Cost Estimating

source: Newnan et al: Engineering

Economic Analysis

Objectives
Define engineering cost estimating
Explain different types of engineering cost
estimates
Use several common mathematical cost
estimating models in cost estimating

source: Newnan et al: Engineering

Economic Analysis

Costs Estimating
Three general types of estimates:
Rough (or order of magnitude) estimate
Budget estimate
Detailed estimate

source: Newnan et al: Engineering

Economic Analysis

Cost Estimating
Rough (order of magnitude) estimate
Used in projects initial planning and
evaluation phases
Has little detail and little accuracy
Used only for quantification (order of
magnitude)
Made quickly and easily
Accuracy from 30% to +60%
source: Newnan et al: Engineering
Economic Analysis

Cost Estimating
Budget estimates
Used for budgeting only at conceptual or
preliminary stage of project
More detailed than rough, so require more
time and resources
Accuracy from 15% to +20%

source: Newnan et al: Engineering

Economic Analysis

Cost Estimating
Detailed estimate
Used during projects detailed design and
contract bidding phases
Made from detailed quantitative models,
blueprints, product specification sheets,
vendor quotes
Require most time and resources
Accuracy from 3% to +5%
source: Newnan et al: Engineering
Economic Analysis

Cost Estimating Types: trade-off

between accuracy and cost

source: Newnan et al: Engineering

Economic Analysis

Difficulties in Estimating
One of a kind estimates: especially difficult
since (almost) all parameters must be
estimated (could use estimation by
analogy)
Time and effort available: both are
required for a detailed estimate (these
resourced must be planned/scheduled)
Estimator expertise: more experienced
and knowledgeable estimator usually
makes better estimates
source: Newnan et al: Engineering
Economic Analysis

Estimating Models

Different models can be used to come up

with different estimates
Per-unit model
Segmenting model
Cost indexes
Power-sizing model

source: Newnan et al: Engineering

Economic Analysis

Estimating Models
Per-unit model
Uses per-unit factor, e.g. utility cost per
m2, gasoline cost per km, safety cost per
employee to develop estimate
Simple and useful
Only for rough estimate

source: Newnan et al: Engineering

Economic Analysis

10

Estimating Models
Segmenting model
Divide estimate into its individual
components (on basis of a Work
Breakdown Structure WBS)
Prepare estimates for each of these
components
Total estimate is sum of all component
estimates
source: Newnan et al: Engineering
Economic Analysis

11

Estimating Models
Cost indexes
Dimensionless numbers reflecting the
change in price over time (commodity
price indexes, e.g. labour costs, composite
indexes, e.g. Manufacturers Price Index)
Cost at time A
Cost at time B

Index value at time A

Index value at time B

source: Newnan et al: Engineering

Economic Analysis

12

Example
Miriam is interested in estimating the annual labour and
material costs for a new production facility. She obtained the
following data:
Labour costs:
Labour cost index value was 124 ten years ago and is 188
today
Annual labour costs for a similar facility were $575,500 ten
years ago
Material costs:
Material cost index value was at 544 three years ago and is
715 today
Annual material costs for a similar facility were $2,455,000
three years ago
source: Newnan et al: Engineering
Economic Analysis

13

Example: solution
Labour costs:
Annual cost today
Annual cost 10 yrs ago

Index value today

Index value 10 yrs ago

Annual cost today = (188/124)*$575,500 = $871,800

Material costs:
Annual cost today
Annual cost 3 yrs ago

Index value today

Index value 3 yrs ago

Annual cost today = (715/544)*$2,455,000 = $3,227,000

source: Newnan et al: Engineering

Economic Analysis

14

Estimating Models
Power-sizing model
Used to estimate costs of industrial plants and
equipment.
Uses exponent x, the power-sizing exponent, to
represent economies of scale in size or capacities

Cost of equipment A Size(capacity ) of equipment A

=
Cost of equipment B Size(capacity ) of equipment B

If x=1, linear relationship; if x>1, diseconomies of scale;

if x<1, economies of scale
Model works best in middle range, not too small, not too
large
source: Newnan et al: Engineering
Economic Analysis

15

Power-Sizing Model (cont)

Cost of equipment A Size(capacity ) of equipment A

=
Cost of equipment B Size(capacity ) of equipment B

Size (capacity) of A and B must be in the same

physical units
Costs for both A and B must occur at the same
point in time
If costs of A and B do not occur at the same
time, cost indexes can be used to convert costs
to the same time
source: Newnan et al: Engineering
Economic Analysis

16

(Source: US Dept. of Energy workshop, DOEs ER Applied Cost

Engineering Team (ACE), 1/8/98)

(http://web.em.doe.gov/aceteam/workpdfs.html)

source: Economics textbook

17

Applications of Cost Indexes to Estimating

In the screening (or rough) estimate of a new facility, a single parameter is
often used to describe a cost function. For example, the cost of a power
plant is a function of electricity generating capacity expressed in megawatts,
or the cost of a sewage treatment plant as a function of waste flow
expressed in million gallons per day.
The general conditions for the application of the single parameter cost
function for rough estimates are:
1. Exclude special local conditions in historical data
2. Determine new facility cost on basis of specified size or capacity
3. Adjust for inflation index
4. Adjust for local index of construction costs
5. Adjust for different regulatory constraints
6. Adjust for local factors for the new facility
Some of these adjustments may be done using compiled indices, whereas
others may require field investigation and considerable professional
judgment to reflect differences between a given project and standard
projects performed in the past.
source:
http://www.ce.cmu.edu/pmbook

18

Rough estimate for a refinery

The total construction cost of a refinery with a
production capacity of 200,000 bbl/day in Gary,
Indiana, started in 1999 (and completed in 2001)
was $100 million (in 1999 dollars). It was
proposed that a similar refinery with a production
capacity of 300,000 bbl/day be built in Los
Angeles, California, for completion in 2003. For
the additional information given below, make an
order of magnitude estimate of the cost of the
proposed plant.
(bbl/day = barrels/day)
source:
http://www.ce.cmu.edu/pmbook

19

Rough estimate for a refinery

1. In the total construction cost for the Gary, Indiana, plant,
there was an item of $5 million for site preparation which
is not typical for other plants.
2. The variation of sizes of the refineries can be
approximated by the exponential rule, power x = 0.6.
3. The inflation rate is expected to be 8% per year from
1999 to 2003.
4. The location index was 0.92 for Gary, Indiana and 1.14
for Los Angeles in 1999. These indices are deemed to
be appropriate for adjusting the costs between these two
cities.
5. New air pollution equipment for the LA plant costs $7
million in 2003 dollars (not required in the Gary plant).
6. The contingency cost due to inclement weather delay will
be reduced by the amount of 1% of total construction
cost because of the favorable climate in LA (compared to
Gary).
source:
http://www.ce.cmu.edu/pmbook

20

Rough estimate for a refinery

On the basis of the above conditions, the estimate for the
new project may be obtained as follows:
1. Typical cost excluding special item at Gary, IN is
$100 million - $5 million = $ 95 million
2. Adjustment for capacity based on the exponential law yields
($95)(300,000/200,000)0.6 = (95)(1.5)0.6 = $121.17 million
3. Adjustment for inflation leads to the cost in 2003 dollars as
($121.17)(1+0.08)4 = $164.84 million
source:
http://www.ce.cmu.edu/pmbook

21

Rough estimate for a refinery

1. In the total construction cost for the Gary, Indiana, plant,
there was an item of $5 million for site preparation which
is not typical for other plants.
2. The variation of sizes of the refineries can be
approximated by the exponential rule, power x = 0.6.
3. The inflation rate is expected to be 8% per year from
1999 to 2003.
4. The location index was 0.92 for Gary, Indiana and 1.14
for Los Angeles in 1999. These indices are deemed to
be appropriate for adjusting the costs between these two
cities.
5. New air pollution equipment for the LA plant costs $7
million in 2003 dollars (not required in the Gary plant).
6. The contingency cost due to inclement weather delay will
be reduced by the amount of 1% of total construction
cost because of the favorable climate in LA (compared to
Gary).
source:
http://www.ce.cmu.edu/pmbook

22

Rough estimate for a refinery

4. Adjustment for location index gives
($164.84)(1.14/0.92) = $204.26 million
5. Adjustment for new pollution equipment at the LA plant gives
$204.26 + $7 = $211.26 million
6. Reduction in contingency cost yields
($211.26)(1-0.01) = $209.15 million or 209 million
Since there is no adjustment for the cost of construction
financing, the order of magnitude estimate for the new project
is $209 million.
source:
http://www.ce.cmu.edu/pmbook

23

Rough estimate for a refinery

All previous steps can be expressed in a single equation:
0.6

300,000
4 1.14
(1 + 0.08)
(100m 5m )
+ 7 m (1 0.01) = 209.15m
0.92
200,000

Or 209 million (it is a rough estimate after all)

source:
http://www.ce.cmu.edu/pmbook

24