BFC44602

Engineering Economy
Dr. Farzaneh Moayedi
CHAPTER 3
Cost Estimation
Techniques
(Part 1)
 What is an Estimate?

An estimate involves calculating the costs of construction work on the

basis of probabilities. a forecast, a best guess, a projection into the future.

Two activities are undertaken when carrying out a cost estimate:

Measurements: all measurements are

approximate.

Pricing: the degree of approximation is

even greater because of the difficulty in
predicting all the probabilities of items such
as labour productivity and site conditions.
Cost Estimating

▪ An important output of project cost management is a cost

estimate

▪ There are several types of cost estimates and tools and

techniques to help create them

▪ It is also important to develop a cost management plan

that describes how cost variances will be managed on the
project
Importance of cost estimation

❖ Provides standard against which actual expenditures

incurred during the course of a project can be compared,
and serve as the basis for cost control
❖ They provide the mechanism for managing cash flow
during the course of the project
❖ They give the project manager a framework for allocating
scarce resources as the project progresses
❑ Setting selling prices for quoting,
bidding, or evaluating contracts.
❑ Determining if a proposed product can
be made and distributed at a profit.
❑ Evaluating how much capital can be
justified for changes and
improvements.
❑ Setting benchmarks for productivity
improvement programs.
Cost estimation and budgeting

▪ Cost estimation and project budgeting

are closely linked

▪ Without reasonable cost estimation,

project budgets are essentially
useless, and without accurate
budgeting, cost estimation is a wasted
exercise
Project Cost Management Processes

• Resource planning: determining what resources and

quantities of them should be used

• Cost estimating: developing an estimate of the costs and

resources needed to complete a project

• Cost budgeting: allocating the overall cost estimate to

individual work items to establish a baseline for measuring
performance

• Cost control: controlling changes to the project budget

• Part of triple constraint, can’t manage one without the
others
• Plots of cost and scope against plan can help spot
problems early Cumulative Value Time Planned Value
(PV) Actual Costs (AC) Earned Value (EV) Today Is this
project over/under budget? Is it ahead of/behind
schedule?
Classification of project costs
The Components of an Estimate

Most estimates are made up of the following five parts:

1. Materials: The estimator makes a take-off of all the different materials required on
the project from the plans and specifications.

2. Labour: The estimator estimates the hours needed to do the required work and
then multiply by the appropriate wage.

3. Equipment: The cost of equipment includes ownership or rental fees, moving to

the job site, erecting, dismantling and operating.

4. Overhead: There are two types of overheads:

• General overhead: includes all costs that can not be directly charged to any
particular project, such as the cost of office supplies, rent, travel expenses and
salaries.
• Job overhead: includes all costs which apply directly to the project and can not be
charged to materials, labour, or equipment.

5. Profit: Most estimators show the profit expected from a job as a percentage of the
total estimated cost of the project. The profit varies from 6-15%.
Cost Estimation Tools
and Techniques
Cost Estimation Tools and Techniques

Top-down

Bottom-up
Top-down Approach

➢ Top-down uses historical data from similar projects.

➢ It is used to extrapolate costs and revenues for current project.
➢ Modify data for changes in activity level, energy consumption, etc.
➢ It is best used when alternatives are still being developed and refined
Top-down Approach -
Advantages

✓ Overall project budgets can be set/controlled very accurately

✓ Management has more control over budgets Disadvantages

✓ Leads to low level competition for larger shares of budget

Bottom-up Approach

➢ Attempt to break down project in small, manageable units and

estimate costs.
➢ Smaller unit costs added together with other types of costs to obtain
overall cost estimate.
➢ Works best when detail concerning desired output has been defined
and clarified.
Bottom-up Approach -
Advantages

✓ More likely to catch unusual expenses

✓ People tend to overstate their budget requirements

✓ Management tends to cut the budget Disadvantages

 Competition is
NOT a
dominant factor
in pricing Encourage
innovation, new
design,
manufacturing
process
improvement and
efficiency

cost estimates
Bottom-Up Approach to Determining the Cost of a College Education
 Engineering
projects generally
have economic
consequences that
occur over an
extended period of
time.

The term cash flow refers to the net amount of cash and cash
equivalents being transferred in and out of a company.
Cash received represents inflows, while money spent represents
outflows.
Integrated approach for developing the net cash flows for
feasible project alternatives

1. Work breakdown structure (WBS):This is a technique for explicitly

defining, at successive levels of detail, the work elements of a project and
their interrelationships (sometimes called a work element structure).
2. Cost and revenue structure(classification):Delineation of the cost and
revenue categories and elements is made for estimates of cash flows at
each level of the WBS.
3. Estimating techniques (models):Selected mathematical models are used
to estimate the future costs and revenues during the analysis period.

Work Cost and

Estimating
Breakdown revenue
techniques
Structure structure
(models)
(WBS) (classification)
❑ A work breakdown structure (WBS) is a deliverable-oriented grouping of
project components that organizes and defines the total scope of the
project (PMBoK).
❑ A WBS is a logical, hierarchical tree of all the tasks needed to complete a
project.
❑ The tool for breaking down a project into its component parts.
❑ This smaller unit can be a data, product, service or any combination.
Work Breakdown Structure

A framework for defining all project work elements and their

relationships, collecting and organizing information,
developing relevant cost and revenue data, and management
activities.
Work Breakdown Structure

To constructs a WBS, project managers or subject matter experts first

identify the main functional deliverables and break them into tasks, sub-
tasks and further into work packages.
The work package is a list of tasks or "to- dos" to produce a specific or
particular unit of work.
 WBS
(Graphical vs Outline method)

1. New factory
1. 1 Substructure
1. 1.1 Piling
1 .1.2 Foundations
1. 2 Superstructure
1. 3 Finishes
The WBS diagram
Example of WBS view
Prototype
Installation

1.2 Application Acceptance

1.1 System Set Up 1.3 Change Requirement 1.4 Prototype Acceptance

1.2.1
1.1.1 1.1.2 1.3.1 Prepare
1.1.3 Verify SW Prepare 1.4.1 Conduct Acceptance
Prepare Site Verify HW Change Requirement
Test Script Test

1.2.2 Review 1.3.2 Update

Test Script Application 1.4.2 Evaluate Acceptance

1.2.3 Prepare & 1.3.3 Accept 1.4.3 Finalize

Load Test Data Change Requirement Acceptance

1.2.4
Conduct Test

33
 The WBS Dictionary

Many tasks are vague and must be explained more so

people know what to do and can estimate how long it will
take and what it will cost

WBS Dictionary

34
Work Breakdown Structure
Advantages

❑ Provides a detailed illustration of the project scope.

❑ Accurate and readable project organization.
❑ Accurate assignment of responsibilities to the project team.
❑ Creates accurate cost and schedule estimates.
❑ Helps to monitor progress easily
❑ Helps to set up milestones in the project.
❑ It is a basis for building project teams
 basic tool in project
management

Work
Breakdown
Structure
(WBS)
• Activities relationships
• Information collection &
define all project organization
work elements • Costs & revenue data
• Activities management
Microsoft Project
Characteristics

1. Both functional and physical work elements are included.

WBS (Three Levels) for Commercial Building Project

Characteristics

2. The content and resource requirements for a work element are the
sum of the activities and resources of related sub-elements below it.

WBS (Three Levels) for Commercial Building Project

Characteristics
3. A project WBS usually includes recurring and nonrecurring work
elements.

Use numbering
scheme to recognize
the work elements
and sub-element of
each works.

WBS (Three Levels) for Commercial Building Project

TASK

Develop the 4-level Work Breakdown Structure (WBS) for

the construction of Electrical Sub Station based on the
following work elements list.
Construction
Architectural
of Electrical Ventilation Brick laying RI Inspection Painting
Works
Sub Station

Sub Structure
Permanent and Super Pile Cap and
Plumbing Column Piling
Works Structure Stump
Works

Retaining Ground Beam

Excavation M&E Works Fire protection Plastering
System and Slab

Testing and
Soil Roof Beam External
Access road Tiling Commissionin
Improvement and Flat Roof Works
g

Certificate of
Temporary Statutory
Lighting Drains
Works Completion
(CSC)
Answer
Level 1 Level 2 Level 3 Level 4

Construction of Electrical Temporary Works Retaining System

Sub Station Soil Improvement
Excavation
Permanent Works Piling
Sub Structure and Super Pile Cap and Stump
Structure Works Ground Beam and Slab
Column
Roof Beam and Flat Roof
Architectural Works Brick laying
Plastering
Painting
Tiling
M&E Works Plumbing
Lighting
Ventilation
Fire protection
External Works Drains
Access road
Testing and Commissioning RI Inspection
Certificate of Statutory
Completion (CSC)
 The secret of getting
ahead is getting started.
The secret if getting
started is breaking your
complex overwhelming
tasks into small
manageable tasks,
And then staring on the
first one.
(Mark Twain)