Engineering Cost Estimating

The Engineering Cost Estimating method (Also called Bottoms-Up) builds the overall cost estimate by summing detailed estimates done at lower levels of the Work Breakdown Structure (WBS). It’s a technique where the system being costed is broken down into lower-level components (such as parts or assemblies), each of which is costed separately for direct labor, direct material, and other costs. Engineering estimates for direct labor hours may be based on analyses of engineering drawings and contractor or industry-wide standards.

Definition: Cost estimating is the examination and study of anticipated expenses, typically determined from comparing the price, performance, schedule, and technical information of comparable goods and services in the past.

Engineering estimates for direct material may be based on discrete raw material and purchase part requirements. The remaining elements of cost (such as quality control or various overhead charges) may be factored in from the direct labor and material costs. The various discrete cost estimates are aggregated by simple algebraic equations (hence the common name “bottoms-up” estimate). The use of engineering estimates requires extensive knowledge of a system’s (and its components’) characteristics and lots of detailed data. [1]

When to Conduct an Engineering Cost Estimate

Most engineering cost estimates are conducted after Milestone C and Low Rate Initial Production (LRIP) approval. This is because the design is finalized, and there will be minimal changes. Also, the Work Breakdown Structure (WBS) and all associated work packages are well-defined in terms of labor and material. The program is basically mature, which allows for a more detailed and accurate cost estimate.

Who Conducts an Engineering Cost Estimate

An engineering cost estimate is normally conducted by the contractor who is building a system and is performed by subject matter experts (engineers, price analysts, and cost accountants). A certain times the government will perform its own independent engineering cost estimate.

Advantages of Engineering Cost Estimating

Because of the high level of detail, each step of the workflow should be identified, measured, and tracked, and the results for each outcome should be summed to make the point estimate. The several advantages to the Engineering Cost Estimating method include: [2]

The estimator’s ability to determine exactly what the estimate includes and whether anything was overlooked,
Its unique application to the specific program and manufacturer,
That it gives good insight into major cost contributors, and
Easy transfer of results to other programs.

Disadvantages of Engineering Cost Estimating

Some disadvantages of the Engineering Cost Estimating method include:

It can be expensive to implement and it is time-consuming
It is not flexible enough to answer what-if questions
New estimates must be built for each alternative
The product specification must be well-known and stable
All product and process changes must be reflected in the estimate

Cost Estimating Methods

There are a number of cost estimating methods that can be used in estimating the costs of a future and current of a system. The use of a specific approach will depend on how much information is available and where the system is in its development and lifecycle. A few of the most common cost estimating techniques are:

Parametric: The parametric technique uses regression or other statistical methods to develop Cost Estimating Relationships (CERs).
Analogy: An analogy is a technique used to estimate a cost based on historical data for an analogous system or subsystem.
Engineering Estimate: With this technique (Also called Bottoms-Up), the system being costed is broken down into lower-level components (such as parts or assemblies), each of which is costed separately for direct labor, direct material, and other costs.
Actual Costs: With this technique, actual cost experience or trends (from prototypes, engineering development models, and/or early production items) are used to project estimates of future costs for the same system.
Three-Point Estimate: This Program Analysis and Review Technique (PERT) style cost estimate has the project manager identifies three separate estimates.

AcqLinks and References:

Updated: 7/23/2023

Rank: G1