Engineering Costs and Cost Estimating

1. Engineering Costs and Cost Estimating Chapter 2: Newnan, Eschenbach, and Lavelle Dr. Hurley’s AGB 555 Course

2. Engineering Cost Concepts • Total Fixed Costs • Total Variable Costs • Sunk Costs • Total Costs • Average Total Variable Costs • Average Total Fixed Costs • Average Total Costs • Marginal Costs • Opportunity Costs

3. Engineering Cost Concepts Cont. • Breakeven Point • Profit Region • Loss Region • Profit-Loss Breakeven Chart • Recurring Costs vs. Non-Recurring Costs • Incremental Costs • What is the difference from this and marginal costs? • Cash Costs vs. Book Costs • Life-Cycle Costs

4. Types of Cost Estimates • Rough Estimates • These estimates are crude and are meant to give you a general idea of the order of magnitude of a project’s cost (e.g., 1,000’s, 10,000’s, 100,000’s, etc.) • These estimates should have a fairly wide error, e.g., -30% to 60% within the actual value of the project’s cost • Very little resources are invested to make these estimates • Semi-Detailed Estimate • These estimates are more refined than the rough estimate • More time is given to identifying specific costs and estimating ranges in the costs • These estimates should have a tighter error than a rough estimate, e.g., -15% to 20% within the actual value of the project’s cost

5. Types of Cost Estimates • Detailed Estimate • This would be an estimate you make when you are bidding • Considerable time and energy has been spent to get accurate numbers for each cost item • These estimates should have very tight error, e.g., -3% to 5% within the actual value of the project’s cost

6. Causes of Difficulties in Estimating a Projects Cost • One-of-a-Kind Estimates • May need to do an estimation by analogy • Time and Effort Available • Estimator Expertise

7. Types of Models for Making Estimates • Per-Unit Model • This is where you take the total cost of the project and divide by the number of units you are dealing with, e.g., per cow, per kWh, per person, etc. • Segmenting Model • The estimates break-up the costs into major components and sub-components • A work breakdown structure is used to decompose the costs • Cost Indexes • These estimates use historical changes in costs, represented by a cost index number, to take a project that has been done in the past where the costs are known to make an estimate of current/future cost of a new project

8. Types of Models for Making Estimates Cont. • Power-Sizing Model • This model uses historical and current information regarding costs and scaling factors to estimate the cost of equipment or facilities • where x is a sizing factor

9. The Learning Curve • This concept captures the idea that increasing knowledge of a process will reduce the time necessary to do the process • It can be represented mathematically as: • TN= T1 * Nx , where • TN represents the time required to produce the N unit • T1represents the time required to produce the first unit • N represents the number of units finished • x represents a learning curve exponent

10. Time-Based Cash Flow Diagram • This is a way of visually representing cash flow for a project either on a diagram or an spreadsheet chart. • Positive values are represented with arrows or bars pointing up, while negative values are represented with arrows that point down • Arrows are placed at different time periods where the time periods can be daily, monthly, quarterly, yearly, or some other meaningful measure of time