Ravi Kiran

Cost estimation is important in all aspects of a project, but especially in the stages of

project conception, preliminary design, detailed design, and economic analysis. In engineering practice, the estimation of costs receives much more attention than revenue estimation.

Unlike direct costs for labor and materials, indirect costs are not easily traced to a specific function, department, machine, or processing line. Therefore, allocation of indirect costs for

functions such as IT, utilities, safety, management, purchasing, and quality is

made using some rational basis.

Cost estimation is a major activity performed in the initial stages of virtually every effort in industry, business, and government. In general, most cost estimates are developed for either a project or a system; however, combinations of these are very common. A project usually involves physical items, such as a building, bridge, manufacturing plant, or offshore drilling platform, to name just a few. A system is usually an operational design that involves processes, software, and other nonphysical items.

The cost estimates are usually made for the initial development of the project or system, with the lifecycle costs of maintenance and upgrade estimated as a percentage of first cost. Much of the discussion that follows concentrates on physical-based projects. How-ever, the logic is widely applicable to cost estimation in all areas

Costs are comprised of direct costs (largely humans, machines, and materials) and indirect

costs (mostly support management, taxes, etc.).

functions,

utilities,

Normally direct costs are estimated with some detail, then the indirect costs are added using standard rates and factors. Direct costs in many industries have become a relatively small percentage of overall product cost, while indirect costs have become much larger. Accordingly, many industrial settings require some estimating for indirect costs as well

If a project revolves around a single piece of equipment, for example, a multi-story building, the cost components will be significantly simpler and fewer than the components for a complete system, such as the design, manufacturing, and testing of a new commercial aircraft. Therefore, it is important to know up front how much the cost estimation task will involve. Examples of direct cost components are the first cost P and the annual operating cost (AOC), also called the M&O costs (maintenance and operating).

First cost component P:

Elements: Equipment cost Delivery charges Installation cost Insurance coverage Initial training of personnel for equipment use Delivered-equipment cost is the sum of the first two elements; installed-equipment cost adds the third element. Elements: Direct labor cost for operating personnel Direct materials Maintenance (daily, periodic, repairs, etc.) Rework and rebuild

AOC component, a part of the equivalent annual cost A:

Some of these elements, such as equipment cost, can be determined with high accuracy; others, such as maintenance costs, may be harder to estimate. However, a wide variety of data are available, such as McGraw-Hill Construction, R. S. Means cost books, Marshall & Swift, NASA Cost Estimating website, and many others. When costs for an entire system must be estimated, the number of cost components and elements is likely to be in the hundreds. It is then necessary to prioritize the estimation tasks.

The bottom-up approach treats the required price as an output variable and the cost estimates as input variables. The design-to-cost, or top-down, approach treats the competitive price as an input variable and the cost estimates as output variables. The design-to-cost approach is best applied in the early stages of a product design. This approach is useful in encouraging innovation, new design, process improvement, and efficiency. These are some of the essentials of value

engineering.