Project Cost Evaluation February 7, 2002 Richard Chung Department of Chemical and Materials Engineering San Jose State University

Objectives Provide a base for the selling price of a product Provide a base for the selling price of a product Determine a most suitable and economical method for R&D, materials, process, and production. Determine a most suitable and economical method for R&D, materials, process, and production. Reduce cost in the development of a product or process Reduce cost in the development of a product or process Control costs based on the adopted standards and design requirements (e.g. PDS) Control costs based on the adopted standards and design requirements (e.g. PDS)

Types of Cost One-time costs (capital/equip. costs..) One-time costs (capital/equip. costs..) Recurring costs (operating, payroll..) Recurring costs (operating, payroll..) Fixed costs (rent, property tax..) Fixed costs (rent, property tax..) Variable costs (utility, materials..) Variable costs (utility, materials..) Direct costs (related to process) Direct costs (related to process) Indirect costs (indirectly related) Indirect costs (indirectly related)

Methods of Cost Evaluation Engineering method Engineering method Break-even point

Analog method Analog method The costs are based on past costs of a similar project Parametric method Parametric method The costs are based on parametric or statistical approach – such as regression analysis

Levels of Cost Evaluation Order of magnitude (use costs in similar projects; allow scale –up ratios) Order of magnitude (use costs in similar projects; allow scale –up ratios) Study (provide ball park figure) Study (provide ball park figure) Preliminary (provide costs for budget approval) Preliminary (provide costs for budget approval) Definitive (provide costs for project control) Definitive (provide costs for project control) Detailed (Prepare for a bid or a purchase order) Detailed (Prepare for a bid or a purchase order) --American Association of Cost Engineers

Cost Factors Cost escalation: to consider the extra costs due to a delayed or prolonged project Cost escalation: to consider the extra costs due to a delayed or prolonged project Allowance for extras: to consider the extra costs due to mistakes & complexity Allowance for extras: to consider the extra costs due to mistakes & complexity Design modification: to consider costs for design revisions Design modification: to consider costs for design revisions Contingency: costs for unseen or unexpected situation Contingency: costs for unseen or unexpected situation

Cost Indexes Cost indexes are used to relate the past costs to current costs General ones are: Bureau of Labor Statistics (consumer CPI) Bureau of Labor Statistics (consumer CPI) US Department of Labor (producer) US Department of Labor (producer) Engineering New Record (construction) Engineering New Record (construction) Marshall and Swift Index (equipment) Marshall and Swift Index (equipment)

Cost–capacity Factors C 1 and C o are capital costs with capacity (or size) Q 1 and Q o x is an exponent ( ) depending on the type of equipment

Plant Costs C p = installed plant costs f = Lang factor depending on the type of plant = 3.1 for a solids-processing plant = 3.6 for a solid-fluid plant = 4.7 for a fluid-processing plant C b = base cost

How to calculate each cost? Order of magnitude estimates Order of magnitude estimates Costs in conceptual design Costs in conceptual design Manufacturing costs Manufacturing costs Costs in value analysis Costs in value analysis Overhead costs Overhead costs Cost models Cost models

Process Cost Model C u = total unit (part) cost C m = material cost n = number of parts per batch n = number of parts per batch m = number of batch processes operated concurrently m = number of batch processes operated concurrently t = time to complete process step for the batch t = time to complete process step for the batch

Conclusion Three methods for cost estimates: engineering method, analog, and parametric method Three methods for cost estimates: engineering method, analog, and parametric method Cost models can be employed to help estimate and control (or reduce) the costs associated with manufacturing process Cost models can be employed to help estimate and control (or reduce) the costs associated with manufacturing process Life cycle costing cover all the costs of a product from design to service in its life cycle. Life cycle costing cover all the costs of a product from design to service in its life cycle.