20/04/2015

Project Management
Cost Estimating
Prof. Mauro Mancini

e-mail: Mauro.Mancini@polimi.it
tel.: +39-02-23994057
POLITECNICO DI MILANO
Department of Management, Economics and Industrial Engineering

Cost Estimating
The project’s costs management evolves during the
whole project life cycle and can be distinguished in
three phases:

1. Estimating
2. Cost control
3. Estimate to finish

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Estimates’ Accuracy
The cost estimating’ accuracy is connected to:

•Project’s phase (labour portion not yet performed)

•Level of the engineering progress (required

resources definition)

•Reliability for the cost data available (database of

historical data availability)

Estimates’ Accuracy

Estimate’s
error

Project Life Cycle t

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Cost estimating levels

Different cost estimating levels correspond to
different grades of belief:

• Ball Park estimate (preliminary information to the

customer)

• Semi-analytic estimate (feasibility study)

• Analytic estimate (proposal)

Cost estimating levels

Increasing the cost estimating levels the estimate’s
cost exponentially increases in terms of:

•Resources allocated

•Time requested

From few hours for the lower level to:

•5-10% of the total project engineering’s hours

•1-2% of the whole investment cost

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Cost estimating techniques

At different cost estimating levels correspond two
cost estimating techniques:

• Parametric (cost driver)

• Analytic (cost = quantity x unit cost)

Ball Park Estimate

The Ball Park estimate (also called order of
magnitude) presupposes well-known:

•Plant typology

•Plant Size

•The whole cost for same type plants

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Ball Park Estimate – Scale Factor

On the basis of the previous information, the scale
factor is used in the following equation:
M
P
C  C0   
 P0 
C = Cost estimate for the new plant
C0 = Historical cost for the plant in the database
P = New Plant size
P0 = Historical plant size
M = Scale factor (0.6 < M < 0.9)

Ball Park Estimate – Scale Factor

€/MWe
Validity Zone

MWe

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Ball Park Estimate – Scale Factor

Economy of scale
1,6

1,5

1,4

M
[$/kWe]

1,3

1,2

1,1

0,9
200 400 600 800 1000 1200
[MWe]

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Ball Park Estimate – Scale Factor

M M M
 P  C  P C    P 
C  C 0      log 
    log 
 
 P0  C 0  C 0 
 P0   P0 
 C 
log  
 C   P   C 0 
 log    M log    M 
 C 0   P0   P 
log  
 P0 

 log C  log C 0  M (log P  log P 0 )
 log C  M log P  M log P 0  log C 0

 log C  M log P  log C 0  M log P 0 

C 0
 log C  M log P  log
P 0M

y  M  x  q

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Ball Park Estimate – Scale Factor

Bi-logarithmic axis
C
100

10

10 100
P

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Ball Park Estimate – Scale Factor

Example: Values for a Nuclear Power Plant
ACCOUNT Scale exponent
Direct costs
Land and land rights 0
Structures and improvements 0.5
Reactor/boiler plant equipment 0.6
Turbine plant equipment 0.8
Electric plant equipment 0.4
Miscellaneous plant equipment 0.3
Main condenser heat rejection system 0.8
Indirect costs
Construction services 0.45
Home office engineering and services 0.2
Field office engineering and services 0.4
Owner's costs 0.5

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Ball Park Estimate – Scale Factor

The Ball Park estimate accuracy increase more:

• P is close to P0
• The historical data is recent

If data for the same Plant type are not available, is

possible to divide the plant in its components.

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Ball Park Estimate – Corrective Factors

It is necessary considering also:

• Location Factor (LF): Per cent whole plant cost

variation connected to the specific environmental
conditions presents where the plat is build
• Escalation Factor (EF): index summarizing the
temporal cost trend for the resource used to build
the plant

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Ball Park Estimate – Corrective Factors

Example 1

New plant (1986)

•Size: 75.000 T/Y
•Location: Saudi Arabia

Reference plant (1974)

•Size: 90.000 T/Y
•Location: Italy
•Cost: 14 M€ (without draining purification plant)

Scale Factor: 0.6

Escalation Factor: 1113.3 / 263.9 = 4.22
Location factor: 2.3 / 2 = 1.15

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Ball Park Estimate – Corrective Factors

Example 1

DESCRIPTION COST

Plant build in the 1986 14 x 4.22= 59.08 M€

0 .6
 75 
59.08     52.96 M€
Size reduction:  90 

Draining purification plant (estimate): 7 M€

Total plant cost build in Italy: 52.96 + 7 = 59.96 M€

Total p. c. build in Saudi Arabia: 59.96 x 1,15 = 68.95 M€

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Ball Park Estimate – Corrective Factors

Example 2
It is necessary to estimate the plant cost calculated
with a scale factor equal to 25 M€ and characterized
by the following breakdown:

Escalation Factors

15% engineering 5% annual

50% materials 10% annual
25% construction 8% annual
10% subcontractors 4% annual

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Ball Park Estimate – Corrective Factors

Example 2
0 12 16 20 24 30 38
months

The Barycentre method is usually used

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Ball Park Estimate – Corrective Factors

Example 2
Barycentre calculation

I 12 + 6= 18 months = 1.5 years

M 12 + 4 + 7 = 23 months = 1.92 years
C 12 + 8 + 12*= 32 months = 2.6 years
S 12 + 8 + 12*= 32 months = 2.6 years
* For this phases the barycentre is usually placed at 2/3
Cost Calculation:
I 25 • 0.15 • (1 + 0.05)1.5 = 4.03
M 25 • 0.5 • (1 + 0.1)1.92 = 15.01
C 25 • 0.25 • (1 + 0.08)2.6 = 4.03
S 25 • 0.1 • (1 + 0.04)2.6 = 2.77
25.84 Ml€
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Fixed Rate of Interest

0 1 2 3 … n Time
[years]
P
T0  S0 = P
T1  S1 = P + i x P = P(1+i)1
T2  S2 = (P + i x P) + i (P + i x P) =
= (P + i x P) (1 + i) = P(1+i) (1+i) = P (1+i)2
T3  S3 = P (1+i)2 + i (P (1+i)2) = P(1+i) (1+i)2 = P (1+i)3
…

Tn Sn = P (1+i)n
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Factorial Estimate
It is used to:
• Estimate using the comparison of the different
design choices
• Perform feasibility studies
• Estimate the stock in hand allocation (budget)

It is based on the cost breakdown and considers:

• Analytic cost items estimate
• Other costs estimate by per cent factors

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Factorial Estimate

Equipment Cost ( E )

Fb Bulk factor (40 - 100 % of E)

Materials Cost ( M )

Fc Construction factor (50 - 80% of M)

Erected Cost ( M + L )

Fs Services factor (15 - 30 % of M + L)

Total Base Cost ( BC )

Fk Markup factor (10 - 20 % of BC)

Total Investment Cost ( TIC )

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Factorial Estimate
The Mark – up factor considers:

•Escalation
•Contingencies
•Overheads
•Financial costs
•Insurances
•Guarantees
•Taxes
•Exchanges
•Profits

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Analytic Estimate
It is the cost estimate for each account in the
breakdown cost:

•Engineering
•Materials
•Transport
•Construction
•Supervision
•…

+ Mark up (in order to determinate the cost)

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Analytic Estimate
For each account it is necessary to point out the
single resources allocated (quantity x unit cost)

• Labour
• Material
• Means of production
• Services

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Analytic Estimate - Design

It consists in the accounts relative to the base and
detail engineering.

The project cost on the whole plant cost is a very

variable component and depends on the plant type
and size.

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Analytic Estimate - Materials

It is possible to distinguish:

• Items

• Bulk materials (piping, instrumentation, electrical

material, metallic structures etc.)

•Various material (Spear parts, catalysts)

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Analytic Estimate – Materials

ITEMS

They are evaluated one by one, according to

statistical data about orders, demands, supplies
etc.
The principal analysis instruments are the cost
curves. They show the recent orders costs
correlated to ad hoc parameters (weight, surface,
power…)
Curves represent the most effective market
situation synthesis

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Analytic Estimate – Materials

CRITICAL ACCOUNTS

Items estimates usually characterized by the major

evaluation risks are:

•Special apparatus (having special material or

processing)
•Big compressors and ovens
•Special valves and piping special materials
•Piping quantity and weight
•Specific features requested by the customer

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Analytic Estimate – Materials

BULK MATERIALS

Is made using the “material take-off”, that is the

estimate quantity of the technical documents
requested by the engineering. It can be manual or
computerized.

The piping account is not the more expensive, but

imply the greatest part of assembly labour.

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Analytic Estimate – Transport

It includes the following accounts:

•PACKING: like percentage of materials costs

•TRANSPORTS: special (unit price)
normal (€/Kg)
The local transportation could be very risky
and difficult to evaluate:

•INSURANCE: percentage of the material and

transport cost
•CUSTOMS AND PORT FEES

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Analytic Estimate – Construction

It is the cost component with major uncertainty and
evaluation risks, particularly for plants in foreign
countries:

Two, not alternative, ways are available:

•Market research through preliminary subcontractor

proposal

•Internal evaluation through:

oStandard Man Hours (SMh)
oEffective Man Hours Estimated (EMh)
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Analytic Estimate – Construction

INTERNAL EVALUATION

Is based on the ideas of:

Q
Yield: Y 
SMh
SMh
Productivity: P 
EMh
Where:
Q = Physical quantities
SMh = Standard Man hour
EMh = Effective Man hour
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Analytic Estimate

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Analytic Estimate

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Analytic Estimate - Supervision

It is the labour cost associated to the staff sent in
the site for the technical supervision and to manage
the project during the construction.

From the organization chart and the permanence

time is calculated the total men/months necessary,
and it is multiplied by:

• standard cost for the internal staff

• travelling allowance, board and accommodation
• other fees

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Analytic Estimate - Contingency

It includes the major cost for:

• Project indeterminateness and incompleteness

• Costs’ uncertain grade
• Delays
• Forgetfulness and estimate’s errors
• Unexpected and incidental facts
• etc.

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Analytic Estimate - Contingency

It not includes great risk from:

•Socio-economical upheaval, wars and revolutions

•Geothermic surprises

•Legislations changes

•Supplier bankruptcy

•Failure to pay

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Cost Trends
(Annual Averages)
• Asphalt
– Jan-Dec 2003 $53.93/ton
– Jan-Dec 2005 $77.66/ton
• Concrete (Structural) 44.0%
– Jan-Dec 2003 $549.82/CY
– Jan-Dec 2005 $761.71/CY
• Steel (Reinforcing) 38.5%
– Jan-Dec 2003 $.52/LB
– Jan-Dec 2005 $0.91/LB
75.0%

Figures based on Weighted Averages

Rising Asphalt Costs

by Quarter

$85.38

$51.60
+20.1%

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Rising Concrete Costs

by Quarter

$1,045.14

$490.02
+64.2%

Rising Steel Costs

by Quarter

$1.28

$0.53
+48.8%

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Causes for Major Cost Increases

• Construction market saturation:
– “Hot” Market, both public and private
sector
– Labor and equipment shortages, due to
hurricane recovery efforts
– Material shortages
• Fuel cost increases
• Project requirements:
– Hours of operation
– Night work
– Delayed start

Creating the Estimate

Finally, once you determine the technique to use in
creating your estimates, it is time to actually create
them.
In this step, you will pull together your project
team and ask them to determine the estimate. You
can apply more precision to your estimates by doing
the following:

• Have the person doing the work create the

estimate.
• Use task information from other projects.
• Use the PERT technique
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An Example
TPMP has just placed you at the Pinnacle Candy Company as
a temporary project manager. You have been assigned the
EspressoFix Bar project. This project is going to create a new
candy that will satisfy every coffee addict’s need for coffee
all wrapped up in a candy bar. The management at Pinnacle
only wants to see if this new candy bar is marketable.
Production of the finished product will be another project
initiated later. The budget of $100,000 was established
before you started work on the project. You are just about
done with the project planning and wonder whether
$100,000 will be enough money to cover the project. Your
team has already created the WBS with duration estimates
illustrated, the network diagram, and effort estimates shown
in the next slides.

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Effort Estimates for the Espresso Fix Project

Effort
Task Resource Rate
Estimate
Market surveys Marketing 20 days $1,200 per day
Marketing plan Marketing 25 days $1,200 per day
Ad campaign Advertising 10 days $1,000 per day
Legal clearance on
Legal 10 days $1,600 per day
the name
Chef 7 days $800 per day
Create recipe
Test kitchen 15 days $1,000 per day
Chef 6 days $800 per day
Create product
Test kitchen 10 days $1,000 per day
Employees on break 0
Internal taste testing
Employee cafeteria 0
Firm fixed
Focus group taste testing $50,000
price contract

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WBS with duration estimates

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Network diagram

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Questions

1. How long is this project?

2. What is the cost baseline? Why?

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Answers

1. This is a 90-day project

2. The cost baseline is the total project budget minus the

managerial reserve. Since this project does not have a
managerial reserve, the cost baseline is $165,400.

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Cost Estimate form: a real case

Best practices…

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