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16thJuly
How do you estimate costs for project resources?

Each project that you carry out requires one or more of your resources to complete. For large projects, this can mean a considerable amount of your resources. Especially in that case, it makes sense to spend time determining the correct amount to help forecast when exactly those resources are needed. This will provide you with a cash flow to manage your expenditures and revenues accordingly. Here we pose the question: how do you make a cost estimation for using resources?

First, let’s make a distinction between the types of resources you may require on projects:

- Material

- Labor

- Overhead

1. Material cost

Normally you think of material as the physical composition of the asset. However, the value of the asset may also include the cost elements of scrap material or manufacturing spares, construction form work and safety items, and the cost of transporting the material to the work site.

2. Labor cost

Labor is the value of the work needed to complete the activity or asset; i.e. the worker’s labor in painting the building or soldering an electrical contact. Labor also includes the work of the engineer who prepares the design, the foreman supervising the field work, or the technician that maintains the wave soldering equipment.

3. Overhead cost

Overhead represents the resources needed to support the activity and/or asset. Examples are the home office cost, the cost of electricity to operate the plant, rent and financing costs.

Although money and time are sometimes thought of as resources, they only allow or constrain the use of the physical resources just listed. The cost of each activity or asset is determined by the costs of the resources used to create it. A project is basically the path by which this is done:

Estimating the cost of resources

Our objective as cost engineer is to identify which resources are required, and how much money and time you need to use on them. To estimate the cost of resources, we have to understand the relationship they have to the design of the asset and the method of construction. 

A cost engineer makes use of the fact that the materials drive the costs of the other resources for an activity or asset. The starting point of an estimating method is, therefore, the MTO and equipment list. When you can determine the market price for materials and the required quantities, you find the material cost. This determines the amount of labor that is required to install these materials or to create the asset. 

Early in the project, labor and overhead are factored in as functions of the material costs. Later, they can be determined separately as it becomes clear how and when the construction will be carried out and what supporting overhead is needed to guide and facilitate the resources.

We encourage you to start analyzing your resources next time you have to make an estimate! This will provide you with a cash flow to manage your expenditures and revenues accordingly.

 

  

Something to add to this article? Do you have a question for us, mail us at contact@costengineering.eu

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