Minimize Cost Engineering & Estimating Guide


1) Cost Engineering
  1.1) Elements of Cost

  1.2) Difference between Costing and Pricing

2) Estimating
   2.1) Definition and requirement
   2.2) Estimates Types & Controlling factors
   2.3) Essential Elements

1) Cost Engineering

Cost Engineering is that area of engineering practice where engineering judgement and experience are utilised in the application of scientific principles and techniques to problems of Cost Estimation; Cost Control; Business Planning  and Management Science; Profitability Analysis ; and Project Management, Planning & Scheduling.

1.1) Elements of Cost
Cost can be classified under 2 main catgories i.e., Direct Cost (i.e., Labour, Material, Equipment, Subcontract) and Indirect Cost (Taxes, Risk, Profit, Contingency and Overhead)

Direct Cost can be defined as cost which can be directly attributed to a particular item of work or acitvity. Indirect Cost are all those cost costs which do NOT become a final part of the installation, but are required for the orderly completion of the installation and not limited to field/home office administration, direct supervision, capital tools and softares, start-up costs, fees, insurances and taxes etc.,

1.2) Difference between Costing and Pricing:

Costing comes from the quantitiy take off and the information presented in the scope documents, the assignment of cost values to the elements of work and related items in the project.

Pricing is the determination of the amount to be charged to the Client/Customer. Price is a function of cost plus profit and contingency. Price is inherent value of the product, project or system to the client or customer. To detrmine the price, we must consider market share, competitivesness and value.

2) Estimating

2.1) Estimating Definition and Requirement

An evaluation of all the costs of the elements of a project or effort as defined by an agreed-upon scope. Estimates are required to establish basis for project scope, resources, revenue, Margin, Budget Control and funding requirements.

2.2) Estimate Types are Order of Magnitude, Preliminary and Definitive. The factors controlling the type of estimates are Project Scope defintion, design availability, methodology, purpose, level of accuracy and time.

Order of Magnitude Estimates are +/- 30% accurate and are based on plant cost/capacity, ratios and budgetory quotations for key items

Prelimary Estimates are +/- 20% accurate and are based on site specific information and key information of critical equipment, and factored bulks

Definitive Estimates are +/-10% and are based on quoted equipment pricing, bulk MTO's, site specific labour rates and based on detailed construction plan.

2.3) Essential Elements: Essential elements of Estimate are Estimate Plan, Scope definition, inclusions/exemptions/basis/assumption, quantifications, direct field cost and distributable, Escalation, Contingency, Risk and Margin. Contingency is allocated based on level of confidence in Estimate. The level of confidence in estimate is determined by : Monte Carlo analysis, by analysing each category in the Estimate, Estimate basis and recent/similar experience.