ENGR 3360U Winter 2014

Unit 3.4-5
Engineering Costs and Cost Estimating
Dr. J. Michael Bennett, P. Eng., PMP,
UOIT,
Version 2014-I-01

Unit 3 Engineering Costs and Cost Estimating

Change Record
2014-I-01 Initial Creation
Text reference Chapter 2

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Unit 3 Engineering Costs and Cost Estimating

3.4 Estimating Models

Per-Unit Model

Uses a per-unit factor (e.g., cost per square foot)

Segmenting Model

Divide and Conquer approach

Individual component estimates are added together

Cost Indexes

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Historical change in costs as a ratio relationship

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Unit 3 Engineering Costs and Cost Estimating

Example: using Indexes

A building cost $5.25M to build in 2000. The
Construction Cost Index then was 3,746. In 2010, it
was 5,260.
a) what is the 2010 estimate?
5.25(5360/3746) = 7.5M
b) what would it be for 2016?
Estimate f, the annual % increase
f = (5360/3746)1/10 -1 = 3.45%
EST15 = 5.25(1.035)15 = 8.73M
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Unit 3 Engineering Costs and Cost Estimating

Estimating Models, contd.

Triangulation

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Approaching the estimate from different perspectives and sources

Using different sources to arrive at the estimate

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Unit 3 Engineering Costs and Cost Estimating

Cost Capacity Equations

CERs use design variables to predict costs.
CERs are more quantitative in nature than cost indexes.
Developed from statistical approaches;
Usually linear or non-linear regression models.

A common model:
Cost-Capacity Equation or CCE

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CCEs cont..
A model that relates the cost of an asset or
activity to its capacity.
Other names:
Power-law or,
Sizing models.

Assume two different capacity levels:

Capacity level Q1,
Capacity level Q2

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Unit 3 Engineering Costs and Cost Estimating

Cost Capacity Equations

CCE is:

Where x is the
correlating exponent

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Normally 0 < x < 1.

For x < 1 the economies of
scale are applied.
For x = 1, the model is linear.
For x > 1, a larger size is
expected to be more costly
than a linear model.
If x is unknown, common to
assume a value of 0.6

Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

Sample Exponents
Component
Activated sludge plant
aerobic digester
Blower
centrifuge
chlorine plant
clarifier
compressor
cyclone separator
dryer
filter (sand)
heat exchanger
hydrogen plant
laboratory
lagoon, aerated
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size

expone
nt

1-100MGD
0.84
0.3-40 MGD
0.24
1000-7000 ft/min
0.46
40-60 in
0.71
3000-350000 tons per
year
0.44
3-100 MGD
0.98
200-2100 hp
0.91
20-8000 cuft/min
0.64
15-400 sqft
0.71
0.5-200 MGD
0.82
500-3000 sqft
0.55
500-20000 cfd
0.56
0.05-50 MGD
1.02
0.05-50 MGD
1.13
50-400 gal Dr. Michael Bennett
0.74

Unit 3 Engineering Costs and Cost Estimating

Combining CCEs with Index values

Combining the cost-index approach with CCEs
add the time adjustment factor to better estimate
costs that change over time.
Specifically;

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C2 = C1(Q2/Q1)x(It/I0)

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Unit 3 Engineering Costs and Cost Estimating

Example
The total design and construction of a new
aerobic digester to handle a flow of 0.5
MGD was $1.7M in 2000. Estimate the cost
today for a flow rate of 2.0 MGD. The cost
index in 2000 was 131 and today, 225. The
exponent for 0.2 to 40 MGD =0.24
C = 1700000(2.0/0.5)0.24(225/131)
= 3,546,178
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Unit 3 Engineering Costs and Cost Estimating

Life-Cycle Costs
Goods and services are designed and
progress through a life-cycle.
Life-cycle costing:

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Considers the costs over the entire life-cycle

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Unit 3 Engineering Costs and Cost Estimating

Estimating Benefits
Economic analysis often requires
considering the benefits as well as the
costs.
Many of the same methods used to
calculate costs can be used to calculate
benefits.
Benefits are typically in the future, which
sometimes makes them more difficult to
estimate.
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Cash Flow Diagrams

Costs and Benefits over time can be represented by a cash
flow diagram:

Cash flows are assumed to occur at the end of each period.

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Unit 3 Engineering Costs and Cost Estimating

3.5 Observations on Engineering Estimation

Back-of-the-envelope
in-the-ballpark estimates
Revisit the chessboard and wheat

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Rules of Thumbs
My Uncle's example
The Rule of 3
The Back of the Envelope

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The Rule of Six

normally, use the average
the (WC+4xEC+BC) / 6 is better
SDest = (WC-BC)/6
be realistic (factor in time of year)

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Unit 3 Engineering Costs and Cost Estimating

The Rule of 3
3 people in my house
30 close neighbours
300 on my jogging route
3000 in my school draw
30000 in my ward
300,000 in London
6,000,000 in Ontario-Toronto
30,000,000 in Canada
300,000,000 in NA (- Mexico)
3,000,000,000 "consumers" in the world

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Unit 3 Engineering Costs and Cost Estimating

Rules of Thumbs (jon bentley)

How much water flows out of the
Mississippi River in one day (cu miles)?

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Unit 3 Engineering Costs and Cost Estimating

Rule of 72
Exponential are difficult
Most of our problems ARE expos
If you invest a sum that must double in y
years at an interest rate of r percent/yr then
r*y = 72 holds. (RULE OF 72)
Example, how long will it take for $1,000 to
double at 6%? 72/6=12 years ($2012)

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Unit 3 Engineering Costs and Cost Estimating

Rules of 2
210 = 1024 (or about a 1000)
220 = about a million
230 = a billion
240= a trillion

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Unit 3 Engineering Costs and Cost Estimating

Example
A program takes 10 seconds for size n=40
Increasing n by 1 increases time by 12%
(expo)
Rule-of-72 says RT doubles when n
increases by 6
By 60, then 1,000
By 160, 107 seconds
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Unit 3 Engineering Costs and Cost Estimating

Help!
How BIG is 107 anyway?
Actually, 3.155x107 seconds in a year
Or seconds in a nanocentury
264 = 100,000,000 donuts/sec for 5,000
years

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Unit 3 Engineering Costs and Cost Estimating

A Little Quiz (thanks Jon)

(give 1+4+1 confidence limits)
1. Canadian population Jan 1,2001
2. Year of Napoleon's birth
3. Length of the Great Lakes/St Lawrence
watershed
4. Maximum takeoff weight of a 747 (pds)
5. Mass of the earth
6. Number of Fathers of Confederation
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Unit 3 Engineering Costs and Cost Estimating

7. Latitude of London, England

8. Number of airplanes in the air at this
minute
9. Number of PCs in Canada
10. Number of bones in the adult human

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Wisdom of Crowds
Example from book (fall fairs)
How many dogs are there in Canada?

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General Estimating cont..

make sure you have a complete SOW
(Statement of Work)
work out the WBS (Work Breakdown
Structure) completely
hand off to the person responsible to
estimate and cost
collect them in the Preliminary Plan

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Unit 3 Engineering Costs and Cost Estimating

General Estimating cont..

Estimation depends on Risk!

W
B
S
W
B
S
L
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v
e
l
D
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s
c
r
i
p
t
i
o
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L
o
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R
i
s
k
%
H
i
g
h
R
i
s
k
%
1 P
rogram 35 75-100
2 P
roject 20 50-70
3 Task 10 20-30
4 S
ubtask 5 10-15
5 W
orkpackage2 5-10

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Unit 3 Engineering Costs and Cost Estimating

Some Examples of Pitfalls

misinterpretation of SOW
scope omissions
improperly defined scope
bad schedule
inaccurate WBS
missing skillsets
missed risks
inflation
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Unit 3 Engineering Costs and Cost Estimating

Things to Avoid
warm fuzzies
too-new technologies
biggies
too-optimistic estimates
LINEARITY

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Unit 3 Engineering Costs and Cost Estimating

Summary

There are many types of costs:

Estimates:

Cost and benefit estimates

Estimate models can be applied
Estimates require resources and sources to produce

Cash Flow Diagrams:

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These include current costs, future costs, and

foregone costs
Costs for design and production follow a life-cycle

Represent +ve and ve flows over time

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