Cost Estimating Relationship

Test Your Knowledge

Quiz on Cost Estimating Relationships (CERs)

Instructions: Choose the best answer for each question.

1. What is a Cost Estimating Relationship (CER)? a) A mathematical formula that estimates project duration. b) A subjective assessment of project costs based on experience. c) A statistical technique that predicts project risks. d) A mathematical formula that links cost to an independent variable.

2. Which of the following is NOT a common independent variable used in CERs? a) Project size b) Complexity c) Weather conditions d) Labor hours

3. What is a key advantage of using CERs for cost estimation? a) They eliminate the need for historical data analysis. b) They are completely immune to project-specific factors. c) They provide more objective and data-driven cost estimates. d) They guarantee 100% accuracy in cost prediction.

4. Which of the following industries is NOT a common application of CERs? a) Construction b) Software Development c) Retail d) Manufacturing

5. What is a crucial factor to consider when applying CERs for cost estimation? a) The reputation of the project team b) The availability of free software tools c) The accuracy and completeness of historical data d) The personal preferences of the project manager

Exercise: Developing a CER

Scenario: You are managing a construction project where the cost of excavation is directly related to the volume of earth moved. You have the following data from previous projects:

| Project | Volume of Earth Moved (m³) | Excavation Cost ($) | |---|---|---| | A | 500 | 10,000 | | B | 750 | 15,000 | | C | 1000 | 20,000 |

Task:

1. Identify the dependent and independent variables.
2. Plot the data points on a graph.
3. Determine the relationship between the variables (linear, exponential, etc.).
4. Develop a CER equation that expresses the relationship.
5. Estimate the excavation cost for a new project with a volume of 1200 m³.

Techniques

Chapter 1: Techniques for Developing Cost Estimating Relationships (CERs)

This chapter details the various techniques employed in developing effective Cost Estimating Relationships (CERs). The accuracy and reliability of a CER are directly tied to the methodologies used in its creation.

1.1 Regression Analysis: This is the most common technique. Regression analysis uses statistical methods to model the relationship between a dependent variable (cost) and one or more independent variables (e.g., size, complexity). Different types of regression (linear, multiple linear, polynomial, etc.) can be used depending on the nature of the relationship between the variables. The output provides a mathematical equation and statistical measures like R-squared to assess the goodness of fit.

1.2 Correlation Analysis: Before performing regression, correlation analysis helps determine the strength and direction of the relationship between variables. A strong correlation suggests a suitable relationship for CER development. However, correlation does not imply causation; a strong correlation needs further investigation before establishing a CER.

1.3 Expert Judgment: While not a purely quantitative technique, expert judgment plays a vital role, especially when historical data is scarce or unreliable. Experts can provide insights into factors that influence cost, helping refine the CER model and account for project-specific nuances. This can be integrated with quantitative techniques through a Delphi process or other structured expert elicitation methods.

1.4 Analogy Estimating: This technique leverages the cost data from similar past projects. It involves identifying analogous projects and scaling their costs to the current project based on relevant factors. While less precise than regression, it's useful when historical data is limited for the specific project type.

1.5 Machine Learning Techniques: Advanced techniques like machine learning algorithms (e.g., neural networks, support vector machines) can be employed to analyze large and complex datasets to identify non-linear relationships and improve prediction accuracy beyond traditional regression methods. However, these techniques require significant data and expertise.

Chapter 2: Models for Cost Estimating Relationships (CERs)

This chapter explores various mathematical models used to represent CERs. The choice of model depends on the nature of the relationship between the cost element and the independent variable(s).

2.1 Linear Models: These are the simplest models, assuming a straight-line relationship between the dependent and independent variables. They are easy to understand and implement but might not accurately capture complex relationships. The general form is: Cost = a + b * Independent Variable, where 'a' is the intercept and 'b' is the slope.

2.2 Polynomial Models: These models accommodate non-linear relationships by including higher-order terms (e.g., squared or cubed terms) of the independent variable. They offer greater flexibility than linear models but can be more complex to interpret.

2.3 Exponential Models: These are suitable when the cost increases exponentially with the independent variable, such as in situations with economies of scale. The general form is: Cost = a * e^(b * Independent Variable), where 'e' is the base of the natural logarithm.

2.4 Power Law Models: These models are useful when the relationship between cost and the independent variable follows a power law, often observed in situations with diminishing returns. The general form is: Cost = a * (Independent Variable)^b.

2.5 Multiple Regression Models: When multiple independent variables influence the cost, multiple regression models are used. These models consider the combined effect of several factors on the cost.

Chapter 3: Software for Developing and Applying CERs

This chapter examines the software tools available to support the development, analysis, and application of CERs.

3.1 Spreadsheet Software (Excel, Google Sheets): These are widely accessible and provide basic statistical functions for performing regression analysis and creating CERs. They are suitable for simpler CERs but may lack advanced features for complex analyses.

3.2 Statistical Software Packages (SPSS, SAS, R): These offer powerful statistical tools for advanced regression analysis, model selection, and diagnostic checks. They are ideal for complex CERs with multiple independent variables and non-linear relationships. R, in particular, is a powerful open-source option with extensive statistical libraries.

3.3 Project Management Software (MS Project, Primavera P6): Some project management software includes features for cost estimating and may incorporate CERs within their cost management modules. These tools can integrate CERs into project scheduling and budgeting processes.

3.4 Specialized Cost Estimating Software: Several software packages are specifically designed for cost estimation and include capabilities for developing and applying CERs. These often include features for data management, model building, and reporting.

3.5 Programming Languages (Python, MATLAB): These languages provide flexibility and control for developing custom CER models and integrating them with other systems. They allow for advanced data processing and analysis but require programming expertise.

Chapter 4: Best Practices for Developing and Using CERs

This chapter outlines best practices to ensure the accuracy, reliability, and effectiveness of CERs.

4.1 Data Quality: Accurate and reliable historical data is crucial. Data should be thoroughly cleaned, validated, and checked for outliers. Data sources should be documented and traceable.

4.2 Variable Selection: Carefully select independent variables that have a demonstrable influence on the cost element. Avoid including irrelevant or highly correlated variables.

4.3 Model Validation: Validate the chosen model using appropriate statistical measures (e.g., R-squared, adjusted R-squared, residual analysis) and ensure it accurately represents the relationship between variables.

4.4 Sensitivity Analysis: Conduct sensitivity analysis to assess the impact of changes in independent variables on the estimated cost. This helps understand the uncertainty associated with the estimates.

4.5 Regular Updates: CERs should be regularly reviewed and updated to reflect changes in project characteristics, market conditions, and technology. Outdated CERs can lead to inaccurate cost estimates.

4.6 Documentation: Maintain thorough documentation of the data sources, assumptions, model development process, and validation results. This ensures transparency and traceability.

Chapter 5: Case Studies of Cost Estimating Relationships (CERs)

This chapter presents real-world examples of successful applications of CERs across different industries.

5.1 Construction Project: A CER could be developed to estimate the cost of a building based on its square footage, number of floors, and type of materials used. The model could be validated using historical data from similar projects.

5.2 Software Development Project: A CER could predict the development cost based on the number of lines of code, complexity of features, and experience level of developers. This can aid in resource allocation and project planning.

5.3 Manufacturing Project: A CER can estimate the production cost of a new product based on the number of units to be produced, material costs, and labor hours. This allows for accurate pricing and profitability analysis.

5.4 Infrastructure Project: Estimating the cost of a highway project could involve a CER that relates cost to length, terrain characteristics, and the presence of environmental constraints.

Each case study will provide details on the data used, the model developed, the results obtained, and the challenges faced in the process. The goal is to demonstrate the practical application of CERs and their impact on project success.