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IT-390 Chapt 1 Introduction to Cost Estimating

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					IT-390     Cost Estimating




         Ch 1                1
            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.


                                                     2
            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.
                                                3
                   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

                                                  4
                Stewardship
     (Housekeeping or, managing financial affairs)



• Survival applies to government agencies
  and non-profit organizations as well

• Resources must be managed carefully



                                                     5
               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
                                                    6
Motivation for Engineering Cost
          Estimating

• Making good business decisions is essential

• Accurate Estimations have to be made




                                                7
    Reasons for Economic Evaluation
•   Cost to Manufacture
•   Profit prediction
•   Labor requirements
•   Time
•   Control of operation
•   Improvement
•   Budgets
•   Equipment justification
                                      8
         Estimations such as:
• Manufacturing operation
  – Baseline


• Introduction of a new product
  – Manufacturing capabilities, marketability,
    (profit) margin


                                                 9
         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
                                             10
      To drive the point home:

• Poor product estimate
  – Wasting hundreds of thousands of dollars


• Poor project estimate
  – Millions for overruns


                                               11
                  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".

                                              12
                     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
                                                 13
                    Design

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




                                             14
                        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
                                                                        15
        – substitutes numbers/symbol
                  Design

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




                                            16
                      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          17
                      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.

                                                          18
    Classification of Estimates
• Few cents to millions of dollars - same
  intellect

• There are four types of estimates:
  Operation, Product, Project, and System



                                            19
    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
                                                     20
    multiple machines, or crew work
    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.




                                                          21
    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
                                                22
    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
                                                             23
       stations (here is the need for a Project Estimate).
      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
                                                 24
                 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                              25
                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
                                                   26
            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
                                           27
  –   Ch. 5 - Forecasting

				
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