Cost Estimating Relationship

Unlocking the Power of Relationships: Cost Estimating Relationships in Cost Estimation & Control

Cost estimation is a crucial part of any project, serving as the foundation for budgeting, resource allocation, and ultimately, project success. While numerous techniques exist for cost estimation, one powerful approach relies on the concept of Cost Estimating Relationships (CERs).

What are Cost Estimating Relationships (CERs)?

In essence, a CER is a mathematical formula that leverages a known relationship between a cost element (dependent variable) and an independent variable. This independent variable could be anything that influences the cost, such as:

• Project size: Measured in square footage for construction, lines of code for software development, or number of units produced for manufacturing.
• Complexity: Reflected in the number of features, design specifications, or technical challenges.
• Material cost: Based on market prices or historical data.
• Labor hours: Determined by the estimated time required to complete specific tasks.

The Power of Parametric Estimating

CERs fall under the umbrella of parametric estimating, a technique that utilizes historical data and statistical relationships to predict future costs. By establishing a clear relationship between independent and dependent variables, CERs offer several advantages:

• Improved Accuracy: CERs leverage historical data and established patterns, leading to more accurate cost estimates compared to purely subjective assessments.
• Faster and Efficient: CERs streamline the estimation process, reducing the need for extensive research and analysis.
• Data-Driven Decision Making: The reliance on quantitative relationships provides a more objective and transparent approach to cost estimation, enabling informed decision-making.

Creating and Applying CERs

Developing a CER requires careful consideration and analysis:

1. Identify the Cost Element: Define the specific cost element you wish to estimate (e.g., labor cost, material cost, overhead).
2. Choose an Independent Variable: Select a variable that demonstrably influences the cost element.
3. Gather Historical Data: Collect relevant data from past projects, including cost data for the dependent variable and values for the independent variable.
4. Establish the Relationship: Analyze the data to identify a clear relationship between the variables. This could be linear, exponential, or other suitable models.
5. Develop the CER: Formulate a mathematical equation that expresses the relationship between the variables.
6. Apply the CER: Use the developed CER to estimate the cost for new projects based on the estimated value of the independent variable.

Real-World Applications

CERs find extensive application across various industries, including:

• Construction: Estimating the cost of building a structure based on its square footage.
• Software Development: Predicting the development cost based on the number of lines of code.
• Manufacturing: Estimating the production cost of a new product based on the number of units to be produced.

Challenges and Considerations

While CERs offer significant benefits, it's essential to acknowledge their limitations:

• Data Accuracy and Completeness: The quality of the historical data used to develop the CER directly impacts its accuracy. Inaccurate or incomplete data can lead to biased estimates.
• Project Specific Factors: CERs may not fully capture the unique aspects of individual projects, requiring adjustments for project-specific factors not reflected in the established relationships.
• Regular Review and Updating: As project characteristics evolve and market conditions change, CERs should be reviewed and updated regularly to maintain their relevance and accuracy.

Conclusion

Cost Estimating Relationships (CERs) provide a powerful tool for cost estimation and control. By harnessing the power of data and established relationships, CERs empower project teams to make more informed decisions, improve budgeting accuracy, and ultimately, enhance project success.