Up to this point, cost and revenue cash flow values have been stated or
assumed as known. In reality, they are not; they must be estimated. This
chapter explains what cost estimation involves, and applies cost estimation
techniques. Cost estimation is important in all aspects of a project, but
especially in the stages of project conception, preliminary design, detailed
design, and economic analysis. When a project is developed in the private
or the public sector, questions about costs and revenues will be posed by
individuals representing many different functions: management, engineering,
construction, production, quality, finance, safety, environmental, legal, and
marketing, to name some. In engineering practice, the estimation of costs
receives much more attention than revenue estimation; costs are the topic of
this chapter.
Unlike direct costs for labor and materials, indirect costs are not easily
traced to a specific department, machine, or processing line. Therefore,
allocation of indirect costs for functions such as utilities, safety, management
and administration, purchasing, and quality is made using some rational
basis. Both the traditional method of allocation and the Activity-Based Costing
(ABC) method are covered in this chapter. Comparison between these
two approaches is made.
There are two case studies; the first concentrates on cost estimate sensitivity
analysis, while the second examines the allocation of indirect costs in a
manufacturing setting.
