ENGR 3360U Winter 2014 Unit 3.1-3: Engineering Costs and Cost Estimating

ENGR 3360U Winter 2014
Unit 3.1-3
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
3-2
2014-I-01
Dr. Michael Bennett
Course Outline
1.
2.
3.
4.
5.
6.
7.
8.
9.
1-3
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
2014-I-01
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 Road Map
3-4
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
2014-I-01
Dr. Michael Bennett
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.
3-5
2014-I-01
Dr. Michael Bennett
Questions to be resolved
For the most part, Engineering economy
3-6
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?
2014-I-01
Dr. Michael Bennett
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:
3-7
Total cost divided by the number of units
2014-I-01
Dr. Michael Bennett
Total Costs
Total Cost = total fixed cost + total variable cost
3-8
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Dr. Michael Bennett
Profit/Loss Breakeven Chart
Breakeven point: total costs = total revenue

Profit region: total revenue > total costs
Loss region: total costs > total revenue
3-9
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Dr. Michael Bennett
Other Types of Costs

Sunk Costs
3-9
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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Dr. Michael Bennett
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
3-11
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.
2014-I-01
Dr. Michael Bennett
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
3-12
Cash costs require a cash transaction (cash flow)

Book costs are recorded but are not transactions
2014-I-01
Dr. Michael Bennett
The Annual Operating Cost Estimation
Direct Labor Costs for operating personnel;

Direct materials;
Periodic maintenance costs;
Rework and rebuilt;
Other costs could be:
3-13
On-line testing and calibration;

Proofing runs before actual production.
2014-I-01
Dr. Michael Bennett
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.
3-14
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Dr. Michael Bennett
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
3-15
Treats the competitive cost as an input variable

and the associated cost estimates as the output
variables.
2014-I-01
Dr. Michael Bennett
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:
3-16
Estimates are viewed as first cut estimates

Serve as inputs to the project initial budget
The unit method is often applied here
2014-I-01
Dr. Michael Bennett
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.
3-17
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Dr. Michael Bennett
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
3-18
Quick/easy, high-level estimates where accuracy

varies widely
Estimates made from detailed designs using

quantitative models and vendor quotes. High level
of accuracy.
2014-I-01
Dr. Michael Bennett
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
3-19
Past experience of similar projects increases accuracy of

estimates
Conversely limited experience decreases accuracy
2014-I-01
Dr. Michael Bennett
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
3-20
Past experience of similar projects increases accuracy of

estimates
Conversely limited experience decreases accuracy
2014-I-01
Dr. Michael Bennett

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ENGR 3360U Winter 2014

Unit 3 Engineering Costs and Cost Estimating

Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

10. Uncertainty and Risk

Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

Unit 3 Road Map

3.1 Engineering cost concepts

Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

3.1 Engineering Costs

alternatives, justify expenditures

Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

analysis tends to be cost driven;

Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

Constant unchanging costs

Depend on the level of output or activity

Variable cost for one more unit

Total cost divided by the number of units

Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

Total Cost = total fixed cost + total variable cost

Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

Profit/Loss Breakeven Chart

Breakeven point: total costs = total revenue

Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

Other Types of Costs

Money already spent

Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

Other Types of Costs, contd.

The costs associated with a resource being

An opportunity cost is the benefit that is forgone

Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

Other Types of Costs

A cost that reoccurs at regular intervals

One-of-a-kind costs recurring at irregular

Cost differences between alternatives

Cash Costs versus Book Costs

Cash costs require a cash transaction (cash flow)

Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

The Annual Operating Cost Estimation

Direct Labor Costs for operating personnel;

On-line testing and calibration;

Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

Apply standard industry-wide software

Dr. Michael Bennett

Unit 3 Engineering Costs and Cost Estimating

Cost Estimation Approaches

Treats the final cost as an independent (output)

Treats the competitive cost as an input variable