Cost Estimation Models

Many FP&A teams forecast compensation using top-down assumptions like "salaries grow 3% year-over-year and benefits are 25% of pay." But this usually fails. Bottoms-up cost builds allow FP&A professionals to build accurate compensation models like this one. Instead of starting with high-level assumptions and averages, it begins with inputs that can then drive the averages used in the financial model. This is an example I sometimes use to illustrate how FP&A teams can build more accurate payroll forecasts: • Separate senior professionals from junior professionals • Build salary growth rates at the category level • Add fringe and statutory costs line by line • Calculate each cost as a % or salaries or per person • Include benefits % of salary to capture non-cash comp The result of this technique is you get a transparent, auditable model with inputs that can be easily flexed. You get immediate sensitivities that you can run on headcount, pay mix, or changes to benefits. And you can easily integrate these assumptions with workforce planning. You can also break down leadership, management, and staff by job category and assign salary bands. If the CFO asks why personnel costs went up 8%, you can show exactly where that increase is coming from. A bottoms-up cost build like this doesn't just make your forecast more detailed. It makes it more defensible for FP&A business partners serving human resources.

Are you aware of the hidden costs in your product's raw material? : : Accurately calculating raw material costs is a cornerstone of should-cost modeling. By effectively identifying the materials required, determining the cost per unit, and accounting for potential waste and additional costs like handling and transportation, you can develop a comprehensive and reliable cost model. Key Parameters for Should Cost Process in Material Calculation: # Raw Material Identification: ·  Material type and grade ·  Material source/origin # Material Quantity: · Required quantity (per unit or batch) · Packaging units # Material Cost per Unit: · Supplier quotes · Market prices · Historical data · Discounts and bulk pricing # Material Waste or Loss: · Scrap/waste factor ·  Defects and rejections # Handling and Storage Costs: ·  Material handling · Storage costs (rent, insurance, utilities) · Inventory management # Freight and Transportation: ·  Shipping costs · Delivery method (air, sea, road) ·  Customs and tariffs # Lead Time and Order Frequency: · Lead time variations · Order volume # Supplier Terms and Conditions: · Payment terms · Return and warranty policies · Exchange Rates (For Imported Materials) # Material Substitution and Alternatives: · Substitute materials ·  Material optimization # Environmental and Regulatory Factors: · Recycling or sustainability initiatives · Regulatory compliance # Operational Overheads Related to Materials: · Processing costs · Energy costs ------------------------------------------------------------------------------------- # Ask Yourself: -> Did you consider the net weight and gross weight calculation properly? -> Did you consider scrap weight and scrap cost in your estimation? -> Do you have access to the global raw material index and recent material price database? -> Have you asked your supplier about the raw material cost per kg as well as the scrap cost per kg? -> Do you consider Manufacturing overhead (MOH) and inventory cost (raw materials)? -> What about the scrap cost percentage based on different commodities? -> Did you optimize material through strip layout, nesting, cavity, and other techniques? -> What’s your strategy when the supplier asks for material cost increases due to market fluctuations? -> Did you consider the volume/batch/MOQ impact, as well as regional cost impact, in your calculations? -> Did you consider any coating and primary requirements in the raw material stage? -> Commodity-Specific Considerations, etc.

1. Analogous Estimating (Top-Down) • Uses historical data from similar past projects. • Faster and less costly but less accurate. • Example: “The last app project cost $100k and took 3 months; this one is similar, so we’ll estimate the same.” ⸻ 2. Parametric Estimating • Uses statistical relationships between historical data and project variables. • More accurate if data is reliable. • Example: “If coding costs $50 per function point, and we have 500 function points, then total cost = $25,000.” ⸻ 3. Three-Point Estimating (PERT) • Considers uncertainty by taking three values: • Optimistic (O), Most Likely (M), and Pessimistic (P). • Expected value formula: (O + 4M + P) / 6 • Example: “Best case: 2 weeks, most likely: 4 weeks, worst case: 8 weeks → (2+16+8)/6 = 4.3 weeks.” ⸻ 4. Bottom-Up Estimating • Breaks down work into smaller components (WBS level). • Estimates each piece and rolls up to total. • Most accurate but time-consuming. • Example: Estimate each module separately, then sum for the full project cost/time.

Cost Evaluation Techniques 🧮 1. Zero-Based Costing (ZBC) A method where each cost element is justified from scratch (“zero base”) rather than using historical prices or vendor quotes. Purpose: To identify what a product should cost based on its fundamental materials, labor, overheads, and profit. Use Case: Negotiating with suppliers; cost transparency analysis; design-to-cost projects. 💡 2. Should-Be Cost (SBC) / Should-Cost Analysis Estimates what a product should cost if produced efficiently, considering realistic input costs, manufacturing processes, and logistics. Purpose: Helps buyers understand supplier pricing structures and negotiate better deals. Use Case: Strategic sourcing, supplier benchmarking, and value engineering. 💰 3. Total Cost of Ownership (TCO) Evaluates the total cost incurred over the product’s entire lifecycle—not just the purchase price. Components Include: Purchase cost Transportation & logistics Installation & commissioning Maintenance & operation Downtime & disposal costs Use Case: Evaluating long-term value, particularly for capital goods and complex systems. 🚢 4. Landed Cost Approach Calculates the total cost of a product once it arrives at the buyer’s location. Includes: Purchase price + transportation + insurance + customs duties + taxes + handling charges. Use Case: Import/export decision-making; supplier comparisons across regions. ⚙️ 5. Activity-Based Costing (ABC) Assigns costs to products/services based on the activities required to produce them. Purpose: Identifies high-cost activities and inefficiencies in the procurement process. Use Case: Indirect cost analysis; process optimization. 📈 6. Life Cycle Costing (LCC) Similar to TCO, but includes environmental and end-of-life costs. Use Case: Sustainability-oriented procurement and long-term investment analysis. 📊 7. Parametric Cost Estimation Uses mathematical models or historical data to estimate costs based on key parameters (e.g., weight, size, power). Use Case: Early-stage cost estimation for new designs or unproven suppliers. 🧩 8. Value Analysis / Value Engineering (VA/VE) Examines functions of a product or service to improve value by reducing cost without compromising quality. Use Case: Collaborative supplier development and continuous improvement initiatives. 🧾 9. Target Costing Begins with a desired market price and profit margin to determine the maximum allowable cost for production. Use Case: Cost planning during product design and supplier collaboration. 🌍 10. Cost Benchmarking Compares supplier or internal costs with industry standards, peers, or market averages. Use Case: Price validation, supplier performance evaluation. 📦 11. Clean Sheet Costing A detailed breakdown of costs built from the ground up—material, labor, overhead, logistics, and profit Use Case: Advanced negotiations and supplier transparency discussions.

Cost Estimating 🔹 What is Cost Estimating? Predicting project cost from scope + drawings + specs + market data. Used for: Tendering | Budgeting | Cost Control. Golden rule: realistic, defendable, measurable + market-based. 🔹 Levels of Accuracy: Conceptual (-25%/+40%) – Feasibility Preliminary (-15%/+20%) – Budget approval Detailed (-5%/+10%) – Tender/BOQ Control (based on actual BOQ/contracts) – Payments 🔹 Components of an Estimate: 1. Direct costs (labour, materials, plant) 2. Indirect costs (site + head office overheads) 3. Profit & Risk (margin + contingencies) 🔹 Step-by-Step Process: 1. Understand the scope 2. Quantity Take-Off (QTO) 3. Build unit rates  Unit Rate = Materials + Labour + Plant + OH + Profit 4. Add preliminaries 5. Include risk/contingencies (5–10%) 6. Review & benchmark 🔹 Quick Example: Blockwork 200 m² → 109 SAR/m² → Total = 21,800 SAR 🔹 Common Junior Mistakes: ❌ Ignoring wastage ❌ Overlooking site conditions ❌ Using “market rates” with no breakdown ❌ Forgetting preliminaries ❌ Copy-pasting old rates 🔹 Pro Tips: ✅ Keep a rate build-up sheet ✅ Build your own rate database ✅ Cross-check against cost/m² benchmarks ✅ Never submit without risk allowance ✅ Accuracy matters more than being the cheapest #QuantitySurveying #CostEstimating #BOQ

Cost Plans/Estimates as per Different Industry Standards 🚫 Rough Order of Magnitude (ROM) ➡ RICS: Level 1 Estimate ➡ AACE: Class 5 Estimate ➡ RIBA: Stage 0 "Strategic Definition" ➡ End Usage: Class 5 (ROM) estimates are prepared for any number of strategic business planning purposes, such as but not limited to market studies, assessment of initial viability, evaluation of alternate schemes, project screening, project location studies, evaluation of resource needs and budgeting, long-range capital planning, etc. 🚫 Order of Cost Estimate ➡ RICS: Level 2 Estimate ➡ AACE: Class 4 Estimate ➡ RIBA: Stage 1 "Preparation and Briefing" ➡ End Usage: Class 4 (Order of Cost Estimate) estimates are prepared for a number of purposes, such as but not limited to, detailed strategic planning, business development, project screening at more developed stages, alternative scheme analysis, confirmation of economic and/or technical feasibility, and preliminary budget approval or approval to proceed to next stage. 🚫 Cost Plan 1 ➡ RICS: Level 3 Estimate ➡ AACE: Class 3 Estimate ➡ RIBA: Stage 2 "Concept Design" ➡ End Usage: Class 3 (Cost Plan 1) estimates are typically prepared to support full project funding requests and become the first of the project phase control estimates against which all actual costs and resources will be monitored for variations to the budget. They are used as the project budget until replaced by more detailed estimates. In many owner organizations, a Class 3 estimate is often the last estimate required and could very well form the only basis for cost/schedule control. 🚫 Cost Plan 2 ➡ RICS: Level 4 Estimate ➡ AACE: Class 2 Estimate ➡ RIBA: Stage 3 "Spatial Coordination" ➡ End Usage: Class 2 (Cost Plan 2) estimates are typically prepared as the detailed contractor control baseline (and update to the owner control baseline) against which all actual costs and resources will now be monitored for variations to the budget and form a part of the change management program. Some organizations may choose to make funding decisions based on a Class 2 estimate. 🚫 Cost Plan 3 ➡ RICS: Level 5 Estimate ➡ AACE: Class 1 Estimate ➡ RIBA: Stage 4 "Technical Design" ➡ End Usage: Generally, owners and EPC contractors use Class 1 estimates to support their change management process. They may be used to evaluate bid checking, to support vendor/contractor negotiations, or for claim evaluations and dispute resolution. Construction contractors may prepare Class 1 estimates to support their bidding and to act as their final control baseline against which all actual costs and resources will now be monitored for variations to their bid. During construction, Class 1 estimates may be prepared to support change management. Client may use these types of estimates for commercial bid evaluations. #costplanning #estimates #costplans #bidding #tendering #RICS #AACE #RIBA #costmanagement

If you work in public health, you will write plans. And every serious plan needs a budget. Sometimes, you’ll have a finance officer by your side. Other times, like what we used to do in Sudan, you will build the budget yourself. Either way, you must understand the #basics Not to do it alone, but to collaborate with clarity. Here are four cost estimation methods every public health professional should know: • Analogous Use when you have done something similar before. (We spent $30K on a similar campaign last year.) • Parametric Use when you have reliable unit costs. (If one field team costs $500 per day, five days = $2,500.) • Bottom-up Use when accuracy is critical. Break the work into small tasks and estimate each. • Three-point Use when there is uncertainty. Ask for best, likely, and worst-case costs—and average them. You don’t need to use all four. Choose the method that fits your context and needs. Budgeting is not just a finance task. It’s part of shaping your impact. #أساسيات #I_Read_it_For_You #قريتوـليك

Have you built your own Total Cost of Ownership (TCO) model for anything other than IT, Equipment, and Real Estate? Here is what I learned from building my own TCO model for services procurement. I struggled to find useful literature on TCO for non-IT use cases while researching to build a model for contract labor procurement. I saw a Big-4 consultancy fail at an attempt to build a TCO model for agri-commodities, and quietly opt to use a basic cost driver analysis instead. Bottom line is, TCO is tricky. The third Procurement framework in our series is TCO. 💡What is it? TCO is a look beyond price per unit, at the lifetime cost incurred in the purchase of a good or service. Lifetime costs can be direct or indirect, and can be associated with buying, using, storing, and maintaining the product or service. ✅ It is most relevant when the purchase price of what you buy is only a fraction of the costs incurred in maintaining it over the course of its lifetime ❌ Do not misuse it on categories where lifetime cost is not applicable 💡 How to use it? 1️⃣ Define scope and purpose of your TCO model I wanted to build a total cost model to evaluate labor bids based on parameters other than bill rate. 2️⃣ Identify cost elements - 💰Initial cost 💰Operating cost 💰Maintenance & support cost 💰Downtime cost 💰End-of-life cost For my model, this was - - Bill rate/hour Cost of - Downtime - Quality incidents - Safety incidents - Training - Attrition 3️⃣ Collect data Find historical data to help you estimate these costs. Or, talk to experts. Not gonna lie, this is the step where I almost gave up. I had to estimate all of these various costs, or find a suitable stand-in. Bill rate - From my bid Downtime cost - From Mfg Team, downtime minutes by supplier Cost of quality defects - From Reliability Team, # of quality issues by supplier Cost of safety - Total Incident Rate by supplier as a stand-in Training cost - From HR Attrition cost - Attrition rate by supplier X training cost assumed recruitment cost, lost productivity, and administrative costs are comparable across suppliers (cop out!) 4️⃣ Build the model I built it on Excel using the cost categories listed above, and took loads of help from a talented colleague. 5️⃣ Calculate TCO - the fun part! Sum up all the costs. Throw in some sensitivity analysis too, if you still have any juice left. How will changes in assumptions affect TCO? I found bugs in my model. Just patiently solve them. 6️⃣ Analyze and make decisions From my analysis, I learned that my lowest cost provider was not that much worse than my highest cost provider when it came to safety, quality, or downtime. We awarded to the lowest cost provider with defined targets on TIR, quality incidents, downtime, and attrition. 7️⃣ Document and update the model I failed to do that after this bid analysis, so my model remained static. I hope this helps you build your own TCO model. HMU if you want to brainstorm.

Not all cost estimates are created equal, and the best method depends on your project’s needs. Whether you’re in the early stages or dealing with detailed data, picking the right approach can make or break your budget. Sometimes you need a quick number to get started. Other times, you need detail to ensure accuracy. — Here’s a quick guide to 5 common estimating methods and when to use them: Need a Quick Estimate? ➠ Go with Top-Down or Analogous estimating. ➠ These are fast and perfect for early-stage planning, but they sacrifice a bit of precision. Need Accuracy? ➠ Bottom-Up or Parametric are your best friends. ➠ They’re detailed, accurate, and ideal for projects where task-level data is available. Dealing with Risk or Uncertainty? ➠ Choose 3-Point Estimating. ➠ It accounts for best-case, worst-case, and most likely scenarios to give you a realistic range. 🔑 The key is to match the method to your project phase, time constraints, and the data you’ve got.