ENGR 3360U Winter 2016

Unit 3.1-3
Engineering Costs and Cost Estimating
Dr. J. Michael Bennett, P. Eng., PMP,
UOIT,
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Unit 3 Engineering Costs and Cost Estimating

Change Record
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Unit 3 Engineering Costs and Cost Estimating

Course Outline
1.
2.

3.
4.
5.
6.
7.
8.
9.
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Engineering Economics
General Economics
1.
Microeconomics
2.
Macroeconomics
3.
Money and the Bank of
Canada
Engineering Estimation
Interest and Equivalence
Present Worth Analysis
Annual Cash Flow
Rate of Return Analysis
Picking the Best Choice
Other Choosing Techniques
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10. Uncertainty and Risk

11. Income and Depreciation
12. After-tax Cash Flows
13. Replacement Analysis
14. Inflation
15. MARR Selection
16. Public Sector Issues
17. What Engineering should know
about Accounting
18. Personal Economics for the
Engineer

Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

Unit 3 Road Map

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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

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Unit 3 Engineering Costs and Cost 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.
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Unit 3 Engineering Costs and Cost Estimating

Questions to be resolved
For the most part, Engineering economy

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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?

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Unit 3 Engineering Costs and Cost Estimating

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:

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Total cost divided by the number of units

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Unit 3 Engineering Costs and Cost Estimating

Total Costs

Total Cost = total fixed cost + total variable cost

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Unit 3 Engineering Costs and Cost Estimating

Profit/Loss Breakeven Chart

Breakeven point: total costs = total revenue

Profit region: total revenue > total costs
Loss region: total costs > total revenue
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Unit 3 Engineering Costs and Cost Estimating

Other Types of Costs

Sunk Costs

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Money already spent

Past decision
Should be disregarded in engineering
economic analysis
Nothing can be done at this point to change the
cost

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Unit 3 Engineering Costs and Cost Estimating

Other Types of Costs, contd.

Opportunity Costs

The costs associated with a resource being

used for an alternate task
Sometimes referred to as forgone opportunity
costs

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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.

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Unit 3 Engineering Costs and Cost Estimating

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

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Cash costs require a cash transaction (cash flow)

Book costs are recorded but are not transactions

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Unit 3 Engineering Costs and Cost Estimating

The Annual Operating Cost Estimation

Direct Labor Costs for operating personnel;

Direct materials;
Periodic maintenance costs;
Rework and rebuilt;
Other costs could be:

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On-line testing and calibration;

Proofing runs before actual production.

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Unit 3 Engineering Costs and Cost Estimating

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.
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Unit 3 Engineering Costs and Cost Estimating

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

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Treats the competitive cost as an input variable

and the associated cost estimates as the output
variables.

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Unit 3 Engineering Costs and Cost Estimating

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:

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Estimates are viewed as first cut estimates

Serve as inputs to the project initial budget
The unit method is often applied here

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Unit 3 Engineering Costs and Cost Estimating

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.
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Unit 3 Engineering Costs and Cost Estimating

3.3 3 Types of Cost Estimating

Types:

Rough Estimates

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

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Quick/easy, high-level estimates where accuracy

varies widely

Estimates made from detailed designs using

quantitative models and vendor quotes. High level
of accuracy.

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Unit 3 Engineering Costs and Cost Estimating

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

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Past experience of similar projects increases accuracy of

estimates
Conversely limited experience decreases accuracy

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Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

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

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Past experience of similar projects increases accuracy of

estimates
Conversely limited experience decreases accuracy

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Dr. Michael Bennett