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CCP_SEC2_ Cost Estimating

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A CCP is an experienced practitioner with advanced knowledge and technical expertise to apply the broad principles and best practices of Total Cost Management (TCM) in the planning, execution and management of any organizational project or program. CCPs also demonstrate the ability to research and communicate aspects of TCM principles and practices to all levels of project or program stakeholders, both internally and externally.

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CCP_SEC2_ Cost Estimating

  1. 1. CCOSTOST EESTIMATINGSTIMATING Hisham Haridy, PMP, PMI-RMP, PMI-SPCCP_Section 2
  2. 2. 1. Cost Estimating 2. Process Product Manufacturing 3. Discrete Part Manufacturing Materials CContentontent C O S T E S T I M AT I N G
  3. 3. 1. Cost Estimating The predictive process used to quantify, cost, and price the resources required by the scope of an investment option, activity, or project. The process of developing an approximation of the cost of the resources needed to complete project activities. An estimate is not the same as a random guess or a bid, but is the derivation of an COST ESTIMATINGCOST ESTIMATING An estimate is not the same as a random guess or a bid, but is the derivation of an approximate value based on one or more rational methods. An estimate uses available data for comparable activities, components or events, and extrapolates or interpolates to the current situation being estimated. C O S T E S T I M AT I N G
  4. 4. 2. The Cost Estimating Framework A system for the classification of cost estimating. The methodologies used in the preparation of cost estimates. Establishing estimating accuracy as it relates to the scope definition. The application of risk analysis to contingency. COST ESTIMATINGCOST ESTIMATING EstimatingEstimating isis thusthus anan iterativeiterative processprocess thatthat isis appliedapplied inin eacheach phasephase ofof thethe projectproject lifelife cyclecycle asas thethe projectproject scopescope isis defined,defined, modified,modified, andand refinedrefined.. C O S T E S T I M AT I N G
  5. 5. COST ESTIMATINGCOST ESTIMATING Why the cost estimate isWhy the cost estimate is important to the success of aimportant to the success of a project?project? C O S T E S T I M AT I N G
  6. 6. 3. The Purposes of Cost Estimating Determining the economic feasibility of a project. Evaluating between project alternatives. Establishing the project budget. Providing a basis for project cost and schedule control. COST ESTIMATINGCOST ESTIMATING Providing a basis for project cost and schedule control. C O S T E S T I M AT I N G
  7. 7. 4. The Basic Estimating Steps i. Understand the scope of the activity to quantify the resources required. ii. Apply costs to the resources. iii. Apply pricing adjustments. iv. Organize the output in a structured way that supports decision-making. COST ESTIMATINGCOST ESTIMATING iv. Organize the output in a structured way that supports decision-making. v. The assessment of risk associated with the estimate. vi. Review and validation of the estimate. C O S T E S T I M AT I N G
  8. 8. 5. Estimate classification COST ESTIMATINGCOST ESTIMATING Class 5 Class 4 Class 3 Class 2 Class 1 Least Most Owner Contractors Least Detailed Most Detailed IndicateIndicate thethe overalloverall maturitymaturity andand qualityquality forfor thethe variousvarious typestypes ofof estimatesestimates “Highest level“Highest level of projectof project Definition”Definition” “Lowest level of“Lowest level of projectproject Definition”Definition” C O S T E S T I M AT I N G
  9. 9. 6. Estimate Characteristics For each class of estimate, five characteristics are used to distinguish one class of estimate from another. i. Degree of project definition ii. End usage of the estimate iii. Estimating methodology COST ESTIMATINGCOST ESTIMATING iii. Estimating methodology iv. Estimating accuracy v. Effort required to produce the estimate C O S T E S T I M AT I N G
  10. 10. COST ESTIMATINGCOST ESTIMATING C O S T E S T I M AT I N G
  11. 11. COST ESTIMATINGCOST ESTIMATING C O S T E S T I M AT I N G
  12. 12. COST ESTIMATINGCOST ESTIMATING Estimating Methodologies Categories Conceptual (Low level of Project Definition ) End-Product Units Method Deterministic (High level of Project Definition) 7. Estimating Methodologies Categories End-Product Units Method Physical Dimensions Method Capacity Factor Method Ratio or Factor Methods Parametric Method C O S T E S T I M AT I N G
  13. 13. Conceptual Deterministic Used for class 4 or 5 (sometime for class 3) Referred to as Order Of Magnitude (OOM) in reference to the wide range of accuracy. Used for Class 3, Class 2 and Class 1 Support final budget authorization, contractor bid tenders, cost control during project execution, and change orders COST ESTIMATINGCOST ESTIMATING of accuracy. May be used for project screening, feasibility evaluation, initial budget. Not direct measure of units. Low level of project definition. Significant or little effort in data Estimation takes little time sometimes an hour orders Direct measure of units. High level of project definition Large effort in data Estimation takes long time sometimes weeks or even months C O S T E S T I M AT I N G
  14. 14. COST ESTIMATINGCOST ESTIMATING I. End-Product Units Method Enough historical data available from similar projects to relate the end- product units (capacity units) of a project to its construction costs. This allows an estimate to be prepared relatively quickly, knowing only the end-product unit capacity of the proposed project. A. Conceptual (Low level of Project Definition) Examples of the relationship between construction costs and end-product units are: Project End Product Electric generating plant Hotel Hospital Parking Garage Kilowatt No of guest rooms No. of patient beds Parking spaces C O S T E S T I M AT I N G
  15. 15. COST ESTIMATINGCOST ESTIMATING Example You are making a feasibility study for constructing a 1,500 rooms hotel. Your company has just finished building a 1,000 hotel with a total cost of 67,500,000 LE. What is the approximate cost of the new hotel? • From historical data:• From historical data: • The cost /room = 67,500,000/1,000= 67,500 LE/room • The cost of the new hotel= 67,500 * 1,500 = 101,250,000 LE • If there are differences between the two facilities (scope, size, location, timing ,..) ,adjustments should be made. C O S T E S T I M AT I N G
  16. 16. COST ESTIMATINGCOST ESTIMATING II. Physical Dimensions Method The physical dimensions estimating methodology. The method uses the physical dimensions (length, area, volume, etc.) of the item being estimated as the driving factor. It depends on historical information from comparable facilities. Project Dimension Water tank Warehouse Railway M3 M2 M C O S T E S T I M AT I N G
  17. 17. COST ESTIMATINGCOST ESTIMATING Example You are making a feasibility study for constructing a warehouse .You have the following data. What is the approximate cost of the new warehouse? Project Area (m2) Height (m) Cost New Warehouse 3,600 5.5 Just finished Warehouse 2,900 4.25 623,500 What is the approximate cost of the new warehouse? • The cost of the new facility = 19,800*50.59 =1,001,682 LE • If there are differences between the two facilities (scope, size, location, timing ,..) ,adjustments should be made. Project Volume (m3) Cost/m3 New Warehouse 19,800 Just finished Warehouse 12,325 50.59 C O S T E S T I M AT I N G
  18. 18. COST ESTIMATINGCOST ESTIMATING III. Capacity Factor Method The cost of a new facility is derived from the cost of a similar facility of a known (but usually different) capacity. It relies on the (typical) non-linear relationship between capacity and cost. The ratio of costs between two similar facilities of different capacities equalsThe ratio of costs between two similar facilities of different capacities equals the ratio of the capacities multiplied by an exponent: Where: $B/$A: $A and $B are the costs of the two similar facilities CapB & CapA: The capacities of the two facilities. e : The exponent typically lies between 0.5 and 0.85 depending on the type of facility $B/$A = (CapB/CapA)e C O S T E S T I M AT I N G
  19. 19. COST ESTIMATINGCOST ESTIMATING Example Deduct costs from the known base case that are not applicable in the new plant being estimated. We need to estimate the costs of a 5,000 Ton/Day cement plant unit, to be built in Philadelphia and completed in 2014. We have recently completed a 7500 Ton/Day plant in Malaysia, with a final cost of $450 million in 2010. • Our recent history shows a capacity factor of 0.6 is appropriate. • $B= ($A)(CapB/CapA)e • $B= $450M (5000/7500)0.6 • $353M C O S T E S T I M AT I N G
  20. 20. COST ESTIMATINGCOST ESTIMATING Example Deduct costs from the known base case that are not applicable in the new plant Scope adjustment • The plant in Malaysia included piling and owner that cost $50M. Location adjustment • Construction in Philadelphia is expected to cost 1.25 X Malaysia. Time adjustmentTime adjustment • Escalation will be included as a 1.06 multiplier from 2002 to 2004. Additional requirements • There are costs for additional pollution requirements in Philadelphia = +$14.5M C O S T E S T I M AT I N G
  21. 21. COST ESTIMATINGCOST ESTIMATING Item Cost Est. 7,500 ton/Day Plant in Malaysia $450M Deduct Piling and Owner Costs $50M Adjusted Cost for Scope $400M Malaysia to Philadelphia Adjustment (X 1.25) $500MMalaysia to Philadelphia Adjustment (X 1.25) $500M Escalate to 2002 (X 1.06) $530M $B= $530M (5000/7500)0.6 $415.5M Add Pollution Requirements (+$14.5M) $430M C O S T E S T I M AT I N G
  22. 22. COST ESTIMATINGCOST ESTIMATING IV. Ratio or Factor Methods Used in situations where the total cost of an item or facility can be reliably estimated from the cost of a primary component. For example, this method is commonly used in estimating the cost of process and chemical plants where the cost of the specialized process equipment makes up a significant portion of the total project cost. This is often referred to as “Equipment Factor” estimating. It relies on the principle that a ratio or factor exists between the cost of an equipment item and costs for the associated non-equipment items (foundations, piping, electrical, etc.) needed to complete the installation. i. Hans Lang (1947) ii. W. E. Hand (1958) iii. Arthur Miller (1965) C O S T E S T I M AT I N G
  23. 23. COST ESTIMATINGCOST ESTIMATING i. Hans Lang (1947) “Lang Factor” • The total cost of equipment to factor the total estimated cost of a plant. • Total Plant $ = Total Equipment $ X Equipment Factor • Lang proposed three separate factors based on the type of process plant. • Lang’s factors were meant to cover all the costs associated with the total installed cost of a plant including the Battery Limits Process Units (ISBL Costs)installed cost of a plant including the Battery Limits Process Units (ISBL Costs) and all Off site Units (OSBL Costs). • Example: A fluid process plant with estimated equipment cost = $1.5M • Total plant cost = $1.5M X 4.74 = $7.11M C O S T E S T I M AT I N G
  24. 24. COST ESTIMATINGCOST ESTIMATING ii. W. E. Hand (1958) • He elaborated on Lang’s work by proposing different factors for each type of equipment (columns, vessels, etc.) rather than process type. • Hand’s factors estimated direct field cost, EXCLUDING instrumentation. • Hand’s published equipment factors ranged from 2.0 to 3.5 (which might correlate to approximately 2.4 to 4.3 including instrumentation).correlate to approximately 2.4 to 4.3 including instrumentation). • Hand’s factors EXCLUDED 1. Indirect Field Costs (IFC), 2. Home Office Costs (HOC), and 3. Outside Battery Limit (OSBL) facilities. • These costs would need to be estimated separately. Item Factor Range Total equipment cost to DFC 2.4 ~ 3.5 Total equipment cost to TFC 3.0 ~ 4.2 Total equipment cost to total project cost, including contingency 4.2 ~ 5.5 C O S T E S T I M AT I N G
  25. 25. COST ESTIMATINGCOST ESTIMATING C O S T E S T I M AT I N G
  26. 26. COST ESTIMATINGCOST ESTIMATING iii. Arthur Miller (1965) • Miller recognized impact of a) Size of the major equipment b) Materials of construction (metallurgy) of the equipment c) Operating pressure • When size gets larger, amount of corresponding materials (foundation, support steel, piping, instruments) does not increase at the same rate.support steel, piping, instruments) does not increase at the same rate. • Thus, as equipment size increases, value of the equipment factor decreases. • A similar tendency exists for metallurgy and operating pressure. • Miller suggested that these three variables could be summarized into a single attribute known as the “average unit cost” of equipment. • Average unit cost = Total cost of equipment/number of equipment items. C O S T E S T I M AT I N G
  27. 27. COST ESTIMATINGCOST ESTIMATING • There’s a statistical correlation between increasing average unit cost of equipment and decreasing equipment factors that if the average unit cost of equipment increases, then the equipment factor is scaled smaller. • These costs do not include IFC, HOC, or OSBL costs. C O S T E S T I M AT I N G
  28. 28. COST ESTIMATINGCOST ESTIMATING V. Parametric Method Is a mathematical module for cost estimating. It completely depends on the quality of the historical data Using project characteristics (or parameters) in a mathematical model to predict costs. Provides a logical and predictable correlation between the physical andProvides a logical and predictable correlation between the physical and functional characteristics of a plant and its resultant cost. Parametric estimating uses a statistical relationship between historical data and other variables. More accurate but takes time and expense to do this form of estimating. Requires that the project be defined and well understood before work begins. Example; price per square meter. C O S T E S T I M AT I N G
  29. 29. COST ESTIMATINGCOST ESTIMATING i. Regression analysis (scatter diagram) This diagram tracks two variables to see if they are related and creates a mathematical formula to use in future parametric estimating. ii. Learning curve The 100th room painted will take less time than the first room because of improved efficiency. Steps: a) Cost model scope definition b) Data collection c) Data normalization d) Data analysis e) Data application f) Testing g) Documentation C O S T E S T I M AT I N G
  30. 30. COST ESTIMATINGCOST ESTIMATING a) Cost model scope definition • Definition of the end use of the model • The physical characteristics of the model • Cost basis • Critical components and cost drivers • Acceptable accuracy range• Acceptable accuracy range b) Data Collection • The quality of the resulting model can be no better than the quality of the data it is based upon. • It is better to use your company data as it represents your company engineering practices and technology. C O S T E S T I M AT I N G
  31. 31. COST ESTIMATINGCOST ESTIMATING c) Data Normalization • Making adjustments for the gathered data in order to be similar to the studied facility. • Adjustments may include escalation, location, site conditions, system specifications and cost scope. d) Data Analysis • Performing regression analysis of costs versus selected design parameters to determine the key driver for the model. • Linear relationship • Non linear relationship $ = a + bv1 + cv2 + … $ = a + bv1 x+ cv2 y + … Where: V1 and V2: Input variables a, b and c Constants derived from regression X and y : Exponents derived from regression C O S T E S T I M AT I N G
  32. 32. COST ESTIMATINGCOST ESTIMATING e) Data Application • Establishing the user interface and presentation form from the parametric cost model. f) Testing • Once we have performed the regression analysis and obtained an algorithm with a reasonably high R2 value ,we need to examine this algorithm to be sure that it makes common sense. • The best way is to examine this model against its inputs. g) Documentation • A user manual should be prepared showing : o Steps involved in preparing the estimate o How the data was adjusted or normalized o Clear description of the required inputs C O S T E S T I M AT I N G
  33. 33. COST ESTIMATINGCOST ESTIMATING Example Your company is specialized in fabricating and erecting water cooling towers . The key design parameters affecting the cost of this type of projects are-Cooling range, Approach and Flow rate. Given company historical data (the table below), create a model to predict the cost of cooling towers with Cooling range 30 and 40 F. Cost and Design Information of Recent Cooling Tower ProjectsCost and Design Information of Recent Cooling Tower Projects C O S T E S T I M AT I N G
  34. 34. COST ESTIMATINGCOST ESTIMATING After much trial and error, the following cost estimating algorithm was developed: Cost = $86,600 + $84500 (Cooling Range in °F)0.65 - $68600 (Approach in °F) + $76700 (Flow Rate in 1000GPM)0.7 Predicted Costs for Cooling Tower Parametric Estimating Example C O S T E S T I M AT I N G
  35. 35. COST ESTIMATINGCOST ESTIMATING Each component comprising a project scope definition is quantitatively surveyed and priced using the most realistic unit prices available. Support final budget authorization, contractor bid tenders, cost control during project execution, and change orders (Class 3 through Class 1 estimates). Require a substantial amount of time and costs to prepare. B. Deterministic – Detailed- (High level of Project Definition) Require a substantial amount of time and costs to prepare. Prepared by engineering or construction contractors, or other third parties, rather than the owner organization ultimately responsible for project funding. Pricing data should include vendor quotations, current pricing information from recent purchase orders, current labor rates, subcontract quotations, project schedule information (to determine escalation requirements), and the construction plan (to determine labor productivity and other adjustments) C O S T E S T I M AT I N G
  36. 36. COST ESTIMATINGCOST ESTIMATING Deterministic (Detailed) estimating methodologies i. Prepare project estimate basis and schedule ii. Prepare Direct Field Cost (DFC) estimate iii. Prepare Indirect Field Cost (IFC) estimate iv. Prepare Home Office Cost (HOC) estimate v. Prepare sales tax/duty estimatesv. Prepare sales tax/duty estimates vi. Prepare escalation estimates vii. Prepare project fee estimate (for contractors) viii. Prepare cost risk analysis/contingency determination ix. Preview/validate estimate C O S T E S T I M AT I N G
  37. 37. COST ESTIMATINGCOST ESTIMATING 8. Take-Off (Quantity Take-offs Method) This is the most detailed type of estimate. To perform this estimate the estimator has to have the complete design document in order to take off or measure an catalogue the various quantities (material and labor) of work to be performed. It is also used to refer to the quantities themselves (Known as a BOQ).It is also used to refer to the quantities themselves (Known as a BOQ). It involves a detailed examination of the engineering drawings and deliverables to count the number of each item appearing on the drawings. C O S T E S T I M AT I N G The quantities of like items are then summarized according to the control structure (WBS/RBS) of the project. It is much more efficient when standard estimating guidelines are established and followed.
  38. 38. COST ESTIMATINGCOST ESTIMATING 9. Costing Vs. Pricing Costing Pricing The process of applying unit costs to the individual quantities of items associated with the estimate. For a detailed estimate, this is It is adjusting the costs that have been applied for specific project conditions, and commercial terms. It includes adjustments to cost to usually in the form of labor hours, wage rates, material costs, and perhaps subcontract costs. These costs may come from an estimating database, vendor quotes, the procurement department, estimating experience, etc. allow for overhead and profit, to improve cash flow, or otherwise serve the business interests of the party preparing the estimate. The level and type of pricing adjustments depends on the particular party preparing the estimate. C O S T E S T I M AT I N G
  39. 39. COST ESTIMATINGCOST ESTIMATING 10.Estimate Allowances Included in an estimate to account for the predictable but undefinable costs associated with project scope. Used when preparing deterministic or detailed estimates. Included in the estimate as a percentage of some detailed cost component. Some typical examples of allowances that may be included in a detailedSome typical examples of allowances that may be included in a detailed construction estimate are: i. Design allowance for engineered equipment. ii. Material take-off allowance. iii. Overbuy allowance. iv. Unrecoverable shipping damage allowance. v. Allowance for undefined major items. C O S T E S T I M AT I N G
  40. 40. COST ESTIMATINGCOST ESTIMATING 11.Estimate Accuracy An estimate is associated with uncertainty and a probability of over-running or under-running the predicted cost. An estimate actually reflects a range of potential cost outcomes, with each value within this range associated with a probability of occurrence. Most of the end uses of an estimate require a single point value within the range of probable values to be selected. We often add an amount (contingency) to the initially developed point value to represent the final estimate cost. Accuracy is traditionally represented as a +/- percentage range around the point estimate; with a stated confidence level that the actual cost outcome will fall within this range. C O S T E S T I M AT I N G
  41. 41. COST ESTIMATINGCOST ESTIMATING Estimate accuracy depends on the level of engineering completeEstimate accuracy depends on the level of engineering complete C O S T E S T I M AT I N G
  42. 42. Rough Order of Magnitude (ROM) Estimate This type of estimate is usually made during the initiating process. A typical range for ROM estimates is +/-50 percent or -25% to +75% from actual. Budget Estimate 12.Degree of Accuracy as per PMBOK (PMI institute) COST ESTIMATINGCOST ESTIMATING This type of estimate is usually made during the planning phase and is in the range of -10 to +25 percent from actual. Definitive Estimate Later during the project (may be during planning phase), the estimate will become more refined. Some project managers use the range of +/- 10 percent from actual, while others use -5 to +10 percent from actual. C O S T E S T I M AT I N G
  43. 43. COST ESTIMATINGCOST ESTIMATING 13.Contingency and Risk Analysis Contingency is an amount used in the estimate to deal with the uncertainties inherent in the estimating process Contingency is required because estimating is not an exact science. Contingency exclusion Significant changes in scopeSignificant changes in scope Major unexpected work stoppages (strikes, etc.) Disasters (hurricanes, tornadoes, etc.) Excessive, unexpected inflation Excessive, unexpected currency fluctuations C O S T E S T I M AT I N G
  44. 44. COST ESTIMATINGCOST ESTIMATING Items typically covered by contingency include: Errors and omissions in the estimating process. Variability associated with the quantification effort. At the time of estimate preparation, design may not be complete enough to determine final quantities. Some items required to be estimated may defy precise quantification. Some items to be quantified are generally computed by factored or other conceptual methods.conceptual methods. Labor productivity variability. Weather may vary from that assumed affecting labor productivity. Wage rate variability. Material and equipment costs. Certain materials of construction may be substituted from that assumed in the estimate. Changes in actual quantities may change discount schedules from that assumed in the estimate. C O S T E S T I M AT I N G
  45. 45. COST ESTIMATINGCOST ESTIMATING Risk analysis is a process that can be used to provide an understanding of the probability of overrunning (or under running) a specified estimate value. It provides a realistic view of completing a project for the specified estimate value by taking a scientific approach to understanding the uncertainties and probabilities associated with an estimate, and to aid in determining the amount of contingency funding to be added to an estimate. Two types of risk analysis are commonly used i. Strategic risk analysis models that evaluate the level of project definition and project technical complexity in determining the overall risk to project cost. ii. Detailed risk analysis models that evaluate the accuracy range for individual or groups of estimate components in determining the overall risk to project cost. . C O S T E S T I M AT I N G
  46. 46. COST ESTIMATINGCOST ESTIMATING Example: Contingency does not increase the overall accuracy of the estimate―it does not change the overall accuracy range of approximately of $18.5M to $32.5M. C O S T E S T I M AT I N G
  47. 47. COST ESTIMATINGCOST ESTIMATING 14.Structuring Estimates The control structure for a project is the breakdown of the total work into manageable units or packages for the purposes of estimating and control of cost and schedule. To maintain some kind of order in the estimate, it is necessary to segregate costs into various categories: i. Material vs. Labor vs. Subcontracts ii. Direct Costs vs. Indirect Costs vs. Home Office Costs iii. Concrete vs. Structural Steel vs. Piping vs. Other Construction Disciplines Large projects will often use Work Breakdown Structures (WBS) and Resource Breakdown Structures (RBS) as components of the overall coding structure. Smaller projects will often use a simpler code of accounts based simply on the disciplines or construction trades used on the project. C O S T E S T I M AT I N G
  48. 48. COST ESTIMATINGCOST ESTIMATING a) Work Breakdown Structure (WBS) Framework for organizing and ordering the activities that makes up a project. Systematic approach to reflect a top-down product oriented hierarchy structure with each lower level providing more detail and smaller elements of the overall work. A product-oriented family tree division of hardware, software, facilities and other items which organizes, defines and displays all of the work to be performed in accomplishing the project objectives. b. Code of Accounts (COA) A systematic coding structure for organizing and managing scope, asset, cost, resource, work, and schedule activity information. A COA is essentially an index to facilitate finding, sorting, compiling, summarizing, or otherwise managing information that the code is tied to. A complete code of accounts includes definitions of the content of each account. Codes are the umbilical cords between cost accounting and cost engineering (estimating and cost control). C O S T E S T I M AT I N G
  49. 49. COST ESTIMATINGCOST ESTIMATING c. Project Work Breakdown Structure (PWBS) A summary WBS tailored by project management to the specific project with the addition of the elements unique to the project. C O S T E S T I M AT I N G
  50. 50. COST ESTIMATINGCOST ESTIMATING WBS RBS C O S T E S T I M AT I N G
  51. 51. COST ESTIMATINGCOST ESTIMATING 15.Estimate/Cost/Schedule Integration The schedule will provide dates that are essential to calculating escalation, cash flow, and commitment forecasts. The estimate provides labor hours and craft breakdowns essential to determining schedule activity durations and resource loading. The estimate also provides cost and quantities to the cost control system. I. One-to-one approachI. One-to-one approach Breakdown the estimate to the level of schedule activities. This can result in a tremendous amount of detail in the cost estimate, and compromise efficient cost and schedule control. Some of the problems resulting from the one-to-one approach are: Collecting costs by detailed schedule activities is generally not feasible. Schedule activities are subject to much more change within the project than traditional cost codes. Tracking bulk material costs by activity is cumbersome and requires high administrative costs. Costs are often not incurred at the same time as construction activities. C O S T E S T I M AT I N G
  52. 52. COST ESTIMATINGCOST ESTIMATING II. Integrating at a sufficient level of detail keeping the estimate and schedule structures the identical to a certain level of work breakdown structure Schedule WBS StructureCost/Estimate WBS Structure C O S T E S T I M AT I N G The basis estimating algorithm is: Total $ = (Qty. X Unit Material $) + (Qty. X Unit Labor Hours X Wage Rate)
  53. 53. COST ESTIMATINGCOST ESTIMATING 16.Estimate Review The estimate should be evaluated not only for its quality or accuracy, but also to ensure that it contains all the required information and is presented in a way that is understandable to all project team members and client personnel. A structured ( if not formal) estimate review process should be a standard practice for all estimating departments. 17.Estimate Review Cycles17.Estimate Review Cycles The estimate review process is usually comprised of a series of estimate reviews, beginning with internal estimating department reviews, engineering reviews, project team reviews, and continuing with reviews by various levels of management, depending on the importance of the project. C O S T E S T I M AT I N G
  54. 54. COST ESTIMATINGCOST ESTIMATING 18.Estimating Team/Estimating Department Review The first review of the estimate conduct by the estimating team that prepared the project estimate. This is essentially a screening review to ensure that the math is correct that the estimate is documented correctly and that it adheres to estimating department guidelines. This review is conducted by the lead estimator with the members of his estimating team. On very large projects or those of significant importance, this review may be conducted by the estimating department manager or supervisor. 19.Check the Math Math errors can be a major concern when using an electronic spreadsheet, such as Excel, for preparing the estimate. All spreadsheet formulas, subtotals and totals should be examined carefully for correctness. From a client’s point of view, nothing will help to lose credibility in the entire estimate faster than a finding a math error that went undetected. C O S T E S T I M AT I N G
  55. 55. COST ESTIMATINGCOST ESTIMATING 20.Basis of Estimate The BOE serves to clearly define the design basis, planning basis, cost basis, and risk basis of the estimate. Design Planning Cost Risk Scope Assumptions Contracting strategies The source of pricing (materials, Every estimate involvesAssumptions Equipment list Drawings list Specifications Sketches strategies Key milestones Resources Project execution plan Project schedule pricing (materials, equipment and labors) The time basis of estimate Allowances Escalation involves uncertainty and risk How contingency was determined C O S T E S T I M AT I N G
  56. 56. COST ESTIMATINGCOST ESTIMATING 21.Estimate validation Review estimate “metrics” report Compare key benchmark ratios and factors versus historical values from similar projects 22.Presenting estimate The method in which you present an estimate to your customer. An estimate should be presented with the supporting information that describes what theAn estimate should be presented with the supporting information that describes what the number represents. A complete estimate report will include the following: Basis of Estimate (BOE) Estimate Summaries Estimate Detail Estimate Benchmarking Report Estimate Reconciliation Report Estimate Backup C O S T E S T I M AT I N G
  57. 57. COST ESTIMATINGCOST ESTIMATING 23.Estimating resources Besides the engineering and design information needed to quantify the scope of the project, other information is also required such as: Engineering and design information Conceptual estimating factors Material cost and pricing information Labor workhour charts and information Labor productivity information Labor wage rates, composite crew mixes, etc. Other estimating factors and information C O S T E S T I M AT I N G
  58. 58. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING All operating and manufacturing costs must be considered to determine the profitability of a process in the manufacturing environment. These costs are treated differently for purposes of calculating taxes and profitability. Direct Costs Variable costs Semi- variable costs Indirect Costs or Fixed Costs Contingencies General and administrative expenses Those which tend to be proportional, These costs are maximized Are direct costs which are Those costs which tend to be Constitute an allowance which must Are costs which are incurred aboveproportional, or partially proportional, to throughput or production. It includes both variable costs and semi-variable costs maximized when a plant operates at full capacity and are not incurred when the plant is not operating which are only partially dependent upon production or plant output At zero production or put-put, 20 ~ 40% be independent of production. These costs are incurred whether or not production rates change. Indirect costs include depreciation. which must be made in an operating cost estimate for unexpected or unpredictable costs or for error or variation likely to occur in the estimate incurred above the factory or production level and are associated with management. marketing and sales costs, salaries and expenses of officers and staff, R&D. C O S T E S T I M AT I N G
  59. 59. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING Types of Operating Cost Estimates and Estimating Forms Operating cost estimates can be performed on a daily, unit-of-production, or annual basis. The annual basis is preferred for the following reasons: It "damps out" seasonal variations. It considers equipment operating time. It is readily adapted to less-than-full capacity operation. It readily includes the effect of periodic large costs It is directly usable in profitability analysis.It is directly usable in profitability analysis. It is readily convertible to the other bases. Prerequisite of Preparing Operating or Manufacturing Cost Estimate Process flow sheets with information such as quantity, composition, temperature, pressure, etc. Estimating form serving as a check list, “estimating form” Obtaining company internal data for similar process External published data sources but use this data with caution. “not updated” C O S T E S T I M AT I N G
  60. 60. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING C O S T E S T I M AT I N G
  61. 61. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING C O S T E S T I M AT I N G
  62. 62. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING Cost of Operations at Less Than Full Capacity It is necessary to perform operating and manufacturing cost estimates both at full plant capacity and at conditions other than full capacity. Performing an estimate assuming operations only at full design capacity is totally erroneous. unscheduled downtime, market fluctuations , time required to develop markets for a new product, and other factors. F = Fixed expense V = Variable expenseV = Variable expense R = Semi-variable expense C = Total operating cost S = Sales income N = income to achieve minimum ROI The variable expense declines to zero at zero percent of capacity, fixed expense is constant, and semi-variable expense declines at zero percent of capacity from 20 to 40 percent of its value at full capacity. C O S T E S T I M AT I N G
  63. 63. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING Variable costs Semi-variable costs Fixed Costs Raw Materials Utilities Royalties Packaging Marketing Direct Labor Supervision General Expense Plant Overhead Depreciation Property Taxes Insurance Catalysts and Chemicals Four Ways to Handle Royalties 1. Capitalized cost if it is paid in a lump sum 2. Fixed cost if it is paid in equal annual increments 3. Variable cost if a fee is paid based on per unit of production 4. Semi-variable cost if it is paid in a sliding scale (based on per unit of production but decreases as production increases (or hits a target quantity)) C O S T E S T I M AT I N G
  64. 64. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING The breakeven and shutdown points : The total cost line can be expressed as: ‫ܤ‬‫ܤ‬‫ܤ‬‫ܤ‬ (ܾܾܾܾ‫ݎ‬‫ݎ‬‫ݎ‬‫ݎ‬݁݁݁݁ܽܽܽܽ݇݇݇݇݁݁݁݁‫ݒ‬‫ݒ‬‫ݒ‬‫ݒ‬݁݁݁݁݊݊݊݊ ‫݌‬‫݌‬‫݌‬‫݌‬‫݋‬‫݋‬‫݋‬‫݋‬݅݅݅݅݊݊݊݊‫ݐ‬‫ݐ‬‫ݐ‬‫ݐ‬) = (F + nR) S + nR (1 + n)R ‫ܣ‬‫ܣ‬‫ܣ‬‫ܣ‬ (‫ݏ‬‫ݏ‬‫ݏ‬‫ݏ‬h‫ݑ‬‫ݑ‬‫ݑ‬‫ݑ‬‫ݐ‬‫ݐ‬‫ݐ‬‫ݐ‬݀݀݀݀‫݋‬‫݋‬‫݋‬‫݋‬‫ݓ‬‫ݓ‬‫ݓ‬‫ݓ‬݊݊݊݊ ‫݌‬‫݌‬‫݌‬‫݌‬‫݋‬‫݋‬‫݋‬‫݋‬݅݅݅݅݊݊݊݊‫ݐ‬‫ݐ‬‫ݐ‬‫ݐ‬) = nR SRVR (1Rn)RWhere: n: Decimal fraction of semi-variable costs incurred at 0 production (usually about 0.3) The total cost line can be expressed as: Since total annual sales are proportional to production (assuming no stock-piling of production), and therefore have no value at zero output, the Equation for the sales line is: Where: Cp: Total cost at production rate p p: Actual annual production rate as a fraction of plant capacity ‫ܥ‬‫ܥ‬‫ܥ‬‫ܥ‬‫݌‬‫݌‬‫݌‬‫݌‬=[ܸܸܸܸ +(1 - ݊݊݊݊)ܴܴܴܴ]‫݌‬‫݌‬‫݌‬‫݌‬ + ‫ܨ‬‫ܨ‬‫ܨ‬‫ܨ‬ + ܴܴܴܴ݊݊݊݊ ܵܵܵܵ‫݌‬‫݌‬‫݌‬‫݌‬= (ܵܵܵܵ ‫ݔ‬‫ݔ‬‫ݔ‬‫ݔ‬ ‫݌‬‫݌‬‫݌‬‫݌‬)Where: Sp: Sales income at production rate p C O S T E S T I M AT I N G
  65. 65. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING Raw Materials Costs In developing the raw materials list, the following information must be obtained for each raw material: “Process flow sheet as a guide” Units of purchase (tons, pounds, etc.) Unit cost Available sources of the material Quantity required per unit of time and/or unit of production Quality of raw materials (concentration, acceptable impurity levels, etc.) External raw material costs, Fuels, and Natural gas for example Internal raw material costs transferred at market value or company book value. FOB C O S T E S T I M AT I N G
  66. 66. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING By-product Credits and Debits Estimate salable by-product credit from the anticipated selling prices less costs of processing, packaging, selling and transporting to market . By-product debits include all costs to remove, eliminate, or reduce wastes and pollutants Utility Costs (Total Consumption and Demand) Electricity (Current rates from the utility companies) Natural gas (Depend on quantity required) Water (Depending upon the water quality and quantity required) Fuel (Vary with the type of fuel used and the source of supply) Equipment losses Mobile equipment fuels and lubricants C O S T E S T I M AT I N G
  67. 67. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING Labor Costs To properly estimate these costs, a staffing table must be established in as detailed a manner as possible. This table should indicate the following: The particular skill or craft required in each operation. Labor rates for the various types of operations. Supervision required for each process step. Overhead personnel required. An alternate method of calculating labor requirements, if sufficient data are not available, is to consider a correlation of labor in work hours per ton of product per processing step. This relationship, which was developed by Wessel C O S T E S T I M AT I N G
  68. 68. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING C O S T E S T I M AT I N G
  69. 69. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING Supervision and Maintenance Costs Costs of supervision = A fixed % of direct labor costs, based upon company experience. (15 ~ 20 % is generally satisfactory). One front line supervisor can manage no more than 8 to 10 workers. Front line supervision (i.e., foremen) at labor rates = 50 ~ 60% above general labor rates. Maintenance labor costs, like supervision costs. However, maintenance costs areMaintenance labor costs, like supervision costs. However, maintenance costs are a semi-variable category, which is distributed about 50 % to labor and 50 % of materials. Maintenance Approximate % Direct labor 35 ~ 40% Direct labor, supervision 7 ~ 8 % Materials 35 ~ 40 % Contract 18 ~ 20 % C O S T E S T I M AT I N G
  70. 70. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING As the project evolves toward a final staffing plan, factors can be replaced with numbers generated from the staffing table. When operating at less than 100 % of capacity, maintenance costs increase per unit of production as shown in table: Maintenance generally increases with age of equipment Percent of capacity Maintenance cost as % of cost at full capacity 100 % 100 % 75 % 85 % 50 % 75 % 0 30 % C O S T E S T I M AT I N G
  71. 71. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING Operating Supplies and Overhead Costs Operating (Factory) Supplies Costs include miscellaneous items such as lubricating oil, instrument charts, wiping cloths, etc. Relatively minor cost of operations. It may be estimated as a percentage of payroll (< 20%). For example, 6% of payroll for operating supplies in a coal preparation plant, while 20% for an oil refinery.for operating supplies in a coal preparation plant, while 20% for an oil refinery. Overhead (burden) Costs Costs are associated with payroll or general and administrative expense. Operating and manufacturing costs but not directly related to production. Either semi variable (Payroll overheads that employee fringe benefits, 25 ~ 40 % of direct labor + supervision + maintenance labor costs for the U.S) or indirect costs (indirect overhead such as clerical, administrative, etc., personnel). Laboratory overhead costs may range from 3 ~ 20 % or more for complex processes (take an average 5 ~ 10%). C O S T E S T I M AT I N G
  72. 72. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING Royalties and Rentals Royalties may be variable, semi-variable, fixed, or capital costs (or a combination of these), and the same is true of rental costs. Royalty expenses, in the absence of data, are treated as a direct expense and may be estimated at 1 ~ 5 % of the product sales price. Contingencies Accounts for those costs which cannot readily be determined or defined, or which are tooAccounts for those costs which cannot readily be determined or defined, or which are too small to estimate individually but may be significant in the aggregate. Applies both to direct and indirect costs and ranges from 1 ~5 %. Hackney has suggested the following guidelines: Task % Installations similar to used by the company, standard costs are available 1% Installations common to the industry, reliable data are available 2% Novel installations that have been completely developed and tested 3% Novel installations that are in the development stage 5% C O S T E S T I M AT I N G
  73. 73. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING General Works Expense (Factory Overhead) It represents the indirect cost of operating a plant or factory and is dependent upon both investment and labor. Black suggestion Factory overhead = (Investment x investment factor)+ (Labor x labor factor). In this case, labor is defined as total annual cost of labor; including direct operating labor, repair and maintenance, and supervision; and labor for loading, packaging,labor, repair and maintenance, and supervision; and labor for loading, packaging, and shipping. Black's suggested labor and investment factors for various industries are as follows: Industry Investment factor (per year) Labor factor (per year) Heavy chemical plants, large-capacity 1.5 45% Power plants 1.8 75% Electrochemical plants 2.5 45% Cement plants 3 50% Heavy chemical plants, small capacity 4 45% C O S T E S T I M AT I N G
  74. 74. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING Depreciation Considered to be an operating cost for tax purposes (not a true cash-cost). Depreciable portion = Initial investment – (working capital + salvage value). In theory, working capital, salvage value can be recovered after plant shut down. Taxing authorities permit the use of any generally accepted method of depreciation calculation provided that it is applied in a consistent manner to all investments Accelerated Cost Recovery System (ACRS) was mandated by law, In 1981 in theAccelerated Cost Recovery System (ACRS) was mandated by law, In 1981 in the U.S. ACRS was replaced by Modified Accelerated Cost Recovery System (MACRS), In 1986. Most industrial firms utilize accelerated depreciation. This deferring taxes to the latest possible date. However, for preliminary estimates, straight-line is used. C O S T E S T I M AT I N G
  75. 75. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING There are two forms of depreciation: 1. Straight Line Depreciation 2. Accelerated Depreciation Accelerated depreciation depreciates faster than straight line. Straight Line Depreciation Accelerated Depreciation Double Declining Balance Sum of the Years Digits The same amount of depreciation is taken each year. DSL = C/Y Where DSL is annual depreciation, C is depreciable portion and Y is asset life in years D = 2 (F-CD) / n where D is depreciation in any given year, F is initial asset value, CD is cumulative depreciation charged in prior years and n is asset life in years. Dy = C x [ 2(n-Y+1) ] / [n(n+1) ] Where Dy depreciation in year Y, C is depreciable portion and n is asset life in years C O S T E S T I M AT I N G
  76. 76. PROCESS PRODUCT MANUFACTURINGPROCESS PRODUCT MANUFACTURING Distribution Costs The costs of packing and shipping products to market (i.e., distribution costs) are highly variable and are dependent upon product characteristics. Distribution costs may include the following: Cost of containers Transportation costs Applicable labor and overheads for packing and shipping.Applicable labor and overheads for packing and shipping. If the product is sold FOB the plant, the cost of transportation is borne by the customer and need not be considered in the estimate. If, however, it is sold on a delivered basis, transportation costs must be included. C O S T E S T I M AT I N G
  77. 77. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING Production process in which its output is individually countable, or identifiable by serial numbers, and is measurable in distinct units rather than by weight or volume. Produces low quantities of production; the average lot size is less than 75 units. Discrete manufacturing has special tools for the various products, so set-up and tooling changes are much more frequent in discrete manufacturing than in continuous manufacturing.continuous manufacturing. C O S T E S T I M AT I N G
  78. 78. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING Various manufacturing philosophies are used in discrete manufacturing, or the production of separate and individual pieces that are produced in small amounts. Discrete-part manufacturing philosophies 1. Computer-aided process planning 2. Concurrent engineering 3. Group technology3. Group technology 4. Just-In-Time 5. Lean manufacturing 6. Materials requirements planning 7. Supply chain management 8. Total quality management 9. Total cost management C O S T E S T I M AT I N G
  79. 79. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING 1. Computer-Aided Process Planning (CAPP) The goal of Computer-Aided Process Planning is to be able to automatically generate the process plan to produce the component from the component drawing and specifications The two approaches to CAPP are: a) The variant approach b) The generative approach similar parts and modifies b) The generative approach C O S T E S T I M AT I N G starting from “scratch,”
  80. 80. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING 2. Concurrent engineering The approach intend to cause the developer (designers) to consider all elements of the product life cycle from conception through disposal. Including quality, cost, schedule, and user requirements 3. Group technology Identifies and exploits the underlying sameness of component parts and manufacturing process. There are two primary approaches which are: a) Classifying into similar design features b) Classifying parts into similar processing operations C O S T E S T I M AT I N G Many problems are similar and by grouping similar problems, a single solution can be found to a set of problems, thus saving time and effort part family
  81. 81. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING 4. Just-In-Time The supplies (raw materials) are delivered when required and inventory costs are theoretically driven to zero, as there is no inventory. This is closely related to the “Kanban” system or “pull” system in which parts are not produced until ordered. Toyota Production System (TPS) C O S T E S T I M AT I N G
  82. 82. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING C O S T E S T I M AT I N G
  83. 83. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING 5. Lean manufacturing Shorten lead times, reduce costs, and reduce waste. It is a continuous improvement process a) Reducing waste (scrap), improving yields, new products from waste materials. b) Improving employee performance, skills, and satisfaction via training and recognition c) Improve processes, process rates, and capabilities C O S T E S T I M AT I N G
  84. 84. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING 6. Materials Requirements Planning Keeping complete records of inventories of materials, supplies, parts in various stages of production, scheduling of production, purchasing of parts, and orders and delivery dates for customers and from suppliers. C O S T E S T I M AT I N G
  85. 85. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING 7. Supply chain management The assurance that the parts will arrive from the suppliers when required, to avoid large inventories or production stoppages from a lack of parts. It requires the involvement of suppliers in the design process to eliminate unnecessary operations and inefficient designs of components. The goals are to: a) Reduce inventory b) Reduce the time-to-market c) Reduce costs d) Improve quality. C O S T E S T I M AT I N G
  86. 86. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING 8. Total quality management A leadership philosophy, organizational structure, and working environment that fosters and nourishes a personal accountability, responsibility for quality, and a quest for continuous improvement in products, services, and processes Inspection Allocating blame Quality Control Compliance to specification Quality Assurance Involvement Total Quality Management Continuous Improvement C O S T E S T I M AT I N G
  87. 87. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING 9. Total cost management The effective application of professional and technical expertise to plan and control resources, costs, profitability and risk. It is a systematic approach to managing cost throughout the life cycle of any enterprise, program, facility, project, product or service C O S T E S T I M AT I N G
  88. 88. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING MaterialsMaterials LaborLabor Factory ExpensesFactory Expenses Manufacturing Costs C O S T E S T I M AT I N G TheThe ProductProduct
  89. 89. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING Factory Expenses / Plant Overhead Cost Manufacturing costs that cannot be easily traced directly to specific units produced. Indirect materials and indirect laborIndirect materials and indirect labor C O S T E S T I M AT I N G Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors, and security guards. Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.
  90. 90. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING Selling, Marketing, and Distribution Expenses Nonmanufacturing Costs Administrative Expenses C O S T E S T I M AT I N G Costs necessary to secure the order and deliver the product. Selling costs can be either direct or indirect costs. salaries, commissions, travel expenses, advertising expenses, and delivery of the product executive, organizational, and clerical costs. Administrative costs can be either direct or indirect costs.
  91. 91. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING Basic cost relationships 1. Prime cost 2. Manufacturing cost 3. Production cost 4. Total cost 5. Selling price C O S T E S T I M AT I N G
  92. 92. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING C O S T E S T I M AT I N G
  93. 93. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING C O S T E S T I M AT I N G
  94. 94. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING Cost Estimating for Discrete Part Manufacturing The direct labor and direct material costs are also referred to as the “out-of- pocket” costs. BUT WHY??? For example, in the copying of a report on a copy machine, The costs would be the paper + the toner + machine rate + the operator + staple costs. The paper and toner would be direct material costs, the operator cost would be a direct labor cost, but the cost of an individual staple is so small compared to the other costs, it typically would be included as part of the indirect burden costs. The machine rate cost includes the “operating cost + capital costs”, so it would be an indirect cost, but it is applied directly to the product. If one did not make the copy, the direct costs of the operator and the paper would be saved and these would be the “out-of-pocket” costs. C O S T E S T I M AT I N G
  95. 95. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING There are different degrees of the indirect costs. In the copying machine example, there is a certain amount of energy consumed to operate the machine each time a copy is made. However, when the machine is on idle, it also consumes some energy and this cost is built into the burden based upon its expected usage. The capital costs of purchasing and installing the machine are another level of burden, based upon the expected life of the machine and the expected copiesburden, based upon the expected life of the machine and the expected copies produced per year. Although these are direct costs, they are considered indirect costs as the machine is used for a wide variety of reports and not only one report. Other indirect costs are those which cannot be directly tied to the product such as supervision, administrative salaries, maintenance, material handling, and legal, etc. C O S T E S T I M AT I N G
  96. 96. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING Cost estimating guide form C O S T E S T I M AT I N G
  97. 97. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING C O S T E S T I M AT I N G
  98. 98. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING BREAKEVEN ANALYSIS 1. Cost basis 2. Time-based 3. Quantity-based 4. Break-even points 5. Shutdown point 6.6. Cost point 7. Required return point 8. Required return after taxes point C O S T E S T I M AT I N G
  99. 99. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING There are two critical issues in breakeven analysis that must be considered: A. The cost base B. The various breakeven points. Time-based breakeven analysis Quantity-based breakeven analysis Determines the production time for the specific breakeven point Determines the production quantity at the specific breakeven point. A variable cost in the quantity based system is often fixed in the time based system and vice-versa. Increased quantities are desired in the quantity-based system. Decreased times are desired in the time-based system. Under the control of the plant supervision (level). Focuses on the time to produce the order. Worked for marketing, sales, and top- management for forecasting yearly sales. Little assistance at the plant management level where the production quantity is not a variable. C O S T E S T I M AT I N G
  100. 100. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING Cost Bases Quantity-based system (Fixed Time) Time-based system (Fixed Quantity) Cost Bases Fixed Costs (Costs not vary with production quantity) Variable Costs (Costs vary with production quantity) Semi-variable Costs (Costs that are not fixed or variable), ex; maintenance cost. Fixed Costs (Costs not vary with time) Variable Costs (Costs vary with time) C O S T E S T I M AT I N G Property taxes, administrative salaries, research and development expenses, and insurance costs would be considered Material costs and direct labor costs
  101. 101. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING The four Breakeven Points that are considered in the profitability evaluation of products or operations are the shutdown point. Breakeven Points Shutdown Point (SD) Cost Point(C) Required Return Point (RR) Required Return After Taxes Point (RRAT) (SD) Point (RR) (RRAT) The quantity or time where the manufacturing costs = the revenues. The quantity or time where the total costs = the revenues The quantity or time where the revenues = the total costs + the required return The quantity or time where the revenues =the total costs + the required return and the taxes on the required return The material costs, tooling costs, labor costs, and plant/shop overhead costs The administrative costs, selling and marketing, research and development expenses, and etc. C O S T E S T I M AT I N G
  102. 102. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING Production quantity based system, the Breakeven Points increase in quantity as one proceeds from the shutdown point to the required return after taxes point which implies higher production quantities are desired. Time based system, the Breakeven Points decrease in time as one proceeds from the Shutdown Point to the required return after taxes point in the time based C O S T E S T I M AT I N G from the Shutdown Point to the required return after taxes point in the time based system. The decrease in time indicates the importance of decreasing production to increase profitability and is similar to the “Just-In-Time” concept that focuses on time.
  103. 103. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING Example A new job is being considered in the foundry. The order is for 40,000 castings and the tentative price is $3.00/casting. The pattern will be designed for 4 castings/mold and the pattern cost has been quoted at $10,000. The molding line is the rate controlling step in the production process in this C O S T E S T I M AT I N G The molding line is the rate controlling step in the production process in this particular foundry and the production rate is 125 molds/hr. Solution The estimated time for the production of the 40,000 castings would be determined by: (40,000 castings)/(4 castings/mold x 125 molds/hr) = 80 hr The costs and overheads are included in Table 11.4 and the corporate tax rate is estimated at 40%.
  104. 104. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING C O S T E S T I M AT I N G
  105. 105. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING Break-Even Analysis A. Production Quantity-Based Calculations 1. Shutdown Point Revenues = Production Costs 3X = Material Costs + Labor Costs + Tooling Costs + Plant Overhead Costs 3X = 1.50X + 0.33X + 10,000 + 8,800 3X = 1.83X + 18,800 C O S T E S T I M AT I N G 3X = 1.83X + 18,800 X = 16,068 units 2. Cost Point Revenues = Total Costs 3X = Production Costs + Overhead Costs 3X = 1.83X + 18,800 + 12,000 3X = 1.83X + 30,800 X = 26,324 units
  106. 106. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING 3. Required Return Point Revenues = Total Costs + Required Return 3X = 1.83X + 30,800 + 9,600 3X = 1.83X + 40,400 X = 34,530 units 4. Required Return After Taxes Revenues = Total Costs + Required Return + Taxes for Required Return C O S T E S T I M AT I N G Revenues = Total Costs + Required Return + Taxes for Required Return 3X = 1.83X + 40,000 + 9,600 x (TR/(1-TR)) 3X = 1.83X + 40,400 + 6,400 X = 40,000 units
  107. 107. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING C O S T E S T I M AT I N G
  108. 108. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING B. Time -Based Calculations 1. Shutdown Point Revenues = Production Costs 120,000 = Material Costs + Labor Costs + Tooling Costs + Plant Overhead Costs 120,000 = 60,000+165Y+10,000+110Y 120,000 = 70,000 + 275Y Y = 181.8 hours C O S T E S T I M AT I N G Y = 181.8 hours 2. Cost Point Revenues = Total Costs 120,000 = Production Costs + Overhead Costs 120,000 = 70,000 + 275Y + 150Y 120,000 = 70,000 + 425Y Y = 117.6 hours
  109. 109. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING 3. Required Return Point Revenues = Total Costs + Required Return 120,000 = 70,000 + 425Y + 120Y 120,000 = 70,000 + 545Y Y = 91.7 hours 4. Required Return After Taxes Revenues = Total Costs + Required Return + Taxes for Required Return C O S T E S T I M AT I N G Revenues = Total Costs + Required Return + Taxes for Required Return 120,000 = 70,000 + 545Y + 120Y + [ 120Y x (TR/(1-TR)) ] 120,000 = 70,000 + 425Y + 120Y + 80Y Y = 80.0 hours
  110. 110. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING C O S T E S T I M AT I N G
  111. 111. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING What is the effect of a 4 hours delay resulting from a machine breakdown? The time based Breakeven Analysis can answer this question. The time based Breakeven Analysis indicates that 84 hours is between the required return and required return after taxes breakeven times Profit = Revenues – Costs Profit = $120,000 – ($70,000 + $425/hr. x time (hr.)) C O S T E S T I M AT I N G Profit = $50,000 - $425/hr. x 84hr. Profit = $14,300 Profit after taxes = (1-TR) x 14,300 = 0.6 x 14,300 = 8,580 The loss on the time base system could also be evaluated at $ 425 (165 + 110 + 150 = 425) per hour, and for four hours down the loss would be $1,700.
  112. 112. DISCRETE PART MANUFACTURINGDISCRETE PART MANUFACTURING C O S T E S T I M AT I N G
  113. 113. 1. Earned Value Overview 2. Performance and Productivity Management PROGRESS AND COST CONTROLPROGRESS AND COST CONTROL C O S T E S T I M AT I N G
  114. 114. THANK YOU C O S T E S T I M AT I N G

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