Folks, what follows is my write-up of an interesting, simple technique for estimating the price of a larger project based on the known price of a smaller one. Whether this applies in reality to anything we're doing is a curiosity to me. Let me know what you think.

Doug

This is to document a rule-of-thumb I learned regarding scaling of project costs from my friend Bob Bjorge. Bob is a turbine engineering executive, most recently with GE, with a technical PhD from MIT. He is in the process of relocating to the Boston area, and he demonstrated this scaling rule to me in comparing the prices of two condominiums. The question we were trying to answer is, since real estate and construction prices don't actually scale linearly with size (i.e. one price per square foot does not fit all), "How do you compare the prices of differently sized properties?"

In his experience estimating costs to construct power plants, he faces a similar problem: how do you account for economies of scale when you extrapolate prices from comparable, but smaller scale projects? The technique is to take the ratio of the sizes, and exponentiate to the 0.7 power to establish a cost ratio.

In the real estate example, we start with a baseline of a 1400 square foot property we valued at $240k from very similar comparables. We were trying to establish our value for a 2000 sf property, listed at $320k. The size ratio, 2000/1400 = 1.43. The price ratio, is therefore 1.43^.7 = 1.28. The scaleup to the larger property is $240k*1.28 = $308k. Bob assumes the asking price is 5% above the expected price, which places the expected price at $320k/105% = $305k, which he is now happier to pay than the $240k for his new alternate.