Introduction to Engineering Economy

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Characteristics of Engineering Projects
• Cost
• Time
• Complexity
• Uncertainty
Project Details
Economic Conditions

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Sample Engineering Projects

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What is Engineering
Engineering is the profession in which the knowledge of the mathematical and natural sciences gained
by study, experience, and practice is applied with judgment to develop ways to utilize, economically, the
materials and forces of nature for the benefit of mankind. - Accreditation Board for Engineering and
Technology (ABET), USA.

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What is Economics
It is defined as the study of the allocation of scarce resources among unlimited ends (or wants)
(Shakya, 2019).

It is "the social science that studies the production, distribution, and consumption of goods and services
(Krugman et al., 2012). It focuses on the behavior and interaction of economic agents and economies at
work.
The word 'economics' comes from two Greek words, 'eco' meaning home and 'nomos' meaning
accounts. The subject has developed from being about how to keep the family accounts into the wide-
ranging subject of today.

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What is Engineering Economy
It involves the systematic evaluation of the economic merits of proposed solutions to engineering
problems.

It is the peso-and-cents side of the decisions that engineers make or recommend as they work to
position a firm to be profitable in a highly competitive marketplace.

Its mission is to balance these trade-offs in the most economical manner.

Eugene Grant is considered as the father of the engineering economy.

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Eugene Lodewick Grant
Eugene Lodewick. Grant (1897-1996) , a
native of Chicago, received his B.S. degree at the
University of Wisconsin in 1917. He served in the
Navy during World War I and later in the United
States Geological Survey. In 1920, he joined the
faculty of the Civil Engineering Department of the
University of Montana (Bozeman). Professor
Grant took a sabbatical leave at Columbia
University during the 1927-28 academic year.
There he earned a Master’s degree in Economics.

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 Engineering processes involve decisions and tradeoffs; each has
a different cost, i.e., something you give up (usually money).

Examples:

Building construction
Product design

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Engineering Economy

Engineering economy is a subset of the economy for application to engineering projects

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Engineering Economy

Engineering economy involves the evaluation of the costs and benefits of proposed projects

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Importance of Engineering Economy
• Engineers play a major role in investment by making decisions based on economic analysis and design
considerations

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Importance of Engineering Economy
• Decisions often reflect the engineer’s choice of how to best invest funds by choosing the proper alternative out
of a set of alternatives.

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The Seven Principles of Engineering Economy

PRINCIPLE 1 - DEVELOP THE ALTERNATIVES:

The choice (decision) is among alternatives. The alternatives need to be identified. A decision
involves making a choice among alternatives. Developing and defining alternatives depends upon the
engineer’s creativity and innovation.

PRINCIPLE 2 - FOCUS ON THE DIFFERENCE:

Only the differences in expected future outcomes among the alternatives are relevant to their
comparison and should be considered in the decision..

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PRINCIPLE 3 - USE A CONSISTENT VIEWPOINT:
The prospective outcomes of the alternatives, economic and other, should be consistently developed
from a defined viewpoint (perspective). Often perspective of the decision-maker is the owner’s point of
view. The success of the engineering projects viewpoint may be looked upon from the various perspectives
e.g. donor, financer, beneficiary group & stakeholders. However, the viewpoint must be consistent
throughout the analysis.

PRINCIPLE 4 - USE A COMMON UNIT OF MEASURE

Using a common unit of measurement to enumerate as many of the prospective outcomes as possible
will make easier the analysis and comparison of the alternatives. For economic consequences, a monetary
unit is the common measure.

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PRINCIPLE 5 – CONSIDER ALL RELEVANT CRITERIA
Selection of a preferred alternative (decision-making) requires the use of a criterion (or several
criteria). The decision process should consider both the outcomes enumerated in the monetary unit and
those expressed in some other unit of measurement or made explicit in a descriptive manner. Apart from
the long-term financial interest of the owner, the needs of stakeholders should be considered.

PRINCIPLE 6 – MAKE UNCERTAINTY EXPLICIT

Uncertainty is inherent in projecting (or estimating) the future outcomes of the alternatives ad should
be recognized in their analysis and comparison. The magnitude & impact of future impact of any course of
action are uncertain or probability of occurrence changes from the planned one. Thus dealing with
uncertainty is important aspect of engineering economic analysis.

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PRINCIPLE 7 – REVISIT YOUR DECISIONS
Improved decision-making results from an adaptive process; to the extent practicable, the initially
projected outcomes of the selected alternative should be subsequently compared with actual results
achieved. If results are significantly different from the initial estimates, appropriate feedback to the
decision-making process should occur.

PRINCIPLE 8 – MAKE UNCERTAINTY EXPLICIT

Uncertainty is inherent in projecting (or estimating) the future outcomes of the alternatives ad should
be recognized in their analysis and comparison. The magnitude & impact of future impact of any course of
action are uncertain or probability of occurrence changes from the planned one. Thus dealing with
uncertainty is important aspect of engineering economic analysis.

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Role of Engineers on Economic Decisions
1. Engineering is involved in every detail of a product's production, from the conceptual design to the shipping.

2. Engineers play a role in the effective utilization of assets.

3 . Engineers are called upon to translate an idea into reality.

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References:

Shakya, N. (2019). Manual of Engineering Economy.

Krugman, Paul; Wells, Robin (2012). Economics (3rd ed.). Worth Publishers. p. 2. ISBN 978-1464128738.

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