Cost Estimation Models

Cost-Estimating Methods There are many different approaches and methods for estimating or assessing costs, all of which have advantages and disadvantages under particular circumstances. Factors determining the most appropriate method will include the nature of the activity to be costed or assessed, the degree of familiarity of the organization with the item or activity to be costed, and the extent to which reference can be made to previous exercises, the availability of reliable design information and the time available to prepare the estimate. Usually several methods will be applied as a “sanity check” on means to verify that the results are valid. The most common approaches to estimating/cost assessment are: - "Rule of thumb" approach This approach is often used for the rough and rapid sizing of an activity in terms of cost. - Detailed "grass-root" or "bottom-up" approach With this method, detailed estimates are made at relatively low levels in the work breakdown structure, typically at work-package or task level. This approach is closely related to scheduling, planning and resource allocation and is both time-consuming and costly. It requires a good knowledge of the activity and there also needs to be a reasonable level of definition for the exercise to be meaningful. Very often, and certainly in the case of ESA tender actions, such an approach has to be followed by bidders in order to be able to present the detailed costing information that the Agency requires. - Analogy This commonly applied method essentially relies on being able to ascertain the cost of previous activities or items and using that as a reference for predicting the cost of a proposed new activity or item. - Competitive supplier proposals Where it is intended to subcontract an activity, committing subcontractor proposals submitted on a competitive basis are likely to be the most reliable estimate possible. However, customers should retain the ability to estimate and analyze the cost of work to be subcontracted, particularly when there is little or no real competition, or where there is the likelihood of subsequent customer-generated changes. - Parametric approach Parametric estimating entails the analysis of cost, programmatic and technical data to identify cost drivers and develop cost models. The approach essentially correlates cost and manpower information with parameters describing the item to be costed. This process results in sets of formulae known as "Cost-Estimation Relationships" (CERS), which are applied to produce cost outputs for different elements of an estimate. Parametric models may be developed by any organization from analysis of its own data, but there are also external models available, some of which are marketed on a commercial basis. In the case of commercially developed models, it is important that they are calibrated by reference to specific data from the user organization.

Cost Plans/Estimates as per Different Industry Standards 🚫 Rough Order of Magnitude (ROM) ➡ RICS: Level 1 Estimate ➡ AACE: Class 5 Estimate ➡ RIBA: Stage 0 "Strategic Definition" ➡ End Usage: Class 5 (ROM) estimates are prepared for any number of strategic business planning purposes, such as but not limited to market studies, assessment of initial viability, evaluation of alternate schemes, project screening, project location studies, evaluation of resource needs and budgeting, long-range capital planning, etc. 🚫 Order of Cost Estimate ➡ RICS: Level 2 Estimate ➡ AACE: Class 4 Estimate ➡ RIBA: Stage 1 "Preparation and Briefing" ➡ End Usage: Class 4 (Order of Cost Estimate) estimates are prepared for a number of purposes, such as but not limited to, detailed strategic planning, business development, project screening at more developed stages, alternative scheme analysis, confirmation of economic and/or technical feasibility, and preliminary budget approval or approval to proceed to next stage. 🚫 Cost Plan 1 ➡ RICS: Level 3 Estimate ➡ AACE: Class 3 Estimate ➡ RIBA: Stage 2 "Concept Design" ➡ End Usage: Class 3 (Cost Plan 1) estimates are typically prepared to support full project funding requests and become the first of the project phase control estimates against which all actual costs and resources will be monitored for variations to the budget. They are used as the project budget until replaced by more detailed estimates. In many owner organizations, a Class 3 estimate is often the last estimate required and could very well form the only basis for cost/schedule control. 🚫 Cost Plan 2 ➡ RICS: Level 4 Estimate ➡ AACE: Class 2 Estimate ➡ RIBA: Stage 3 "Spatial Coordination" ➡ End Usage: Class 2 (Cost Plan 2) estimates are typically prepared as the detailed contractor control baseline (and update to the owner control baseline) against which all actual costs and resources will now be monitored for variations to the budget and form a part of the change management program. Some organizations may choose to make funding decisions based on a Class 2 estimate. 🚫 Cost Plan 3 ➡ RICS: Level 5 Estimate ➡ AACE: Class 1 Estimate ➡ RIBA: Stage 4 "Technical Design" ➡ End Usage: Generally, owners and EPC contractors use Class 1 estimates to support their change management process. They may be used to evaluate bid checking, to support vendor/contractor negotiations, or for claim evaluations and dispute resolution. Construction contractors may prepare Class 1 estimates to support their bidding and to act as their final control baseline against which all actual costs and resources will now be monitored for variations to their bid. During construction, Class 1 estimates may be prepared to support change management. Client may use these types of estimates for commercial bid evaluations. #costplanning #estimates #costplans #bidding #tendering #RICS #AACE #RIBA #costmanagement

Cost Estimation * Cost estimation is the process of forecasting the financial resources required to complete a project within its defined scope and timeframe.    Purpose: To provide an approximate budget for the project. To determine the feasibility and economic viability of the project. To assist in project planning and decision-making. Stages: Initial Estimation: Broad estimates made during the early stages of the project based on limited information. Refined Estimation: More detailed and accurate estimates made as the project scope becomes clearer and more information is available. Techniques: Analogous Estimating: Using historical data from similar projects. Parametric Estimating: Using statistical relationships between historical data and other variables. Bottom-Up Estimating: Breaking down the project into smaller components and estimating the cost of each component. Expert Judgment: Consulting with experts who have experience with similar projects. Output: A detailed cost estimate document that outlines the expected financial requirements for the project. Cost Control *Cost control is the process of monitoring and managing project expenditures to ensure that the project stays within the approved budget. Purpose: To manage and reduce cost overruns. To ensure the project is completed within the approved financial resources. To provide data for financial reporting and project decision-making. Stages: Budget Baseline: Establishing a baseline budget based on the cost estimation. Monitoring: Continuously tracking actual costs against the budget. Controlling: Taking corrective actions to address any deviations from the budget. Techniques: Earned Value Management (EVM): Measuring project performance and progress in an objective manner. Variance Analysis: Identifying and analyzing differences between planned and actual costs. Trend Analysis: Using historical data to predict future performance. Change Control: Managing changes to the project scope that may affect costs. Output: Regular cost reports and updates. Corrective action plans to address any deviations. Final cost performance assessment at project completion. Key Differences Focus: Cost estimation focuses on predicting the financial resources needed before the project starts. Cost control focuses on managing and adjusting the project budget during execution. Timing: Cost estimation is primarily a pre-project activity. Cost control is an ongoing activity throughout the project lifecycle. Objective:  The objective of cost estimation is to create a financial plan.  The objective of cost control is to adhere to the financial plan and mitigate deviations. Both cost estimation and cost control are crucial for effective project management. Accurate cost estimation sets the foundation for a realistic budget, while diligent cost control ensures that the project stays on track financially, ultimately contributing to the project's success. #Cost_Estimation #Cost_control #Safeek #LinkedIn

If you work in public health, you will write plans. And every serious plan needs a budget. Sometimes, you’ll have a finance officer by your side. Other times, like what we used to do in Sudan, you will build the budget yourself. Either way, you must understand the #basics Not to do it alone, but to collaborate with clarity. Here are four cost estimation methods every public health professional should know: • Analogous Use when you have done something similar before. (We spent $30K on a similar campaign last year.) • Parametric Use when you have reliable unit costs. (If one field team costs $500 per day, five days = $2,500.) • Bottom-up Use when accuracy is critical. Break the work into small tasks and estimate each. • Three-point Use when there is uncertainty. Ask for best, likely, and worst-case costs—and average them. You don’t need to use all four. Choose the method that fits your context and needs. Budgeting is not just a finance task. It’s part of shaping your impact. #أساسيات #I_Read_it_For_You #قريتوـليك

Should-cost methodology is emerging as one of the most reliable solutions to help #upstream players address their current challenges, providing the granular cost transparency needed to deal with the changing landscape. So how does it work? After breaking down the total cost of a project, product, or service into granular components and assessing the #cost drivers for each, companies can determine the reasonable should-cost of a service or product based on its constituent elements. Compared to traditional solutions (which limit the benchmark to a finite number of past projects), should-cost can estimate the costs associated with any combination of design, geographic footprint, and commercial agreement. Initially developed, fine-tuned, and deployed at scale in the automotive sector, the #shouldcost methodology uses bottom-up modeling of all supply chain costs through a four-step approach: ➡️Step 1: Analyzing the design choices and 2D or 3D drawings of the project to derive a bill of quantities for raw and bulk materials. ➡️Step 2: Mapping the end-to-end value chain to identify all the manufacturing steps required to produce each component. ➡️Step 3: Costing the required quantities and value chains to calculate direct costs, leveraging proprietary databases and productivity models tailored to each country, technology, and sector. ➡️Step 4: Completing the bottom-up should-cost calculations to define should-cost components, including all elements of suppliers’ cost structures. Through its flexible, unbiased, and fact-based methodology, a should-cost analysis can, therefore, provide up-to-date, end-to-end transparency on the entire supply chain cost structure for an upstream project’s tenancy in common (TIC) investment. To illustrate, we performed a deep dive should-cost analysis for #LNG tanks, providing full transparency on key cost drivers for further negotiation with the supplier. This analysis enabled a fact-based negotiation with the supplier and led to an 8% cost reduction on the final negotiated price compared to the initial bid. #capitalexcellence #mckinsey #lngtanks #oilandgas #procurement #projectmanagement #labor #materials