Topic 01-2:

Cost concepts & Cost

Estimation Techniques
Engineering Economics (IM1027)
Instructor: Dr. Nguyen Vu Quang
Contents
• Cost concepts and design economics
• Cost estimation techniques:
– Integrated Approach

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Cost concepts and design economics
General Price–Demand Relationship

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Cost concepts and design economics (2)
Total Revenue Function as a Function of Demand

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Cost concepts and design economics (3)
Combined Cost and Revenue Functions, and Breakeven Points, as
Functions of Volume

TR-TC=PROFIT P=a-bQ
TR=P-Q P=constant
TC=FC+vQ
Based event profit = Q' (D')
=> profit = 0
=> Optimal Q*=> profit=max

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Cost concepts and design economics (4)
Breakeven Chart with Price (p) a Constant (unchanged with volume)

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Cost estimation techniques

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Integrated Approach for Developing the
Cash Flows for Alternatives

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WBS – Work Breakdown Structure

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Example: WBS (Three Levels) for
Commercial Building Project

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Categories of costs and revenues

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Estimation techniques detail,
accuracy, and
intended use
• Order-of-magnitude estimates: used in the
planning and initial evaluation stage of a
project
• Semidetailed (or budget) estimates: used
in the preliminary or conceptual design
stage of a project
• Definitive (detailed) estimates: used in the
detailed engineering/construction stage of
a project

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Accuracy of Cost and Revenue
Estimates versus the Cost of Making Them

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Data sources for estimation

• Accounting records
• Other sources within the firm
• Sources outside the firm

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Parametric cost estimates
• The use of historical cost data and statistical techniques to predict
future cost

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Typical equation forms in Cost Estimating
Relationship (CER)

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