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Topics: Business Analysis/Requirements Management, Cost Management
Operating Costs Estimation


In many circumstances we are asked to estimate the costs of manufacturing for products.
Some instances is to estimate the full manufacturing costs in others it's to assess whether it could sub-contracted.

In my example, we are comparing the Sub-contracting option with Internal of part of the manufacturing operations.

For manufacturing activities on a Press-Brake and CNC Machine which costs should I consider as operating costs of manufacturing? Which ones are relevant to the estimation?

I have a list in mind already, but since I'm facing some resistance to the items chosen for consideration, I am turning to the PM community.

Looking forward to reading you.
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In my opinion manufacturing costs would include all of the below . from the time the raw material arrives on the machine to the time when it's delivered to the end-point

Cost of Raw materials
Electricity costs for operating the machine for the duration that you will need to produce the required amount of units
Manpower costs for operating the machine for the duration that you will need to produce the required amount of units
Cost of raw materials required to produce the finished product
Cost of consumables required to produce the finished product; any metallic parts on the machines , any packaging materials, any adhesives, any machine oils
Any servicing or break-fix cost for the Press Brake and CNC machines during the duration of manufacturing
Manpower spent in the routine inspection/quality control of the machines
Manpower spent in the Testing of the finished product
packaging costs for the finished product
Manpower spent for loading the finished products
Manpower spent for the delivery of the product to the destination
Hiring of vehicles or running costs of vehicles used to transport the product to the destination
Estimate some contingency (say 10% of the total cost to replace/repair any delivered products within the warranty period)

In addition to above:
Cost towards preventive maintenance
Cost towards maintaining spares inventory
Cost towards Training staff

Agree with Deepesh and Rajesh.

The tricky part will be comparing manpower costs. In the in-house scenario, you have have to include employee benefit costs associated to manpower - benefits, vacations, ... - which will not be itemized in the outsourcing price.

It depends. You can try adding up the many different cost elements, but simple questions such as, “Is the equipment owned or leased?” can change the manufacturing costs in a variety of ways. Rather than trying to do a bottom-up estimate, burdened rates are frequently used. That uses an average cost based on historical data that covers all the costs. The cost of labor includes not just the wage of the worker, but their manager, the electricity and water bills, their training, etc. Equipment costs can also include the cost of the equipment itself, maintenance, power consumption, the fact that it’s in a building, etc.

It’s a lot easier for a PM to use those burdened rates than to add up all the minutia, which may add more significant digits to the answer, but perhaps not much more accuracy.

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