A Short Course on Product Cost

Estimation
By

Dr. Muhammad Elrabaa

1
 Contents

„ BASIC DEFINITIONS

„ COST PRICE MODULE (FOR CONSTRUCTION CONTRACTS)

„ COST ESTIMATING PROCESS & PROCEDURE

„ COST ESTIMATING CLASSIFICATION

„ COST ESTIMATING METHODOLOGIES

„ FACTORS AFFECTING COST ESTIMATING ACCURACY

„ CASE STUDIES

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 Basic Definitions

CAPITAL COST ESTIMATE (CAPEX)

„ REPRESENTS THE TOTAL CAPITAL COST OF THE PROJECT, INCLUDING

ENGINEERING, MATERIAL, CONSTRUCTION, AND MANAGEMENT COSTS.

ALLOWANCES

„ USED TO REDUCE THE RISK OF OVERRUN DUE TO “KNOWN” UNCERTAINTIES

DESIGN GROWTH / DESIGN DEVELOPMENT
EXTRAORDINARY FREIGHT COST (AIR FREIGHT, SPECIAL CARGO ...etc)
FORWARD ESCALATION
CUT / WASTE (BULK MATERIALS)

CONTINGENCIES

„ USED TO REDUCE THE RISK OF OVERRUN DUE TO “POTENTIAL” UNCERTAINTIES

INCOMPLETE PROJECT DEFINITION
CURRENCY FLUCTUATION
ERRORS
DOES NOT COVER FORCE MAJEURE, SCOPE CHANGES, CLAIMS ETC.

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 Basic Definitions

DIRECT COSTS

„ COSTS DIRECTLY ATTRIBUTED TO A JOB OR A PIECE OF PROJECT EQUIPMENT

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 Basic Definitions

INDIRECT COSTS

„ THESE ARE OFTEN REFERRED TO AS “OVERHEAD” COSTS AND CANNOT EASILY

BE ALLOCATED TO ONE JOB OR PROJECTS.

„ THE PROCESS OF RECOVERING OVERHEADS IS KNOWN AS “ ABSORPTION

COSTING” . CLIENTS FOR LARGE CAPITAL PROJECTS ARE VERY INTERESTED IN
PROPOSED OVERHEAD RATES, CHARGEABLE TO PROJECTS AND REQUIRED
DETAILED OF HOW THE OVERHEADS ARE TO BE ALLOCATED.

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 Basic Definitions

FIXED COSTS

„ COSTS ARE SAID TO BE FIXED WHEN THEY REMAIN UNCHANGED AND MUST
CONTINUE TO BE INCURRED, EVEN THOUGH THE WORKLOAD FLUCTUATES, (EG.
MANAGEMENT SALARIES , RENT INSURANCE….ETC.

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 Basic Definitions

VARIABLE COST

„ THESE ARE COSTS WHICH ARE INCURRED AT A RATE DEPENDING ON THE

LEVEL OF THE WORK ACTIVITY.

E.G - MATERIAL
- CONSUMABLES
- SPARE PARTS
- UTILITIES (POWER, WATER, SYSTEM)

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 Cost Price Modle
COST

DIRECT + INDIRECT + PROFIT = PRICE

• DESIGN
• MARKETING
• LABOUR • MATCH
• SALES
• MATERIAL INVESTMENT
• COMPONENTS • ACCOUNTING
• TOOLING • PURCHASING
• MANAGEMENT
• WARRANTY
• LIABILITY
• ADMINISTRATION

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 Cost - Price Modle

CONSTRUCTION EQUIP. DURATION (HOURS) X RATE $/HR X CONSUMABLE FACTOR

+
LABOR COST LABOR (MHRS) X $/HR X SUPERVISION FACTOR
+
MATERIAL COST + DELIVERY COST + PURCHASING &
MATERIAL COST
INSPECTION COST
=
DIRECT COST TOTAL DIRECT COST

= OVERHEAD MOB. & DEMOB., TEMPORARY FACILITIES ,

INDIRECT COST INSURANCE ADMINISTRATION, MANAGEMENT,
= ENGINEERING,…ETC

TOTAL COST COST

X
PROFIT FACTOR

PRICE PRICE 9
 Cost Estimating Process
1.0 Cost Estimation Purposes

„ INITIAL COST INPUT FOR PROJECT IDENTIFICATION DOC. (PID)

„ INDICATIVE COST ESTIMATE FOR PLANNING ITEMS FOR BUSINESS PLAN
„ PERFORMANCE INDICATORS
„ BUDGET UPDATING/ REVISION
„ NEW BUDGET PROPOSALS
„ COUNTER CHECKING CONSULTANT COST ESTIMATE
„ REVIEW BIDDERS RATES
„ EVALUATE ALTERNATIVES / OPTIONS
„ PROVIDE DATA FOR PROJECT SCHEDULING (ACTIVITY WEIGHTS,
„ RESOURCE LEVELLING)

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 Cost Estimating Process
2.0 Capital Cost Major Component

• Screening Studies
ENGINEERING • Basic Engineering (FEED)
• Detailed Engineering
• Procurement Services
DIRECT COST

• Major Equipment
MATERIAL • Bulk Material
• Freight & Transportation

• Preliminaries (Mobilisation, Site Facilities,

Site Running Costs)
CONSTRUCTION • Civil, Mechanical, E&I Works etc.
• Pre-commissioning / Commissioning
INDIRECT COST

• Owner Management
OWNER COST • Housing/Camp
• Fees
• Services

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 Cost Estimating Process
3.0 In-House Cost Estimate

Review / Discuss Review

• Scope of Work &
• Basis / Strategy Develop Check
Customer Issue
• Exclusions Cost Output
Input / Estimate
• Estimate Methodology Estimate
Request • Required Accuracy • Quality
• Risks
• Contingency

Cost Data
• Purchase Order
• Vendor Quotes
• Completed Projects
• Escalation Rates
• Construction Unit Rates

• Cost Est. Software

• Excel Worksheet

Computer Tools 12
 Cost Estimating Process
4.0 Estimating Procedure

 PREPARE ESTIMATING REQUIREMENTS

 PLANNING THE ESTIMATE

 STRUCTURE THE ESTIMATE

 DEVELOPING THE ESTIMATE

 DEVELOPING CONTINGENCY

 DOCUMENTING

 REVIEW / ISSUE ESTIMATE

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 Cost Estimate Classification
International Classification Practices

Association Norwegian American

AACE ANSI AACE ADCO
of Cost Project Society of
Classification Standard Pre-1972 EMPD
Engineers (UK) Management Professional
Standard Z94.0 Classification
ACostE Association (NFP) Estimators
(ASPE)
Concession Estimate
Class 4
Order of
INCREASING PROJECT DEFINITION

Order of Order of
+40/-20%
Class 5 Magnitude Magnitude Magnitude Exploration Estimate Level 1 Screening /
Estimate Estimate Estimate
Feasibility
-30/+50 Class IV-30/+30
Feasibility Estimate

Class 3
Study Study Estimate Authorization
Class 4 Class III -20/+20
+30/-15%
Estimate Estimate Conceptual /
Budget Level 2
Estimate Prelim. Budget
-15/+30 Preliminary Budget Class 2
Class 3 Estimate
Master Control
Estimate Estimate Level 3 +20/-10%
Class II-10/+10 Master Budget

Definitive Level 4
Class 2 Estimate Class 1
Definitive Definitive Current Control
Estimate Estimate Estimate Level 5 +10/-5%
-5/+15 Class I-5/+5 Definitive /
Detailed
Class 1 Control Budget
Estimate Level 6

Extracted from “AACE International Recommended Practices and Standards”

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 Estimating Classification
1.0 Order of Magnitude

 PREPARED BEFORE PROJECT STARTS

 HAZY INFORMATION

 DETAILS OF PROJECT YET TO BE DEVELOPED

 USEFUL FOR QUICK SCREENING AND PLANNING DECISIONS

2 INTENDED ACCURACY + 35%

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 Estimating Classification
2.0 Study Estimate

 PREPARED DURING PROJECT STUDY AND SCREENING PHASE

 BASED ON A GOOD OUTLINE PROJECT DEFINITION

Ñ MAJOR PROJECT ELEMENTS

Ñ SIZE / CAPACITY /VOLUME /AREA

 USEFUL FOR: SCREENING ALTERNATIVES /OPTIONS

Ñ PRELIMINARY FEASIBILITY STUDY

Ñ MANAGEMENT DECISION

2 INTENDED ACCURACY + 20%

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 Estimating Classification
3.0 Study Estimate

 DEVELOPED DURING ENGINEERING PHASE 10-20% OF ENGINEERING

 BASED ON - WELL DEFINED DESIGN CRITERIA.

2 INTENDED ACCURACY + 15%

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 Estimating Classification
4.0 Definitive Estimate

 MOST DESIGN WORK COMPLETED.

 ALL MAJOR CONTRACTS / PURCHASE ORDER HAVE BEEN PLACED.

 USED TO UPDATE BUDGET FOR THE THE PURPOSE OF COST CONTROL.

2 INTENDED ACCURACY + 5-10%

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 Cost Estimating Methodology

Example: (Process Equipment)

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 Cost Estimating Methodology
What is Process Equipment

Package Units
Engineered Equipment PROCESS
EQUIPMENT • chemical Dosing
• Columns • Water Treatment
• Vessels • HVAC Equipment
• Reactors
• Tanks

Standard Equipment
• Pumps
• Compressors
• Fans

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 Estimating Equipment Cost Methodologies
(Direct Cost)

 BUDGET PRICE

 PRICE TABLES

 PURCHASE ORDERS (FROM PREVIOUS JOBS)

 PRICE CURVES

 CALCULATION BASED

 EXPONENTIAL METHODS (COSTS SCALING)

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 Estimating Methodologies
Equipment Cost (Direct Cost)

ADJUSTMENT TO THE NEW NEW CONDITIONS

SOURCE OF DATA • Cost of Spare Parts

• Freight, Insurance, Transportation Cost
• BUDGET PRICE • Currency & Exchange Rate
• PURCHASE ORDER • Exclusions
• BUDGET QUOTATION • Escalation Formula
• COST CURVES • Scaling Factor

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 Estimating Methodologies
Estimating Equipment (Scaling Factor)

COST
E2

E1
x
COST E2 = COST E1 X (size E2/ size E1)

SIZE

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 Material Selection Impact on Equipment

FOB-COST VS WEIGHT CURVE - PRESS. VESSEL

FOB-VALUE

E L
. STE
S
V1
L
TEE
C.S
V2

W WEIGHT Kg

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 Estimating Methodologies
Estimating Equipment Cost Calculation

MANHOLE
VESSEL WIGHT
NOZZLES
Shell weight = π x D x L x t x s.g. = W1 Kg

Heads weight = 2 x 1.3 x D x t x s.g.= W2 Kg D HEAD

Others: SHELL

• Internals = W3 Kg L
• Supports = W4 Kg
• Nozzles = W5 Kg
• Manhole = W6 Kg

---------------
Total Weight W Kg

Estimated Cost = W (Kg) X Unit Cost (Cost/Kg)

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 Factors Affecting Project Final Cost

„ 1.0 SCOPE OF WORK

„ CLARITY OF SCOPE DEFINITION

„ CHANGES IN SCOPE

„ 2.0 TECHNICAL FACTORS

„ DESIGN STANDARDS & PRACTICES

„ SAFETY & ENVIRONMENT REQUIREMENTS
„ SKILLS/COMPETENCIES
„ 3.0 OTHERS

„ PROJECT TIME FRAME/SCHEDULE

„ INTERFACES WITH OTHER OPCOS
„ PROJECT ORGANIZATION
„ CURRENCY EXCHANGE RATES
„ MARKET CONDITIONS
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 Case Study 1

+ 7.00 mtr

T- 1001

+ 5.0 mtr

+ 0.00 mtr

„ TANK T-1001 NEEDS TO BE RE-PAINTED (EXTERNAL).

„ MAINTENANCE RECEIVED A QUOTATION FOR BLAST-CLEANING AND PAINTING OF
THE TANK. THE QUOTE EXCLUDES THE PROVISION OF THE SCAFFOLDING, ASSUMED
TO BE PROVIDED BY THE OWNER. THE JOB IS PLANNED TO START ON MONDAY 1ST
MAY AND WILL TAKE 10 WORKING DAYS.
„ THE MAINTENANCE DEPARTMENT REQUESTED YOU TO PROVIDE AN ESTIMATE OF
THE COST FOR THE SCAFFOLDING.

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 Case Study 1

„ THERE IS A CURRENT ‘SCHEDULE OF RATES’ CONTRACT WITH A SPECIALIZE

COMPANY FOR PROVIDING OF SCAFFOLDING

INSTALLATIN AND DISMANTLING

CODE STANDARD SCAFFOLDING US$ Unit
S25 0 - 25 m3 6.96 m3
S50 25 - 50 m3 5.05 m3
S75 50 - 75 m3 4.80 m3
S100 75-100m3 4.15 m3
S150 100-150m3 3.95 m3
S200 150-200m3 3.65 m3
S400 200-400m3 3.40 m3
S000 400->m3 3.30 m3
CODE SPEICALS US$ UNIT
LA LADDER 2.50 M1
WFR WORK FLOOR 4.35 M2
Z FLEXIABLE SHEETING 4.80 M2

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 Case Study 1

RENT

CODE TYPE US$ Unit

SR SCAFFOLDING 0.03 M3/DAY
LAR LADDER 0.04 M1/DAY
WFR WORK FLOOR 0.04 M2/DAY

ZR FLEXIBLE SHEETING 0.05 M2/DAY

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 Case Study 1

„ STEPS TO BE TAKEN

1.0 MAKE A (SIMPLE) WORK PLAN

2.0 DEVELOP SCOPE OF WORK
3.0 CALCULATE QUANTITY OF EACH ACTIVITY
4.0 APPLY APPLICABLE UNIT RATES
5.0 CALCULATE TOTAL COST

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 Case Study 1

WORKPLAN: SCAFFOLDING FOR BLASTING/PAINTING T-1001.Dia 5 Mtr H =7 Mtr

1.0 ERECT STANDARD SCAFFOLDING (NO HEAVY EQT. ETC. INVOLVED) AROUND
TANK.
2.0 PROVIDE WORKING FLOORS. FOR EASY WORKING AT VERTICAL CENTERS OF
2.0 Mtr.
3.0 FOR ENVIRONMENTAL REASONS PROVIDE FLEXIBLE SHEETING AROUND
SCAFFOLDING.
4.0 PROVIDE 3 LADDERS
5.0 APPROVAL SAFETY ADVISER
6.0 SCAFFOLDING SHOULD BE READY BEFORE START OF THE WORK ON MONDAY
1ST MAY (WK18).

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 Case Study 1

WORK SCHEDULE:

START
WK17 1/5 WK18 W/E WK19 W/E WK 20

Blasting/painting
Scaffolding Ready
Start Dismantling Scaffolding

Renting Period Scaffolding

(16 Calendar Days )

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 Case Study 1

D (=d+4)
d Volume Scaffolding:

∏/4 (D2 - d2) x H1

∏/4(92 - 52) x 7 = 307 m3 (S400)

Work Floor:
each:
∏/4(D2 - d2)
∏/4(92- 52)= 44m2
Total 3 x44m2 = 132m2 (WFR)

+9 Flexible Sheeting
∏D x H
+6 ∏ x 9 x 9 - 254 m2 (ZR)

Work Floor Ladder:

+4 3 x 6 m1 = 18m1 (LA)

+2
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 Case Study 1

POINTERS

 UNDERSTAND PROJECT REQUIREMENTS BEFORE DEFINING SCOPE.

 UNDERSTAND METHOD OF MEASUREMENT OF A ‘SCHEDULE OF RATE CONTRACT.

 SELECT OPTIMUM IMPLEMENTATION PLAN.

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 Case Study 1
Cost Estimate Details

# Activity Qty Unit Standard Norm Correction Total

1 Erection & dismantling scaffolding 307 m3 3.4 1,043.80
2 Erection & dismantling work Floor 132 m2 4.35 574.2
3 Erection & dismantling Sheeting 254 m2 4.8 1,219.20
4 Erection & dismantling Ladders 18 m1 2.5 45
5 Rent Scaffolding 4,912.00 m3d 0.03 147.36
6 Rent Work Floor 2,112.00 m2d 0.04 84.48
7 Rent Sheeting 4,064.00 m3d 0.05 203.2
8 Rent Ladders 288 m1d 0.04 11.52
Total 3,328.76

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 Case Study 2

THE FOLLOWING COST INFORMATION IS AVAILABLE OF A SPECIFIC EQUIPMENT ITEM:

SIZE F.O.B COST

100 M3/hr US$ 50,000

200 M3/hr US$ 80,000

QUESTION:

WHAT IS THE ESTIMATED COST FOR THE EQUIPMENT ITEM WITH A CAPACITY OF 300
M3/HR?

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 Direct Cost
Estimating Equipment Cost Calculation

COST
E2

E1
x
COST E2 = COST E1 X (size E2/ size E1)

SIZE

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 Case Study 2

THE SOLUTION:

1) 200 (X) = 80,000

( )
100 50,000

(X)
2) 2 = 1.60

3) LOG2 x (X) = LOG 1.60

4) 0.301 x (X) = 0.204

5) (X) =0.678
300 (0.678)
Estimated Cost: ( ) X US$80,000 = US$105,000
200
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