3360 Unit 3.1 2016-I-01 (1)

ENGR 3360U Winter 2016Unit 3.1-3

Engineering Costs and Cost Estimating

Dr. J. Michael Bennett, P. Eng., PMP, UOIT,

Version F

Unit 3 Engineering Costs and Cost Estimating

Change Record

• Version F

Version F3-2 ©Dr. Michael Bennett


Course Outline1. Engineering Economics2. General Economics

1. Microeconomics2. Macroeconomics3. Money and the Bank of

Canada3. Engineering Estimation4. Interest and Equivalence5. Present Worth Analysis6. Annual Cash Flow7. Rate of Return Analysis8. Picking the Best Choice9. Other Choosing Techniques

10. Uncertainty and Risk11. Income and Depreciation12. After-tax Cash Flows13. Replacement Analysis14. Inflation15. MARR Selection16. Public Sector Issues17. What Engineering should know

about Accounting18. Personal Economics for the

Engineer

Version F ©Dr. Michael Bennett 1-3


Unit 3 Road Map• 3.1 Engineering cost concepts• 3.2 Engineering cost estimating• 3.3 Three types of engineering cost estimating• 3.4 Estimating models• 3.5 Observations on engineering estimating



3.1 Engineering Costs

• Costs need to be estimated to evaluate alternatives, justify expenditures

• Future costs are very critical to the analysis of a project. Why?

• Engineers generally have the responsibility of cost estimation

• Revenue generation generally comes from marketing/sales areas.



Questions to be resolved

• For the most part, Engineering economy analysis tends to be “cost driven”;

• What cost components must be estimated?• What approaches will be utilized?• How accurate should the estimates be?• What estimation techniques will be utilized?

Version F ©Dr. Michael Bennett 3-6


Engineering Costs• Costs are analyzed to evaluate alternatives• Fixed Costs:

• Constant unchanging costs • Variable Costs:

• Depend on the level of output or activity• Marginal Costs:

• Variable cost for one more unit• Average Costs:

• Total cost divided by the number of units



Total Costs

• Total Cost = total fixed cost + total variable cost



Profit/Loss Breakeven Chart

Breakeven point: total costs = total revenueProfit region: total revenue > total costsLoss region: total costs > total revenue



Other Types of Costs• Sunk Costs

– Money already spent– Past decision– Should be disregarded in engineering

economic analysis– Nothing can be done at this point to change the

cost



Other Types of Costs, cont’d.• Opportunity Costs

– The costs associated with a resource being used for an alternate task

– Sometimes referred to as ‘forgone opportunity costs’

• ‘An opportunity cost is the benefit that is forgone by engaging a business resource in a chosen activity instead of engaging that same resource in a forgone activity.’



Other Types of Costs• Recurring Costs

– A cost that reoccurs at regular intervals• Non-recurring Costs

– One-of-a-kind costs recurring at irregular intervals

• Incremental Costs– Cost differences between alternatives

• Cash Costs versus Book Costs– Cash costs require a cash transaction (cash flow)– Book costs are recorded but are not transactions



The Annual Operating Cost Estimation

• Direct Labor Costs for operating personnel;• Direct materials;• Periodic maintenance costs;• Rework and rebuilt;• Other costs could be:

• On-line testing and calibration;• Proofing runs before actual production.



AOC E cont.

• “Familiar” projects:• Home construction;• Buildings – standard designs;• Petrochemical and energy production.

• Apply standard industry-wide software packages.

• Most projects – no “canned” software packages exist!

• Apply your own knowledge and experience.



Cost Estimation Approaches

• Bottom-up Approach• Treats the final cost as an independent (output)

variable and the associated costs as input or dependent variables.

• Design-to-Cost Approach• Treats the competitive cost as an input variable

and the associated cost estimates as the output variables.



Accuracy of Estimates

• No estimate is intended to be “exact”• But must be reasonable and accurate

enough to provide a robust economic analysis

• In preliminary design phase:• Estimates are viewed as “first cut” estimates• Serve as inputs to the project initial budget• The “unit method” is often applied here



Cost Estimation Techniques

• Expert Opinion/ Delphi Method• Comparisons with known installations;• Past experience in the field;• Cost Indexes where available;• Cost Estimating Relationships (forms of

regression analysis based upon historical data; also abbreviated CERs)

• Combinations of the above.



3.3 3 Types of Cost Estimating• Types:

– Rough Estimates• Quick/easy, high-level estimates where accuracy

varies widely – Budget Estimates

• Used for budgeting projects where the accuracy is better than a rough estimate due to the extra effort used to make a determination

– Detailed Estimates• Estimates made from detailed designs using

quantitative models and vendor quotes. High level of accuracy.



Estimation Difficulties

• One-of-a-Kind Estimates– First-run projects and projects that have never been done

before – No previous experience of costs

• Time and Effort Available– Human resources and time available for making estimates

• Estimator Experience– Past experience of similar projects increases accuracy of

estimates– Conversely limited experience decreases accuracy



Estimation Difficulties

• One-of-a-Kind Estimates– First-run projects and projects that have never been done

before – No previous experience of costs

• Time and Effort Available– Human resources and time available for making estimates

• Estimator Experience– Past experience of similar projects increases accuracy of

estimates– Conversely limited experience decreases accuracy


Documents

3360 Unit 3.1 2016-I-01 (1)