 446 450 455 575 610 625 635 Solution • For each item, the index (IN/Ik) is calculated with the firs-quarter 2001 cost used for the Ik value Year 1999 2000 2001 2002 Quarter Q1 Q2 Q1 Q2 Q1 Q2 Q1 -------------------------------------------------------------------------------------------------Item A cost index 100.71 100.53 100.53 100.17 100.00 99.65 99.38 Item B cost index 73.11 73.77 74.59 94.26 100.00 102.46 104.10 • [((56.60-56.60)/56.60 )*100]+100

Cost Estimation, Part 1

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