ESTIMATING AND

CONTROLLING COST

RIA LIZA C. CANLAS, CE, MEM

 COST AND DESIGN
ECONOMICS
Designing to meet economic
needs and achieving
competitive operations depends
on balancing:

TECHNICAL = ECONOMIC
FEASIBILITY FEASIBILITY
 COST TERMINOLOGY

COSTS DIFFER IN:

 Frequency of occurrence

 Relative magnitude

 Degree of impact on the study

 FIXED, VARIABLE AND
INCREMENTAL COSTS
 FIXED COSTS – unaffected by
changes in activity level (constant)
 VARIABLE COSTS – vary in total
with the quantity of output or other
measures of activity level
 INCREMENTAL COST (or
Incremental Revenue) – additional
cost results from increasing the
output of a system by one unit.
EXAMPLE: The costs for producing a
product is given, determine the unit
cost per level of activity
Quantity FC VC TC Unit
(php) (P30/ (FC+VC) Cost
unit) (php/
unit)
5000 100000 150000 250000 50

10000 100000 300000 400000 40

20000 100000 600000 700000 35

 DIRECT, INDIRECT AND
STANDARD COSTS
 Direct costs – measured to a
specific output or work activity
 Indirect costs – difficult to
attribute to a specific output or
work activity. (Overhead,
burden)
 Standard costs – representative
costs per unit of output.
 Uses of Standard Costs

 Estimating future manufacturing

costs
 Measuring operating performance by
comparing actual cost per unit with
the standard cost.
 Preparing bids on products or
services requsted by costumers
 Establishing the value of work in
process and finished inventories.
LIFE-CYCLE COST – summation
of all costs related to a product,
system or service during its life
span.
High
Potential for life-cycle
cost savings

Cumulative
life cycle
Cumulative cost
committed
Cost life-cycle cost

Needs Concep Detailed Producti Operati Retire

assessm tual design; on or on or ment
producti
ent; (prelimi constru custom and
on or
definition nary) construc ction er use; dispos
of design; tion mainten al
requirem advanc planning ance
ents. ed ; facility and
develop & support
resourc
ment;
e
prototyp acquisiti
e on
testing

ACQUISITION COST OPERATION PHASE

 COST-DRIVEN DESIGN
OPTIMIZATION
In a life-cycle consider:
 Initial investment costs

 Operation & maintenance

expenses
 Other annual expenses

 Design for the Environment

(DFE); green engineering
 RULES IN SELECTING
PREFERRED ALTERNATIVES
 RULE 1
When revenues & other economic benefits
are present and vary among alternatives,
choose the alternative that maximizes
overall profitability.
 RULE 2

When revenues & other economic benefits

are NOT present and are constant among
alternatives, choose the alternative that
minimizes total cost.
 METHODS USED IN COST
ESTIMATION
 COST
expenses
cash outflows

 ESTIMATE
assumption
forecast future events
 AN INTEGRATED
APPROACH: Component 1

 Work Breakdown Structure

(WBS) – defining, at successive
levels of detail, the work
elements of a project and their
interrelationship
 3 LEVELS WBS

PROJECT

ELECTRICAL MECHANICAL CIVIL ARCHITECTURAL

WORKS WORKS WORKS WORKS

ROUGHING ROUGHING ROUGHING

ROUGHING
FINISHING INS FINISHING INS FINISHING INS
INS
AN INTEGRATED
APPROACH: Component 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
LISTING OF SOME CATEGORIES OF
COSTS & REVENUES

 Capital investment
 Labor costs
 Material costs
 Maintenance costs
 Property taxes and insurance
 Quality (and scrap) costs
 Overhead costs
 Disposal costs
 Revenues
 Market (salvage) values
AN INTEGRATED
APPROACH: Component 3
 Estimating techniques (models)
– selected mathematical models
used to estimate future costs
and revenues during the
analysis period.
 Integrated Approach for Developing the
Cash Flows for Alternatives

Define
•Cash flow
Determine WBS
Perspective Cost & revenue
Levels for
•Estimating database
estimating
Baseline
•Study Period
Basic component 1

Describe first Yes

Develop cash Last
Design project Feasible Flow for Stop
Alternative?
in WBS Alternative using alternative
WBS
No

Delineate cost Estimating

& revenue Techniques Describe next feasible
Categories (models) Alternative using
& elements Project WBS
Basic Component 2 Basic Component 3
 CLASSIFICATION OF COST & REVENUE
ESTIMATES
(according to detail, accuracy and purpose)

 Order-of magnitude estimates

 Planning & initial evaluation
 Accuracy of +/-30 to 50%
 Applied at level 1 or 2 of WBS
 Semidetailed, or budget, estimates
 Used on the conceptual design
 Accuracy of +/-15%
 Applied at level 2 & 3
 Definitive(detailed) Estimate
 Used in detailed
engineering/bidding/construction stage
 Accuracy of +/-5
 Applied at level 3 & successive levels of WBS
 SELECTED ESTIMATING
TECHNIQUES(MODELS)
 Indexes or ratio technique
(present and future cost & price
estimates)
 Unit Technique
 Factor Technique
 Parametric cost estimating
 Parametric Cost Estimating

 Establish cost estimating

relationships (CER)
 Use of historical data such as cost
drivers, and
 Statistical techniques such as simple
or multiple regression
 Mathematical techniques (type of
CER: linear, power, logarithmic or
exponential equation forms)
 COST ESTIMATION IN THE
DESIGN PROCESS
 Bottom-up Estimating
- “design to price”
- what does the product cost
- American firms
 Top-down Estimating
- “target costing”
- what should the product cost
- Japanese firms
 DETAILED ESTIMATES
1. Direct Costs:
 Material Cost
= (Quantity)(Material Price)
 Labor Cost
=(Quantity)(Labor Productivity
Rate)(Labor Rate)
 Machine Cost
=(Quantity)(Machine Productivity
Rate)(Machine Rental Rate)
 Subcontract Cost_____________
TOTAL DIRECT COST
2. Indirect Cost
 Overhead (%)(Direct Cost)

 Capital Cost (%)(Direct Cost)

 Contingencies (%)(Direct Cost)

 Tax____________________

TOTAL INDIRECT COST

 Profit (%)[DC+IC]

___________________________
TOTAL PROJECT COST
 BREAK-EVEN ANALYSIS

INCOMECURVE

COST
EXPENSE CURVE

LEVEL OF PRODUCTION
 BREAK THE ICE
 Finally God said, "Cool it. I am going to push through with the
proposed road that will connect heaven and earth, and set up a
test who’s better in preparing the design and costing.
 So, Satan and Jesus sat at the keyboards and typed away. They
moused,, They make use of softwares needed to come up with
the design. They did spreadsheets to estimate.They wrote
reports. They sent faxes. They sent e-mail, They sent out e-mail
with attachments. They downloaded.
 They did every known job to source data.
 But ten minutes before their time was up, lightning suddenly
flashed across the sky, thunder rolled, the rain poured and, of
course, the electricity went off.
 Satan stared at his blank screen and screamed every curse word
known in the underworld. Jesus just sighed.
 The electricity finally flickered back on, and each of them
restarted their computers. Satan started searching frantically,
screaming "It's gone! It's all gone! I lost everything when the
power went out!"
 Meanwhile, Jesus quietly started printing out all of his files. Satan
observed this and became irate. "Wait! He cheated, how did he
do it?"
 God shrugged and said, "Jesus saves."
THE END!!!!