12.3 Engineering Project Cost Estimation - 12.3 Engineering Project Cost Estimation
Engineering Project Cost Estimation is a critical process in Project Cost Management that involves predicting the cost of resources needed to complete project activities. Accurate cost estimation ensures that the project stays within budget and helps in making informed decisions throughout the project lifecycle.
Key Concepts
1. Work Breakdown Structure (WBS)
The Work Breakdown Structure (WBS) is a hierarchical decomposition of the total scope of work to accomplish project objectives. It breaks down the project into smaller, more manageable components, which helps in estimating the cost of each component accurately.
Example: In an engineering project to design and build a new product, the WBS might include components such as design, prototyping, testing, and manufacturing. Each of these components can be further broken down into specific tasks, making it easier to estimate costs.
2. Cost Estimating Techniques
Cost Estimating Techniques are methods used to predict the cost of resources required for the project. Common techniques include Analogous Estimating, Parametric Estimating, Bottom-Up Estimating, and Three-Point Estimating.
Example: Analogous Estimating might be used to estimate the cost of a new manufacturing facility by comparing it to the cost of a similar facility built in the past. Parametric Estimating might use statistical relationships between historical data and variables to estimate costs.
3. Cost Baseline
The Cost Baseline is a time-phased budget that serves as a reference for measuring, monitoring, and controlling overall cost performance. It is derived from the cost estimates and includes contingency reserves.
Example: For an engineering project, the cost baseline might include a detailed budget for each phase of the project, such as design, prototyping, and testing, with allowances for unexpected expenses.
4. Contingency Reserves
Contingency Reserves are funds added to the cost baseline to cover identified risks. These reserves are used to manage known unknowns, such as potential delays or cost overruns.
Example: In an engineering project, contingency reserves might be set aside to cover potential cost increases due to material price fluctuations or unexpected technical challenges.
5. Management Reserves
Management Reserves are funds added to the cost baseline to cover unidentified risks. These reserves are used to manage unknown unknowns, such as unforeseen events that could impact the project.
Example: For a construction project, management reserves might be allocated to cover unexpected site conditions or regulatory changes that were not initially anticipated.
6. Cost Control
Cost Control involves monitoring the cost performance of the project to ensure that the actual costs do not exceed the budget. This includes tracking expenditures, analyzing variances, and taking corrective actions when necessary.
Example: In an engineering project, cost control might involve regular reviews of the project budget, comparing actual expenditures to the cost baseline, and adjusting the project plan to stay within budget.
Examples and Analogies
Think of engineering project cost estimation as planning a road trip. Just as you need to estimate the cost of fuel, lodging, and meals to ensure you have enough money for the trip, you need to estimate the cost of resources to ensure your project stays within budget. Accurate cost estimation helps you avoid unexpected expenses and ensures a smooth journey.
For instance, in an engineering project to design and build a new product, accurate cost estimation would involve breaking down the project into manageable tasks, estimating the cost of each task, and setting aside reserves for potential risks. By carefully managing costs, the project team can ensure that the project stays on track and achieves its objectives.