# W5_SSD_Selection of Parametric Estimation Techniques for Estimating the Cost of a Switchroom

This blog is written to claim Problem Solving Work from Engineering Economy, Chapter 3 Cost-Estimation Techniques.

1. Problem Recognition, Definition and Evaluation
A switchroom is one of the big non electrical construction components in a substation. The switchroom cost is usually estimated using the following formula:

Switchroom estimate = a x [Area], where a= swichroom estimate unit rate

Here we try to find a formula to estimate a switchroom cost.

Unfortunately, the actual switchroom project cost is buried in the contract which makes it very hard to determine the cost base on the actual. But usually in the pricing schedule, it is very easy separate the switchroom cost from other part of the project. So, in this case, instead of using actual construction cost, for this paper, the cost from tender pricing schedule is used.

The data was gathered from several tenders, which happen in the same year. It is assume there is no impact on the data due because of escalation.

The switchroom sizes for each project are shown in Table 1:

 Projects Switchroom Size (m2) A 254.92 B 295.92 C 250.03 D 630.78

Table 1. Switchroom sizes

The tender submissions for projects are shown in Table 2

 Cost \$ (k) Switchroom Size (m2) 1,191 254.92 1,009 254.92 1,379 254.92 1,024 254.92 1,220 295.63 1,281 295.63 949 250.03 1,004 250.03 1,908 630.78 2,050 630.78 2,335 630.78 2,136 630.78 2,092 630.78

Table 2. Tender information for the switchroom

1. Development of feasible alternatives and the outcomes

There are 2 methodologies that can be used to develop the formula

1. Averaging

In this methodology, the tender submission price is divided by the size of the building, to determine the \$/m2 value for the each submission. Then an average value of the overall is determined by averaging all the result. The standard deviation of this methodology is determined by comparing the expected/estimated price (calculated based on the overall average multiply by the building size) with the tender prices using the following formula:

σ = √[(Σ (y – ỹ)2) / n]

The result is shown in Table 3.

 Cost \$ (k) Building Area (m2) Average Area/m2 Estimated Cost \$ (k) 1,191 254.92 4.672 1,000 1,009 254.92 3.958 1,000 1,379 254.92 5.409 1,000 1,024 254.92 4.017 1,000 1,220 295.63 4.127 1,160 1,281 295.63 4.333 1,160 949 250.03 3.795 981 1,004 250.03 4.015 981 1,908 630.78 3.025 2,475 2,050 630.78 3.250 2,475 2,335 630.78 3.702 2,475 2,136 630.78 3.386 2,475 2,092 630.78 3.317 2,475 General Average 3.924 Std Deviation 275.033

Table 3. Averaging result

The result is as per the following formula:

Switchroom estimate = 3.924 x [Area]

2. Linier Regression

In this methodology, the tender prices are plot against the building areas, and a regression analysis is performed to produce regression formula. The formula is as per the following arrangement:

Y = a x [Area] + b

Two approaches were used. The first one is forcing the regression line to pass the point of origin (0, 0), which represent by setting b = 0. With this arrangement the formula becomes:

Y = a x [Area]

This it can be seen, the above formula is similar to the result from the averaging method.

The second approach is by letting b = constant, as per common regression formula.

For this analysis, LINEST() function in Excel is used. The Excel graph Trendlines function cannot be used in this matter as it produces wrong R-square value when the constant is set to 0 [2].

Plotting

Figure 1. Plotting switchroom area to tender prices

The regression results for both cases are shown at Table 4.

 b=constant b=0 X Variable 2.66 3.55 Intercept 429.17 0.00 R Square 0.929 0.981 Standard Error 143.62 227.03 Formula 2.66 x [Area] + 429.17 3.55 x [Area]

Table 4. Regression result

The Predicted Y for b=constant is shown at Table 5, and Table 6 shows Predicted Y for b=0.

 Building Area (m2) Predicted Y 254.92 1106.98 254.92 1106.98 254.92 1106.98 254.92 1106.98 295.63 1215.21 295.63 1215.21 250.03 1093.98 250.03 1093.98 630.78 2106.34 630.78 2106.34 630.78 2106.34 630.78 2106.34 630.78 2106.34

Table 5. Predicted Y for b=constant

 Building Area (m2) Predicted Y 254.92 903.77 254.92 903.77 254.92 903.77 254.92 903.77 295.63 1048.07 295.63 1048.07 250.03 886.44 250.03 886.44 630.78 2236.28 630.78 2236.28 630.78 2236.28 630.78 2236.28 630.78 2236.28

Table 6. Predicted Y for b=0

3. Selection of Criterion

In regression analysis, coefficient of determination (a.k.a R-squared) usually is used to determine how much the data fit to the formula. The closer R-squared value to 1, the better the formula. But unfortunately the R-square value produces by Excel cannot be used to compare between these 3 equations, and to select which equation is more representing the data. It is because when a regression is set to start from the point of origin, the R-squared is calculated based on the comparison of (Σ(ŷ)2/ Σ(y)2) instead of Σ(ŷ – ỹ)2/ Σ(y – ỹ)2 , resulting the R-squared this type of regression is always higher compare to R-squared for regression with b=constant, despite the regression equation with b=constant has better connection to the data.

Because of that John Perez-Garcia suggests using different formula to calculate R-squared for regression formula which start from the point of origin[3]. The formula is as follow:

R-squared = 1 – (Σ(y – a x [Area])2/ Σ(y – ỹ)2)

Using this equation, the R-squared for the regression through the point of origin can be calculated. As the averaging methodology produces basically the same set of equation as the regression with b=0, then the above equation can be used to calculate the R-squared value for the averaging methodology.

5. Analysis and Comparison of the Alternatives

The R-squared for b=constant is 0.929. The R-squared value for b=0 based on the above equation is 0.805, and the R-squared for averaging is 0.690

6. Selection of Preferred Alternatives

As the R-squared for regression equation with b=constant is the biggest compare to the R-squared with b=0 and R-squared for averaging method, then the regression equation with b=constant, should be used as switchroom cost estimating formula. The formula is as follow:

Switchroom cost = 2.66 x [Area] + 429.17

7. Performance monitoring and post evaluation result

The formula is developed based on limited number of project. As the formula surprisingly has quite high R-squared, it gives confidence that the formula is quite good for this level of estimate. With more projects available is we can check and re-calibrate the formula with new data.

Reference

1. Carlberg, C.(Feb 12, 2013).Forcing the Constant in Regression to Zero: Understanding Excel’s LINEST() Error. Retrieved from: http://www.quepublishing.com/articles/article.aspx?p=2019170
2. Microsoft Knowledge Base. (Jan 11, 2006). You will receive an incorrect R-squared value in the chart tool in Excel 2003. Retrieved from: http://support.microsoft.com/kb/829249
3. Perez-Garcia, J. (2007). Lecture 20: Regression through the Origin and Its Pitfalls. In : QSCI 483: Statistical Inference in Applied Research – II Applied Linear Regression. Retrieved from: http://courses.washington.edu/qsci483/Lectures/20.pdf
4. Sri, S. (Aug 3, 2010).6 common big Excel errors. Linear Regression Through The Origin, Excel 2000. Retrieved from: http://funwithexcel.blogspot.com.au/2010/08/linear-regression-through-origin-excel.html
5. Interpretationin Multiple Regression. Retrived from: http://www.stat.duke.edu/courses/Spring00/sta242/handouts/beesIII.pdf
6. Oracle Crystal Ball Reference and Examples Guide.  (n.d). Statistics, Standard Regression without Constant. Retrieved from: http://docs.oracle.com/cd/E17236_01/epm.1112/cb_statistical/frameset.htm?ch07s03s06s02.html
7. Oracle Crystal Ball Reference and Examples Guide.  (n.d). Statistics, Standard Regression with Constant. Retrieved from: http://docs.oracle.com/cd/E17236_01/epm.1112/cb_statistical/frameset.htm?ch07s03s06s01.html#predictor_stats_44
8. STAT@MTSU. (n.d). Excel Interpretation. In Regression Tutorial. Retrieved from : http://mtweb.mtsu.edu/stats/regression/level3/multireg/useexcelinterp.htm
9. Mason, J. O. (Oct 2012). PERFORMING REGRESSION ANALYSIS USING MICROSOFT EXCEL. In International Journal of Arts and Commerce, Vol. 1 No. 5. Retrieved from: http://www.ijac.org.uk/images/frontImages/gallery/Vol._1_No._5/19.pdf
10. Sullivan, W. G., Wicks, E. M., & Koelling, C. P. (2012). Engineering Economy (15th Ed.) (pp.67-96). New Jersey, United States: Prentice Hall.

1 Comment

Filed under Sadat SD, Week 05

### One response to “W5_SSD_Selection of Parametric Estimation Techniques for Estimating the Cost of a Switchroom”

1. AWESOME case study and I am truly amazed at the research you put into this!!

I didn’t realize there were two ways to calculate the R2 value, although I fully understand how starting at zero rather than starting at the first point will change the R2 calculations.

VERY well done!!!

And thank you for bringing to my attention the fact I missed a posting. Sorry about that!!

BR,
Dr. PDG, Jakarta