CHAPTER 3

Cost Estimation
Techniques
Part 1

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
All rights1reserved.
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
 The objective of Chapter 3 is to
present various methods for
estimating important factors in
an engineering economy study.

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
CONTENT
3.1 Introduction
3.2 An Integrated Approach
3.2.1 WBS
3.2.2 Classification
3.2.3 Models
3.3 Selected Estimating Technique (Models)
3.3.1 Indexes
3.3.2 Unit Techniques
3.3.3 Factors Techniques
3.4 Parametric Cost Estimating
3.4.1 Power Sizing Techniques
3.4.2 Learning & Improvement
3.4.3 CER
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
All rights3reserved.
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
3.1 Introduction
Results of cost estimating are used for a variety of
purposes.

• Setting selling prices for quoting, bidding, or evaluating

contracts.
• Determining if a proposed product can be made and
distributed at a profit.
• Evaluating how much capital can be justified for changes
and improvements.
• Setting benchmarks for productivity improvement
programs.

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
All rights4reserved.
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
3.1 Introduction (Con’t)

Cost estimation is a complex activity

• What strategy to cost estimation will be applied?

• What costs components must be estimated?
• How accurate should the estimates be?
• What estimation techniques will be utilized?

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Example:

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.1 Introduction (Con’t)

Cost estimation is a complex activity

• What strategy to cost estimation will

be applied?
• What costs components must be estimated?
• How accurate should the estimates be?
• What estimation techniques will be utilized?

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.1 Introduction(Con’t)
Fundamental approach to cost estimating
Top-down
• uses historical data from
similar projects. It is best used
when alternatives are still being
developed and refined.

Bottom-up
• more detailed and works best
when the detail concerning the
desired output (product or
service) has been defined and
clarified.

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.1 Introduction(Con’t)

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.1 Introduction(Con’t)

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.1 Introduction(Con’t)

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.1 Introduction(Con’t)

Bottom-Up Approach to Determining the Cost of a College Education

Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.1 Introduction(Con’t)

Example for bottom-up approach

Q1 (a) Estimate your annual expenses for the following

items:
i. Books RM100/book
ii. House rental RM 250/month
iii. Educational Fee RM 1500/semester
iv. Food RM15/day

(b) Calculate the total cost of expenses for 4 year.

Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Competition is
NOT a
dominant
factor in
pricing Encourage
innovation, new
design,
manufacturing
process
improvement
and efficiency

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.1 Introduction (Con’t)

Cost estimation is a complex activity

• What strategy to cost estimation will be applied?

•What costs components must be

estimated?
• How accurate should the estimates be?
• What estimation techniques will be utilized?

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2 Integrated Approach for Cost Estimation

Work
Cost and revenue Estimating
Breakdown structure techniques
Structure (classification) (models)
(WBS)

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
• WBS is display as a graphical or outline method that shows
the division of work in a multi level system.
• Identifies the tasks and activities that must be performed.
• It divides the project into identifiable parts that can be
managed.
• It defines:
• The work to be performed
• The need of expertise
• Assist in selection of project team
• Establish a base of project scheduling and control

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 WBS is display as a graphical or outline method that
shows the division of work in a multi level system.

WBS identifies the

tasks and activities
that must be performed.

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2.1 Work Breakdown Structure (WBS)
basic tool in project
management

Work
Breakdown
Structure
(WBS)
• Activities relationships
• Information collection &
define all project organization
work elements • Costs & revenue data
• Activities management

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2.1 Work Breakdown Structure (WBS)
• A basic tool in project management (example : Microsoft Project
& Primavera)
• A framework for defining all project work elements and their
relationships, collecting and organizing information, developing
relevant cost and revenue data, and management activities.
• Each level of a WBS divides the work elements into increasing
detail.

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2.1 Work Breakdown Structure (WBS)(Con’t)

The WBS diagram

Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2.1 Work Breakdown Structure (WBS)(Con’t)

WBS (Three Levels) for Commercial Building Project

Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2.1 Work Breakdown Structure (WBS)(Con’t)

Other characteristics of WBS:

• Both functional and physical work elements are included.

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2.1 Work Breakdown Structure (WBS)(Con’t)

Example of
Example of functional work
physical work element
element

WBS (Three Levels) for Commercial Building Project

Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2.1 Work Breakdown Structure (WBS)(Con’t)
Other characteristics of WBS:
• Both functional and physical work elements are included.
• The content and resource requirements for a work element are
the sum of the activities and resources of related sub-elements
below it.

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2.1 Work Breakdown Structure (WBS)(Con’t)

WBS (Three Levels) for Commercial Building Project

Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2.1 Work Breakdown Structure (WBS)(Con’t)

Other characteristics of WBS:

• Both functional and physical work elements are included.

• The content and resource requirements for a work element are
the sum of the activities and resources of related sub-elements
below it.
• A project WBS usually includes recurring and nonrecurring work
elements.

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2.1 Work Breakdown Structure (WBS)(Con’t)

Use numbering
scheme to recognize
the work elements
and sub-element of
each works.

WBS (Three Levels) for Commercial Building Project

Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 Microsoft Project

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 w1 w2 w3 w4 w5 w6 w7 w8 w9 w10 w11 w12 w13 w14 w15 w16 w17 w18
cum %
complete 4% 8% 10% 11% 14% 17% 23% 30% 37% 49% 63% 72% 82% 89% 89% 92% 97% 100%
cum cost 19,571 23,857 26,000 26,500 36,917 47,333 58,562 67,890 78,483 95,800 115,091 126,784 139,355 148,000 148,000 150,333 153,633 155,500
13% 15% 17% 17% 24% 30% 38% 44% 50% 62% 74% 82% 90% 95% 95% 97% 99% 100%

Physical S-Curve
120%

100%

80%

60%

40%

20%

0%
W1 W2 W3 W4 W5 W6 W7 W8 W9 W10 W11 W12 W13 W14

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2 Integrated Approach for Cost Estimation

Cost and
Work revenue Estimating
Breakdown techniques
Structure (WBS) structure (models)
(classification)

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2.2 Cost and Revenue Structure (Classification)
Capital investment To identify and categorize
Labour costs the costs and revenues
Material costs for analysis
Maintenance costs Cost and
Taxes & insurance revenue
structure
Overhead costs
(classification)
Disposal costs
Requires technical
Sales
familiarity of a life-cycle
Quality (and scrap) costs
for a particular project
Salvage/market values

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
TASK ( Pair Group in Classroom)

Develop the 4-level Work Breakdown Structure (WBS) for

the construction of Electrical Sub Station based on the
following work elements list.

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Construction of
Architectural
Electrical Sub Ventilation Brick laying RI Inspection Painting
Works
Station

Sub Structure
Permanent Pile Cap and
Plumbing and Super Column Piling
Works Stump
Structure Works

Retaining Ground Beam

Excavation M&E Works Fire protection Plastering
System and Slab

Soil Testing and Roof Beam and

Access road Tiling External Works
Improvement Commissioning Flat Roof

Certificate of
Temporary Statutory
Lighting Drains Completion
Works
(CSC)

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Answer
Level 1 Level 2 Level 3 Level 4

Construction of Electrical Temporary Works Retaining System

Sub Station Soil Improvement
Excavation
Permanent Works Piling
Sub Structure and Super Pile Cap and Stump
Structure Works Ground Beam and Slab
Column
Roof Beam and Flat Roof
Architectural Works Brick laying
Plastering
Painting
Tiling
M&E Works Plumbing
Lighting
Ventilation
Fire protection
External Works Drains
Access road
Testing and Commissioning RI Inspection
Certificate of Statutory
Completion (CSC)

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 What is the following step?

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.1 Introduction (Con’t)

Cost estimation is a complex activity

• What strategy to cost estimation will be applied?

• What costs components must be estimated?
• How accurate should the estimates be?
• What estimation techniques will be
utilized?

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2 Integrated Approach for Cost Estimation

Work Cost and revenue Estimating

Breakdown structure techniques
Structure (WBS) (classification) (models)

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 To be continue………

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.