A cost model is a diagrammatic form of a cost estimate. It is used as a tool in the VE process to provide increased visibility of the cost of the various elements of a system or an item, to aid in identifying the item’s subelements most suitable for cost reduction attention, and to establish cost targets for comparison of alternative approaches. It also helps define the worth of an element.
A cost model is an expression of the cost distribution associated with a specific item, product, or system. In industry, it is often referred to as a work breakdown structure. A cost model is developed by first identifying assembly, subassembly, and major component elements or centers of work. From this, the model can be expanded to include a parts breakdown at more minute levels, as necessary. Next, the costs are developed (actual, estimated, or budgeted) for each of the above categories. These become the cost elements of the model and can be viewed as the cost building blocks of cost buildup from successive levels.
Shown in Fig. 10.3 are five common categories of cost for a government construction program. Some additional items that should be considered, particularly for a commercial project, include cost of land, financing charges, building permits, and taxes.
The same form of model used to distribute cost of a system can be used to allocate worth. The cost model and the worth model should be identical in format. The procedures to follow in creating a worth model are as follows:
1. First, the VE team determines the necessary functions to be performed by each element of work at the lowest level of activity of the cost model.
2. The worth of each of these functions is determined as explained in the job plan.
FIGURE 10.3 Cost model for construction program.
3. The worth of all functions for each cost element is totaled and becomes the worth for that element.
4. The sum of the worth of all cost elements becomes the worth of the corresponding cost element at the next higher level.
Thus, the VE team develops the minimum costs it believes are possible for each block of the cost model. The result is a cost model representing minimum costs. These costs become targets to be compared with costs as reflected by the best estimates available. Cost blocks having the greatest differences between target and estimated costs are then selected for VE study.
(H. G. Tufty, Compendium on Value Engineering, Indo-American Society, Bombay, 1989.)