Ch 1 1

IT-390 Cost Estimating

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Cost Estimating

• Predictive process used to quantify cost and price and possibly resources

– Goal: Minimize the uncertainty of the estimate

– Outcome: Expected cost and probabilistic cost

distribution.

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Cost Estimating

• Certain aspects are mechanistic (automatic)

• Estimating is a predictive process– Judgment and experience add value– Requires an in-depth understanding

• Cost Estimating as a recognized discipline.

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Profit

• Definition: The amount by which income exceeds expenses in a given time.

• Necessary for continued existence

• Planned expense

• Managers are to assure profit will exist, and to insure long-term survival, must hold it as a primary goal

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Stewardship(Housekeeping or, managing financial affairs)

• Survival applies to government agencies and non-profit organizations as well

• Resources must be managed carefully

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Competition

• No pure competition or monopolies (somewhere in-between)

• Monopolies– One supplier controls the market with no

competition

• Pure competition– Many suppliers exist and no single entity has

the strength to affect prices

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Motivation for Engineering Cost Estimating

• Making good business decisions is essential

• Accurate Estimations have to be made

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Reasons for Economic Evaluation

• Cost to Manufacture• Profit prediction• Labor requirements• Time• Control of operation• Improvement• Budgets• Equipment justification

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Estimations such as:

• Manufacturing operation– Baseline

• Introduction of a new product– Manufacturing capabilities, marketability,

(profit) margin

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Estimations such as:

• A project– Addition to existing facility,

purchase/installation of a CNC machine– Set aside capital funds.

• An entire system– Metro-Link

• Made up of many project estimates

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To drive the point home:

• Poor product estimate– Wasting hundreds of thousands of dollars

• Poor project estimate– Millions for overruns

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Design

• A design (in Cost Estimating terms) is a combination of preexisting knowledge

• Each element is translated differently, depending on the unique aspects of the item to be estimated

• In essence, the design is the "equation", and the estimate is the "answer".

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Design

• These loosely defined elements are: Problem, Concept, Engineering Models, Evaluation, and Design.– Problem - vague representation satisfying some

want (ie. In the case of an estimate for a product; Does this fit the companies strategic plan, capabilities or needs?)

• Information must be gathered

• Contemplative statement of the problem

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Design

• Concept - the concept search is an investigative, learning, and recognizing process.– Do not apply at this point

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Design

• Engineering Models - application of the concept uncovered in the Concept search.– The models may be physical, schematic, or

mathematical• Physical models

– change of scale (size)

• Schematic models– utilize one set of properties to represent a second set. (A process

flow chart.)

• The mathematical models– substitutes numbers/symbol

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Design

– Within Engineering Models, of the three (physical, schematic, or mathematical)

• Quickest or cheapest

• Fewest number and simplest models

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Design

• Evaluation– evaluate it against reality– Few models make it first time

• Design - (as an element within the Design Process)– Execution of plans - computing, drafting, checking,

specifying• Perform detailed cost estimates

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Design

• Implementation– Provides proof of the design and cost analysis

• Before implementation takes place, several questions should be answered– Does the design satisfy the requirements?– Will the enterprise yield a profit?

• This is what engineering cost estimating is for.

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Classification of Estimates

• Few cents to millions of dollars - same intellect

• There are four types of estimates: Operation, Product, Project, and System

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Classification of Estimates

• Operation Estimate: The process of producing a change in value or a way of working– Forecast of labor and material required for an

operation design– The design: (a toy, radio or aircraft) and work: (a

worker and a tool) are involved– The definition of an operation estimate includes

one worker with one tool, one worker with multiple machines, or crew work

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Classification of Estimates

• Product Estimate: Entire product (which is multiple produced), rather than subassembly or component part, is estimated.– Product has to be duplicated - two items to

millions of items• Automobile production, computer production, etc.

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Classification of Estimates:

• Project Estimate: Is one of a kind - plan, plant, equipment, capital tooling for a product, or a prototype– Custom design - only one will be manufactured– Usually Capitalized– Normally Long Projects - high-rise apartment

building, bridge construction, or an airplane– Operation and/or product estimates as input

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Classification of Estimates: • System Estimate: Involves elements of operations,

products, and/or project designs and is the most comprehensive– system design deals in the public, government, or not-for-

profit domain of enterprise

– Profit is not the main concern

– Metro-Link transit system• rail cars (Hence the need for a Product Estimate), the worker and

tool building the stations (the need for an Operation Estimate), and the complete stations (here is the need for a Project Estimate).

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Strategies for the Enterprise

• Design uniqueness or superiority• Price and cost• Quality• Reliability• Innovation and first to market• Inventory, service, and supply to customer• Custom design or manufacturing• Commodity products

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Information

• Unknowns - cost estimating VS cost accounting.• Resources

– Historical information– Measured data (work measurement)– Policy data– Other departments– Outside agencies (Bureau of Labor Statistics)– Trade associations

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Information

• Furthermore:– Estimating is done to better allocate scarce

resources– The more accurate an estimate is, the more

expensive it is– It's important to know the intended purpose– Detective mindset– Changes and Challenges

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As an Added Note:• Total cost of a typical metal products manufacturing

enterprise is:– 15% Direct Labor– 50% Direct Material– 35% Overhead

• This weekend we will cover:– Ch. 2 - Direct Labor– Ch. 3 - Direct Material– Ch. 4 - Overhead– Ch. 5 - Forecasting