ENSC31 Estimation of Detailed Costs and Benefits of Engineering Projects PDF

Estimation of detailed costs and benefits of any engineering projects ENGR. JOHN PAULO M. PERIDO, MSC ENSC31 ENGR. KELVIN MICHAEL A. CRYSTAL, MSC  PROJECT a collaborative enterprise, frequently involving research or design, that is careful...

Estimation of detailed costs and benefits of any engineering projects ENGR. JOHN PAULO M. PERIDO, MSC ENSC31 ENGR. KELVIN MICHAEL A. CRYSTAL, MSC  PROJECT a collaborative enterprise, frequently involving research or design, that is carefully planned to achieve a particular aim; a problem that needs to be solved. A project is temporary in that it has a defined beginning and end in time, and therefore defined scope and resources. It is unique in that it is not a routine operation, but a specific set of operations designed to accomplish a singular goal.  Recall your previous projects from past subjects What were they and how were they planned? What were the goals you wished to achieve with the project? How was the project started and how was it terminated? How much did the project cost? If the goals were achieved, what were the benefits that were derived from it?  Examples of Projects Development of a prototype hydropower windpump Construction of wooden worktables for students Development of software for checking of attendance Feasibility study of commercial building Purchase of agricultural machinery Construction of housing for broiler Construction of irrigation system for farm Reblocking of farm-to-market road They all have an objective that will benefit the end user.  CASH FLOW TANGIBLE COST ANALYSIS OR BENEFITS determines the are those costs or estimated annual benefits that an costs and benefits for organization can a project and the easily measure in resulting annual cash dollars flow INTANGIBLE Costs resources used to COST OR research related areas of a project but not billed to BENEFITS the project are costs or benefits Benefits that are difficult to goodwill, prestige, measure in monetary general statements of terms improved productivity not easily translated in dollars PROJECT COST  PROJECT COST Cost Project Costs are any expenditures made an amount of money or estimated to be made, or needed to pay or monetary obligations compensate to buy or incurred or estimated to be take a service or good. incurred to complete the project which are listed in a project baseline. Cost Terminology Most cost estimates are broken down into direct costs and indirect costs Cost Terminology Direct costs costs that can be reasonably measured and allocated to a specific output or work activity. Example: salaries for project staff and materials required for a particular project Cost Terminology Indirect costs costs that are difficult to allocate to a specific output or work activity. Example: costs for management, insurance, taxes, or maintenance Cost Terminology Investment Cost this is the first cost; it is the capital required to get a project started. Example: the costs of acquiring the Property; the costs of design, engineering, materials, labor, construction, and other services arising in connection with the design and construction of the Company Facility; costs of furniture, fixtures, equipment and inventory. Cost Terminology Fixed Cost costs that are unaffected by changes in activity level over a feasible range of operations for the capacity or capability available. Example: Insurance and taxes on facilities, general management and administrative salaries, license fees, depreciation, and interest costs on borrowed capital. Cost Terminology Variable Cost costs associated with an operation that vary in total with the quantity of output or other measures of activity level. Example: the costs of material and labor used in a product or services Cost Terminology Incremental Costs (Incremental Revenue) additional cost, or revenue, that results from increasing the output of a system by one or more units. Example: Changing the product line, Changing the level of product output, Buying additional or new materials, Hiring extra labor, Adding new machines or replacing existing ones, Switching distribution channels, Variable overhead costs. Cost Terminology Sunk Costs cost that occurred in the past and has no relevance to estimates of future costs and revenues related to an alternative course of action. This is the amount which has been spent or capital invested which for some reasons can not be retrieved. Cost Terminology Sunk Costs Example: Suppose that you pay P500 as down payment for a computer set to a computer shop, which will be applied to P20,000 purchase price but which must be forfeited if you decide not to take the unit. You find a similar unit similar in another shop with a purchase price of P18,000. For the purpose of deciding which unit to purchase, the P500 is a sunk cost and thus would not enter into the decision except that it lowers the remaining cost of the first unit. Cost Terminology Opportunity Costs costs that are incurred because of the use of limited resources, such that the opportunity to use those resources to monetary advantage in an alternative use is forgone. Thus, it is the cost of the best rejected (i.e., forgone) opportunity and is often hidden or implied. Cost Terminology Opportunity Costs Example: Suppose that a project involves the use of vacant warehouse space presently owned by a company. The cost for that space to the project should be the income or savings that possible alternative uses of the space may bring to the firm. In other words, the opportunity cost for the warehouse space should be derived from the best alternative use of the space. PROJECT COST ESTIMATION COST 1. 2. Identify project. Identify individual project components. ESTIMATE: 3. Classify individual project components. 4. Schedule construction, operation and FEASIBILITY/ maintenance of individual components within the project design. DETAILED 5. Engage project cost estimator to begin estimating costs in financial terms. DESIGN 6. Engage financial analyst to provide cost estimator with the level of detail required for financial analysis. 7. Engage economist to provide cost estimator with the level of detail required for economic analysis.  Top-down approach (design-to-cost) Approaches uses historical data from similar engineering projects to to Project estimate the costs, revenues, Estimation and other data for the current project by modifying these data for changes in inflation or deflation, activity level, weight, energy consumption, size, and other factors.  Top-down approach (design-to-cost) Approaches This approach is best used early in the estimating to Project process when alternatives are Estimation still being developed and refined.  Bottom-up approach method that breaks down a Approaches project manageable into units small, and to Project estimates their economic consequences. Estimation These smaller unit costs are added together with other types of costs to obtain an overall cost estimate.  Bottom-up approach This approach usually works Approaches best when the detail concerning the desired output to Project (a product or a service) has been defined and clarified. Estimation  Components of an Integrated Approach Approaches 1. Work breakdown structure (WBS) This is a technique for to Project explicitly defining, at successive levels of detail, the Estimation work elements of a project and their interrelationships (sometimes called a work element structure).  Components of an Integrated Approach Approaches 2. Cost and revenue structure (classification) Delineation of to Project the cost and revenue categories and elements is Estimation made for estimates of cash flows at each level of the WBS.  Components of an Integrated Approach Approaches 3. Estimating techniques (models) Selected to Project mathematical models are used to estimate the future Estimation costs and revenues during the analysis period. WORK BREAKDOWN STRUCTURE Work Breakdown Structure A work breakdown structure defines all the things a project needs to accomplish, organized into multiple levels, and displayed graphically. Deliverable-Based WBS A work breakdown structure defines all the things a project needs to accomplish, organized into multiple levels, and displayed graphically. Level 1 Level 2 Level 3 Level 4 Phase-Based WBS Phase-Based WBS - requires work associated with multiple elements be divided into the work unique to each Level 1 Element. Other Example Of WBS Three-level WBS for Commercial Building Project 1. GATHER CRITICAL DOCUMENTS 2. IDENTIFY KEY TEAM MEMBERS a. Identify the appropriate project team members. How to Make a Work b. Analyze the documents and identify the deliverables. Breakdown Structure 3. DEFINE LEVEL 2 ELEMENTS a. Level 2 Elements are summary deliverable descriptions that must capture 100% of the How to Make project scope. a Work b. Verify 100% of scope is captured. This requirement is Breakdown commonly referred to as Structure the 100% Rule. 4. DECOMPOSE (BREAKDOWN) ELEMENTS a. Begin the process of breaking the Level 2 deliverables into How to Make unique lower Level deliverables. This “breaking a Work down” technique is called Decomposition. Breakdown Structure 4. DECOMPOSE (BREAKDOWN) ELEMENTS b. Continue breaking down the work until the work covered How to Make in each Element is managed by a single individual or a Work organization. Ensure that all Elements are mutually Breakdown exclusive. Structure 4. DECOMPOSE (BREAKDOWN) ELEMENTS c. Ask the question, would any additional decomposition How to Make make the project more manageable? If the answer is a Work “no”, the WBS is done Breakdown Structure 5. CREATE WBS DICTIONARY a. Define the content of the WBS Dictionary. The WBS Dictionary is a narrative How to Make description of the work covered in each Element in the a Work WBS. The lowest Level Elements in the WBS are Breakdown called Work Packages. Structure 5. CREATE WBS DICTIONARY b. Create the WBS Dictionary descriptions at the Work Package Level with detail How to Make enough to ensure that 100% of the project scope is covered. a Work The descriptions should include information such as, Breakdown boundaries, milestones, risks, owner, costs, etc. Structure Gantt Chart Gantt chart is a visual view of tasks scheduled over time. It is a type of bar chart that illustrates a project schedule. Program of works. Cost Structure  used to identify and categorize the costs that need to be included in the analysis. Cost Structure The cost structure, prepared in tabular or checklist form, is a good means of preventing overlooking important categories of costs  Technical familiarity with the project is essential in ensuring the Cost completeness of the Structure structure, as are using the life-cycle concept and the WBS in its preparation.  Labor costs also called direct costs, are the costs of employees’ time spent on rendering services or Cost performing manufacturing works within the project. Structure They can incur as work time paid at a specific pay rate, or as a fixed cost per item, unit, or service.  Material costs arise as costs of raw materials, parts and supplies purchased for using in project Cost works or performing them. Structure Sometimes, this cost type also includes insurance, custom clearance and other costs related to purchasing materials and goods.  Overhead costs cannot be always allocated to a specific cost driver and Cost don’t create profit in a direct way. Structure However, they influence project outcomes indirectly by making business activities possible, or increasing their efficiency.  Subcontracting, or outsourcing costs are sometimes treated as direct costs, and sometimes Cost included in cost structures as a separate category. Structure Again, they can be accrued on the basis of work time spent by an outsourcing team and their pay rates, or as a fixed cost for certain products or services.  Logistics costs are associated with storing and moving purchased materials and include such Cost subcomponents transportation, as storage, Structure distribution, etc. Estimating Techniques  Estimate Considerations Project Size Time of Year Project Quality Labor Pool Project Length Specialty Equipment Location Other Market Conditions  The level of detail and accuracy of estimates should depend on the following: 1. Time and effort available as Estimating justified by the importance of Techniques the study 2. Difficulty of estimating the items in question  The level of detail and accuracy of estimates should depend on the following: 3. Qualifications of the Estimating estimator(s) Techniques 4. Sensitivity of study results to particular factor estimates 5. Methods or techniques employed  1. Order-of-magnitude estimates used in the planning and initial evaluation stage of a project used in selecting the feasible alternatives for the study. they typically provide accuracy in the range of ±30 to 50% and are Classification of developed through semiformal means such as conferences, Cost Estimate questionnaires, and generalized equations  2. Semi-detailed, or budget, estimates: used in the preliminary or conceptual design stage of a project. compiled to support the preliminary design effort and decision making during this project period. Classification of Cost Estimate Their accuracy usually lies in the range of ±15%.  2. Semi-detailed, or budget, estimates: These estimates differ in the fineness of cost and revenue breakdowns and the amount of effort spent on the estimate. Estimating equations applied at Levels 2 and 3 of the WBS are normally used. Classification of Cost Estimate  3. Definitive (detailed) estimates: used in the detailed engineering/construction stage of a project. used as the basis for bids and to make detailed design decisions. Classification of Cost Estimate  3. Definitive (detailed) estimates: Their accuracy is ±5%. They are made from specifications, drawings, site surveys, vendor quotations, and in-house historical records and are usually done at Level 3 and successive levels in the WBS. Classification of Cost Estimate  UNIT TECHNIQUE Average cost of residential building for the first quarter of 2017 was estimated at PHP9,605 per square meter. Industrial-type buildings have an average cost of PHP6,677 per square meter. Estimating Agricultural-type buildings have an Techniques average cost of PHP4,548 per square meter.  ITEMIZED COST This is the most common way to estimate costs All the items needed in the project is listed and the costs are added up. Includes all applicable costs, such as equipment and parts, materials and supplies, labor, financing, fees and Estimating licensing, transportation, and acquisition costs for land or facilities. Techniques  ITEMIZED COST For some of the items, bidding is done to accurately determine their prices. If carried out consistently and if the list is reasonably complete, the resulting cost is highly accurate, but the process is time-consuming, lengthy and costly. Estimating Techniques  Allowance for adverse conditions which will be in addition to the base cost estimate. Physical contingencies – to cover physical uncertainties beyond the base case to complete the project. Often calculated and expressed as percentages of base costs. Contingency Price contingencies – to cover Allowances inflation and price uncertainties  Some typical levels of Physical Contingencies: 5% - standard equipment designs/definable civil works, e.g., road surfacing, canal lining. 10% - general civil works with routine and predictable uncertainties e.g, roads, buildings, pipelines, transmission lines Contingency Allowances 15% - plant and civil works in difficult terrain. Cost estimation is a skill It is something that you improve the more times you practice.  References Blank, L.T. and Tarquin, A. (2012). Engineering Economy 7th ed. McGraw-Hill: United States of America. Sullivan, W.G. et. al. (2014). Engineering Economy 16th ed. Pearson Education: England. https://psa.gov.ph/content/construction-statistics-approved- building-permits-first-quarter-2017-preliminary-results https://www.workbreakdownstructure.com/