Process Planning and Cost Estimation
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==Cost Estimation== | ==Cost Estimation== | ||
== ''Introduction'' == | == ''Introduction'' == | ||
| − | + | ||
| + | The basic definition of cost estimation is, it is the process of determining the cost of a program, project, or operation. It is used to forecast the expenses and prepare a budget for the project. Cost estimation helps in decision making and plays a crucial role in developing the scope of a project and determines what all the things are required for completion of a project. | ||
| + | |||
| + | == Why to perform cost estimation? == | ||
| + | |||
| + | Budgeting and scheduling are the two main areas where there are more chances of problems to arise while managing projects or handling business. It involves a lot of risks as any miscalculation may lead to a huge loss. For eg: Sydney opera house in Sydney, Australia: The Sydney Opera House, which was originally expected to cost just $7 million and open by Australia Day 1963, was eventually completed 10 years late for around $102 million – almost 14 times over budget. | ||
| + | |||
| + | Cost estimation is the first step in deciding whether a project is feasible. | ||
| + | |||
| + | There are many factors that are involved in cost estimation: | ||
| + | Labor | ||
| + | Materials | ||
| + | Machines | ||
| + | Equipment and facilities | ||
| + | Services | ||
| + | Contingency costs | ||
| + | |||
| + | Cost estimation is done while dealing with a project whose outcome is uncertain. Cost estimation is directly linked to the different phases of the project life cycle. They are: | ||
| + | |||
| + | Conceptual: How much the project will cost? How much time it will take for the project to be done? | ||
| + | |||
| + | Planning: Defines the activities involved in the process of completing the project. | ||
| + | |||
| + | Execution: While implementing those activities from the planning phase of the project. | ||
| + | |||
| + | == Cost estimation and best practices == | ||
| + | |||
| + | Cost estimation is done throughout the project periodically and there are different cost estimation techniques that are applied which takes various inputs and gives different outputs. You can find detailed information on phases and techniques from the figure below. | ||
| + | |||
| + | \subsubsection{Tools and Techniques} | ||
| + | |||
| + | Expert Judgement: Expert judgment uses experience and knowledge of experts in that particular field of the project for cost estimation. It is the cheapest, easiest and fastest technique. No resources are required for the implementation of this technique and it is used in the beginning phase when less or no data is available. | ||
| + | |||
| + | For eg: Estimating the cost of a small and simple project. | ||
| + | |||
| + | Disadvantages with this technique are that it is very hard to find an expert for the specific project and also that it can be easily biased. | ||
| + | |||
| + | Top-down Estimation: Top-down estimation takes historic data from earlier projects which are similar, as a basis for estimating cost. It is used in the early phase of the project when the availability of data is limited. This is one of the least expensive methods. | ||
| + | |||
| + | For eg: Cost estimation for making an online platform for a company. For this, the cost estimator can use the data generated while making the online platform for another company. | ||
| + | |||
| + | The disadvantage of this technique is that the results obtained are not reliable and accurate compared to others. | ||
| + | |||
| + | Parametric Estimation: Parametric estimation utilizes statistical modeling and historical data of the key drivers to develop cost estimation. It is a fast and also cheap method. It is a more accurate technique compared to Top-down and Expert judgement methods. | ||
| + | |||
| + | The disadvantage of this technique is that its accuracy lies in the correctness of the data used. | ||
| + | |||
| + | 3-Point Estimation: 3-Point estimation is derived from PERT (Program Evaluation and Review Technique). This technique uses 3 estimates to define the final cost; | ||
| + | |||
| + | Most likely cost (Cm):- the estimated cost if everything is executed as planned. | ||
| + | Pessimistic cost (Cp):- the estimated cost in the worst case scenario, when nothing goes according to the plan and the cost is very high compared to the budget. | ||
| + | Optimistic cost (Co):- the estimated cost in the best case scenario, when everything works much better than the actual plan. In this case, the cost is very less than the budget. | ||
| + | |||
| + | Formulae: Cost_estimation = (Co+4Cm+Cp)/6 | ||
| + | |||
| + | |||
| + | |||
| + | This technique is used to reduce the uncertainty and manage the risk. | ||
| + | |||
| + | Disadvantages with this method are, instead of one, there are three estimates to be done. It needs more work and more time. And there are chances that everything can go wrong. | ||
| + | |||
| + | Bottom-up Estimation: Bottom-up estimation takes the estimates from individual work collections and then combines them to give a final estimate. It is one of the most accurate methods of estimation since it focuses on the cost from a very deep perspective. In this process, the project is fragmented down to smaller activities and more detailed. The more the activities are detailed, the more accurate will be the results. This is the best technique among all other cost estimation methods. | ||
| + | |||
| + | The only disadvantage which this method is that it takes more time than any others which might result in spending more money. Also, it can be difficult to use this method for complex projects. | ||
| + | |||
| + | Reserve Analysis: Reserve analysis takes uncertainty into account and determines how much contingency reserves should be assigned to the project. This amount is accounted for uncertainty cost. It can be a fixed value, or a percentage of the cost estimated or can be calculated separately. This is a form of buffer cost. | ||
| + | |||
| + | Cost of Quality (CoQ): This includes the amount spent during the project to avoid failure that might happen and also the money spent before and after the project is done, due to the failures. It is a methodology that helps the organization or business to estimate the extent to which their resources are utilized. This also determines the potential savings that can be gained by implementing process improvement steps. | ||
| + | |||
| + | |||
| + | Vendor Bid Analysis: This is the last technique. Vendor bid analysis is used to calculate the cost of the project by comparing the bids quoted by the vendors. This method is used when the product is provided by the vendor or the service is outsourced. | ||
| + | |||
| + | A disadvantage with this method is that it relies completely on the capability and knowledge of the vendor. | ||
| + | |||
| + | == Limitations == | ||
| + | |||
| + | |||
| + | Cost estimation has a number of strengths which we have learned in the previous parts. But it also has a few weaknesses and limitations. | ||
| + | |||
| + | |||
| + | Flexible areas of calculation, efficiency and cost control: When there are so many models to estimate cost, with different features and different ways of providing data, it is very difficult to choose the right model for the right estimation. | ||
| + | |||
| + | Subjective: It is highly subject as in most of the cases the results depend on the knowledge and capabilities of the managers or experts or the vendors. | ||
| + | |||
| + | Variable factors: Even if the manager has chosen the right method of estimating still there are some external factors that affect the results the of the cost, like change in prices of products, market fluctuation, etc. | ||
Revision as of 04:47, 4 May 2019
Contents |
Abstract
Process Planning and Cost Estimation are two very important and vital parts of any industry or business, either for the public sector or private organization. A process is a set of activities that are carried out in a sequence to reach a goal or target or to obtain the desired product. Any miscalculation or unorganized planning of this process may lead to a loss in terms of money, manpower, time or sometimes even loss of life. Cost estimation is equally important as process planning. It is the initial step in any business or making a budget and also to calculate the profit and loss. Both process planning and cost estimation should go hand in hand for an operation to be executed successfully. And in this article will see the detailed description of both process planning and cost estimation and how they are related to each other.
Process Planning
Introduction
A process in a systemic and sequential path to achieve the desired output of an operation with the required specifications and effectiveness. This involves a lot of factors and elements which adhere to the process and also guides it. Process planning is a subsystem of the process which aids in initializing the process and also easing the mobility of it. Process planning helps in determining and describing the best possible process for a job to be performed. It also determines what all the types of equipment, manpower or facilities are required. Process planning has a number of steps: 1. Establishment of objectives. 2. Developing the premises. 3. Evaluating and selection of alternatives. 4. Formulating derivative plans. 5. Securing cooperation and participation. 6. Review and follow up.
Cost Estimation
Introduction
The basic definition of cost estimation is, it is the process of determining the cost of a program, project, or operation. It is used to forecast the expenses and prepare a budget for the project. Cost estimation helps in decision making and plays a crucial role in developing the scope of a project and determines what all the things are required for completion of a project.
Why to perform cost estimation?
Budgeting and scheduling are the two main areas where there are more chances of problems to arise while managing projects or handling business. It involves a lot of risks as any miscalculation may lead to a huge loss. For eg: Sydney opera house in Sydney, Australia: The Sydney Opera House, which was originally expected to cost just $7 million and open by Australia Day 1963, was eventually completed 10 years late for around $102 million – almost 14 times over budget.
Cost estimation is the first step in deciding whether a project is feasible.
There are many factors that are involved in cost estimation:
Labor Materials Machines Equipment and facilities Services Contingency costs
Cost estimation is done while dealing with a project whose outcome is uncertain. Cost estimation is directly linked to the different phases of the project life cycle. They are:
Conceptual: How much the project will cost? How much time it will take for the project to be done?
Planning: Defines the activities involved in the process of completing the project.
Execution: While implementing those activities from the planning phase of the project.
Cost estimation and best practices
Cost estimation is done throughout the project periodically and there are different cost estimation techniques that are applied which takes various inputs and gives different outputs. You can find detailed information on phases and techniques from the figure below.
\subsubsection{Tools and Techniques}
Expert Judgement: Expert judgment uses experience and knowledge of experts in that particular field of the project for cost estimation. It is the cheapest, easiest and fastest technique. No resources are required for the implementation of this technique and it is used in the beginning phase when less or no data is available.
For eg: Estimating the cost of a small and simple project.
Disadvantages with this technique are that it is very hard to find an expert for the specific project and also that it can be easily biased.
Top-down Estimation: Top-down estimation takes historic data from earlier projects which are similar, as a basis for estimating cost. It is used in the early phase of the project when the availability of data is limited. This is one of the least expensive methods.
For eg: Cost estimation for making an online platform for a company. For this, the cost estimator can use the data generated while making the online platform for another company.
The disadvantage of this technique is that the results obtained are not reliable and accurate compared to others.
Parametric Estimation: Parametric estimation utilizes statistical modeling and historical data of the key drivers to develop cost estimation. It is a fast and also cheap method. It is a more accurate technique compared to Top-down and Expert judgement methods.
The disadvantage of this technique is that its accuracy lies in the correctness of the data used.
3-Point Estimation: 3-Point estimation is derived from PERT (Program Evaluation and Review Technique). This technique uses 3 estimates to define the final cost;
Most likely cost (Cm):- the estimated cost if everything is executed as planned. Pessimistic cost (Cp):- the estimated cost in the worst case scenario, when nothing goes according to the plan and the cost is very high compared to the budget. Optimistic cost (Co):- the estimated cost in the best case scenario, when everything works much better than the actual plan. In this case, the cost is very less than the budget.
Formulae: Cost_estimation = (Co+4Cm+Cp)/6
This technique is used to reduce the uncertainty and manage the risk.
Disadvantages with this method are, instead of one, there are three estimates to be done. It needs more work and more time. And there are chances that everything can go wrong.
Bottom-up Estimation: Bottom-up estimation takes the estimates from individual work collections and then combines them to give a final estimate. It is one of the most accurate methods of estimation since it focuses on the cost from a very deep perspective. In this process, the project is fragmented down to smaller activities and more detailed. The more the activities are detailed, the more accurate will be the results. This is the best technique among all other cost estimation methods.
The only disadvantage which this method is that it takes more time than any others which might result in spending more money. Also, it can be difficult to use this method for complex projects.
Reserve Analysis: Reserve analysis takes uncertainty into account and determines how much contingency reserves should be assigned to the project. This amount is accounted for uncertainty cost. It can be a fixed value, or a percentage of the cost estimated or can be calculated separately. This is a form of buffer cost.
Cost of Quality (CoQ): This includes the amount spent during the project to avoid failure that might happen and also the money spent before and after the project is done, due to the failures. It is a methodology that helps the organization or business to estimate the extent to which their resources are utilized. This also determines the potential savings that can be gained by implementing process improvement steps.
Vendor Bid Analysis: This is the last technique. Vendor bid analysis is used to calculate the cost of the project by comparing the bids quoted by the vendors. This method is used when the product is provided by the vendor or the service is outsourced.
A disadvantage with this method is that it relies completely on the capability and knowledge of the vendor.
Limitations
Cost estimation has a number of strengths which we have learned in the previous parts. But it also has a few weaknesses and limitations.
Flexible areas of calculation, efficiency and cost control: When there are so many models to estimate cost, with different features and different ways of providing data, it is very difficult to choose the right model for the right estimation. Subjective: It is highly subject as in most of the cases the results depend on the knowledge and capabilities of the managers or experts or the vendors. Variable factors: Even if the manager has chosen the right method of estimating still there are some external factors that affect the results the of the cost, like change in prices of products, market fluctuation, etc.
