Cost engineering & cost estimation

In this lecture series the basics of cost engineering & estimation are delt with in 2 lecture hours of 45 minutes each. The lecture series forms part of a compulsory lecture series on the basics of space engineering given in the first three years (undergraduate program) of the study for aerospace engineer at TU-Delft, faculty of aerospace engineering.

Cost engineering

Cost engineering- An area of engineering principles where engineering judgment and experience are used in the application of scientific principles and techniques to problems of cost estimation, cost control, business planning and management science.

Cost estimation for space systems and its elements aims to provide an answer to a range of questions, including:

  • How much money does the total space system/element cost?
  • What is the cost of a single unit
  • How much profit can be made
  • How much money do we need when?
  • What is the risk  and how much money should be held in reserve?
  • Are my subcontractrors asking for a reasonable price?

An answer two the above two questions might be gained from the next figure, indicating the capital (investments) expenses and operating expenses for the to be developed European Galileo space based navigation system (taken from a  presentation by Ranieri Pasquale from Telespazio Telecom in 2001 for the EU).

Cost estimation:

Cost estimating is one of the most important steps in project management. A cost estimate establishes the base line of the project cost at different stages of development of the project. A cost estimate at a given stage of project development represents a prediction provided by the cost engineer or estimator on the basis of available data.

Virtually all cost estimation is performed according to one or some combination of the following basic approaches:

Empirical cost inference.

Empirical estimation of cost functions requires statistical techniques which relate the cost of development, production or operating a facility to a few important characteristics or attributes of the system. The role of statistical inference is to estimate the best parameter values or constants in an assumed cost function. Usually, this is accomplished by means of regression analysis techniques.

Unit costs for bill of quantities.

A unit cost is assigned to each of the facility components or tasks as represented by the bill of quantities. The total cost is the summation of the products of the quantities multiplied by the corresponding unit costs. The unit cost method is straightforward in principle but quite laborious in application. The initial step is to break down or disaggregate a process into a number of tasks. Collectively, these tasks must be completed for the construction of a facility. Once these tasks are defined and quantities representing these tasks are assessed, a unit cost is assigned to each and then the total cost is determined by summing the costs incurred in each task. The level of detail in decomposing into tasks will vary considerably from one estimate to another.

Allocation of joint costs.

Allocations of cost from existing accounts may be used to develop a cost function of an operation. The basic idea in this method is that each expenditure item can be assigned to particular characteristics of the operation. Ideally, the allocation of joint costs should be causally related to the category of basic costs in an allocation process. In many instances, however, a causal relationship between the allocation factor and the cost item cannot be identified or may not exist. For example, in construction projects, the accounts for basic costs may be classified according to (1) labor, (2) material, (3) construction equipment, (4) construction supervision, and (5) general office overhead. These basic costs may then be allocated proportionally to various tasks which are subdivisions of a project.

In order not to forget any item in the cost estimation, a Cost Breakdown Structure (CBS) is a usefull tool. A CBS, see below, is a hierarchical list of all items that must be paid for to bring a system to its full operational capability. A space system's CBS includes high-level categories such as launch vehicle, as well as low-level items such as engines and software.


General launcher CBS


General spacecraft CBS

Costs Associated with space missions

The costs of a space mission to the owner include both the (initial) capital cost and the subsequent operation and maintenance costs. Each of these major cost categories consists of a number of cost components.

The capital cost for a space mission includes the expenses related to the inital establishment of the space system needed:

  • Planning and feasibility studies
  • Engineering design
  • Development, including materials, equipment and labor
  • Production & deployment financing
  • Systems Engineering & management (supervision of development, production, & deploment)
  • Insurance and taxes during developement, production & deployment
  • Owner's general office overhead
  • Inspection and testing

The operation and maintenance cost in subsequent years over the project life cycle includes the following expenses:

  • Operating staff
  • Labor and material for maintenance and repairs
  • Periodic improvements
  • Insurance and taxes
  • Financing costs
  • Utilities
  • Owner's other expenses

The magnitude of each of these cost components depends on the nature, size and location of the project as well as the management organization, among many considerations. The owner is interested in achieving the lowest possible overall project cost that is consistent with its investment objectives.

References

Lecture Notes "Space Engineering & Technology II"
Space Mission Analysis & Design, by Wertz & Larson (Chap. 20)

Exercises

Problems
Answers

Supporting data

Comments?

Mail to: b.t.c.zandbergen

Interesting links:

See Spacelinks

© 2012 TU Delft

Metamenu