COST ESTIMATES FOR FEASIBILITY STUDY

BUDI HARTONO

Remember
Benefit Cost

Budi Hartono - JTMI - UGM

Cost Estimates

Budi Hartono - JTMI - UGM

Contents
Types
Estimating Models Analogy Per-unit model Power-sizing model Cost estimating relationships Factor estimates Indices Segmenting model (BOM, WBS)

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Level of Accuracy of Estimates

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1. Analogy
You are in the pre-feasibility study stage of considering building a warehouse in the boom times.

You are not ready to commit any money yet. The warehouse is one of the many options that you have in mind.
Hence you do not want to spend too much money in the estimation exercise.

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How to estimate cost of building a warehouse with minimal cost?

Use analogy for conceptual estimate Question: What is a good analogy?
Warehouse costs from $1m to > $100m Answer: What are some basic data for the warehouse you have in mind?
20,000 square metres 3 storey
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Requirements and Applications of Cost Estimation by Analogy

Requirements
Database of cases Implementation process of target project similar to database cases

Applications
Software development
Functions and size Prediction based on effort

Military and Space Programs

Mission type Physical Dimensions
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2. Per-Unit Model
Identification of cost per base unit of a cost

driver
Floor area Customers Miles travelled Patients

Differentiation of cost driver category needed No assumption of economies of scale Simple yet useful for order of magnitude
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Per-unit Model Example for Warehouse

Assume that the floor area is the primary driver of cost Unit price: $800-950 per square metre Our proposed warehouse = 20,000 sq metre $16m - $19m
The construction cost serves as a guide for preliminary cost appraisals and budgeting. It must be understood that the actual cost of a building will depend upon the design and many other factors and may vary from the figures shown. The costs per square metre are based on construction floor areas measured to the outside face of the external walls/external perimeter including lift shafts, stairwells, plant rooms, water tanks and the like.

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3. Power-Sizing Model
Like analogy and per unit estimating, compares with existing cost Unlike them, accounts for economies of scale common in certain industrial plant and equipment Scale up and down according to capacity and size Industry norm for scaling factors
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Power Sizing Model: Computation

where, Cx = estimated cost of facility or equipment of size (or capacity) Sx Ck = known cost of facility or equipment of size (or capacity) Sk n = power sizing exponent (normally < 1)

n < 1 economies of scale in construction n > 1 diseconomies of scale in construction The above equation known as sixth-tenths or seven-tenths rule because exponent n has an approximate value of 0.6-0.7 for many types of plants and equipment Rationale: Costs tend to be proportional to surface area while capacity is proportional to volume area does not increase as fast in a proportionate sense as volume Application limit: Advisable iF capacity ratios < 2:1 Never used above ratio of > 5:1 Budi Hartono - JTMI - UGM

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Examples of Power Sizing Exponents

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Example of Use of Power-Sizing Model

Your engineering group has just completed the building of a small refinery at an estimated cost of $19m for a capacity of 2 million barrels per year. Your management has asked you for order-of-magnitude estimates for facilities with capacities of 1 million and 3 million barrels per year. The managers also want a comparison of cost per barrel of capacity. The capacity exponent of small refinery is 0.57. Cx = Ck (Sx/Sk)n C1 = C2(1/2)0.57 = $19m (0.6736) = $12.8m or $13m C3 = C2(3/2)0.57 = $19m (1.2600) = $23.94 or $24m

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Relationship Between Per-Unit Model and PowerSizing Model

A special case of the power-sizing exponent n=1 Per-Unit model in more general usage than power-sizing model
Data constraints restricts the use of power sizing model

Revenue and cost side more easily estimated using per-unit model
One less parameter (exponent) to estimate Example The warehouse example where unit price per sq metre was used in estimation of building cost

Implication of using per-unit if per mile is more appropriate

Economies of scale not accounted for Wrong economic decision too small a plant?

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4. Cost Estimating Relationship (CER)

A more generalized model compared to power-sizing model
Cost relationship to parameters
Parameters include output, size, capacity, weight Are neither exponential one nor a unit one Can encompass multiple parameters

Historical cost and parameter data needed

Statistical analysis used to estimate the cost-parameter relationship

US government agencies such as DoE, DoD, FAA,NASA

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Some Parameters Used in CER

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CER Process
Define The Variable we want to estimate
Cost, labour hours, materials

Select relevant parameters to be tested

Industry knowledge important

Collect data on dependent and parameters Explore relationships between dependent variable and parameters Select and quantify the most appropriate relationship
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CER Example: Cost of New House

A developer offers a number of standard housing models of differing options and size. It has now a new model of house on the drawing board and wants a quick idea of how much it would cost to build such the new model. The new model has 2.5 baths, 2,600 sq. ft. of living area and 2,100 sq ft. Of external wall area. You have just joined the developer as a cost analyst and must come out with the answer in a hurry. What would you do?

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CER Example: Steps

Estimated Variable: Cost Relevant parameters
No. of baths(?), Living Area, Exterior Wall Area, Gross Area, Grade of finishing

Collect data Balance between number of parameters and resource availability

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CER example: Data Collection

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Explore Relationships between Cost and Parameters

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CER Example: Quantification of Most Appropriate Relationship

1. With the Ambassador House, House Cost = $146,898 + 15.63 (Living Area) -11.13 (External Wall Surface) (t= 20.525) (1.545) (-0.742) Adjusted R2 = 0.815

2. Without the Ambassador House, House Cost = $118,038 + 17.52 (Living Area) -0.156 (External Wall Surface) (t= 32.84) (10.39) (-0.056) Adjusted R2 = 0.997
3. Without the Ambassador House, House Cost = $117,907 + 17.44 (Living Area) (t= 61.22) (21.50) Adjusted R2 = 0.995 Applicable for 2,400 sq. ft. Living Area 2,800 sq. ft.
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CER Example: EXCEL Output

Regression: House Cost = 0 + 1(Living Area) without Ambassador

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CER: Estimating the Cost

New Home: Living Area = 2,600 sq. ft. Estimated Cost of New Home = $117,907 + $17.44 (Living Area) = $117,907 + $17.44(2,600) = $163,251

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5. Factor Estimates
Total costs extrapolated from the quantum of a component whose costs are easier to obtain Assumption of stable relationship between component cost and total cost Industry knowledge and practice Chemical industry
Equipment

Service sector
Manpower
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Factor Estimates: Example from Chemical Industry

Total costs made on the basis of bare equipment costs Equipment list for plant (especially chemical plant) usually known Cost of equipment
Firm bids and quotations Previous published equipment costs Preliminary vendor quotations Scale-up of data for similar equipment of other capacities (use of capacity functions)

Example
http://www.matche.com/EquipCost/ (provides equipment cost estimates)

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Process Flowchart: What is necessary for the process

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Estimates from Detailed Equipment List

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6. Indices
Assumption of base case cost with standard parameters Indices are used to make adjustments from the base case on basis of pre-identified factors Indices include:
Location Size of Facility

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Indices: Example of US Air force Facility Construction

The US Air Force produces a handbook of standard costs for the construction of a number of buildings on airbase The standard costs are based on historical construction costs The handbook list the indices that accounts for differences form the assumptions in the standard costs
Cost escalation Size of facilities Location of facilities

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Use of Escalation Index

The midpoint of construction is determined by figuring the total construction time and dividing by two. For example, if the construction time were 16 months, starting in September 2007, the midpoint of the escalation would be April 2008. An example of using the escalation table: Assume your project has an April 2008 mid-point of construction, based on a construction start date of September 2007 and a 16 month construction period. The Escalation Table inflation index for your project is 1.010 for April 2008.

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Location Factors (Area Cost Factors)

Considers: Cost of: Construction materials Labor Equipment

Other factors: Weather Seismic condition Mobilization Overhead and profit Labor availability Labor productivity

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Example Data

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Example of Use of Indices

A dining facility of 3,000 sq. metre is proposed to be built in Afghanistan. What is the estimated cost if the construction period of one year is scheduled to start in January 2008. The standard unit cost of a 2,000 m2 dining facility is US$2,906 per m2. (source: Air Force Cost Handbook)
Adjusted Unit Cost = (1.014 x 0.96 x 1.50) x $2,906 = 1.460 x $2,906 = $4,243 Estimated Cost of Dining Facility = $4,243 x 3,000 = $12.73m Support Costs (16%) = $12.73 * 0.16 = $2.04m Supervision, Inspection and Overhead (5%) = ($12.73m + $2.04m) * 0.05 = $0.74m Total Estimated Costs = $12.73m + $2.4m + $0.74m = $15.87m
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7. Segmenting Models
A semi-detailed or detailed level of analysis Divide and Conquer strategy Decompose investment into component levels
Categories with differential costs Bill of Materials (BOM) Work Breakdown Structure (WBS)

Total cost is summation of the component level cost

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Segmenting Example: WBS and BOM

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Segment Example: BOM for Lawn Mower

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Segment Example: BOM for Lawn Mower

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PR

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Summary
Dont spend more money than necessary: Fit type of estimates to purposes
Rough Semi-detailed Detailed

Rough and semi-detailed estimates have references to existing costs of similar investments

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