Chapter3costestimationtechniques 28pt2 29

CHAPTER 3
Cost Estimation
Techniques
Part 2
Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Upper Saddle River, New Jersey 07458
1
All rights reserved.
3.2.3 Estimating Techniques (Models)
REMEMBER! The purpose of estimating is to develop

cash-flow projections—not to produce exact data about the
future, which is virtually impossible. Cost and revenue
estimates can be classified according to detail, accuracy, and
their intended use.
• Order-of-magnitude estimates (±30%)

• Semidetailed, or budget, estimates (±15%)
• Definitive (detailed) estimates (±5%)
3.2.3 Estimating Techniques (Models)Con’t
Cost and revenue estimates can be classified according to detail,
accuracy, and their intended use.
Early stage of project ROUGH ESTIMATION (20-30%)

-by expert opinion, experience, or high-level
models.
-prepare such order-of-magnitude or indicative
estimates
Pass initial screening - project to proceed
SEMIDETAILED ESTIMATION (10-20%)
-uses data on actual costs of analogous projects
and various parametric estimation model
TAIL ESTIMATION (±5%) - based on completed drawings and specifications as well as actual quota

Sources for cost and revenue estimation.
• e.g., sales,
• good for historical engineering,
data, but limited for production,
engineering purchasing. (payment
economic analysis. voucher & cash
voucher).
Sources
Accounting
inside the
records
firm
Research Sources
and outside the
development firm • Government data,
• e.g., pilot plant, test industry surveys and
marketing program, personal contacts..
surveys. (Jabatan Akauntan
Negara / Clients)

3.3 Estimating Techniques (Models )Con’t
A Indexes
B Unit Technique
C Factor Estimates
D Power-sizing Model
E Learning Curve
A Indexes
These three models are
commonly applicable
B Unit technique
for rough and
semidetailed
C Factor Estimates
estimation. But
Power-sizing Model sometimes, they can
also be used in detailed
Learning Curve estimates.

3.3.1 Indexes
• An index indicates how a price or cost has changed with time with
respect to a based year.
• It provides a means for developing present and future cost and price
estimates from historical data.
• Indexes can be created for a single item or for multiple items.
• Referred as ratio technique.

3.3.1.1 Indexes: Single item
• The ratio of the cost of the item in the current year to the cost of
the same item in the reference year, multiplied by the reference
year factor (typically, 100)

k = reference year for which cost or price is known.

n = year for which cost or price is to be estimated (n>k).
Cn = estimated cost or price of item in year n.
Ck = cost or price of item in reference year k.

Example:
In evaluating the feasibility of a major construction project, an engineer is
interested in estimating the cost of skilled labor for the job. The engineer
finds that a project of similar complexity and magnitude was completed 5
years ago at a skilled labor cost of $360,000. The skilled labor index was
3496 then and is now 4038. What is the estimated skilled labor cost?

Source: JUBM & Arcadis Construction Cost Handbook, 2018
3.3.1.1 Indexes: Multiple item
• A composite index is created by averaging the ratios of
selected item costs in a particular year to the cost of the
same items in a reference year.

If the index in 2012 is estimated to be 327, determine the 2012 prices for
each type of gasoline if the 2010 consider as reference year.

3.3.2 Unit Technique
• The unit technique involves a per unit factor, then multiplied by the
appropriate unit to estimate the cost, savings, or revenue.
• For example, to estimate the cost of a house. Let say, using a per unit factor
of $120 per square foot, and the area of house would be 3,000 square feet. So,
the cost of the house is estimated to be $120 x 3,000 = $360,000.
• This techniques is useful in preliminary estimates, but using average costs

can be very misleading.

3.3.3 Factor technique
• The factor technique is an extension of the unit technique where

the products of several quantities are summed and then added to
components estimated directly.
C = cost being estimated

Cd = cost of the selected component d estimated directly
fm = cost per unit of component m
Um = number of units of component m

Example
Estimate the cost of a house consisting of 2,000 square feet with two porches,
and a garage. Using a unit factor of $85 per square foot, $10,000 per porch, and
$8,000 per garage.

3.4 Parametric Cost Estimating
• Parametric cost estimating is the use of historical cost data and statistical
techniques (e.g., linear regression) to predict future costs.
• Statistical techniques are used to develop the cost estimation relationship
between the cost/price of an items to one or more independent variables (e.g.
floor area, wall surface area).
• Parametric models are used in the early design stages to get an idea of how
much the product (or project) will cost, on the basis of a few physical
attributes.

3.4 Parametric Cost Estimating
Indexes
These two models are
called as parametric Unit technique
cost estimates which is
use historical data and Factor Estimates
statistical analysis to
predict future costs. Power-sizing Model
D
Learning Curve
E
3.4.1 Power-sizing technique
• The power-sizing technique (or exponential model) is frequently
used for developing capital investment estimates for industrial plants
and equipment.
(both in $ as of the point in time for

which the estimate is desired)
(both in the same physical units)

3.4.2 Learning curve
• A learning curve reflects increased efficiency and

performance with repetitive production of a good or
service. The concept is that some input resources
decrease, on a per-output-unit basis, as the number of
units produced increases.

3.4.2 Learning curve(Con’t)
Amount of resources needed to produce output unit u ;

3.4.2 Learning curve(Con’t)
•

FINAL EXAMINATION
SEMESTER I
SESSION 2014/2015
Q2(a) The table Q2 (a) below shows the past price of Standard Malaysia Rubber (SMR) since
2012, whereby 2013 is the reference year having 246 as an index value. The weight place on SMR
CV is one (1) time, SMR L is one and half (1.5) times and SMR 5 is two (2) time.
(i) Calculate a weighted index for the price of a kg of SMR in 2014.

(4 marks)

(ii) Calculate the corresponding 2015 prices of SMR from 2014 if 218 is the index value in 2015.
Price (sen / kg ) in Year (6 marks)

SMR
2012 2013 2014
SMR CV 1088 919 753
SMR L 1046 832 696
SMR 5 974 794 579

Solution:
W1 (Cn1/Ck2) + W2 (Cn2/Ck2) + W3 (Cn3/Ck3)
In2014 = ---------------------------------------------------------- X In2011
W1 + W2 + W3
1(753/919) + 1.5(696/832) + 2(579/794)

= --------------------------------------------------------- X 246 = 193.1163
1 + 1.5 + 2
= 0.8193 + 1.2548 + 1.4584
------------------------------- X 246 = 193.1100
4.5
= 193.1163 OR 193.1100 …………………. (4 marks)

Cn2015SMR CV = Ck2014 (In2015/Ik2014)
= 753(218/193.1163)
= 850.0266 sen/kg……..…..…….. (2 marks)
Cn2015SMR L = Ck2014 (In2015/Ik2014)

= 696 (218/193.1163)
= 785.6820 sen/kg ……….……….……..…….. (2 marks)
Cn2015SMR 5 = Ck2014 (In2015/Ik2014)

= 579(218/193.1163)
= 653.6061 sen/kg……………….………….. (2marks)

FINAL EXAMINATION SEMESTER I
SESSION 2013/2014
Q3 (b) Cost for a generator set of 100-KW was RM35,000 ten years ago while
the cost index for this generator was 187 and is now 194 with the cost capacity
factor 0.75. The EE team is considering a 240-KW and 300-KW units of the
same general design to power a small-medium isolated plant. Both models
require an additional pre-compressor, which currently costs RM22,000.
(i) Calculate the total cost of the 240-KW unit. (9 marks)
(ii) Compute the total cost of a 300-KW unit. (6 marks)

Solution:
CB = Ck (In/Ik)
= 35,000(194/187)
= RM 36,310.16 ................................................(3 marks)

CA1 = CB(SA/SB)X
= 36,310.16(240-KW/100-KW) 0.75
= RM 70,014.27
TC = 70,014.27 + 22,000
= RM 92,014.27 ................................................(6 marks)

CA2 = CB(SA/SB)X
= 36,310.16(300-KW/100-KW) 0.75
= RM 82,769.27
TC = 82,769.27 + 22,000
= RM 104,769.27 ...........................................(6 marks)

FINAL EXAMINATION SEMESTER I
SESSION 2014/2015
Q2(b) The structural engineering design section of Agile E-Power, a multinational

electrical utility corporation has developed several standard designs for a group of similar
transmission line towers. The detailed design for each tower is based on one of the standard
designs. A transmission line project involving 60 towers has been approved. The estimated
number of engineering hours needed to accomplish the first detailed tower design is 123.
Determine:
(i) The number of engineering hours needed to design the eight and sixteenth tower using a
95% learning curve. (5 marks)
(ii) The reduction percentage when the production is doubled. (5 marks)
(iii) The estimated cumulative average hours required to produce the first five tower designs
(5 marks)

Solution:
K = 123 hours
s = 0.95 (95% learning curve)
n = (log 0.95) / (log 2) = -0.074 ........................................... (1 marks)
Z8 = 123(8)-0.074 = 105.46 hours ................................... (2 marks)
Z16 = 123(16)-0.074 = 100.18 hours ................................... (2 marks)

(Z8 - Z16) / Z8 = (105.46-100.18)/105.46 = 0.05
Assumption / conclusion: The 95% learning curve results in a 5% reduction in number of
engineering hours each time the quantity of the tower needed to be designed is doubled. (5
marks)

T5 = 123 ∑10 U=1u-0.074
= 123 [1-0.074 + 2-0.074+ 3-0.074+ 4-0.074+ 5-0.074]
= 123[1 + 0.9500 + 0.9219 + 0.9025 + 0.8877]
= 123 [4.6621]
= 573.4383 hours ..................................... (3 marks)

Cx = Tx / x = T5/ 5 = 573.4383 / 5 = 114.69 hours............. (2 marks)


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CHAPTER 3

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

REMEMBER! The purpose of estimating is to develop

• Order-of-magnitude estimates (±30%)

Early stage of project ROUGH ESTIMATION (20-30%)

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

k = reference year for which cost or price is known.

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

• This techniques is useful in preliminary estimates, but using average costs

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

• The factor technique is an extension of the unit technique where

C = cost being estimated

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

(both in $ as of the point in time for

(both in the same physical units)

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

• A learning curve reflects increased efficiency and

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

Amount of resources needed to produce output unit u ;

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

(i) Calculate a weighted index for the price of a kg of SMR in 2014.

Price (sen / kg ) in Year (6 marks)

SMR CV 1088 919 753

SMR L 1046 832 696

SMR 5 974 794 579

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

1(753/919) + 1.5(696/832) + 2(579/794)

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

Cn2015SMR L = Ck2014 (In2015/Ik2014)

Cn2015SMR 5 = Ck2014 (In2015/Ik2014)

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

(i) Calculate the total cost of the 240-KW unit. (9 marks)

(ii) Compute the total cost of a 300-KW unit. (6 marks)

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

Q2(b) The structural engineering design section of Agile E-Power, a multinational

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition Copyright ©2012 by Pearson Education, Inc.

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