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Project management
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20/04/2015
1
Project ManagementCost EstimatingProf. Mauro Mancini
e-mail: [email protected].: +39-02-23994057
POLITECNICO DI MILANODepartment of Management, Economics and Industrial Engineering
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Cost Estimating
The project’s costs management evolves during thewhole project life cycle and can be distinguished inthree phases:
1. Estimating2. Cost control3. Estimate to finish
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Estimates’ Accuracy
The cost estimating’ accuracy is connected to:
•Project’s phase (labour portion not yet performed)
•Level of the engineering progress (requiredresources definition)
•Reliability for the cost data available (database ofhistorical data availability)
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Estimates’ Accuracy
%
Estimate’s error
Project Life Cycle t
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Cost estimating levels
Different cost estimating levels correspond todifferent grades of belief:
•Ball Park estimate (preliminary information to thecustomer)
• Semi-analytic estimate (feasibility study)
•Analytic estimate (proposal)
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Cost estimating levels
Increasing the cost estimating levels the estimate’scost exponentially increases in terms of:
•Resources allocated
•Time requested
From few hours for the lower level to:
•5-10% of the total project engineering’s hours•1-2% of the whole investment cost
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Cost estimating techniques
At different cost estimating levels correspond twocost estimating techniques:
• Parametric (cost driver)
• Analytic (cost = quantity x unit cost)
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Ball Park Estimate
The Ball Park estimate (also called order ofmagnitude) presupposes well-known:
•Plant typology
•Plant Size
•The whole cost for same type plants
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Ball Park Estimate – Scale Factor
On the basis of the previous information, the scalefactor is used in the following equation:
M
P
PCC
00
C = Cost estimate for the new plantC0 = Historical cost for the plant in the databaseP = New Plant sizeP0 = Historical plant sizeM = Scale factor (0.6 < M < 0.9)
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Ball Park Estimate – Scale Factor
€/MWe
MWe
Validity Zone
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Ball Park Estimate – Scale Factor
0,9
1
1,1
1,2
1,3
1,4
1,5
1,6
200 400 600 800 1000 1200
[$/k
We
]
[MWe]
Economy of scale
M
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Ball Park Estimate – Scale Factor
M
MMM
P
CPMC
PMCPMC
CPMPMC
PPMCC
PP
CC
MP
PM
C
C
P
P
C
C
P
P
C
C
P
PCC
0
0
00
00
00
0
0
00
000000
logloglog
loglogloglog
loglogloglog
)log(logloglog
log
log
loglog
loglog
qxMy
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Ball Park Estimate – Scale Factor
C
P
M
Bi-logarithmic axis
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10
100
100
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Ball Park Estimate – Scale Factor
Example: Values for a Nuclear Power Plant
ACCOUNT Scale exponent
Direct costs
Land and land rights 0
Structures and improvements 0.5
Reactor/boiler plant equipment 0.6
Turbine plant equipment 0.8
Electric plant equipment 0.4
Miscellaneous plant equipment 0.3
Main condenser heat rejection system 0.8
Indirect costs
Construction services 0.45
Home office engineering and services 0.2
Field office engineering and services 0.4
Owner's costs 0.5
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Ball Park Estimate – Scale Factor
The Ball Park estimate accuracy increase more:
• P is close to P0• The historical data is recent
If data for the same Plant type are not available, ispossible to divide the plant in its components.
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Ball Park Estimate – Corrective Factors
It is necessary considering also:
• Location Factor (LF): Per cent whole plant costvariation connected to the specific environmentalconditions presents where the plat is build
• Escalation Factor (EF): index summarizing thetemporal cost trend for the resource used to buildthe plant
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Ball Park Estimate – Corrective Factors
Example 1
New plant (1986)•Size: 75.000 T/Y•Location: Saudi Arabia
Reference plant (1974)•Size: 90.000 T/Y•Location: Italy•Cost: 14 M€ (without draining purification plant)
Scale Factor: 0.6Escalation Factor: 1113.3 / 263.9 = 4.22Location factor: 2.3 / 2 = 1.15
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Ball Park Estimate – Corrective Factors
Example 1
DESCRIPTION COST
Plant build in the 1986 14 x 4.22= 59.08 M€
Size reduction:
Draining purification plant (estimate): 7 M€
Total plant cost build in Italy: 52.96 + 7 = 59.96 M€Total p. c. build in Saudi Arabia: 59.96 x 1,15 = 68.95 M€
M€ 52.9690
7508.59
6.0
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Ball Park Estimate – Corrective Factors
Example 2It is necessary to estimate the plant cost calculated with a scale factor equal to 25 M€ and characterized by the following breakdown:
Escalation Factors
15% engineering 5% annual50% materials 10% annual25% construction 8% annual10% subcontractors 4% annual
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Ball Park Estimate – Corrective Factors
Example 2
I
M
C
S
12 16 20 24 30 380months
The Barycentre method is usually used
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Ball Park Estimate – Corrective Factors
Example 2Barycentre calculation
I 12 + 6= 18 months = 1.5 yearsM 12 + 4 + 7 = 23 months = 1.92 yearsC 12 + 8 + 12*= 32 months = 2.6 yearsS 12 + 8 + 12*= 32 months = 2.6 years* For this phases the barycentre is usually placed at 2/3
Cost Calculation:I 25 • 0.15 • (1 + 0.05)1.5 = 4.03M 25 • 0.5 • (1 + 0.1)1.92 = 15.01C 25 • 0.25 • (1 + 0.08)2.6 = 4.03S 25 • 0.1 • (1 + 0.04)2.6 = 2.77
25.84 Ml€
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Fixed Rate of Interest
P
S
Time[years]
0 1 n32 …
T0 S0 = PT1 S1 = P + i x P = P(1+i)1
T2 S2 = (P + i x P) + i (P + i x P) == (P + i x P) (1 + i) = P(1+i) (1+i) = P (1+i)2
T3 S3 = P (1+i)2 + i (P (1+i)2) = P(1+i) (1+i)2 = P (1+i)3
…
Tn Sn = P (1+i)n
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Factorial Estimate
It is used to:• Estimate using the comparison of the different
design choices• Perform feasibility studies• Estimate the stock in hand allocation (budget)
It is based on the cost breakdown and considers:• Analytic cost items estimate• Other costs estimate by per cent factors
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Factorial Estimate
Equipment Cost ( E )
Materials Cost ( M )
Erected Cost ( M + L )
Total Base Cost ( BC )
Total Investment Cost ( TIC )
Fb Bulk factor (40 - 100 % of E)
Fc Construction factor (50 - 80% of M)
Fs Services factor (15 - 30 % of M + L)
Fk Markup factor (10 - 20 % of BC)
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Factorial Estimate
The Mark – up factor considers:
•Escalation•Contingencies•Overheads •Financial costs•Insurances•Guarantees•Taxes•Exchanges•Profits
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Analytic Estimate
It is the cost estimate for each account in the breakdown cost:
•Engineering•Materials•Transport•Construction•Supervision• …
+ Mark up (in order to determinate the cost)
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Analytic Estimate
For each account it is necessary to point out the single resources allocated (quantity x unit cost)
• Labour• Material• Means of production• Services
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Analytic Estimate - Design
It consists in the accounts relative to the base and detail engineering.
The project cost on the whole plant cost is a very variable component and depends on the plant type and size.
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Analytic Estimate - Materials
It is possible to distinguish:
• Items
• Bulk materials (piping, instrumentation, electrical material, metallic structures etc.)
•Various material (Spear parts, catalysts)
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Analytic Estimate – Materials
ITEMS
They are evaluated one by one, according to statistical data about orders, demands, supplies etc.The principal analysis instruments are the cost curves. They show the recent orders costs correlated to ad hoc parameters (weight, surface, power…)Curves represent the most effective market situation synthesis
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Analytic Estimate – Materials
CRITICAL ACCOUNTS
Items estimates usually characterized by the major evaluation risks are:
•Special apparatus (having special material or processing)•Big compressors and ovens•Special valves and piping special materials•Piping quantity and weight•Specific features requested by the customer
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Analytic Estimate – Materials
BULK MATERIALS
Is made using the “material take-off”, that is the estimate quantity of the technical documents requested by the engineering. It can be manual or computerized.
The piping account is not the more expensive, but imply the greatest part of assembly labour.
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Analytic Estimate – Transport
It includes the following accounts:
•PACKING: like percentage of materials costs•TRANSPORTS: special (unit price)
normal (€/Kg)The local transportation could be very risky
and difficult to evaluate:
•INSURANCE: percentage of the material and transport cost•CUSTOMS AND PORT FEES
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Analytic Estimate – Construction
It is the cost component with major uncertainty and evaluation risks, particularly for plants in foreign countries:
Two, not alternative, ways are available:
•Market research through preliminary subcontractor proposal
•Internal evaluation through:oStandard Man Hours (SMh)oEffective Man Hours Estimated (EMh)
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Analytic Estimate – Construction
INTERNAL EVALUATION
Is based on the ideas of:
Yield:
Productivity:
Where:Q = Physical quantitiesSMh = Standard Man hourEMh = Effective Man hour
SMh
QY
EMh
SMhP
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Analytic Estimate
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Analytic Estimate
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Analytic Estimate - Supervision
It is the labour cost associated to the staff sent in the site for the technical supervision and to manage the project during the construction.
From the organization chart and the permanence time is calculated the total men/months necessary, and it is multiplied by:
• standard cost for the internal staff• travelling allowance, board and accommodation• other fees
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Analytic Estimate - Contingency
It includes the major cost for:
• Project indeterminateness and incompleteness• Costs’ uncertain grade• Delays• Forgetfulness and estimate’s errors• Unexpected and incidental facts• etc.
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Analytic Estimate - Contingency
It not includes great risk from:
•Socio-economical upheaval, wars and revolutions
•Geothermic surprises
•Legislations changes
•Supplier bankruptcy
•Failure to pay
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• Asphalt– Jan-Dec 2003 $53.93/ton– Jan-Dec 2005 $77.66/ton
• Concrete (Structural)– Jan-Dec 2003 $549.82/CY– Jan-Dec 2005 $761.71/CY
• Steel (Reinforcing)– Jan-Dec 2003 $.52/LB– Jan-Dec 2005 $0.91/LB
Figures based on Weighted Averages
44.0%
38.5%
75.0%
Cost Trends(Annual Averages)
$85.38
$51.60+20.1%
Rising Asphalt Costsby Quarter
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Rising Concrete Costsby Quarter
$490.02
$1,045.14
+64.2%
Rising Steel Costsby Quarter
$1.28
$0.53+48.8%
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• Construction market saturation:– “Hot” Market, both public and private
sector– Labor and equipment shortages, due to
hurricane recovery efforts– Material shortages
• Fuel cost increases• Project requirements:
– Hours of operation– Night work– Delayed start
Causes for Major Cost Increases
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Creating the Estimate
Finally, once you determine the technique to use in creating your estimates, it is time to actually create them.In this step, you will pull together your project team and ask them to determine the estimate. You can apply more precision to your estimates by doing the following:
•Have the person doing the work create the estimate.•Use task information from other projects.•Use the PERT technique
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An Example
TPMP has just placed you at the Pinnacle Candy Company asa temporary project manager. You have been assigned theEspressoFix Bar project. This project is going to create a newcandy that will satisfy every coffee addict’s need for coffeeall wrapped up in a candy bar. The management at Pinnacleonly wants to see if this new candy bar is marketable.Production of the finished product will be another projectinitiated later. The budget of $100,000 was establishedbefore you started work on the project. You are just aboutdone with the project planning and wonder whether$100,000 will be enough money to cover the project. Yourteam has already created the WBS with duration estimatesillustrated, the network diagram, and effort estimates shownin the next slides.
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Effort Estimates for the Espresso Fix Project
Task ResourceEffort
EstimateRate
Market surveys Marketing 20 days $1,200 per day
Marketing plan Marketing 25 days $1,200 per day
Ad campaign Advertising 10 days $1,000 per day
Legal clearance on the name
Legal 10 days $1,600 per day
Create recipeChef 7 days $800 per day
Test kitchen 15 days $1,000 per day
Create productChef 6 days $800 per day
Test kitchen 10 days $1,000 per day
Internal taste testingEmployees on break 0
Employee cafeteria 0
Focus group taste testingFirm fixed
price contract$50,000
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WBS with duration estimates
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Network diagram
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Questions
1. How long is this project?
2. What is the cost baseline? Why?
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Answers
1. This is a 90-day project
2. The cost baseline is the total project budget minus the managerial reserve. Since this project does not have a managerial reserve, the cost baseline is $165,400.
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Cost Estimate form: a real case
Best practices…