20/04/2015

1

Project ManagementCost EstimatingProf. Mauro Mancini

e-mail: Mauro.Mancini@polimi.ittel.: +39-02-23994057

POLITECNICO DI MILANODepartment of Management, Economics and Industrial Engineering

2

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

20/04/2015

2

3

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)

4

Estimates’ Accuracy

%

Estimate’s error

Project Life Cycle t

20/04/2015

3

5

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)

6

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

20/04/2015

4

7

Cost estimating techniques

At different cost estimating levels correspond twocost estimating techniques:

• Parametric (cost driver)

• Analytic (cost = quantity x unit cost)

8

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

20/04/2015

5

9

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)

10

Ball Park Estimate – Scale Factor

€/MWe

MWe

Validity Zone

20/04/2015

6

11

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

12

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

20/04/2015

7

13

Ball Park Estimate – Scale Factor

C

P

M

Bi-logarithmic axis

10

10

100

100

14

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

20/04/2015

8

15

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.

16

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

20/04/2015

9

17

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

18

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

20/04/2015

10

19

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

20

Ball Park Estimate – Corrective Factors

Example 2

I

M

C

S

12 16 20 24 30 380months

The Barycentre method is usually used

20/04/2015

11

21

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€

22

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

20/04/2015

12

23

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

24

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)

20/04/2015

13

25

Factorial Estimate

The Mark – up factor considers:

•Escalation•Contingencies•Overheads •Financial costs•Insurances•Guarantees•Taxes•Exchanges•Profits

26

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)

20/04/2015

14

27

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

28

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.

20/04/2015

15

29

Analytic Estimate - Materials

It is possible to distinguish:

• Items

• Bulk materials (piping, instrumentation, electrical material, metallic structures etc.)

•Various material (Spear parts, catalysts)

30

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

20/04/2015

16

31

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

32

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.

20/04/2015

17

33

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

34

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)

20/04/2015

18

35

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

36

Analytic Estimate

20/04/2015

19

37

Analytic Estimate

38

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

20/04/2015

20

39

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.

40

Analytic Estimate - Contingency

It not includes great risk from:

•Socio-economical upheaval, wars and revolutions

•Geothermic surprises

•Legislations changes

•Supplier bankruptcy

•Failure to pay

20/04/2015

21

• 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

20/04/2015

22

Rising Concrete Costsby Quarter

$490.02

$1,045.14

+64.2%

Rising Steel Costsby Quarter

$1.28

$0.53+48.8%

20/04/2015

23

• 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

46

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

20/04/2015

24

47

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.

48

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

20/04/2015

25

49

WBS with duration estimates

50

Network diagram

20/04/2015

26

51

Questions

1. How long is this project?

2. What is the cost baseline? Why?

52

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.

20/04/2015

27

Cost Estimate form: a real case

Best practices…