UCLA Extension

Effective Techniques for Cost Estimation and Business Case Analysis

A 3-Day Short Course

Rapidly advancing technology, increasing project complexity, and competitive pressures demand better cost and schedule estimation and investment evaluation of projects, processes, products, or services, whether developing new ones or improving existing ones. Successful engineers, scientists, business and project managers, and business and financial analysts must use modern cost estimating and investment evaluation techniques to select the optimum mix of projects for today’s cost-conscious environment. Accurate project cost estimates and investment evaluations are critical to staying competitive and optimizing organizational resources. Learn to evaluate and prioritize the feasibility of business initiatives and to develop a business case to support the defined project.

Complete Details

This course provides participants with the skills needed to prepare, review, approve, supervise, monitor, and/or use cost estimates and business case evaluations in research, development, design, manufacturing, operations, marketing, and management. The course also discusses how to produce accurate cost estimates and investment evaluations to avoid large cost overruns or unsatisfactory investment returns, whether the project budget is a few thousand dollars or hundreds of millions of dollars. Participants acquire techniques and methods that not only help them to evaluate projects and work more successfully with their financial department, but also to optimize their personal investment portfolio. This course bridges the gap between the business and technical communities.

Specific course objectives include:

  • Understanding how cost estimation and business case evaluation fit into the life cycle of a project, process, product, or service—from conception and definition through design and construction to implementation, operation, and disposal
  • Gaining an appreciation for the advantages, disadvantages, and pitfalls of different cost estimation and investment evaluation methods
  • Describing how to do order-of-magnitude, budget, and detailed cost estimates
  • Gaining insight into economic evaluations by using sensitivity and risk analysis
  • Understanding how to avoid common errors and pitfalls in cost estimation and capital investment evaluation
  • Learning how to select and rank the best projects, designs, ideas, and alternatives given limited budgets, staff, and other resources
  • Knowing the importance of new costing and investment concepts and paradigms
  • Giving insight into the cost estimation and investment evaluation process by presenting case studies from a broad cross-section of the public and private sectors
  • Introducing rules-of-thumb and reference sources
  • Comparing and contrasting economic evaluations in the public sector, such as at national laboratories, with evaluations done at corporations
  • Dealing with emerging cost factors, such as new environmental, safety, health, and government regulations; improved quality; increasing litigation; outsourcing; increased training; international projects; and reengineering
  • Interacting with professionals from industry, government, non-profit organizations (NPOs), and universities

The course consists of lectures, discussion, and individual and group exercises.

Please bring a calculator.

Course Materials

Course notes, consisting of copies of presentation slides and supplementary readings, are distributed on the first day of the course. These notes are for participants only and are not for sale.

Coordinator and Lecturer

Donald S. Remer, PhD, PE, Cofounder and President, Claremont Consulting Group, Claremont, California; and Oliver C. Field Professor of Engineering, Harvey Mudd College of Engineering and Science, Claremont, California. Dr. Remer has been managing projects, performing cost estimation and project feasibility studies, and doing technical and economic evaluations for over 30 years. He has managed over 70 projects ranging from tens of thousands of dollars to hundreds of millions of dollars. His industrial and consulting experience includes aerospace, automotive, biotechnology, chemical, computer software and hardware, electronics, medical products, oil shale, paper and pulp, and petroleum companies; design, construction, and legal firms; local, regional, and federal agencies; water, gas, and coal-fired power generation utilities and railroads; research and development laboratories; and energy conservation, environmental, sustainability, and renewable energy projects, including solar hot water heating and photovoltaics.

Dr. Remer’s clients range from small entrepreneurs to Fortune 500 companies and government agencies, including clients such as Beckman-Coulter, Boeing, Booz-Allen & Hamilton, DIRECTV, eCivis, GEC Marconi and Lear Astronics (now BAE Systems), Hewlett-Packard, TRW, Disney, the FAA, Sequent Computer (now IBM), JPL, 20th Century Fox, Amgen, QAD, Raytheon, Northrop Grumman, St. Jude Medical, Lawrence Livermore and Lawrence Berkeley National Laboratories, Los Alamos National Laboratory, Sandia National Laboratories, U.S. Coast Guard, U.S. Air Force, County of San Bernardino, and the City of Tucson, Arizona. He has also served as a task force and project manager and division coordinator for Exxon, and director of the Energy Institute at Harvey Mudd College. He has presented short courses in project management, managing and estimating software projects, and project cost estimation and economic evaluation to over 11,000 practicing professionals.

Dr. Remer is a registered Professional Engineer in California and Michigan. He is the former director of the American Society of Engineering Management and is currently on the editorial board of the International Journal of Production Economics. He was recently selected to be a charter member of the new Engineering Management Honor Society that was started by the American Society of Engineering Management. He has produced over 50 publications on cost estimation, capital investment evaluation, and engineering and project management. The International Society of Parametric Analysts named his paper on cost modeling the outstanding paper of the year in the Journal of Parametrics. Dr. Remer was case study editor of The Engineering Economist and has been on the editorial boards of Engineering and Process Economics and Engineering Costs and Production Economics. He has a BS in engineering from the University of Michigan and MS and PhD in engineering and business economics from Caltech.

Course Program

Introduction

  • Historical estimates vs. final costs and schedules—the fantasy factor
  • Group exercise

Cost Estimating Methods

  • Top-down cost estimating
  • Bottom-up cost estimating
  • Parametric cost estimating
    — Simple models: power law and sizing factors
    — Complex models: Cost Estimating Relationships (CERs)
  • Activity-based costing (ABC)
  • Ratio cost estimating
  • Probability range estimating or three-point estimating
  • Price-to-win estimating
  • Level of effort estimating

Cost Estimation Problem Areas

  • Software development and life cycle costs
  • Maintenance costs
  • Labor costs, fringe benefits, and indirect costs (overhead rates)
  • Documentation costs
  • Obtaining good cost quotes

Types of Cost Estimates

  • Order of magnitude
  • Budget
  • Detailed
  • Corporate examples

Case Studies on Cost Estimation from a Broad Cross-Section of the Private and Public Sectors

  • NASA Deep Space Network
    — Long-range planning cost model
    — Top-down cost drivers
  • Biotechnology
    — Detailed ratio cost estimate and sensitivity analysis
    — Recombinant DNA manufacturing process
  • Electronics
    — Printed circuit board (PCB) assembly
    — Costing tool for concurrent engineering
    — Activity-based costing (ABC)
  • Construction
    — Compressing schedules

Managing the Cost Estimation Process

  • Key questions to ask
  • Contingency policy and a contingency algorithm
  • Example of why contingency is needed
  • 80/20 Rule: Pareto’s Law
  • Cost to do a cost estimate
  • Fantasy factor
  • 90% Syndrome
  • Post-mortem analysis
  • Challenging the requirements

Transition from Cost Estimation to Business Case Evaluation

Time Value of Money and Interest Rate Factors

  • Compound interest formulas
  • Present and future values
  • Capital recovery and sinking fund factors
  • Cash flow diagrams
  • Amortized loans

Methods for Comparing and Evaluating Alternatives

  • Present value methods
  • Annual worth evaluations
  • Rate of return methods
  • Payback period methods
  • Cost-Benefit Analysis (CBA)
  • Cost effectiveness analyses
  • Personal investment decisions
  • Advantages, disadvantages, and potential pitfalls of each method
  • Common applications and techniques
    — Break-even analysis
    — Design-to-cost evaluations
    — Public sector vs. private sector evaluations

Tax Considerations in Business Case Evaluations

  • Kinds of taxes to include
  • How to calculate federal, state, and local taxes: corporate and individual
  • Personal economic decisions

Inflation and Cost Indexes (Domestic and International)

  • How to include inflation in estimates and evaluations
  • Government and industrial cost indexes
  • Actual vs. constant dollars

Managing Investment Evaluations

  • Investment yardsticks
    — Present value analysis vs. rate of return
    — Life cycle cost vs. minimizing initial cost
  • Current corporate practice is changing
  • Cost of money and Minimum Acceptable Rate of Return (MARR)
  • Sensitivity and risk analysis
  • Breakeven analysis
  • Cumulative probability vs. project cost

Case Studies on Business Case Evaluation from a Broad Cross-Section of the Public and Private Sectors

  • Cogeneration
  • Biotechnology
  • Department of Defense weapons system

Emerging Factors in Cost Estimation and Investment Evaluation

  • Rapidly changing environment
  • Reengineering, reorganizing, and Mergers and Acquisitions (M&A)
  • Environmental, Health, and Safety (EH&S) and other governmental regulations and audits
  • Increased litigation
  • International projects
  • Software development costs abroad
  • Offshoring and outsourcing
  • Improved quality (ISO and CMMI)
  • Schedule compression
  • Training costs
  • Professional certifications in cost estimation and project management

Summary and Wrap-Up

  • Personal action plan
  • Tips for applying what you have learned

Sources for cost estimating and business case evaluation information are included in the course materials.

For more information contact the Short Course Program Office:
shortcourses@uclaextension.edu | (310) 825-3344 | fax (310) 206-2815

image_print