Engineering Cost

Chapter 2Engineering CostsandCost Estimating

Chapter OutlineEngineering CostsCost Estimating and Estimating Models

Learning ObjectivesUnderstand various cost conceptsUnderstand various cost estimation modelsBe able to estimate engineering costs with various models

Types of CostsFixed Costs & Variable CostsMarginal Costs & Average CostsSunk Costs & Opportunity CostsRecurring & Non-recurring CostsIncremental CostsCash Costs & Book CostsLife-Cycle Costs

Fixed Costs and Variable CostsFixed Costs: constant, independent of the output or activity level.Property taxes, insuranceManagement and administrative salariesLicense fees, and interest costs on borrowed capitalRental or leaseVariable Costs: Proportional to the output or activity level. Direct labor costDirect materials

Breakeven AnalysisTotal Variable Cost = Unit Variable Cost * QuantityTotal Cost = Fixed Cost + Total Variable CostTotal Revenue = Unit Selling Price * QuantityBreakeven point: the output level at which total revenue is equal to total cost. Applications of Breakeven analysis:Determining minimum production quantityForecast production profit / loss

Copyright Oxford University Press 2009

Breakeven AnalysisProduction Quantity$Break-even PointFixed CostsVariable CostsTotal CostsTotal RevenueLossProfit


Example 2-1X# of Customers15Fixed Costs= $225Variable Costs= 20XTotal Costs= $225 + 20XTotal Revenue= 35XLossProfit1052025


Marginal Costs and Average CostsMarginal Costs: the variable cost for one more unit of outputCapacity Planning: excess capacityBasis for last-minute pricing

Average Costs: total cost divided by the total number of units produced.Basis for normal pricing

Sunk Costs & Opportunity CostsSunk Costs: Cost that has occurred in the past and has no relevance to estimates of future costs and revenues related to an alternativePurchasing price of current equipment in deciding new equipment (except for capital gain/loss consideration)Opportunity Costs: Cost of the foregone opportunity and is hidden or impliedExisting equipment in replacement analysis

Recurring Costs and Non-recurring CostsRecurring Costs: Repetitive and occur when a firm produces similar goods and services on a continuing basisOffice space rentalNon-recurring Costs: Not repetitive, even though the total expenditure may be cumulative over a period of timeTypically involve developing or establishing a capability or capacity to operateExamples are purchase cost for real estate and the construction costs of the plant

Incremental CostsIncremental Costs: Difference in costs between two alternatives.Suppose that A and B are mutually exclusive alternatives. If A has an initial cost of $10,000 while B has an initial cost of $14,000, the incremental initial cost of (B - A) is $4,000.

Example 2-3 Choosing between Model A & B

Cost ItemsModel AModel BIncremental CostPurchase Price$10,000$17,500$7,500Installation Costs3,5005,0001,500Annual Maintenance2,500750-1,750Annual Utility1,2002,000800Disposal Cost700500-200


Life-Cycle CostsLife-Cycle Costs: Summation of all costs, both recurring and nonrecurring, related to a product, structure, system, or service during its life span.Life cycle begins with the identification of the economic needs or wants (the requirements) and ends with the retirement and disposal activities.

Cost EstimatingNeeds for Cost EstimatingImportance of Cost EstimatingTypes of Cost EstimatingRough Estimates -30% to +60%Semi-detailed Estimates -15% to +20%Detailed Estimates -3% to +5%

Difficulties in EstimationOne-of-a-Kind EstimatesTime and Effort AvailableEstimator Expertise

Categories of Cost EstimatingCapital Investment (S&H, Installation, Training)Labor Costs (Direct and Indirect)Material Costs (Direct & Indirect)Maintenance Costs (Regular & Overhaul)Property Taxes and InsuranceOperating Costs (Rental, Gas, Electricity)Quality Costs (Scrap, Rework, Inspection)Overhead Costs (Administration, Sales)Disposal CostsRevenuesMarket Values

Cost Estimating ModelsPer-Unit Model (Unit Technique)Segmenting ModelCost IndexesPower-Sizing ModelTriangulationImprovement and the Learning Curve

Cost Estimating Models -- Per-Unit Model (Unit Technique)Per-Unit Model (Unit Technique)Construction cost per square foot (building)Capital cost of power plant per kW of capacityRevenue / Maintenance Cost per mile (hwy)Utility cost per square foot of floor spaceFuel cost per kWh generatedRevenue per customer served

Example 2-4 Cost Estimating using Per-Unit ModelCost estimation of camping on an island for 24 students over 10 days.

Planned Activities:2 days of canoeing3-day hikes3 days at the beachNightly entertainment

Example 2-4 Cost Estimating using Per-Unit Model Cost Data:Van (capacity 15) rental: $50 one wayCamp is 50 miles away, van gets 10 miles/gallon, and gas is $1/gallonEach cabin holds 4 campers, rent is $10/day-cabinMeals are $10/day-camperBoat transportation is $2/camper (one way)Insurance/grounds fees/overhead is $1/day-camperCanoe (capacity 3) rentals are $5/day-canoeDay hikes are $2.50/camper-dayBeach rental is $25/group-(half-day)Nightly entertainment is free


Example 2-4 Cost Estimating using Per-Unit Model Solution:Assumption: 100% participation in all activitiesTransportation Costs:Van: $50/van-trip * 2 vans * 2 trips = $200Gas: $1/gallon * (50 miles / 10 miles/gallon) *2 *2 =20Boat: $2/camper-trip * 24 campers * 2 =96Subtotal$316Living Costs:Meals: $10/day-camper * 24 campers * 10 days = $2400Cabin rental: $10/day-cabin * (24/4) cabins *10 days =600Insurance: $1/day-camper * 24 campers * 10 days = 240Subtotal$3240


Example 2-4 Cost Estimating using Per-Unit Model Solution (Continued):Entertainment Costs:Canoe rental: $5/day-canoe * 2 days * (24/3) canoes = $80Beach rental: $25/group-(half-day) * (3*2) half-days =150Day hike: $2.50/camper-day* 24 campers * 3 days =180Nightly entertainment0Subtotal$410Total Costs:$3966


Cost Estimating Models Segmenting ModelEstimate is decomposed into individual componentsEstimates are made at component levelIndividual estimates are aggregated back together


Example 2-5 Cost Estimating using Segmenting ModelCost estimate of lawn mowerA. ChassisB. Drive Train

Cost ItemEstimateB.1 Engine$38.50B.2 Starter assembly5.90B.3 Transmission5.45B.4 Drive disc assembly10.00B.5 Clutch linkage5.15B.6 Belt assemblies7.70Subtotal$72.70

Cost ItemEstimateA.1 Deck$7.40A.2 Wheels10.20A.3 Axles4.85Subtotal$22.45


Example 2-5 Cost Estimating using Segmenting ModelCost estimate of lawn mowerC. ControlsD. Cutting/Collection systemTotal material cost = $22.45 + $72.70 + $52.70 + $25.60 = $173.45

Cost ItemEstimateC.1 Handle assembly$3.85C.2 Engine linkage8.55C.3 Blade linkage4.70C.4 Speed control linkage21.50C.5 Drive control assembly6.70C.6 Cutting height adjuster7.40Subtotal$52.70

Cost ItemEstimateD.1 Blade assembly$10.80D.2 Side chute7.05D.3 Grass bag & adapter7.75Subtotal$25.60


Cost Estimating Models Cost IndexesCost indexes reflect historical change in costCost index could be individual cost items (labor, material, utilities), or group of costs (consumer prices, producer prices)Indexes can be used to update historical costs(Eq. 2-2)


Example 2-6 Cost Estimating using Cost Indexes


Cost Estimating ModelsPower-Sizing ModelX = Power-sizing exponent(Eq. 2-3)

Equipment/FacilityXBlower, centrifugal0.59Compressor0.32Crystallizer, vacuum0.37Dryer, drum0.40Fan, centrifugal1.17

Equipment/FacilityXFilter, vacuum0.48Lagoon, aerated1.13Motor0.69Reactor0.56Tank, horizontal0.57


Example 2-7 Cost Estimating using Power-Sizing and Cost IndexesA. Considering Power-Sizing Index ChangeB. Considering Cost Index Change


Cost Estimating Models TriangulationTechniques Used in Surveying: To map points of interest by using three fixed points and horizontal angular distanceApplication in Economic Analysis: To approach economic estimate from different perspectives, such as different source of data, or different quantitative models.


Cost Estimating Models Improvement and Learning CurveLearning Phenomenon: As the number of repetitions increase, performance of people becomes faster and more accurate.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


Cost Estimating Models Improvement and Learning CurveLearning CurveLet T1 = Time to perform the 1st unitTN = Time to perform the Nth unitb = Constant based on learning curve %N = Number of completed units(Eq. 2-4)(Eq. 2-5)


Example 2-9 Cost Estimating using Learning CurveExample 2-9 Cost Estimating using Learning Curve

NTN19.6028.1637.4246.9456.5866.3176.0885.9095.73105.59

NTN115.47125.36135.26145.17155.09165.00175.00185.00195.00205.00


Chart2

9.6

8.1598034741

7.4196991963

6.93566591

6.5820740972

6.3065924249

6.0826908283

5.8951740404

5.7345766838

5.594628238

5.4709739686

5.3604744561

5.2607966736

5.1701626826

5.0871885301

5

5

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NTNlog(N)log(Tn)ln(N)ln(Tn)

19.600.00000.982302.2617630985

28.160.30100.91170.69314718062.0992200846

37.420.47710.87041.09861228872.0041385168

46.940.60210.84111.38629436111.9366770708

56.580.69900.81841.60943791241.884349908

66.310.77820.79981.79175946921.8415955029

76.080.84510.78411.94591014911.8054471685

85.900.90310.77052.07944154171.7741340569

95.730.95420.75852.19722457731.7465139351

105.591.00000.74782.3025850931.7218068942

115.471.04140.73812.39789527281.699456657

125.361.07920.72922.48490664981.6790524891

135.261.11390.72112.56494935751.6602824741

145.171.14610.71352.63905732961.6429041547

155.091.17610.70652.70805020111.6267253263

165.001.20410.69902.77258872221.6094379124

175.001.23040.69902.83321334411.6094379124

185.001.25530.69902.89037175791.6094379124

195.001.27880.69902.94443897921.6094379124

205.001.30100.69902.99573227361.6094379124

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Example 2-9 Cost Estimating using Learning CurveExample 2-9 Cost Estimating using Learning CurveNormal ScaleLog-Log Scale


Chart4

9.6

8.1598034741

7.4196991963

6.93566591

6.5820740972

6.3065924249

6.0826908283

5.8951740404

5.7345766838

5.594628238

5.4709739686

5.3604744561

5.2607966736

5.1701626826

5.0871885301

5

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TN

Sheet1


19.600.00000.982302.2617630985

28.160.30100.91170.69314718062.0992200846

37.420.47710.87041.09861228872.0041385168

46.940.60210.84111.38629436111.9366770708

56.580.69900.81841.60943791241.884349908

66.310.77820.79981.79175946921.8415955029

76.080.84510.78411.94591014911.8054471685

85.900.90310.77052.07944154171.7741340569

95.730.95420.75852.19722457731.7465139351

105.591.00000.74782.3025850931.7218068942

115.471.04140.73812.39789527281.699456657

125.361.07920.72922.48490664981.6790524891

135.261.11390.72112.56494935751.6602824741

145.171.14610.71352.63905732961.6429041547

155.091.17610.70652.70805020111.6267253263

165.001.20410.69902.77258872221.6094379124

175.001.23040.69902.83321334411.6094379124

185.001.25530.69902.89037175791.6094379124

195.001.27880.69902.94443897921.6094379124

205.001.30100.69902.99573227361.6094379124

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Chart5

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8.1598034741

7.4196991963

6.93566591

6.5820740972

6.3065924249

6.0826908283

5.8951740404

5.7345766838

5.594628238

5.4709739686

5.3604744561

5.2607966736

5.1701626826

5.0871885301

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19.600.00000.982302.2617630985

28.160.30100.91170.69314718062.0992200846

37.420.47710.87041.09861228872.0041385168

46.940.60210.84111.38629436111.9366770708

56.580.69900.81841.60943791241.884349908

66.310.77820.79981.79175946921.8415955029

76.080.84510.78411.94591014911.8054471685

85.900.90310.77052.07944154171.7741340569

95.730.95420.75852.19722457731.7465139351

105.591.00000.74782.3025850931.7218068942

115.471.04140.73812.39789527281.699456657

125.361.07920.72922.48490664981.6790524891

135.261.11390.72112.56494935751.6602824741

145.171.14610.71352.63905732961.6429041547

155.091.17610.70652.70805020111.6267253263

165.001.20410.69902.77258872221.6094379124

175.001.23040.69902.83321334411.6094379124

185.001.25530.69902.89037175791.6094379124

195.001.27880.69902.94443897921.6094379124

205.001.30100.69902.99573227361.6094379124

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Engineering Cost