A Short Course on Product Cost
Estimation
By
Dr. Muhammad Elrabaa
1
Contents
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
2
Basic 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” UNCERTAINTIES
DESIGN GROWTH / DESIGN DEVELOPMENT
EXTRAORDINARY FREIGHT COST (AIR FREIGHT, SPECIAL CARGO ...etc)
FORWARD ESCALATION
CUT / WASTE (BULK MATERIALS)
CONTINGENCIES
USED TO REDUCE THE RISK OF OVERRUN DUE TO “POTENTIAL” UNCERTAINTIES
INCOMPLETE PROJECT DEFINITION
CURRENCY FLUCTUATION
ERRORS
DOES NOT COVER FORCE MAJEURE, SCOPE CHANGES, CLAIMS ETC.
3
Basic Definitions
DIRECT COSTS
COSTS DIRECTLY ATTRIBUTED TO A JOB OR A PIECE OF PROJECT EQUIPMENT
4
Basic Definitions
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.
5
Basic Definitions
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.
6
Basic Definitions
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)
7
Cost Price Modle
COST
DIRECT + INDIRECT + PROFIT = PRICE
• DESIGN
• MARKETING
• LABOUR • MATCH
• SALES
• MATERIAL INVESTMENT
• COMPONENTS • ACCOUNTING
• TOOLING • PURCHASING
• MANAGEMENT
• WARRANTY
• LIABILITY
• ADMINISTRATION
8
Cost - Price Modle
CONSTRUCTION EQUIP. DURATION (HOURS) X RATE $/HR X CONSUMABLE FACTOR
+
LABOR COST LABOR (MHRS) X $/HR X SUPERVISION FACTOR
+
MATERIAL COST + DELIVERY COST + PURCHASING &
MATERIAL COST
INSPECTION COST
=
DIRECT COST TOTAL DIRECT COST
= OVERHEAD MOB. & DEMOB., TEMPORARY FACILITIES ,
INDIRECT COST INSURANCE ADMINISTRATION, MANAGEMENT,
= ENGINEERING,…ETC
TOTAL COST COST
X
PROFIT FACTOR
PRICE PRICE 9
Cost Estimating Process
1.0 Cost Estimation Purposes
INITIAL COST INPUT FOR PROJECT IDENTIFICATION DOC. (PID)
INDICATIVE COST ESTIMATE FOR PLANNING ITEMS FOR BUSINESS PLAN
PERFORMANCE INDICATORS
BUDGET UPDATING/ REVISION
NEW BUDGET PROPOSALS
COUNTER CHECKING CONSULTANT COST ESTIMATE
REVIEW BIDDERS RATES
EVALUATE ALTERNATIVES / OPTIONS
PROVIDE DATA FOR PROJECT SCHEDULING (ACTIVITY WEIGHTS,
RESOURCE LEVELLING)
10
Cost Estimating Process
2.0 Capital Cost Major Component
• Screening Studies
ENGINEERING • Basic Engineering (FEED)
• Detailed Engineering
• Procurement Services
DIRECT COST
• Major Equipment
MATERIAL • Bulk Material
• Freight & Transportation
• Preliminaries (Mobilisation, Site Facilities,
Site Running Costs)
CONSTRUCTION • Civil, Mechanical, E&I Works etc.
• Pre-commissioning / Commissioning
INDIRECT COST
• Owner Management
OWNER COST • Housing/Camp
• Fees
• Services
11
Cost Estimating Process
3.0 In-House Cost Estimate
Review / Discuss Review
• Scope of Work &
• Basis / Strategy Develop Check
Customer Issue
• Exclusions Cost Output
Input / Estimate
• Estimate Methodology Estimate
Request • Required Accuracy • Quality
• Risks
• Contingency
Cost Data
• Purchase Order
• Vendor Quotes
• Completed Projects
• Escalation Rates
• Construction Unit Rates
• Cost Est. Software
• Excel Worksheet
Computer Tools 12
Cost Estimating Process
4.0 Estimating Procedure
PREPARE ESTIMATING REQUIREMENTS
PLANNING THE ESTIMATE
STRUCTURE THE ESTIMATE
DEVELOPING THE ESTIMATE
DEVELOPING CONTINGENCY
DOCUMENTING
REVIEW / ISSUE ESTIMATE
13
Cost Estimate Classification
International Classification Practices
Association Norwegian American
AACE ANSI AACE ADCO
of Cost Project Society of
Classification Standard Pre-1972 EMPD
Engineers (UK) Management Professional
Standard Z94.0 Classification
ACostE Association (NFP) Estimators
(ASPE)
Concession Estimate
Class 4
Order of
INCREASING PROJECT DEFINITION
Order of Order of
+40/-20%
Class 5 Magnitude Magnitude Magnitude Exploration Estimate Level 1 Screening /
Estimate Estimate Estimate
Feasibility
-30/+50 Class IV-30/+30
Feasibility Estimate
Class 3
Study Study Estimate Authorization
Class 4 Class III -20/+20
+30/-15%
Estimate Estimate Conceptual /
Budget Level 2
Estimate Prelim. Budget
-15/+30 Preliminary Budget Class 2
Class 3 Estimate
Master Control
Estimate Estimate Level 3 +20/-10%
Class II-10/+10 Master Budget
Definitive Level 4
Class 2 Estimate Class 1
Definitive Definitive Current Control
Estimate Estimate Estimate Level 5 +10/-5%
-5/+15 Class I-5/+5 Definitive /
Detailed
Class 1 Control Budget
Estimate Level 6
Extracted from “AACE International Recommended Practices and Standards”
14
Estimating Classification
1.0 Order of Magnitude
PREPARED BEFORE PROJECT STARTS
HAZY INFORMATION
DETAILS OF PROJECT YET TO BE DEVELOPED
USEFUL FOR QUICK SCREENING AND PLANNING DECISIONS
2 INTENDED ACCURACY + 35%
15
Estimating Classification
2.0 Study Estimate
PREPARED DURING PROJECT STUDY AND SCREENING PHASE
BASED ON A GOOD OUTLINE PROJECT DEFINITION
Ñ MAJOR PROJECT ELEMENTS
Ñ SIZE / CAPACITY /VOLUME /AREA
USEFUL FOR: SCREENING ALTERNATIVES /OPTIONS
Ñ PRELIMINARY FEASIBILITY STUDY
Ñ MANAGEMENT DECISION
2 INTENDED ACCURACY + 20%
16
Estimating Classification
3.0 Study Estimate
DEVELOPED DURING ENGINEERING PHASE 10-20% OF ENGINEERING
BASED ON - WELL DEFINED DESIGN CRITERIA.
2 INTENDED ACCURACY + 15%
17
Estimating Classification
4.0 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.
2 INTENDED ACCURACY + 5-10%
18
Cost Estimating Methodology
Example: (Process Equipment)
19
Cost Estimating Methodology
What is Process Equipment
Package Units
Engineered Equipment PROCESS
EQUIPMENT • chemical Dosing
• Columns • Water Treatment
• Vessels • HVAC Equipment
• Reactors
• Tanks
Standard Equipment
• Pumps
• Compressors
• Fans
20
Estimating Equipment Cost Methodologies
(Direct Cost)
BUDGET PRICE
PRICE TABLES
PURCHASE ORDERS (FROM PREVIOUS JOBS)
PRICE CURVES
CALCULATION BASED
EXPONENTIAL METHODS (COSTS SCALING)
21
Estimating Methodologies
Equipment Cost (Direct Cost)
ADJUSTMENT TO THE NEW NEW CONDITIONS
SOURCE OF DATA • Cost of Spare Parts
• Freight, Insurance, Transportation Cost
• BUDGET PRICE • Currency & Exchange Rate
• PURCHASE ORDER • Exclusions
• BUDGET QUOTATION • Escalation Formula
• COST CURVES • Scaling Factor
22
Estimating Methodologies
Estimating Equipment (Scaling Factor)
COST
E2
E1
x
COST E2 = COST E1 X (size E2/ size E1)
SIZE
23
Material Selection Impact on Equipment
FOB-COST VS WEIGHT CURVE - PRESS. VESSEL
FOB-VALUE
E L
. STE
S
V1
L
TEE
C.S
V2
W WEIGHT Kg
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Estimating Methodologies
Estimating Equipment Cost Calculation
MANHOLE
VESSEL WIGHT
NOZZLES
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 D HEAD
Others: SHELL
• Internals = W3 Kg L
• Supports = W4 Kg
• Nozzles = W5 Kg
• Manhole = W6 Kg
---------------
Total Weight W Kg
Estimated Cost = W (Kg) X Unit Cost (Cost/Kg)
25
Factors Affecting Project Final Cost
1.0 SCOPE OF WORK
CLARITY OF SCOPE DEFINITION
CHANGES IN SCOPE
2.0 TECHNICAL FACTORS
DESIGN STANDARDS & PRACTICES
SAFETY & ENVIRONMENT REQUIREMENTS
SKILLS/COMPETENCIES
3.0 OTHERS
PROJECT TIME FRAME/SCHEDULE
INTERFACES WITH OTHER OPCOS
PROJECT ORGANIZATION
CURRENCY EXCHANGE RATES
MARKET CONDITIONS
26
Case Study 1
+ 7.00 mtr
T- 1001
+ 5.0 mtr
+ 0.00 mtr
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.
27
Case Study 1
THERE IS A CURRENT ‘SCHEDULE OF RATES’ CONTRACT WITH A SPECIALIZE
COMPANY FOR PROVIDING OF SCAFFOLDING
INSTALLATIN AND DISMANTLING
CODE STANDARD SCAFFOLDING US$ Unit
S25 0 - 25 m3 6.96 m3
S50 25 - 50 m3 5.05 m3
S75 50 - 75 m3 4.80 m3
S100 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
28
Case 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
29
Case 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
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Case 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 OF
2.0 Mtr.
3.0 FOR ENVIRONMENTAL REASONS PROVIDE FLEXIBLE SHEETING AROUND
SCAFFOLDING.
4.0 PROVIDE 3 LADDERS
5.0 APPROVAL SAFETY ADVISER
6.0 SCAFFOLDING SHOULD BE READY BEFORE START OF THE WORK ON MONDAY
1ST MAY (WK18).
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Case Study 1
WORK SCHEDULE:
START
WK17 1/5 WK18 W/E WK19 W/E WK 20
Blasting/painting
Scaffolding Ready
Start Dismantling Scaffolding
Renting Period Scaffolding
(16 Calendar Days )
32
Case Study 1
D (=d+4)
d 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)
+9 Flexible Sheeting
∏D x H
+6 ∏ x 9 x 9 - 254 m2 (ZR)
Work Floor Ladder:
+4 3 x 6 m1 = 18m1 (LA)
+2
33
Case Study 1
POINTERS
UNDERSTAND PROJECT REQUIREMENTS BEFORE DEFINING SCOPE.
UNDERSTAND METHOD OF MEASUREMENT OF A ‘SCHEDULE OF RATE CONTRACT.
SELECT OPTIMUM IMPLEMENTATION PLAN.
34
Case Study 1
Cost Estimate Details
# Activity Qty Unit Standard Norm Correction Total
1 Erection & dismantling scaffolding 307 m3 3.4 1,043.80
2 Erection & dismantling work Floor 132 m2 4.35 574.2
3 Erection & dismantling Sheeting 254 m2 4.8 1,219.20
4 Erection & dismantling Ladders 18 m1 2.5 45
5 Rent Scaffolding 4,912.00 m3d 0.03 147.36
6 Rent Work Floor 2,112.00 m2d 0.04 84.48
7 Rent Sheeting 4,064.00 m3d 0.05 203.2
8 Rent Ladders 288 m1d 0.04 11.52
Total 3,328.76
35
Case Study 2
THE FOLLOWING COST INFORMATION IS AVAILABLE OF A SPECIFIC EQUIPMENT ITEM:
SIZE F.O.B COST
100 M3/hr US$ 50,000
200 M3/hr US$ 80,000
QUESTION:
WHAT IS THE ESTIMATED COST FOR THE EQUIPMENT ITEM WITH A CAPACITY OF 300
M3/HR?
36
Direct Cost
Estimating Equipment Cost Calculation
COST
E2
E1
x
COST E2 = COST E1 X (size E2/ size E1)
SIZE
37
Case Study 2
THE SOLUTION:
1) 200 (X) = 80,000
( )
100 50,000
(X)
2) 2 = 1.60
3) LOG2 x (X) = LOG 1.60
4) 0.301 x (X) = 0.204
5) (X) =0.678
300 (0.678)
Estimated Cost: ( ) X US$80,000 = US$105,000
200
38
