Engg-Eco._-Ch.-3.-Cost-Estimation-Techniques

CHAPTER 3 Cost-Estimation Techniques

Introduction and Objectives

  • Purpose: To explore various methods for estimating key factors in engineering economy studies.

  • Background: Introduction to CERCLA (Comprehensive Environmental Response, Compensation and Liability Act), addressed the high costs of environmental cleanup that arose from neglecting hazardous substances.

  • Significance: Early action can lead to cost savings and compliance with federal legislation, such as CERCLA, which provides liability for the cleanup of hazardous waste sites.

The Cost of Environmental Cleanup

  • Federal Response: Enactment of CERCLA in December 1980 to manage hazardous waste cleanups.

  • Historical Context: Many corporations had not accounted for cleanup costs in the past, leading to substantial financial implications.

  • Types of Neglected Hazards: Asbestos insulation, PCB-contaminated oil in transformers, which migrated into the environment.

  • Overall Imprint: Businesses today must integrate costs for monitoring and maintaining safe closures of contaminated facilities.

Cost Estimation in Engineering Economy Studies

  • Decisions Based on Estimates: All decisions, significant or minor, hinge on precise estimates.

  • Role of Estimation in Projects: Cost estimation is essential in economic analysis, influencing cash flows and project viability.

  • Key Components Utilized:

    1. Cost estimation assists in pricing, profit determination, capital justification, and setting productivity benchmarks.

    2. Top-Down Approach: Utilizes historical data modified by inflation and other variables to estimate cost.

    3. Bottom-Up Approach: Breaks down projects into smaller components for detailed cost assessment.

Example: Estimating the Cost of a College Degree

  • Top-Down Approach:

    • Start with the published cost of tuition and project future costs considering inflation (6% per year) and additional expenses.

    • Total estimated cost for four years: $93,036.

  • Bottom-Up Approach:

    • Dives deeper into anticipated expenses like books and living costs calculated based on course loads and lifestyle variations.

Integrated Approach to Cost Estimation

  • Components:

    1. Work Breakdown Structure (WBS): A detailed hierarchy of project elements.

    2. Cost and Revenue Structures: Identification and categorization of costs and revenues needed for thorough analysis.

    3. Estimating Techniques/Models: Utilization of mathematical models and historical data for accurate predictions.

Work Breakdown Structure (WBS)

  • A framework to organize project components into a manageable structure.

  • Example of WBS for constructing a commercial building, detailing major physical and functional elements required for effective management.

Cost and Revenue Structure

  • Outlines various costs and revenue categories that must be integrated into economic studies, such as:

    • Capital investment,

    • Labor and material costs,

    • Maintenance & overhead costs,

    • Market values and disposal costs.

Estimating Techniques and Models

  • Differentiation of estimates based on levels of detail and purpose:

  • Order-of-Magnitude Estimates: Rough estimates used during project planning stages. Typical accuracy: ±30-50%.

  • Semidetailed Estimates: Support preliminary designs; accuracy: ±15%.

  • Definitive Estimates: Used for bidding and detailed designs; accuracy around ±5%.

  • Importance of accurate estimations to judiciously allocate time and resources without exceeding budgets.

Sources of Estimating Data

  • Importance of leveraging multiple sources for historical data, including:

    • Internal accounting records,

    • Engineering and production statistics within firms,

    • Information from outside sources such as trade publications and government reports.

Parametric Cost Estimating

  • Use of historical data and statistical modeling to forecast future costs based on independent variables (cost drivers).

  • Power-Sizing Technique: Assesses how costs change with plant or equipment size.

    • Formula: CA = CB * (SA/SB)^X, where X reflects the cost-capacity factor based on historical data.

  • Learning Curve Concept: Reflects enhanced efficiency over time, showing reduced costs per unit with increased production.

Example Calculations

  • Power-Sizing Example: Estimate costs given changed capacities (e.g., 600-MW vs 200-MW plants).

  • Learning Curve Example: Time and resource calculations necessary for assembling a series of Formula cars demonstrating efficiency gains over repetitions.

Conclusion

  • Comprehensive approaches to cost estimation are vital in engineering practices to ensure financial viability and adherence to economic strategies in project management.