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IT-390 Cost Estimating

Learn the fundamentals of cost estimating and profit management in engineering projects, including the importance of accurate estimations and economic evaluations.

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IT-390 Cost Estimating

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  1. Engineering COST ESTIMATING Philip F. Ostwald IT-390 Cost Estimating Ch 1

  2. Cost Estimating • Predictive process used to quantify cost and price and possibly resources • Goal: Minimize the uncertainty of the estimate • Outcome: Expected cost and probabilistic cost distribution.

  3. Cost Estimating • Certain aspects are mechanistic (automatic) • Estimating is a predictive process • Judgment and experience add value • Requires an in-depth understanding • Cost Estimating as a recognized discipline.

  4. Profit • Definition: The amount by which income exceeds expenses in a given time. • Necessary for continued existence • Planned expense • Managers are to assure profit will exist, and to insure long-term survival, must hold it as a primary goal

  5. Stewardship(Housekeeping or, managing financial affairs) • Survival applies to government agencies and non-profit organizations as well • Resources must be managed carefully

  6. Competition • No pure competition or monopolies (somewhere in-between) • Monopolies • One supplier controls the market with no competition • Pure competition • Many suppliers exist and no single entity has the strength to affect prices

  7. Motivation for Engineering Cost Estimating • Making good business decisions is essential • Accurate Estimations have to be made

  8. Reasons for Economic Evaluation • Cost to Manufacture • Profit prediction • Labor requirements • Time • Control of operation • Improvement • Budgets • Equipment justification

  9. Estimations such as: • Manufacturing operation • Baseline • Introduction of a new product • Manufacturing capabilities, marketability, (profit) margin

  10. Estimations such as: • A project • Addition to existing facility, purchase/installation of a CNC machine • Set aside capital funds. • An entire system • Metro-Link • Made up of many project estimates

  11. To drive the point home: • Poor product estimate • Wasting hundreds of thousands of dollars • Poor project estimate • Millions for overruns

  12. Design • A design (in Cost Estimating terms) is a combination of preexisting knowledge • Each element is translated differently, depending on the unique aspects of the item to be estimated • In essence, the design is the "equation", and the estimate is the "answer".

  13. Design • These loosely defined elements are: Problem, Concept, Engineering Models, Evaluation, and Design. • Problem - vague representation satisfying some want (ie. In the case of an estimate for a product; Does this fit the companies strategic plan, capabilities or needs?) • Information must be gathered • Contemplative statement of the problem

  14. Design • Concept - the concept search is an investigative, learning, and recognizing process. • Do not apply at this point

  15. Design • Engineering Models - application of the concept uncovered in the Concept search. • The models may be physical, schematic, or mathematical • Physical models • change of scale (size) • Schematic models • utilize one set of properties to represent a second set. (A process flow chart.) • The mathematical models • substitutes numbers/symbol

  16. Design • Within Engineering Models, of the three (physical, schematic, or mathematical) • Quickest or cheapest • Fewest number and simplest models

  17. Design • Evaluation • evaluate it against reality • Few models make it first time • Design - (as an element within the Design Process) • Execution of plans - computing, drafting, checking, specifying • Perform detailed cost estimates

  18. Design • Implementation • Provides proof of the design and cost analysis • Before implementation takes place, several questions should be answered • Does the design satisfy the requirements? • Will the enterprise yield a profit? • This is what engineering cost estimating is for.

  19. Classification of Estimates • Few cents to millions of dollars - same intellect • There are four types of estimates: Operation, Product, Project, and System

  20. Classification of Estimates • Operation Estimate: The process of producing a change in value or a way of working • Forecast of labor and material required for an operation design • The design: (a toy, radio or aircraft) and work: (a worker and a tool) are involved • The definition of an operation estimate includes one worker with one tool, one worker with multiple machines, or crew work

  21. Classification of Estimates • Product Estimate: Entire product (which is multiple produced), rather than subassembly or component part, is estimated. • Product has to be duplicated - two items to millions of items • Automobile production, computer production, etc.

  22. Classification of Estimates: • Project Estimate: Is one of a kind - plan, plant, equipment, capital tooling for a product, or a prototype • Custom design - only one will be manufactured • Usually Capitalized • Normally Long Projects - high-rise apartment building, bridge construction, or an airplane • Operation and/or product estimates as input

  23. Classification of Estimates: • System Estimate: Involves elements of operations, products, and/or project designs and is the most comprehensive • system design deals in the public, government, or not-for-profit domain of enterprise • Profit is not the main concern • Metro-Link transit system • rail cars (Hence the need for a Product Estimate), the worker and tool building the stations (the need for an Operation Estimate), and the complete stations (here is the need for a Project Estimate).

  24. Strategies for the Enterprise • Design uniqueness or superiority • Price and cost • Quality • Reliability • Innovation and first to market • Inventory, service, and supply to customer • Custom design or manufacturing • Commodity products

  25. Information • Unknowns - cost estimating VS cost accounting. • Resources • Historical information • Measured data (work measurement) • Policy data • Other departments • Outside agencies (Bureau of Labor Statistics) • Trade associations

  26. Information • Furthermore: • Estimating is done to better allocate scarce resources • The more accurate an estimate is, the more expensive it is • It's important to know the intended purpose • Detective mindset • Changes and Challenges

  27. As an Added Note: • Total cost of a typical metal products manufacturing enterprise is: • 15% Direct Labor • 50% Direct Material • 35% Overhead • This weekend we will cover: • Ch. 2 - Direct Labor • Ch. 3 - Direct Material • Ch. 4 - Overhead • Ch. 5 - Forecasting

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