Professional Documents
Culture Documents
CCE Preparation - 2016 S&N 6 Section 2
CCE Preparation - 2016 S&N 6 Section 2
Cost Estimating
10 Process Product Manufacturing
11. Discrete Part Manufacturing
Magda El Talawy, MD, PMP, PSP, CCE
9. Cost Estimating
Magda El Talawy, MD, PMP, PSP, CCE 122
1
Estimate Accuracy
As potential projects are considered, there are many decision points at
which to decide whether a specific project should be continued to be
developed.
Each subsequent decision‐making point during the project life cycle
typically requires cost estimates of increasing accuracy.
Estimating is thus an iterative process that is applied in each phase of
the project life cycle as the project scope is defined, modified, and refined.
Magda El Talawy, MD, PMP, PSP, CCE 123
Estimate Classifications
AACE International (AACE) developed the “Recommended Practice for
Cost Estimate Classification” (AACE 17R‐97) to provide generic
guidelines for the general principles of estimate classification that may
be applied across a wide variety of industries.
Magda El Talawy, MD, PMP, PSP, CCE 124
2
Magda El Talawy, MD, PMP, PSP, CCE 125
Estimating Methodologies
Magda El Talawy, MD, PMP, PSP, CCE 126
3
Deterministic Estimating Methods
The independent variables used in the estimating algorithm are more or
less a direct measure of the item being estimated
Deterministic estimating methods require a high degree of precision in
the determination of quantities, pricing, and the completeness of
scope definition.
Magda El Talawy, MD, PMP, PSP, CCE 127
Magda El Talawy, MD, PMP, PSP, CCE 128
4
1. End‐Product Units Method
Used when the estimator has enough historical data available from
similar projects to relate the end‐product units (capacity units) of a
project to its construction costs.
This allows an estimate to be prepared relatively quickly
. Example :
• The construction cost of an electric generating plant and the plant’s
capacity in kilowatts,
• The construction cost of a hotel and the number of guest rooms,
Magda El Talawy, MD, PMP, PSP, CCE 129
Magda El Talawy, MD, PMP, PSP, CCE 130
5
3. Capacity Factor Method
A capacity factored estimate is one in which the cost of a new facility is
derived from the cost of a similar facility of a known (but usually different)
capacity
$B/$A = (CapB/CapA)e
$B = ($A)(CapB/CapA)e
where
$B :is the cost of the facility being estimated,
$A :is the known cost of a similar facility,
CapB :is the capacity of the facility being estimated,
CapA :is the capacity of the similar facility, and
“e” :is the exponent or proration factor.
Magda El Talawy, MD, PMP, PSP, CCE 131
The exponent “e” typically lies between 0.5 and 0.85, depending on the
type of facility, The exponent “e” is actually the slope of the curve that has
been drawn to reflect the change in the cost of a facility as it is made larger
or smaller.
This methodology is sometimes referred to as the “scale of operations”
method or the “six tenth’s factor” method due to the common reliance on
an exponent value of 0.6 if no other information is available.
Typically, we must also adjust for differences in scope, location and time
between the estimated facility and the known facility.
Magda El Talawy, MD, PMP, PSP, CCE 132
6
Magda El Talawy, MD, PMP, PSP, CCE 133
Magda El Talawy, MD, PMP, PSP, CCE 134
7
4. Ratio or Factor Methods
Used in situations where the total cost of an item or facility can be
reliably estimated from the cost of a primary component.
For example, this method is commonly used in estimating the cost of
process and chemical plants, where the cost of the specialized process
equipment makes up a significant portion of the total project cost.
This is often referred to as “equipment factor” estimating. It can typically
be generated when project definition (engineering complete) is
approximately 1 percent to 15 percent complete (Class 4).
Magda El Talawy, MD, PMP, PSP, CCE 135
Magda El Talawy, MD, PMP, PSP, CCE 136
8
Inside Battery Limits (ISBL)—
In reference to a process plant, it refers to the process units of the plant or
facility.
In reference to a single piece of equipment, it refers to the piece of
equipment and the associated bulk materials (foundation, piping,
electrical, controls, etc.) directly associated with the piece of equipment.
Outside Battery Limits (OSBL)—
In reference to a process plant, it refers to the non‐process facilities of the
plant (i.e., the utility generation facilities, storage facilities, office buildings,
etc.), and are sometimes also referred to as off sites.
Magda El Talawy, MD, PMP, PSP, CCE 137
In 1947, Hans Lang introduce the concept of using the total cost of equipment to
factor the total estimated cost of a plant:
Total plant $ = total equipment $ x equipment factor
Lang proposed three separate factors based on the type of process plant .
Lang’s factors were meant to cover all the costs associated with the total installed
cost of a plant including the Battery Limits Process Units (ISBL Costs) and all Off
sites Units (OSBL Costs).
Magda El Talawy, MD, PMP, PSP, CCE 138
9
Equipment factored estimates are typically prepared during the
feasibility stage of a project.
They can be quite precise if the equipment factors are appropriate, the
correct adjustments have been applied, and the list of process equipment
is complete and accurate.
They have an advantage over capacity factored estimates in that they are
based upon the specific process design for the project.
Magda El Talawy, MD, PMP, PSP, CCE 139
5. Parametric Method
A parametric cost model is an extremely useful tool for preparing early
conceptual estimates when there is little technical data or engineering
deliverables to provide a basis for using more detailed estimating methods.
A parametric model is a mathematical representation of cost relationships
that provide a logical and predictable correlation between the physical or
functional characteristics of a plant (or process).
Capacity factor and equipment factor estimates are simple examples of
parametric estimates.
Magda El Talawy, MD, PMP, PSP, CCE 140
10
The process of developing a parametric model should generally involve
the following steps:
1. cost model scope determination,
2. data collection,
3. data normalization,
4. data analysis,
5. data application,
6. testing, and
7. documentation.
Magda El Talawy, MD, PMP, PSP, CCE 141
Magda El Talawy, MD, PMP, PSP, CCE 142
11
At a minimum, the required engineering and design data include process
and utility flow drawings, piping and instrument diagrams, equipment data
sheets, motor lists, electrical one‐line diagrams, piping isometrics (for alloy
and large diameter piping), equipment and piping layout drawings, plot
plans, and engineering specifications.
Magda El Talawy, MD, PMP, PSP, CCE 143
The following steps comprise the activities undertaken during
preparation of a detailed estimate:
1. Prepare project estimate basis and schedule,
2. Prepare direct field cost (DFC) estimate,
3. Prepare indirect field cost (IFC) estimate,
4. Prepare home office cost (HOC) estimate,
5. Prepare sales tax/duty estimates,
6. Prepare escalation estimates,
7. Prepare project fee estimate (for contractors),
8. Prepare cost risk analysis/contingency determination,
9. Review/validate estimate.
Magda El Talawy, MD, PMP, PSP, CCE 144
12
TAKE‐OFF
Estimating take‐off is the process of quantifying the material and labor quantities
associated with the project. The term take‐off is also used to refer to the quantities
themselves (often known as a bill of quantities).
Guidelines for preparing an efficient take‐off include the following:
• Use pre‐printed forms for the orderly sequence of item descriptions,
dimensions, etc.
• Abbreviate (consistently) whenever possible.
• Be consistent when listing dimensions (i.e., length x width x height).
• Use printed dimensions from drawings when available.
• Measure all dimensions carefully.
• Take advantage of design symmetry or repetition.
Magda El Talawy, MD, PMP, PSP, CCE 145
Magda El Talawy, MD, PMP, PSP, CCE 146
13
Estimate Allowances
Allowances are often included in an estimate to account for the predictable
but undefinable costs associated with project scope.
Allowances are most often used when preparing deterministic or detailed
estimates as a percentage of some detailed cost component.
Allowances are:
• Design allowance for engineered equipment, (2 ‐ 5%) of engineered
equipment cost
• Material take‐off allowance, (2 ‐ 15%)
• Overbuy allowance, (2 ‐ 10%)
Magda El Talawy, MD, PMP, PSP, CCE 147
Estimate Accuracy
An estimate is a prediction of the expected final cost of a proposed
project (for a given scope of work).
By its nature, an estimate is associated with uncertainty, and, therefore,
is also associated with a probability of overrunning or under running
the predicted cost.
Estimate accuracy tends to improve as the level of project definition
used to prepare the estimate improves.
Magda El Talawy, MD, PMP, PSP, CCE 148
14
Contingency and Risk Analysis
Contingency is an amount used in the estimate to deal with the
uncertainties inherent in the estimating process.
The estimator regards contingency as the funds added to the originally
derived point estimate to achieve a given probability of not overrunning
the estimate.
Magda El Talawy, MD, PMP, PSP, CCE 149
Magda El Talawy, MD, PMP, PSP, CCE 150
15
Items typically covered by contingency include the following:
• Errors and omissions in the estimating process;
• Variability associated with the quantification effort;
• Design that may not be complete enough to determine final quantities at
the time of estimate preparation;
• Labor productivity variability;
• Labor availability, skills, and productivity that may vary.
• Weather, which may vary from that assumed affecting labor productivity;
• Wage rate variability.
Magda El Talawy, MD, PMP, PSP, CCE 151
Contingency specifically excludes the following:
• Significant changes in scope,
• Major unexpected work stoppages (strikes, etc.),
• Disasters (hurricanes, tornadoes, etc.),
• Excessive, unexpected inflation, and
• Excessive, unexpected currency fluctuations.
Magda El Talawy, MD, PMP, PSP, CCE 152
16
Structuring the Estimate
The control structure for a project is the breakdown of the total work into
manageable units or packages for the purposes of estimating and control of
cost and schedule. The structure will vary with the size and complexity of the
project, as well as the reporting requirements.
To maintain some kind of order in the estimate (and later in project
execution), it is necessary to segregate costs into various categories:
• Material vs. Labor vs. Subcontracts,
• Direct costs vs. Indirect costs vs. Home office costs, and
• Concrete vs. structural steel vs. piping vs. other construction disciplines.
Magda El Talawy, MD, PMP, PSP, CCE 153
Estimate Review
The estimate should be evaluated not only for its quality or accuracy, but
also to ensure that it contains all the required information and is
presented in a way that is understandable to all project team members
and client personnel.
A structured (if not formal) estimate review process should be a standard
practice for all estimating departments.
Magda El Talawy, MD, PMP, PSP, CCE 154
17
A‐ Estimating Team/Estimating Department Review
1. Check the Math.
2. Basis of Estimate.
The comprehensive basis of estimate (BOE) document should be reviewed
carefully to ensure that it is both correct and complete.
Design Basis: The overall scope of the project should be summarized, with additional
detail provided for each area/unit/work package of the project.
Planning Basis: Information from the integrated project plan that affects the
estimate. length of the workweek, use of overtime, and number of shifts, etc.
Cost Basis: The source of all pricing used in the estimate
Risk Basis: how the contingency was determined, and identify key areas of risk and
opportunity in the cost estimate.
The BOE is an extremely important document.
Magda El Talawy, MD, PMP, PSP, CCE 155
Magda El Talawy, MD, PMP, PSP, CCE 156
18
Presenting the Estimate
Complete estimate report will include the following:
• Basis of estimate (BOE),
• Estimate summaries,
• Estimate detail,
• Estimate benchmarking report,
• Estimate reconciliation report, and
• Estimate backup.
Magda El Talawy, MD, PMP, PSP, CCE 157
Estimating Resources
Reliable estimate preparation depends on information.
Besides the engineering and design information needed to quantify
the scope of the project, other information is also required, such as
• Conceptual estimating factors;
• Material cost and pricing information;
• Labor work hour charts and information;
• Labor productivity information;
• Labor wage rates, composite crew mixes, etc.; and
• Other estimating factors and information.
Magda El Talawy, MD, PMP, PSP, CCE 158
19
10. Process Product Manufacturing
Operating Cost Estimates
Operating cost estimates can be performed on a daily, unit of‐production, or
annual basis.
Of these, the annual basis is preferred for the following reasons:
• It “damps out” seasonal variations.
• It considers equipment operating time.
• It is readily adapted to less‐than‐full capacity operation.
• It readily includes the effect of periodic large costs.
• It is directly usable in profitability analysis.
• It is readily convertible to the other bases, daily cost and unit‐of‐ production.
Magda El Talawy, MD, PMP, PSP, CCE 159
Cost of Operations at Less Than Full Capacity
Fixed‐cost items, in addition to royalties if applicable, include the following:
• Depreciation,
• Property taxes, and
• Insurance.
Variable costs generally include the following:
• Raw materials,
• Utilities,
• Royalties (if applicable),
• Packaging (if applicable),
• Marketing, and
• Catalysts and chemicals.
Semi variable costs, those which are partially proportional to production level:
• Direct labor,
• Supervision,
• General expense, and
• Plant overhead.
Magda El Talawy, MD, PMP, PSP, CCE 160
20
N is the income required to achieve the minimum acceptable return on
investment before taxes (P) for the capital investment (I).
Magda El Talawy, MD, PMP, PSP, CCE 161
The breakeven and shutdown points can be determined as
follows:
• F is the fixed expense;
• V is the variable expense;
• R is the semi‐variable expense;
• C is total operating cost;
• S is sales income; and
• n = decimal fraction of semi‐variable costs incurred at 0 production (usually
about 0.3)
Magda El Talawy, MD, PMP, PSP, CCE 162
21
Royalties and Rentals
Royalties may be variable, semi variable, fixed, or capital costs (or a combination
of these), depending upon the conditions of the royalty agreement.
The same is true of rental costs.
Single‐sum royalty, rental, or license payments are considered as capital
investment items,
whereas payments in proportion to production or fixed payments per annum are
treated as direct operating costs.
Due to the complexity of agreements for royalty payments and to variations in tax
laws and accounting methods, extreme care should be exercised to be sure that
such costs are properly included in the appropriate expense category.
Magda El Talawy, MD, PMP, PSP, CCE 163
Depreciation
Depreciation, while not a true operating cost, is considered to be an
operating cost for tax purposes.
It is customarily listed as a fixed, indirect cost.
Magda El Talawy, MD, PMP, PSP, CCE 164
22
11. Discrete Part Manufacturing
Discrete part manufacturing involves the production of separate,
individual products, usually in small batches of 75 units or less.
Magda El Talawy, MD, PMP, PSP, CCE 165
Magda El Talawy, MD, PMP, PSP, CCE 166
23
Concurrent Engineering
A systematic approach to the integrated, concurrent design of products
and their related processes, including manufacturing and support.
This approach is intended to cause the developer (designers), from the
outset, to consider all elements of the product life cycle from conception
through disposal.
Group Technology
Group technology is a manufacturing philosophy that identifies and exploits
the underlying sameness of component parts and manufacturing process
Magda El Talawy, MD, PMP, PSP, CCE 167
Just‐in‐Time
Just‐in‐time is the manufacturing philosophy that requires that the supplies
(raw materials) are delivered when required, and, thus, inventory costs are
theoretically driven to zero as there is no inventory.
Lean Manufacturing
Lean manufacturing is a manufacturing philosophy to shorten lead times,
reduce costs, and reduce waste
Material Requirements Planning (MRP)
MRP is a system that uses bills of material, inventory and open order data,
and master production schedule information to calculate requirements for
materials.
Magda El Talawy, MD, PMP, PSP, CCE 168
24
Supply Chain Management—
The production of complex products require the integration of many
different components from a variety of suppliers.
Supply chain management involves the assurance that the parts will arrive
from the suppliers when required to avoid large inventories or production
stoppages from a lack of parts.
Total Quality Management—
Total quality management is a leadership philosophy, organizational
structure, and working environment that fosters and nourishes a personal
accountability and responsibility for the quality and a quest for continuous
improvement in products, services, and processes.
Magda El Talawy, MD, PMP, PSP, CCE 169
Basic Cost Relationships
Magda El Talawy, MD, PMP, PSP, CCE 170
25
*prime cost = direct material cost + direct labor cost + direct engineering
cost + direct expense
**manufacturing cost = prime cost + factory expense
production cost = manufacturing cost + administrative expense
total cost = production cost + marketing, selling, and distribution expense
selling price = total cost + mark‐up (profit and taxes)
*prime cost is also called direct cost
**manufacturing cost is also called factory cost
mark‐up (amount) = total cost x [% MU /[1 ‐ % MU]]
% MU = decimal percent of mark‐up for profits and taxes
Magda El Talawy, MD, PMP, PSP, CCE 171
Break‐even Analysis
Shutdown Point (SD)—
The quantity or time where the manufacturing costs equals the revenues.
Cost Point (C)—
The cost point is the quantity or time where the total costs equals revenues.
Required Return Point (RR)—
The required return point is the quantity or time where the revenues equals the
total costs plus the required return.
Required Return after Taxes Point (RRAT)—
The required return after taxes point is the quantity or time where the revenues
equals the total costs plus the required return and the taxes on the required
return.
Magda El Talawy, MD, PMP, PSP, CCE 172
26