The Value of Precision Cost Estimating in Product Development
Looking at the costs of a component or manufacturing process as early as the development phase helps uncover and utilize savings potential early on. A simple example makes this clear: the decision whether a component should be built in a differential or integral construction process also defines the manufacturing method and required machinery. This determines the manufacturing location. The location is responsible for commercial parameters such as overhead cost structures, wage and machine costs and customs duties or logistics fees.
Behind every development decision is a whole bundle of calculation risks.
Inaccurate cost estimates due to lack of collaboration on product costs
Product development continuously needs data and information from development, project and program management, production, business development and controlling to be able to analyze and evaluate product costs. The data is usually available, but in a variety of files and applications. Information from the departments is stored in folder structures or e-mails.
Manual data consolidation from previous project documentation, current and latest project sketch data, CAD data (be it from 2D, 3D, JT files or drawings) and purchasing info records across multiple locations requires a high level of resources. In many cases, information relevant to costing is not considered, or outdated values are included in the calculation of product costs – with consequences for the project:
- lack of own- and third-party confidence in the cost estimate
- inaccurate cost estimation for construction elements and lack of ability to identify the inaccuracies
- limited analyses capabilities to quantify cost certainty and selective cost reduction
Conversely, this means that the project team is better supported by automated data transfers and can evaluate costing results more quickly and accurately.
Robust project costing in the early stages with maturity analyses
The analysis and evaluation of imputed risks needs a flexible approach to be able to control the cost side effectively. At FACTON, we have learned that when you increase the amount of data in your estimating process, you also increase your precision. We have identified seven levels of precision cost estimating, based on the use of increasing amounts of data to achieve progressively higher levels of accuracy.
Seven Levels of Precision Cost Estimating
- ESTIMATING: The simplest, easiest level, estimating is used when data is vague. The output is necessarily imprecise, and the risk to your business is high. The good part about estimating: There’s plenty of room for improvement.
- SCALING: At this level, you are still making assumptions, data inputs are still imprecise, and may be based on a similar product produced in the past. Scaling is still high risk, and there is still enormous room for improvement.
- BASIC: You’ve acquired and used more information (e.g., location of production, cost rate calculations). This enables a greater level of calculation, and thus somewhat higher confidence and reduced risk.
- ADVANCED: At this level, there’s a greater amount of detailed data available (e. g., machine time estimates by piece, worker cycle time). This again leads to greater confidence and lower risk.
- TECHNOLOGY: Now more specific technical information is available (e. g., dimensional requirements, material specifications) and there’s an emphasis on bottom-up calculations.
- COST CENTER: With increased data resources available, a better understanding of resources used, and following expense tracking, you may have cost centers by function, usage, etc. This results in a much higher level of accuracy and greatly reduced risk.
- OFFER: You now have binding contracts with your customer and an associated high level of confidence in quote and pricing.
Figure 1: Example Maturity Analysis, Source: FACTON
The moment development teams can use maturity models to break down project costing into different phases, costs and contained risks become transparent. The spectrum can range from simple cost estimates to negotiated prices with suppliers. The result provides certainty at any point in time as to which stage the project costing is in.
The more data the project team can process for costing, the more reliably maturity levels of cost estimates can be predicted. The project is assured and gains confidence among stakeholders.
Find out more about development-related costing
Author: Rüdiger Stern
President for North America, FACTON
Advisory Board, Society of Cost Engineers