Investment Cost Estimation Methods
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ScribdTranslations23 investment cost estimation methods
Definition
In Economics, "investment cost" is considered the sum of efforts and resources
that have been invested to produce something.
Incurred or investment costs: Represents the technical factors involved in
production, measurable in money. This cost is what cost accounting studies.
The estimates should reflect a step-by-step plan of what the project team
Project feels or predicts the work to be developed.
The different cost estimates are made at specific times in the life of the project,
depending on various factors such as those presented below:
• Information that is held at that moment
• Time available to make the estimate
• Cost that will be involved in making the estimate
“Project cost management includes the processes involved in estimating,
budgeting and cost control, so that the project is completed within the approved
budget.”
The stages of the project are as follows:
Stage 1: Project initiation/ Feasibility
Stage 2: Organization and preparation/ Plan and design
Stage 3: Work development/ Production
Stage 4: Project Closure/ Delivery
Estimation methods
MAGNITUDE ORDER
It is important to note that it is in stage 1 where the associated cost estimate is by
order of magnitude and is where the first approval is given to proceed with the
development of the project, that is, in the feasibility stage.
All projects begin with an idea to satisfy a need or to create a new product, service
or result, and the decision maker is required to know an original estimate of the
economic resources that will be required to develop said project. This estimate will
make it easier to decide whether to continue with it or cancel it.
Estimates by order of magnitude are used for planning and forecasting, in order
to help the development of economic and financial evaluations of an investment.
The advantages of order of magnitude estimation have certain characteristics that
must be taken advantage of from the first moment:
• Uses data with a low level of detail.
• Its generation is the fastest.
• Provides a scenario that helps choose the best path to carry out or develop a
project.
The order of magnitude estimate is based on meaningful results. This estimate
provides a frame of reference without the emphasis of a very detailed
approximation.
Estimates by order of magnitude
a) Coarse proration: In this method, a base cost is established for the
implementation of a single parameter, either from a previous project, or preferably
from several similar projects that have been weighted and averaged appropriately
to correspond to the nature of the implementation. current.
b) Units of finished product: This method is used when the estimator has
sufficient historical data available, which comes from experience in a particular
type of project to relate some units of finished products to construction costs.
c) Scales of operations: This method uses historically derived empirical
equations to obtain an estimate of approximate costs, for different sizes of the
same type of project or industrial facilities.
d) Rates or factors:
e) Physical dimensions: This type of estimate is based on physical dimensions
such as height, area or volume. This method depends on historical data from
similar installations.
f) Parametric estimates: Parametric estimates consist of the relationship between
one or more variables (known as parameters) and their associated cost. In more
technical terms, it is understood as a mathematical expression that shows the cost
of an element or a system as a function of its characteristics. These estimates are
usually prepared upon completion of a very preliminary design.
g) Three-point estimates : This is a probabilistic method, which indicates that the
precision of the estimate of the costs of an activity or a project can be improved by
considering that the cost estimates for each project or activity may have a greater
or higher cost, a probable or average one and a lower or lower cost one.
Estimated Cost = (Optimistic + 4 (Most Likely) + Pessimistic) / 6
Conclusion
To conclude this topic, the following ideas can be rescued:
• The purpose of order of magnitude estimation is to determine the economic
feasibility of the project.
• This estimate is used to arrive at a reasonable budget in the shortest possible
time, without losing sight of the fact that an item of reserves or contingencies must
be considered, which will be a percentage of the cost estimate or a fixed amount,
an amount that will tend to be modified as more information about the project
becomes available.
• The project estimation is carried out considering the costs of similar projects
carried out in the past. It is important to note that similar degrees of quality must
also be considered.
• Correction factors must be applied due to time (inflation), location and any other
process factors that may differ from the baseline.
BUDGETS
Estimates for budgets are prepared once the order of magnitude estimate has
been approved, that is, when the economic feasibility of the project has been
analyzed and where a scenario has already been defined.
The preparation of this type of estimate requires generating the conceptual design
bases.
In the budget stage is where approval to formally execute the project is achieved or
not; this estimate presents a lower variation compared to the estimates by order of
magnitude.
Estimates are normally prepared after the project manager has finished his
planning work, that is, he has staged his (economic, using order of magnitude
estimating as a basis) options and is now in the position where he will normally
require of the approval of the administration or sponsor to continue with the
development of the project.
Budget estimation
Curves: Curves need relevant historical data, they are also a prediction
computer and can be sophisticated and precise.
Factoring: The estimation factor lies in the principle that there is a
relationship or factor between the cost of a particular piece of equipment
and the elements associated with the installation. Therefore, the term "ratio
estimate" is almost always applied to a factor estimate.
Semi-detailed: It is similar to the factoring method but with the difference
that semi-detailed must try to predict the individual quantities and costs of
the elements related to its installation, rather than adding them as rates or
factors.
Estimates in Information Technology projects: This space will explain
how estimates are made for software development projects and other
information technology projects.
Conclusion
It is important to mention that budget estimates require the following for their
development:
• Determine the scope of the project.
• Develop flowcharts.
• Prepare equipment lists and generate logistics studies.
• Contact suppliers for major equipment costs.
• Prepare the general project program.
• Evaluate the availability of human resources.
• Review general specifications.
• Estimates for information technology projects are based heavily on the complexity of the
system to be developed, as well as the “ expertise ” of the human resources that each
organization has.
DEFINITIVE
Once the project begins formally and the general specifications and/or major
contracts are assigned, the definitive estimates can be obtained, that is, those
whose range of precision is very high and very close to what the total cost will be.
of the project, achieving with this, continuing with the final development, closure
and delivery of the complete project.
Final estimates are the most accurate and require the most effort to prepare.
There are basically two types of definitive estimates.
1. Conceptual or average approach: This approach is almost always referred to
as an " in-house " estimate and is used primarily by the owners of organizations.
In this approach, estimation methods are developed through historical data and an
average of concepts is used. This method is more or less an extension of the
factorization method , only it is done in much greater detail.
2. Detailed approach: The second type of definitive estimates is much more
detailed in its approach and is mainly used by contracting organizations.
Conclusion
To finish the topic, the following ideas can be rescued.
• Final estimates are the most detailed and precise and represent the baseline of
the project's cost or base budget.
• They are used as a tool for project control.
• They must be based on plans, specifications, complete contracting packages,
programming of definitive activities and with all the details clarified and specified in
writing.
