A group of builders are considering a method for estimating the cost of constructing custom…
A group of builders are considering a method for estimating the cost of constructing custom houses.
The builders used the method to estimate the cost of 10 “spec’’ houses that were built without a commitment from a customer. The builders obtained the actual costs (exclusive of land costs) of completing each house, to compare with the estimated costs.
“We went back to our accountant, who did a regression analysis of the data and gave us these results. The accountant says that the estimates are quite accurate, with an 80% correlation and a very low p-value. We’re still pretty skeptical of whether this new method gives us decent estimates. We only clear a profit of about 10 percent, so a few bad estimates would hurt us. Can you explain to us what this output says about the estimating method?’’
Write a brief, not-too-technical explanation for them. Focus on the builders’ question about the accuracy of the estimates. A plot is shown here.