Cost Estimating – Part 2 of 3

In this episode, Ricardo continues to talk about cost estimates, explaining how to use the capacity factor to calculate costs when there is economy of scale.

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Hello, everyone. Welcome to the five minutes PM. Podcast Today. I like to continue the podcast about cost estimation. If you do. We remember we are trying to create and an approximation of the cost of our project. And this is very different from the budgeting where I'm using a deterministic model to understand the cost. Last week, I spoke about physical dimensions, remember square feet, the cost per square feet, and then the size.

And then you just multiply this to item's. The second one, I explained it to you. What was the unit of final product? Remember the cost of one bat in the hospital, times the size in beds, then you move to apply and you have the final cost estimation for the hospital. Today I want to talk about the capacity factor. It Since a hard to understand, but it's not the basic concept behind the capacity factor is that most of our projects are know linear.

You can get the economy software scale when you grow your project. So let me give you a simple example. Let's suppose that you have the 10 bed hospital is a very tiny hospital, and then you have a hundred bed hospital. Then you have at a thousand bed hospital. If it's linear, or you can say that a hundred bed hospital will cost 10 times more than a 10 bed hospital in a thousand bed hospital, we'll cost a hundred times a 10 bed hospital. This is the linear. You just do a proportion, but how many times or most of the time, this is not so linear when you grow you safe because maybe the hundred bed hospital in a thousand bed hospital, for example, the corridor, or for example, the reception, they do not rise.

Maybe in the same proportion may be the operation room does not grow in the same proportion. So this is why we use the capacity factor. So let me explain first time, formula off the capacity factor, the cost of the project you want to ask, add to make that divided by the cost of the product that you did before, or, you know, from the market that you know, the price. So the cost of project B divided by the cost of a project that, you know, it's equal the capacity of project, be divided by the capacity of project, a dis raise it to an X factor.

Okay. So let's take a very simple example. So if you know the cost of a project that you did before, or you found on the marketplace, if you know the capacity of that project, if you know the capacity of the project you want to forecast, and if you know the capacity factor, you can just take the new capacity divided by the known capacity of the project did, and you raise this to the capacity factor, but the problem you all asked me, but Ricardo, I don't know the capacity.

So how you can calculate the capacity factor. You can calculate the capacity factor based it on a two, for example, you can, the more but basic don't two projects, you know, the capacity and the cost. So let's take a simple example, let's suppose that you are doing a waste management station. Okay. And let's suppose you have two data's that you have all the information. The first one is that you built one that cost $2 million, and that is able to process five Qubit fit per second.

Okay. So of course I am taking this number's from my mind. Okay. 2,000,005 cubic feet per second. Then you have a lot of one that you also build past $1 million and it processed two cubic feet per second. So look, it's not linear 1 million, two cubic feet to million five cubic feet and not four, because if it was four, we can just forget that capacity factor and go back to, for example, physical dimensions.

Okay. The problem is that it's not linear. It's a two and five. So I raise it from two to five, my capacity only by doubling the cost. So how do you do that? You take a piece of paper and then you put two. That is the cost of the one, you know, divided by one is the cost of the other one. You also know it's equal. So two divided by one is the capacity of the one that comes to its five divided by to is the capacity of the one that costs 1 million or so five divided by to do this.

Okay. Raise it two X. So do divided by one it's equals five divided by to raise it two X. How do we solve this mathematical equation? It's basically by placing lager eight to mimic. So you put the logarithmic, you have to it's the factor times it MC of 2.505 divided by to, and you will find that that capacity factor is zero point 75. Look at Luke's God, mostly for those who are not from engineering, but it's very extremely easy.

It takes you five seconds. She used a Microsoft Excel to do that. As soon as you have the capacity factor, then if you asked me Ricardo now I went to calculate the cost of a 10 cubic feet. So what do you do? You take your base for example, 10 divided by to raise it to zero points, 75, and then you will have the cost of your new waste management station. So it's very simple and there is only one B concept behind that its the concept of normal linearity on the cost and concept of economy.

We have scale. It's a very, very simple process. Trust me, they're a very simple process. You can find this formulas on the web. It's extremely simple for you to do that and its a more elaborate that just using physical dimensions of units of final product next week, I'll talk to you about the audit today. Jesus proportionality factor and parametric modeling. So see you next week with another five minutes BM Podcast.

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