Engineering Economy

Chapter 3: Cost Estimation 
Techniques
Part 1

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
The objective of Chapter 3 is to present various methods for 
estimating important factors in an engineering economy 
study.

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 CONTENT
3.1Introduction
3.2An Integrated Approach
3.2.1 WBS
3.2.2 Classification
3.2.3 Models
3.3Selected Estimating Technique (Models)
3.3.1 Indexes
3.3.2 Unit Techniques
3.3.3 Factors Techniques
3.4Parametric Cost Estimating
3.4.1 Power Sizing Techniques
3.4.2 Learning & Improvement
3.4.3 CER

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.1 Introduction 

Results of cost estimating are used for a variety of purposes.

• Setting selling prices for quoting, bidding, or evaluating 
contracts.
• Determining if a proposed product can be made and 
distributed at a profit.
• Evaluating how much capital can be justified for changes 
and improvements.
• Setting benchmarks for productivity improvement 
programs.

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.1 Introduction(Con’t)
Fundamental approach to cost estimating
Top-down
• uses historical data from
similar projects. It is best
used when alternatives are
still being developed and
refined.

Bottom-up
• more detailed and works best
when the detail concerning the
desired output (product or
service) has been defined and
clarified.
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 Fundamental approach to cost 
3.1 Introduction(Con’t) estimating

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 Fundamental approach to cost 
3.1 Introduction(Con’t) estimating

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 Fundamental approach to cost 
3.1 Introduction(Con’t) estimating

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 Fundamental approach to cost 
3.1 Introduction(Con’t) estimating

Bottom-Up Approach to Determining the Cost of a College Education

Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 Fundamental approach to cost 
3.1 Introduction(Con’t) estimating

Example for bottom-up approach

Q1 (a) Estimate your annual expenses for the following items:

i. Books RM100/book
ii. House rental RM 250/month
iii. Educational Fee RM 1500/semester
iv. Food RM15/day

(b) Calculate the total cost of expenses for 4 year.

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2 Integrated Approach for Cost Estimation

Work Cost and

Estimating
Breakdown revenue
techniques
Structure structure
(classification) (models)
(WBS)

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 3.2.1 Work Breakdown Structure (WBS)
basic tool in project 
management 

Work
Breakdown
Structure
(WBS)
• Activities relationships
• Information collection & 
organization
define all project  • Costs & revenue data
work elements  • Activities management

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2.1 Work Breakdown Structure (WBS)(Con’t)

The WBS diagram

Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2.1 Work Breakdown Structure (WBS)(Con’t)

WBS (Three Levels) for Commercial Building Project
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2.1 Work Breakdown Structure (WBS)(Con’t)

Other characteristics of WBS:
• Both functional and physical work elements are included.
• The content and resource requirements for a work element are 
the sum of the activities and resources of related sub‐elements 
below it.
• A project WBS usually includes recurring and nonrecurring work 
elements.

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
3.2.1 Work Breakdown Structure (WBS)(Con’t)

Use numbering
scheme to
recognize the
work elements
and sub-element
of each works.

WBS (Three Levels) for Commercial Building Project
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 Microsoft Project

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 w1 w2 w3 w4 w5 w6 w7 w8 w9 w10 w11 w12 w13 w14 w15 w16 w17 w18
cum %
complete 4% 8% 10% 11% 14% 17% 23% 30% 37% 49% 63% 72% 82% 89% 89% 92% 97% 100%
cum cost 19,571 23,857 26,000 26,500 36,917 47,333 58,562 67,890 78,483 95,800 115,091 126,784 139,355 148,000 148,000 150,333 153,633 155,500
13% 15% 17% 17% 24% 30% 38% 44% 50% 62% 74% 82% 90% 95% 95% 97% 99% 100%

Physical S-Curve
120%

100%

80%

60%

40%

20%

0%
W1 W2 W3 W4 W5 W6 W7 W8 W9 W10 W11 W12 W13 W14

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
 3.2.2  Cost and Revenue Structure (Classification)

Capital investment To identify and categorize 

Labour costs the costs and revenues 
Material costs for analysis
Maintenance costs Cost and
Taxes & insurance revenue
structure
Overhead costs
(classification)
Disposal costs
Requires technical 
Sales
familiarity of a life‐cycle
Quality (and scrap) costs
for a particular project
Salvage/market values

Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.