Forecasting Slides

Dr.
Farrukh Arif, Assistant Professor, NED UET
CE-591-Cost Engineering and

Control
Lecture 4
Forecasting
____________________
Dr. Farrukh Arif,
Assistant Professor, NED UET
Lecture 4-1
CE-591-Cost Engineering and Control
Dr. Farrukh Arif, Assistant Professor, NED UET
Overview
Working
with Data
Graphing, Statistics
Regression / Curve Fitting
Confidence / Correlation
Time
Series
Moving Averages, Smoothing

Cost
Indexes
Lecture 4-2
Business Forecasting
Forecasting does not mean Estimating. It is a Prediction
Prediction
Price of Material
Availability & Cost of Labor
Market Demand/Price
Cost of Construction
Business forecasting involves extrapolation of past data into the future
by using
Linear or Non-linear curves
Mathematical relationships
Business forecasting periods/term
Short 2 Years
Medium 2 - 5 Years
Long Range > 5 Years
Lecture 4-3
Graphical Analysis
Descriptive Statistics
Collect/Organize/Analyze Data
Summarize/Present
Draw Conclusions/Make Decisions
Type of Data
Discrete
Continuous
Raw Data Communicates Little Information
Lecture 4-4
Graphical Analysis
A
frequency distribution begins with

the collection of observations into a
tabular arrangement by intervals.
Example 1
A survey is made of the price for a roll of
heavy 100 X 4ft plastic underlayment
Lecture 4-5
Example 1-Simplifying Data

Price, ($/roll)
Obs
Rel Freq
Cum Freq
12.3512.75
12.7513.15
13.1513.55
1
6
33
0.003
0.019
0.102
0.003
0.022
0.124
13.5513.95
51
0.157
0.281
13.9514.35
14.3514.75
121
50
0.373
0.154
0.654
0.808
14.7515.15
44
0.136
0.944
15.1515.65
13
0.040
0.984
15.6516.05
5
324
0.016
1.000
1.000
Lecture 4-6
Example
Price range of $12.35-$12.75 is called
interval
End numbers (12.35 and 12.75) are called
limits
Size of the interval = 12.75-12.35 = 0.40
First Mid-point = [(12.35+12.75)/2] = 12.55
Graphical representation of relativefrequency is called histograms
Lecture 4-7
Graphical Presentation
Lecture 4-8
Frequency Curves
Joining the
midpoints of
histogram cells
creates frequency
curves
Lecture 4-9
Example 1
A labor survey is conducted for area contractors,

and the following wage groupings and their
frequency of occurrences are found. Sketch the
frequency distribution, relative frequency curve
and cumulative frequency curve.
Lecture 4-10
Mean
Average
n
x + x +L+ xn
x= 1 2
=
n
i =1
x
n
Lecture 4-11
Median & Mode

Median
All Data from Lowest to Highest

Number in the Middle
Mode
Data Value(s) that Appear the Most

Often
Lecture 4-12
Standard Deviation
Amount
of Data Spread Around the
Mean
(x x)
n
s=
Variance
n 1
Is the Square of the Standard
Deviation
Lecture 4-13
Example 2
Find the mean, median, mode, range, standard deviation
and variance for the following set of data.
(a) 3,5,2,6,5,9,5,1,7,6
(b) 41.6, 38.7, 40.3, 39.5, 38.9
(c) 2, -1, 0, 4, 6, 6, 8, 3, 2
Lecture 4-14
Graph the Data

Pure
Statistics Can Be Misleading

Any Set of Numbers
Will Have Mean, Std Dev, etc.
May or May Not Be Relevant
Plot
the Data
Visual Interpretation
Apply Judgment
Lecture 4-15
Mathematical Model

Collect raw data

Select the axes (Independent and Dependent variable)
Plot the points
Draw Line Through Data
Half of Points Above Line, Half Below
Straight Line
y = a + bx
y = dependent variable
a = intercept value along the y-axis at x = 0
b = slope, length of the rise divided by length of the run
x = independent variable (controlling variable)
Determine a and b from Graph
Lecture 4-16
Example
Lecture 4-17
Why Graph?
Visual
Analysis of What Is Happening

Non-Linearity May Be Exposed
Shows sharp changes knee jerk
effect
Sufficiently effective for practical dayto-day estimating work
Lecture 4-18
Regression Analysis

The descriptive statistical methods are concerned

with single variable and its frequency variation
Construction estimation involves several variables
Regression finds Dependent y for Given x
Determined by least square equation that fits the
sample data
If x Is Time
Called Trend Line
Used for Forecasting
Lecture 4-19
Least Squares
Minimize
Variation (Error) Between
Observed (Real) Values

Fitted Curve (Predicted) Values
Minimize
Sum of the Squares of the Errors
Lecture 4-20
The Least Squares Equation

y
= a + bx
x 2 y x xy
a=
2
n x 2 ( x )
b=
n xy x y
2
n x 2 ( x )

The
Least Squares Line Goes Through

(X, Y)
Lecture 4-21
Example 3
Determine the least square

equation for the following data.
Predict the value of index (y) in
year 15.
Lecture 4-22
Curvilinear Regression

Linearity is largely an imagination

But a tidy assumption for making generalizations
In construction estimating, non-linear relationships are
present
Semi log
Exponential
Power
Reciprocal
Hyperbolic
Polynomial
Lecture 4-23
Non-Linear Relationships
Curvilinear
Regression
y = ab x
Exponential
y = ax b
Power
Polynomial
y = a + b1 x + b2 x 2 + b3 x 3 +L+ b p x p ..
Lecture 4-24
Transformation
(Power Equation Model)
The power function y = axb is transformed from curved line

to a straight line on log-log scales
Let y = logy, a = loga and x = logx
loga =
b=
(logx )2 log y logx (log xlog y )
n(logx )2 (log x)2

n (logxlog y ) logx log y
n(log x)2 (logx )2
Lecture 4-25
Power Equation Models

(Applications/Benefits)
The power equation models the important learning

concept useful for estimating construction projects
If we repeat the same construction project, it takes less

time or cost to construct what has been constructed
earlier, known as learning
The concept has been successfully applied/modeled to

Natural-gas-fired power plants for technological learning
Residential construction for time of total workforce
Nuclear-fired central steam power plants
Lecture 4-26
Example 4 (1/4)
Assume that we have five sets of separate

experiences, or the unit number produced x and
the man hours y, to construct a product. Use the
following observations to develop model using
Power Equation Model. Also estimate man-hours
for 350 units.
3
Y (10 ) Manhours
10
510
30
210
100
190
150
125
300
71
Lecture 4-27
Example 4 (2/4)
Solution
(log x)2
log x
log y
10
510
1.0000
2.7076
1.0000
2.7076
30
210
1.4771
2.3222
2.1819
3.4302
100
190
2.0000
2.2788
4.0000
4.5575
150
125
2.1761
2.0969
4.7354
4.5631
300
71
2.4771
1.8513
6.1361
4.5858
9.1303
11.2567
18.0534
19.8441
log x log y
Lecture 4-28
Example 4 (3/4)
Finding a and b
log a =
=
n ( log x ) 2 ( log x ) 2
(18 .0534 )(11 .2567 ) ( 9 .1303 )(19 .8441 )
b=
=
( log x ) 2 log y log x (log x log y )
5 (18 .0534 ) ( 9 .1303 ) 2

n ( log x log y ) log x log y
n ( log x ) 2 ( log x ) 2
5 (19 .8441 ) ( 9 .1303 )(11 .2567 )
5 (18 .0534 ) ( 9 .1303 ) 2
= 3 .1921
= 0 .5152
Logarithmic function/transformed : log y = 3.1921-0.515logx

For Original Function
For a, antilog a = antilog(3.1921) = 1556
y = 1556 .38 x 0.5152
Lecture 4-29
Example 4 (4/4)

Estimate for x = 350 units

In logarithm units
Log y = 3.1921-0.515log350 = 1.8819
Antilog y = 76.19 hours
In Original units
y = 1556(350)-0.515 = 76.19 hours
Lecture 4-30
Correlation

Regression shows the relationship of one dependent

variable to another independent variable
Correlation tells us how well the variable are satisfied by
the linear relationship
If the values of the variable satisfy an equation exactly, the
variables are perfectly related
This is determined through coefficient of correlation (r)
We will deal with the simple correlation between the two
variables
When multiple more than two variables are involved it is
called multiple regression and multiple correlation
Lecture 4-31
Correlation
Lecture 4-32
Correlation
Quantitative
r=
Measure
xy x y
n x ( x ) n y ( y )
1/ 2
1
Farther from 0, Stronger Correlation
-1r
Lecture 4-33
Example 5
Find
the
correlation of the
following data
(from example 3)
(Hint: use the
calculations done
for example 3)
Lecture 4-34
Cost Index

Construction estimates frequently use time-series cost

indices
A cost index is an amalgam of labor, material and services
Dimensionless Number
Represents Change in Cost
Over a Period of Time
Relative to a Benchmark Period
What is Costed Remains Constant
Used to Forecast
Lecture 4-35
Using Cost Index

If a design cost of a previous period is known, present cost

is determined by multiplying the original cost (Cr) by the
ratio of the present index value (Ic) to the index value
applicable to the original cost (Ir)
Ic
C c = C r
Ir
Cc = desired cost
Cr = reference cost
Ir = Index correspond to Cr
Ic = Index correspond to Cc
Lecture 4-36
Example 6
of
a
700,000-ft2
warehouse is planned for a future
period. Several years ago a similar
warehouse was constructed for a unit
estimate of $162.50 when index was
118. The index for the construction
period is forecast as 143. Forecast the
construction cost per ft2
Construction
Lecture 4-37
Arithmetic Development of
Indices
Arithmetic development of indices are of different types
(1)
Adding cost and dividing by their number
(2)
Adding the cost reciprocals and dividing by their
number
(3)
Multiplying the cost and extracting the root indicated by
their number
(4)
Ranking the cost and selecting the median value
(5)
Selecting the mode cost
(6)
Adding actual costs of each year and taking the ratio of
those sums
Lecture 4-38
Figuring Cost Indexes

Benchmark
Cost Used as Denominator

Index for Benchmark Period = 1 or 100
Costs for Other Periods Divided by
Benchmark Cost
Lecture 4-39
Change Rate
Figuring
Average Rate of Change
I
r = e
I b
Using
1/ n
1 100
Rate of Change to Find Index

r
I e = I b 1 +
100
Lecture 4-40
Change Rate

r = average rate per period

Ie = index at the end of period
Ib = index at the beginning of the period
n = number of period
Lecture 4-41
Example 7
A construction firm uses indices to estimate the cost of

concrete forms. Material quantities, labor man-hour data
and material unit costs have been gathered for three
periods, and are given in the following table.
(a) Find the indices for the three period and determine
index for the period 4
(b) An actual job cost is $175,000 during period 1. A new
job that is similar to the job during period 1 is to be
estimated for period 4. calculate the future cost for period
4.
Lecture 4-42
Example 7
Lecture 4-43
Example 8
An assembly called 10-cm disk amplifier was constructed

during period 0 but the cost tracking of the selected items
has continued. The prices are gathered over 4 years as
shown in the following table. Determine the composite
index
Lecture 4-44
Example 8 Solution
Material
0*
Laser glass
$26,117
$24,027
$22,345
$21,228
Steel tubing
1913
2008
2129
2278
Al extrusion
418
426
439
456
Printed circuits
637
643
656
657
Harness cable
2103
2124
2134
2305
Glass tubing
4317
4187
4103
4185
$35,505
$33,415
$31,806
$31,119
100.0
94.1
89.6
87.6
Total
Index, %
* Benchmark Period
Lecture 4-45
Indexes
Basis
Changes (Qty, Qual, Mix, etc)

Technology Creep
Kinds of Indexes
Material
Labor Geographical
Index
Specific for Time and Location
Lecture 4-46
Sample
Listing
of
Indices
Lecture 4-47
Summary
Objective
- Forecasting
Methods for Working with Data
Graphing, Statistics, Regression
Data
In Time Periods (Time Series)

Cost Indexes
Applications, Calculations
Lecture 4-48

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Dr.

Farrukh Arif, Assistant Professor, NED UET

CE-591-Cost Engineering and

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Moving Averages, Smoothing

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Dr. Farrukh Arif, Assistant Professor, NED UET

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

frequency distribution begins with

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Example 1-Simplifying Data

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

A labor survey is conducted for area contractors,

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Median & Mode

All Data from Lowest to Highest

Data Value(s) that Appear the Most

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

of Data Spread Around the

Is the Square of the Standard

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Graph the Data

Statistics Can Be Misleading

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Collect raw data

Determine a and b from Graph

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Analysis of What Is Happening

Dr. Farrukh Arif, Assistant Professor, NED UET

The descriptive statistical methods are concerned

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Variation (Error) Between

Observed (Real) Values

Sum of the Squares of the Errors

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

The Least Squares Equation

Least Squares Line Goes Through

CE-591-Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Determine the least square