Ch 91 IT-390Cost Analysis

2 Project Estimating (Design) l A Project Estimate is one of a kind n Custom design, only one will be manufactured n Capital expenditure because it is an asset n Project designs have long time frames –Examples would be a high-rise apartment building, bridge construction, an airplane, purchase/installation of a CNC machine or a new plant

3 Project Bid l (RFE) request for estimate is issued if the engineers are employed by the company l (RFP) request for proposal is issued to engineering if the engineers belong to another company l Bid n Is The cost, and profit (if an RFP), that a project requires for labor, materials and overhead

4 Project Bid l Costs required for a Project - divided into Fixed Capital Investment and Networking Capital n Fixed Capital Investment –Amount of money req'd from conception to the completion of the plant n Net Working Capital (for operation of the plant) –It is used for operating material and cash on hand and will expand or contract depending on many factors

5 Work Package l The Work Package is the total project, all information included. Forms included are: n Definition n Designs n Work Breakdown Structure n Schedule n Estimates

6 Work Package l The definition is a form that identifies what, when, and who l Design forms are the "how" of what is to be accomplished l Work Breakdown Structure (WBS) is a visual representation n It shows major hardware and costs n It is used for estimating, planning, performance measurement and control n It is composed of separate levels; in order of complexity n It is also widely recognized by the DOD as a standard business practice

7 Estimating l Project Estimate component which encompasses: n Labor estimates n Direct and Subcontract material estimates n Facilities and equipment estimates n Engineering estimates we accomplished in Chapter 8

8 Estimating l Labor estimate - bidder's workforce l Direct material estimate goes directly into the project l Subcontract material estimate is specially designed or commercial material l Facilities and equipment estimates are direct materials, constructed elsewhere and include materials and labor costs (Product Estimate)

9 Cost & Bid Analysis l Within the cost and bid analysis, four kinds of estimates provide a critical basis: n Overhead n Contingency n Interest n Pricing and Bid

10 Cost & Bid Analysis l Overhead is broken down into two distinct types: n Office overhead - includes general business expenses –Rent, insurance, heating, lighting, supplies n Job overhead- is directly related to the project, but not an actual part of it –Permits, fees, electricity and water used in construction

11 Cost & Bid Analysis l Contingency ("engineering reserve”) is for unforeseen costs that haphazardly occur n buffer for high-risk elements that generally befall all projects

12 Cost & Bid Analysis l Interest - Partial or progress payments exist throughout the course of the contracted work. These payments are insurance that the contract will be fulfilled according to terms of the contract l When bank funds are used to finance the project or fill an escrow account, Interest comes into play. This interest is called short term construction interest

13 System Estimate l System Estimate: operations, products, project estimates n System design deals in the public, government, or not-for-profit domain of enterprise n Example of a system design is the Metro-Link transit system n The Metro-Link transit system would include rail cars (Product Estimate), the worker and tool building the stations (Operation Estimate), and the complete stations (Project Estimate)

14 Definitions l Elements of a System Estimate n Nonrecurring Cost –Occur only once. After completion of the "project or engineering estimate", no further funding is required n Recurring Cost –These costs continue for the duration of the production of a product or the repeating of an operation

15 Definitions l Elements of a System Estimate n Opportunity Cost The "cost" of an opportunity is the loss of another opportunity. If I spend on A, I will not be able to on B. B is the "cost" of the opportunity. We have the opportunity to minimize costs (possibly) by looking at Inherited, Marginal, and Residual costs

16 Definitions l Elements of a System Estimate (cont) n Inherited Cost –Using part of an existing system (eg. tracks are already in place for the Metro-Link from a previous project), then we have inherited cost, or saved an expenditure

17 Definitions l Elements of a System Estimate (cont) n Marginal Cost –Additional costs due to an alternative design - tracks had to be up-graded for the Metro-Link System. n Residual Cost (Salvage Costs) –Positive or negative costs - future values of an investment long term. If a company is using a piece of land that has to be reclaimed (re- planted) after so many years (cost), if not, can it sell for a profit

18 Elements of a System Estimate Nonrecurring Cost System Effectiveness Investment Cost Project Estimates Product Estimates Operation Estimates Engineering Estimates Inherited, marginal, and residual cost analysis Contingencies Recurring Cost Opportunity Cost

19 Methods l Benefit Cost n These look at all benefits of the System in question n Two methods currently exist: the net annual benefit and gross benefits and costs –Net Annual Benefit method subtracts annual benefits from annual costs and time value of money (or discounting) is taken into consideration –Gross Benefits and Costs are taken in the now time frame, as if they happen all at once. No discounting (or time value of money) of funds is taken into consideration

20 Life Cycle Cost l The Life Cycle is the life of an asset from planning through acquisition, maintenance, operation and disposal. The cost is all expenses that occur throughout the Life Cycle Product Development Introduction to Market Mature Market Product Phase-out

21 System Budgeting l Formal plan that shows how financial resources are obtained/used during a period of time, (quarter or annual basis) n It is used for planning the future as well as traceability n Performance Reports are the main partner of Budgets, formalizing controls and providing feedback by comparing results with plans and highlighting variances n Variances are deviations from the initial plan

22 System Budgeting Unfavorable Favorable Unfavorable Performance Report