Engineering Economic Analysis

Cost Estimating 39

semidetailed estimates than the rough-order type, and their accuracy is generally

-15 to +20%.

Detailed estimates: Used during ap!oject' s detailed design and contract bidding phases.

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 semi-

detailed 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 gen-

eral 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 sophisticated methods are used.

Difficulties in Estimation

Estimating is difficult because the future is unknown. With few exceptions (such as with

legal contracts) it is difficult to anticipate future economic consequences exactly. In this

section we discuss several aspects of estimating that make it a difficult task.

FIGURE 2-6 Accuracy versus High

cost trade-off in estimating.

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Low

Low Medium

Accuracy of Estimate

High

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