Engineering Cost Analysis

Cost Estimate, Analysis and Activity Based Costing

Accurately forecasting the cost of projects is vital to the survival of any business or organization. Cost estimators develop the cost information that business owners or managers, professional design team members, and construction contractors need to make budgetary and feasibility determinations. From an Owner's perspective the cost estimate may be used to determine the project scope or whether the project should proceed. According to the U.S. Department of Labor there were about 198,000 cost estimators in 1994. That of which 58% work in the construction industry, 17% employed in manufacturing industries, and the remaining 25% elsewhere. From this we could conclude that a great deal of cost estimation lies in the construction industry, where multi-million dollar contracts are formed after a thorough cost estimation.

Cost Analysis is an aspect of estimation that applies both formally and informally to the aspect of costing. Cost analysis is a formal discipline used to help appraise, or assess, the case for a project or proposal, and is an informal approach to making decisions of any kind. It is ultimately an economic tool to aid in logical decision making. In the case of construction cost estimates, the next step would be the cost analysis process. The sole purpose is to determine if the completed estimates are reasonable. Usually comparisons are made with similar projects done in the past to see if the number are within the same vicinity of each other. Though the estimates may differ from case to case, if the cost estimate is significantly higher or lower than the normal range, it might be reason to suspect that are errors that exist in the estimate.

Activity Based Costing or “ABC” is a universal system that breaks down activities into its constituent parts to determine the work effort required. ABC allows you to produce accurate staff timing and cost analysis’, and allows it to attribute all activities within an organization and provides a measure of the amount of resources needed to undertake a specific element of work. This is beneficial because this in turn provides data to support any necessary planning or monitoring allowing managers to make informed business decisions.

Techniques of Activity Based Costing are used wherever there is a need to measure a work process or need to determine costs. Activity Based Costing identifies the factors that drive costs in organizations. It also measures and analyzes costs in a way that helps managers understand better what influences their core business and allows them to exert control in achieving objectives. We are all involved in costing activities in our day to day lives. When people pay for an item, they complete a complex costing transaction that helps the manufacturer pay wages and miscellaneous fees that are required to produce the item. Another portion of the payment goes to the upkeep of the location that the item was purchased from to pay salaries and support their continuation in the market place. Furthermore that purchase provides elements that will cover profit and possibly some shareholder dividends. The bottom line though is that the sale price always has to be greater than the price of production, otherwise the seller of a product would rapidly go out of business. This is the primary reason why manufacturers know the price of every single part of their production process.

After a visit with a cost analyst in the construction industry, I was able to get a comprehensive detailed description of why cost estimating is important, the techniques that are utilized, and the personality skills that are required in order to be successful in the field.

Cost estimating in construction is important because it will ultimately determine the contractor's construction bid to their client. In many cases it also determines whether the client will go forth and agree on the construction contract. Most construction estimators have a great deal of experience in the field through actually working in the building industry. This gives them the background knowledge of the procedures that need to be accounted for, and the various construction methodologies available in building today.

The construction cost estimator, estimates building costs through every phase of the design and construction process. That is why it is especially important to have the cost estimator involved from the beginning of the project. This way, it ensures that the project budget constraint controls the decisions made by the rest of the project team throughout the building process. Some important personal traits that are needed to be a good cost estimator is to have good ethics, integrity, judgment, and attitude.

Professional behavior and discipline is always expected of the cost estimator since construction estimating tend to be highly technical. Estimators must also exercise holding good morals, because more often than not they receive pressure from other members of the construction team to make short-term decisions that can lead to inaccurate estimates. Resistance to this type of pressure is a part of the estimator’s job and can be beneficial to everyone in the long run. Integrity is another trait expected upon the estimator. Another important trait is to have good judgment. This is a skill obtained through proper training as well as extensive experience in the construction field. The proper use of judgment could mean the difference between profit and loss for the company or client. Estimators should approach each estimate with a professional attitude because the process is usually quite extensive. They must usually set aside specific times each day for entry of estimate quantities and data without interruption. Mental concentration is essential for preparing accurate cost estimates and ensures less errors to occur along the way. An estimator must also allow enough time to research and become familiar with the background