Cev633 CHP8

CEV633
ENGINEERING ECONOMICS
& PROJECT MANAGEMENT
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Course Outcome
 Explain the principles of engineering economy and
project management in solving chemical
engineering/environmental problems (C6) ~ CO1
 Demonstrate the solutions of complex engineering
problems using modern engineering tools (C3) ~ CO2
 Propose suitable solutions to the complex engineering
problems using the engineering economy and project
management principles (A5) ~ CO3
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Course Learning
Outcome
The student should be able to :
 Identify the methods of budgeting
 Generate cost estimating
 Discuss in improving cost estimates
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Methods Of Budgeting
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 In this method, elemental tasks, their schedules, and

their individual budgets are constructed following
the WBS or project action plan
 The people doing the work are consulted regarding
times and budgets for the tasks to ensure the best
level of accuracy
 Initially, estimates are made in terms of resources,
such as labor hours and materials
 Bottom-up budgets should be and usually are, more
accurate in the detailed tasks, but it is critical that all
elements be included
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Cost Estimating
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Cost Estimating
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Cost Estimating
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Cost Estimating
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Cost Estimating
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Improving Cost Estimates
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Improving Cost Estimates - Forms
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Improving Cost Estimates – Learning Curves
 Studies have shown that human performance usually
improves when a task is repeated.
 In general, performance improves by a fixed percent
each time production doubles.
 More specifically, each time the output doubles, the
worker hours per unit decrease to a fixed percentage
of their previous value.
 That percentage is called the learning rate
 The project manager should take the learning curve
into account for any task where labor is significant
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 Suppose a firm wins a contract to supply 25 units of a
complex electronic device to a customer. Although the
firm is competent to produce this device, it has never
produced one as complex as this.
 Based on the firm ’ s experience, it estimates that if it were

to build many such devices it would take about four hours
of direct labor per unit produced. With this estimate, and
the wage and benefit rates the firm is paying, the PM can
derive an estimate of the direct labor cost to complete the
contract.
 Unfortunately, the estimate will be in considerable error

because the PM is underestimating the labor costs to
produce the initial units that will take much longer than
four hours each.
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Example:
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 The reason for the error is the learning exhibited by humans when they
repeat a task.
 In general, it has been found that unit performance improves by a fixed

percent each time the total production quantity doubles. More
specifically, each time the output doubles, the worker hours per unit
decrease by a fixed percentage of their previous value . This percentage
is called the learning rate, and typical values run between 70 and 95
percent.
 The higher values are for more mechanical tasks, while the lower, faster
- learning values are for more mental tasks such as solving problems. A
common rate in manufacturing is 80 percent.
 For example, if the device described in the earlier example required 10

hours to produce the first unit and this firm generally followed a typical
80 percent learning curve, then the second unit would require .80 x 10
= 8 hours, the fourth unit would require 6.4 hours, the eighth unit 5.12
hours, and so on.
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Improving Cost Estimates – Tracking Signals
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 Random errors are errors in measurement that lead

to measurable values being inconsistent when
repeated measures of a constant attribute or quantity
are taken. The word random indicates that they are
inherently unpredictable, and have null expected
value, namely, they are scattered about the true value,
and tend to have null arithmetic mean when a
measurement is repeated several times with the same
instrument.
 Systematic errors are predictable, and typically

constant or proportional to the true value. If the cause
of the systematic error can be identified, then it can
usually be eliminated.
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In column D,
• The list of errors for each of the periods
and then cumulate them at the bottom of
the spreadsheet.
• If the cumulative percent error at the
bottom of the spreadsheet is positive,
which it is in this case, it means that the
actuals are usually greater than the
estimates.
• The forecaster underestimates if the ratio
is positive and overestimates if it is
negative.
• The larger the percent error, the greater
the forecaster’s bias, systematic under- or
overestimation.
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In column E,
• shows the absolute value of column
D
In Column F
• the “mean absolute ratio,”
abbreviated MAR, which is the
running average of the values in
column E up to that period.
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In column G
• The tracking signal listed >> is the ratio of
the running sum of the values in column D
divided by the MAR for that period.
• If the estimates are unbiased, the running
sum of ratios in column D will be about
zero and dividing this by the MAR will
give a very small tracking signal, possibly
zero.
• On the other hand, if there is considerable
bias in the estimates, either positive or
negative, the running sum of the ratios in
column D will grow quite large. Then,
when divided by the mean absolute ratio
this will show whether the tracking signal
is >1 or <1, and therefore greater than the
variability in the estimates or not.
• If the bias is large, resulting in large
positive or negative ratios, the resulting
tracking signal will be correspondingly
positive or negative.
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• The MAR is also
important because this
indicates the variability
of the estimates
compared with the
resulting actual values.
• With experience, the
MAR should decrease
over time though it will
never reach zero.
• We strive to find a
forecasting technique
that minimizes both the
bias and the MAR.
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THAT’S ALL FOR TODAY …..
THANK YOU….
 Don’t take easy for your

EXERCISES…. Practice make it
perfect……
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CEV633

 In this method, elemental tasks, their schedules, and

 Based on the firm ’ s experience, it estimates that if it were

 Unfortunately, the estimate will be in considerable error

 In general, it has been found that unit performance improves by a fixed

 For example, if the device described in the earlier example required 10

 Random errors are errors in measurement that lead

 Systematic errors are predictable, and typically

 Don’t take easy for your

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