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Lecture 3

The document discusses engineering cost estimating including the types of estimates such as rough, semi-detailed, and detailed estimates. It also discusses estimating models like per unit, segmentation, cost indexes, and triangulation models. The document provides examples of using a power sizing model to estimate costs based on scale as well as the concept of a learning curve capturing performance improvements from repetition.

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Waleed Aziz
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Download as PDF, TXT or read online on Scribd
25 views

Lecture 3

The document discusses engineering cost estimating including the types of estimates such as rough, semi-detailed, and detailed estimates. It also discusses estimating models like per unit, segmentation, cost indexes, and triangulation models. The document provides examples of using a power sizing model to estimate costs based on scale as well as the concept of a learning curve capturing performance improvements from repetition.

Uploaded by

Waleed Aziz
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Engineering Economics

Engineering Costs
and Cost Estimating

1
Cost Estimating
• Economic analysis is future based. •
Costs and benefits in the future require
estimating.
• Estimated costs are not known with
certainty.
• The more accurate the estimate, the
more reliable the decision.
• Estimating is the foundation of
economic analysis.
Types of Estimates
• There are three general types of
estimates:
1. Rough – order of magnitude, used for
high level planning, inaccurate, range
from -30% to +60% of actual values. -
General feasibility activities
2. Semi-detailed - based on historical
records, reasonably sophisticated and
accurate, -15% to +20% of actual values.
- support budgeting and preliminary
design decision.
Types of Estimates
3. Detailed –
- based on detailed specifications
and cost models.
- very accurate, within -3% to +5%
of actual.
- used for establishing design details
and contracts.
Accuracy vs. Cost Tradeoff in
Estimating
Estimating Models
Model Explanation Examples
Uses a “per unit” Scaling previous
Per Unit
factor. own costs up or
$/sq ft, down (economies of
Segmenting Benefits/employee scale).
Divide problem intoLooking at costs
Cost Indexes Power items, estimatefrom several
each & sum. perspectives.
Sizing Index number based Microsoft Excel Worksheet

on historical Microsoft Excel Worksheet

changes in cost.
Triangulation
Example 2-5
Example 2-5
Example 2-5
Example 2-6
Example 2-6
Example 2-6
Example 2-7
Example 2-7
Power Sizing Model
• The power sizing models used to estimate the
costs of industrial plants and equipment. • The
model "scales up“ or scales down "known costs,
thereby accounting for economies of scale that are
common in industrial plant and equipment costs.
• Consider the cost to build a refinery. Would it
cost twice as much to build the same facility with
double the capacity? It is unlikely.
Power Sizing Model
• The power-sizing model uses the exponent (x),
called the power-sizing exponent, to reflect
economies of scale in the size or capacity:

• Exponent values for plants and equipment of many


types may be found in several sources, including
industry reference books, research reports, and
technical journals.
Example 2-8
Triangulation
• Triangulation is used in engineering surveying. A
geographical area is divided into triangles from
which the surveyor is able to map points within
that region by using three fixed points and
horizontal angular distances to locate fixed
points of interest.
• We will not use trigonometry to arrive at our cost
estimates, but we can utilize the concept of
triangulation.
• Triangulation in cost estimating might involve
using different sources of data or using different
quantitative models to arrive at the value being
estimated
Improvement and the Learning
Curve
• As the number of repetitions increases,
performance becomes faster and more
accurate.
• This is the concept of learning and improvement
in the activities that people perform.
• The fiftieth repetition is completed in much less
time than we needed to accomplish the task the
first time.
• The learning curve captures the relationship
between task performance and task repetition. • In
general. as output doubles the-unit production
time will be reduced to some fixed percentage, the
learning curve percentage or learning curve rate.
Example 2-9
Example 2-10
Estimating Benefits
• So far we have focused on cost terms and cost
estimating.
• However, engineering economists must often
also estimate benefits.
• Example benefits include sales of products,
revenues from bridge tolls and electric power
sales, cost reductions from reduced material or
labor costs, reduced time spent in traffic jams,
and reduced risk of flooding.
• These benefits are the reasons that many
engineering projects are undertaken.
• The cost concepts and cost estimating models
can also be applied to economic benefits.
Cash Flow Diagrams
• The costs and benefits of engineering projects occur
over time and are summarized on a Cash Flow Diagram
(CFD).
• Specifically, a CFD illustrates the size, sign, and timing
of individual cash flows. In this way the CFD is the basis
for engineering economic analysis.
• A Cash Flow Diagram is created by first drawing a
segmented time-based horizontal line, divided into
appropriate time units.
• The time units on the CFD can be years, months,
quarters or any other consistent time unit.
• Then at each time when there is a cash flow, a vertical
arrow is added - pointing down for costs and up for
revenues or benefits.
• These cash flows are drawn to relative scale.
Summary
• Donald G. Newnan, et al., “Engineering Economic
Analysis,” 9th Edition, Oxford University Press
(Read Chapter No 2)

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