11

A Short Course on Product Cost Estimation

By

Dr. Muhammad Elrabaa

22

BASIC DEFINITIONS

COST PRICE MODULE (FOR CONSTRUCTION CONTRACTS)

COST ESTIMATING PROCESS & PROCEDURE

COST ESTIMATING CLASSIFICATION

COST ESTIMATING METHODOLOGIES

FACTORS AFFECTING COST ESTIMATING ACCURACY

CASE STUDIES

ContentsContents

33

Basic DefinitionsBasic Definitions

CAPITAL COST ESTIMATE (CAPEX)

REPRESENTS THE TOTAL CAPITAL COST OF THE PROJECT, INCLUDING ENGINEERING, MATERIAL, CONSTRUCTION, AND MANAGEMENT COSTS.

ALLOWANCES

USED TO REDUCE THE RISK OF OVERRUN DUE TO “KNOWN” UNCERTAINTIESDESIGN GROWTH / DESIGN DEVELOPMENTEXTRAORDINARY FREIGHT COST (AIR FREIGHT, SPECIAL CARGO ...etc)FORWARD ESCALATIONCUT / WASTE (BULK MATERIALS)

CONTINGENCIES

USED TO REDUCE THE RISK OF OVERRUN DUE TO “POTENTIAL” UNCERTAINTIESINCOMPLETE PROJECT DEFINITIONCURRENCY FLUCTUATIONERRORSDOES NOT COVER FORCE MAJEURE, SCOPE CHANGES, CLAIMS ETC.

44

DIRECT COSTS

COSTS DIRECTLY ATTRIBUTED TO A JOB OR A PIECE OF PROJECT EQUIPMENT

Basic DefinitionsBasic Definitions

55

INDIRECT COSTS

THESE ARE OFTEN REFERRED TO AS “OVERHEAD” COSTS AND CANNOT EASILY BE ALLOCATED TO ONE JOB OR PROJECTS.

THE PROCESS OF RECOVERING OVERHEADS IS KNOWN AS “ ABSORPTION COSTING” . CLIENTS FOR LARGE CAPITAL PROJECTS ARE VERY INTERESTED IN PROPOSED OVERHEAD RATES, CHARGEABLE TO PROJECTS AND REQUIRED DETAILED OF HOW THE OVERHEADS ARE TO BE ALLOCATED.

Basic DefinitionsBasic Definitions

66

FIXED COSTS

COSTS ARE SAID TO BE FIXED WHEN THEY REMAIN UNCHANGED AND MUST CONTINUE TO BE INCURRED, EVEN THOUGH THE WORKLOAD FLUCTUATES, (EG. MANAGEMENT SALARIES , RENT INSURANCE….ETC.

Basic DefinitionsBasic Definitions

77

VARIABLE COST

THESE ARE COSTS WHICH ARE INCURRED AT A RATE DEPENDING ON THE LEVEL OF THE WORK ACTIVITY.

E.G - MATERIAL- CONSUMABLES- SPARE PARTS- UTILITIES (POWER, WATER, SYSTEM)

Basic DefinitionsBasic Definitions

88

Cost Price ModleCost Price Modle

DIRECT INDIRECT PROFIT PRICE+ + =

• LABOUR• MATERIAL• COMPONENTS• TOOLING

• DESIGN• MARKETING• SALES• ACCOUNTING• PURCHASING• MANAGEMENT• WARRANTY• LIABILITY• ADMINISTRATION

• MATCHINVESTMENT

COST

99

Cost Cost -- Price ModlePrice Modle

CONSTRUCTION EQUIP.+

LABOR COST

MATERIAL COST

DIRECT COST

INDIRECT COST

TOTAL COST

PRICE

=

=

=

DURATION (HOURS) X RATE $/HR X CONSUMABLE FACTOR

LABOR (MHRS) X $/HR X SUPERVISION FACTOR

MATERIAL COST + DELIVERY COST + PURCHASING & INSPECTION COST

TOTAL DIRECT COST

OVERHEAD MOB. & DEMOB., TEMPORARY FACILITIES , INSURANCE ADMINISTRATION, MANAGEMENT, ENGINEERING,…ETC

COST

XPROFIT FACTOR

PRICE

+

1010

Cost Estimating ProcessCost Estimating Process1.0 1.0 Cost Estimation PurposesCost Estimation Purposes

INITIAL COST INPUT FOR PROJECT IDENTIFICATION DOC. (PID)INDICATIVE COST ESTIMATE FOR PLANNING ITEMS FOR BUSINESS PLANPERFORMANCE INDICATORS BUDGET UPDATING/ REVISIONNEW BUDGET PROPOSALSCOUNTER CHECKING CONSULTANT COST ESTIMATEREVIEW BIDDERS RATESEVALUATE ALTERNATIVES / OPTIONSPROVIDE DATA FOR PROJECT SCHEDULING (ACTIVITY WEIGHTS,

RESOURCE LEVELLING)

1111

Cost Estimating ProcessCost Estimating Process2.0 2.0 Capital Cost Major ComponentCapital Cost Major Component

DIR

ECT

CO

STIN

DIR

ECT

CO

ST

ENGINEERING

MATERIAL

CONSTRUCTION

• Screening Studies• Basic Engineering (FEED)• Detailed Engineering• Procurement Services

• Major Equipment• Bulk Material• Freight & Transportation

• Preliminaries (Mobilisation, Site Facilities, Site Running Costs)

• Civil, Mechanical, E&I Works etc.• Pre-commissioning / Commissioning

• Owner Management• Housing/Camp• Fees• Services

OWNER COST

1212

Cost Estimating ProcessCost Estimating Process3.0 3.0 InIn--House Cost EstimateHouse Cost Estimate

Review / Discuss• Scope of Work • Basis / Strategy• Exclusions• Estimate Methodology• Required Accuracy

DevelopCost

Estimate

IssueEstimate

Review&

Check

• Quality• Risks• Contingency

• Purchase Order• Vendor Quotes• Completed Projects• Escalation Rates• Construction Unit Rates

Cost Data

• Cost Est. Software• Excel Worksheet

Computer Tools

OutputCustomer

Input / Request

1313

PREPARE ESTIMATING REQUIREMENTS

PLANNING THE ESTIMATE

STRUCTURE THE ESTIMATE

DEVELOPING THE ESTIMATE

DEVELOPING CONTINGENCY

DOCUMENTING

REVIEW / ISSUE ESTIMATE

Cost Estimating ProcessCost Estimating Process4.0 4.0 Estimating ProcedureEstimating Procedure

1414

Cost Estimate ClassificationCost Estimate ClassificationInternational Classification PracticesInternational Classification Practices

Class 5

Class 4

Class 3

Class 2

Class 1

Order of MagnitudeEstimate -30/+50

Order ofMagnitudeEstimate

Order ofMagnitudeEstimate

Class IV-30/+30

Exploration Estimate

Feasibility Estimate

AuthorizationEstimate

Master ControlEstimate

Current Control Estimate

DefinitiveEstimate

Class I-5/+5

Budget Estimate

Class II-10/+10

Study EstimateClass III -20/+20

Level 6

Level 5

Level 4

Level 3

Level 2

Level 1

Detailed Estimate

DefinitiveEstimate

PreliminaryEstimate

StudyEstimate

BudgetEstimate-15/+30

DefinitiveEstimate

-5/+15

INC

REA

SIN

G P

RO

JEC

T D

EFIN

ITIO

N

ADCOEMPD

Classification

Class 4+40/-20%

Screening /Feasibility

Class 3+30/-15%

Conceptual /Prelim. Budget

Class 2+20/-10%

Master Budget

Class 1+10/-5%

Definitive /Control Budget

Extracted from “AACE International Recommended Practices and Standards”

AACE Classification

Standard

ANSIStandard

Z94.0

AACEPre-1972

Concession Estimate

Association of Cost

Engineers (UK)ACostE

Norwegian Project

ManagementAssociation (NFP)

American Society of

ProfessionalEstimators

(ASPE)

1515

PREPARED BEFORE PROJECT STARTS

HAZY INFORMATION

DETAILS OF PROJECT YET TO BE DEVELOPED

USEFUL FOR QUICK SCREENING AND PLANNING DECISIONS

Estimating ClassificationEstimating Classification1.0 Order of Magnitude 1.0 Order of Magnitude

INTENDED ACCURACY + 35%

1616

PREPARED DURING PROJECT STUDY AND SCREENING PHASE

BASED ON A GOOD OUTLINE PROJECT DEFINITION

MAJOR PROJECT ELEMENTSSIZE / CAPACITY /VOLUME /AREA

USEFUL FOR: SCREENING ALTERNATIVES /OPTIONS

PRELIMINARY FEASIBILITY STUDYMANAGEMENT DECISION

Estimating ClassificationEstimating Classification2.0 Study Estimate2.0 Study Estimate

INTENDED ACCURACY + 20%

1717

DEVELOPED DURING ENGINEERING PHASE 10-20% OF ENGINEERING

BASED ON - WELL DEFINED DESIGN CRITERIA.

INTENDED ACCURACY + 15%

Estimating ClassificationEstimating Classification3.0 Study Estimate3.0 Study Estimate

1818

INTENDED ACCURACY + 5-10%

Estimating ClassificationEstimating Classification4.0 Definitive Estimate4.0 Definitive Estimate

MOST DESIGN WORK COMPLETED.

ALL MAJOR CONTRACTS / PURCHASE ORDER HAVE BEEN PLACED.

USED TO UPDATE BUDGET FOR THE THE PURPOSE OF COST CONTROL.

1919

Cost Estimating Methodology Cost Estimating Methodology

Example: Example: (Process Equipment)

2020

Cost Estimating MethodologyCost Estimating MethodologyWhat is Process EquipmentWhat is Process Equipment

PROCESSEQUIPMENT

Package Units

• chemical Dosing• Water Treatment• HVAC Equipment

Engineered Equipment

• Columns• Vessels• Reactors• Tanks

Standard Equipment • Pumps• Compressors• Fans

2121

Estimating Equipment Cost MethodologiesEstimating Equipment Cost Methodologies(Direct Cost) (Direct Cost)

BUDGET PRICE

PRICE TABLES

PURCHASE ORDERS (FROM PREVIOUS JOBS)

PRICE CURVES

CALCULATION BASED

EXPONENTIAL METHODS (COSTS SCALING)

2222

Estimating MethodologiesEstimating MethodologiesEquipment Cost (Direct Cost)Equipment Cost (Direct Cost)

SOURCE OF DATA

• BUDGET PRICE• PURCHASE ORDER• BUDGET QUOTATION• COST CURVES

ADJUSTMENT TO THE NEW NEW CONDITIONS

• Cost of Spare Parts• Freight, Insurance, Transportation Cost• Currency & Exchange Rate• Exclusions• Escalation Formula• Scaling Factor

2323

Estimating Methodologies Estimating Equipment (Scaling Factor)

E1

E2

COST

SIZE

COST E2 = COST E1 X (size E2/ size E1)x

2424

Material Selection Impact on Equipment

WEIGHT Kg

S.STEEL

C.STEEL

FOB-VALUE

FOB-COST VS WEIGHT CURVE - PRESS. VESSEL

W

V2

V1

2525

Estimating MethodologiesEstimating Equipment Cost Calculation

LSHELL

HEAD

NOZZLES

MANHOLE

D

VESSEL WIGHT

Shell weight = π x D x L x t x s.g. = W1 Kg

Heads weight = 2 x 1.3 x D x t x s.g.= W2 Kg

Others:

• Internals = W3 Kg• Supports = W4 Kg• Nozzles = W5 Kg• Manhole = W6 Kg

---------------Total Weight W Kg

Estimated Cost = W (Kg) X Unit Cost (Cost/Kg)

2626

Factors Affecting Project Final CostFactors Affecting Project Final Cost

1.0 SCOPE OF WORK

CLARITY OF SCOPE DEFINITIONCHANGES IN SCOPE

2.0 TECHNICAL FACTORS

DESIGN STANDARDS & PRACTICESSAFETY & ENVIRONMENT REQUIREMENTSSKILLS/COMPETENCIES

3.0 OTHERS

PROJECT TIME FRAME/SCHEDULEINTERFACES WITH OTHER OPCOSPROJECT ORGANIZATIONCURRENCY EXCHANGE RATESMARKET CONDITIONS

2727

Case Study 1Case Study 1

+ 0.00 mtr+ 0.00 mtr

+ 5.0 mtr+ 5.0 mtr

TT-- 10011001

TANK T-1001 NEEDS TO BE RE-PAINTED (EXTERNAL).MAINTENANCE RECEIVED A QUOTATION FOR BLAST-CLEANING AND PAINTING OF THE TANK. THE QUOTE EXCLUDES THE PROVISION OF THE SCAFFOLDING, ASSUMED TO BE PROVIDED BY THE OWNER. THE JOB IS PLANNED TO START ON MONDAY 1ST MAY AND WILL TAKE 10 WORKING DAYS.THE MAINTENANCE DEPARTMENT REQUESTED YOU TO PROVIDE AN ESTIMATE OF THE COST FOR THE SCAFFOLDING.

+ 7.00 mtr+ 7.00 mtr

2828

INSTALLATIN AND DISMANTLINGCODE STANDARD SCAFFOLDING US$ Unit

S25 0 - 25 m3 6.96 m3S50 25 - 50 m3 5.05 m3S75 50 - 75 m3 4.80 m3S100 75-100m3 4.15 m3

S150 100-150m3 3.95 m3

S200 150-200m3 3.65 m3

S400 200-400m3 3.40 m3

S000 400->m3 3.30 m3

CODE SPEICALS US$ UNIT

LA LADDER 2.50 M1

WFR WORK FLOOR 4.35 M2

Z FLEXIABLE SHEETING 4.80 M2

THERE IS A CURRENT ‘SCHEDULE OF RATES’ CONTRACT WITH A SPECIALIZE COMPANY FOR PROVIDING OF SCAFFOLDING

Case Study 1Case Study 1

2929

Case Study 1Case Study 1

RENT

CODE TYPE US$ Unit

SR SCAFFOLDING 0.03 M3/DAY

LAR LADDER 0.04 M1/DAY

WFR WORK FLOOR 0.04 M2/DAY

ZR FLEXIBLE SHEETING 0.05 M2/DAY

3030

Case Study 1Case Study 1

STEPS TO BE TAKEN

1.0 MAKE A (SIMPLE) WORK PLAN

2.0 DEVELOP SCOPE OF WORK

3.0 CALCULATE QUANTITY OF EACH ACTIVITY

4.0 APPLY APPLICABLE UNIT RATES

5.0 CALCULATE TOTAL COST

3131

Case Study 1Case Study 1

WORKPLAN: SCAFFOLDING FOR BLASTING/PAINTING T-1001.Dia 5 Mtr H =7 Mtr

1.0 ERECT STANDARD SCAFFOLDING (NO HEAVY EQT. ETC. INVOLVED) AROUND TANK.

2.0 PROVIDE WORKING FLOORS. FOR EASY WORKING AT VERTICAL CENTERS OF2.0 Mtr.

3.0 FOR ENVIRONMENTAL REASONS PROVIDE FLEXIBLE SHEETING AROUND SCAFFOLDING.

4.0 PROVIDE 3 LADDERS5.0 APPROVAL SAFETY ADVISER6.0 SCAFFOLDING SHOULD BE READY BEFORE START OF THE WORK ON MONDAY

1ST MAY (WK18).

3232

Case Study 1Case Study 1

WORK SCHEDULE:

WK18 WK19 WK 20WK17 1/5

Scaffolding ReadyBlasting/painting

Start Dismantling Scaffolding

Renting Period Scaffolding (16 Calendar Days )

W/EW/ESTART

3333

Case Study 1Case Study 1

dD (=d+4)

Volume Scaffolding:

∏/4 (D2 - d2) x H1∏/4(92 - 52) x 7 = 307 m3 (S400)

Work Floor:each:∏/4(D2 - d2)∏/4(92- 52)= 44m2

Total 3 x44m2 = 132m2 (WFR)

Flexible Sheeting∏D x H∏ x 9 x 9 - 254 m2 (ZR)

Ladder:3 x 6 m1 = 18m1 (LA)

+9

+6

+4

+2

Work Floor

3434

POINTERS

UNDERSTAND PROJECT REQUIREMENTS BEFORE DEFINING SCOPE.

UNDERSTAND METHOD OF MEASUREMENT OF A ‘SCHEDULE OF RATE CONTRACT.

SELECT OPTIMUM IMPLEMENTATION PLAN.

Case Study 1Case Study 1

3535

Case Study 1Case Study 1Cost Estimate DetailsCost Estimate Details

# Activity Qty Unit Standard Norm Correction Total1 Erection & dismantling scaffolding 307 m3 3.4 1,043.802 Erection & dismantling work Floor 132 m2 4.35 574.23 Erection & dismantling Sheeting 254 m2 4.8 1,219.204 Erection & dismantling Ladders 18 m1 2.5 455 Rent Scaffolding 4,912.00 m3d 0.03 147.366 Rent Work Floor 2,112.00 m2d 0.04 84.487 Rent Sheeting 4,064.00 m3d 0.05 203.28 Rent Ladders 288 m1d 0.04 11.52

Total 3,328.76

3636

THE FOLLOWING COST INFORMATION IS AVAILABLE OF A SPECIFIC EQUIPMENT ITEM:

SIZE F.O.B COST

100 M3/hr US$ 50,000200 M3/hr US$ 80,000

QUESTION:

WHAT IS THE ESTIMATED COST FOR THE EQUIPMENT ITEM WITH A CAPACITY OF 300 M3/HR?

Case Study 2Case Study 2

3737

Direct CostEstimating Equipment Cost Calculation

E1

E2

COST

SIZE

COST E2 = COST E1 X (size E2/ size E1)x

3838

THE SOLUTION:

1) = 80,00050,000

2) 2 = 1.60

3) LOG2 x (X) = LOG 1.60

4) 0.301 x (X) = 0.204

5) (X) =0.678

Estimated Cost: X US$80,000 = US$105,000

(X))

100200(

(X)

(0.678))

200300(

Case Study 2Case Study 2