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Cost Estimation Fundamentals

This document discusses cost estimation fundamentals and processes. It outlines 12 steps in the cost estimating process, including developing a work breakdown structure, scheduling work elements, analyzing historical data, and developing cost estimates. It describes organizing for estimating by using information, methods, estimating plans, and skills. The document also covers ground rules for estimation, different project stages, the role of estimation, and factors that affect estimated costs such as variability, idle time, and rework.

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Usman
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127 views15 pages

Cost Estimation Fundamentals

This document discusses cost estimation fundamentals and processes. It outlines 12 steps in the cost estimating process, including developing a work breakdown structure, scheduling work elements, analyzing historical data, and developing cost estimates. It describes organizing for estimating by using information, methods, estimating plans, and skills. The document also covers ground rules for estimation, different project stages, the role of estimation, and factors that affect estimated costs such as variability, idle time, and rework.

Uploaded by

Usman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Cost Estimation fundamentals

Prof.P.M.Deshpande

"Cost accounting is about being


approximately right than being
precisely wrong
By: Rakesh Singh, FICWA

Cost Estimating

Cost estimation is considered as a


dynamic and integral part of the technical
and financial function of Project
organization
Cost Management of Project consists of
1. Cost accounting
2. Cost estimating
3. Cost Management

Cost Estimating Process

1.
2.
3.
4.
5.
6.

It consists of twelve Steps

Develop the Work element Structure


Schedule the work element
Retrieve and organize historical data
Develop and use cost estimating relationship
Develop and use curves
Identify Skill categories, skill levels and man hour
rates
7. Develop man hour, labor hour material estimate

8.Develop overhead and administrative cost

9. Apply inflation and Cost escalation


10. Price or compute the estimated cost
11 Analyse,adjust and support the estimates
12 Publish and Preset the estimates so that it can be
utilized effectively

Organizing For Estimating


The Four Principle Tools are:
1. Information
Historical data, recent information,similar work

2. Methods
Techniques,procedures,policies, practices

3. Plan for Estimates


the plane of action is a schedule for
estimating activity itself cost of work
4. Skills
The skills are needed in estimating mirror
the complexity and content of work being
estimated

Skills for estimation

Business and financial skills


Engineering and Technical Skills
Manufacturing and assembly skills
Mathematical and Statistical skills
Production Planning
Industrial Engineering

Ground Rules for estimation


What is the Start date assumed for Project
What are the Principle Deliverable hardware item
What are principle deliverable software and documentation
items
What is the location of work and where deliverables are
shipped
Will nonrecurring cost be estimated separately from recurring
cost
What Warranties will be provided
What spare parts or services will be provided
Are engineering or test model required
What service and product quality reliability requirement

Methodology

Work brake down structure


Work element numbering system
Development of structure
Designation of work element levels
Treatment of Recurring / Non recurring Cost
Work element coding Conversions
Work breakdown structure Dictionaries
Estimation and scheduling

Different Stages of Project

Concept estimates
Preliminary
Budgetary Estimates
Detailed / Definitive

Role of Estimation

Generate the Cost data


Analyse the cost cost
Analyse the specification
Identify the cost and Specification
relationship
Develop the cost estimation Methodology
Develop cost control Methodology

Effect of cost behavior on estimated cost


There are number of factors which markedly affect
the behavior of costs and consequently play a
significant role in cost estimation. To minimize
such factors or to keep a limit on it, cost elements
must be analyse or broken down into subgroups so
that the cost estimator may handle properly the
separate elements which make up the total cost.
The number of classifications into which costs are
subdivided depends upon the number of separate
elements requiring consideration and increases
proportionately

elements affecting cost behavior and thus cost


classification,

Variability of cost,
Erratic elements in cost,
Central tendencies in cost,
Idle time, and
Spoilage and rework.

Limitation of costing professionals:


Market dynamics,
Proper classification between fixed costs and
variable costs,
Engineering details and their level of accuracy,
Cost accounting standards and allocation
methodology,
Relevance of information to the end user, and
Cost advantage of the costing system.
Can cost professionals overcome cost accounting
limitations?

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