Types of Cost Estimate.

The American poet and novelist Gertrude Stein wrote in The Making of Americans in 1925 that "a rose is a rose is a rose is a rose." However,what holds for roses does not necessarily hold for estimates because "an estimate is not an estimate."Ms. Stein was not suggesting that all roses are the same, but it is true that all estimates are not the same. Rather,we can define three general types of estimate whose purposes, accuracies, and underlyingmethods are quite different.

Rough estimates: Order-of-magnitude estimates used for high-level planning, for determining macrofeasibility, and in a project's initial planning and evaluation phases. Rough estimates tend to involve back-of-the-envelope numbers with little detail or accuracy. The intent is to quantify and consider the order of magnitude of the numbers involved. These estimates require minimumresources to develop, and their accuracy is generally -30% to +60%.

Notice the nonsymmetry in the estimating error. This is because decision makers tend to underestimate the magnitude of costs (negative economic effects). Also as Murphy's law predicts, there seem to be more ways for results to be worse than expected than there are for the results to be better than expected.

Semidetailed estimates: Used for budgeting purposes at a project's conceptual or preliminary design stages. These estimates are more detailed, and they require additional time and resources to develop. Greater sophistication is used in developing semidetailed estimates than the rough-order type, and their accuracy is generally -15 to +20%.

Detailed estimates: Usedduringap!oject' sdetailed designandcontractbiddingphases.

These estimates are made from detailed quantitative models, blueprints, product specification sheets, and vendor quotes. Detailed estimates involve the most time and resources to develop and thus are much more accurate than rough or semidetailed estimates. The accuracy of these estimates is generally -3 to +5%.

The upper limits of +60%for rough order, +20%for semi-detailed, and +5%for detailed estimates are based on construction data for plants and infrastructure.

Final costs for software, research and development, and new military weapons often correspond to much higher percentages.

In considering the three types of estimate it is important to recognize that each has its unique purpose, place, and function in a project's life. Rough estimates are used for general feasibility activities, semidetailed estimates support budgeting and preliminary design decisions, and detailed estimates are used for establishing design details and contracts. As one moves from rough to detailed design, one moves from less to much more accurate estimates.

However, this increased accuracy requires added time and resources. Figure 2-6 illustrates the trade-off between accuracy and cost. In engineering economic analysis, the resources spent must be justified by the need for detail in the estimate. As an illustration, during the project feasibility stages we would not want to use our resources (people, time, and money) to develop detailed estimates for unfeasible alternatives that will be quickly eliminated from further consideration.However, regardless of how accurate an estimate is assumed to be, it only an estimate of what the future will be. There will be some error even if ample resources and sophisticatedmethods are used.


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