Technology & Engineering
Cost Estimation
Cost estimation is the process of predicting the expenses associated with a project or product. It involves analyzing various factors such as materials, labor, and overhead costs to arrive at an accurate budget. This helps in planning and decision-making, ensuring that resources are allocated efficiently and projects are completed within financial constraints.
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11 Key excerpts on "Cost Estimation"
- Zahid A. Khan, Arshad N. Siddiquee, Brajesh Kumar, Mustufa H. Abidi(Authors)
- 2018(Publication Date)
- Cambridge University Press(Publisher)
15 Cost Estimation 15.1 INTRODUCTION In today’s competitive environment, success of an organization, be it a manufacturing or a service organization, depends to a great extent on its ability to estimate costs as accurately as possible. For timely and economical completion of an engineering or business project, it is essential to accurately estimate costs associated with different stages of the project. In engineering projects, the estimation of costs is considered to be more important than revenue estimation. Therefore, different aspects of Cost Estimation are discussed in this chapter. Out of two types of costs, i.e., direct costs and indirect costs, it may be noted that indirect costs are not associated with a specific function, department or process. Hence, some logical basis should be used for allocating indirect costs to the different functions. For this purpose, both traditional as well as Activity-Based Costing (ABC) are also discussed in this chapter. 15.2 HOW DOES AN ORGANIZATION ESTIMATE COST? Organizations are involved in either producing tangible products or providing services for customers for which serious efforts are made by them. In order to perform the required activities to produce goods or provide services, capital is required. In other words, for every activity there is an associated cost and, therefore, the organizations need to make cost estimates of the activities. The estimates should be as accurate as possible, so that the organization can arrange the capital required well in advance. Generally, Cost Estimations are required to be made in the initial stages of implementation of a project or a system. Maintenance and upgradation costs are estimated as a percentage of the first cost and they are subsequently added to make the trial cost estimates. Typical examples of a project include physical items such as building, bridge, manufacturing plant etc.
- Patrick J. Driscoll, Gregory S. Parnell, Dale L. Henderson(Authors)
- 2022(Publication Date)
- Wiley(Publisher)
The methodology contains the typical estimating methods that are employed to generate each class of estimate. The less knowledge is on-hand regarding the system, the more appropriate it is to provide a cost estimate range instead of a single number. The expected accuracy range indicates the degree to which the final cost outcome for a given system is expected to vary from the estimated cost. The values in this column do not represent percentages as generally given for expected accuracy but instead represent an index value relative to a best range index value of 1. For example, if a given industry expects a Class 1 accuracy range of +15 to −10, then a Class 5 estimate with a relative index value of 10 would have an accuracy range of +150 to −100 percent. The final characteristic, preparation effort provides an indication of the cost, time, and other resources required to prepare a given estimate, which is again a relative index value. Once definitions have been determined for all the cost elements forecasts to occur during a system’s life cycle, the systems engineering team begins cost estimating—defined by Stewart, Wyskida, and Johannes [2] as “the process of predicting or forecasting the cost of a work activity or work output.” This process is divided into 12 major steps discussed in more detail in the Cost Estimator’s Reference Manual [2]. This manual is an excellent source for developing life cycle cost estimates. The book contains extensive discussions and numerous examples of how to develop a detailed life cycle cost estimate. The 12 steps are as follows: 1. Developing the work breakdown structure 2. Scheduling the work elements 3. Retrieving and organizing historical data 4. Developing and using cost estimating relationships 5. Developing and using production learning curves 6. Identifying skill categories, skill levels, and labor rates 7. Developing labor hour and material estimates
eBook - PDF- Kenneth K. Humphreys(Author)
- 2004(Publication Date)
- CRC Press(Publisher)
3 Cost Estimating 3.1 CAPITAL Cost Estimation The purpose of this chapter is to provide guidelines to the theories and practices of capital cost estimating, primarily for the process industries. Many of the tech-niques used, however, are generic and can be used widely in other areas of engin-eering. Additional information is available in the AACE International Cost Engineers’ Notebook , AACE Recommended Practices and Standards , other AACE publications, and in the literature. 3.1.1 Purpose of Estimates Estimates are the foundation of all cost engineering activity. They are made for several reasons including: . Feasibility studies . Selection from alternate designs . Selection from alternate investments . Appropriation of funds . Presentations of bids and tenders The type of estimate to be made and its accuracy depends upon many factors including the purpose of the estimates, how much is known about the project, and how much time and effort is spent in preparing the estimate. It must be remembered that an estimated project cost is not an exact number. Rather it is an opinion of probable cost , not an exact calculation. The accuracy and reliability of an estimate is totally dependent upon how well the project scope is defined and the time and effort expended in preparation of the estimate. The one thing that is known with 99.9 þ % certainty about any estimate it that it is wrong . Actual cost will rarely, if ever, equal the estimated cost. The final cost of a project will be more or less than the estimate. The difference 57 may be very small, but there will nevertheless be a difference. That fact must always be kept in mind when making project decisions based upon any estimate of costs. It is often said that the only time an estimate is correct is after the project is complete and all of the bills have been paid and totaled.
eBook - PDF- Amos Haniff, Mohamed Salama, Amos Haniff, Mohamed Salama(Authors)
- 2016(Publication Date)
- Goodfellow Publishers(Publisher)
The term ‘cost’ in this chapter refers to the cost for the client, which is the asking price by the provider, also referred to as the ‘tender price’. 8.3 Cost planning and cost estimating In general, cost management, which involves cost planning and cost control, is a process that extends throughout the various stages of the project from inception to decommissioning (Ashworth, 1999). The output of the cost planning cycle, that is the cost estimate, will obviously affect the cost control cycle. The more accurate the cost estimates, the less the variation and consequently the more limited need for remedial actions. Cost estimating is also seen as the process of approximat-ing the expenditure of resources, materials, equipment, overheads and other expenses required to complete the project. The accuracy and reliability of project cost estimates are critical as: They determine the viability of a project in terms of return on investment. If the estimate is deemed to be high, the organisation may not pursue it. They determine the level of funds allocated to the project. It is the project estimates that dictate the budget. If the budget is exceeded, it will be the responsibility of the project manager to either negotiate additional project funding or seek a reduction in the quality or scope of the project. They determine the cash flow and funds made available for the project throughout the project life-cycle. They provide a mechanism for measuring progress of the project by drawing comparison between the project estimates and actual costs. Typically a good cost plan should “reduce project risk” and “ensure that the tender figure is as close as possible to the first estimate, or that any likely differ-ence between the two is anticipated and within an acceptable range” (Kirkham, 2007). The same author identified three main phases of the cost planning process; the briefing phase; the design phase and finally the “production and operation” phase.
- Triant G. Flouris, Dennis Lock(Authors)
- 2016(Publication Date)
- Routledge(Publisher)
5Estimating the Project CostsCost estimates are necessary for all projects, and cost re-estimates are often needed at times throughout the project life cycle. Without a cost estimate it would be impossible to carry out financial appraisal or prepare a business plan for a new project. Project management requires cost estimates to establish detailed budgets, help control spending, assess manpower requirements and perform many other management procedures. A company’s sales executives, sometimes in committee with their more senior company management, must rely on cost estimates when deciding the price to be offered in proposals to external customers for aviation projects.INTRODUCTION TO COST ESTIMATING
There are several reasons why cost estimating is not a popular pastime with technical people. Those asked to put aside more creative work whilst they give thought to the possible costs of future projects will regard the exercise as an unwelcome distraction. Yet they know just how difficult cost estimating can be. Get it wrong, and their mistakes or bad judgments in this important function will come home to haunt them in the future. Cost estimating is an onerous task but it carries great responsibility.Some companies employ cost or estimating engineers whose only role in life is to live with cost estimating and cost reviews. Other companies assign the cost estimating task to their line managers. However, whatever the original source of cost estimates it is always wise and recommended that experienced line managers should be involved in the process. These managers should at least be asked to review and approve the cost estimates that will ultimately become their own committed working budgets.A cost estimate for a large aviation project will collect a great amount of data. This brings us to another aspect of cost estimating, which is that it must be approached with great formality. All the data must be recorded and assembled in a logical way, which will help to ensure that no item is forgotten and that all aspects of the cost estimate are available for the near and far future. This will be important when the time comes to convert the estimates into departmental and task budgets (discussed in Chapter 24
eBook - PDFHandbook Of Software Engineering And Knowledge Engineering, Vol 2: Emerging Technologies
Volume II: Emerging Technologies
- Shi-kuo Chang(Author)
- 2002(Publication Date)
- World Scientific(Publisher)
2. Process of Estimation Cost Estimation is an important part of the planning process. For example, in the top-down planning approach, the cost estimate is used to derive the project plan: (1) The project manager develops a characterization of the overall functionality, size, process, environment, people, and quality required for the project. (2) A macro-level estimate of the total effort and schedule is developed using a software Cost Estimation model. (3) The project manager partitions the effort estimate into a top-level work breakdown structure. He also partitions the schedule into major milestone dates and determines a staffing profile, which together forms a project plan. The actual Cost Estimation process involves seven steps [5]: (1) Establish cost-estimating objectives. (2) Generate a project plan for required data and resources. 310 H. Leung d F. Zhang (3) Pin down software requirements. (4) Work out as much detail about the software system as feasible. (5) Use several independent Cost Estimation techniques to capitalize on their (6) Compare different estimates and iterate the estimation process. (7) After the project has started, monitor its actual cost and progress, and combined strengths. feedback results to project management. No matter which estimation model is selected, users must pay attention to the following to get best results: 0 coverage of the estimate (some models generate effort for the full life-cycle, 0 calibration and assumptions of the model; 0 sensitivity of the estimates to the different model parameters; and 0 deviation of the estimate with respect to the actual cost. while others do not include effort for the requirement stage); 3. Software Sizing The software size is the most important factor that affects the software cost. This section describes five software size metrics used in practice. The line of code and function point are the most popular metrics among the five metrics.
- Pablo F. Navarrete, William C. Cole(Authors)
- 2001(Publication Date)
- CRC Press(Publisher)
Others, even if they would like to have the cost and progress tracking capability, are very hesitant to start spending on engineering before formal project approval. The Project Managers then find themselves between a rock and a hard place. Although there is nothing they can do to change management policies, they are still expected to come up with good quality appropriation estimates no matter how meager the available resources are. THE SEMI-DETAILED ESTIMATING TECHNIQUE PROPOSED IN CHAPTER 19 PROVIDES THE OWNER'S PROJECT MANAGERS WITH A SIMPLE WAY TO PREPARE QUALITY ESTIMATES WITHOUT RESORTING TO CONTRACTORS OR TO COMPLICATED TECHNIQUES. 10.2 Estimating Definitions Cost estimates are categorized according to the quality of the basic process information available rather than on the meticulousness of the estimating procedure and the details included in the estimate. A PRECISE ESTIMATE IS NOT AL WAYS AN ACCURA TE ESTIMATE. For example, under certain circumstances, a series of theoretical and/or test tube chemical reactions could be the basis of a conceptual but impressive-looking 110 Chapter 10 design package with enough information to prepare a detailed estimate. However, regardless of the details, the resulting estimate cannot be anything but conceptual. Order of Magnitude Estimate These estimates provide only ballpark costs and are sometimes required in the very early stages of project development as decisionmaking tools. The basis could be no more than a given capacity of a generic product; the estimating procedure, a simple search of existing literature and, if required, the application of the proportioned estimating method. Conceptual Estimates Conceptual estimates are typically prepared during the advanced R&D and early process design stages. They are normally used to build the preliminary project economics, prepare preliminary execution plans, and develop cost estimates for the preparation of a complete process design (Phase 1) and a definitive cost estimate.
eBook - PDFThe Engineer's Cost Handbook
Tools for Managing Project Costs
- Richard E. Westney(Author)
- 1997(Publication Date)
- CRC Press(Publisher)
Contracting. This phase encompasses all the activities required to en- gage contractors to perform the services necessary to design, procure the materials and equipment, fabrication, transportation of materials, and field construction, to start up of the facilities. Execution. This phase is typically subdivided further into Detailed de- sign, Procurement, and construction. Contracting may be to a major contractor that includes a full turnkey capability, to others that specialize in engineering and procurement only, or engineering support for the field construction effort. A large complex project may require a variety of engineering contractors that have a particular knowledge or special skill required for the successful execution of a project. Estimating Engineering Costs 115 V. ESTIMATING METHODS Estimating cost for engineering services is one of the more challenging ac- tivities for a project. In the early stages of a project, a need often arises for an appraisal of engineering and design costs; yet there is seldom enough project definition or technical information to use detailed estimating methods. A variety of estimating methods have been in use for arriving at engineering services costs. This section identifies each of these methods. A. Historic Relationships A common practice in determining engineering costs is based on a percentage value of the advertised overall project cost. Caution must be exercised for percentages can vary considerably. Some average percentage ranges for dif- ferent types of facilities are as follows: Office buildings and laboratories 3-1 3% Electrical power generating plants, and cement plants 4-1 4% Petrochemical plants and oil refinery process units &20% Cross-country pipelines 1-5% Offshore oil/gas production platforms and marine facilities 6-1 5% Typically, the percentage is a lower value for a large expensive project. Projects that contain more technical elements and complexity will tend to have a higher percentage.
- Barry Benator, Albert Thumann(Authors)
- 2020(Publication Date)
- River Publishers(Publisher)
Chapter 6 Cost Estimating THE ROLE OF THE PROJECT MANAGER AND COST ESTIMATING T he project manager plays an important role in develop- ment of the overall estimate of the total costs of the project. In addition the project manager develops check- points to ensure the overall project is completed within budget. The project manager usually develops the budget in conjunction with a cost estimating department. The purpose of this chapter is to review how to estimate a project’s costs in conjunction with other engineers, construction man- agers, financial staff and a cost estimating department if available. GENERAL a) Quality of Estimate This chapter on estimating of engineering/procurement/con- struction (EPC) is roughly divided into conceptual and detailed estimating. The general range in the quality of these two phases of estimating is about 40% to 10%, respectively. The measure of the quality of an estimate is usually categorized by the amount of contingency that is contained in the estimate. For example, a 10% estimate would have a 10% contingency. Due to the high develop- ment cost and the time necessary to produce a 10% quality esti- mate, most companies approve the funding and full execution of EPC type projects at the ± 20% estimate quality. It is possible, in the “specialist equipment” areas and building industry, to pro- duce 10% quality estimates from preliminary design information. 73 74 Project Management and Leadership Skills The accuracy of estimates varies considerably and is largely dependent on the quality of the estimating program and experi- ence of the estimator. Quality also can be controlled to a substan- tial extent, by increasing or decreasing estimating manpower and time. The relationship is not linear. Appropriate, modest invest- ments of time and resources will, usually, provide capital cost estimates of acceptable reliability.
- Soh Khim Ong, Qianli Xu, Andrew Yeh Ching Nee(Authors)
- 2008(Publication Date)
- World Scientific(Publisher)
Its importance can be seen from a simple observation: Profit = Price – Cost Thus, for any manufacturers, Cost Estimation and control is indispensable for successful business management. From the perspective of product development, Cost Estimation at the planning and design stage is of special interest. This is because 70 – 80% of the production cost is committed at this stage, whereas the cost incurred at this stage accounts for only 7% of the production cost [Ehrlenspiel, 1985]. Figure 6.1 illustrates the cost incurred and committed in different production activities. It is apparent that wise decisions at the early design stage are more effective at reducing cost and hence can increase the chances of business success. 0 10 20 30 40 50 60 70 80 Planning & Design Manufacturing Materials; Purchasing Administration; Sales Percentage of cost cost committed cost incurred potential for reducing cost Figure 6.1 Product cost incurred and committed in different production activities [Ehrlenspiel, 1985] Cost Estimation in Product Development 155 However, Cost Estimation is not easy at the early stage of product development. First, there are many factors to be considered. For example, cost is related to different departments and manufacturing processes. Hence, cost must be properly allocated among the various production activities, such as market investigation, research and development (R&D), manufacturing, service, administration, etc. Second, information for decision support is highly uncertain at this stage. For example, the colors and materials of a product preferred by the customers cannot be predicted accurately. The change of color or material as a request from the customers may cause a series of adjustments in the design, process planning, purchase order, and inventory stages, which have considerable effects on the production cost.
eBook - PDF- Anghel Patrascu(Author)
- 1988(Publication Date)
- CRC Press(Publisher)
A pre-engineering estimate may be used for financing a project. A bid estimate for a lump-sum project 91 92 Chapter 7 will not have the detail of a definitive estimate, but it will be as good a control estimate as a definitive estimate. WHEN AND WHY A D E F IN IT IV E ESTIM A TE IS REQ UIRED The detail or definitive estimate must represent the best forecast of the final cost. As mentioned above, it should have an accuracy of about +10%, or, in other words, contingency for remaining work should not exceed 10%. If the project cost is running according to plan, the total of the defini-tive estimate is the same as the budget total. The definitive estimate it-self permits cost control in much more detail because the estimate itself has greater detail. No major commitments should be made without the benefit of a detailed or control estimate. Even long-delivery items must be verified before com-mitments are made. Prepare and release the definitive estimate in phases or installments and concentrate first on items that require commitment in the early stage of the project. What matters most, of course, is the way in which the estimate is used, not the way it is released. A really cost- conscious organization will not make any commitment without the benefit of a detailed estimate. If value engineering is part of an organization’s procedures, most major deviations from the budget or the original concept would have been identified by this time. If, however, value engineering is not used, the detailed estimate must be the final point where things could be brought back in line. This will reduce eventual overruns and schedule delays. During the time that the engineering is being developed, the cost engineer should review the main aspects of the original budget to ensure that detailed engineering proceeds according to the basic assumptions on which the budget estimate relies. Any significant departures must be re-viewed and analyzed for scope and cost.
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