Making cost engineering count (2022)

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Cost engineering is a long-established practice in industries that deal with big, complex projects. In the automotive and advanced-industrial sectors, for example, companies have recognized for decades the need to take a whole-lifecycle perspective, balancing the costs of procurement, manufacturing and assembly, and in-service support.

(Video) Construction Cost Engineering | LS 1

Today, companies in many sectors are making the same calculations. Pressure to do so comes from a variety of sources: margins in many sectors are being squeezed by low-cost players, while new business models that include ongoing service and support create a strong incentive for companies to minimize their products’ through-life costs.

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Cost-engineering maturity by sector

To understand the maturity of cost engineering in different companies and industry sectors, we conducted interviews and assessments at more than 75 companies worldwide. Our evaluation considered eight dimensions that contribute to an organization’s ability to understand cost drivers, identify savings opportunities, and implement those savings across their product portfolios.

  1. Design tools. How advanced and how standardized are the organization’s design methods, such as idea generation, specification reviews, benchmarking, or design-to-value?
  2. Cost tools. How advanced and standardized are the organization’s cost-evaluation methods, such as should-cost models, regression analyses, or index tracking?
  3. Expertise. Does the organization have significant in-house cost engineering expertise? Does it make use of external sources of expertise?
  4. Databases. Does the organization have appropriate and accessible technological enablers, such as centralized databases, templates, and pricing algorithms?
  5. Process integration. Are cost-engineering activities fully integrated into the organization’s standard business processes?
  6. Organizational enablers. Does the company have the right organizational elements to support and sustain cost engineering?
  7. Training. Does the company have training, skills assessments, and Sidebar development processes for cost engineering?
  8. Functional integration. Is the cost-engineering function effectively integrated with other functions?

Our findings are summarized in the exhibit below. As expected, they show considerable variation in maturity between sectors. Unsurprisingly, the first sectors to adopt cost-engineering methods show the highest level of maturity today, with high-tech and advanced industries leading the pack, followed by medical products, consumer packaged goods, and some of the retail sector. Agriculture and the majority of retailers are the least mature.

Making cost engineering count (1)

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Our analysis suggests, however, that the maturity of cost-engineering capabilities still varies widely between sectors (see sidebar, “Cost-engineering maturity by sector”). And even industries that are applying the approach extensively often take a narrow approach to its use. They focus on a specific set of technical skills, such as estimation and modeling, while paying insufficient attention to cross-functional collaboration, idea generation, or the steps necessary to ensure cost-reduction opportunities are implemented and sustained. To capture the full value potential of cost engineering, a fundamental mindset shift is required.

What is cost engineering?

We believe that companies should take a comprehensive perspective to cost engineering, one that goes beyond attempts to reduce the purchase or manufacturing cost of individual components. We define this approach as follows: “A cost-focused methodology that supports the design and implementation of specifications at the lowest total cost of ownership, across the end-to-end lifecycle.”

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This definition encompasses several elements which are critical to our view of the scope and reach of cost engineering across the business:

  • “Cost-focused.” Cost-engineering activities are focused on bottom-line impact. If they succeed, the business will save money.
  • “Supports.” While bottom-line impact is the ultimate outcome, cost engineering must also serve as an enabler within the organization. It brings stakeholders from multiple functions together to work collaboratively on the design and implementation of specifications.
  • “Lowest total cost of ownership.” Cost engineering is holistic in scope, considering all types of cost (e.g., capex and opex, together with recurring and non-recurring costs) across the entire value chain.
  • “End-to-end lifecycle.” Cost engineering is not a standalone activity; it must be an integral part of the full produce lifecycle, from initial ideation to ultimate disposal or recycling.

Strategic mindset required

Failure to get the whole organization on board with the cost-engineering process leads to a variety of problems. Cost-reduction opportunities may be missed. Savings in one part of the value chain or product lifecycle may end up raising costs elsewhere. Seemingly valid ideas may fail in execution. And in our experience, these symptoms typically result from the interactions among five major causes.

  1. Ignoring total cost of ownership. Excessive focus on direct material costs may mean losing track of other important costs. A cheaper input may raise logistics, tooling, processing-time or after-sales costs by enough to outweigh any hoped-for savings.
  2. Poor cross-functional collaboration. Where cost engineering is owned by a single function, such as purchasing or engineering, hidden costs are easily missed. Purchasing might identify a supplier that can deliver at a lower price, for example, only for manufacturing to suffer higher costs and delays due to quality issues. Or engineering may design a component for which there is no local supplier available, driving up logistics costs and the risk of supply disruption.

    Involving all relevant functions in the cost-engineering process also strengthens buy-in for new ideas. That can be especially important when companies choose to outsource the creation of product cleansheets to outside organizations. If internal functions don’t understand the details of the resulting cleansheets, they will struggle to use them effectively in supplier negotiations or design revisions.

  3. Analysis paralysis. Some companies forget that the objective of cost engineering is not just to identify potential savings, but to capture them. Instead of expending endless time and effort attempting to create “perfect,” highly detailed cleansheet cost models, for example, it can be more illuminating to use simpler, 80/20 approximations as a basis for constructive conversations with suppliers and between functions.
  4. Insufficient attention to building and embedding capabilities. Some companies treat cost engineering as a one-off effort. That may address specific cost challenges in one (or a few) products. But any competitive advantage is unlikely to last if leaders don’t spend the time to ensure that cost engineering skills and tools— such as benchmarking, competitor analysis, and cleansheet cost models—become part of the organization’s standard operating model.
  5. Inability to scale. Building cost-engineering capabilities in a single business unit is one type of challenge. Rolling out the approach across an entire organization is another. Introducing a new way of working to hundreds or thousands of staff across multiple locations requires a systematic change-management effort, with sustained support from top management and appropriate investment in tools, processes, and capabilities.

A working model

The experience of companies that have overcome these pitfalls is instructive. We have seen a growing number of organizations that have taken a systematic, integrated approach to their cost-engineering activities, developing skills and processes that allow them to capture savings rapidly, scale effectively, and make cost engineering an integral and sustainable part of their business. The examples below highlight successful steps taken by companies in different sectors and at different levels of cost engineering maturity.

Building new muscle in the healthcare sector

After acquisition by a private-equity firm, one healthcare company wanted to maximize its margins. The company had already identified cost-saving opportunities with the potential to raise earnings margins by up to 30 percent. But with no in-house experience in cost engineering—combined with a history of poor collaboration between functions— the company struggled to develop and execute its cost-saving plans.

To break the deadlock, the organization chose to invest in talent. It recruited specialists from industries with a strong cost-engineering track record, tasking them to build a dedicated cost-engineering function. The primary objective was to replace the ad-hoc, fragmented approaches the company had tried before with a new set of standardized best practices.

While its work is still at a relatively early stage, the company is already achieving clear progress. It has built a complete toolkit of cost-engineering approaches, including the use of cleansheet models and standardized fact-gathering techniques. And it has applied those tools to strategically important products in its portfolio.

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As well as proving the feasibility of capturing cost-reduction opportunities of 25 to 30 percent, the new cost-engineering group has broken barriers between functions, challenging stakeholders to collaborate on new solutions. And the group’s success has attracted attention across the organization, strengthening belief in cost engineering’s value and creating demand for further projects.

Replicating muscle in consumer-goods retail

A major retail chain had developed a reputation for strong operational performance across all functions, including procurement. The company had already used cost engineering selectively in its private-label product ranges. With thousands of product lines in hundreds of categories, however, leaders knew that the company lacked the capabilities to apply best practices consistently across the whole portfolio.

In a market defined by slow growth and margin pressure, the retailer launched a large-scale program to increase the use of cost engineering, design-to-value, and other advanced techniques in its private-label range.

The company adopted an agile model for its program, with numerous small teams co-located in its headquarters, each dedicated to a single private-label category. The teams were supported by a six-person center-of-excellence team, which helped to identify and recruit staff with strong analytical capabilities, then trained them to build cost models and conduct other cost-engineering analyses.

Since its inception, the new group has achieved significant success, with average cost reductions of 10 to 15 percent across the categories it has addressed. The group has also become a catalyst for bigger changes across the company. The retailer has reorganized its procurement and product-development functions following the agile model, and the new group has become a magnet for talent, with junior employees seeing it as a career springboard. Most spend one to two years within the group before moving on to other roles within procurement or other functions.

Fine tuning the muscle in aerospace

One aerospace company had become adept at the use of cleansheet target costing and other analytical techniques to achieve short-term component cost savings. The company knew, however, that it was leaving money on the table by not capturing longer-term opportunities through modifications to early product designs. When it looked at the root cause of the issue, the company found that poor cross-functional collaboration was hampering efforts to make the required product changes. An additional challenge was the requirement for extensive testing and validation before redesigned parts were approved for use in flight.

To overcome these barriers, the company established a new cost-engineering department, which worked with the purchasing, supply-chain, and engineering functions to analyze and deliver the end-to-end impact of design changes across its product portfolio. Using the new approach, the company was able to overcome longstanding bottlenecks to reach cost savings averaging more than 10 percent. The new cost-engineering function also collaborated closely with suppliers to introduce improved designs for manufacturing and assembly approaches. And the fact base developed during the effort is being used to inform the design of new products early on, at the concept stage.

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For companies that manage to integrate cost engineering fully into their product-development, procurement, and manufacturing processes, significant bottom-line savings are only part of the story. In our experience, a strategic approach to cost engineering can also transform the effectiveness of collaboration between different functions, and between companies and their suppliers.

FAQs

Should cost engineer? ›

In a large organization, the engineering department typically arrives at a “should” cost for a product. Often this estimate is achieved by reverse engineering to determine the cost of parts. Then the additional costs of labor, materials, overhead and profit margin are added to that estimate.

Should costing team? ›

Should Costing enables teams from development, purchasing and cost engineering to efficiently manage purchasing processes and cost estimates from product development onwards. Collaboration with suppliers is empowered to achieve the best price for purchased parts.

What is meant by engineering cost? ›

Engineering Costs means costs for designing, locating, staking, inspecting, or any other incidental costs of engineering.

Should cost tool? ›

Should-cost analysis is a powerful cost estimation tool that empowers procurement and supply chain professionals to furnish viable evidence to suppliers as part of negotiation efforts, helping them achieve a final cost estimate that is closer to their target price.

What is the role of cost engineer? ›

To collect and analyse data and information in order to estimate costs associated with manufacturing a product. Works proactively towards cost target objectives in collaboration with others. Job holders in this role may take responsibility for a limited amount of components within the design and manufacturing process.

How do you calculate should be cost? ›

Designing a Should-Cost Calculation

With this understanding, the procurement professional should (1) separate the project launch process into steps, (2) estimate the resources and hours associated with those steps, and (3) multiply the estimations by relevant rates for the work.

What is a costing model? ›

A cost model is a method or framework for determining the total value invested to deliver a product or service. The scope and detail of the process can vary depending on the situation, but the goal of all cost modeling is to find an accurate way to assess value input for comparison against value output.

Should costing examples? ›

If materials are $100, a should cost roll up would be $100 (materials) + $9 (burdened labor) + $2.18 (2% corp costs) = 111.18 / . 75 (25% margin)=$148.24 should cost. This kind of should cost information can be invaluable when conducting price discovery with asymmetrical suppliers.

What is used to build a cost model? ›

The most basic inputs to a cost model are the cost elements captured by accountants: direct labor, materials and overhead. However, documenting the cost elements is only a start. A cost model should capture the drivers of cost such as labor productivity or hourly wage rates.

How many types of costs are there? ›

Costs are broadly classified into four types: fixed cost, variable cost, direct cost, and indirect cost. 1. Fixed cost: These are costs that do not change based on the number of items produced.

What makes a good cost engineer? ›

General capabilities. Cost engineering involves a lot of working together with different departments, setting priorities and making choices. It also needs to follow strict rules and guidelines to ensure the same principles and techniques are used throughout an organization; Communication.

What is cost standard? ›

A standard cost is the budgeted cost of a regular manufacturing process against which actual costs are compared. Of course, if a new product, service, or process is to be carried out, the initial standard costs will have to be estimated.

What is purchase cost analysis? ›

It is primarily used to identify the breakdown of costs involved in the production of a product. This in turn helps with further research in relation to pricing (e.g. the amount of profit retained by the supplier).

Should cost Vs will cost? ›

Will Cost estimates are the official program position for budgeting, programming, and reporting. The Should Cost estimate is an internal management tool for incentivizing performance to target.

What is design to cost approach? ›

The "Design-to-Cost" approach aims to optimise the total costs of a product, from its design to its release on the market. This requires analysing and optimising costs in relation to customer expectations for functionality and quality.

Is a quantity surveyor a cost engineer? ›

What is ICEC? Cost Engineering and Quantity Surveying have similar and highly overlapping functions. Quantity Surveying relates more to building design and construction, while Cost Engineering relates more to engineering projects and processes. However, Cost Engineers and Quantity Surveyors commonly work in both areas.

What is cost control? ›

Cost control is the practice of identifying and reducing business expenses to increase profits, and it starts with the budgeting process. Cost control is an important factor in maintaining and growing profitability.

Should Costing engineer interview questions? ›

Top 5 cost engineer interview questions with answers
  • Top 5 cost engineer interview questions with answers Interview questions and answers Page 1 of 8.
  • What is Flow Control? ...
  • What is Materials Requirement Planning? ...
  • What is Just-In-Time? ...
  • What are your biggest strengths? ...
  • Why should we hire you?
1 Nov 2013

What is total cost example? ›

Total Costs

For example, suppose a company leases office space for $10,000 per month, rents machinery for $5,000 per month, and has a $1,000 monthly utility bill. In this case, the company's total fixed costs would be $16,000.

How do you calculate total cost analysis? ›

The formula to calculate the TCO is to add the initial purchase value to direct, indirect and other hidden costs. The value so arrived is then subtracted from a projected resale/ residual value at the end of the asset's lifespan.

What are the three types of cost estimates? ›

The three types of cost estimates are design, bid, and control estimates. Design estimates are prepared in the project preliminaries which gives the order of magnitude of the project cost.

What is a cost structure example? ›

Examples include sales commissions, product cost, cost of labor and raw materials used in manufacturing, etc. Conversely, fixed costs are those that occur irrespective of the volume of selling or business activities. They are costs that accrue due to the passage of time such as insurance, salaries, and rent.

Should costing steps? ›

Should-cost analysis is the process of building and understanding the elements that make up the cost of a product or service. It's also commonly known as cost breakdown analysis, cleansheet costing, open book costing, should costing, teardown analysis, price breakdown analysis, or supplier cost analysis.

What is Activity Based Costing? ›

Activity-based costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services. The ABC system of cost accounting is based on activities, which are considered any event, unit of work, or task with a specific goal.

What is zero based costing in purchase? ›

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a "zero base," and every function within an organization is analyzed for its needs and costs.

How do you create a cost model in Excel? ›

Click "Formulas" from the top menu. Then, click "AutoSum." This will add up the total cost and expense for each category and continue to add up the total as you add more costs and expenses in that category.

Why is cost model important? ›

Cost modeling helps in determining the process for new product development, benchmarking operations to achieve efficiency, identifying the manufacturing costs incurred by the suppliers and devising a product pricing strategy.

Why do we use cost models? ›

Companies use cost models to project future costs of materials and services, as the cost is broken down into individual components. Understanding changes in prices of individual components helps predict the overall cost.

What are the 7 types of cost? ›

Types of Costs
  • 1) Fixed costs. Costs that are unaffected by the quantity of demand. ...
  • 2) Variable costs. Costs associated with a company's output level. ...
  • 3) Operating costs. ...
  • 4) Direct costs. ...
  • 5) Indirect costs. ...
  • 1) Standard Costing. ...
  • 2) Activity-Based Costing. ...
  • 3) Lean Accounting.
18 Dec 2021

What is a cost sheet? ›

A cost sheet is a formal documentation of the fixed, variable, direct, and indirect costs a business incurs from start to finish in its production process. Based on this information, a company can determine the total production cost and fix the price per item for the commodities.

What is basic costing? ›

In Basic Costing you'll learn how to identify the elements of cost within an organisation (such as materials, labour and overheads), and distinguish the nature and behaviour of particular costs. The nature of costs means recognising whether a cost is a direct or an indirect cost.

Where do cost engineers work? ›

Many cost engineers work in construction, manufacturing, or other industrial enterprises. In these positions, your responsibilities focus on using technical knowledge to forecast expenses for all phases of the project accurately. You help create a budget that includes time, materials, labor costs, and other factors.

What is an estimating engineer? ›

ENGINEERS ESTIMATE

Preparing the estimate requires knowledge of construction methods, fabrication processes and construction costs based on the measurement and payment section in the Specifications. An Engineer's Estimate is required for all projects.

What do cost estimators do? ›

Cost estimators collect and analyze data in order to assess the time, money, materials, and labor required to manufacture a product, construct a building, or provide a service. They generally specialize in a particular product or industry.

What is a budget cost? ›

Definition: A budgeted cost is a forecasted future expense that the company is expected to incur in the future. In other words, it's an estimated expense that management anticipates will be incurred in a future period based on projected revenues and sales.

How are standard cost fixed? ›

Establishing Standards: First and foremost, the standards are to be set on the basis of management's estimation, wherein the production engineer anticipates the cost. In general, while fixing the standard cost, more weight is given to the past data, the current plan of production and future trends.

What are the types of standard costing? ›

There are three main categories of standard costs, basic standard costs, ideal standard costs and currently attainable standard costs.

What is costing in purchase? ›

Purchase Cost means the total cost for the item(s) or service purchased including taxes, shipping costs and other fees, and contingencies.

What is costing in cost accounting? ›

Costing is any system for assigning costs to an element of a business. Costing is typically used to develop costs for customers, distribution channels, employees, geographic regions, products, product lines, processes, subsidiaries, and entire companies.

What is cost analysis of a product? ›

Cost analysis, a more complex process, is a thorough assessment of the direct and indirect costs leading to the final price of the product or service. Once either of these strategies is applied and expenses are identified, negotiation may be necessary to ensure the best price.

What is a should cost review? ›

(1) A program should-cost review is used to evaluate significant elements of direct costs, such as material and labor, and associated indirect costs, usually associated with the production of major systems.

What is the should cost? ›

What is Should Cost? A “should cost” is a projection of the total cost of a given component if efficient manufacturing and distribution practices are followed. A robust estimate will need to account for a plethora of factors including labor, materials, overhead, and profit margin.

What is meant by target costing? ›

Target costing estimates product cost by subtracting a desired profit margin from a competitive market price. As the target cost makes reference to the competitive market, it is fundamentally customer-focused and an important concept for new product development.

What are the 6 steps of the engineering design process in order? ›

The engineering method (also known as engineering design) is a systematic approach used to reach the desired solution to a problem. There are six steps (or phases): idea, concept, planning, design, development, and launch from problem definition to desired result.

What is product design cost? ›

Average Pricing for Different Types of Product Design
Project TypeHourlyPer Project
Concept Design$45–$105 per hour$100.00 and up
Product Design$45–$105 per hour$100.00 and up
Mechanical Design$45–$125$5,000–$10,000
Industrial Design$45–$150$5,000–$10,000
3 more rows
1 Feb 2022

What is design to value? ›

Design to Value (DTV) is a fact-based, multi-dimensional approach that typically enables companies to improve margins by 350 to 900 basis points through improvements in product preference together with reductions in packaging and raw material costs of 10 to 20 percent.

What makes a good cost engineer? ›

General capabilities. Cost engineering involves a lot of working together with different departments, setting priorities and making choices. It also needs to follow strict rules and guidelines to ensure the same principles and techniques are used throughout an organization; Communication.

Should Costing engineer interview questions? ›

Top 5 cost engineer interview questions with answers
  • Top 5 cost engineer interview questions with answers Interview questions and answers Page 1 of 8.
  • What is Flow Control? ...
  • What is Materials Requirement Planning? ...
  • What is Just-In-Time? ...
  • What are your biggest strengths? ...
  • Why should we hire you?
1 Nov 2013

Should costing examples? ›

If materials are $100, a should cost roll up would be $100 (materials) + $9 (burdened labor) + $2.18 (2% corp costs) = 111.18 / . 75 (25% margin)=$148.24 should cost. This kind of should cost information can be invaluable when conducting price discovery with asymmetrical suppliers.

Should cost Vs will cost? ›

Will Cost estimates are the official program position for budgeting, programming, and reporting. The Should Cost estimate is an internal management tool for incentivizing performance to target.

Where do cost engineers work? ›

Many cost engineers work in construction, manufacturing, or other industrial enterprises. In these positions, your responsibilities focus on using technical knowledge to forecast expenses for all phases of the project accurately. You help create a budget that includes time, materials, labor costs, and other factors.

Is a quantity surveyor a cost engineer? ›

What is ICEC? Cost Engineering and Quantity Surveying have similar and highly overlapping functions. Quantity Surveying relates more to building design and construction, while Cost Engineering relates more to engineering projects and processes. However, Cost Engineers and Quantity Surveyors commonly work in both areas.

What is cost control? ›

Cost control is the practice of identifying and reducing business expenses to increase profits, and it starts with the budgeting process. Cost control is an important factor in maintaining and growing profitability.

What is a cost model? ›

Cost models are simple equations, formulas, or functions that are used to measure, quantify, and estimate the effort, time, and economic consequences of implementing a SPI method.

What should be in a cost analysis? ›

Should cost analysis involves determining what a product should cost based on materials, labor, overhead, and profit margin. The most common procurement method is strategic sourcing.

What are should cost models? ›

Should-Cost modeling, also known as cost breakdown analysis or clean sheet analysis, is an exercise to determine what a product or service has to cost based on a number of factors such as cost drivers like raw materials cost, manufacturing cost, labor rates, overhead costs, and the addition of a fair markup for profit.

What is design to cost approach? ›

The "Design-to-Cost" approach aims to optimise the total costs of a product, from its design to its release on the market. This requires analysing and optimising costs in relation to customer expectations for functionality and quality.

What is zero based costing in Purchase? ›

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a "zero base," and every function within an organization is analyzed for its needs and costs.

What is meant by target costing? ›

Target costing estimates product cost by subtracting a desired profit margin from a competitive market price. As the target cost makes reference to the competitive market, it is fundamentally customer-focused and an important concept for new product development.

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