cost planning : tools and techniques

 

´  COST PLANNING –TOOLS AND TECHNIQUES

COST ESTIMATION

´  PREPARATION OF COST ESTIMATE

1.     PROJECT COST ESTIMATE IS REQUIRED NOT ONLY FOR ASSESSING THE FUND REQUIREMENTS

2.     BUT ALSO FOR ASCERTAINING THE ECONOMIC VIABILITY OF THE PROJECT

3.     THE ESTIMATE SHOULD BE ACCURATE

4.     IF UNDER ESTIMATED : SHORTAGE OF FUNDS

5.     IF OVER ESTIMATED ---LOWER PROFITABILITY

6.     BUT ACCURACY IS NOT IS NOT EASY

´  TOOLS AND TECHNIQUES FOR PLANNING PROJECT COST

1. EXPERT JUDGEMENT
2. ANALOGOUS ESTIMATION
3. PARAMETRIC ESTIMATION
4. BOTTOM UP ESTIMATION
5. THREE POINT ESTIMATION
6. RESERVE ANALYSIS
7. COST OF QUALITY
8. PROJECT MANAGEMENT SOFTWARE

´  EXPERT JUDGEMENT

1.     EXPERTS ARE THE PEOPLE WHO HAVE PRIOR KNOWLEDGE ON SIMILAR KIND OF PROJECTS

2.     THE FIRST STEP IS TO TAKE COMMENTS FROM THE EXPERTS

3.     THEY COULD SUGGEST VALUABLE INSIGHTS BASED ON THEIR EXPERIENCE

´  ANALOGOUS ESTIMATION

1. AS IT IS BEGINNING,WE DO NOT HAVE MUCH DETAIL
2. SIMILAR PROJECTS PREVIOUSLY COMPLETED  ARE TAKEN INTO ACCOUNT
3. PARAMETERS USED:
1. SCOPE
2. BUDGET
3. DURATION SIZE
4. WEIGHT AND COMPLEXITY

4.     MEASURES THE CURRENT PROJECT ON THAT BASIS

5.     BUT ACCURACY IS LOWER AND PURELY HISTORICAL

´  PARAMETRIC ESTIMATION

1.     USES AN ALGORITHM TO CALCULATE THE COST OF THE ACTIVITY CONSIDERING THE HISTORICAL DATA AND OTHER PROJECT VARIABLES

2.     ONE OF THE MOST ACCURATE TECHNIQUE  AND SHOULD BE USED WITH OTHER TECHNIQUES

3.     A STATISTICAL RELATION NEEDS TO BE EVALUATED BETWEEN THE HISTORICAL DATA AND OTHER VARIABLES

´  BOTTOM UP ESTIMATION

1.      STARTS WITH THE ESTIMATION FROM THE LOWER LEVEL I.E THE WORK PACKAGES LEVEL CREATED AS PER WBS AND THEN ROLLED UP TO HIGHER LEVEL

2.     ACCURACY LEVEL IS QUIET HIGH

´  THREE POINT ESTIMATION

´  ALSO REFERRED PERT  PROGRAM EVALAUATION REVIEW TECHNIQUES ( PERT)

´ THREE TYPE ESTIMATION :

1.     MOST LIKELY (M) : REALISTIC OR IDEAL SITUATION ,ALL THE REQUIRED RESOURCES WILL BE ASSIGNED AND CAN ACHIEVE THE EXPECTED PROFITABILITY

2.     OPTIMISTIC(O) : BASED ON BEST CASE SCENARIO

3.     P( PESSIMISTIC)  : ESTIMATION BASED ON WORST SCENARIO

´ TRIANGULAR DISTRIBUTION = (O+M+P)/3

´ BETA DISTRIBUTION = (O+4M+P)/6

´  RESERVE ANALYSIS

1.      ALLOCATION OF CERTAIN FUNDS--- CONTINGENCY RESERVES

2.     ESTIMATION FOR Unknown RISK

3.     NOT INCLUDED IN THE COST BUDGET BUT PART OF THE OVER ALL PROJECT BUDGET

´  COST OF QUALITY

1.      ESTIMATING THE COST OF BOTH CONFORMANCE AND NON CONFORMANCE EXPENSES

2.     COST OF CONFORMANCE : BUDGET REQUIRED FOR PREVENTION AND APPRAISALS

3.     NON CONFORMANCE – DUE TO INTERNAL AND EXTERNAL FAILURE

´  OTHER TECHNIQUES

´ PROJECT MANAGEMENT SOFTWARE : SOME SOFTWARE LIKE SPREAD SHEETS,SIMULATION AND STATISTICAL TOOLS

´ VENDOR ANALYSIS : BY COMPARING THE VARIOUS BID PROPOSALS SUBMITTED BY THE VENDORS

´  COST ESTIMATION
TYPES OF ESTIMATES

 

´  COST ESTIMATION

1.  MORPHOLOGICAL BREAKDOWN OF THE PROJECT
2. ESTIMATING EACH COMPONENT
3. SUMMING UP --- THEN WE HAVE  OVER ALL COST ESTIMATE

´  TYPES OF ESTIMATES

´ FIVE TYPES OF ESTIMATES  THAT ARE MADE DURING THE LIFE CYCLE OF PROJECT

1.     ORDER OF MAGNITUDE ESTIMATE

2.     STUDY ESTIMATE

3.     PRELIMINARY ESTIMATE

4.     DETAILED ESTIMATE

 ACCURACY DEPENDS ON THE INFORMATION AVAILABILITY

´  ORDER OF MAGNITUDE ESTIMATE

1.     ESTIMATE IS MADE WHEN A PROJECT IS IDENTIFIED

2.     ENTREPRENEUR WANTS TO GET ROUGH IDEA

3.     AWARE OF THE DESCRIPTION OF THE PROJECT AND PRODUCT,CAPACITY OF THE PLANT

4.     ESTIMATE CAN BE ACCURACY PLUS MINUS 60%

5.     ESTIMATING METHODS ---KNOW ARE ESTIMATING RATIO METHODS

 

´  ORDER OF MAGNITUDE ESTIMATE

a)    INVESTMENT PER ANNUAL TONNE CAPACITY

b)    TURNOVER AND CAPITAL RATIO

c)    SIXTH TENTH FACTOR

d)    INFLATION INDEX

e)    LOCATION INDEX

´  INVESTMENT PER ANNAM TONNE CAPACITY

•                         R₂= (R₁ X C₂ )/ C₁

 IF INSTALLED COST OF P₁ OF ANNUAL CAPACITY C₁

IS R₁

  WE COULD FIND OUT THE INSTALLED COST OF PLANT P₂

  OF ANNUAL CAPACITY C₂

   IT ASSUMES THE COST OF PLANT PER ANNUAL TONNE CAPACITY FOR PARTICULAR PROJECT WILL HOLD TRUE FOR ALL CAPACITIES IF THE TECHNOLOGY REMAINS THE SAME

 

´  TURNOVER RATIO AND CAPITAL RATIO

RATIO BETWEEN ANNUAL SALES AND INVESTMENT EXPRESSED IN RUPEES IS KNOWN AS TURNOVER RATIO.

RATIO BETWEEN INVESTMENT AND ANNUAL SALES BOTH EXPRESSED IN RUPEES AGAIN CAPITAL RATIO

R₂ =C XV₁    XP₁

V₁ =PROJECTED ANNUAL SALES VOLUME

P₁ = PRICE PER UNIT OF THE VOLUME

 

 

 

 

 

 

 

 

 

 

´  SIXTH TENTH FACTOR

MODIFICATION OF THE INVESTMENT PER ANNUAL TONNE CAPACITY METHOD

PLANT INVESTMENT IS ASSUMED TO VARY AS .6 POWER OF THE PLANT SIZE

R₂ =R₁  x (C₂ /C₁ ) ^.6

R₁ = COST OF THE PREVIOUSLY COMPLETED PLANT

C₁ = CAPACITY OF THE PREVIOUSLY COMPLETED PLANT

 

 

 

 

 

 

 

 

 

 

 

 

´  INFLATION INDEX

CAN BE USED TO WORK OUT AN ESTIMATE IF THE CAPACITY FOR THE NEW UNIT REMAINS THE SAME AS THAT OF ONE FOR WHICH INSTALLED CAPACITY DATA ARE AVIALABLE

USED THE ABOVE MENTIONED METHODS

INSTALLED COST ( NOW) = INSTALLED COST ( PAST) X (COST OF INDEX ( NEW))/(COST INDEX PAST)

 

 

 

 

 

 

 

 

 

 

 

´  LOCATION INDEX

KNOWING A PLANT COST IN THE USA OR ANY OTHER COUNTRY THE COST CAN BE ESTIMATED

INDEX CAN BE DEVELOPED IF DATA RELATED TO PRODUCTIVITY OF COUNTRIES INVOLVED ARE AVAILABLE

 

 

 

 

 

 

 

 

´  2. STUDY ESTIMATE

a)    FOR STUDYING IS THE ECONOMIC VIABILITY OF THE PROJECT AND ALSO ARRANGING FUNDS FOR THE PROJECT

b)    PRELIMINARY FLOW SHEETS,LISTING OF MAJOR PROCESS EQUIPMENT AND MATERIALS OF CONSTRUCTION ARE OBTAINED FROM THE PROCESS LICENSOR

c)    COST IS ESTIMATED OF EACH PLANT BY HISTORICAL DATA OR QUOTATIONS FROM VENDORS

d)    OVER  PLANT COST IS ESTIMATED BY MULTIPLYING THE TOTAL EQUIPMENT COST BY FACTOR KNOWN AS LANG FACTOR

e)    THIS FACTOR TAKES CARE OF CIVIL, ELECTRICAL,PIPING AND INSTRUMENTATION,INSULATION AND INSTALLATION COSTS

´  3. PRELIMINARY ESTIMATE

1.     URGENT NEED TO IMPROVE THE  COST ESTIMATE

2.     THE PRELIMINARY ESTIMATE IS PREPARED WHEN TECHNOLOGY PACKAGE IS FROZEN AND A FIRM IMPLEMENTATION SCHEDULE IS THERE

3.     THIS POINT OF TIME IS CONSIDERED AS AN EFFECTIVE START DATE OR ZERO DATE

4.     BUDGET ALLOCATION IS FROZEN AND BASIS OF CONTROL IS AVAILABLE

5.     PLUS MINUS 20%

BASED ON FINAL TECHNOLOGY PACKAGE

EXAMPLE FOR THE CHEMICAL PROCESS PLANT:

1.     FINAL PROCESS AND INSTRUMENTATION DIAGRAM

2.     OVER ALL PLOT PLAN

3.     PRELIMINARY EQUIPMENT PROCESS SPECIFICATION

1.     FINAL EQUIPMENT PROCESS SPECIFICATION/DATA SHEET

2.     PRELIMINARY SINGLE LINE DIAGRAM

3.     PRELIMINARY MATERIAL LIST

4.     PRELIMINARY PIPININ MTO

5.     FINAL INSTRUMENTS

´  4. DEFINITIVE COST ESTIMATE

PREPARED AFTER THE ZERO DATE WHEN THE DETAILED ENGINEERING OF A PROJECT IS IN ADVANCED STAGE

ADDITIONAL INFORMATION :

1. EQUIPMENT PURCHASE SPECIFICATION/VENDOR QUOTATION/AWARDED COST

2.     :

3. EQUIPMENT PURCHASE SPECIFICATION/VENDOR QUOTATION/AWARDED COST
4. SCHEDULE OF ITEMS FOR WORK TENDER/CONTRACTORS
5. REASONABLE ACCURATE MATERIAL TAKE OFFS, FOR STEEL.PIPING AND ELECTRICAL EQUIPMENT
6. HOUSING GENERAL ARRANGEMENT DRAWN
7. PLUS MINUS 10%

´  5. DETAILED ESTIMATE

ESTIMATES MADE ON COMPLETION OF ENGINEERING,ORDERING OF EQUIPMENT AND MACHINERY AND AWARD MAJOR FILED CONTRACTS

1. ORDERED VALUE OF PLANT EQUIPMENT AND MACHINERY
2. AWARDED COST OF ALL MAJOR CONTRACTS
3. FINAL MATERIAL TAKE OFFS
4. NINETY PER CENT CONSTRUCTION DRAWING

5.     PLUS MINUS 5%