Ch 11 IT-390Cost Estimating

2 Cost Estimating Predictive process used to quantify cost and price and possibly resources –Goal: Minimize the uncertainty of the estimate –Outcome: Expected cost and probabilistic cost distribution.

3 Cost Estimating Certain aspects are mechanistic (automatic) Estimating is a predictive process –Judgment and experience add value –Requires an in-depth understanding Cost Estimating as a recognized discipline.

4 Profit Definition: The amount by which income exceeds expenses in a given time. Necessary for continued existence Planned expense Managers are to assure profit will exist, and to insure long-term survival, must hold it as a primary goal

5 Stewardship (Housekeeping or, managing financial affairs) Survival applies to government agencies and non-profit organizations as well Resources must be managed carefully

6 Competition No pure competition or monopolies (somewhere in-between) Monopolies –One supplier controls the market with no competition Pure competition –Many suppliers exist and no single entity has the strength to affect prices

7 Motivation for Engineering Cost Estimating Making good business decisions is essential Accurate Estimations have to be made

8 Reasons for Economic Evaluation Cost to Manufacture Profit prediction Labor requirements Time Control of operation Improvement Budgets Equipment justification

9 Estimations such as: Manufacturing operation –Baseline Introduction of a new product –Manufacturing capabilities, marketability, (profit) margin

10 Estimations such as: A project –Addition to existing facility, purchase/installation of a CNC machine –Set aside capital funds. An entire system –Metro-Link Made up of many project estimates

11 To drive the point home: Poor product estimate –Wasting hundreds of thousands of dollars Poor project estimate –Millions for overruns

12 Design A design (in Cost Estimating terms) is a combination of preexisting knowledge Each element is translated differently, depending on the unique aspects of the item to be estimated In essence, the design is the "equation", and the estimate is the "answer".

13 Design These loosely defined elements are: Problem, Concept, Engineering Models, Evaluation, and Design. –Problem - vague representation satisfying some want (ie. In the case of an estimate for a product; Does this fit the companies strategic plan, capabilities or needs?) Information must be gathered Contemplative statement of the problem

14 Design Concept - the concept search is an investigative, learning, and recognizing process. –Do not apply at this point

15 Design Engineering Models - application of the concept uncovered in the Concept search. –The models may be physical, schematic, or mathematical Physical models –change of scale (size) Schematic models –utilize one set of properties to represent a second set. (A process flow chart.) The mathematical models –substitutes numbers/symbol

16 Design –Within Engineering Models, of the three (physical, schematic, or mathematical) Quickest or cheapest Fewest number and simplest models

17 Design Evaluation –evaluate it against reality –Few models make it first time Design - (as an element within the Design Process) –Execution of plans - computing, drafting, checking, specifying Perform detailed cost estimates

18 Design Implementation –Provides proof of the design and cost analysis Before implementation takes place, several questions should be answered –Does the design satisfy the requirements? –Will the enterprise yield a profit? This is what engineering cost estimating is for.

19 Classification of Estimates Few cents to millions of dollars - same intellect There are four types of estimates: Operation, Product, Project, and System

20 Classification of Estimates Operation Estimate: The process of producing a change in value or a way of working –Forecast of labor and material required for an operation design –The design: (a toy, radio or aircraft) and work: (a worker and a tool) are involved –The definition of an operation estimate includes one worker with one tool, one worker with multiple machines, or crew work

21 Classification of Estimates Product Estimate: Entire product (which is multiple produced), rather than subassembly or component part, is estimated. –Product has to be duplicated - two items to millions of items Automobile production, computer production, etc.

22 Classification of Estimates: Project Estimate: Is one of a kind - plan, plant, equipment, capital tooling for a product, or a prototype –Custom design - only one will be manufactured –Usually Capitalized –Normally Long Projects - high-rise apartment building, bridge construction, or an airplane –Operation and/or product estimates as input

23 Classification of Estimates: System Estimate: Involves elements of operations, products, and/or project designs and is the most comprehensive –system design deals in the public, government, or not-for-profit domain of enterprise –Profit is not the main concern –Metro-Link transit system rail cars (Hence the need for a Product Estimate), the worker and tool building the stations (the need for an Operation Estimate), and the complete stations (here is the need for a Project Estimate).

24 Strategies for the Enterprise Design uniqueness or superiority Price and cost Quality Reliability Innovation and first to market Inventory, service, and supply to customer Custom design or manufacturing Commodity products

25 Information Unknowns - cost estimating VS cost accounting. Resources –Historical information –Measured data (work measurement) –Policy data –Other departments –Outside agencies (Bureau of Labor Statistics) –Trade associations

26 Information Furthermore: –Estimating is done to better allocate scarce resources –The more accurate an estimate is, the more expensive it is –It's important to know the intended purpose –Detective mindset –Changes and Challenges

27 As an Added Note: Total cost of a typical metal products manufacturing enterprise is: –15% Direct Labor –50% Direct Material –35% Overhead This weekend we will cover: –Ch. 2 - Direct Labor –Ch. 3 - Direct Material –Ch. 4 - Overhead –Ch. 5 - Forecasting