TOPIC 3 - Cost Estimation
All systems must be evaluated both in terms of the functionality of the design and the cost
effectiveness of the design. In this section, we will determine ways to estimate the cost of a thermal
system as a parameter of that system.
The kinds of costs that must be considered are these:
 Equipment costs - the costs to buy the equipment and ship it to the site.
 Installation costs - The costs associated with installing the equipment and getting it running.
• Labor
• Materials (siting, footing, electrical, housing, etc.)
 Overhead - The cost of ordering and paying the bill.
EQUIPMENT COSTS
 Tables of costs - Maintain a lookup table of costs for those components commonly used in
systems that you design. Usually this is not very efficient unless you work for a large firm
that does many similar designs.
 Vendor Quote - The most reliable source of accurate cost information is a firm quote from
the likely or possible vendor.

Cannot tie up a sales person frequently just to provide cost quotes while you shop through all
of the options. You should not approach the vendor until you are close to the final design.

Firm quotes (should be in writing) are only valid for a specific period of time. You must
request new quotes if a project is delayed substantially.
 Size Effect Estimate - a mathematical relationship that gives an approximate cost for various
kinds of equipment based on size.

Only approximate. Variation of 20% is common.

Still requires substantial tabulated data.

Data becomes dated and must be corrected for the effects of inflation and technological
changes.
Size Effect Estimation Method
Many kinds of equipment have initial costs that vary as a power function of size. When the cost is
plotted as a function of size, on a log-log scale, the resultant curve is nearly a straight line as shown
below:
This being the case, the equation of the line can be accurately fit with a power function of the form
Y=aXb
The Rule of Six-tenths
Approximate costs can be obtained if the cost of a similar item of different size or capacity is
known. A rule of thumb developed over the years known as the rule of six-tenths gives satisfactory
results when only an approximate cost within plus or minus 20% is required.
 S
C  C r 
 Sr



0.6
For a somewhat more accurate estimation of equipment cost, the equation is cast in the form:
 S
C  C r 
 Sr



m
Where
C = Cost of equipment
Cr= Reference cost
S = Size of actual equipment
Sr= Reference size
m = Empirical exponent
Values for Cr, Sr, and m are tabulated in the Appendix I at the end of Topic 3(from Boehm, 1985)
The reference costs listed in this table are based on equipment costs in 1985. These can be corrected
for inflation using a cost index that reflects current costs when compared to the baseline (in this case,
1985). Many cost indices are available, and the Consumer Price Index is widely available; however,
it is more appropriate for retail costs than construction costs. A widely used index for construction
costs is the Marshall and Swift Equipment Cost Index (M&S). The M&S was started in 1926 and set
= 100 at that time. Reference costs tabulated use M&S1985 = 800; current M&S2009 = 1432. So
current reference costs must be adjusted linearly according to
Where
 I 
C r  C O  
 IO 
Cr = current reference cost
C = base cost
O
I = current index
I = base index
O
Example 1
(Not corrected to
current M&S Index)
Example 2.
(Not corrected to
current M&S Index)
INSTALLATION COSTS
The costs of materials, labor, and affiliated costs must be included there are several methods to
estimate these costs:
Factor Method The equipment cost is multiplied by a factor Fm based on historical data that
estimates the total cost.
Ctotal = Cequipment * Fm
Factor values are supplied by manufacturers and distributors.
Component Method The components that make up the overall factor are separately identified
and estimated. This approach is more accurate if special considerations or difficult installations
are being considered. Examples of the components that comprise the overall installation costs:
 Direct Materials - The materials necessary for installation, such as pipe fittings, electrical
connections, slabs and footings, etc. Typical values are 50-100% of equipment costs.
 Labor - Wages for skilled and semi-skilled laborers to install the equipment. Costs are based
on a percentage of the equipment and material costs. Typical values are in the 25-40%
range.
 Indirect Costs - "The cost of doing business." Typical facets:

Freight, insurance, and taxes - ~8% of equipment and materials in USA.

Construction overhead - indirect costs on direct labor (insurance, FICA, workman's
compensations, taxes, etc.); ~70% of labor cost.

Engineering - detailed engineering plans and specifications. Vary with the size of the
job; ~15% of equipment and materials.
 Contingency and Fee - Costs to complete the job and account for overruns.

Contingency - ~15% of total costs.

Fee - ~3% of total costs.
 Auxiliary Facilities - Costs associated with preparing the site, constructing auxiliary
buildings, etc. Typical values are in the range of 25-50%.
Detailed Method - Accurate estimates of cost associated with each task and derived from a
complete manual of cost data, such as Means Mechanical Cost Data. This process is very
arduous and does not lend itself to automation, but is the most accurate.
EQUIPMENT COST ESTIMATION – Appendix I
Appendix II – Plots of Equipment Costs